Edgar Filing: BIODELIVERY SCIENCES INTERNATIONAL INC

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 18, 2002

REGISTRATION NO. 333-72872

AMENDMENT NO. 6

REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
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BIODELIVERY SCIENCES INTERNATIONAL, INC.
(Name of small business issuer in its charter)

DELAWARE 2834 35-2089858
(State or Other Jurisdiction (Primary Standard Industrial (IRS Employment
of Incorporation Organization) Classification Identification "SIC" Number) or "EIN" Number)

---------------------
UNIVERSITY OF MEDICINE AND DENTISTRY NEW JERSEY MEDICAL SCHOOL
ADMINISTRATIVE BUILDING 4
185 SOUTH ORANGE AVENUE,
NEWARK, NEW JERSEY 07103
(973) 972-0015
(Address including the zip code & telephone number including area code, of
registrant's principal executive office)

DR. FRANCIS E. O'DONNELL
CHIEF EXECUTIVE OFFICER
BIODELIVERY SCIENCES INTERNATIONAL, INC.
185 SOUTH ORANGE AVENUE, ADMINISTRATIVE BUILDING 4
NEWARK, NEW JERSEY 07103
(973) 972-0015
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
---------------------
COPIES TO:

DOUGLAS S. ELLENOFF, ESQ. BRIAN C. DAUGHNEY, ESQ
DAVID SELENGUT, ESQ. GOLDSTEIN & DIGIOIA, LLP
TONY P. NGO, ESQ. 369 LEXINGTON AVENUE
ELLENOFF GROSSMAN SCHOLE & CYRULI, LLP NEW YORK, NY 10017
370 LEXINGTON AVENUE (212) 599-3322
NEW YORK, NY 10017
(212) 370-1300

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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
---------------------
CALCULATION OF REGISTRATION FEE

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PROPOSED MAXIMUM MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE AGGREGATE REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED PER UNIT(1)($) OFFERING PRICE(1)($) FEE($)
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Units, each consisting of:.......... 2,300,000(2)(3) $5.25 $12,075,000 $3,018.75
(i) one share of Common Stock,
$.001 par value.............. 2,300,000 -- -- --
(ii) one Class A Warrant to
purchase one share of common
stock....................... 2,300,000 -- -- --
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Representative's Unit Purchase
Option(4)......................... 200,000 -- -- --
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Units issuable upon exercise of the
representative's unit purchase
option, each consisting of:....... 200,000 $8.66 $1,732,500 $433.13
(i) one share of Common Stock,
$.001 par value, and......... 200,000
(ii) one Class A Warrant to
purchase one share of common
stock....................... 200,000
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Shares of common stock issuable upon
exercise of Class A warrants,
including warrants underlying
representative's unit purchase
option and the Underwriter's
overallotment option(5)........... 2,500,000 $6.30 $15,750,000 $3,937.50
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Total............................... -- -- $29,557,500 $7,389.38(6)
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(1) Estimated solely for purposes of calculating the registration fee.

(2) Includes 300,000 Units subject to the Underwriter's over-allotment option

(3) Assumes the Underwriter's overallotment option is exercised in full.

(4) In connection with the sale of the Units, as additional compensation,
registrant is granting to the Representative unit purchase options to
purchase up to 200,000 Units at 165% of the initial Unit offering price.

(5) Issuable upon exercise of the unit purchase option and/or the warrants
issuable thereunder.

(6) $20,902.50 Fee previously paid.
(continued on next page)

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(continued from Front Cover)

If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [X]

If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
------------------

If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
------------------

If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
------------------

If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
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Pursuant to Rule 416 under the Securities Act of 1933, as amended, there
are also being registered such additional shares of Common Stock as may become
issuable pursuant to anti-dilution provisions upon exercise of the Class A
Warrants and the warrants issuable in the Representative's unit purchase option.
---------------------

THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.

THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND WE ARE NOT SOLICITING OFFERS TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.

SUBJECT TO COMPLETION, DATED JUNE 18, 2002

[BIODELIVERY LOGO]

PROSPECTUS

BIODELIVERY SCIENCES INTERNATIONAL, INC.
2,000,000 UNITS
---------------------

This is a public offering of our securities. Our securities are being
offered in Units, with each Unit consisting of: (i) one share of our common
stock and (ii) one redeemable Class A common stock purchase warrant. The common
stock and warrants will not trade as separate securities until 30 days after
this offering unless the representative of the underwriters determines that
separate trading should occur earlier. After 30 days the securities contained in
the Units will automatically trade separately and the Units will no longer trade
as a security.

Each Class A warrant entitles the holder to purchase one share of our
common stock at a price of $ . The exercise price of the Class A warrant is
subject to adjustment, including anti-dilution provisions for corporate events,
such as stock splits and for issuance of securities at less than the then
current exercise price.

There is presently no public market for our Units, common stock or
warrants. We expect that the initial public offering price of the Units will be
$5.25 per Unit. The actual initial public offering price of the Units will be
determined by negotiations between the Representative and us.

We have applied for listing of our Units, the common stock and the Class A
warrants on the Nasdaq SmallCap Market and the Boston Stock Exchange under the
symbols "BDSIU", "BDSI", and "BDSIW", respectively.

Pharmaceutical Product Development, Inc. (Nasdaq: PPDI), a global provider
of drug discovery and development services and products for pharmaceutical and
biotechnology companies, has expressed an interest to the Representative in
purchasing up to 690,000 Units as part of this offering.

INVESTING IN OUR SECURITIES INVOLVES A HIGH DEGREE OF RISK. SEE "RISK
FACTORS" BEGINNING ON PAGE 6.
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NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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PER UNIT TOTAL
-------- ---------

Public offering price....................................... $ $
Underwriting discount....................................... $ $
Proceeds, before expenses................................... $ $

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

We expect total cost expenses of this offering to be approximately
$2,038,850, which will include a non-accountable expense allowance of 3% of the
gross proceeds of this offering payable to the Representative of the
underwriters. We have granted the representative a 45-day option to acquire up
to an additional 15% of the Units (300,000) to cover over-allotments.

Kashner Davidson Securities Corporation, as representative, on behalf of
the underwriters, expects to deliver our securities to purchasers on or
about , 2002.

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KASHNER DAVIDSON SECURITIES CORPORATION ROAN/MEYERS ASSOCIATES, L.P.

June , 2002

Appearing above is a picture of our cochleate structure as magnified under
a microscope.

Appearing below is a diagram showing the process of "nano-encapsulation" of a
drug in our cochleate structure.

Our drug delivery technology is based upon encapsulating drugs to
potentially deliver the drug safely and effectively. In order to minimize their
interaction with water, these lipid sheets rolled up into jellyroll-like
structures, termed "cochleate" cylinders, after the Greek name for a snail with
a spiral shell.

TABLE OF CONTENTS

PAGE
----

Prospectus Summary.......................................... 1
The Offering................................................ 4
Risk Factors................................................ 6
Special Note Regarding Forward Looking Statements........... 19
Use of Proceeds............................................. 21
Dividend Policy............................................. 21
Capitalization.............................................. 22
Dilution.................................................... 23
Selected Financial and Operating Data....................... 24
Management's Discussion and Analysis of Financial Condition
and Plan of Operation..................................... 26
Description of Business..................................... 32
Management.................................................. 48
Certain Relationships and Related Transactions.............. 58
Principal Stockholders...................................... 61
Description of Capital Stock................................ 64
Shares Eligible for Future Sale............................. 66
Underwriting................................................ 68
Legal Matters............................................... 71
Experts..................................................... 71
Where You Can Find More Information......................... 71
Index to Financial Statements............................... F-1

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NOTICE TO ARIZONA INVESTORS

Each purchaser of Units in Arizona must satisfy either of the following
conditions: (1) minimum of $100,000, or $150,000 when combined with spouse, in
gross income during 2001 and a reasonable expectation that the purchaser will
have such income in 2002, or (2) minimum net worth of $250,000, or $300,000 when
combined with spouse, exclusive of home, home furnishings and automobiles, with
the investment not exceeding 10% of the net worth of the purchaser, together
with spouse, if applicable.

NOTICE TO CALIFORNIA INVESTORS

This offering was approved in California on the basis of a limited offering
qualification. Investors must meet a "super suitability" standard of not less
than $250,000 liquid net worth (exclusive of home, home furnishings and
automobiles), plus $65,000 gross annual income or $500,000 liquid net worth or
$1,000,000 net worth (inclusive) or $200,000 gross annual income. We did not
have to demonstrate compliance with some or all of the merit regulations of the
California Department of Corporations, as found in Title 10, California Code of
Regulations, Rule 260.140 et seq.

Residents of the State of California will be unable to sell shares of
common stock they purchase in this offering, and investors residing in all other
states will be unable to sell shares of common stock they purchase in this
offering to California residents, pursuant to exemptions for secondary trading
available under California Corporations Code ss.25104(h), as such exemptions
have been withheld. However, secondary sales may be made to purchasers who meet
the "super suitability" standards or there may be other exemptions to cover
private sales by the bona fide owners of our securities for such owners' own
account without advertising and without being effected by or through a broker
dealer in a public offering.

We have been and will continue to file reports such as our annual reports
on Form 10KSB, quarterly reports on Form 10QSB and other information with the
Securities and Exchange Commission, once our securities are publicly-traded. You
should rely only on the information contained in this prospectus. We have not
authorized anyone to provide you with information different from that contained
in this prospectus. We are offering to sell, and seeking offers to buy, Units,
consisting of shares of common stock and Class A warrants. We are offering these
securities only in jurisdictions where offers and sales are permitted. Neither
the delivery of this prospectus nor the sale of our securities means that the
information contained in this prospectus is correct after the date of this
prospectus, except that we will update this prospectus when required by law.

Until , 2002 (25 days after the date of this prospectus) all
dealers that buy, sell or trade our securities, whether or not participating in
this offering, may be required to deliver a prospectus. This delivery
requirement is in addition to the dealers' obligation to deliver a prospectus
when acting as underwriters and with respect to their allotments or
subscriptions.

For investors outside the United States, neither we nor any of the
underwriters have done anything that would permit this offering or possession or
distribution of this prospectus in any jurisdiction where action for that
purpose is required, other than in the United States. You are required to inform
yourselves about such local rules and regulations and to observe any
restrictions relating to this offering and the distribution of this prospectus.

PROSPECTUS SUMMARY

This summary highlights information contained in other parts of this
prospectus. Because it is a summary, it does not contain all of the information
that you should consider before investing in this offering. For a more complete
understanding of this offering, you should read the entire Prospectus carefully,
including, the Risk Factors and the Financial Statements.

We are a development-stage biotechnology company that is developing and
seeking to commercialize a drug delivery technology designed for a potentially
broad base of pharmaceuticals, vaccines and over-the-counter drugs. In general,
a drug delivery technology refers to any process, substance, or combination
thereof, that delivers drugs into the body. Our proposed drug delivery
technology varies from competitors by encapsulating or wrapping the selected
drug in a jellyroll-like structure termed a "cochleate" cylinder. All of the
components of the cochleate cylinder are naturally occurring substances. We
believe that the cochleate cylinder provides an effective delivery mechanism
without forming a chemical bond, or otherwise chemically altering, the drug. Our
drug delivery technology is being developed in collaboration with the University
of Medicine and Dentistry of New Jersey and the Albany Medical College, which
have granted us the exclusive worldwide licenses under applicable patents. When
wrapped in our cochleate cylinders, we anticipate that these drugs may be
marketed under our brand name, "Bioral".

Drug delivery technologies generally seek to achieve a broad range of
objectives in improving the way drugs are delivered into and within the body,
including oral availability, minimizing side-effects, stability, delivery of the
drug into the cell, resistance to environmental attack, patient compliance and
release characteristics. We believe that available drug delivery technologies
generally enhance some combination of these objectives, but in most
applications, not all. In developing our drug delivery technology, our goal is
to seek to enhance some or all of these objectives to potentially provide an
improved delivery mechanism for a broad base of drugs identified by us. We
believe that our technology may potentially enable oral delivery of certain
drugs otherwise requiring injection, such as Amphotericin B. Drugs most likely
to benefit from this aspect of our technology will usually have certain
characteristics which make their oral delivery form unfavorable, such as poor
water solubility and drugs which consist of proteins. We believe our technology
may also benefit drugs which are currently administered orally or which
currently require delivery through injection. These benefits include potentially
reduced toxicity and side effects which may be associated with certain drugs and
potentially improved therapeutic drug performance. We believe that our drug
delivery technology holds promise in addressing certain of the limitations
confronted by other lipid based drug delivery technologies which in the past may
not have achieved their desired results. We could however conceivably devote
significant operational and financial resources to this research effort only to
discover that our methodology and approach is no better or maybe not as good as
previous or existing delivery technologies. Additionally, the development of our
own drug delivery technology is ongoing and accordingly is subject to numerous
scientific and procedural hurdles, such as receiving FDA approvals, raising
capital to fund development and the possibility that pre-clinical and clinical
trials may reveal presently unknown disadvantages or problems associated with
our technology.

If we establish our technology, we intend to seek commercialization through
a combination of marketing approaches which we anticipate may include marketing
off-patent drugs under our brand name, Bioral, licensing our drug delivery
technology to other pharmaceutical companies with regard to certain patented,
proprietary, or branded drugs and entering into various types of agreements with
other biotechnology or pharmaceutical companies. As we seek commercialization,
we face numerous scientific and procedural hurdles which may adversely affect,
delay or even frustrate our selected marketing approaches. Such hurdles may
include, difficulty in obtaining FDA approval of our proposed products or
difficultly in identifying, establishing, or maintaining research and commercial
relationships. To achieve our objectives, our strategy includes the following
key elements:

- Identify drugs which we believe may benefit from our drug delivery
technology;

- Reduce development risk, regulatory approval process time and uncertainty
of commercial acceptance by utilizing our technology with drugs which
currently have both regulatory approval and commercial acceptance,
including those which are not currently patent protected;

- Obtain relationships with pharmaceutical and biotechnology companies that
have the rights to drugs, which may include access to their proprietary
drugs, and licensing arrangements which may result in sharing some or all
of the risks, time and expense generally associated with development and
commercialization;

- Obtain regulatory approval, including FDA approval, for each drug
encapsulated with our drug delivery technology; and

- Prepare for commercialization of our intended Bioral products.

We are presently engaged in research and development activities with regard
to the following drugs and/or category of drugs, which are not currently patent
protected:

- Bioral Amphotericin B: Amphotericin B, an accepted intravenous drug, has
been identified by us for oral treatment of systemic fungal infections
and as an oral prophylactic agent for immunosuppressed patients. We are
collaborating with the National Institutes of Health, the Public Health
Research Institute of New York and the University of Texas to develop
this intended product. We have been awarded a grant totaling
approximately $0.9 million from the National Institutes of Health which,
along with additional awards of $1.8 million expected under the same
grant, will support our planned Investigational New Drug Application
(IND) submission for Phase I clinical trials.

- Bioral Clofazimine: Clofazimine, an antibiotic, currently an accepted
drug used to treat cells infected with the microbacteria causing
tuberculosis has also been identified for "encapsulation". Clofazimine is
currently administered orally and our goal is to improve oral
availability, reduce side effects, and improve the therapeutic effect. We
are also pursuing applications of our drug delivery technology with
generic injectable antibiotics used to treat other infections. We are
currently in pre-clinical development of clofazimine using our drug
delivery technology in collaboration with the Institute for Tuberculosis
Research, University of Illinois.

- Bioral Anti-Inflammatories: We have identified several, commercially
accepted over-the-counter, non-steroidal, anti-inflammatories such as
generic aspirin or ibuprofen to be potentially "encapsulated" in our
delivery technology. Our objective is to increase the availability of
currently accepted anti-inflammatories for arthritis and other
inflammations with potentially reduced risk of side effects. We are in
the process of preparing formulations in anticipation of potential
pre-clinical trials.

We are also preparing an application seeking to begin Phase I clinical
trials with the FDA with regard to the research and development of our
autologous HIV immunotherapeutic which we currently believe may be filed in the
first quarter of 2003. This technology is being developed as a patient specific
(autologous) therapeutic for treatment following HIV infection. We believe that
the ongoing research and development of this technology will require significant
time and resources and we intend to primarily rely upon the availability of
grants and corporate support to finance further development of this technology.

POSSIBLE STRATEGIC SALE OF SHARES TO PPDI

PPDI has expressed its interest in purchasing up to 690,000 Units in this
offering, constituting approximately 34.5% of the offering (assuming an offering
of 2,000,000 Units), at the initial public offering price. Following the
offering, and assuming PPDI purchases these Units, PPDI will beneficially own up
to 9.9% of our outstanding common stock (9.5% if the Representative's over
allotment option is exercised in full). PPDI will agree not to sell any Units,
shares of common stock or warrants for a period of at least 180 days, subject to
Representative's approval following the date of the final prospectus. The
underwriters will receive the stated commission and expense allowance on the
sale of these Units. In addition to its intent to purchase Units, PPDI has
indicated an interest in securing a license for the use of our drug delivery
technology for certain purposes. We have initiated early-stage negotiations with
PPDI regarding such license, but no terms have been agreed upon and no license
has been entered into as of the date of this prospectus, and the parties may not
be able to reach agreement on any such license.

As of the date of this prospectus, PPDI does not own any of our securities
nor is there any pre-existing relationship between us and PPDI. See "Description
of Business -- Collaborative and Supply Relationships,"

"Certain Transactions," and "Principal Stockholders" for further discussion of
our proposed relationship with PPDI.

HISTORICAL AND RECENT EVENTS

MAS Acquisition XXIII Corp., our original corporate name, was formed in
Indiana on January 6, 1997. In January 2000, an investment group, led by Dr.
Francis E. O'Donnell, our current President and CEO, acquired a controlling
interest in MAS Acquisition XXIII Corp. ("MAS XXIII") for the purpose of
facilitating an investment by us in BioDelivery Sciences, Inc., a Delaware
corporation. At the time of the investment, MAS XXIII did not conduct any
business or have any meaningful operations. Prior to Dr. O'Donnell's investment
group purchasing a majority interest, MAS XXIII was controlled by Mr. Aaron Tsai
who was the President and CEO as well as a majority stockholder. Several
companies which are not affiliated with us in any capacity, that Mr. Tsai and
MAS Capital, Inc., a registered broker dealer, have been involved with
previously, have been the subject of regulatory investigation. After Dr.
O'Donnell's investment group bought a majority interest in MAS XXIII, Mr. Tsai
resigned from any position in management and has no direct or indirect role in
our management. On March 29, 2002, Hopkins Capital Group II, LLC, controlled by
Dr. O'Donnell, entered into an agreement with MAS Capital, Inc. and Mr. Tsai to
purchase and/or surrender all of their interest in our securities, consisting of
74,966 shares of common stock and to return to us 22,881 options, respectively
for $150, 696 in the form of a promissory note payable March 29, 2003.

The business opportunity described in this prospectus is primarily the drug
delivery technology developed by BioDelivery Sciences, Inc. BioDelivery
Sciences, Inc., the Delaware entity, was formed in 1995 by Drs. Raphael Mannino,
Susan Gould-Fogerite, who are currently members of our management, and others,
in order to conduct research and development on various vaccines. On October 10,
2000, with the proceeds of the investment from the investment group led by Dr.
O'Donnell, we purchased shares of the Series A convertible preferred stock of
BioDelivery Sciences, Inc. which resulted in our owning securities representing
84.8% of its voting stock. In September 2000, immediately prior to completing
the investment and gaining control of BioDelivery Sciences, Inc., we changed our
name from MAS Acquisition XXIII Corp. to BioDelivery Sciences International,
Inc. In May 2001, we acquired common stock of BioDelivery Sciences, Inc. from a
group of its stockholders which resulted in our owning 9% (representing 1.4% of
the total voting rights of BioDelivery Sciences, Inc.) of the outstanding common
stock.

In January 2002, we completed our merger with BioDelivery Sciences, Inc.
bringing our aggregate voting right in BioDelivery Sciences, Inc. to 100% and
resulted in our owning all of its assets, including but not limited to the
intellectual property involving the drug delivery technology, subject to all the
liabilities. As a result of the merger, we were the surviving company and
BioDelivery Sciences, Inc. ceased operations as a separate entity. Consequently,
except where specifically noted to the contrary, all discussions in this
prospectus reflect our completion of the merger of BioDelivery Sciences, Inc.
and thus refers to such business operations as those of ours. We ceased being an
Indiana corporation and became a Delaware corporation through a re-
incorporation merger effected on June 3, 2002.

In May 2002, we also effected a reverse stock split of one for 4.37 shares.
All references to our outstanding common stock and other securities reflect the
reverse split.

Our offices and scientific facilities are located at the University of
Medicine and Dentistry of New Jersey, 185 South Orange Avenue, Administrative
Building 4, Newark, New Jersey 07103 and our telephone number is (973) 972-0015.

THE OFFERING

Securities offered.................... 2,000,000 Units, each Unit consisting
of:

(i) one share of common stock; and

(ii) one Class A warrant.

Common Stock:

Number outstanding prior to the
Offering............................ 5,000,863 shares.(1,2)

Number outstanding after this
Offering............................ 7,000,863 shares.(2)

Class A Warrant:

Number outstanding after this
Offering............................ 2,000,000 warrants

Securities underlying Class A
warrants.............................. Each Class A warrant is exercisable
to purchase one share of common
stock.

Exercise price...................... The initial exercise price of each
Class A warrant is 120% of the
purchase price of the Units. The
exercise price is subject to
adjustment, including anti-dilution
provisions for corporate events such
as stock splits and for issuance of
securities at less than the then
current exercise price.

Exercise period..................... The Class A warrants are exercisable
from June 2003 until June 2007.

Redemption.......................... We may redeem the outstanding Class A
warrants for $.10 per warrant upon 30
days written notice to the warrant
holder; provided:

(i) that there is then an
effective registration
statement under the Securities
Act allowing the issuance of
the shares issuable upon
exercise of the Class A
warrants; and

(ii) the average closing sale
price of the Common Stock
equals or exceeds 150% of the
offering price of the Units
for the 10 trading days prior
to the date of the notice of
redemption; and

(iii) that 12 months has elapsed
since the date of this
prospectus.
---------------

(1) As of April 25, 2002, the number of shares of common stock includes the
issuance of 462,243 shares of common stock which were issued as part of our
December, 2001 rescission of all our issued and outstanding Series A
preferred stock. In connection with our merger with BioDelivery Sciences,
Inc. which was consummated in January, 2002, we issued 520,313 shares of
common stock, which are also included in the number of shares outstanding.

(2) Excludes an aggregate of 3,978,355 shares of common stock issuable under (i)
the 2001 incentive stock option plan, (ii) the Representative's unit
purchase option, (iii) the over-allotment option and (iv) Class A warrants.
For a full discussion of the terms of these securities, see the sections
entitled "Description of Capital Stock" and "Capitalization".

Nasdaq and Boston Stock Exchange
Symbols:

Units BDSIU

Common Stock BDSI

Class A Warrants BDSIW

Type of offering...................... This is a firm commitment offering by
the Underwriters. If PPDI fails to
purchase 690,000 Units, the
Representative may terminate the
Offering.

RISK FACTORS

An investment in this offering is extremely risky. You should carefully
consider the following risks, in addition to the other information presented in
this prospectus, before deciding to buy our securities. If any of the following
risks actually materialize, our business and prospects could be seriously
harmed, the price and value of our securities could decline and you could lose
all or part of your investment. The risks and uncertainties described below are
intended to be the material risks that are specific to us, to our industry or to
companies going public.

RISKS RELATED TO OUR TECHNOLOGIES

THE FAILURE TO COMPLETE DEVELOPMENT OF OUR DRUG DELIVERY TECHNOLOGY, OBTAIN
GOVERNMENT APPROVALS, INCLUDING REQUIRED FDA APPROVALS, OR TO COMPLY WITH
ONGOING GOVERNMENTAL REGULATIONS COULD DELAY OR LIMIT INTRODUCTION OF OUR
PROPOSED PRODUCTS AND RESULT IN FAILURE TO ACHIEVE REVENUES OR MAINTAIN OUR
ONGOING BUSINESS.

Our research and development activities, the manufacture and marketing of
our intended products are subject to extensive regulation for safety, efficacy
and quality by numerous government authorities in the United States and abroad.
Before receiving FDA clearance to market our proposed products, we will have to
demonstrate that our products are safe and effective on the patient population
and for the diseases that are to be treated. Clinical trials, manufacturing and
marketing of drugs are subject to the rigorous testing and approval process of
the FDA and equivalent foreign regulatory authorities. The Federal Food, Drug
and Cosmetic Act and other federal, state and foreign statutes and regulations
govern and influence the testing, manufacture, labeling, advertising,
distribution and promotion of drugs and medical devices. As a result, clinical
trials and regulatory approval can take a number of years or longer to
accomplish and require the expenditure of substantial financial, managerial and
other resources.

In order to be commercially viable, we must successfully research, develop,
obtain regulatory approval for, manufacture, introduce, market and distribute
our technologies. For each drug encapsulated with our drug delivery technology
and for the HIV therapy, as the case may be, we must successfully meet a number
of critical developmental milestones, including:

- demonstrate benefit from delivery of each specific drug through our drug
delivery technology,

- demonstrate through pre-clinical and clinical trials that our drug
delivery technology and our patient specific HIV therapy is safe and
effective,

- establish a viable Good Manufacturing Process capable of potential
scale-up.

The time-frame necessary to achieve these developmental milestones may be
long and uncertain, and we may not successfully complete these milestones for
any of our intended products in development.

In addition to the risks previously discussed, our HIV immunotherapeutic is
subject to additional developmental risks which includes the following:

- the uncertainties arising from the rapidly growing scientific aspects of
HIV and potential treatments

- uncertainties arising as a result of the broad array of potential
treatments related to HIV

- anticipated expense and time believed to be associated with the
development and regulatory approval of treatments for HIV

In order to conduct clinical trials that are necessary to obtain approval
by FDA to market a product, it is necessary to receive clearance from the FDA to
conduct such clinical trials. The FDA can halt clinical trials at any time for
safety reasons or because we or our clinical investigators do not follow the
FDA's requirements for conducting clinical trials. If we are unable to receive
clearance to conduct clinical trials or the trials are halted by the FDA, we
would not be able to achieve any revenue from such product as it is illegal to
sell any drug or medical device for human consumption without FDA approval. See
"Description of Business -- Government Regulation."

DATA OBTAINED FROM CLINICAL TRIALS ARE SUSCEPTIBLE TO VARYING INTERPRETATIONS,
WHICH COULD DELAY, LIMIT OR PREVENT REGULATORY CLEARANCES.

Data already obtained, or in the future obtained, from pre-clinical studies
and clinical trials do not necessarily predict the results that will be obtained
from later pre-clinical studies and clinical trials. Moreover, pre-clinical and
clinical data is susceptible to varying interpretations, which could delay,
limit or prevent regulatory approval. A number of companies in the
pharmaceutical industry including those involved in competing drug delivery
technologies, have suffered significant setbacks in advanced clinical trials,
even after promising results in earlier trials. The failure to adequately
demonstrate the safety and effectiveness of an intended product under
development could delay or prevent regulatory clearance of the potential drug,
resulting in delays to commercialization, and could materially harm our
business. Our clinical trials may not demonstrate sufficient levels of safety
and efficacy necessary to obtain the requisite regulatory approvals for our
drugs, and thus our proposed drugs may not be approved for marketing.

We have conducted research regarding whether other companies have subject
to FDA review regarding nano-encapsulation drug delivery systems and based upon
this research are unaware of any FDA proceedings limiting the use of this
technology. There can be no assurance that the FDA will not undertake any such
actions against our technology or similar technologies developed by others. See
"Description of Business -- Government Regulation."

COMPETITORS IN THE DRUG DEVELOPMENT INDUSTRY MAY DEVELOP COMPETING TECHNOLOGY.

Drug companies and/or other technology companies may seek to develop and
market nanoencapsulation technologies which may compete with our technology.
While we believe that our technology for nanoencapsulating drugs is unique
because we utilize cochleate nanocrystals to encapsulate drugs; we capture the
drugs at the time when large lipid sheets are rolling up to form the scroll-like
cochleate structure; and no chemical reactions are involved in this process
which would otherwise result in drugs being exposed to potentially damaging
chemicals, other competitors may develop similar or different nanoencapsulation
techniques which may become more accepted by the marketplace.

OUR PATIENT-SPECIFIC HIV THERAPY MAY NOT GAIN FDA APPROVAL IN CLINICAL TRIALS
OR BE EFFECTIVE AS A THERAPEUTIC AGAINST THE HIV VIRUS WHICH COULD AFFECT OUR
FUTURE PROFITABILITY.

In order to obtain regulatory approvals of our patient-specific HIV
therapy, we must demonstrate that the procedure is safe and effective for use in
humans and functions as a therapeutic against the HIV virus. To date, we have
only conducted a pilot study pursuant to Institutional Review Board oversight in
anticipation of our initial FDA submission for our patient-specific HIV therapy.

We may not be able to demonstrate that this potential HIV therapy, is safe
or effective in advanced clinical trials that involve human patients. We are
also not able to assure that the results of the clinical trials already
conducted and which we intend to conduct will support our applications for
regulatory approval. As a result, our HIV therapy may be curtailed, redirected
or eliminated at any time. The HIV virus is very complex and may be prone to
genetic mutations. These mutations have produced strains of HIV that are
resistant to currently approved therapeutics.

Even if we gain regulatory approval for our patient-specific HIV therapy,
the virus may develop similar resistance to our treatment. This could have a
material adverse effect on our business, financial condition and results of
operations. See "Description of Business -- Government Regulation."

RISKS RELATING TO OUR BUSINESS

SINCE WE HAVE A LIMITED OPERATING HISTORY AND HAVE NOT GENERATED ANY REVENUES
FROM THE SALE OF PRODUCTS TO DATE, YOU CANNOT RELY UPON OUR LIMITED HISTORICAL
PERFORMANCE TO MAKE AN INVESTMENT DECISION.

Since our inception in January 1997 and through March 31, 2002, we have
recorded operating losses totaling $5,412,581. As of March 31, 2002, we had a
working capital deficit of $1,697,470 and a stockholder's deficit of $504,212.
In addition, we expect to incur increasing operating losses over the next
several years as we

continue to incur increasing costs for research and development and clinical
trials. Our ability to generate revenue and achieve profitability depends upon
our ability, alone or with others, to complete the development of our proposed
products, obtain the required regulatory approvals and manufacture, market and
sell our proposed products.

We have not generated any revenue from the commercial sale of our proposed
products or any encapsulated drugs and do not expect to receive such revenue in
the near future. Since our inception, we have engaged primarily in research and
development, licensing technology, seeking grants, raising capital and
recruiting scientific and management personnel. We have not generated any
revenue to date, other than research grants, and have no licensing or royalty
revenue or products ready for use or licensing in the marketplace. This limited
history may not be adequate to enable you to fully assess our ability to develop
our technologies and proposed products, obtain FDA approval and achieve market
acceptance of our proposed products and respond to competition. We cannot be
certain as to when or whether to anticipate commercializing and marketing our
proposed products in development, and do not expect to generate sufficient
revenues from proposed product sales to cover our expenses or achieve
profitability in the near future.

WE RELY SOLELY ON THE FACILITIES OF THE UNIVERSITY OF MEDICINE AND DENTISTRY
OF NEW JERSEY FOR ALL OF OUR RESEARCH AND DEVELOPMENT, WHICH COULD BE
MATERIALLY DELAYED SHOULD WE LOSE ACCESS TO THOSE FACILITIES.

We have no research and development facilities of our own. As of the date
of this prospectus, we are entirely dependent on third parties to use their
facilities to conduct research and development. To date, we have relied on the
University of Medicine and Dentistry of New Jersey and Albany Medical College
for this purpose. Additionally, these universities own certain of the patents to
our drug delivery technology. Our inability to conduct research and development
may delay or impair our ability to gain FDA approval and commercialization of
our drug delivery technology and products.

We do not currently have plans nor are we planning in the near future, to
relocate out of our offices and research facilities at the University of
Medicine and Dentistry of New Jersey. We currently maintain a good working
relationship with the University of Medicine and Dentistry. Should the situation
change and we are required to relocate on short notice, we do not currently have
an alternate facility where we could relocate. The cost and time to establish or
locate an alternative research and development facility to develop our
technology, other than through the universities, would be substantial and would
delay gaining FDA approval and commercializing our products, assuming that we
have not defaulted on the terms of our intellectual property licenses and can
continue with our approval process. See "Description of Business -- Relationship
with University of Medicine and Dentistry and Albany Medical College."

WE ARE DEPENDENT ON OUR COLLABORATIVE AGREEMENTS FOR THE DEVELOPMENT OF OUR
DRUG DELIVERY TECHNOLOGY AND BUSINESS DEVELOPMENT WHICH EXPOSES US TO THE RISK
OF RELIANCE ON THE VIABILITY OF THIRD PARTIES.

In conducting our research and development activities, we rely upon
numerous collaborative agreements with universities, governmental agencies,
manufacturers, contract research organizations and corporate partners. The loss
of or failure to perform under any of these arrangements, by any of these
entities, may substantially disrupt or delay our research and development
activities including our anticipated clinical trials. This loss may also
increase our expenses and materially harm our business, financial condition and
results of operation.

We have a license agreement with the University of Medicine and Dentistry
of New Jersey and Albany Medical College in which they grant us exclusive
license to conduct research and development of the drug delivery technology. Our
research facilities are also located on the premises of the University of
Medicine and Dentistry of New Jersey pursuant to a research agreement.

To date, almost all of our funding for research and operations have come
from grants and other types of funding from corporate sponsors and the National
Institutes of Health (NIH). We will continue to be dependent upon the NIH, in
particular, to develop our Bioral Amphotericin B. Furthermore, we anticipate
that research and development of our HIV therapy will primarily depend on
funding from the federal government. See "Description of
Business -- Collaborative and Supply Relationships."

REQUIREMENTS IMPOSED BY OUR NATIONAL INSTITUTES OF HEALTH GRANT COULD DELAY OR
HINDER OUR ABILITY TO DEVELOP OUR AMPHOTERICIN B PRODUCT OR RECEIVE ADDITIONAL
FUNDING.

In 2001, the National Institutes of Health awarded us a Small Business
Innovation Research Grant (SBIR), which will be utilized in our research and
development efforts. NIH has formally awarded us a grant of $883,972 of which we
have received approximately $627,000 through March 2002 and expect to receive
the remainder through June 2002. Additionally, this award refers to future
funding levels of $814,398 and $989,352 that we expect to be awarded in 2002 and
2003, respectively, subject to availability and satisfactory progress of the
project in NIH's opinion. The grant is subject to provisions for monitoring set
forth in NIH Guide for Grants and Contracts dated February 24, 2000,
specifically, the NIAID Policy on Monitoring Grants Supporting Clinical Trials
and Studies. If NIH believes that satisfactory progress is not achieved in its
opinion, the 2002 and 2003 amounts noted above may be reduced or eliminated in
their entirety at NIH's sole discretion. See "Description of
Business -- Collaborative and Supply Relationships."

WE ARE EXPOSED TO PRODUCT LIABILITY, CLINICAL AND PRECLINICAL LIABILITY RISKS
WHICH COULD PLACE A SUBSTANTIAL FINANCIAL BURDEN UPON US, SHOULD WE BE SUED,
BECAUSE WE DO NOT CURRENTLY HAVE PRODUCT LIABILITY INSURANCE ABOVE AND BEYOND
OUR GENERAL INSURANCE COVERAGE.

Our business exposes us to potential product liability and other liability
risks that are inherent in the testing, manufacturing and marketing of
pharmaceutical products. We cannot assure potential investors that such claims
will not be asserted against us. In addition, the use in our clinical trials of
pharmaceutical products that our potential collaborators may develop and the
subsequent sale of these products by us or our potential collaborators may cause
us to bear a portion of or all product liability risks. A successful liability
claim or series of claims brought against us could have a material adverse
effect on our business, financial condition and results of operations.

We do not currently have any product liability insurance or other liability
insurance relating to clinical trials or any products or compounds. We cannot
assure you that we will be able to obtain or maintain adequate product liability
insurance on acceptable terms, if at all, or that such insurance will provide
adequate coverage against our potential liabilities. Furthermore, our current
and potential partners with whom we have collaborative agreements with or our
future licensees may not be willing to indemnify us against these types of
liabilities and may not themselves be sufficiently insured or have a net worth
sufficient to satisfy any product liability claims. Claims or losses in excess
of any product liability insurance coverage that may be obtained by us could
have a material adverse effect on our business, financial condition and results
of operations.

WE DO NOT CURRENTLY HAVE SPECIFIC PLANS FOR UNALLOCATED OFFERING PROCEEDS AND
OUR MANAGEMENT WILL HAVE BROAD DISCRETION IN DETERMINING FUTURE ALLOCATION.

The principal purposes of the funding from this offering are to conduct
research and development of our drug delivery technology, obtain regulatory
approval for our technology and proposed products, and expand our research
facilities. We currently do not have specific plans for all of the net proceeds
from this offering. We expect to use a percentage of the proceeds for general
corporate purposes, including working capital, development of our technology,
obtain regulatory approvals for our products and capital expenditures. The
amounts expended for each purpose and the timing of such expenditures may vary
depending upon numerous factors. Consequently, we will have broad discretion in
determining the amount and timing of expenditures and in using the unallocated
proceeds of this offering, and there can be no assurance that we will use such
discretion effectively or in a manner that will not result in a material adverse
effect on our business, financial condition and results of operation. Proceeds
received by us as a result of the exercise of any of the Class A warrants may be
used in any manner generally consistent with the use of proceeds of this
offering. See "Use of Proceeds."

ACCEPTANCE OF OUR PRODUCTS IN THE MARKETPLACE IS UNCERTAIN AND FAILURE TO
ACHIEVE MARKET ACCEPTANCE WILL PREVENT OR DELAY OUR ABILITY TO GENERATE
REVENUES

Our future financial performance will depend, at least in part, upon the
introduction and customer acceptance of our proposed products. Even if approved
for marketing by the necessary regulatory authorities, our products may not
achieve market acceptance. The degree of market acceptance will depend upon a
number of factors, including:

- the receipt of regulatory clearance of marketing claims for the uses that
we are developing;

- the establishment and demonstration of the advantages, safety and
efficacy of our technologies;

- pricing and reimbursement policies of government and third-party payors
such as insurance companies, health maintenance organizations and other
health plan administrators;

- our ability to attract corporate partners, including pharmaceutical
companies, to assist in commercializing our intended products; and

- our ability to market our products.

Physicians, patients, payors or the medical community in general may be
unwilling to accept, utilize or recommend any of our proposed products. If we
are unable to obtain regulatory approval, commercialize and market our proposed
products when planned, we may not achieve any market acceptance or generate
revenue.

WE MAY BE SUED BY THIRD PARTIES WHICH CLAIM THAT OUR PRODUCTS INFRINGE ON
THEIR INTELLECTUAL PROPERTY RIGHTS, PARTICULARLY BECAUSE THERE IS SUBSTANTIAL
UNCERTAINTY ABOUT THE VALIDITY AND BREADTH OF MEDICAL PATENTS

We may be exposed to future litigation by third parties based on claims
that our technologies, products or activities infringe the intellectual property
rights of others or that we have misappropriated the trade secrets of others.
This risk is exacerbated by the fact that the validity and breadth of claims
covered in medical technology patents and the breadth and scope of trade secret
protection involve complex legal and factual questions for which important legal
principles are unresolved. Any litigation or claims against us, whether or not
valid, could result in substantial costs, could place a significant strain on
our financial resources and could harm our reputation. Most of our license
agreements require that we pay the costs associated with defending this type of
litigation. In addition, intellectual property litigation or claims could force
us to do one or more of the following:

- cease selling, making, using, importing, incorporating or using any of
our technologies and/or products that incorporate the challenged
intellectual property, which would adversely affect our revenue;

- obtain a license from the holder of the infringed intellectual property
right, which license may be costly or may not be available on reasonable
terms, if at all; or

- redesign our products, which would be costly and time-consuming.

We are aware of two issued United States patents dealing with lipid
formulations of Amphotericin B products. The first of these patents, United
States Patent No. 4,978,654, claims an Amphotericin B liposome product. We do
not believe that our patents or our technology are in conflict with this
existing patent, although there can be no assurance that a court of law or the
United States' patent authorities might determine otherwise. Our belief is based
upon the fact that our cochleate product does not contain liposomes, which
appears to be the basis for the existing patent. The second of these patents,
United States Patent No. 5,616,334, claims a composition of a lipid complex
containing Amphotericin B defined during prosecution as a ribbon structure. Our
nano-encapsulation technology uses cochleates which are not ribbon structures.
Accordingly, we do not believe that we are in conflict with this second patent.
If a court were to determine that we infringe either of these patents, we might
be required to seek a license from the holders of the patent to commercialize
our Amphotericin B products. In such event, we do not know whether we would be
able to obtain a license from either patent holder. In addition, if we were
unable to obtain a license, or if the terms of the license were onerous, there
would likely be a material adverse effect upon our business plan to
commercialize our Amphotericin B products.

As of the date of this prospectus, we have not engaged in discussions,
received any communications, nor do we have any well-founded reason to believe
that any third party is challenging or has the right proper legal authority to
challenge our intellectual property rights or those of the actual patent
holders. See "Description of Business -- Licenses, Patents and Proprietary
Information."

IF WE ARE UNABLE TO ADEQUATELY PROTECT OR ENFORCE OUR RIGHTS TO INTELLECTUAL
PROPERTY OR SECURE RIGHTS TO THIRD-PARTY PATENTS, WE MAY LOSE VALUABLE RIGHTS,
EXPERIENCE REDUCED MARKET SHARE, ASSUMING ANY, OR INCUR COSTLY LITIGATION TO
PROTECT SUCH RIGHTS

Our ability to obtain license to patents, maintain trade secret protection
and operate without infringing the proprietary rights of others will be
important to our commercializing any products under development. The current and
future development of our drug delivery technology is contingent upon whether we
are able to maintain a license to access the patents. Without this license, the
technology would be protected from our use and we would not be able to even
conduct research without prior permission from the patent holder. Therefore, any
disruption in access to the technology could substantially delay the development
of our technology.

The patent positions of biotechnology and pharmaceutical companies,
including ours which involves licensing agreements, are frequently uncertain and
involve complex legal and factual questions. In addition, the coverage claimed
in a patent application can be significantly reduced before the patent is
issued. Consequently, our patent applications and any issued and licensed
patents may not provide protection against competitive technologies or may be
held invalid if challenged or circumvented. Our competitors may also
independently develop drug delivery technologies or products similar to ours or
design around or otherwise circumvent patents issued to us or licensed by us. In
addition, the laws of some foreign countries may not protect our proprietary
rights to the same extent as U.S. law.

We also rely upon trade secrets, technical know-how and continuing
technological innovation to develop and maintain our competitive position. We
generally require our employees, consultants, advisors and collaborators to
execute appropriate confidentiality and assignment-of-inventions agreements with
us. These agreements typically provide that all materials and confidential
information developed or made known to the individual during the course of the
individual's relationship with us is to be kept confidential and not disclosed
to third parties except in specific circumstances, and that all inventions
arising out of the individual's relationship with us shall be our exclusive
property. These agreements may be breached, and in some instances, we may not
have an appropriate remedy available for breach of the agreements. Furthermore,
our competitors may independently develop substantially equivalent proprietary
information and techniques, reverse engineer our information and techniques, or
otherwise gain access to our proprietary technology. We may be unable to
meaningfully protect our rights in trade secrets, technical know-how and other
non-patented technology.

Although our trade secrets and technical know-how are important, our
continued access to the patents is a significant factor in the development and
commercialization of our drug delivery technology. Aside from the general body
of scientific knowledge from other drug delivery processes and lipid technology,
these patents, to the best of our knowledge and based upon our current
scientific data, are the only intellectual property necessary to develop our
current drug delivery system using our proposed drugs. We do not believe that
any other company is developing a drug delivery technology similar to ours or
that we violating any other patents in developing our technology.

We may have to resort to litigation to protect our rights for certain
intellectual property, or to determine their scope, validity or enforceability.
Enforcing or defending our rights is expensive, could cause diversion of our
resources and may not prove successful. Any failure to enforce or protect our
rights could cause us to lose the ability to exclude others from using our
technology to develop or sell competing products. See "Description of
Business -- Licenses, Patents and Proprietary Information."

KEY COMPONENTS OF OUR DRUG DELIVERY AND AUTOLOGOUS HIV THERAPY TECHNOLOGIES MAY
BE PROVIDED BY SOLE OR LIMITED NUMBERS OF SUPPLIERS, AND SUPPLY SHORTAGES OR
LOSS OF THESE SUPPLIERS COULD RESULT IN INTERRUPTIONS IN SUPPLY OR INCREASED
COSTS.

Certain components used in our research and development activities such as
lipids are currently purchased from a single or a limited number of outside
sources. For example, we currently purchase our lipid supplies from Avanti Polar
Lipids. The reliance on a sole or limited number of suppliers could result in:

- potential delays associated with research and development and clinical
and pre-clinical trials due to an inability to timely obtain a single or
limited source component;

- potential inability to timely obtain an adequate supply of required
components; and

- potential of reduced control over pricing, quality and timely delivery.

We do not have long-term agreements with any of our suppliers, and
therefore the supply of a particular component could be terminated without
penalty to the supplier. Any interruption in the supply of components could
cause us to seek alternative sources of supply or manufacture these components
internally. If the supply of any components is interrupted, components from
alternative suppliers may not be available in sufficient volumes within required
timeframes, if at all, to meet our needs. This could delay our ability to
complete clinical trials, obtain approval for commercialization or commence
marketing; or cause us to lose sales, incur additional costs, delay new product
introductions or harm our reputation.

Further, components from a new supplier may not be identical to those
provided by the original supplier. Such differences if they exist could affect
product formulations or the safety and effectiveness of our products that are
being developed.

As of the date of this prospectus and based upon our discussions with these
suppliers, we do not foresee nor have any current reason to believe that there
will be any meaningful interruption, delay, or termination of supplies.

WE HAVE LIMITED MANUFACTURING EXPERIENCE AND ONCE OUR PRODUCTS ARE APPROVED WE
MAY NOT BE ABLE TO MANUFACTURE SUFFICIENT QUANTITIES AT AN ACCEPTABLE COST

We remain in the research and development and clinical and pre-clinical
trial phase of product commercialization. Accordingly, once our proposed
products are approved for commercial sale we will need to establish the
capability to commercially manufacture our product(s) in accordance with FDA and
other regulatory requirements. We have limited experience in establishing,
supervising and conducting commercial manufacturing. If we fail to adequately
establish, supervise and conduct all aspects of the manufacturing processes, we
may not be able to commercialize our products. We do not presently own
manufacturing facilities necessary to provide clinical or commercial quantities
of our intended products.

We presently plan to rely on third party contractors to manufacture part or
all of our proposed products. This may expose us to the risk of not being able
to directly oversee the production and quality of the manufacturing process.
Furthermore, these contractors, whether foreign or domestic, may experience
regulatory compliance difficulty, mechanic shut downs, employee strikes, or any
other unforeseeable acts that may delay production. See "Description of
Business -- Manufacturing."

DUE TO OUR LIMITED MARKETING, SALES AND DISTRIBUTION EXPERIENCE, WE MAY BE
UNSUCCESSFUL IN OUR EFFORTS TO SELL OUR PRODUCTS, ENTER INTO RELATIONSHIPS
WITH THIRD PARTIES OR DEVELOP A DIRECT SALES ORGANIZATION

Except for our non-exclusive distribution agreement with BioTech Specialty
Partners, Inc., a development-stage company affiliated with Dr. Francis E.
O'Donnell, a member of our management and significant beneficial owner of our
securities, we have yet to establish marketing, sales or distribution
capabilities for our proposed products. Until such time as our proposed products
are further along in the regulatory process, we will not devote any meaningful
time and resources in this regard. At the appropriate time, we intend to enter
into agreements with third parties to sell our proposed products or we may
develop our own sales and marketing force. We may be unable to establish or
maintain third-party relationships on a commercially reasonable basis, if at
all. In addition, these third parties may have similar or more established
relationships with our competitors.

If we do not enter into relationships with third parties for the sales and
marketing of our proposed products, we will need to develop our own sales and
marketing capabilities. We have limited experience in developing, training or
managing a sales force. If we choose to establish a direct sales force, we may
incur substantial additional expenses in developing, training and managing such
an organization. We may be unable to build a sales force on a cost effective
basis or at all. Any such direct marketing and sales efforts may prove to be
unsuccessful. In addition, we will compete with many other companies that
currently have extensive and well-funded marketing and sales operations. Our
marketing and sales efforts may be unable to compete against these other
companies. We may be unable to establish a sufficient sales and marketing
organization on a timely basis, if at all. See "Description of
Business -- Manufacturing" and "Sales and Marketing."

We may be unable to engage qualified distributors. Even if engaged, these
distributors may:

- fail to satisfy financial or contractual obligations to us;

- fail to adequately market our products;

- cease operations with little or no notice to us; or

- offer, design, manufacture or promote competing products.

If we fail to develop sales, marketing and distribution channels, we would
experience delays in product sales and incur increased costs, which would harm
our financial results.

IF WE ARE UNABLE TO CONVINCE PHYSICIANS AS TO THE BENEFITS OF OUR INTENDED
PRODUCTS, WE MAY INCUR DELAYS OR ADDITIONAL EXPENSE IN OUR ATTEMPT TO
ESTABLISH MARKET ACCEPTANCE.

Broad use of our drug delivery technology may require physicians to be
informed regarding our intended products and the intended benefits. The time and
cost of such an educational process may be substantial. Inability to
successfully carry out this physician education process may adversely affect
market acceptance of our proposed products. We may be unable to timely educate
physicians regarding our intended products in sufficient numbers to achieve our
marketing plans or to achieve product acceptance. Any delay in physician
education may materially delay or reduce demand for our products. In addition,
we may expend significant funds towards physician education before any
acceptance or demand for our products is created if at all.

WE MAY HAVE DIFFICULTY RAISING NEEDED CAPITAL IN THE FUTURE BECAUSE OF OUR
LIMITED OPERATING HISTORY AND BUSINESS RISKS ASSOCIATED WITH OUR COMPANY.

Our business currently does not generate any sales from our proposed
products and revenue from grants and collaborative agreements may not be
sufficient to meet our future capital requirements. We do not know when this
will change. We have expended and will continue to expend substantial funds in
the research, development and clinical and pre-clinical testing of our drug
delivery technology and autologous HIV immunotherapeutic. We will require
additional funds to conduct research and development, establish and conduct
clinical and pre-clinical trials, commercial-scale manufacturing arrangements
and to provide for the marketing and distribution of our products. Additional
funds may not be available on acceptable terms, if at all. If adequate funds are
unavailable from any available source, we may have to delay, reduce the scope of
or eliminate one or more of our research or development programs or product
launches or marketing efforts which may materially harm our business, financial
condition and results of operations.

Our long term capital requirements which will exceed the anticipated net
proceeds of this offering, are expected to depend on many factors, including:

- the number of potential products and technologies in development;

- continued progress and cost of our research and development programs;

- progress with pre-clinical studies and clinical trials;

- the time and costs involved in obtaining regulatory clearance;

- costs involved in preparing, filing, prosecuting, maintaining and
enforcing patent claims;

- costs of developing sales, marketing and distribution channels and our
ability to sell our drugs;

- costs involved in establishing manufacturing capabilities for commercial
quantities of our drugs;

- competing technological and market developments;

- market acceptance or our products;

- costs for recruiting and retaining employees and consultants; and

- costs for training physicians

We may consume available resources more rapidly than currently anticipated,
resulting in the need for additional funding. We may seek to raise any necessary
additional funds through the exercising of warrants, equity or debt financings,
collaborative arrangements with corporate partners or other sources, which may
be dilutive to existing stockholders or otherwise have a material effect on our
current or future business prospects. See "Management's Discussion and Analysis
of Financial Condition and Plan of Operation." If adequate funds are not
available, we may be required to significantly reduce or refocus our development
efforts with regards to our drug delivery technology and the proposed
encapsulation of certain drugs.

RISKS RELATED TO OUR INDUSTRY

THE MARKET FOR OUR PROPOSED PRODUCTS IS RAPIDLY CHANGING AND COMPETITIVE, AND
NEW DRUG DELIVERY MECHANISMS, DRUG DELIVERY TECHNOLOGIES, NEW HIV
THERAPEUTICS, NEW DRUGS AND NEW TREATMENTS WHICH MAY BE DEVELOPED BY OTHERS
COULD IMPAIR OUR ABILITY TO MAINTAIN AND GROW OUR BUSINESS AND REMAIN
COMPETITIVE

The pharmaceutical and biotechnology industries are subject to rapid and
substantial technological change. Developments by others may render our
technologies and intended products noncompetitive or obsolete, or we may be
unable to keep pace with technological developments or other market factors.
Technological competition from pharmaceutical and biotechnology companies,
universities, governmental entities and others diversifying into the field is
intense and is expected to increase. Many of these entities have significantly
greater research and development capabilities and budgets than we do, as well as
substantially more marketing, manufacturing, financial and managerial resources.
These entities represent significant competition for us. Acquisitions of, or
investments in, competing pharmaceutical or biotechnology companies by large
corporations could increase such competitors' financial, marketing,
manufacturing and other resources.

We are a development-stage enterprise and are engaged in the development of
novel drug delivery technologies. As a result, our resources are limited and we
may experience technical challenges inherent in such novel technologies.
Competitors have developed or are in the process of developing technologies that
are, or in the future may be, the basis for competition. Some of these
technologies may have an entirely different approach or means of accomplishing
similar therapeutic effects compared to our technology. Our competitors may
develop drug delivery technologies and drugs that are safer, more effective or
less costly than our intended products and, therefore, present a serious
competitive threat to us.

The potential widespread acceptance of therapies that are alternatives to
ours may limit market acceptance of our products even if commercialized. Many of
our targeted diseases and conditions can also be treated by other medication or
drug delivery technologies. These treatments may be widely accepted in medical
communities and have a longer history of use. The established use of these
competitive drugs may limit the potential for our technologies and products to
receive widespread acceptance if commercialized. See "Description of
Business -- Competition."

IF USERS OF OUR PROPOSED PRODUCTS ARE UNABLE TO OBTAIN ADEQUATE REIMBURSEMENT
FROM THIRD-PARTY PAYORS, OR IF NEW RESTRICTIVE LEGISLATION IS ADOPTED, MARKET
ACCEPTANCE OF OUR PROPOSED PRODUCTS MAY BE LIMITED AND WE MAY NOT ACHIEVE
REVENUES

The continuing efforts of government and insurance companies, health
maintenance organizations and other payors of healthcare costs to contain or
reduce costs of health care may affect our future revenues and profitability,
and the future revenues and profitability of our potential customers, suppliers
and collaborative partners and the availability of capital. For example, in
certain foreign markets, pricing or profitability of prescription
pharmaceuticals is subject to government control. In the United States, given
recent federal and state government initiatives directed at lowering the total
cost of health care, the U.S. Congress and state legislatures will likely
continue to focus on health care reform, the cost of prescription
pharmaceuticals and on the reform of the Medicare and Medicaid systems. While we
cannot predict whether any such legislative or

regulatory proposals will be adopted, the announcement or adoption of such
proposals could materially harm our business, financial condition and results of
operations.

Our ability to commercialize our proposed products will depend in part on
the extent to which appropriate reimbursement levels for the cost of our
proposed products and related treatment are obtained by governmental
authorities, private health insurers and other organizations, such as HMOs.
Third-party payors are increasingly challenging the prices charged for medical
drugs and services. Also, the trend toward managed health care in the United
States and the concurrent growth of organizations such as HMOs, which could
control or significantly influence the purchase of health care services and
drugs, as well as legislative proposals to reform health care or reduce
government insurance programs, may all result in lower prices for or rejection
of our drugs.

WE COULD BE EXPOSED TO SIGNIFICANT DRUG LIABILITY CLAIMS WHICH COULD BE TIME
CONSUMING AND COSTLY TO DEFEND, DIVERT MANAGEMENT ATTENTION AND ADVERSELY
IMPACT OUR ABILITY TO OBTAIN AND MAINTAIN INSURANCE COVERAGE.

The testing, manufacture, marketing and sale of our intended products
involve an inherent risk that product liability claims will be asserted against
us. We currently have a general liability policy with an annual aggregate limit
of $2 million with a $1 million limit per occurrence which does not provide
coverage for product liability. All of our pre-clinical trials have been and all
of our proposed clinical and pre-clinical trials are anticipated to be conducted
by collaborators and third party contractors. We currently do not have insurance
which relate to product liability or insurance related to clinical or
pre-clinical trials. We intend to seek insurance against such risks before our
product sales are commenced, although there can be no assurance that such
insurance can be obtained at such time, or even if it is available, that the
cost will be affordable. Even if we obtain insurance, it may prove inadequate to
cover claims and/or litigation costs. The cost and availability of such
insurance are unknown. Product liability claims or other claims related to our
intended products, regardless of their outcome, could require us to spend
significant time and money in litigation or to pay significant settlement
amounts or judgments. Any successful product liability or other claim may
prevent us from obtaining adequate liability insurance in the future on
commercially desirable or reasonable terms. In addition, product liability
coverage may cease to be available in sufficient amounts or at an acceptable
cost. An inability to obtain sufficient insurance coverage at an acceptable cost
or otherwise to protect against potential product liability claims could prevent
or inhibit the commercialization of our drug delivery technology. A product
liability claim could also significantly harm our reputation and delay market
acceptance of our intended products.

OUR BUSINESS INVOLVES ENVIRONMENTAL RISKS RELATED TO HANDLING REGULATED
SUBSTANCES WHICH COULD SEVERELY AFFECT OUR ABILITY TO CONDUCT RESEARCH AND
DEVELOPMENT OF OUR DRUG DELIVERY TECHNOLOGY

In connection with our research and development activities and our
manufacture of materials and drugs, we are subject to federal, state and local
laws, rules, regulations and policies governing the use, generation,
manufacture, storage, air emission, effluent discharge, handling and disposal of
certain materials, biological specimens and wastes. Although we believe that we
have complied with the applicable laws, regulations and policies in all material
respects and have not been required to correct any material noncompliance, we
may be required to incur significant costs to comply with environmental and
health and safety regulations in the future. Our research and development may in
the future involve the controlled use of hazardous materials, including but not
limited to certain hazardous chemicals and narcotics. The current hazardous
chemicals that we currently use, which may change as our research progresses,
are chloroform and methanol. We are authorized to use these and other hazardous
chemicals in our facilities through our affiliation with the University Medicine
and Dentistry of New Jersey. The university also disposes these chemicals from
our premises as part of our agreement to use the facilities and carries general
liability insurance in this regard.

Although we believe that our safety procedures for storing, handling and
disposing of such materials will comply with the standards prescribed by state
and federal regulations, we cannot completely eliminate the risk of accidental
contamination or injury from these materials. In the event of such an
occurrence, we could be held liable for any damages that result and any such
liability could exceed our resources.

RISKS RELATED TO THIS OFFERING

OUR STOCK PRICE AFTER THIS OFFERING WILL BE SUBJECT TO MARKET FACTORS, AND
YOUR INVESTMENT IN OUR SECURITIES COULD DECLINE IN VALUE

After this offering, an active trading market in our securities might not
develop or continue. If you purchase shares of our securities in the offering,
you will pay a price that was not established in a competitive market. Rather,
you will pay a price that we negotiated with the representatives of the
underwriters based upon an assessment of the valuation of our business, market
factors and associated securities. The public market may not agree with or
accept this valuation, in which case you may not be able to sell your securities
at or above the initial offering price. The market price of our securities may
fluctuate significantly in response to factors which are beyond our control.

In addition, the market prices of securities of biotechnology and
pharmaceutical companies have been extremely volatile, and have experienced
fluctuations that often have been unrelated or disproportionate to the operating
performance of these companies. These broad market fluctuations could result in
extreme fluctuations in the price of our securities, which could cause a decline
in the value of your securities. See "Dilution."

FUTURE SALES OF OUR SECURITIES MAY DEPRESS OUR STOCK PRICE AND CAUSE A
SUBSTANTIAL LOSS TO PURCHASERS OF OUR SECURITIES

Within 45 days of the completion of this offering, as many as an additional
15% of the Units in this offering may be purchased and subsequently resold by
the underwriters, the over-allotment option. If substantial amounts of our
securities were to be sold in the public market by the underwriters following
this offering, the market price of our securities could fall. In addition, these
sales could create the perception to the public of difficulties or problems in
our business. As a result, these sales also might make it more difficult for us
to sell equity or equity-related securities in the future at a time and price
that we deem appropriate. For a more detailed discussion of shares eligible for
sale after this offering, see "Shares Eligible for Future Sale."

The Units offered by this prospectus include Class A warrants to purchase
up to an additional 2,000,000 shares (2,300,000 shares if the over-allotment
option is exercised in full) of our common stock at a per share exercise price
of 120% of the purchase price of the Units.

Under Rule 144 as currently in effect, commencing on the date of this
prospectus, a person who has beneficially owned restricted shares of common
stock for at least one year, including the holding period of any prior owner who
is not an affiliate, would be entitled to sell a number of the shares within any
three-month period equal to the greater of 1% of the then outstanding shares of
the common stock or the average weekly reported volume of trading of the common
stock on the NASDAQ SmallCap Market during the four calendar weeks preceding
such sale. Immediately after the offering, 1% of our outstanding shares of
common stock (excluding shares of common stock underlying all options and
warrants) would equal approximately 70,009 shares. There are approximately
4,254,002 shares which would be eligible for resale under Rule 144 (between 12
and 36 months from the date of this prospectus.) Although 3,330,115 of such
shares are held by officers, directors and affiliates and are subject to a
lock-up of at least 6 months). Therefore, a significant number of shares may be
sold immediately and may negatively effect our market price. Under Rule 144,
restricted shares are subject to manner of sale and notice requirements and
requirements as to the availability of current public information concerning us.

THE SALE OF A SUBSTANTIAL NUMBER OF SHARES OF OUR COMMON STOCK BY PPDI AFTER
THE LOCK-UP PERIOD EXPIRES MAY CAUSE THE PRICE OF OUR COMMON STOCK TO DECLINE.

PPDI has expressed an interest in purchasing approximately 690,000 Units or
34.5% of this offering. Assuming that PPDI purchases these Units, the underlying
securities are subject to a 180 day lock-up arrangement between PPDI and the
Representative after the effective date of this prospectus. Upon the expiration
of lock-up, PPDI may sell a substantial number of shares in the public market
which could saturate the market for our common stock and substantially harm the
market price.

THE REDEMPTION OF OUR WARRANTS IN THIS OFFERING MAY ADVERSELY AFFECT POTENTIAL
INVESTORS.

The warrants in this offering are redeemable, in whole or in part, pursuant
to the following terms:

Our Class A warrants will be redeemable for $.10 per warrant upon 30 days
written notice to the warrant holder; provided that (i) there is then an
effective registration statement under the Securities Act covering the shares
issuable upon exercise of the warrants; (ii) the average closing sale price of
our common stock equals or exceeds 150% of the offering price of the Units for
the 10 trading days prior to the date of the notice of redemption; and (iii)
that 12 months has elapsed since the date of this prospectus.

Notice of redemption of the warrants could force holders to exercise the
warrants and pay the exercise price therefor at the time when it may be
disadvantageous for them to do so, sell the warrants at the current market price
when they might otherwise wish to hold the warrants or accept the redemption
price which is likely to be substantially less than the market value of the
warrants at the time of redemption. See "Description of Securities."

CURRENT PROSPECTUS AND STATE BLUE SKY REGISTRATION REQUIRED TO EXERCISE
WARRANTS.

Holders of our warrants will be able to exercise their warrants only if a
current registration statement relating to such shares is then in effect and
only if the shares are qualified for sale under the securities laws of the
applicable state or states. We have undertaken and intend to file and keep
current a registration statement covering the shares of common stock issuable
upon exercise of the warrants, but there can be no assurance that we will be
able to do so. Although we intend to seek to qualify such shares of common stock
for sale in those states where the Units are to be offered, there is no
assurance that such qualification will occur. The warrants may be deprived of
any value if the current registration statement covering the shares underlying
the warrants is not effective and available or such underlying shares are not or
cannot be registered in the applicable states. See "Description of Securities."

OUR CERTIFICATE OF INCORPORATION, OUR BYLAWS AND DELAWARE LAW CONTAIN
PROVISIONS THAT PRESERVE OUR CURRENT MANAGEMENT.

Our certificate of incorporation and by-laws may discourage, delay or
prevent a change in our management team that stockholders may consider
favorable. These provisions include:

- authorizing the issuance of "blank check" preferred stock without any
need for action by stockholders;

- eliminating the ability of stockholders to call special meetings of
stockholders;

- permitting stockholder action by written consent; and

- establishing advance notice requirements for nominations for election to
the board of directors or for proposing matters that can be acted on by
stockholders at stockholder meetings.

These provisions could allow our board of directors to affect your rights
as a stockholder since our board of directors can make it more difficult for
common stockholders to replace members of the board. Because our board of
directors is responsible for appointing the members of our management team,
these provisions could in turn affect any attempt to replace our current
management team.

THE INVESTMENT RISK IN THIS OFFERING WILL BE SUBSTANTIALLY BORNE BY PUBLIC
INVESTORS.

Our current stockholders paid a relatively small amount of consideration
for their shares or paid nothing and received such shares as compensation, while
public investors in this offering will pay a substantially higher price. This
creates a situation in which a larger portion of the investment risk will shift
to the public investors participating in this offering.

PURCHASERS IN THIS OFFERING WILL EXPERIENCE IMMEDIATE AND SUBSTANTIAL DILUTION
OF THEIR INVESTMENT

We expect that the initial public offering price of the Units will
significantly exceed the net tangible book value per share of the outstanding
common stock after this offering. Based upon an offering price per Units of
$5.25, you will incur immediate dilution of approximately $4.19 (80% dilution of
value) in net tangible book value for each share of our common stock included in
the Units you purchase. If currently outstanding options or warrants to purchase
our common stock are exercised, your investment may be further diluted.
Accordingly,

purchasers of our securities will suffer immediate and substantial dilution of
their investment. Although the amount of dilution may vary, holders of the Class
A warrants will also suffer immediate and substantial dilution upon exercise of
such securities based upon an initial exercise price of $6.30 per share. See
"Dilution."

LIMITED EXPERIENCE OF THE UNDERWRITERS COULD AFFECT THIS OFFERING AS WELL AS
THE PRICE OF OUR SHARES IN THE SECONDARY MARKET

We have been advised that solely as a result of business considerations,
one of our underwriters, Roan/Meyers Associates, LP, has not acted as lead
underwriter in any firm commitment public offering in the last 3 years while the
Representative, Kashner Davidson Securities Corporation has acted as lead
underwriter only once in the last year. No assurance can be given that Kashner
Davidson Securities Corporation or Roan/Meyers Associates, L.P.'s limited public
offering experience will not affect the subsequent development of a trading
market of our shares of common stock. Investors should consider this lack of
public offering experience in making an investment decision. See "Underwriting".
To obtain detailed information regarding this underwriter (or any underwriter),
you should contact your state regulator or visit the National Association of
Securities Dealers website at www.nasdr.com.

RISKS RELATED TO OUR MANAGEMENT AND KEY EMPLOYEES

WE DEPEND UPON KEY PERSONNEL WHO MAY TERMINATE THEIR EMPLOYMENT WITH US AT ANY
TIME, AND WE WILL NEED TO HIRE ADDITIONAL QUALIFIED PERSONNEL

Our success will depend to a significant degree upon the continued services
of key management, technical, and scientific personnel, including Drs. Francis
O'Donnell, Raphael Mannino, Leila Zarif and Susan Gould-Fogerite. With the
exception of Dr. Gould-Fogerite, our key scientific personnel devote full time
to the company. Dr. Gould-Fogerite has on-going obligations as a professor at
the University of Medicine and Dentistry of New Jersey. At such time as our
board of directors deems it is necessary, we anticipate that a number of our
executives will become full-time or recruit/hire as necessary. Mr. McNulty, has
been intentionally employed on a "part-time as required" basis. Notwithstanding
his part-time status, he has been paid $67,461 in 2002 through June 7, because
we have been using his services on a more regular basis. On March 29, 2002, Dr.
O'Donnell executed an employment agreement with us to serve as our full-time
interim CEO. We have identified and are in discussions with potential
replacement candidates for Dr. O'Donnell, as Chief Executive Officer, although
we do not believe that any such candidate will accept a position with us until
we receive funding and are sufficiently capitalized. Dr. O'Donnell is prepared
to resign as an officer after this offering is consummated and an acceptable
replacement has been identified and accepts such a position on terms acceptable
to us.

We have applied for "key man" life insurance policies for Drs. Raphael
Mannino and Leila Zarif in the amount of $2,000,000 each. Our president and CEO,
Dr. Frank O'Donnell does not currently have this coverage. This insurance, if
issued, may not adequately compensate us for the loss of their services. In
addition, our success will depend on our ability to attract and retain other
highly skilled personnel. Competition for qualified personnel is intense, and
the process of hiring and integrating such qualified personnel is often lengthy.
We may be unable to recruit such personnel on a timely basis, if at all. Our
management and other employees may voluntarily terminate their employment with
us at any time. The loss of the services of key personnel, or the inability to
attract and retain additional qualified personnel, could result in delays to
development or approval, loss of sales and diversion of management resources.
See "Certain Transactions."

EXECUTIVE OFFICERS, DIRECTORS AND ENTITIES AFFILIATED WITH THEM WILL CONTINUE
TO HAVE SUBSTANTIAL CONTROL OVER US AFTER THE OFFERING, WHICH COULD DELAY OR
PREVENT A CHANGE IN OUR CORPORATE CONTROL FAVORED BY OUR OTHER STOCKHOLDERS

Our directors, executive officers and principal stockholders, together with
their affiliates, will beneficially own, in the aggregate, approximately 58.48%
of our outstanding common stock following the completion of this offering and
56.07% if the over-allotment option is exercised in full. In particular, our
directors and executive officers will control approximately 54.52% of our common
stock after this offering, 52.28% if the over-allotment option is exercised in
full. These figures do not reflect the exercise of the Class A warrants into

shares of common stock. Additionally, these figures do not reflect the increased
percentages that the officers and directors may have in the event that they
exercise any of the options granted to them in the 2001 Stock Option Plan or if
they otherwise acquire additional shares of common stock. The interests of our
current officer and director stockholders may differ from the interests of other
stockholders, including purchasers of shares in this offering. As a result,
these current officer and director stockholders would have the ability to
exercise control over all corporate actions requiring stockholder approval,
irrespective of how our other stockholders including purchasers in this offering
may vote, including the following actions:

- the election of directors;

- adoption of stock option plans;

- the amendment of charter documents;

- issue blank check preferred stock; or

- the approval of certain mergers and other significant corporate
transactions, including a sale of substantially all of our assets.

CERTAIN OF OUR MANAGEMENT TEAM HAVE RELATIONSHIPS WHICH MAY POTENTIALLY RESULT
IN CONFLICTS OF INTERESTS.

Dr. O'Donnell, who is an executive officer, on our board of directors and
also is a substantial beneficial owner of our securities, has a financial
interest in a number of other companies which have business relationships with
us. These companies include RetinaPharma International, Inc., Tatton
Technologies, LLC, BioKeys, Inc., Biotechnology Specialty Partners, Inc, and
American Prescription Partners, Inc. We have entered into license agreements
with RetinaPharma International, Inc. and Tatton Technologies, LLC with regard
to our proposed Bioral neutraceutical product. We have entered into a
non-exclusive distribution with Biotechnology Specialty Partners, Inc. We have
entered into a license agreement with BioKeys, Inc. with regard to their vaccine
in development. Each of these business arrangements was approved by the Board of
Directors of BioDelivery Sciences, Inc., the Delaware entity and have been
approved by our board of directors of which Dr. O'Donnell abstained. These
agreements or any future agreements may involve conflicting interests between
our interests, the interests of the other entities and Dr. O'Donnell.

Dr. L.M. Stephenson is on our board of directors and is also associated
with the University of Medicine and Dentistry of New Jersey for the last five
years. He is currently Vice President for Research at the university. Dr.
Stephenson's association with the university may currently or in the future
involve conflicting interests. In future matters involving the university, Dr.
Stephenson will refrain from voting and a majority of the disinterested
directors has been and will be required to approve all such transactions. Dr.
Stephenson currently owns stock options which have been issued to him as a
result of his agreeing to serve on the board of directors. See "Certain
Relationships and Related Transactions."

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

Some of the statements under "Prospectus Summary," "Risk Factors,"
"Management's Discussion and Analysis of Financial Condition and Plan of
Operation," "Description of Business," and elsewhere in this prospectus are
forward-looking statements. These statements involve known and unknown risks,
uncertainties, and other factors that may cause our or our industry's actual
results, levels of activity, performance, or achievements to be materially
different from any future results, levels of activity, performance, or
achievements expressed or implied by forward-looking statements. Such factors
include, among other things, those listed under "Risk Factors" and elsewhere in
this prospectus.

In some cases, you can identify forward-looking statements by terminology
such as "may," "will," "should," "expects," "plans," "anticipates," "believes,"
"estimates," "predicts," "potential," "proposed," "intended," or "continue" or
the negative of these terms or other comparable terminology. You should read
statements that contain these words carefully, because they discuss our
expectations about our future operating results or our future financial
condition or state other "forward-looking" information. There may be events in
the future that we are not able to accurately predict or control. Before you
invest in our securities, you should be aware that the occurrence of any of the
events described in these risk factors and elsewhere in

this prospectus could substantially harm our business, results of operations and
financial condition, and that upon the occurrence of any of these events, the
trading price of our securities could decline and you could lose all or part of
your investment.

Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, growth rates,
levels of activity, performance, or achievements. We are under no duty to update
any of the forward-looking statements after the date of this prospectus to
conform these statements to actual results.

USE OF PROCEEDS

The net proceeds (excluding any proceeds from the exercise of any warrants
or the exercise of the over-allotment option) from the sale of the 2,000,000
Units in this offering are estimated to be approximately $8,461,150, based upon
an assumed initial public offering price of $5.25 per Unit and after deducting
estimated underwriting discounts and commissions ($897,750) and our estimated
offering expenses ($1,141,100) consisting primarily of non-accountable expenses,
SEC registration fees, legal, accounting and transfer agent and registrar
expenses. If the underwriters' over-allotment option is exercised in full, the
additional net proceeds would be approximately $1,393,088. We currently intend
to use the net proceeds of this offering as follows:

AMOUNT PERCENTAGE OF
CATEGORY ALLOCATED TOTAL PROCEEDS
-------- ---------- --------------

Product Development(1)................................... $6,000,000 70.9%
Licensing and Other Marketing Activities................. $ 800,000 9.5
Payment of Debt(2)....................................... $1,250,000 14.8
Payment of stockholder tax liability(3).................. $ 200,000 2.4
General and Administrative Support and Working
Capital(4)............................................. $ 211,150 2.4
---------- ----
Total Net Proceeds....................................... $8,461,150 100%
========== ====

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

(1) Approximately $6,000,000 to the further research and development of our drug
delivery technology as well as our proposed drugs and our patient-specific
HIV therapy, including research and development expenses, clinical and
pre-clinical trial expenses, expenses associated with seeking regulatory
approvals and expenses associated with the product manufacturing and
marketing upon approval.

(2) Approximately $1,250,000 for repayment of debt. Approximately $200,000 of
the debt was primarily incurred in 2001 in connection with our purchase of
approximately 9% of the outstanding capital stock of BioDelivery Sciences,
Inc. and settlement of certain litigation matters with a prior officer and
stockholders of BioDelivery Sciences, Inc. The approximately $1,050,000
remaining of the debt was incurred under a line of credit which was
guaranteed and collateralized by Dr. O'Donnell and Mr. Ferguson, members of
our management. The line of credit permits us to borrow up to $1,050,000.
See "Legal Proceedings".

(3) Reflects estimated taxes to be paid by us to certain stockholders in
conjunction with the merger consummated in January 2002 with BioDelivery
Science, Inc. See "Certain Transactions".

(4) Approximately $211,150 for working capital and corporate purposes. These
purposes include rent, operating expenses, professional fees, license
negotiations, research and product development, and salaries for employees
and officers.

The amount of cash that we actually expend for any of the described
purposes and the timing of any such expenditures may vary based on a number of
factors, including the progress of our research and development programs and
clinical trials, the establishment of collaborative relationships, the cost and
pace of establishing and expanding our manufacturing capabilities, the
development of sales and marketing activities if undertaken by us and competing
technological and market developments.

Proceeds received by us as a result of the exercise of the Class A warrants
will be used for working capital purposes.

We expect the proceeds to last approximately 12 months. Pending the uses
described above, we will invest the net proceeds in investment-grade,
interest-bearing securities. We intend to invest the net proceeds of this
offering so as to avoid being subject to the registration requirements of the
Investment Company Act of 1940, as amended, unless an exemption from such
registration is available, because such registration would subject us to
substantial regulations that could have a material adverse effect on our
business.

DIVIDEND POLICY

We have never declared or paid any cash dividends on our common stock or
other securities and we do not intend to pay any cash dividends with respect to
our common stock in the foreseeable future. For the foreseeable future, we
intend to retain any earnings for use in the operation of our business and to
fund future growth.

CAPITALIZATION

The following table sets forth our total capitalization as of March 31,
2002, on an actual basis, which reflects the December 2001 rescission of our
outstanding preferred stock and issuance of common stock in replacement thereof
and the completion of the January 2002 merger with BioDelivery Sciences, Inc.,
and on an as adjusted basis to reflect the sale of the 2,000,000 Units in this
offering at an assumed initial public offering price of $5.25 per Unit after
deducting estimated underwriting discounts and commissions and our estimated
offering expenses. This calculation excludes the proceeds from the exercise of
the Class A warrants or other outstanding options.

You should read this table in conjunction with "Management's Discussion and
Analysis of Financial Condition and Plan of Operations" and the consolidated
financial statements and related notes to the financial statements.

ACTUAL AS ADJUSTED
----------- -----------

Capital Lease Payable..................................... $ 33,173 $ 33,173
Notes Payable............................................. 246,210(1) --
Line of credit............................................ 618,732(2) --
Stockholders' Equity (Deficit):
Preferred Stock, $.001 par value; 20,000,000 shares
authorized; no shares of Preferred Stock issued and
outstanding.......................................... -- --
Common Stock, $.001 par value; 80,000,000 shares
authorized; 5,000,863 and 7,000,863 shares of Common
Stock issued and outstanding......................... 5,001 7,001
Additional paid-in capital................................ 4,903,368 13,362,518
Deficit accumulated during development stage.............. (5,412,581) (5,412,581)
----------- -----------
Total stockholders' equity (deficit)...................... (504,212) 7,956,938
----------- -----------
Total capitalization............................ $ 393,903 $ 7,990,111
=========== ===========

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

(1) The Notes Payable will be paid out of the proceeds of this offering.
Represents debt incurred as part of a litigation settlement with a former
officer and stockholder. See "Legal Matters".

(2) The line of credit is personally guaranteed by the personal assets of Dr.
O'Donnell and Mr. Ferguson, members of our management and collateralized by
all the business assets of the Company.

DILUTION

Our net tangible book value as of March 31, 2002 was a deficit of
approximately $(1,051,000) or $(.21) per share of common stock. Net tangible
book value per share represents our stockholders' equity less intangible assets
divided by the number of shares of common stock outstanding. Dilution per share
represents the difference between the amount per share paid by purchasers of
shares of common stock in this offering and the net tangible book value per
share of common stock immediately after completion of this offering.

After giving effect to the sale of 2,000,000 Units offered by us, at an
assumed initial public offering price of $5.25 per Unit and after deducting
estimated underwriting discounts and commissions and estimated offering expenses
payable by us as part of the Units, and the application of the estimated net
proceeds, our net tangible book value at March 31, 2002 would have been $7.4
million, or $1.06 per share. This represents an immediate dilution to new
investors of $4.19 per share, or 80% of the purchase price value (assuming the
shares have a price equal to the offering price of the Units of $5.25). These
calculations exclude the shares of common stock underlying the 2001 Incentive
Option Plan and any warrants or options, including the Class A warrants.

The following table illustrates the pro forma information with respect to
dilution to new investors on a per share basis:

Public offering price per share............................. $ 5.25
Net tangible book value per share before this offering...... $ (.21)
Increase per share attributable to new investors............ $ 1.27
Net tangible book value per share after this offering....... $ 1.06
Dilution to new investors(1)................................ $ 4.19

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

(1) If the over-allotment option were exercised in full, the net tangible book
value after this offering would be approximately $1.21 per share, resulting
in dilution to new investors in this offering of $4.04 per share or 77% of
the purchase price value.

The following table sets forth on a pro forma basis as of March 31, 2002,
the Units purchased from us, the total consideration paid to us (after offering
expenses) and the average price per share (i) paid by the existing stockholders
and (ii) paid by the purchasers of the Units in this offering, assuming the sale
of 2,000,000 Units at an assumed public offering price of $5.25 per Unit,
ascribing no portion of the value of a unit to the Class A warrants, and the
receipt of the net proceeds therefrom. The calculation in this table with
respect to shares of common stock to be purchased by new investors in this
offering excludes shares of common stock issuable upon exercise of the Class A
warrants.

SHARES PURCHASE TOTAL CONSIDERATION
-------------------- ----------------------
NUMBER PERCENT AMOUNT PERCENT
---------- ------- ------------ -------

Existing stockholders..................... 5,000,863 71.4% $ 2,317,041 18.1%
New Investors............................. 2,000,000 28.6% $ 10,500,000 81.9%
---------- ----- ------------ -----
Total........................... 7,000,863 100% $ 12,817,041 100%
========== ===== ============ =====

This table assumes no exercise of the underwriters' over-allotment option
nor the representative's unit purchase option, nor any option under the 2001
Incentive Stock Option Plan, the Class A warrants or any other outstanding
options or warrants of which there will be 3,978,355 outstanding.

SELECTED FINANCIAL AND OPERATING DATA

The following selected financial and operating data should be read in
conjunction with and are qualified by reference to "Management's Discussion and
Analysis of Financial Condition and Plan of Operation" and our financial
statements and related notes, which are included elsewhere in this prospectus.
The selected financial data for the period from inception through December 31,
1998 (unaudited) and the year ended December 31, 1999, has been derived from our
audited financial statements which are not included herein. The selected
financial data for the years ended December 31, 2000 and 2001 has been derived
from our audited financial statements included elsewhere in this prospectus. The
Selected Financial data for the three months ended March 31, 2001 and 2002 have
been derived from our unaudited financial statements, which include all
adjustments, consisting of normal recurring accruals, which we consider
necessary for a fair presentation of the financial position and the results of
operations for those periods. The selected financial data for the year ended
December 31, 1999 has been derived from the audited financial statements of
BioDelivery Sciences, Inc. which are not included herein. The selected financial
data for the nine-month period ended September 30, 2000 has been derived from
the audited financial statements of BioDelivery Sciences, Inc. included
elsewhere in this prospectus. The selected financial data for the period from
inception through December 31, 1998 has been derived from the unaudited
financial statements of BioDelivery Sciences, Inc. which include all
adjustments, consisting of normal recurring accruals, which BioDelivery
Sciences, Inc. considers necessary for a fair presentation of the results of
operations for this period. Historical operating results are not necessarily
indicative of results in the future, and the results for interim periods are not
necessarily indicative of the results that may be expected for the entire year.

BIODELIVERY SCIENCES, INC.(1) BIODELIVERY SCIENCES INTERNATIONAL, INC.(1)
------------------------------------------- ---------------------------------------------------------
PERIOD FROM NINE PERIOD FROM
INCEPTION MONTHS INCEPTION
THROUGH YEAR ENDED ENDED THROUGH YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, SEPTEMBER 30, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1998 1999 2000 1998 1999 2000 2001
------------ ------------ ------------- ------------ ------------ ------------ ------------
(UNAUDITED) (AUDITED) (AUDITED) (AUDITED) (AUDITED) (AUDITED) (AUDITED)

STATEMENT OF OPERATIONS
DATA:
Sponsored research
revenues............. $5,159,500 $1,565,000 $ 614,001 $ -- $ -- $ 56,000 $ 478,385
Research and
development
expenses............. 4,662,606 1,333,287 820,551 -- -- 312,736 1,663,932
General and
administrative
expenses............. 201,700 159,053 62,480 57 18 540,239 3,255,592
---------- ---------- --------- ---- ---------- ---------- -----------
Income (loss) from
operations........... 295,194 72,660 (269,030) (57) (18) (796,975) (4,441,139)
Interest income, net... 127,454 34,430 25,290 21,772 (21,957)
---------- ---------- --------- ---- ---------- ---------- -----------
Income (loss) before
income taxes and
minority interest.... 422,648 107,090 (243,740) (57) (18) (775,203) (4,463,096)
Income tax expense
(benefit)............ 207,082 14,579 (37,736) -- -- -- (18,535)
---------- ---------- --------- ---- ---------- ---------- -----------
Income (loss) before
minority interest.... 215,566 92,511 (206,004) (57) (18) (775,203) (4,444,561)
Minority Interest...... -- -- -- -- -- 102,472 --
---------- ---------- --------- ---- ---------- ---------- -----------
Net income (loss)...... $ 215,566 $ 92,511 $(206,004) $(57) $ (18) $ (672,731) $(4,444,561)
========== ========== ========= ==== ========== ========== ===========
Net loss per common
share -- basic and
diluted................ $ -- $ (0.19) $ (1.15)
========== ========== ===========
Weighted average common
shares outstanding --
basic and diluted...... 3,512,586 3,512,586 3,851,587
========== ========== ===========

THREE MONTHS ENDED
-------------------------

MARCH 31, MARCH 31,
2001 2002
----------- -----------
(UNAUDITED) (UNAUDITED)

STATEMENT OF OPERATIONS
DATA:
Sponsored research
revenues............. $ -- $ 275,000
Research and
development
expenses............. 331,483 450,475
General and
administrative
expenses............. 74,394 205,768
--------- ----------
Income (loss) from
operations........... (405,877) (381,243)
Interest income, net... 13,406 (9,814)
--------- ----------
Income (loss) before
income taxes and
minority interest.... (392,471) (391,057)
Income tax expense
(benefit)............ -- 95,343
--------- ----------
Income (loss) before
minority interest.... (392,471) (295,214)
Minority Interest...... -- --
--------- ----------
Net income (loss)...... $(392,471) $ (295,214)
========= ==========
Net loss per common
share -- basic and
diluted................ $ (0.11) $ (0.06)
========= ==========
Weighted average common
shares outstanding --
basic and diluted...... 3,518,179 5,000,863
========= ==========

BALANCE SHEET DATA:
Cash and cash
equivalents.......... $ 212,357 $ 580,465 $ -- $ 950,939 $ 75,513
Total assets........... 588,076 974,956 36 1,288,934 1,333,569
Total indebtedness..... 2,346 392,025 -- 42,025 616,957
Stockholders' equity
(deficit)............ 308,477 102,473 36 337,305 (208,998)

THREE MONTHS ENDED
-------------------------

MARCH 31, MARCH 31,
2001 2002
----------- -----------
(UNAUDITED) (UNAUDITED)

BALANCE SHEET DATA:
Cash and cash
equivalents.......... $ 591,115 $ --
Total assets........... 909,368 1,586,249
Total indebtedness..... 35,430 898,115
Stockholders' equity
(deficit)............ 44,834 (504,212)

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

(1) The table covers periods before and after the Company acquired its
controlling interest (approximately 84.8% voting interest) from BioDelivery
Sciences, Inc. on October 10, 2000. The operations of BioDelivery Sciences,
Inc. for the period October 1, 2000 through October 10, 2000 were not
material.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND PLAN OF OPERATION

The following discussion and analysis of our financial condition and plan
of operations should be read in conjunction with our consolidated financial
statements and related notes appearing elsewhere in this prospectus. This
discussion and analysis contains forward-looking statements that involve risks,
uncertainties and assumptions. The actual results may differ materially from
those anticipated in these forward-looking statements as a result of certain
factors, including, but not limited to, those set forth under "Risk Factors" and
elsewhere in this prospectus.

LIMITED OPERATING HISTORY; BACKGROUND OF OUR COMPANY

We are a development-stage company and we expect to continue research and
development of our drug delivery technology. As such, we do not anticipate any
revenues from the sale or commercialization of our products under development
within the next 12 months. The funding will come primarily from the sale of
securities, exercise of warrants, collaborative research agreements, including
pharmaceutical companies, grants from public service entities and government
entities.

In 2001, the National Institutes of Health awarded us a Small Business
Innovation Research Grant, which will be utilized in our research and
development efforts. NIH has formally awarded us a 2001 grant of $883,972, of
which we have received approximately $627,000 through March 31, 2002 and expect
to receive the remainder through June 2002. This grant is more fully discussed
below under Liquidity and Capital Resources. Although there can be no assurance
that the full grant will be realized, we expect to receive a total of
approximately $2.7 million related to our initial application for the grant
through June 2004, assuming that we continue to achieve positive results from
the research. The grant is subject to provisions for monitoring set forth in NIH
Guide for Grants and Contracts dated February 24, 2000, specifically, the NIAID
Policy on Monitoring Grants Supporting Clinical Trials and Studies. If NIH
believes that satisfactory progress is not achieved by us in its subjective
opinion, the total expected funding amounts noted above may be reduced or
eliminated.

We have a limited history of operations and anticipate that our quarterly
results of operations will fluctuate significantly for the foreseeable future.
Prior to our acquisition of a majority interest in BioDelivery Sciences, Inc.,
we had no operations. We believe that period-to-period comparisons of our
operating results should not be relied upon as predictive of future performance.
Our prospects must be considered in light of the risks, expenses and
difficulties encountered by companies at an early stage of development,
particularly companies in new and rapidly evolving markets such as
pharmaceuticals, drug delivery, and biotechnology. For the foreseeable future,
we must, among other things, seek regulatory approval for and commercialize our
proposed drugs, which may not occur. We may not address these risks and
difficulties. We will require additional funds to complete the development of
our drugs and to fund operating losses to be incurred in the next several years.

Our operations include the results of operations of BioDelivery Sciences,
Inc. BioDelivery Sciences Inc. was incorporated in Delaware in March 1995.
Effective October 10, 2000, we acquired Series A Preferred Stock of BioDelivery
Sciences Inc. for an aggregate purchase price of $15,000,000, consisting of
$1,000,000 in cash and a note of $14,000,000. Through the purchase of the Series
A Preferred Stock, we acquired 84.8% of the voting rights of BioDelivery
Sciences Inc. All of the science related to our drug delivery technology has
been developed through BioDelivery Sciences Inc. and its relationship with the
University of Medicine and Dentistry of New Jersey and Albany Medical College.

In May 2001, we acquired common stock of BioDelivery Sciences Inc. from a
group of its stockholders which resulted in our owning 9% (representing 1.4% of
the voting rights of BioDelivery Sciences, Inc.) of the common stock of
BioDelivery Sciences Inc. This purchase settled outstanding litigation with a
former officer and stockholder group.

Further, in July 2001 we entered into a merger agreement with BioDelivery
Sciences Inc. and the remaining stockholders of BioDelivery Sciences Inc.
acquired 520,313 shares of our common stock. The

merger was consummated on January 7, 2002. As a result of the merger, the Series
A preferred stock of BioDelivery Sciences, Inc. which was owned by us was
cancelled, as well as the outstanding $14,000,000 note issued in payment
thereof.

On a combined basis (our company and BioDelivery Sciences, Inc.) since
inception through March 31, 2002, we received approximately $8.1 million of
sponsored research revenue. Approximately $6.7 million of the funding was from a
single commercial entity, American Cyanamid Company. The contract with American
Cyanamid Company as amended, was completed, in 2000. Of the remaining $1.4
million, approximately $.7 million was received from the National Institutes of
Health.

FOR THE THREE MONTHS ENDED MARCH 31, 2002 COMPARED TO THE THREE MONTHS ENDED
MARCH 31, 2001

Sponsored Research Revenue. During the three-month period ended March 31,
2002, we reported approximately $275,000 of sponsored research revenues. With
the exception of grants by the National Institutes of Health and funding
provided to us through various collaborative agreements, we have not derived any
revenues from our operations, technologies or products.

Research and Development. Research and development expenses of
approximately $331,000 and $450,000 were incurred during the three-month periods
ended March 31, 2001 and 2002, respectively. Research and development expenses
generally include: salaries for key scientific personnel, research supplies,
facility rent, lab equipment depreciation, a portion of overhead operating
expenses and other costs directly related to the development and application of
the Bioral cochleate drug delivery technology.

General and Administrative Expense. General and administrative expenses of
approximately $74,000 and $206,000 were incurred in the three-month periods
ended March 31, 2001 and 2002, respectively. These expenses are principally
comprised of legal and professional fees and other costs including office
supplies, conferences, travel costs, salaries, website update and development,
and other business development costs.

Interest Income (Expense). Interest income (expense) for the periods ended
March 31, 2001 and 2002 was principally comprised of earnings from invested cash
and from notes receivable from employees offset by interest expense on the line
of credit, notes payable and capital leases payable.

Income Taxes. While net operating losses were generated during the three
month period ended March 31, 2002, we did not recognize any benefit associated
with these losses, as all related deferred tax assets have been fully reserved
for. However, in March 2002, a new tax law changed a carryback period from two
to five years, which allowed us to carryback prior losses to 1996 and 1997,
resulting in a tax benefit of $95,843. Financial Accounting Standards Board
Statement No. 109 provides for the recognition of deferred tax assets if
realization of such assets is more likely than not. Based upon available data,
which includes our historical operating performance and our reported cumulative
net losses in prior years, we have provided a full valuation allowance against
our net deferred tax assets as the future realization of the tax benefit is not
sufficiently assured.

FOR THE YEAR ENDED DECEMBER 31, 2001 COMPARED TO THE YEAR ENDED DECEMBER 31,
2000 (WHICH INCLUDES OUR OPERATIONS AFTER THE ACQUISITION OF OUR CONTROLLING
INTEREST IN BIODELIVERY SCIENCES, INC.)

Sponsored Research Revenue. During the years ended December 31, 2000 and
2001, we recognized sponsored research revenue of $56,000 and $478,000,
respectively. The 2000 revenue was derived from a research agreement that has
since been terminated. The 2001 revenue amount was derived from the National
Institutes of Health Small Business Research Grant awarded to us in 2001. The
total grant amount is $884,000, of which we have received approximately $479,000
through December 31, 2001 and expect to receive the remaining amount by June
2002. While no assurances can be made, assuming positive results are achieved
through our sponsored research activities, we expect to receive a total of
approximately $2.7 million through 2004 related to our initial application for
the grant.

Research and Development Expenses. During the years ended December 31,
2000 and 2001, research and development expenses totaled $313,000 and
$1,664,000, respectively. The increase was due to our increased development and
application of Bioral cochleate technology and other drug-related areas. Funding
27

of this research was obtained through sponsored research revenue, common stock
issuance and line of credit borrowings. Research and development expenses
generally include salaries for key scientific personnel, research supplies,
facility rent, lab equipment depreciation and a portion of overhead operating
expenses and other costs. We are unable to track costs on a project by project
basis as our accounting system does not allow us to do so. Given the multiple
uses of personnel and resources for different projects, separate tracking of
expenses on a line item basis was historically not done for accounting purposes.

General and Administrative Expenses. During the years ended December 31,
2000 and 2001, general and administrative expenses totaled $540,000 and
$3,256,000, respectively. The increase is primarily due to compensation expense
of $2,137,000 recognized related to the elimination of the restrictions on the
permanent discount redeemable common stock. This stock represents a variable
stock award and will continue to require variable plan accounting until the
related stockholder loans are forgiven or paid. To the extent that related
stockholder loans are forgiven, which is anticipated immediately following this
offering, or the fair market value of our common stock exceeds $5.50 per share
prior to the loan forgiveness date, additional compensation expense will be
recognized. Also included in general and administrative costs are legal
settlement costs, legal and professional fees, and other costs including office
supplies, conferences, travel costs, executive personnel costs, consulting fees,
website update and development and business development costs.

Interest Income (Expense), Net. During the years ended December 31, 2000
and 2001, interest income (expense), net totaled $22,000 and $(22,000),
respectively. The increase in interest income (expense), net is primarily due to
an increase in the average outstanding borrowings in 2001 versus 2000.

Income Tax Benefit. We recognized an income tax benefit of $18,000 in 2001
for a previous year's income tax receivable understatement. While net operating
losses were generated during the year ended December 31, 2001, we did not
recognize any benefit associated with these losses. We had federal and state net
operating loss carryforwards of $2.7 million at December 31, 2001. The federal
net operating loss carryforwards will expire beginning in 2020, if not utilized.
The state operating loss carryforwards will expire beginning in 2007, if not
utilized. Financial Accounting Standards Board Statement No. 109 provides for
the recognition of deferred tax assets if realization is more likely than not.
Based upon available data, which includes our historical operating performance
and our reported cumulative net losses in prior years, we have provided a full
valuation allowance against our net deferred tax assets as the future
realization of the tax benefit is not sufficiently assured.

Minority Interest. Minority interest relates to the amount of loss that is
attributable to the common stockholders of BioDelivery Sciences, Inc. and is
limited to the minority interest in the equity of BioDelivery Sciences, Inc. In
2000, we recognized $103,000 of minority interest losses of subsidiary. In 2001,
no minority interest in losses of subsidiary was recognized due to the minority
interest in the equity of BioDelivery Sciences, Inc. being zero throughout 2001.
In addition, as a result of a litigation settlement and our merger with
BioDelivery Sciences, Inc., the minority interest in BioDelivery Sciences, Inc.
no longer exists. We consummated the merger on January 7, 2002. However, the
merger agreement was substantially complete and accounted for as of December
2001, as effective control of BioDelivery Sciences, Inc. was transferred to us
without restrictions.

PRO FORMA ANALYSIS FOR THE YEAR ENDED DECEMBER 31, 2001 COMPARED TO THE YEAR
ENDED DECEMBER 31, 2000

The following pro forma discussion was derived from our historical
financial statements combined with those of BioDelivery Sciences, Inc. included
elsewhere in this prospectus. With regard to the year ended December 31, 2000,
the amounts include the historical results of operations of BioDelivery
Sciences, Inc. for the nine month period ended September 30, 2000 and our
results of operations for the year ended December 31, 2000. With regard to the
year ended December 31, 2001, the amounts are the historical results of
operations of our Company.

Sponsored Research Revenue. Revenue decreased from $670,000 for the year
ending December 31, 2000 to $479,000 for the year ending December 31, 2001.
Revenue during both periods was principally

generated from a collaborative research agreement and certain grants, and was
recognized as the related costs were incurred.

Research and Development Expenses. Research and development expenses
increased from $1.1 million for the year ended December 31, 2000 to $1.7 million
for the year ended December 31, 2001. The increase was due to our increased
development and application of Bioral cochleate technology and other
drug-related areas. Funding of this research was obtained through sponsored
research revenue, common stock issuance and line of credit borrowings. Research
and development expenses generally include salaries for key scientific
personnel, research supplies, facility rent, lab equipment depreciation, and a
portion of overhead operating expenses and other costs. We are unable to track
costs on a project by project basis as our accounting system does not enable us
to do so.

General and Administrative Expenses. General and administrative expenses
increased from $603,000 for the year ended December 31, 2000 to $3.3 million for
the year ended December 31, 2001. The increase is primarily due to compensation
expense of $2.1 million recognized in 2001 related to the elimination of
restrictions on the BioDelivery Sciences Inc. permanent discount redeemable
common stock. This stock represents a variable stock award and will continue to
require variable plan accounting until the related shareholder loans are
forgiven or paid. To the extent that related stockholder loans are forgiven or
the fair market value of our common stock exceeds $5.50 per share prior to the
loan forgiveness date, additional compensation expense will be recognized. Also
included in general and administrative costs are legal settlement costs, legal
and professional fees, and other costs including office supplies, conferences,
travel costs, executive personnel costs, consulting fees, website update and
development, and business development costs.

Interest Income (Expense), Net. Interest Income (Expense), Net decreased
from $47,000 for the year ended December 31, 2000 to $(22,000) for the year
ended December 31, 2001. The decrease in interest income (expense), net is
primarily due to an increase in the average outstanding borrowings and decrease
in the average outstanding cash balances in 2001 versus 2000.

Income Tax Benefit. The Company recognized an income tax benefit of
$18,000 in 2001 for the previous year's income tax receivable understatement.
The Company recognized an income tax benefit of $38,000 in 2000 which was
attributable to net operating losses that were carried back to periods in which
taxes were paid.

Minority Interest. Minority interest relates to the amount of loss that is
attributable to the common stockholders of BioDelivery Sciences, Inc. and is
limited to the minority interest in the equity of BioDelivery Sciences, Inc.
subsequent to our October 2000 84.8% acquisition of BioDelivery Sciences, Inc.
In 2000, we recognized $103,000 of minority interest losses of subsidiary. In
2001, no minority interest in losses of subsidiary was recognized due to the
minority interest in the equity of BioDelivery Sciences, Inc. being zero
throughout 2001. In addition, as a result of a litigation settlement and our
merger with BioDelivery Sciences, Inc., the minority interest in BioDelivery
Sciences, Inc. no longer exists. The merger was consummated on January 7, 2002.
However, the merger agreement was substantially completed and accounted for as
of December 2001, as effective control of BioDelivery Sciences, Inc. was
transferred to us without restrictions.

LIQUIDITY AND CAPITAL RESOURCES

Since inception, we have financed our operations primarily from the sale of
our convertible preferred stock and common stock. From inception through March
31, 2002, we raised approximately $1.8 million, net of issuance costs, through
private placements or convertible preferred stock and common stock financings.
On April 1, 2001, we issued 137,300 shares of common stock in consideration for
payment in full of the approximate $500,000 payable to the University of
Medicine and Dentistry of New Jersey due through March, 2001. At December 31,
2001, we had cash and cash equivalents totaling approximately $76,000. At March
31, 2002, we had cash and cash equivalents totalling approximately $0.

the remainder through June 2002. Additionally, this award refers to funding
levels of $814,398 and $989,352 that we expect to be awarded in 2002 and 2003,
respectively, subject to availability and satisfactory progress of the project
in NIH's opinion. Therefore, we expect to receive a total of approximately $2.7
million related to our initial application for the grant through June 2004
assuming that we continue to achieve positive results from the research. Our
initial application was for approximately $3.0 million. However, due to our
proposed purchase of certain materials from sources outside the United States,
the funding was accordingly reduced because NIH grants require materials to be
purchased from U.S. based entities. The grant is subject to provisions for
monitoring set forth in NIH Guide for Grants and Contracts dated February 24,
2000. If NIH believes that satisfactory progress is not achieved in its opinion,
the 2002 and 2003 amounts noted above may be reduced or eliminated in its sole
discretion.

On a pro forma basis (our results combined with BioDelivery Sciences, Inc.)
we used $253,000 of cash for operations in 2000 compared to $1.6 million of cash
used for operations in 2001. On a pro forma basis (BioDelivery Sciences, Inc.
combined with us) we have used $1.6 million of cash for operations since
inception through March 31, 2002, net of sponsored research proceeds received
since inception of $8.1 million. We have paid limited compensation to certain
executive employees, including the CEO and chairman of the board. While members
of the board of directors and other executive officers have received
compensation in the form of stock options, we expect that increases in their
compensation will occur in future periods commensurate with the level of
services rendered.

Since our inception through March 31, 2002, we have incurred approximately
$2.0 million of research and development expenses. Additionally, during the
period March 28, 1995 (date of BioDelivery Sciences, Inc.'s incorporation)
through the acquisition of a controlling interest in BioDelivery Sciences, Inc.
in October 2000, we incurred approximately $6.8 million of research and
development expenses.

We have also obtained a $1,050,000 line of credit personally guaranteed by
Dr. Francis O'Donnell, our President and CEO and Donald Ferguson, our Senior
Executive Vice President, at a rate of prime plus 2% of which $850,000 matured
in May 2002 but is currently deferred until the completion of this offering and
$200,000 will mature in June 2002. At March 31, 2002, $619,000 was outstanding
under the credit line.

We have incurred significant net losses and negative cash flows from
operations since our inception. As of March 31, 2002, we had an accumulated
deficit of approximately $5.4 million and our working capital deficit at March
31, 2002 was $1.7 million.

We anticipate that cash used in operations and our investment in facilities
will increase significantly in the future as we research, develop, and,
potentially, manufacture our proposed drugs. While we believe further
application of our Bioral cochleate technology to other drugs will result in
license agreements with manufacturers of generic and over-the-counter drugs, our
plan of operations in the next 18 months is focused on our further development
of the Bioral cochleate technology itself and its use in a limited number of
applications, and not on the marketing, production or sale of FDA approved
products.

We believe that our existing cash and cash equivalents, together with
available equipment financing and the net proceeds of this offering will be
sufficient to finance our planned operations and capital expenditures through at
least the next 12 months. While we plan to manage our expenditures for
development in accordance with the prior statement, we are currently unable to
estimate the costs to complete or the completion dates of our current projects.
Accordingly, we may be required to raise additional capital through a variety of
sources, including:

- the public equity market;

- private equity financing;

- collaborative arrangements;

- grants;

- public or private debt; and

- redemption and exercise of warrants.

There can be no assurance that additional capital will be available on
favorable terms, if at all. If adequate funds are not available, we may be
required to significantly reduce or refocus our operations or to obtain funds
through arrangements that may require us to relinquish rights to certain of our
technologies, drugs or potential markets, either of which could have a material
adverse effect on our business, financial condition and results of operations.
To the extent that additional capital is raised through the sale of equity or
convertible debt securities, the issuance of such securities would result in
ownership dilution to our existing stockholders including investors in this
offering.

NEW ACCOUNTING PRONOUNCEMENTS.

In July 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) 141, Business Combinations,
and SFAS 142, Goodwill and Intangible Assets. SFAS 141 is effective for all
business combinations completed after June 30, 2001. SFAS 142 is effective for
the year beginning January 1, 2002; however, certain provisions of that
Statement applied to goodwill and other intangible assets acquired between July
1, 2001 and the effective date of SFAS 142. We are in the process of evaluating
the effect, if any, of adopting SFAS 142, but do not believe that this standard
will have any material effect on our financial statements.

In July 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement
Obligations. This statement addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. This Statement applies to all entities. It
applies to legal obligations associated with the retirement of long-lived assets
that result from the acquisition, construction, development and (or) the normal
operation of a long-lived asset, except for certain obligations of lessees. This
Statement is effective for financial statements issued for fiscal years
beginning after June 15, 2002. The Company is evaluating the impact of the
adoption of this standard and has not yet determined the effect of adoption on
its financial position and results of operations.

In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment
or Disposal of Long-Lived Assets. This statement address financial accounting
and reporting for the impairment or disposal of long-lived assets and supersedes
FASB Statement No. 121, Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of. The provisions of the statement are
effective for financial statements issued for fiscal years beginning after
December 15, 2001. We adopted this standard effective January 1, 2002, which did
not have any material effect on our financial statements.

DESCRIPTION OF BUSINESS

OVERVIEW

We are a development-stage biotechnology company that is developing and
seeking to commercialize a drug delivery technology designed for a potentially
broad base of prescription drugs, vaccines, and over-the-counter drugs. Our
proposed drug delivery technology encapsulates the selected drug in a
jellyroll-like structure termed a "cochleate" cylinder. All of the components of
the cochleate cylinder are naturally occurring substances. We believe that the
cochleate cylinder provides an effective delivery mechanism without forming a
chemical bond, or otherwise chemically altering, the drug. Our drug delivery
technology is being developed in collaboration with the University of Medicine
and Dentistry of New Jersey and the Albany Medical College which have granted us
the exclusive worldwide licenses under applicable patents. When wrapped in our
cochleate cylinders, we anticipate that these drugs may be marketed under our
brand name, "Bioral".

We believe that our drug delivery technology is potentially applicable with
a broad base of existing and new drugs, vaccine, and over-the-counter drugs.
Once we have established our technology, we intend to seek commercialization
through a combination of marketing approaches which, we anticipate may include
marketing drugs no longer under patent protection under our brand name Bioral,
licensing our drug delivery technology to other pharmaceutical companies with
regard to certain patented, proprietary, or branded drugs and entering into
various types of agreements with other bio-technology or pharmaceutical
companies.

In addition to completing development of our drug delivery technology and
initial Bioral products, we are also preparing an application seeking to begin
Phase I clinical trials with the FDA with regard to our HIV therapy. This
technology is being developed as a patient specific (autologous) therapy for
treatment following HIV infection. Our autologous HIV therapy is based upon a
patented proteoliposome technology which we believe facilitates uptake by cells
responsible for stimulating immune responses. We believe that the ongoing
research and development of this technology will require significant time and
resources and we intend to primarily rely upon the availability of grants and
corporate support to largely finance further development of this technology.

Investors should be aware that we do not develop any new drugs. Our
business is to license drugs from third parties and to encapsulate them in our
delivery system. This requires that we enter into numerous license or
development agreements with third parties.

OVERVIEW OF THE DRUG DELIVERY INDUSTRY

The drug delivery industry develops technologies for the improved
administration of certain drugs. These technologies have focused primarily on
safety, efficacy, ease of patient use and patient compliance. Pharmaceutical and
biotechnology companies view new and improved delivery technology as a way to
gain competitive advantage through enhanced safety, efficacy, convenience and
patient compliance of their drugs.

Drug delivery technologies can provide pharmaceutical and biotechnology
companies with an avenue for developing new drugs, as well as extending existing
drug patent protections. Drug delivery companies can also apply their
technologies to drugs no longer patent protected.

We believe that focusing our drug delivery technology for use with existing
FDA approved drugs to be less risky than attempting to discover new drugs. When
management believes that the market opportunity exists and given the right
circumstances however, we may consider devoting resources to discovering new
drugs.

We intend to primarily target drugs that have large established markets for
which there is an established medical need and therefore doctors are familiar
with the drug compounds and are accustomed to prescribing them. We anticipate
that many of the drug candidates we target will have been through the regulatory
process and therefore the safety and efficacy of the drug has been previously
established. Consequently, we believe that our clinical trials would primarily
need to show that our encapsulation technology delivers the drug without harming
the patient or changing the clinical attributes of the drug. Focusing on drug
delivery
32

compared to drug discovery should allow us to potentially form a number of
collaborations to deliver a wide variety of medicines without limiting rights to
utilize our proprietary technology with additional drug opportunities.

DESCRIPTION OF OUR DRUG DELIVERY TECHNOLOGY

Overview

Our drug delivery technology is based upon encapsulating drugs to
potentially deliver the drug safely and effectively. Over the years, biochemists
and biophysicists have studied artificial membrane systems to understand their
properties and potential applications, as well as to gain insight into the
workings of more complex biological membrane systems. In the late 1960's,
scientists began investigating the interactions of divalent cations with
negatively charged lipid bilayers. They reported that the addition of calcium
ions to small phosphatidylserine vesicles induced their collapse into discs
which fused into large sheets of lipid. In order to minimize their interaction
with water, these lipid sheets rolled up into jellyroll-like structures, termed
"cochleate" cylinders, after the Greek name for a snail with a spiral shell.

Bioral cochleate technology is based upon components which are believed to
be non-toxic. The primary chemical components of our Bioral cochleate technology
are phosphatidylserine (PS) and calcium. Phosphatidylserine is a natural
component of essentially all biological membranes, and is most concentrated in
the brain. Clinical studies by other investigators (more than 30 have been
published that we are aware of), to evaluate the potential of phosphatidylserine
as a nutrient supplement indicate that PS is safe and may play a role in the
support of mental functions in the aging brain. As an indication of its nontoxic
nature, today phosphatidylserine isolated from soybeans is sold in health food
stores as a nutritional supplement.

Research and development of cochleates has been conducted at the University
of Medicine and Dentistry of New Jersey and Albany Medical College ("the
Universities") for a number of years. Our scientists, some of whom were former
researchers and others who still hold teaching positions with these
Universities, supervised their cochleate research programs. As a result of the
relationship between our scientists and the Universities, we became the
exclusive worldwide licensee to develop this cochleate technology and in some
cases co-own the patents with them. See "Description of Business -- Relationship
with the University of Medicine and Dentistry of New Jersey and Albany Medical
College."

Potential Advantages

We believe that our drug delivery technology represents a potentially
important new delivery mechanism. While the characteristics and benefits of our
drug delivery technology will ultimately be established through FDA clinical
trials, our research, based upon pre-clinical studies indicates that our drug
delivery technology may have the following characteristics:

- Oral Availability. Our drug delivery technology is being developed to
enable oral availability of a broad spectrum of compounds, such as those with
poor water solubility, and protein and peptide biopharmaceuticals, which have
been difficult to administer.

- Encapsulation. Our drug delivery encapsulates, rather than chemically
bond, with the included drug.

- Minimizing Side Effects. Our drug delivery technology may reduce
toxicity, stomach irritation and other side effects of the encapsulated drug.

- Stability. Our drug delivery technology employs cochleate cylinders
which consists of unique multi-layered structures of large, continuous, solid,
lipid bilayer sheets rolled up in a spiral, with no internal aqueous space. We
believe that our cochleate preparations can be stored in cation-containing
buffer, or lyophilized to a powder, stored at room temperature, and
reconstituted with liquid prior to administration. Our cochleate preparations
have been shown to be stable for more than two years at 4(LOGO) C in a
cation-containing buffer, and at least one year as a lyophilized powder at room
temperature.

- Cellular Delivery. Our drug delivery technology is being developed as
membrane fusion intermediates. We believe that, when drugs encapsulated in our
drug delivery technology come into close

approximation to a target membrane, a fusion event between the outer layer of
the cochleate cylinder and the cell membrane may occur. This fusion may result
in the delivery of a small amount of the encochleated material into the
cytoplasm of the target cell. Further, we believe that drugs encapsulated in our
drug delivery technology may slowly fuse or break free of the cell and be
available for another fusion event, either with this or another cell.

- Resistance to Environmental Attack. Our drug delivery technology is
being developed to provide protection from degradation of the encochleated drug.
Traditionally, many drugs can be damaged from exposure to adverse environmental
conditions such as sunlight, oxygen, water and temperature. Since the cylinder
structure consists of a series of solid layers, we believe that components
within the interior of the cochleate structure remain intact, even though the
outer layers of the cochleate may be exposed to these conditions.

- Patient Compliance. We believe that a potential benefit of our cochleate
cylinders may include reducing unpleasant taste, unpleasant intestinal
irritation, and in some cases providing oral availability.

- Release Characteristics. Our cochleate technology may offer the
potential to be tailored to control the release of the drug depending on desired
application.

Initial Bioral Products in Development

We plan a diverse pipeline of products to be developed by applying our drug
delivery technology to a potentially broad array of established and promising
pharmaceuticals. Each intended Bioral product (i.e. drug and neutraceutical
encapsulated with our drug delivery technology) will, upon completion of
development, require separate FDA regulatory approval, and accordingly, will be
subject to the uncertainty, time and expense generally associated with the FDA
regulatory process. Even though we are targeting FDA approved, market-accepted
drugs for encapsulation, each of the products currently in development face,
development hurdles, regulatory requirements and uncertainty before market
introduction. As summarized below, we have initially targeted three potential
Bioral products for development.

PRE-CLINICAL
INDICATION DRUGS CATEGORY DEVELOPMENT FDA STATUS
---------- ----- -------- ------------ ----------

Systemic fungal Antifungal Bioral Antimicrobial Formulation Submission
infection Amphotericin B development for Phase I
completed. In IND being
vitro and in prepared, GMP
vitro manufacturing
efficacy data initiated.
completed
Tuberculosis and Antibacterial Bioral Antimicrobial Formulation Pre-clinical
bacterial infections Clofazimine development development
in process.
In vitro and
animal
studies in
process
Inflammatory disease Bioral Anti- OTC Anti- Formulation Pre-clinical
Inflammatory (such as inflammatory and in vitro development
generic aspirin or studies in
ibuprofen) process

Bioral Amphotericin B. We are currently developing a Bioral product for
treatment of fungal infection which we plan to submit to the FDA for a Phase I
Investigational New Drug Application (IND). Our IND has not been completed and
assuming that the funding is available, we estimate the filing will be made in
the first quarter of 2003. Systemic fungal infections continue to be a major
domestic and international health care problem. In the mid-1990s, Amphotericin B
was the most commonly used drug to treat these infections in the United States.

The major types of systemic fungal infections are normally controlled and
disposed of by the body's immune system. However, patients whose immune systems
have been suppressed by therapies for cancer, bone marrow transplants or
diseases such as AIDS can lose the ability to combat these infections. Systemic
Candidiasis, the most common type of invasive fungal infection, represents the
majority of all such infections, with fatality rates between 30 and 40 percent.
Aspergillosis, while occurring less frequently, is a significant threat as
fatality rates for this infection range as high as 90 percent. Cryptococcal
meningitis is a disease that frequently strikes patients with AIDS. The use of
conventional Amphotericin B to treat these infections is often limited by its
propensity to cause kidney damage which we believe our Bioral products may
minimize.

Amphotericin B is an established drug which is delivered intravenously. The
primary advantage which we are seeking for our proposed Bioral Amphotericin B
product is an oral form of the drug. Additional potential advantages include
improved safety, extended shelf life, improved cellular uptake and reduced
dosage. Assuming that we complete development of our proposed Bioral
Amphotericin B and that we obtain FDA approval, we believe that Bioral
Amphotericin B (a Bioral encapsulation of Amphotericin B) may provide an
effective orally administered version of Amphotericin B which may be more
effective and less toxic.

In the development of this drug, we are collaborating with the National
Institutes of Health, the Public Health Research Institute of New York and the
University of Texas. Further, we have been awarded a grant totaling
approximately $0.9 million, with an additional $1.8 million which could be
awarded from the National Institutes of Health to support the further
development of this drug if it believes in its judgment that progress continues
to be made.

Bioral Clofazimine. We are currently developing a Bioral product to target
tuberculosis. The bacillus is suspected to reside latently in a large population
of people, and remains viable for infection in those people for many years past
the initial infection stage.

We are targeting clofazimine, an off-patent oral drug, and may target other
drugs no longer under patent protection which treat tuberculosis, for potential
encapsulation in our drug delivery technology. The primary advantages which we
are seeking for our proposed Bioral Clofazimine product include increased oral
bio-availability, reduce required dosage and decrease side effects. Assuming
that we complete development of this Bioral drug and that we obtain FDA
approval, we believe that it may provide an effective, orally administered
version of a tuberculosis agent such as clofazimine. This Bioral product in
development may be administered orally, be more effective and have fewer side
effects. We are currently in pre-clinical development of a Bioral encapsulated
clofazimine in collaboration with the University of Chicago. Our development for
the proposed Bioral Clofazamine has not been completed. We estimate that the
preparation of an IND will be completed in the first quarter of 2003 assuming
the data in pre-clinical trials are favorable and the funding is available.

Bioral Anti-Inflammatory -- We have targeted inflammation disorders, such
as arthritis, for development of Bioral products, based upon accepted,
unpatented, over-the-counter, anti-inflammatory drugs such as generic aspirin or
ibuprofen. Various types of over-the-counter anti-inflammatory compounds are
currently available. Nonsteroidal anti-inflammatory drugs significantly decrease
inflammation at higher dosages.

We believe that our drug delivery technology can be used to effectively
deliver anti-inflammatory drugs with reduced side effects. The primary
advantages which we are seeking for our proposed Bioral anti-inflammatory
products include reduced gastrointestinal side effects, reduce required dosage
and improve cellular uptake. Anti-inflammatories formulated within cochleates
are inside a multi-layered solid particle which we believe may enhance the
safety and efficacy profiles and could potentially transform the compounds into
an entirely new class of improved anti-inflammatory drugs. As part of our
pre-clinical development, initial formulations have been tested in vitro. We are
in the process of preparing formulations as part of our preparation to commence
pre-clinical development. Our IND for our proposed Bioral Anti-Inflammatories
has not been completed and we believe that the earliest that we may begin the
preparation of an IND would be the second quarter of 2003 assuming the data in
pre-clinical trials are favorable and the funding is available.

OUR AUTOLOGOUS HIV THERAPY

As part of our research and development activities, we have developed and
are investigating our patented autologous (patient-specific) HIV therapy for
AIDS which uses a cochleate related (proteoliposone) delivery vehicle. This
immunotherapeutic is autologous meaning that it contains the specific patient's
virus or membrane protein. Our autologous HIV therapy is intended to boost or
alter the immune response in patients already infected with HIV.

We are preparing a submission to the FDA seeking to begin Phase I clinical
trials as a follow-up to our initial clinical trials which were conducted
pursuant to an Institutional Review Board process. Our development for this
proposed Autologous HIV Therapy has not been completed. We estimate that the
preparation of an IND will begin in the first quarter of 2003 assuming the data
in pre-clinical trials are favorable and the funding is available. We believe
that the time, expense and risk to market is substantial and uncertain
particularly when compared to that which we anticipate for the potentially
broad-base of pharmaceuticals, vaccines which may ultimately be encapsulated in
our drug delivery technology. Accordingly, we intend to primarily rely upon the
availability of grants and corporate partners to largely finance the further
research and development of this technology.

RELATIONSHIP WITH THE UNIVERSITY OF MEDICINE AND DENTISTRY OF NEW JERSEY AND
ALBANY MEDICAL COLLEGE

We have had and continue to have critical relationships with the University
of Medicine and Dentistry of New Jersey and Albany Medical College. Some of our
scientists were former researchers and educators at these Universities
researching cochleate technology. All of our current research and development is
done using facilities provided to us on the campus of the University of Medicine
and Dentistry of New Jersey, pursuant to a lease, or at the facilities of our
contractors or collaborators. Both of these Universities are stockholders in our
company and have a substantial financial interest in our business.

In September 1995, we entered into a license agreement with the
Universities to be the exclusive worldwide developer of the cochleate
technology. Under the license agreement, we and the Universities have also
jointly patented certain aspects of the cochleate technology and co-own such
patents with them.

Pursuant to the license agreement, we agreed that each university would be
issued an equity interest in our capital stock, originally equal to 2% of our
outstanding capital stock. As of the date of this prospectus, the University of
Medicine and Dentistry of New Jersey owns 139,522 shares (including shares
issued under a research agreement) and warrants to purchase 9,952 shares of our
common stock and the Albany Medical College owns 2,222 shares and warrants to
purchase 9,952 shares of our common stock. There are no further requirements to
provide either university any additional equity interest.

The license agreement grants us an exclusive license to the technology
owned by these Universities and obligates us to pay a royalty fee structure as
follows:

(a) For commercial sales made by us or our affiliates, we shall pay to
the Universities a royalty equal to 3% of our net sales;

(b) For commercial sales made by any of our sublicensee, we shall pay
to the Universities royalties up to 25% of our revenues received from the
sublicensee from the sale of the product;

Our royalty payments to the Universities will be divided equally among
them.

The Universities have reserved the right to use and permit the use of our
licensed technology and licensed patents by non-profit organizations for
educational and research purposes on a non-commercial basis.

In April 2001, we entered into a research agreement with the University of
Medicine and Dentistry of New Jersey whereby we and the university agree to
share the rights to new research and development that jointly takes place at the
university's facilities until December 31, 2005. We also agreed to provide the
university with progress and data updates and allow its researchers to publish
certain projects. We lease our research facilities totaling approximately 8,000
square feet located on their campus pursuant a lease agreement ending December
31, 2005. The monthly rent is $3,340 for the first year; $3,840 for the second
year; $4,340 for the third year; $4,840 for the fourth year and $5,340 for the
fifth year.

In addition to our rent payments, we have also agreed to pay for certain
other services provided by the university totaling approximately $99,187
annually. These include employing three graduate students from the
36

university for a total of $51,840, a budget to purchase chemicals totaling
approximately $40,000 (adjusted to exact cost), and an indirect cost factor
constituting 8% for 2001 (12% in 2002, 16% in 2003, 20% for 2004 and 24% for
2005) of the direct costs of the graduate students and chemicals totaling
$7,347. Research assistants and personnel provided to us are university
employees and they belong to various unions on campus.

COLLABORATIVE AND SUPPLY RELATIONSHIPS

We are a party to collaborative agreements with universities, government
agencies, corporate partners, and contractors. Research collaboration may result
in new inventions which are generally considered joint intellectual property.
Our collaboration arrangements are intended to provide us with access to greater
resources and scientific expertise in addition to our in-house capabilities. We
also have supply arrangements with a few of the key component producers of our
delivery technology. Our relationships include:

- National Institutes of Health. To investigate the properties of new
antifungal and anti-staphylococcal cochleate formulations. Grants
totaling approximately $2.7 million have been or could be awarded to us
by NIH for the development of our proposed Amphotericin B product of
which we have been awarded $0.9 million. Additionally, we are conducting
anti-fungal studies using our drug delivery technology through NIH
selected and paid contractors. The NIH has reserved broad and subjective
authority over future disbursements under the grant. While no objective
or specific milestones for future disbursements have been established by
the NIH, we must generally demonstrate to the satisfaction of the NIH
that our research and use of proceeds are consistent with the goal of
developing a formulation for the oral delivery of Amphotericin B.
Furthermore, we are required to submit to the NIH an annual report of
activities under the grant. To date we have received all expected
disbursements under the NIH grant and anticipate that future
disbursements will be made by the NIH under the terms of the grant.

- Public Health Research Institute of New York. To investigate our
proposed Amphotericin B product and other anti-fungal and
anti-staphylococcal applications of our drug delivery technology. This
relationship may involve shared expense reimbursement and shared
intellectual property with regard to joint inventions.

- Institute for Tuberculosis Research, University of Illinois at
Chicago. To support our development of Bioral Clafozimine product and
other anti-tuberculosis cochleate formulations. This relationship may
involve shared intellectual property with regard to joint inventions.

- University of Utrecht. To study and quantify pursuant to a Material
Transfer Agreement, the various aspects of drug delivery using our
technology. This relationship may involve expense reimbursement and
shared intellectual property with regard to joint inventions.

- Erasmus University of Rotterdam. To develop the cochleate as a delivery
system for glycopeptides

- Avanti Polar Lipids, Inc. To supply lipids which is a required material
for the manufacture of our drug delivery technology.

- Octo Plus Pharmaceutical Development, B.V. To supply Amphotericin
cochleates under Good Manufacturing Practice for our anticipated Phase I
clinical trials

We also have agreements with entities that are affiliated with and
partially-owned by key members of our board of directors and management to
conduct research and license certain proposed drugs. See "Certain Transactions"
for affiliations with our management. As of March 6, 2002, our board of
directors appointed an audit committee consisting of independent directors to
review all agreements and transactions which have been entered into with related
parties, as well as all future related party transactions. At the meeting the
independent board members, with Dr. O'Donnell abstaining, and after seeking and
reviewing advice from an independent valuation firm and inquiring about the
details of the various transactions, ratified all prior related party
transactions. Subsequent to this meeting, the audit committee independently
ratified these agreements. The following are the related-party agreements:

- RetinaPharma International, Inc. We have entered into a license
agreement with this development-stage biotechnology company to use our
delivery technology in connection with their proposed neutraceutical
product with potential application for macular degeneration and retinitus
pigmentosa, a
37

disease affecting the retina. This exclusive worldwide right to use our
drug delivery technology in conjunction with their effort to develop,
commercialize and manufacture their proposed product, or to sublicense to
a third party, is only for the purpose of treating antiapoptotic
pharmaceutical and nutriceutical treatment of retinal disease and
glaucoma. This license shall remain in effect as long as RetinaPharma
International, Inc. remains in compliance with the terms of the
agreement.

- Tatton Technologies, LLC. We have entered into a license agreement with
this development-stage biotechnology company to use our delivery
technology in connection with their proposed neutraceuticals product with
potential application to various neuro-degenerative diseases. Tatton
Technologies, LLC is developing and plans to commercialize technology
regarding certain apoptotic drugs and apoptotic naturally occurring
substances to treat certain neuro-degenerative diseases. We have entered
into exclusive worldwide licenses allowing Tatton Technologies, LLC to
incorporate our drug delivery technology into their effort to develop and
potentially commercialize their drug. Tatton Technologies, LLC may
sublicense our drug delivery technology to third parties to incorporate
into their proposed product and this license shall remain in effect as
long as both parties remain in compliance with the terms of the
agreement.

- BioKeys Pharmaceuticals, Inc. We have entered into a letter of intent to
seek a license agreement with this development-stage biotechnology
company to use our delivery technology in connection with the development
of its proposed vaccine technology. BioKeys Pharmaceuticals, Inc. in
conjunction with a third party will conduct research to develop their
EradicAids Vaccine Project. This proposed license shall remain in effect
as long as BioKey remains in compliance with the terms of the agreement.

- Biotech Specialty Partners, LLC. We have entered into a non-exclusive
distribution agreement with this development-stage distribution company
to market and distribute our proposed products once we have completed the
commercialization of our products. Our financial arrangement with Biotech
Specialty Partners, LLC requires us to sell to Biotech Specialty
Partners, LLC all of our proposed products, as and when purchased by with
Biotech Specialty Partners, LLC at a cost which is the lesser of: (i) ten
percent (10%) below the lowest wholesale acquisition cost, inclusive of
rebates, quantity discounts, etc.; and (ii) the lowest cost at which we
are then selling the product(s) to any other purchaser. The term of the
agreement shall be for a term of five years once a product becomes
available for distribution. Biotech Specialty Partners, LLC is a start-up
enterprise, which to date has not distributed any pharmaceutical
products.

These agreements generally provide that, except for on-going development
costs related to our drug delivery technology, we are not required to share in
the costs of the development of the pharmaceutical product or technologies of
these companies. We are entitled to receive the following royalty payments:

- RetinaPharma International, Inc. We are entitled to 10% of all net
revenue from the sale for the authorized use of our technology
incorporated into the product. The planned RetinaPharma product is in its
early stage of development and no sales of such product or royalty
revenue therefrom is anticipated in the foreseeable future.

- Tatton Technologies, LLC. We are entitled to 10% of all net revenue from
the sale for the authorized use of our technology incorporated into their
proposed product with potential application to various neuro-degenerative
diseases. The planned Tatton Technologies product is in its early stage
of development and no sales of such product or royalty revenue therefrom
is anticipated in the foreseeable future.

- BioKeys Pharmaceuticals, Inc. We are in the process of negotiating a
royalty on net revenue from the license of our drug delivery technology.
The letter of intent provides for license payments in the amount of
$341,000. We have also received a $35,000 loan from BioKeys
Pharmaceuticals, Inc. to begin research on BioKeys Pharmaceuticals, Inc.
products incorporating our technology. The loan is in the form of a
demand note with an interest rate of 1% plus prime. The planned BioKeys
Pharmaceuticals,

Inc. product is in its early stage of development and no sales of such
product or royalty revenue therefrom is anticipated in the foreseeable
future.

In pursuing potential commercial opportunities, we intend to seek and rely
upon additional collaborative relationships with corporate partners. Such
relationships may include initial funding, milestone payments, licensing
payments, royalties, access to proprietary drugs or potential
"nano-encapsulation" with our drug delivery technology or other relationships.
While we have not, to date, entered into any such arrangements, we are currently
in discussion with a number of pharmaceutical companies.

COLLABORATIVE AGREEMENTS IN NEGOTIATION

We are currently in the beginning stages of negotiations to potentially
establish one or more license agreements with PPDI, regarding the use of our
drug delivery technology. No letter of intent has been negotiated or executed
and no formal or legally binding license agreement has been reached and we
cannot predict whether we and PPDI will be able to reach any agreement with
regard to any such licensing agreement. The proposed sale of Units to PPDI in
connection with this offering is not conditioned upon the consummation of any
licensing arrangement between the parties.

LICENSES, PATENTS AND PROPRIETARY INFORMATION

We are the exclusive licensee of eight issued United States patents and
three foreign issued patents owned by the parties listed in the chart below.(1)
We believe that our licenses to this intellectual property will enable us to
develop this new drug delivery technology based upon cochleate and cochleate
related technology. Our intellectual property strategy is intended to maximize
our potential patent portfolio, license agreements, proprietary rights and any
future licensing opportunities we might pursue. With regard to our Bioral
cochleate technology, we intend to seek patent protection for not only our
delivery technology, but also potentially for the combination of our delivery
technology with various drugs no longer under patent protection. Below is a
table summarizing patents we believe are currently important to our business and
technology position.

PATENT NUMBER ISSUED EXPIRES TITLE PATENT OWNER
------------- ------ ------- ----- ------------

EUR0722338 7/25/2001 9/30/2014 Protein- and peptide- The University of
cochleate vaccines and Medicine and Dentistry of
methods of immunizing New Jersey and Albany
using the same Medical College
US06,165,502 12/26/2000 9/11/2016 Protein-lipid vesicles The University of
and autogenous Medicine and Dentistry of
immunotherapeutic New Jersey and Albany
comprising the same Medical College
US06,153,217 11/28/2000 1/22/2019 Nanocochleate BioDelivery Sciences
formulations, process of International, Inc., The
preparation and method of University of Medicine
delivery of and Dentistry of New
pharmaceutical agents Jersey
AUS722647 11/23/2000 9/02/2017 Protein-lipid vesicles The University of
and autogenous Medicine and Dentistry of
immunotherapeutic New Jersey and Albany
comprising the same Medical College
US05,994,318 11/30/1999 11/24/2015 Cochleate delivery The University of
vehicles Medicine and Dentistry of
New Jersey and Albany
Medical College
US05,840,707 11/24/1998 11/24/2015 Stabilizing and delivery The University of
means of biological Medicine and Dentistry of
molecules New Jersey and Albany
Medical College

PATENT NUMBER ISSUED EXPIRES TITLE PATENT OWNER
------------- ------ ------- ----- ------------

US05,834,015 11/10/1998 9/11/2016 Protein-lipid vesicles The University of
and autogenous Medicine and Dentistry of
immunotherapeutic New Jersey and Albany
comprising the same Medical College
AUS689505 2/2/1998 9/30/2014 Protein- or peptide- The University of
cochleate Medicine and Dentistry of
immunotherapeutics and New Jersey and Albany
methods of immunizing Medical College
using the same
US05,643,574 07/01/1997 7/01/2014 Protein- or peptide- The University of
cochleate Medicine and Dentistry of
immunotherapeutics and New Jersey and Albany
methods of immunizing Medical College
using the same
US04,871,488 10/03/1989 10/03/2006 Reconstituting viral Albany Medical College
glycoproteins into large
phospholipid vesicles
US04,663,161 05/05/1987 4/22/2005 Liposome methods and Albany Medical College
compositions

(1) We also co-own U.S. Patent 06,340,591 with the University of Maryland and
University of Medicine and Dentistry of New Jersey, dealing with gene
therapy which has no relation with either drug delivery or vaccines as
described in this prospectus.

Our interest in the intellectual property is subject to and burdened by
various royalty payment obligations and by other material contractual or license
obligations.

In general, the patent position of biotechnology and pharmaceutical firms
is frequently considered to be uncertain and involve complex legal and technical
issues. There is considerable uncertainty regarding the breadth of claims
allowed in such cases and the degree of protection afforded under such patents.
While we believe that our intellectual property position is sound and that we
can develop our new drug delivery technology and our HIV therapy, we cannot
provide any assurances that our patent applications will be successful or that
our current or future intellectual property will afford us the desired
protection against competitors. It is possible that our intellectual property
will be successfully challenged or that patents issued to others may preclude us
from commercializing our drugs. We are aware of two issued United States patents
dealing with lipid formulations of Amphotericin B products. The first of these
patents, United States Patent No. 4,978,654, claims an Amphotericin B liposome
product. We do not believe that our patent or technology are in conflict with
this existing patent, although there can be no assurance that a court of law in
the United States' patent authorities might determine otherwise. Our belief is
based upon the fact that our cochleate product does not contain liposomes, which
appears to be the basis for the existing patent. The second of these patents,
United States Patent No. 5,616,334, claims a composition of a lipid complex
containing Amphotericin B defined during prosecution as a ribbon structure. Our
nano-encapsulation technology uses cochleates which are not ribbon structures.
Accordingly, we do not believe that we require a license under this patent. If a
court were to determine that we infringe either of these patents, we might be
required to seek to a license to commercialize Amphotericin B products. There
can be no assurance that we would be able to obtain a license from either patent
holder. In addition, if we were unable to obtain a license, or if the terms of
the license were onerous, there may be a material adverse effect upon our
business plan to commercialize these products.

Most of the inventions claimed in our Patents were made with the United
States government support. Therefore, the United States government might have
certain rights in the technology, which could be inconsistent with the our plans
for commercial development of products and/or processes. We believe to the
extent the United States government would have rights in our licensed technology
due to their funding, we have to either obtain a waiver from the United States
government relating to the United States government's

rights in the technology, or have agreements with the United States government
which would granting us exclusive rights.

We also rely on trade secrets and confidentiality agreements with
collaborators, advisors, employees, consultants, vendors and other service
providers. We cannot assure you that these agreements will not be breached or
that our trade secrets will not otherwise become known or be independently
discovered by competitors. Our business would be adversely affected if our
competitors were able to learn our secrets or if we were unable to protect our
intellectual property.

We filed a trademark registration for our proposed brand name, Bioral,
which we plan to establish as our brand to use in conjunction with all of our
potential oral delivery drugs. There can be no assurance it will be issued.

HISTORY OF OUR TECHNOLOGY

Below is a table summarizing technology development milestones:

April 1995 BioDelivery Sciences, Inc. obtained the worldwide exclusive
rights to the Bioral cochleate technology owned by the
Universities.
September 1995 BioDelivery Sciences, Inc. was awarded a vaccine research
grant from Wyeth Lederle Vaccines, an affiliate of American
Home Products and American Cyanamid Company.
September 1995 BioDelivery Sciences, Inc. established a Research Agreement
with the University of Medicine and Dentistry of New Jersey.
June 1996 BioDelivery Sciences, Inc. established research and
development, and License Agreement for Vaccines with Wyeth
Lederle Vaccines which expired in December 1999.
August 1996 BioDelivery Sciences, Inc. signed a Material Transfer
Agreement ("MTA") and started collaboration with the
University of Maryland, Gene Therapy.
July 1997 U.S. Patent No. 5,643,574 issued to the Universities.
PROTEIN -- OR PEPTIDE-COCHLEATE VACCINES.
September 1997 BioDelivery Sciences, Inc. expanded its scientific and
administrative staff and moved to new laboratories.
November 1997 Initiated on-going collaboration with Public Health Research
Institute of New York ("PHRI").
February 1998 Initiated on-going National Institute of Health funded
amphotericin cochleate studies with University of Texas.
July 1998 AUS Patent No 689505 issued to the Universities. VACCINE &
METHODS OF IMMUNIZING.
November 1998 U.S. Patent No. 5,834,015, issued to the Universities.
AUTOGENOUS VACCINE (HIV).
November 1998 U.S. Patent No. 5,840,707 issued to the Universities.
STABILIZING AND DELIVERY MEANS OF BIOLOGICAL MOLECULES.
March 1999 Moved into current 8,000 square foot facility on the campus
of the University of Medicine and Dentistry of New Jersey.
July 1999 Awarded Phase I SBIR for Amphotericin Cochleates.
September 1999 Awarded Phase I SBIR for Cochleate Gene Therapy.
November 1999 U.S. Patent No. 5,994,318 issued to the Universities.
COCHLEATE DELIVERY VEHICLES.
December 1999 Signed a MTA and started an on-going collaboration in drug
delivery with a major pharmaceutical company under a
non-disclosure agreement.

April 2000 Signed a MTA and started an on-going collaboration in drug
delivery with a major pharmaceutical company under a
non-disclosure agreement.
June 2000 Initiate an on-going collaboration with the National Cancer
Institute, Drug Delivery.
October 2000 Initiated an on-going collaboration with the Institute for
Tuberculosis Research, University of Illinois of Chicago,
drug delivery.
November 2000 A U.S. Patent No 722,647 to the Universities. AUTOGENOUS
VACCINE (HIV)
November 2000 U.S. Patent No. 6,153,217 issued to BioDelivery Sciences,
Inc. and the University of Medicine and Dentistry of New
Jersey. NANOCOCHLEATE FORMULATIONS. Initiate process for
preparation of Investigational New Drug Application for
Amphotericin B cochleates.
December 2000 U.S. Patent No. 6,165,502, issued to the Universities.
AUTOGENOUS VACCINE (cancer etc.).
December 2000 U.S. Patent No. 6,340,591, issued to the Universities.
January 2001 Signed a MTA and started an on-going collaboration with a
major pharmaceutical company under a non-disclosure
agreement in drug delivery.
April 2001 Establish a MTA and started an on-going collaboration with
Utrecht Institute for Pharmaceutical Sciences, and
University Medical Center Nijmegen, The Netherlands, to
study mechanism of cochleates in drug delivery.
May 2001 Signed a MTA with PHRI, NY to develop the cochleates for the
treatment of Staphylococcus, drug delivery.
June 2001 Signed a MTA with EUR Erasmus University of Rotterdam, The
Netherlands, to develop the cochleates for the treatment of
Staphylococcus, drug delivery.
June 2001 License Agreement with Retina Pharma International, Inc. and
Tatton Technology, LLC, affiliates of Dr. O'Donnell a
stockholder, director and officer, for such entities to
potentially use our technology to encapsulate their
proprietary therapies for potential of certain
neurodegenerative diseases.
July 2001 European Patent No. 722338, issued to the Universities and
the University of Maryland.
September 2001 Award of $0.9 million, with an additional $1.8 million
expected to be awarded NIH(SBIR) Grant for Pre-clinical and
Clinical development of Amphotericin B cochleates.

COMPETITION

The biopharmaceutical industry in general is competitive and subject to
rapid and substantial technological change. Developments by others may render
our proposed technology and proposed drugs and HIV therapy under development
noncompetitive or obsolete, or we may be unable to keep pace with technological
developments or other market factors. Technological competition in the industry
from pharmaceutical and biotechnology companies, universities, governmental
entities and others diversifying into the field is intense and is expected to
increase. Below are some examples of companies seeking to develope potentially
competitive technologies. Many of these entities have significantly greater
research and development capabilities than we do, as well as substantially more
marketing, manufacturing, financial and managerial resources. These entities
represent significant competition for us. In addition, acquisitions of, or
investments in, competing development-stage pharmaceutical or biotechnology
companies by large corporations could increase such competitors' research,
financial, marketing, manufacturing and other resources.

While many development activities are private, and therefore we cannot know
what research or progress has actually been made, we are not aware of any other
drug delivery technology using a naturally occurring drug delivery vehicle
(carrier) that can be used to simultaneously address two important clinical
goals; oral delivery of drugs that normally require injection and targeted cell
delivery once the drug is in the body.

Included amongst companies which we believe are developing potentially
competitive technologies are Emisphere (NASDAQ: EMIS), a publicly-traded company
and Nobex, a privately-held company. We believe that these potential competitors
are seeking to develop and commercialize technologies for the oral delivery of
drug which may require customization for various therapeutics or groups of
therapeutics. While our information concerning these competitors and their
development strategy is limited, we believe our technology can be differentiated
because our cochleate technology is seeking to deliver a potential broad base of
water soluble and water insoluble (fat of lipid soluble) compounds with limited
customization for each specific drug.

We believe that our technology may have cell-targeted delivery attributes
as well. Additional companies which are developing potentially competitive
technologies in this area may include Valentis (NASDAQ: VLTS) and Enzon (NASDAQ:
ENZN), both publicly-traded companies, which we believe may be seeking to
develop technologies for cell-targeted delivery of drugs. While we have limited
information regarding these potential competitors and their development status
and strategy, we believe that our technology may be differentiated because
unlike these potential competitors, we seek to use our cochleate to encapsulate
the therapeutic to achieve drug delivery into the interior of the cells such as
inflammatory cells.

Although the competitors mentioned above are developing drug delivery
techniques conceptually similar to ours with respect to encapsulation, or more
specifically "nano-encapsulation," we believe that our approach is different,
proprietary and protected under our patent. One primary way we can be
differentiated from our competitors is in our approach of using naturally
occurring substances to form a cochleate which encapsulates the drug in a
scroll-like multilayered delivery vehicle.

We believe that competitors may also be working on patient-specific
therapies for cancer. However, we are not aware of any competitors currently
attempting to develop patient-specific therapies for HIV. This does not,
however, mean to imply that there are not any now or that there will not be in
the future. Vaccines can be used for prophylactic (prevention of infection), or
therapeutic (treatment following infection) applications. The patient-specific
therapeutic, which we are attempting to develop, is intended to boost or alter
the immune response in patients already infected with HIV. For the most part,
HIV vaccines in development, about which we are aware, are being targeted
specifically to prevent infection, however, some of these vaccines may also
prove useful for therapeutic applications. As such, these could prove to be
competitive with our autologous therapeutic.

Our drug delivery technology, specific drugs encapsulated with our drug
delivery technology and HIV autologous immunotherapeutics must compete with
other existing technologies and/or technologies in development. Such potential
competitive technologies may ultimately prove to be safer, more effective or
less costly than any drugs which we are currently developing or may be able to
develop. Additionally, our competitive position may be materially affected by
our ability to develop or successfully commercialize our drugs and technologies
before any such competitor.

MANUFACTURING

During drug development and the regulatory approval process, we plan to
rely on third-party manufacturers to produce our compounds for research purposes
and for pre-clinical and clinical trials. With regard to our intended
Amphotericin B product, we have entered into a manufacturing agreement with Octo
Plus, Inc. Under our agreement, Octo Plus, Inc. will manufacture our
encochleated Amphotericin B for use in clinical and preclinic trials.
Manufacturing by Octo Plus, Inc. is required to comply with Good Manufacturing
Practices with demonstrated scale-up capability for submission to the FDA. To
date, we have not entered into manufacturing arrangements for any other intended
Bioral product. As our intended products near market introduction, we intend to
outsource manufacturing to third party manufacturers, which comply with the
FDA's applicable Good Manufacturing Practices. While we believe that such
commercial manufacturing arrangements may be available, no such relationships
have been establish to date.

We intend to purchase component raw materials from various suppliers. With
regard to our lipids, we have a supply relationship with Avanti Polar Lipids,
Inc. which we believe is capable of meeting our anticipated requirements during
clinical trials. Avanti Polar Lipids, Inc. is located in Alabaster, Alabama. As

our intended products near market introduction, we intend to seek multiple
suppliers of all required components although there may not actually be more
than one at that time.

In the event that Avanti Polar Lipids, Inc. fails to provide us with the
necessary supply of required lipids, we would have difficulty replacing such
supply in a timely manner which could negatively affect our research and
production capabilities.

SALES AND MARKETING

Our marketing strategy, assuming completion of our drug delivery technology
and product development and regulatory approval, is to market each of our
approved orally delivered products under the Bioral brand name. Marketing may be
conducted through a wide range of potential arrangements such as licensing,
direct sales, co-marketing, joint venture and other arrangements. Such
arrangements may be with large or small pharmaceutical companies, general or
specialty distributors, biotechnology companies, physicians or clinics, or
otherwise. We have a non-exclusive distribution arrangement with Biotech
Specialty Partners, LLC ("BSP"). BSP is an early-stage alliance of specialty
pharmaceutical and biotechnology companies.

GOVERNMENT REGULATION

The manufacturing and marketing of any drug encapsulated in our drug
delivery technology, our autologous HIV therapeutic and our related research and
development activities are subject to regulation for safety, efficacy and
quality by numerous governmental authorities in the United States and other
countries. We anticipate that these regulations will apply separately to each
drug to be encapsulated by us in our drug delivery technology. We believe that
complying with these regulations will involve a considerable level of time,
expense and uncertainty.

In the United States, drugs are subject to rigorous federal regulation and,
to a lesser extent, state regulation. The Federal Food, Drug and Cosmetic Act,
as amended, and the regulations promulgated thereunder, and other federal and
state statutes and regulations govern, among other things, the testing,
manufacture, safety, efficacy, labeling, storage, record keeping, approval,
advertising and promotion of our drugs. Drug development and approval within
this regulatory framework is difficult to predict and will take a number of
years and involve the expenditure of substantial resources.

The steps required before a pharmaceutical agent may be marketed in the
United States include:

1. Pre-clinical laboratory tests, in vivo pre-clinical studies and
formulation studies;

2. The submission to the FDA of an Investigational New Drug Application
(IND) for human clinical testing which must become effective before
human clinical trials can commence;

3. Adequate and well-controlled human clinical trials to establish the
safety and efficacy of the product;

4. The submission of a New Drug Application or Biologic License Application
to the FDA; and

5. FDA approval of the New Drug Application or Biologic License Application
prior to any commercial sale or shipment of the product.

In addition to obtaining FDA approval for each product, each domestic
product-manufacturing establishment must be registered with, and approved by,
the FDA. Domestic manufacturing establishments are subject to biennial
inspections by the FDA and must comply with the FDA's Good Manufacturing
Practices for products, drugs and devices.

Pre-clinical Trials

Pre-clinical testing includes laboratory evaluation of chemistry and
formulation, as well as tissue culture and animal studies to assess the
potential safety and efficacy of the product. Pre-clinical safety tests must be
conducted by laboratories that comply with FDA regulations regarding Good
Laboratory Practices. No assurance can be given as to the ultimate outcome of
such pre-clinical testing. The results of pre-clinical testing are submitted to
the FDA as part of an IND and are reviewed by the FDA prior to the commencement
44

of human clinical trials. Unless the FDA objects to an IND, the IND will become
effective 30 days following its receipt by the FDA.

We intend to largely rely upon contractors to perform pre-clinical trials.
With regard to Bioral Clofazimine, our pre-clinical trials are being coordinated
by the Institute for Tuberculosis research, University of Illinois at Chicago.
To date, we have not established any relationship with regard to pre-clinical
testing of our intended Bioral anti-inflammatory products.

Clinical Trials

Clinical trials involve the administration of the new product to healthy
volunteers or to patients under the supervision of a qualified principal
investigator. Clinical trials must be conducted in accordance with Good Clinical
Practices under protocols that detail the objectives of the study, the
parameters to be used to monitor safety and the efficacy criteria to be
evaluated. Each protocol must be submitted to the FDA as part of the IND.
Further, each clinical study must be conducted under the auspices of an
independent institutional review board at the institution where the study will
be conducted. The institutional review board will consider, among other things,
ethical factors, the safety of human subjects and the possible liability of the
institution. Compounds must be formulated according to Good Manufacturing
Practices.

Clinical trials are typically conducted in three sequential phases, but the
phases may overlap. In Phase I, the initial introduction of the product into
healthy human subjects, the drug is tested for safety (adverse side effects),
absorption, dosage tolerance, metabolism, bio-distribution, excretion and
pharmacodynamics (clinical pharmacology). Phase II is the proof of principal
stage and involves studies in a limited patient population in order to:

- Determine the efficacy of the product for specific, targeted indications;

- Determine dosage tolerance and optimal dosage; and

- Identify possible adverse side effects and safety risks.

When there is evidence that the product may be effective and has an
acceptable safety profile in Phase II evaluations, Phase III trials are
undertaken to further evaluate clinical efficacy and to test for safety within
an expanded patient population at geographically dispersed multi-center clinical
study sites. Phase III frequently involves randomized controlled trials and,
whenever possible, double blind studies. We, or the FDA, may suspend clinical
trials at any time if it is believed that the individuals participating in such
trials are being exposed to unacceptable health risks.

We intend to rely upon third party contractors to advise and assist us in
our clinical trials. We have entered into an agreement with Pharma Research,
Inc., Wilmington, Delaware, to assist in the preparation and filing of our IND
with regard to Phase I clinical trials and upon acceptance to potentially
oversee clinical trials of our "nano-encapsulated" Amphotericin B. Under the
agreement, Pharma-Research, Inc. would provide scientific and other professional
personnel to assist us in drafting and submitting the IND. We have been given an
estimate of the total cost of the project which is subject to variables such as
actual time spent on the project. However, at this time, we believe the total
project will approximate $100,000. Furthermore, this agreement may be terminated
at any time by either party. We have not established similar relationships
regarding anticipated clinical trials for any other intended Bioral product.

New Drug Application and FDA Approval Process

The results of the pharmaceutical development, pre-clinical studies and
clinical studies are submitted to the FDA in the form of a New Drug Application
for approval of the marketing and commercial shipment of the product. The
testing and approval process is likely to require substantial time and effort.
In addition to the results of preclinical and clinical testing, the NDA
applicant must submit detailed information about chemistry and manufacturing and
controls that will determine how the product will be made. The approval process
is affected by a number of factors, including the severity of the disease, the
availability of alternative treatments and the risks and benefits demonstrated
in clinical trials. Consequently, there can be no assurance

that any approval will be granted on a timely basis, if at all. The FDA may deny
a New Drug Application if applicable regulatory criteria are not satisfied,
require additional testing or information or require post-marketing testing
(Phase IV) and surveillance to monitor the safety of a company's products if it
does not believe the New Drug Application contains adequate evidence of the
safety and efficacy of the drug. Notwithstanding the submission of such data,
the FDA may ultimately decide that a New Drug Application does not satisfy its
regulatory criteria for approval. Moreover, if regulatory approval of a drug is
granted, such approval may entail limitations on the indicated uses for which it
may be marketed. Finally, product approvals may be withdrawn if compliance with
regulatory standards is not maintained or if problems occur following initial
marketing. Post approval studies may be conducted to explore further
intervention, new indications or new product uses.

Among the conditions for New Drug Application approval is the requirement
that any prospective manufacturer's quality control and manufacturing procedures
conform to Good Manufacturing Practices and the requirement specifications of
the approved NDA. In complying with standards set forth in these regulations,
manufacturers must continue to expend time, money and effort in the area of
drugion and quality control to ensure full technical compliance. Manufacturing
establishments, both foreign and domestic, also are subject to inspections by or
under the authority of the FDA and by other federal, state or local agencies.
Additionally, in the event of non-compliance, FDA may issue warning letters and
seek criminal and civil penalties, enjoin manufacture, seize product or revoke
approval.

International Approval

Whether or not FDA approval has been obtained, approval of a product by
regulatory authorities in foreign countries must be obtained prior to the
commencement of commercial sales of the drug in such countries. The requirements
governing the conduct of clinical trials and drug approvals vary widely from
country to country, and the time required for approval may be longer or shorter
than that required for FDA approval. Although there are some procedures for
unified filings for certain European countries, in general, each country at this
time has its own procedures and requirements.

Other Regulation

In addition to regulations enforced by the FDA, we are also subject to
regulation under the Occupational Safety and Health Act, the Environmental
Protection Act, the Toxic Substances Control Act, the Resource Conservation and
Recovery Act and other present and potential future federal, state or local
regulations. Our research and development may involve the controlled use of
hazardous materials, chemicals, and various radioactive compounds. Although we
believe that our safety procedures for handling and disposing of such materials
comply with the standards prescribed by state and federal regulations, the risk
of accidental contamination or injury from these materials cannot be completely
eliminated. In the event of any accident, we could be held liable for any
damages that result and any such liability could exceed our resources.

EMPLOYEES

As of March 31, 2002, we had nine full-time employees, of which six are
scientists and three are administrative. Three of these scientists have Ph.D.
degrees. None of our employees are covered by collective bargaining agreements.
From time to time, we also employ independent contractors to support our
engineering and support and administrative functions. We consider relations with
our employees to be good. Each of our current scientific personnel has entered
into confidentiality and non-competition agreements with us.

FACILITIES

We conduct our operations in laboratory and administrative facilities on a
single site located on the campus of the University of Medicine and Dentistry of
New Jersey. Pursuant to a five year lease agreement with the university ending
2005, we occupy a total of approximately 8,000 square feet. The monthly rent is
$3,340 in 2001, $3,840 in 2002, $4,340 in 2003, $4,840 in 2004 and $5,340 in
2005 plus agreed payments for graduate student assistants and supplies used by
us. These payments are expected to be approximately

$100,000 annually. The terms of the lease allows us flexibility of terminating
the lease arrangement and relocating to a new space better suited for our
long-term space requirements. Our ability to terminate is without a penalty
provided that we give prior written notice.

LEGAL PROCEEDINGS

We are not subject to any pending legal actions other than described below.
However, in May 2001, we settled litigation commenced against BioDelivery
Sciences, Inc. by Irving A. Berstein and certain of his family members and
affiliates.

Mr. Berstein was an officer, director and more than 10% stockholder of
Biodelivery Sciences, Inc. A dispute arose between Mr. Berstein and the
remaining management team of Biodelivery Sciences, Inc. which was considered to
be disruptive to the ongoing operation of Biodelivery Sciences, Inc. The
litigation was based upon various legal theories arising out of Mr. Berstein's
conduct as an officer and director of Biodelivery Sciences, Inc., the terms and
enforceability of certain agreements between Mr. Berstein and Biodelivery
Sciences, Inc., the termination of employment of Mr. Berstein as an employee and
officer of Biodelivery Sciences, Inc. and the subsequent issuance of stock by
Biodelivery Sciences, Inc. to stockholders other than Mr. Berstein. The
litigation involved both direct claims by Mr. Berstein against Biodelivery
Sciences, Inc. and certain members of management individually and counterclaims
by Biodelivery Sciences, Inc. against Mr. Berstein. Claims for compensation for
past and future services and under long term contracts were alleged. Further,
Mr. Berstein alleged that an issuance of stock to other stockholders of
Biodelivery Sciences, Inc. except him around the time of his termination was
inappropriate and dilutive. Mr. Berstein alleged an entitlement to additional
shares of stock to prevent dilution to him. In the settlement, all claims of Mr.
Berstein and the counterclaims against Mr. Berstein were fully resolved and we
purchased Mr. Berstein's entire stock position in Biodelivery Sciences, Inc.

The settlement required that we pay $150,000 in cash and $125,000 by
promissory note, which is being satisfied in full out of the proceeds of this
offering. At the same time, we purchased the shares of BioDelivery Sciences,
Inc. held by these plaintiffs for $500,000 which was paid $200,000 in cash and
$300,000 by promissory note. As part of the settlement, there is a lien upon all
of our assets until all of the outstanding promissory notes have been paid. We
will use part of the proceeds to fully satisfy debt owed pursuant to this
litigation and remove the lien on our assets.

A lawsuit has been filed by Michael Pennessi d/b/a SSP Consultants, who is
not affiliated with us, arising out of an introduction to BioDelivery Sciences,
Inc. in 2000. Settlement discussions have been conducted. Informal telephonic
settlement discussions prior to the filing of the lawsuit, have ranged between
an approximately $120,000 cash demand upon us to our counter-offer of
approximately $5,000 in cash and 5,000 shares of stock. We do not know if the
matter will be settled. If settlement is reached, the damages sought or obtained
may be different or greater than that previously discussed in settlement
negotiations. We intend to vigorously defend this litigation. It is our belief
that the potential claim is neither material nor meritorious.

MANAGEMENT

Our directors and executive officers and their ages as of June 1, 2002 are
as follows:

NAME AGE POSITION(S) HELD
---- --- ----------------

Francis E. O'Donnell, Jr., 52
M.D. ........................... President, Chief Executive Officer, Chairman, and
Director
Raphael J. Mannino, Ph.D. ........ 55 Executive Vice President, Chief Scientific
Officer and Director
James A. McNulty.................. 51 Secretary, Treasurer, and Chief Financial Officer
Donald L. Ferguson................ 53 Senior Executive Vice President
Leila Zarif, Ph.D., MBA(1)........ 47 Executive Vice President of Research and
Development
Christopher Chapman, M.D. ........ 49 Executive Vice President of Medical and
Regulatory Affairs and Director of New Business
Development
Susan Gould-Fogerite, Ph.D. ...... 49 Director of Business Development-Vaccines and
Gene Therapy
L.M. Stephenson, Ph.D. ........... 59 Director
William B. Stone.................. 58 Director
James R. Butler................... 61 Director
John J. Shea...................... 75 Director
Robert G.L. Shorr................. 48 Director

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

(1) Dr. Zarif has notified us that she and her family have decided to move back
to their native country of France and discontinue working with us. She has
indicated to us that her departure is solely for personal reasons and not
having any thing to do with this offering or any disagreement with us. We do
not believe that Dr. Zarif's termination of employment will have a material
adverse effect on our operations.

There are no family relationships between any director, executive officer,
or person nominated or chosen to become a director or executive officer.

Francis E. O'Donnell, Jr., MD, age 52, has been CEO, President, Chairman
and Director on a full time basis since March 29, 2002 when Dr. O'Donnell
executed an employment agreement with us to become full-time interim President
and CEO. Following the offering, we are intending to identify a replacement CEO
and President for Dr. O'Donnell, who will assume full day-to-day
responsibilities of our operations. For more than the last five years, Dr.
O'Donnell has served as managing director of The Hopkins Capital Group, an
affiliation of limited liability companies which engage in business development
and venture activities. He has been Chairman of Laser Sight Inc. (LASE), a
publicly traded manufacturer of advanced refractive laser systems since 1993. He
is also the founder and a director of BioKeys Pharmaceuticals, Inc., a publicly
traded biopharmaceutical company. He is a founder and chairman of PhotoVision
Pharmaceuticals, Inc. and since early 2001, the chairman of RetinaPharma, Inc.
He is a non-managing partner of Tatton Technologies, LLC, a biotechnology
company and a managing partner of Biotech Specialty Partners, LLC, an alliance
of specialty pharmacy and biotechnology companies. Dr. O'Donnell is a graduate
of The Johns Hopkins School of Medicine and received his residency training at
the Wilmer Ophthalmological Institute. Dr. O'Donnell is a former professor and
Chairman of the Department of Ophthalmology, St. Louis University School of
Medicine. Dr. O'Donnell holds 25 U.S. Patents. Dr. O'Donnell is the 2000
Recipient of the Jules Stein Vision Award sponsored by Retinitis Pigmentosa
International.

James McNulty, age 51, has been Secretary, Treasurer, and Chief Financial
Officer on a part time basis (estimated to constitute approximately 80% of his
time) since October 2000. Mr. McNulty has, since May 2000, also served as Chief
Financial Officer of Hopkins Capital Group, an affiliation of limited liability
companies which engage in venture activities. Hopkins Capital Group is owned and
controlled by Dr. Francis E. O'Donnell. Mr. McNulty has performed accounting and
consulting services as a certified public accountant

for approximately 27 years. He co-founded, Pender McNulty Newkirk, which became
one of Florida's largest regional CPA firms, and was a founder/principal in two
other CPA firms, McNulty & Company, and McNulty Garcia & Ortiz. He served as CFO
of Star Scientific, Inc. (STSI) from October 1998 to May 2000. Since June 2000
he has served as CFO/COO of American Prescription Providers, Inc. He is a
principal in Pinnacle Group Holdings, a real estate development company
developing a major downtown Tampa destination entertainment complex. He is a
published co-author (with Pat Summerall) of Business Golf, The Art of Building
Relationships Through Golf, and is chairman of Business Links International,
Inc., a business development training company, which uses golf as its focus. Mr.
McNulty is a graduate of University South Florida, a licensed Certified Public
Accountant, and is a member of the American and Florida Institutes of CPA's.

Donald L. Ferguson, age 53, has been Senior Executive Vice President on a
part time basis since October 2000. Mr. Ferguson has been Chief Executive
Officer and principal owner of Land Dynamics, Inc., a developer of real estate
projects since its founding in 1979 and currently owns in excess of 20 real
estate properties. Mr. Ferguson is an investor in early stage technology and
biotechnology companies including Nanovision Technologies, Inc., Star
Scientific, Inc., BioKeys Pharmaceuticals, Inc. and PhotoVision Pharmaceuticals,
Inc. Mr. Ferguson holds an M.B.A. Degree from the University of Kansas and a
B.S. Degree in industrial engineering from Oklahoma State University.

Raphael J. Mannino, Ph.D., age 55, has been Executive Vice President and
Chief Scientific Officer since October 2000, and a Director since October 2001.
Dr. Mannino has served as President, CEO, Chief Scientific Officer, and a member
of the Board of Directors of BioDelivery Science, Inc. since its incorporation
in 1995. Dr. Mannino's previous experience includes positions as Associate
Professor, at the University of Medicine and Dentistry of New Jersey (1990 to
present), Assistant, then Associate Professor, Albany Medical College (1980 to
1990), and Instructor then Assistant Professor, Rutgers Medical School (1977 to
1980). His postdoctoral training was from 1973 to 1977 at the Biocenter in
Basel, Switzerland. Dr. Mannino received his Ph.D. in Biological Chemistry in
1973 from the Johns Hopkins University, School of Medicine.

Leila Zarif, Ph.D., MBA., age 47, has been Executive Vice President of
Research and Development since October 2000. Dr. Zarif joined BioDelivery
Sciences, Inc. in 1997 as Director of European Operations, and then moved to the
United States headquarters as Vice President from October 1997 until October
2000. Dr. Zarif served as a Director and Treasurer from March 1998 until March
2000. Dr. Zarif's prior experience includes eleven (11) years with ATTA, SA.
(Application and Transfer of Advanced Technology, French subsidiary of Alliance
Pharmaceutical Corp., San Diego) beginning as Head of New Technology Assessment
and promoted to President in 1993. Previously, Dr. Zarif worked as a
postdoctoral fellow with the French CNRS (National Center of Scientific
Research). Dr. Zarif received her Ph.D. in Chemistry in 1988, her MBA in 1992,
and her Habilitation to Direct Research in 1995 from the University of Nice,
France. Dr. Zarif has notified us that she and her family have decided to move
back to their native country of France and discontinue working with us. She has
indicated to us that her departure is solely for personal reasons and not having
any thing to do with this offering or any disagreement with us.

Christopher Chapman, MD, age 49, has been the Executive Vice President of
Medical and Regulatory Affairs and Director of New Business Development
(pharmaceuticals) on a part time basis since October 2000. Dr. Chapman received
his M.D. degree from Georgetown University in Washington, D.C. in 1987 where he
completed his internship in Internal Medicine. He completed a residency in
Anesthesiology and a fellowship in Cardiovascular and Obstetric Anesthesiology
at Georgetown University. Since 1995, Dr. Chapman has been a critical care
physician on the staff at Doctor's Community Hospital, Lanham, Maryland. He was
most recently President of Chapman Pharmaceutical Consulting. From 1995 to April
2000, Dr. Chapman was Executive Director, Medical Affairs, Quintiles Consulting
and a founding Co-Director of Quintiles BRI (QBRI) Medical Affairs, Drug Safety
and Medical Writing Departments.

Susan Gould-Fogerite, Ph.D., age 49, has been Director of Business
Development -- Vaccines and Gene Therapy since October 2000. Dr. Gould-Fogerite
served as Vice President and Secretary, and has been a member of the Board of
Directors of BioDelivery Sciences, Inc. since its incorporation in 1995. Dr.
Gould-Fogerite's previous experience includes her positions as Associate
Professor (2002 to present),

Assistant Professor (1991-2002), at University Of Medicine And Dentistry Of New
Jersey, New Jersey Medical School, and Research Instructor (1985 to 1988), then
Research Assistant Professor (1988-1990), at Albany Medical College. Dr.
Gould-Fogerite received her Ph.D. in Microbiology and Immunology from the Albany
Medical College in 1985.

L.M. Stephenson, Ph.D., age 59, is a member of the Board of Directors of
the Company. Dr. Stephenson has been associated with the University of Medicine
and Dentistry of New Jersey since 1995 where he is currently the Vice President
for Research with responsibility over developing the research capability,
research funding and intellectual property of New Jersey's medical science
campuses, including three medical schools, dental, nursing and public health
schools and a graduate school of biomedical sciences. He also serves as the
Acting Associate Dean for Research of the New Jersey Medical School where he is
temporarily responsible for managing and reorganizing the Sponsored Projects
Office. Dr. Stephenson also currently serves as the Director of Patents and
Licensing of the University of Medicine and Dentistry of New Jersey where he is
responsible for management of the Intellectual Property Assets, including
marketing of patents and establishment of new ventures. Dr. Stephenson is a
graduate of the University of North Carolina where he earned a BS in chemistry
and was awarded the Venable Medal for outstanding senior in chemistry. Dr.
Stephenson earned his Ph.D. in chemistry from the California Institute of
Technology where he earned the Kodak Prize for outstanding chemistry graduate
student and was an NSF Predoctoral Fellow. Additionally, Dr. Stephenson was a
Research Fellow at Harvard University. Dr. Stephenson also serves on the board
of directors of the following institutions: Kessler Medical Rehabilitation &
Research Corporation (Non-Profit), University Heights Sciences Park
(Non-Profit), New Jersey Entrepreneurs Network, Rutgers Help Desk & Business
Incubator, Crescent Genomics and the New Jersey Research and Development
Council.

William B. Stone, age 58, is a member of our Board of Directors. For the
past 20 years, Mr. Stone has been continuously employed with Mallinckrodt Inc.
in various capacities such as Vice-President Corporate Controller and CIO. Mr.
Stone retired in October 2000. Mr. Stone is a graduate of the University of
Missouri-Columbia where he earned a BS and MA degree in accounting. Mr. Stone is
also a Certified Public Accountant.

James R. Butler, age 61, is currently a director of Durect Corporation and
has served in this capacity since July 1999. Mr. Butler is retired from ALZA
Corporation where the last position he held was President of Alza International
and from which he retired in June 2001. Mr. Butler was employed at Alza from
August 1993 to June 2001. Prior to that, Mr. Butler worked at Glaxo Inc. for 23
years where the last position he held was Vice President -- General Manager of
Corporate Division. He is currently on the Board of Directors of Hematrope
Pharmaceuticals and is the Chairman of the Board of Directors of Respirics, Inc.
In addition, he is also a Senior Advisor/Principal to Apothogen, Inc., which is
a start up company funded by J.P. Morgan Partners, as well as Pharmaceutical
Products Development, Inc. Mr. Butler is on the Pharmacy School Board at the
University of Florida and is on the Board of Advisors at Campbell University,
North Carolina. Mr. Butler is also a principal in a start up pharmaceutical
company called Apothogen Pharmaceuticals. Mr. Butler earned a B.S. in marketing
at the University of Florida.

John J. Shea, age 75, is currently the head of his own firm of John J. Shea
& Associates and a Quality Systems Adviser with Quintiles, a private consulting
firm. Mr. Shea has been employed at John J. Shea Associates since 1989. Mr. Shea
has also served in the capacity of Director of Quality Assurance which is
responsible for the implementation of quality assurance procedures in a number
of public and private companies. From 1987-1989, he served as Director of
Quality Assurance at NeoRx Corporation. Mr. Shea was also the Director of
Corporate Quality Assurance at Hexcel Corporation from 1980-1987. Mr. Shea has
also served as the quality assurance person for other companies including,
Teledyne Relays, Ortho Diagnostics, Inc. and Bio Reagents & Diagnostics, Inc.
Mr. Shea earned a B.S. in Chemistry at Bethany College.

Robert G.L. Shorr, Ph.D., age 48, is currently President and CEO of
Cornerstone Pharmaceuticals, a company focussed on novel tumor targeting drug
delivery and novel anticancer agent technologies. He is also on the faculty of
State University of New York (SUNY) Stony Brook Department of Biomedical
Engineering where he serves as the Director of Business Development for the
Center for Advanced Technology State University of New York at Stony Brook. He
has served in that position since October 1998. As Director of

Business Development for the State University of New York at Stony Brook Center
for Biotechnology, Dr. Shorr has been responsible for working with faculty and
the university technology transfer office to establish grant funded
entrepreneurial programs for promising commercializable technology. From 1991 to
1998, Dr. Shorr served as Vice President Science and Technology and as Vice
President for Research and Development at Enzon Inc., a public company. Among
his many accomplishments, Dr. Shorr was responsible for management of the
co-development with Schering Plough of the product PEG INTRON A, which is now
approved in the US and Europe. Dr. Shorr also served as chief scientist for
another public company, United Therapeutics, Inc. since 1998 and continues to be
a consultant. Dr. Shorr was also Associate Director for Molecular Pharmacology
at SmithKline and >French Upper Marion, PA; working under the direction of
Stanley T. Crooke, M.D., Ph.D. and President of World Wide Research and
Development. Dr. Shorr received his B.S. in Biology from the State University of
New York (Buffalo) in 1975, his D.I.C. from Imperial College of Science &
Technology in London, England in 1982, and his Ph.D., in Biochemistry from the
University of London in 1981.

BOARD COMPOSITION

Directors are elected annually at our annual meeting of stockholders, and
serve for the term for which they are elected and until their successors are
duly elected and qualified. There is only one class of directors.

BOARD COMPENSATION

The Company's policy is to pay $1,000 per diem compensation to members of
the Board for attendance at formal Board meetings or committee meetings and no
compensation for informal meetings such as telephonic meetings and written
consent actions. All directors are reimbursed for travel and other related
expenses incurred in attending meetings of the Board.

Directors are eligible to participate in our 2001 stock option plan. We
grant each director upon agreeing to serve an option to purchase 20,000 shares
of common stock. We award an additional 10,000 for each committee chairmanship
and 5,000 shares for each committee membership. We grant subsequent grants of
options to purchase 20,000 shares upon each anniversary of such director's
appointment. Such options are granted at an exercise price equal to the fair
market value of the common stock on the grant date and are exercisable 13 months
following the completion of this offering or 24 months from the date of grant.

We have indemnified each member of the board of directors and our executive
officers to the fullest extent authorized, permitted or allowed by law.

BOARD COMMITTEES

The board of directors has a compensation committee that reviews and
recommends the compensation arrangements for our management. The members of the
compensation committee are Dr. O'Donnell, L.M. Stephenson, and William Stone.

The board of directors designated an audit committee on March 6, 2002 that
reviews our annual audit and meets with our independent auditors to review our
internal controls and financial management practices. The board's audit
committee currently consists of James R. Butler, John J. Shea, Robert G.L.
Shorr, and William Stone. We believe that these individuals qualify as
independent directors in accordance with the rules of the Nasdaq Stock Market.
The functions of the audit committee are to make recommendations to the board of
directors regarding the selection of independent auditors, review the results
and scope of the audit and other services provided by our independent auditors
and review and evaluate our audit and control functions. The audit committee is
also charged with reviewing all related party transactions. One of the first
acts of the audit committee was to review all related-party agreements and
transactions which we had executed. The audit committee reviewed our related
party transactions including agreements with RetinaPharma International, Inc.,
Tatton Technologies, LLC, and BioKeys Pharmaceuticals, Inc and subsequently
ratified them on March 13, 2002.

SCIENTIFIC ADVISORY BOARD

We have established our Scientific Advisory Board as an additional
scientific and technical resource for our management team. Members of our
advisory board have entered into consulting agreements which provide for expense
reimbursements, 10,000 non-qualified stock options and cash compensation of
$1,500 for attendance at each formal board meeting. The following is a short
discussion of our advisory board members' background:

Ralph Arlinghaus, Ph.D. is Professor and Chairman of the Department of
Molecular Pathology at M. D. Anderson Cancer Center since 1986. Dr. Arlinghaus
has an extensive research background and experience in several fields, including
small RNA viruses (picornaviruses), retroviruses, including HIV, molecular
mechanisms involved in signal transduction, and molecular aspects of leukemia
research both at the level of diagnostics and developing novel strategies to
treat leukemia. From 1983-1986 Dr. Arlinghaus was Director of Vaccine
Development at the Johnson & Johnson Biotechnology Center in La Jolla, CA.

Floyd H. Chilton, Ph.D., is Founder, Director, President, Chief Executive
Officer and Chief Scientific Officer of Pilot Therapeutics. Prior to joining
Pilot Therapeutics as CEO and CSO in December 2000, Dr. Chilton was Director of
Molecular Medicine, Professor of Physiology and Pharmacology, Professor of
Internal Medicine (Section on Pulmonary and Critical Care Medicine) and
Professor of Biochemistry at the Wake Forest University School of Medicine. Dr.
Chilton is widely recognized in academia and industry for his leading work on
the role of arachidonic acid metabolism in human diseases.

Gerald Lee Mandell, MD, MACP is the Owen R. Cheatham Professor of the
Sciences and Professor of Medicine at the University of Virginia. He is the
founding editor of the world's leading reference source, Principles and
Practices of Infectious Diseases and the journal Current Infectious Diseases. He
is a past-President of the Infectious Diseases Society of America and was holder
of an NIH MERIT Award for his research focused on neutrophils and infection and
neutrophil interactions with antibiotics. He is a member of the Institute of
Medicine.

James M. Oleske, M.D., MPH is Francois-Xavier Bagnoud Professor of
Pediatrics and Director, Division of Pulmonary, Allergy, Immunology and
Infectious Diseases Department of Pediatrics UMD-New Jersey Medical School. Dr.
Oleske is an internationally recognized expert in the management of children
with HIV/AIDS. His earlier interest in immune based therapy for infants and
children with primary immunodeficiency has been extended to children with HIV
infection His multiple medical Board certifications (Allergy/Immunology,
Infectious Disease, Laboratory Immunology and Palliative/Hospice Care and Pain)
reflect his lifelong commitment of advocacy for children.

David S. Perlin, Ph.D., is the Scientific Director of The Public Health
Research Institute, an internationally recognized 60 year-old biomedical
research institute in New York City that emphasizes molecular approaches to
infectious diseases research. Dr. Perlin is widely published, and his research
activities focus on investigating the molecular properties of fungal membrane
proteins, novel approaches to fungal diagnostics, and the molecular basis for
clinical resistance to antifungal agents.

Leo A. Whiteside, M.D., is founder and President of Missouri Bone and Joint
Center, Missouri Bone and Joint Research Laboratory, and Whiteside Biomechanics
Inc. Dr. Whiteside is an internationally recognized arthritis surgeon and
innovator, specializing in total replacement of the hip and knee. He has been
the surgeon-inventor for three major hip replacement and two major knee
replacement systems, and his company is involved with developing and marketing
orthopaedic surgical instruments and implantable devices. He is past president
of the Hip Society, recipient of the Charnley award for excellence for research
involving hip replacement surgery, and is currently on the editorial board of
The Journal of Arthroplasty and Clinical Orthopaedics and Related Research.

LIMITATION ON LIABILITY AND INDEMNIFICATION MATTERS

Our certificate of incorporation and bylaws limit or eliminate the personal
liability of our directors for monetary damages for breach of the directors'
fiduciary duty of care. The duty of care generally requires that, when acting on
behalf of the corporation, directors exercise an informed business judgment
based on all
52

material information reasonably available to them. Consequently, our directors
or officers will not be personally liable to us or our stockholders for monetary
damages for breach of their fiduciary duty as a director, except for:

- any breach of the director's duty of loyalty to us or our stockholders;

- acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law;

- unlawful payments of dividends or unlawful stock repurchases, redemptions
or other distributions; and

- any transaction from which the director derived an improper personal
benefit.

These provisions are permitted under Delaware law which will be the controlling
law upon the completion of the reincorporation.

Our certificate of incorporation also provides that we will indemnify, to
the fullest extent permitted by law, any person made or threatened to be made a
party to any action or proceeding by reason of the fact that he or she is or was
one of our directors or officers or serves or served at any other enterprise as
a director, officer or employee at our request.

Our bylaws provide that we will, to the maximum extent and in the manner
permitted by Delaware law, indemnify each of the following persons against
expenses, including attorneys' fees, judgments, fines, settlements, and other
amounts incurred in connection with any proceeding arising by reason of the fact
that he or she is or was our agent:

- one of our current or past directors or officers;

- a current or past director or officer of another enterprise who served at
our request; or

- a current or past director or officer of a corporation that was our
predecessor corporation or of another enterprise at the request of a
predecessor corporation.

In addition, we will acquire directors' and officers' insurance providing
indemnification for our directors, officers and certain employees for certain
liabilities. We believe that these indemnification provisions and agreements are
necessary to attract and retain qualified directors and officers.

The limited liability and indemnification provisions in our certificate of
incorporation and bylaws may discourage stockholders from bringing a lawsuit
against directors for breach of their fiduciary duty and may reduce the
likelihood of derivative litigation against directors and officers, even though
a derivative action, if successful, might otherwise benefit us and our
stockholders. Furthermore, a stockholder's investment in us may be adversely
affected to the extent we pay the costs of settlement and damage awards against
our directors and officers under these indemnification provisions.

EXECUTIVE COMPENSATION

The following table provides certain summary information concerning the
compensation earned for services rendered to us during the fiscal year ended
December 31, 2001 by our Chief Executive Officer and our four other most highly
compensated executive officers who earned more than $100,000 in fiscal 2001 and
were serving as executive officers at the end of fiscal 2001, whom we refer to
collectively as the named executive officers.

The annual and long-term remuneration to or accrued for the executive
officers, for services rendered during the years ended December 31, 1999, 2000
and 2001 was as follows:

SUMMARY COMPENSATION TABLE*

LONG TERM COMPENSATION
-----------------------------------
ANNUAL COMPENSATION(1) AWARDS PAYOUTS
------------------------------- ------------------------- -------------------------
(a) (b) (c) (d) (f) (g)
(e) RESTRICTED SECURITIES (h) (i)
OTHER ANNUAL STOCK UNDERLYING LTIP ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION AWARD(S) OPTIONS/SARS PAYOUTS COMPENSATION(2)
--------------------------- ---- -------- ----- ------------ ---------- ------------ ------- ---------------
($) ($) ($) ($) (#) ($) ($)

Francis E. O'Donnell, Jr., 2001 -- -- -- -- 8,009 -- --
M.D.,........................
CEO, President and Chairman 2000 -- -- -- -- -- -- --
709 The Hampton Lane 1999 -- -- -- -- -- -- --
Chesterfield, MO 63017
James McNulty, CFO,............ 2001 $ 40,000 -- -- -- -- -- --
Secretary and Treasurer 2000 -- -- -- -- -- -- --
4419 W. Sevilla Street 1999 -- -- -- -- -- -- --
Tampa, Florida 33629
Donald L. Ferguson,............ 2001 -- -- -- -- 274,600 -- --
Senior Executive Vice 2000 -- -- -- -- -- -- --
President
Land Dynamics, Inc. 1999 -- -- -- -- -- -- --
11719 Old Ballas Road,
Suite 110
St. Louis, MO 63141
Raphael J. Mannino, Ph.D., .... 2001 $ 83,650 -- -- -- 96,110 -- $726,957
Executive Vice President, 2000 $ 64,800 -- -- -- -- -- --
Chief Scientific Officer 1999 $ 64,800 -- -- -- -- -- --
UMDNJ New Jersey
Medical School
185 South Orange Avenue
Building 4
Newark, NJ 07103
Christopher Chapman, .......... 2001 $ 80,000 -- -- -- 91,533 -- --
Director of Medical and 2000 -- -- -- -- -- -- --
Regulatory Affairs and 1999 -- -- -- -- -- -- --
Director
of New Business Management
800 Falls Lake Drive
Mitchelsville, MD 20720
Leila Zarif, Ph.D.,(3) ........ 2001 $139,514 -- -- -- 91,533 -- $726,957
Executive Vice President 2000 $114,716 -- -- -- -- -- --
of Research and Development 1999 $109,622 -- -- -- -- -- --
UMDNJ New Jersey
Medical School
185 South Orange Avenue
Building 4
Newark, NJ 07103

Susan Gould-Fogerite, 2001 $ 40,800 -- -- -- 34,324 -- $581,564
Ph.D., ......................
Director of Business 2000 $ 40,800 -- -- -- -- -- --
Development -- Vaccines and 1999 $ 40,800 -- -- -- -- -- --
Gene Therapy
UMDNJ New Jersey
Medical School
185 South Orange Avenue
Building 4
Newark, NJ 07103

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

* Salary reflects total compensation paid to these executives (pre-merger and
post-merger with BioDelivery Sciences, Inc. during these periods).

(1) The annual amount of perquisites and other personal benefits, if any, did
not exceed the lesser of $50,000 or 10% of the total annual salary reported
for each named executive officer and has therefore been omitted.

(2) Reflects the increase in value of the permanent discount stock (a variable
award) and the compensation expense recorded by us as a result of the
agreement to remove the permanent discount and put rights.

(3) Dr. Zarif has notified us that she and her family have decided to move back
to their native country of France and discontinue working with us. She has
indicated to us that her departure is solely for personal reasons and not
having any thing to do with this offering or any disagreement with us.

OPTION GRANTS DURING YEAR ENDED DECEMBER 31, 2001

POTENTIAL REALIZABLE VALUE AT ASSUMED ANNUAL RATES
INDIVIDUAL GRANTS OF STOCK PRICE APPRECIATION FOR OPTION TERM
------------------------------- ----------------------------------------------------
(a) (c) (d) (e) (f) (g)
(b) PERCENT OF
NUMBER OF TOTAL
SECURITIES OPTIONS/SARS EXERCISE
UNDERLYING GRANTED TO OR BASE
OPTIONS/SARS EMPLOYEES IN PRICE
NAME GRANTED (#) FISCAL YEAR ($/SH) EXPIRATION DATE 5% ($) 10% ($)
---- ------------ ---------------- -------- ------------------ --------- ---------

Francis E. O'Donnell, Jr.
M.D. .................... 8,009 0.96% $ 3.06 September 30, 2006 $ 6,808 $ 14,977
Donald L. Ferguson......... 137,300 16.48% $ 3.06 September 30, 2006 $ 116,705 $ 256,751
68,650 8.24% $11.80 September 30, 2006 $ -- $ --
68,650 8.24% $17.48 September 30, 2006 $ -- $ --
Raphael J. Mannino,
Ph.D. ................... 45,767 5.49% $ 3.06 September 30, 2006 $ 38,902 $ 85,584
22,883 2.75% $11.80 September 30, 2006 $ -- $ --
22,883 2.75% $17.48 September 30, 2006 $ -- $ --
Christopher Chapman,
M.D. .................... 45,767 5.49% $ 3.06 September 30, 2006 $ 38,902 $ 85,584
22,883 2.75% $11.80 September 30, 2006 $ -- $ --
22,883 2.75% $17.48 September 30, 2006 $ -- $ --
Leila Zarif, Ph.D. ........ 45,767 5.49% $ 3.06 September 30, 2006 $ 38,902 $ 85,584
22,883 2.75% $11.80 September 30, 2006 $ -- $ --
22,883 2.75% $17.48 September 30, 2006 $ -- $ --
Susan Gould-Fogerite,
Ph.D. ................... 17,162 2.06% $ 3.06 September 30, 2006 $ 14,588 $ 32,093
8,581 1.03% $11.80 September 30, 2006 $ -- $ --
8,581 1.03% $17.48 September 30, 2006 $ -- $ --

AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES

No options were exercised during the fiscal year-end December 31, 2001.

AGGREGATED OPTIONS/SAR EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTION/SAR VALUES

NUMBER OF VALUE OF
SECURITIES UNEXERCISED
UNDERLYING UNEXERCISABLE
UNEXERCISED IN-THE-MONEY
OPTIONS/SARS AT OPTIONS/SARS AT
SHARES FISCAL YEAR-END(#) FISCAL YEAR-END($)
ACQUIRED ON VALUE EXERCISABLE/ EXERCISABLE/
NAME AND PRINCIPAL POSITION EXERCISE(#) REALIZED($) UNEXERCISABLE UNEXERCISABLE
--------------------------- -------------- ----------- ------------------ ------------------
(a) (b) (c) (d) (e)

Francis E. O'Donnell, Jr.,
M.D. ............................. -- -- -- --
CEO, President and Chairman
709 The Hampton Lane
Chesterfield, MO 63017
James McNulty, CFO................ -- -- -- --
Secretary and Treasurer
4419 W. Sevilla Street
Tampa, Florida 33629
Donald L. Ferguson................ -- -- -- --
Senior Executive Vice President
Land Dynamics, Inc.
11719 Old Ballas Road,
Suite 110
St. Louis, MO 63141
Raphael J. Mannino, Ph.D. ........ -- -- -- --
Executive Vice President,
Chief Scientific Officer
UMDNJ New Jersey
Medical School
185 South Orange Avenue
Building 4
Newark, NJ 07103
Christopher Chapman............... -- -- -- --
Director of Medical and
Regulatory
Affairs and Director of New
Business Management
800 Falls Lake Drive
Mitchelsville, MD 20720
Leila Zarif, Ph.D. ............... -- -- -- --
Executive Vice President
of Research and Development
UMDNJ New Jersey
Medical School
185 South Orange Avenue
Building 4
Newark, NJ 07103

Susan Gould-Fogerite, Ph.D. ...... -- -- -- --
Director of Business
Development -- Vaccines and
Gene Therapy
UMDNJ New Jersey
Medical School
185 South Orange Avenue
Building 4
Newark, NJ 07103

EMPLOYMENT AGREEMENTS

Except for Dr. Frank O'Donnell, Mr. James McNulty and Dr. Christopher
Chapman, we currently have no written employment agreements or confidentiality
and non-compete agreements with any of our officers, directors, or key
employees. We may elect to pursue obtaining employment agreements with certain
of these individuals at some point in the future. Under our employment at will
arrangement, our officers received the following annualized salaries and other
benefits in 2001:

(i) Dr. O'Donnell, President, CEO and Chairman - On March 29, 2002,
Dr. O'Donnell executed an employment agreement to be our full-time
President and CEO at an annual salary of $150,000. Dr. O'Donnell's term of
employment shall be no longer than three years or until another CEO
candidate is appointed.

(ii) James McNulty, CFO, Secretary and Treasurer - Although he is a
part-time CFO, he has an employment agreement with us for a base salary of
$48,000, which terminates on March 1, 2004. Under the terms of this
agreement, he is also entitled to the following benefits: medical and
dental. Notwithstanding his part-time status, he has been paid $67,461 in
2002 through June 7 because we have been using his services on a more
regular basis.

(iii) Donald Ferguson, Senior Executive Vice President - Receives no
salary and no benefits.

(iv) Dr. Raphael Mannino, Ph.D., Executive Vice President, and Chief
Scientific Officer-Receives a salary of $90,000 and receives no benefits.

(v) Dr. Leila Zarif, Executive Vice President of Research and
Development - Receives a salary of $170,000. Under the terms of this
agreement, she is also entitled to the following benefits: medical and
dental. Dr. Zarif has notified us that she and her family have decided to
move back to their native country of France and discontinue working with
us. She has indicated to us that her departure is solely for personal
reasons and not having any thing to do with this offering or any
disagreement with us.

(vi) Dr. Susan Gould-Fogerite, Director of Business
Development - Receives a salary of $40,800 and is entitled to the following
benefits: a 401k Plan.

(vii) Chistopher Chapman, MD, Director of Medical and Regulatory
Affairs and Director of New Business Management -- Receives $6,667 per
month pursuant to a consulting contract and receives no other benefits from
us. This consulting contract was entered into prior to Dr. Chapman becoming
an officer, however, he continues to receive remuneration under the
consulting agreement. Prior to the effective date, such consulting
agreement will be reconstituted into an employment agreement on similar
terms and conditions.
57

Drs. Raphael Maninno, Leila Zarif, and Susan Gould-Fogerite have
outstanding debt payable to us which was incurred with their purchase of stock
of BioDelivery Sciences, Inc. in 1999. Simultaneously with the closing of this
offering, we are forgiving those notes and providing these same individuals with
a total of approximately $200,000 as compensation for their tax liability.

2001 STOCK OPTION PLAN

The purpose of the 2001 stock option plan is (i) to align our interests and
recipients of options under the 2001 stock option plan by increasing the
proprietary interest of such recipients in our growth and success, and (ii) to
advance our interests by providing additional incentives to officers, key
employees and well-qualified non-employee directors and consultants who provide
services to us, who are responsible for our management and growth, or otherwise
contribute to the conduct and direction of its business, operations and affairs.

Our board of directors will administer the 2001 stock option plan, select
the persons to whom options are granted and fix the terms of such options.

Under our 2001 stock option plan, we reserved 572,082 shares. The plan was
approved by our stockholders at our October 2001 annual meeting. Our board of
directors subsequently voted to increase the plan to 1,100,000 shares which will
be submitted to our stockholders for approval at the next annual meeting.
Options to purchase 978,355 shares of common stock have been granted under the
2001 stock option plan a portion of which is subject to shareholder approval.
Options may be awarded during the ten-year term of the 2001 stock option plan to
our employees (including employees who are directors), consultants who are not
employees and our other affiliates. Our 2001 stock option plan provides for the
grant of options intended to have been approved by our Board and qualify as
incentive stock options under Section 422A of the Internal Revenue Code of 1986,
as amended, ("Incentive Stock Options"), and options which are not Incentive
Stock Options ("Non-Statutory Stock Options").

Only our employees or employees of our subsidiaries may be granted
Incentive Stock Options. Our affiliates or consultants or others as may be
permitted by our board of directors, may be granted Non-Statutory Stock Options.

Directors are eligible to participate in the 2001 stock option plan. The
2001 stock option plan provides for an initial grant of an option to purchase up
to 20,000 shares of common stock to each director upon first joining our board
of directors and subsequent grants of options to purchase 20,000 shares upon
each anniversary of such director's appointment. Additionally, directors will be
granted 10,000 options for each committee chairmanship and 5,000 options for
each committee membership. Such options are granted at an exercise price equal
to the fair market value of the common stock on the grant date and fully vest
following one year of service after the date of grant.

Options and warrants to purchase 978,355 shares of our common stock at
prices ranging from $2.87 to $17.48 have been granted as of April 23, 2002. None
of our options have been granted at less than 85% of the fair market value at
the time of grant. Certain options granted under the 2001 options plan do not
vest or are not exercisable until the earlier of: (i) 13 months following the
completion this offering registered with the SEC; or (ii) 24 months from the
date of grant. None of our outstanding options have terms in excess of five (5)
years from the date of grant.

CERTAIN TRANSACTIONS

During 2001, we entered into agreements with RetinaPharma, Inc. and Tatton
Technology LLC. Both are biotechnology companies which are developing
neutraceutical neuroprotective therapies for treating neurodegenerative disease
such as macular degeneration and Parkinson's disease. To the extent that such
drugs utilize Bioral cochleate technology, we will support drug development and
will share in ten percent (10%) of all net revenue from such sales of Bioral
encapsulated drugs. The Hopkins Capital Group II, LLC, one of our significant
stockholders and Dr. Francis E. O'Donnell, Jr., our CEO, President and a
director are affiliated as stockholders and a director of RetinaPharma, Inc.
Additionally, Hopkins Capital Capital, LLC,
58

which is affiliated with Hopkins Capital Group II, LLC and Dr. O'Donnell, is a
significant stockholder of Tatton Technologies, LLC. Dr. O'Donnell is the
managing director of Hopkins Capital Group, LLC and Hopkins Capital Group II,
LLC.

Dr. Francis O'Donnell and Donald Ferguson have personally guaranteed a line
of credit up to $1,050,000 with a bank and other liabilities for our benefit at
a rate of prime plus 2% of which $850,000 matured in May 2002 but is being
deferred pending the completion of this offering and $200,000 will mature in
June 2002. As of March 31, 2002, we used $598,000 for expenses related to this
offering.

We have also entered into an agreement with Biotech Specialty Partners,
LLC, an emerging alliance of early stage biotechnology and specialty
pharmaceutical companies. Biotech Specialty Partners, LLC is in its formative
stage and to date has not distributed any pharmaceutical products. Under this
agreement, Biotech Specialty Partners, LLC will serve as a nonexclusive
distributor of our Bioral drugs in consideration of a ten (10%) discount to the
wholesale price, which our board of directors have determined to be commercially
reasonable. The Hopkins Capital Group II, LLC, which is affiliated with Dr.
Francis E. O'Donnell, Jr., our CEO and director, are affiliated as stockholders,
and a member of the management, of Biotech Specialty Partners, LLC.

We have also entered into a letter agreement with BioKeys Pharmaceutical,
Inc, a biotechnology company, which is developing several potential products
which are vaccine based. To the extent that BioKeys Pharmaceutical, Inc.
utilizes our Bioral drug delivery technology, we will earn a flat royalty which
we will negotiate and be approved by our independent audit committee. Regent
Court Technologies LLC, which is affiliated with one of our stockholders, and
Dr. Francis E. O'Donnell, our CEO and director, and Donald L. Ferguson, our
senior executive vice-president, are affiliated as stockholders and Dr.
O'Donnell is a member of the board of directors of BioKeys Pharmaceutical, Inc.
We have also received a $35,000 loan from BioKeys Pharmaceutical, Inc. to begin
research on their products using our technology. The loan is in the form of a
demand note with an interest rate of 1% plus prime.

Mr. James McNulty, our current Secretary, Treasurer and part-time Chief
Financial Officer, is also the Chief Financial Officer of The Hopkins Capital
Group II, LLC, which is affiliated with Dr. Francis E. O'Donnell, our president
and CEO.

Samuel S. Duffey, Esq., through Friday Harbour, LLC, a Florida limited
liability company owned with his spouse, owns 74,371 shares of our common stock.
An aggregate of 51,487 additional shares are owned by trusts for the benefit of
Mr. Duffey's adult children. Mr. Duffey is a partner in Duffey & Dolan, P.A.
which provides legal services to us and Friday Harbour, LLC, which provides
consulting services to us and Hopkins Capital Group, LLC.

In 2001, we settled litigation commenced against BioDelivery Sciences, Inc.
by Irving A. Berstein and certain of his family members and affiliates. Mr.
Berstein was a stockholders, and former officer and director of BioDelivery
Sciences, Inc. The settlement required that we pay $150,000 in cash and $125,000
by promissory note, which is being satisfied in full out of the proceeds of this
offering. At the same time, we purchased the shares of BioDelivery Sciences,
Inc. owned by these stockholders for $500,000 which was paid $200,000 in cash
and $300,000 by promissory note which is being satisfied in full out of the
proceeds of this offering.

In December 2001, we exchanged 447,391 shares of our stock for 1,470,000
shares of BioDelivery Sciences, Inc. redeemable common stock. Drs. Raphael J.
Mannino, Leila Zarif and Susan Gould-Fogerite, officers of the company,
principally owned those BioDelivery Sciences Inc. shares. In connection with
this exchange, we removed certain restrictions, put rights with respect to those
shares and expect to forgive loans of approximately $320,000 that are secured by
the BioDelivery Sciences Inc. shares upon the successful completion of the
offering. In connection with forgiveness of the notes, we will provide them with
approximately $200,000 for compensation for their tax liability. Due to the
variable nature of the underlying stock award, we recognized compensation
expense totaling $2,140,000 in 2001. This compensation expense does not include
any amount with respect to the expected forgiveness of loans.

We also issued an additional 137,300 shares during 2001 to the University
of Medicine and Dentistry of New Jersey to settle outstanding payments owed to
them under our research agreement.

As a matter of corporate governance policy, we have not and will not make
loans to officers or loan guarantees available to "promoters" as that term is
commonly understood by the SEC and state securities authorities.

We believe that the terms of the above transactions with affiliates were as
favorable to us or our affiliates as those generally available from unaffiliated
third parities. At the time of the above referenced transactions, we did not
have sufficient disinterested directors to ratify or approve the transactions;
however, the present board of directors includes four independent directors.
These independent directors are William Stone, James Butler, John Shea, and
Robert Shorr.

All future transactions between us and our officers, directors or five
percent stockholders, and respective affiliates will be on terms no less
favorable than could be obtained from unaffiliated third parties and will be
approved by a majority of our independent directors who do not have an interest
in the transactions and who had access, at our expense, to our legal counsel or
independent legal counsel. We intend to maintain at least two independent
members on our Board of Directors.

PPDI has expressed its intent in purchasing up to 690,000 Units in this
offering, constituting approximately 34.5% of this offering (assuming an
offering of 2,000,000 Units), at a price equal to the initial public offering
price. The shares of common stock will be issued to PPDI with the voting and
disposition rights vesting in its board of directors. The board may elect to
delegate the voting and disposition rights to a member or members of PPDI's
management. The current board of directors of PPDI consists of the following
eight members: Stuart Bondurant, M.D., Fredric N. Eshelman, Frederick Frank,
Catherine M. Klema, Terry Magnuson, Ernest Mario, John A. McNeill, Jr. and Paul
J. Rizzo. There is one vacancy on PPDI's board resulting from a former
director's decision not to stand for re-election. The vacancy will be filled as
soon as practicable. We are also in the process of beginning stages of
negotiation with PPDI as to the terms of one or more license agreements,
pursuant to which we would be exploring the possibility of granting PPDI a non-
exclusive license to our drug delivery technology. Although each side has
expressed an interest in further negotiations to formalize the proposed
licensing relationship, there is not currently a license agreement or any other
document which reflects any definitive or binding arrangements. If PPDI
purchases all of the Units for which it has expressed an interest, any
negotiations with PPDI after the offering will be with a party that owns more
than a 5% beneficial interest in our securities.

PRINCIPAL STOCKHOLDERS

The following table presents information concerning the beneficial
ownership of the shares of our common stock.

- each person who is known by us to beneficially own more than 5% of our
common stock;

- each of our directors;

- each of the named executive officers; and

- all of our directors and executive officers of as a group.

The number and percentage of shares beneficially owned are based on
5,000,863 shares of common stock outstanding. In computing the outstanding
shares of common stock, we have excluded all shares of common stock subject to
options or warrants since they are not currently exercisable or exercisable
within 60 days of the effective date and are therefore not deemed to be
outstanding and beneficially owned by the person holding the options or warrants
for the purpose of computing the number of shares beneficially owned and the
percentage ownership of that person.

Except as indicated in the footnotes to this table, and subject to
applicable community property laws, these persons have sole voting and
investment power with respect to all shares of our common stock shown as
beneficially owned by them. Percentage ownership figures after the offering do
not include shares that may be purchased by each person in this offering.

PERCENTAGE PERCENTAGE
NO. OF SHARES OF CLASS OF CLASS
OF COMMON PRIOR TO THIS AFTER THIS
NAME OF BENEFICIAL OWNER POSITION STOCK OFFERING OFFERING
------------------------ -------- ------------- ------------- ----------

Hopkins Capital Group II,
LLC(1)
4419 W. Sevilla Street
Tampa, FL 33629 Stockholder 3,111,579 62.22% 44.45%

Francis E. O'Donnell, Jr.,
M.D.(2)
CEO, President and Chairman
709 The Hampton Lane
Chesterfield, MO 63017 Chief Executive Officer,
Chairman and Director 3,161,922 63.23% 45.16%

University of Medicine and
Dentistry of New Jersey(3)
65 Bergen Street
MB 1414
University Heights
Newark, NJ 07103 Stockholder 139,522 2.79% 1.99%

Albany Medical College(3)
Director of Research Admin
47 New Scotland Avenue
Albany, NY 12202 Stockholder 2,222 0.04% 0.03%

John R. Williams, Sr.(4)
1 Starwood Lane
Manakin-Sabot, VA 23103 Stockholder 3,203,112 64.05% 45.75%

Dennis Ryll, M.D.(5)
1029 Speckledwood
Manor Court
Chesterfield, MO 63017 Stockholder 3,157,346 63.14% 45.10%

James A. McNulty
4419 W. Sevilla Street
Tampa, FL 33629 Chief Financial Officer
Treasurer and Secretary 76,659 1.53% 1.09%

Donald L. Ferguson(6)
11719 Old Ballas Road,
Suite 110
St. Louis, MO 63141 Sr. Executive Vice President 91,533 1.83% 1.31%

Raphael J. Mannino, Ph.D.(7)
185 South Orange Avenue
Building 4
Newark, NJ 07103 Executive Vice President,
Chief Scientific Officer and
Director 182,609 3.65% 2.61%

Susan Gould-Fogerite,
Ph.D.(8)
185 South Orange Avenue
Building 4
Newark, NJ 07103 Director of Business
Development -- Vaccines and
Gene Therapy 152,174 3.04% 2.17%
Leila Zarif, Ph.D.(9)
185 South Orange Avenue
Building 4
Newark, NJ 07103 Executive Vice President of
Research and Development 152,174 3.04% 2.17%
Pharmaceutical Product
Development, Inc.(10)
3151 South Seventeenth
Street
Wilmington, NC 28412 Stockholder 690,000 -- 9.86%

L.M. Stephenson, Ph.D.(11)
University of Medicine and
Dentistry of New Jersey
65 Bergen Street MB 1414
University Heights
Newark, NJ 07103 Director -- -- --

William Stone(12)
11120 Geyers Down Lane
Frontenac, MO 63131 Director -- -- --

James R. Butler(13)
109 Cutler Court
Ponte Bedra Beach, FL 32082 Director -- -- --

John J. Shea(13)
90 Poteskeet Trail
Kitty Hawk, NC 27949 Director -- -- --

Robert G. L. Shorr(13)
28 Brookfall Road
Edison, NJ 08817 Director -- -- --

All directors and officers as a group
(2)(6)(7)(8)(9)(11)(12)(13) 3,817,071 76.33% 54.52%

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

(1) Hopkins Capital Group II, LLC is owned one third by each of: (i) various
trusts of the Francis E. O'Donnell family; (ii) John R. Williams, Sr. and
his family trusts; and (iii) MOAB LLC, which is beneficially owned by
Dennis Ryll and members of his family.

(2) Includes the shares owned by Hopkins Capital Group II, LLC (see Note 1) and
45,767 shares of common stock, owned by his wife, as to which he disclaims
beneficial interest of. Does not include options to purchase 8,009 shares
of common stock at an exercise price of $3.06 per share and 26,991 shares
of common stock at an exercise price of $5.50 per share exercisable 13
months from the date of this prospectus. The remaining 4,576 shares of
common stock are personally owned by Dr. O'Donnell.

(3) Excludes warrants owned by both of the universities with each owning
warrants to purchase 9,951 additional shares of common stock at an exercise
price of $3.05 per share vesting 13 months from the date of this
prospectus. These warrants were granted in October 2001.

(4) Includes the shares owned by Hopkins Capital Group II, LLC (see Note 1) and
45,767 shares of common stock, converted from preferred stock prior to this
offering, owned by his wife, as to which he disclaims beneficial interest
of. The remaining 45,766 shares of common stock are personally owned by Mr.
Williams.

(5) Includes the shares owned by Hopkins Capital Group II, LLC. The remaining
45,767 shares of common stock are personally owned by Mr. Ryll.

(6) Does not include options to purchase 137,300 shares of common stock at an
exercise price of $3.06 per share vesting the earlier of 13 months from the
date of this prospectus or October 2003; options to purchase 68,650 shares
of common stock at an exercise price of $11.80 per share vesting the
earlier of 13 months from the date of this prospectus or October 2003; and
options to purchase 68,650 shares of common stock at an exercise price of
$17.48 per share vesting the earlier of 13 months from the date of this
prospectus or October 2003.

(7) Does not include options to purchase 45,767 shares of common stock at an
exercise price of $3.06 per share vesting the earlier of 13 months from the
date of this prospectus or October 2003; options to purchase 22,883 shares
of common stock at an exercise price of $11.80 per share vesting the
earlier of 13 months from the date of this prospectus or October 2003; and
options to purchase 22,883 shares of common stock at an exercise price of
$17.48 per share vesting the earlier of 13 months from the date of this
prospectus or October 2003.

(8) Does not include options to purchase 17,162 shares of common stock at an
exercise price of $3.06 per share vesting the earlier of 13 months from the
date of this prospectus or October 2003; options to purchase 8,581 shares
of common stock at an exercise price of $11.80 per share vesting the
earlier of 13 months from the date of this prospectus or October 2003; and
options to purchase 8,581 shares of common stock at an exercise price of
$17.48 per share vesting the earlier of 13 months from the date of this
prospectus or October 2003.

(9) Does not include options to purchase 45,767 shares of common stock at an
exercise price of $3.06 per share vesting the earlier of 13 months from the
date of this prospectus or October 2003; options to purchase 22,883 shares
of common stock at an exercise price of $11.80 per share vesting the
earlier of 13 months from the date of this prospectus or October 2003; and
options to purchase 22,883 shares of common stock at an exercise price of
$17.48 per share vesting the earlier of 13 months from the date of this
prospectus or October 2003. Dr. Zarif has notified us that she and her
family have decided to move back to their native country of France and
discontinue working with us. She has indicated to us that her departure is
solely for personal reasons and not having any thing to do with this
offering or any disagreement with us.

(10) Includes PPDI's intended purchase of 690,000 Units as part of this
offering.

(11) Does not include options to purchase 6,865 shares of common stock at an
exercise price of $3.06 per share and 23,135 shares of common stock at an
exercise price of $5.50 per share exercisable 13 months from the date of
this prospectus.

(12) Does not includes options to purchase 8,009 shares of common stock at an
exercise price of $3.06 per share and 26,991 shares of common stock at an
exercise price of $5.50 per share exercisable 13 months from the date of
this prospectus.

(13) Does not include options to purchase 25,000 shares of common stock at an
exercise price of $5.50 per share exercisable 13 months from the date of
this prospectus.

DESCRIPTION OF CAPITAL STOCK

Our authorized capital stock consists of 45,000,000 shares of common stock
and 5,000,000 shares of preferred stock. Upon the completion of this offering,
our outstanding capital stock will consist of 7,000,863 shares of common stock,
$.001 par value, and no shares of preferred stock, $.001 par value. There will
also be 2,000,000 outstanding Class A warrants to purchase 2,000,000 shares of
common stock in the aggregate. These figures do not include securities to be
issued as part of the exercise of the overallotment option, the Representative's
unit purchase option or the 2001 Incentive Stock Option Plan.

UNITS

Each Unit consists of: (i) one share of our common stock, par value $.001
per share; and (ii) one redeemable Class A common stock purchase warrant. The
common stock and warrants will not trade as separate securities until 30 days
after this offering unless the Representative of the underwriters determines
that separate trading should occur earlier. After the 30 day period, the
securities contained in the Units will automatically begin to trade separately.

COMMON STOCK

There are 5,000,863 shares of common stock outstanding, held of record by
approximately 227 stockholders. The holders of common stock are entitled to one
vote for each share held of record on all matters submitted to a vote of the
stockholders. Subject to preferential rights with respect to any outstanding
preferred stock, holders of common stock are entitled to receive ratably such
dividends as may be declared by the board of directors out of funds legally
available therefor. See "Dividend Policy." In the event of our liquidation,
dissolution or winding up, the holders of common stock are entitled to share
ratably in all assets remaining after payment of liabilities and satisfaction of
preferential rights of any outstanding preferred stock.

Our common stock has no preemptive or conversion rights or other
subscription rights. There are no sinking fund provisions applicable to the
common stock. The outstanding shares of common stock are, and the shares of
common stock to be issued upon completion of this offering will be, fully paid
and non-assessable.

CLASS A WARRANTS

Each Class A warrant entitles the holder to purchase one share of our
common stock at a price of $ (120% of the initial offering price of the
Units). The exercise price of the Class A warrants is subject to adjustment,
including anti-dilution provisions for corporate events, such as stock splits
and for issuance of securities at less than the current exercise price. You may
exercise your warrants at any time during the four years commencing one year
after the date of this prospectus unless we have redeemed them.

The Class A warrants are exercisable from 2003 until
2007. We may redeem the outstanding Class A warrants for $.10 per warrant upon
no less than 30 days written notice to the warrant holder; provided: (i) that
there is then an effective registration statement under the Securities Act
allowing the issuance of the shares issuable upon exercise of the Class A
warrants; (ii) the average closing sale price of the common stock equals or
exceeds 150% of the offering price of the Units for the 10 trading days prior to
the date of the notice of redemption; and (iii) that 12 months has elapsed since
the date of this prospectus.

The Class A warrants will be issued pursuant to a warrant agreement among
us, Kashner Davidson Securities Corporation and American Stock Transfer and
Trust Company, as warrant agent. The shares of common stock underlying the Class
A warrants, when issued upon exercise of the Class A warrants will be fully paid
and non-assessable.

PREFERRED STOCK

We have authorized 5,000,000 shares of preferred stock, none of which have
been designated or are outstanding. Prior to this offering, all outstanding
shares of preferred stock were rescinded and shares of common stock issued in
replacement thereof. The issuance of preferred stock with voting and conversion
rights may adversely affect the voting power of the holders of common stock,
including voting rights, of the

holders of common stock. In certain circumstances, such issuance could have the
effect of decreasing the market price of the common stock. Notwithstanding the
broad discretion granted to the Board of Directors with respect to designating
the terms and conditions of any series of preferred stock, our Board of
Directors has agreed to refrain from issuing shares of preferred stock, unless
such designation and issuance are approved by a majority of our independent
directors who do not have an interest in the transactions and who have access to
and consulted with (at our expense) our counsel or counsel of their choosing.

OPTIONS

We have outstanding options and warrants to purchase 978,355 shares of our
common stock at exercise prices ranging from $2.87 to $17.48. Up to 121,645
additional shares of common stock may be subject to options granted in the
future under the 2001 stock option plan. See "2001 incentive stock option plan."

In order for the holders of the rights to resell the common stock issuable
upon exercise of the rights, there must be a current prospectus available under
the Securities Act of 1933 and applicable state securities laws.

REGISTRATION RIGHTS

Except for the registration rights granted to the underwriters pursuant to
the underwriting agreement, there are no registration rights granted to
investors. See "Underwriting".

ANTI-TAKEOVER LAW

We are subject to Section 203 of the Delaware General Corporation Law,
which restricts certain transactions and business combinations between a
corporation and an "interested stockholder" (as defined in Section 203) owning
15% or more of the corporation's outstanding voting stock, for a period of three
years from the date the stockholder becomes an interested stockholder. Subject
to certain exceptions, unless the transaction is approved by the board of
directors and the holders of at least two-thirds of our outstanding voting stock
(excluding shares held by the interested stockholder), Section 203 prohibits
significant business transactions such as a merger with, disposition of assets
to, or receipt of disproportionate financial benefits by the interested
stockholder, or any other transaction that would increase the interest
stockholder's proportionate ownership of any class or series of the
corporation's stock. The statutory ban does not apply if, upon consummation of
the transaction in which any person becomes an interested stockholder, the
interested stockholder owns at least 85% of the outstanding voting stock of the
corporation (excluding shares held by persons who are both directors and
officers or by certain employee stock plans).

TRANSFER AGENT AND REGISTRAR

American Stock Transfer & Trust Company will be our transfer agent and
registrar for our common stock and warrant agent for the Class A warrants.

LISTING

We have applied to the Nasdaq SmallCap Market for quotation of our Units,
Class A warrants and common stock under the symbols "BDSIU", "BDSI", and
"BDSIW", respectively. We have also applied to the Boston Stock Exchange for
quotation of our Units, common stock and Class A warrants under the same
symbols.

SHARES ELIGIBLE FOR FUTURE SALE

Prior to this offering, there has been no public market for our common
stock. Future sales of substantial amounts of common stock in the public market,
or the perception that such sales may occur, could adversely affect prevailing
market prices.

Upon consummation of the offering, we will have an aggregate of 7,000,863
shares of common stock outstanding, assuming that the underwriters do not
exercise their over-allotment option and none of the outstanding options and
warrants are exercised. Of the 7,000,863 shares outstanding after the offering,
only the 2,000,000 shares sold in this offering (excluding an additional 300,000
shares included in the underwriter's overallotment option and shares underlying
the Class A warrants) will be freely tradable without restriction under the
Securities Act, except for any shares that may be sold or purchased by our
"affiliates." Shares purchased by our affiliates will be subject to the volume
and other limitations of Rule 144 of the Securities Act, or "Rule 144" described
below. As defined in Rule 144, an "affiliate" of an issuer is a person who,
directly or indirectly, through one or more intermediaries, controls, is
controlled by or is under common control with the issuer. Of the outstanding
shares, 3,934,237 shares are subject to the volume and other limitations of Rule
144 and 319,765 shares are subject to only the limitations of Rule 144(k). The
remaining 746,861 shares will become eligible for sale at various times.

The Representative required as a condition to closing of the offering that
all officers, directors, and certain significant stockholders agree to
contractual restrictions for a period of twelve months (three years in the case
of Dr. Francis O'Donnell and The Hopkins Group II, LLC.) from the effective date
of this prospectus, as follows:

- such parties may not offer, pledge, sell, contract to sell, sell any
option or contract to purchase, purchase any option or contract to sell,
grant any option, right or warrant to purchase, lend, or otherwise
transfer or dispose of, directly or indirectly, any shares of common
stock or any securities convertible into or exercisable or exchangeable
for common stock; or

- such parties may not enter into any swap or other arrangement that
transfers to another, in whole or in part, any of the economic
consequences of ownership of the common stock, whether any such
transaction described above is to be settled by delivery of common stock
or other securities, in cash or otherwise.

These persons and entities own an aggregate of 3,817,072 shares of common stock,
and 778,525 warrants and/or options. Upon the expiration of this "lock-up"
period, all these shares will be available for sale subject to Rule 144. Kashner
Davidson Securities Corporation may choose to release some or all of these
shares from such restrictions prior to the expiration of the applicable
"lock-up" period, although it has no current intention of doing so.

RULE 144

Under Rule 144 as currently in effect, a person who has beneficially owned
restricted shares of common stock for at least one year, including the holding
period of any prior owner who is not an affiliate, would be entitled to sell a
number of the shares within any three-month period equal to the greater of 1% of
the then outstanding shares of the common stock or the average weekly reported
volume of trading of the common stock on the Nasdaq Small Cap Market during the
four calendar weeks preceding such sale. Immediately after the offering, 1% of
our outstanding shares of common stock would equal approximately 70,001 shares.
Under Rule 144, restricted shares are subject to manner of sale and notice
requirements and requirements as to the availability of current public
information concerning us.

Under Rule 144(k), a person who is not deemed to have been an affiliate at
any time during the 90 days preceding a sale, and who has beneficially owned the
shares proposed to be sold for at least two years, including the holding period
of any prior owner who is not an affiliate, is entitled to sell such shares
without regard to the volume or other limitations of Rule 144 just described.

RULE 701

Immediately after this offering, excluding the underwriter's
over-allotment, there will be options and warrants outstanding to purchase
approximately 3,378,355 shares of common stock. Subject to the provisions of the
lock-up agreements described above, holders of these options may rely on the
resale provisions of Rule 701 under the Securities Act. Rule 701 permits
non-affiliates to sell their shares without having to comply with the volume,
holding period or other limitations of Rule 144 and permits affiliates to sell
their shares without having to comply with the holding period limitation of Rule
144, in each case beginning 90 days after the consummation of this offering.

UNDERWRITING

Under the terms and subject to the conditions contained in an underwriting
agreement dated the date hereof, the underwriters named below through their
representative Kashner Davidson Securities Corporation have severally agreed to
purchase, and we have agreed to sell to them, severally and not jointly, the
respective number of Units set forth opposite their names at the public offering
price less the underwriting discounts and commission set forth on the cover page
of this prospectus below:

NUMBER
OF
UNDERWRITERS UNITS
------------ ------

Kashner Davidson Securities Corporation.....................
Roan/Meyers Associates, L.P. ...............................
-------
Total.............................................
=======

The underwriters are collectively referred to as the "underwriters." The
underwriting agreement provides that the obligations of the several underwriters
to pay for and accept delivery of the Units offered hereby are subject to the
approval of certain legal matters by their counsel and to certain other
conditions. The underwriters are obligated to take and pay for all of the Units
offered by this prospectus if any Units are taken except for those covered by
the overallotment option. These conditions include requirements that no stop
order be in effect and that no proceedings for such purpose be instituted or
threatened by the Securities and Exchange Commission.

The Representative has informed us that the underwriters propose to offer
the Units directly to the public at the public offering price set forth on the
cover page hereof and part to certain dealers at a price that represents a
concession not in excess of $ a Unit under the public offering price.
Any underwriter may allow, and such dealers may re-allow, a concession not in
excess of $ a Unit to other dealers including the underwriters. After
the initial offering of the Units, the offering price and other selling terms
may from time to time be changed by the representative.

We have granted to the Representative an option, exercisable for 45 days
from the date of this prospectus, to purchase up to an aggregate of 300,000
additional Units at the public offering price set forth on the cover page
hereof, less underwriting discounts and commissions. The underwriters may
exercise such option solely for the purpose of covering over-allotments, if any,
made in connection with the offering of the Units offered hereby. To the extent
such option is exercised, each underwriter will become obligated, subject to
certain conditions, to purchase approximately the same percentage of such
additional Units as the number set forth next to such underwriter's name in the
preceding table bears to the total number of Units set forth next to the names
of all underwriters in the preceding table.

We have also agreed to issue to the Representative a Unit Option Agreement
granting the Representative the right to purchase up to 200,000 Units at an
exercise price equal to 165% of the initial offering price of the Units. The
exercise price and the number of underlying securities in the warrants contained
in the Representative's Units are subject to adjustment upon the same terms as
contained the Class A warrants being sold in the Units. The securities to be
delivered upon exercise of the Representative's Unit Option are the same as the
Units being sold to the public in this offering, and include the same provisions
for redemption of the Class A warrants as being sold to the public. These Unit
warrants are exercisable during the four year period beginning one year from the
date of effectiveness of the registration statement of which this prospectus
forms a part. The Representative's Unit Purchase Option will be restricted from
sale, transfer, assignment or hypothecation for a period of one year from the
effective date of the offering except to officers or partners (not directors) of
the underwriter and members of the selling group and/or their officers or
partners in compliance with NASD Rule 2710(c)(7)(A).

The representative's unit purchase option is not redeemable by us. In
addition, we have agreed to certain "demand and piggyback" registration rights
for the securities underlying the representative's unit purchase option. The
holder of the representative's unit purchase option can demand, on one occasion,
at anytime until

five years from the effective date of the registration statement, that we
register the shares and warrants for resale under the Securities Act of 1933.
The "piggyback" registration provision provides that we will include the
underlying shares and Class A warrants in any registration statement filed by us
during the five-year period commencing after the effective date.

The holders of the representative's unit purchase option will have, in that
capacity, no voting, dividend or other stockholder rights. Any profit realized
by the representative on the sale of the securities issuable upon exercise of
the representative's unit purchase option may be deemed to be additional
underwriting compensation. The securities underlying the representative's unit
purchase option are being registered in the registration statement. During the
term of the representative's unit purchase option, the holders thereof are given
the opportunity to profit from a rise in the market price of our common stock.
We may find it more difficult to raise additional equity capital while the
representative's unit purchase option are outstanding. At any time at which the
representative's unit purchase option are likely to be exercised, we may be able
to obtain additional equity capital on more favorable terms.

We have also paid to an underwriter $90,000 on account of the underwriters'
expenses in connection with this offering to be applied to the non-accountable
expense allowance equal to 3% of the gross proceeds of the offering (including
proceeds from the sale, if any, of the over allotment option securities). In
addition, an associated person of the Underwriters has received compensation of
$26,076 which will be included, pursuant to applicable NASD rules, as
underwriter compensation. This compensation was paid in connection with a
consulting agreement between us and the affiliated person. The agreement has
been terminated in full.

The representative has informed us that sales to discretionary accounts by
the underwriters will not exceed 5% of the securities offered in the offering.

We have agreed, in connection with the exercise of the Class A warrants, to
pay to the representative a fee of 5% of the exercise price for each Class A
warrants exercised; provided, however, that the representative will not be
entitled to receive such compensation in warrant exercise transactions in which
(i) the market price of common stock at the time of exercise is lower than the
exercise price of the warrants; (ii) the warrants are held in any discretionary
account; (iii) disclosure of compensation arrangements is not made, in addition
to the disclosure provided in this Prospectus, in documents provided to holders
of warrants at the time of exercise; (iv) the holder of the warrants has not
confirmed in writing that the representative solicited such exercise; or (v) the
solicitation of exercise of the warrants was in violation of Regulation M
promulgated under the Securities Act. The Representative will not solicit the
exercise of warrants prior to 12 months from the date of this prospectus and
NASD members will not be compensated for solicitations sooner than such date. In
addition, unless granted an exemption by the Commission from Regulation M under
the Exchange Act, the representative will be prohibited from engaging in any
market making activities or solicited brokerage activities until the later of
the termination of such solicitations activity or the termination by waiver or
otherwise of any right the representative may have to receive a fee for the
exercise of the warrants following such solicitation. Such a prohibition, while
in effect, could impair the liquidity and market price of the securities offered
pursuant to the offering.

The Representative required as a condition to closing of the offering that
all officers, directors, and certain significant stockholders agree to
contractual restrictions for a period of twelve months (three years in the case
of Dr. Francis O'Donnell and The Hopkins Group II, LLC) from the effective date
of this prospectus, as follows:

- such parties may not offer, pledge, sell, contract to sell, sell any
option or contract to purchase, purchase any option or contract to sell,
grant any option, right or warrant to purchase, lend or otherwise
transfer or dispose of, directly or indirectly, any Unit or any
securities convertible into or exercisable or exchangeable for common
stock, or

The restrictions described above do not apply to:

- the sale of Units to the underwriters;

- the issuance by us of shares of common stock upon the exercise of an
option or a warrant or the conversion of a security outstanding on the
date of this prospectus of which the underwriters have been advised in
writing, provided that purchasers enter into similar "lock-up"
agreements; or

- transactions by any person other than us relating to the Units or other
securities acquired in open market transactions after the completion of
the offering of the shares.

PPDI, has expressed its interest in purchasing up to 690,000 Units as part
of this offering. In the event that PPDI fails to consummate the purchase of
690,000 Units, then the Representative has the right to terminate the offering.
The underwriters will receive the stated commission and expense allowance on the
sale of these Units. Following this offering, and assuming PPDI purchases these
Units, PPDI will beneficially own up to a 9.9% of our outstanding common stock
(9.5% if the Underwriter's Over Allotment Option is exercised). PPDI will agree
not to sell any Units, common stock or Class A warrants for a period of at least
180 days, following the date of the final Prospectus without the
Representative's approval.

REGULATION M

In order to facilitate the offering of the Units, the underwriters may
engage in transactions that stabilize, maintain or otherwise affect the price of
the Units. Specifically, the underwriters may sell more shares than they are
obligated to purchase under the underwriting agreement, creating a short
position. A short sale is covered if the short position is no greater than the
number of Units available for purchase by the underwriters under the
over-allotment option. The underwriters can close out a covered short sale by
exercising the over-allotment option or purchasing Units in the open market. In
determining the source of shares to close out a covered short sale, the
underwriters will consider, among other things, the open market price of the
Units compared to the price available under the over-allotment option. The
underwriters may also sell the Units in excess of the over-allotment option,
creating a naked short position. The underwriters must close out any naked short
position by purchasing shares in the open market. A naked short position is more
likely to be created if the underwriters are concerned that there may be
downward pressure on the price of the Unit in the open market after pricing that
could adversely affect investors who purchase in the offering. As an additional
means of facilitating the offering, the underwriters may bid for, and purchase,
the Units in the open market to stabilize the price of the Unit. The
underwriting syndicate may also reclaim selling concessions allowed to an
underwriter or a dealer for distributing the Units in the offering, if the
syndicate repurchases previously distributed Units to cover syndicate short
positions or to stabilize the price of the Unit. These activities may raise or
maintain the market price of the common stock above independent market levels or
prevent or retard a decline in the market price of the common stock. The
underwriters are not required to engage in these activities, and may end any of
these activities at any time.

We and the underwriters have agreed to indemnify each other against certain
liabilities, including liabilities under the Securities Act.

DETERMINATION OF OFFERING PRICE

Before this offering, there has been no public market for the units and the
common stock and Class A warrants contained in the units. Accordingly, the
initial public offering price of the units offered by this prospectus and the
exercise price of the Class A warrants were determined by negotiation between us
and the representative. Among the factors considered in determining the initial
public offering price of the units and the exercise price of the warrants were:

- our history and our prospects;

- the industry in which we operate;

- the status and development prospects for our proposed products and
services;

- our past and present operating results;

- the previous experience of our executive officers; and

- the general condition of the securities markets at the time of this
offering.

The offering price stated on the cover page of this prospectus should not
be considered an indication of the actual value of the units. That price is
subject to change as a result of market conditions and other factors, and we
cannot assure you that the units, or the common stock and warrants contained in
the units, can be resold at or above the initial public offering price.

LEGAL MATTERS

The validity of the common stock offered hereby will be passed upon for us
by Ellenoff Grossman Schole & Cyruli, LLP, New York, New York. Goldstein &
DiGioia LLP is acting as counsel for Kashner Davidson Securities Corporation as
Representative, and the underwriters.

EXPERTS

The financial statements for our company as of December 31, 2000 and 2001
and for the years ended December 31, 2000 and 2001 and the financial statements
of BioDelivery Sciences, Inc. for the nine months ended September 30, 2000,
included in this Prospectus and in the registration statement, have been audited
by Grant Thornton LLP, independent certified public accountants, as stated in
their reports included herein and in the registration statement, and are
included herein in reliance upon the reports given upon the authority of that
firm as experts in auditing and accounting.

WHERE YOU CAN FIND MORE INFORMATION

We have filed with the Securities and Exchange Commission a registration
statement on Form SB-2 under the Securities Act, and the rules and regulations
promulgated thereunder, with respect to the common stock offered hereby. This
prospectus, which constitutes a part of the registration statement, does not
contain all of the information set forth in the registration statement and the
exhibits thereto. Statements contained in this prospectus as to the contents of
any contract or other document that is filed as an exhibit to the registration
statement are not necessarily complete and each such statement is qualified in
all respects by reference to the full text of such contract or document. For
further information with respect to us and the common stock, reference is hereby
made to the registration statement and the exhibits thereto, which may be
inspected and copied at the principal office of the Commission, 450 Fifth
Street, N.W., Washington, D.C. 20549, and at the regional offices of the
Commission located at Seven World Trade Center, Suite 1300, New York, New York
10048 and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661, and copies of all or any part thereof may be obtained at
prescribed rates from the Commission's Public Reference Section at such
addresses. Also, the Commission maintains a World Wide Web site on the Internet
at http://www.sec.gov that contains reports, proxy and information statements
and other information regarding registrants that file electronically with the
Commission.

Prior to filing this registration statement on Form SB-2, we have
voluntarily complied with the information and periodic reporting requirements of
the Exchange Act and, in accordance therewith, will file periodic reports, proxy
and information statements and other information with the Commission. Such
periodic reports, proxy and information statements and other information will be
available for inspection and copying at the regional offices, public reference
facilities and Web site of the Commission referred to above.

INDEX TO FINANCIAL STATEMENTS

PAGE
----

BIODELIVERY SCIENCES INTERNATIONAL, INC.
Report of Independent Certified Public Accountants........ F-2
Consolidated Balance Sheets as of December 31, 2000 and
2001 and March 31, 2002 (unaudited).................... F-3
Consolidated Statements of Operations for the years ended
December 31, 2000 and 2001, the period from January 6,
1997 (date of incorporation) to December 31, 2001, and
the three months ended March 31, 2001 and 2002
(unaudited)............................................ F-4
Consolidated Statement of Stockholders' Equity (Deficit)
for the period from January 6, 1997 (date of
incorporation) to December 31, 1999, and the years
ended December 31, 2000 and 2001, and the three months
ended March 31, 2002 (unaudited)....................... F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 2000 and 2001, the period from January 6,
1997 (date of incorporation) to December 31, 2001, and
the three months ended March 31, 2001 and 2002
(unaudited)............................................ F-6
Notes to Consolidated Financial Statements................ F-7
BIODELIVERY SCIENCES, INC.
Report of Independent Certified Public Accountants........ F-20
Statements of Operations for the nine months ended
September 30, 2000..................................... F-21
Statements of Cash Flows for the nine months ended
September 30, 2000..................................... F-22
Notes to Financial Statements............................. F-23

F-1

REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

Board of Directors
BioDelivery Sciences International, Inc.

We have audited the accompanying consolidated balance sheets of BioDelivery
Sciences International, Inc. (a development stage company) and subsidiary as of
December 31, 2001 and 2000, and the related consolidated statements of
operations, stockholders' equity, and cash flows for each of the years then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of BioDelivery
Sciences International, Inc. and subsidiary as of December 31, 2001 and 2000,
and the consolidated results of their operations and cash flows for the years
then ended in conformity with accounting principles generally accepted in the
United States of America.

We also audited the combination of the accompanying consolidated statements
of operations and cash flows for the period January 6, 1997 (date of
incorporation) to December 31, 2001, which includes the statements of operations
and cash flows for the period January 6, 1997 (date of incorporation) to
December 31, 1999 that were audited and reported on separately by another
auditor; in our opinion, such consolidated statements have been properly
combined.

/s/ GRANT THORNTON LLP

Tampa, Florida
March 1, 2002

F-2

BIODELIVERY SCIENCES INTERNATIONAL, INC.
(A DEVELOPMENT STAGE COMPANY)

CONSOLIDATED BALANCE SHEETS

DECEMBER 31, MARCH 31,
------------------------ -----------
2000 2001 2002
---------- ----------- -----------
(UNAUDITED)

ASSETS
CURRENT ASSETS:
Cash and cash equivalents............................ $ 950,939 $ 75,513 $ --
Prepaid expenses and other assets.................... 54,481 111,684 247,553
---------- ----------- -----------
Total current assets.............................. 1,005,420 187,197 247,553
EQUIPMENT, net......................................... 253,390 233,562 193,905
OTHER ASSETS, net...................................... 30,124 912,810 1,144,791
---------- ----------- -----------
TOTAL ASSETS......................................... $1,288,934 $ 1,333,569 $ 1,586,249
========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable and accrued liabilities............. $ 394,020 $ 814,279 $ 1,085,738
Due to related parties............................... 515,584 74,331 106,608
Line of credit....................................... -- 282,527 618,732
Deferred revenue..................................... -- 37,000 --
Current portion of capital lease payable............. 11,307 14,804 14,804
Current portion of notes payable..................... -- 149,524 119,141
---------- ----------- -----------
Total current liabilities......................... 920,911 1,372,465 1,945,023
CAPITAL LEASE PAYABLE, LESS CURRENT PORTION............ 28,372 18,369 18,369
NOTES PAYABLE, less current portion.................... -- 151,733 127,069
COMMITMENTS AND CONTINGENCIES.......................... -- -- --
REDEEMABLE COMMON STOCK, net of notes receivable of
approximately $321,000............................... 2,346 -- --
STOCKHOLDERS' EQUITY (DEFICIT):
Preferred stock, $.001 par value, 20,000,000 shares
authorized, 462,243 and 0 shares issued and
outstanding in 2000 and 2001, respectively........ 462 -- --
Common stock, $.001 par value, 80,000,000 shares
authorized, 3,512,586 and 5,000,863 shares issued
and outstanding including issuable shares in 2000
and 2001, respectively............................ 3,513 5,001 5,001
Additional paid-in capital........................... 1,006,136 4,903,368 4,903,368
Deficit accumulated during development stage......... (672,806) (5,117,367) (5,412,581)
---------- ----------- -----------
Total stockholders' equity (deficit).............. 337,305 (208,998) (504,212)
---------- ----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIT).................................. $1,288,934 $ 1,333,569 $ 1,586,249
========== =========== ===========

The accompanying notes are an integral part of these financial statements.
F-3

BIODELIVERY SCIENCES INTERNATIONAL, INC.
(A DEVELOPMENT STAGE COMPANY)

CONSOLIDATED STATEMENTS OF OPERATIONS

PERIOD FROM
JANUARY 6, 1997
(DATE OF THREE MONTHS ENDED MARCH
YEAR ENDED YEAR ENDED INCORPORATION) 31,
DECEMBER 31, DECEMBER 31, TO DECEMBER 31, -------------------------
2000 2001 2001 2001 2002
------------ ------------ --------------- ----------- -----------
(UNAUDITED) (UNAUDITED)

Sponsored research
revenues................... $ 56,000 $ 478,385 $ 534,385 $ -- $ 275,000
Expenses:
Research and development... 312,736 1,663,932 1,976,668 331,483 450,475
General and administrative:
General and
administrative........ 265,239 679,883 945,197 74,394 205,768
Stock compensation...... -- 2,192,084 2,192,084 -- --
Legal settlement........ 275,000 383,625 658,625 -- --
---------- ----------- ----------- ---------- ----------
Total expenses.......... 852,975 4,919,524 5,772,574 405,877 656,243
Interest income (expense),
net........................ 21,772 (21,957) (185) 13,406 (9,814)
---------- ----------- ----------- ---------- ----------
Loss before income taxes and
minority interest.......... (775,203) (4,463,096) (5,238,374) (392,471) (391,057)
Income tax benefit........... -- 18,535 18,535 -- 95,843
---------- ----------- ----------- ---------- ----------
Loss before minority
interest................... (775,203) (4,444,561) (5,219,839) (392,471) (295,214)
Minority interest in net loss
of subsidiary.............. 102,472 -- 102,472 -- --
---------- ----------- ----------- ---------- ----------
Net loss..................... $ (672,731) $(4,444,561) $(5,117,367) $ (392,471) $ (295,214)
========== =========== =========== ========== ==========
Net loss per common share:
Basic and diluted.......... $ (0.19) $ (1.15) $ (.11) $ (.06)
========== =========== ========== ==========
Weighted average common stock
shares outstanding
(including issuable
shares) -- basic and
diluted.................... 3,512,586 3,851,587 3,518,179 5,000,863
========== =========== ========== ==========

The accompanying notes are an integral part of these financial statements.
F-4

BIODELIVERY SCIENCES INTERNATIONAL, INC.
(A DEVELOPMENT STAGE COMPANY)

CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)

DEFICIT
ACCUMULATED TOTAL
PREFERRED STOCK COMMON STOCK ADDITIONAL DURING STOCKHOLDERS'
----------------- ------------------ PAID-IN DEVELOPMENT EQUITY
SHARES AMOUNT SHARES AMOUNT CAPITAL STAGE (DEFICIT)
-------- ------ --------- ------ ---------- ----------- -------------

BALANCE, JANUARY 6, 1997
(date of incorporation)
Shares issued to founders............... -- $ -- 80,091 $ 80 $ 31 $ -- $ 111
Shares issued for services.............. -- -- 1 -- -- -- --
Net loss................................ -- -- -- -- -- (75) (75)
-------- ----- --------- ------ ---------- ----------- -----------
BALANCE, DECEMBER 31, 1999.............. -- -- 80,092 80 31 (75) 36
Shares issued to founders............... -- -- 3,432,494 3,433 (3,433) -- --
Preferred stock issued for cash......... 462,243 462 -- -- 1,009,538 -- 1,010,000
Net loss................................ -- -- -- -- -- (672,731) (672,731)
-------- ----- --------- ------ ---------- ----------- -----------
BALANCE, DECEMBER 31, 2000.............. 462,243 462 3,512,586 3,513 1,006,136 (672,806) 337,305
Shares issued for cash.................. -- -- 368,421 369 804,631 -- 805,000
Shares issued for satisfaction of
debt.................................. -- -- 137,300 137 499,447 -- 499,584
Shares issued in replacement of
preferred stock....................... (462,243) (462) 462,243 462 -- -- --
Shares issuable in merger with
subsidiary............................ -- -- 520,313 520 2,540,148 -- 2,540,668
Issuance of stock options............... -- -- -- -- 53,006 -- 53,006
Net loss................................ -- -- -- -- -- (4,444,561) (4,444,561)
-------- ----- --------- ------ ---------- ----------- -----------
BALANCE, DECEMBER 31, 2001.............. -- -- 5,000,863 $5,001 $4,903,368 $(5,117,367) (208,998)
Net loss (unaudited)....................
BALANCE, MARCH 31, 2002 (unaudited)..... -- -- -- -- -- (295,214) (295,214)
-------- ----- --------- ------ ---------- ----------- -----------
$ -- 5,000,863 $5,001 $4,903,368 $(5,412,581) $ (504,212)
======== ===== ========= ====== ========== =========== ===========

The accompanying notes are an integral part of this financial statements.
F-5

BIODELIVERY SCIENCES INTERNATIONAL, INC.
(A DEVELOPMENT STAGE COMPANY)

CONSOLIDATED STATEMENTS OF CASH FLOWS

PERIOD FROM
JANUARY 6, 1997
(DATE OF
YEAR ENDED YEAR ENDED INCORPORATION) THREE MONTHS ENDED MARCH 31,
DECEMBER 31, DECEMBER 31, TO DECEMBER 31, ---------------------------------
2000 2001 2001 2001 2002
------------ ---------------- --------------- --------------- ---------------
(UNAUDITED) (UNAUDITED)

OPERATING ACTIVITIES:
Net loss................................ $ (672,731) $(4,444,561) $(5,117,367) $(392,471) $(295,214)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization......... 23,455 104,789 128,298 23,665 40,358
Loss applicable to minority
interest........................... (102,472) -- (102,472) -- --
Deferred revenue...................... (56,000) 37,000 (19,000) -- (37,000)
Litigation settlement................. -- 425,000 425,000 -- --
Compensation expense.................. -- 2,190,395 2,190,395 -- --
Changes in assets and liabilities:
Prepaid expenses and other
assets........................... 33,077 (417,103) (384,005) (3,923) (368,551)
Accounts payable and accrued
liabilities...................... 307,064 420,259 727,323 (66,846) 271,459
Due to/from related parties........ 178,081 52,754 230,835 (16,000) 32,277
---------- ----------- ----------- --------- ---------
Net cash used by operating
activities....................... (289,526) (1,631,467) (1,920,993) (455,575) (356,671)
---------- ----------- ----------- --------- ---------
INVESTING ACTIVITIES:
Net cash received with business
combination........................... 380,465 -- 380,465 -- --
Purchase of equipment................... -- (84,862) (84,862) -- --
Purchase of minority interest........... -- (116,375) (116,375) -- --
---------- ----------- ----------- --------- ---------
Net cash provided (used) by
investing activities............. 380,465 (201,237) 179,228 -- --
---------- ----------- ----------- --------- ---------
FINANCING ACTIVITIES:
Issuance of Preferred Stock............. 1,010,000 -- 1,010,000 -- --
Issuance of Common Stock................ -- 805,000 805,000 100,000 --
Net change in line of credit............ -- 282,527 282,527 -- 336,205
Payment on capital lease payable........ -- (6,506) (6,506) (4,249) --
Payment on notes payable................ (150,000) (123,743) (273,743) -- (55,047)
---------- ----------- ----------- --------- ---------
Net cash provided by financing
activities....................... 860,000 957,278 1,817,278 95,751 281,158
---------- ----------- ----------- --------- ---------
NET CHANGE IN CASH........................ 950,939 (875,426) 75,513 (359,824) (75,513)
CASH AT BEGINNING OF PERIOD............... -- 950,939 -- 950,939 75,513
---------- ----------- ----------- --------- ---------
CASH AT END OF PERIOD..................... $ 950,939 $ 75,513 $ 75,513 $ 591,115 $ --
========== =========== =========== ========= =========

The Company paid interest of $0, and $28,178 during 2000 and 2001,
respectively.

In 2001, in addition to paying cash of $350,000, the Company issued notes
payable totaling $425,000 in connection with a litigation settlement and
re-acquisition of the BioDelivery Sciences, Inc. common shares previously held
by certain minority stockholders. This transaction resulted in the recognition
of goodwill of $116,375.

In 2001, the Company issued 137,300 shares of its common stock in full
payment of a related-party payable of approximately $500,000.

In 2001, the Company agreed to exchange 72,922 shares of its common stock
for common shares of BioDelivery Sciences, Inc. previously held by minority
stockholders, This agreement resulted in the recognition of goodwill of
$401,070. In addition, the Company agrees to exchange 447,391 shares of its
common stock for outstanding redeemable permanent discount common shares of
BioDelivery Sciences, Inc. The variable nature of this underlying stock award,
as modified by the removal of discount and redemption provisions resulted in the
recognition of compensation expense of approximately $2,140,000.

During 2001, the Company granted stock options to non-employees resulting
in the recognition of compensation expense of approximately $53,000.

The accompanying notes are an integral part of these financial statements.

F-6

BIODELIVERY SCIENCES INTERNATIONAL, INC.
(A DEVELOPMENT STAGE COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INCLUDING NOTES APPLICABLE TO UNAUDITED PERIODS)

NOTE 1 -- ORGANIZATION

BioDelivery Sciences International, Inc. ("BDSI" or "Company") (formerly
known as MAS Acquisition XXIII Corp.) was incorporated in the State of Indiana
on January 6, 1997. BDSI and its subsidiary, BioDelivery Sciences, Inc. ("BDS"),
are collectively referred to as the Company. In October 2000, BDSI acquired
84.8% of the voting rights of BioDelivery Sciences Inc. through the purchase of
BioDelivery Sciences Inc. Series A Preferred Stock.

As of December 2001, BDSI and BDS had entered into a merger agreement. The
merger was then subsequently consummated on January 7, 2002 (the "Merger"). The
Company considers December 31, 2001 to be the acquisition date for accounting
purposes as the rights of ownership of BDS had been essentially transferred to
BSDI, without restrictions, by that date. The agreement required an exchange of
1.33 shares of identical BDSI common stock for each share of BDS common stock
outstanding, including redeemable common stock. The Company would also exchange
72,922 shares of common stock for 239,600 shares of BDS common stock and 447,391
shares of common stock for 1,470,000 shares of BDS redeemable common stock. The
acquisition of the 239,600 shares of common stock represents the acquisition of
minority interest which resulted in recorded goodwill of approximately $401,000.
Prior to the acquisition of the 1,470,000 shares of redeemable common stock the
Company agreed to remove the permanent discount and redemption provisions and
agreed to the forgiveness of the stockholder debt associated with these shares
upon, or soon after, the proposed IPO (see Note 16). The redeemable stock was
originally characterized as a variable stock award for accounting purposes and
therefore, the acquisition of the redeemable stock and the removal of the
restrictions in December 2001 involved the recognition of compensation costs
totaling approximately $2,137,000. As of December 2001, the permanent discount
and redemption provisions with respect to such shares have been terminated.

The Company is a development stage company that has devoted substantially
all of its efforts to research and product development involving drug delivery
technology (e.g., cochleate technology) and has not yet generated any revenues
from the sale of products or licensing of technology. The Company intends to
obtain additional funds for research and development through collaborative
arrangements with corporate partners, additional financings, and from other
sources. The Company operates in one segment focused on the development of its
drug delivery platform technology.

The accompanying consolidated statements of operations and cash flows for
the period January 6, 1997 (date of incorporation) to December 31, 2001 include
the statements of operations and cash flows for the period January 6, 1997 (date
of incorporation) to December 31, 1999 that were audited and reported on
separately by an auditor previously engaged by the Company.

In March 2002, the Company approved a one for 4.37 reverse stock split. The
financial statements have been retroactively restated to reflect this reverse
stock split.

NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION

The financial statements include the accounts of BDSI and its subsidiary
(until the Merger), BioDelivery Sciences Inc. All significant inter-company
balances have been eliminated. Minority interest in net loss of subsidiary
reflects the losses attributable to the common stockholders of BioDelivery
Sciences Inc. to the extent that net assets were attributed to those
stockholders on the business combination date. At December 31, 2000 those
stockholders owned 100% of the common stock of BioDelivery Sciences Inc. while
BDSI owns preferred stock with voting rights, representing 84.8% of the total
voting rights. At December 31, 2000, the equity attributable to the minority
interest holders was at a deficit balance and accordingly was reduced to

F-7

BIODELIVERY SCIENCES INTERNATIONAL, INC.
(A DEVELOPMENT STAGE COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INCLUDING NOTES APPLICABLE TO UNAUDITED PERIODS)

NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)

zero. In connection with a litigation settlement (see Note 7) and in connection
with the Merger of BDSI and BDS (see Note 1) the remaining minority interest was
acquired by the Company.

REVENUE RECOGNITION

Sponsored research amounts are recognized as revenue, when the research
underlying such payments has been performed or when the funds have otherwise
been utilized, such as for the purchase of operating assets. Revenue is
recognized to the extent provided for under the related grant or collaborative
research agreement. Research and development expenses are charged to operations
as incurred. Research and development expenses principally include, among other
things, consulting fees and cost reimbursements to the University of Medicine
and Dentistry of New Jersey ("UMDNJ"), testing of compounds under investigation,
and salaries and benefits of employees engaged in research and development
activities. Patent costs are expensed as incurred as research and development
expenses.

CASH AND CASH EQUIVALENTS

The Company considers all highly liquid debt instruments with an original
maturity of three months or less to be cash equivalents.

EQUIPMENT

GOODWILL

Goodwill represents amounts paid for the Company's acquisitions of the BDS
minority interest common shares in excess of fair market value. Those amounts
paid prior to July 1, 2001 are amortized over 10 years.

INCOME TAXES

Deferred income tax assets and liabilities are determined based on
differences between the financial statement and tax bases of assets and
liabilities as measured by the enacted tax laws and rates applicable to the
periods in which the differences are expected to affect taxable income. Income
tax expense is the tax payable or refundable for the period plus or minus the
change during the period in deferred tax assets and liabilities.

USE OF ESTIMATES IN FINANCIAL STATEMENTS

The preparation of the accompanying financial statements conforms with
accounting principles generally accepted in the United States of America and
requires management to make certain estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosures 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 and assumptions.

IMPAIRMENT OF ASSETS

The Company periodically reviews long-lived assets for impairment, whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. The Company uses an

F-8

BIODELIVERY SCIENCES INTERNATIONAL, INC.
(A DEVELOPMENT STAGE COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INCLUDING NOTES APPLICABLE TO UNAUDITED PERIODS)

NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)

estimate of the undiscounted cash flows over the remaining life of its
long-lived assets in measuring whether the assets to be held and used will be
realizable. In the event of an impairment, the Company would discount the future
cash flows using its then estimated incremental borrowing rate to estimate the
amount of the impairment.

CONCENTRATION OF CREDIT RISK

The Company derived substantially all of its working capital from the sale
of its Common and Preferred Stock. BioDelivery Sciences Inc. historically
derived its working capital from research and development arrangements.

STOCK BASED COMPENSATION

The Company follows Statement of Financial Accounting Standards (SFAS) No.
123, Accounting for Stock-Based Compensation (SFAS 123), which establishes a
fair value based method of accounting for stock-based employee compensation
plans; however, the Company has elected to continue to account for its employee
stock compensation plans under Accounting Principles Board Opinion No. 25 with
pro forma disclosures of net earnings and earnings per share, as if the fair
value based method of accounting defined in SFAS 123 had been applied.

REDEEMABLE COMMON STOCK

Redeemable Common Stock represents the Company's obligation to re-purchase
the 1,470,000 shares of BioDelivery Sciences Inc. redeemable permanent discount
common stock at the option of the holder. The Company accounted for its ten-year
re-purchase obligation (through 2009) using variable plan accounting; however,
through the date of the modification of the terms of this stock (see Note 1) the
value of the stock (less the permanent discount) was lower than the initial
redemption value. Accordingly, no compensation expense has been recognized
related to the redeemable permanent discount common stock. Under the terms of
the redemption agreement, holders required the Company to repurchase, at the
then fair value (less the permanent discount), the permanent discount common
stock beginning in 2004 or upon an employee's termination, whichever was
earlier. In December 2001, the Company agreed to remove the permanent discount
and redemption rights, resulting in the recognition of approximately $2,140,000
of compensation expenses.

FAIR VALUE OF FINANCIAL INSTRUMENTS

At December 31, 2001, the carrying amount of cash, accounts payable,
accrued expenses, capital lease obligations and notes payable approximate fair
value based either on the short term nature of the instruments or on the related
interest rate approximating the current market rate.

NEW ACCOUNTING PRONOUNCEMENTS

In July, 2001, the Financial Accounting Standards Board (FASB) issued SFAS
141, Business Combinations, and SFAS 142, Goodwill and Intangible Assets. SFAS
141 is effective for all business combinations completed after June 30, 2001.
SFAS 142 is effective for the year beginning January 1, 2002; however certain
provisions of this Statement apply to goodwill and other intangible assets
acquired between July 1, 2001, and the effective date of SFAS 142. The Company
is evaluating the effect, if any, of adopting

F-9

BIODELIVERY SCIENCES INTERNATIONAL, INC.
(A DEVELOPMENT STAGE COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INCLUDING NOTES APPLICABLE TO UNAUDITED PERIODS)

NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)

SFAS 142, but does not believe the adoption of these standards will have a
material impact on the Company's financial statements.

In July 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 143, Accounting for Asset
Retirement Obligations. This statement addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. This Statement applies to all
entities. It applies to legal obligations associated with the retirement of
long-lived assets that result from the acquisition, construction, development
and (or) the normal operation of a long-lived asset, except for certain
obligations of lessees. This Statement is effective for financial statements
issued for fiscal years beginning after June 15, 2002. The Company is evaluating
the impact of the adoption of this standard and has not yet determined the
effect of adoption on its financial position and results of operations.

In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment
or Disposal of Long-Lived Assets. This statement addresses financial accounting
and reporting for the impairment or disposal of long-lived assets and supersedes
FASB Statement No. 121, Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of. The provisions of this statement are
effective for financial statements issued for fiscal years beginning after
December 15, 2001. The Company adopted this standard effective January 1, 2002,
which did not have a material impact on the Company's financial statements.

UNAUDITED FINANCIAL STATEMENTS

The unaudited financial statements and the related notes thereto for March
31, 2002 and 2001 include all normal and recurring adjustments which, in the
opinion of management, are necessary for a fair presentation and are prepared on
the same basis as audited annual statements. The interim results are not
necessarily indicative of the results that may be expected for the full year.

NOTE 3 -- BUSINESS COMBINATION

On October 10, 2000, BDSI acquired 210,006 shares of newly issued
BioDelivery Sciences Inc. Series A Convertible Preferred Stock representing
84.8% of the voting rights of BioDelivery Sciences Inc. in exchange for cash and
notes payable to BioDelivery Sciences Inc. of $1,000,000 and $14,000,000,
respectively. Since its inception in 1995, BioDelivery Sciences Inc. has been
principally engaged in developing a cochleate based drug delivery platform and
had no pre-existing relationship with BDSI prior to the acquisition. The
business combination was accounted for as a purchase and the operations of
BioDelivery Sciences Inc. are included in the consolidated financial statements
since September 30, 2000 as the operations during the period October 1, 2000
through October 10, 2000 were not significant. The shares of Series A Preferred
were convertible into BioDelivery Sciences Inc. Common Stock on a 50-for-1
basis, subject to customary anti-dilution adjustments. Dividends accrued on the
Series A Preferred at the rate of 8% per annum. In the event of liquidation,
dissolution, or winding up of BioDelivery Sciences Inc., the Series A Preferred
Stockholders would have been entitled to receive, in preference to Common
Stockholders of BioDelivery Sciences Inc., an amount per share equal to the
original purchase price plus any accrued dividends per share. The Series A
Preferred Stock was convertible at the option of the preferred stockholders, but
would automatically convert at the earlier of the initial public offering of
BDS's common stock, or September 2005. The BioDelivery Sciences Inc. Series A
Preferred Stock and note are eliminated in consolidation. BDSI and BioDelivery
Sciences Inc. had amended the payment terms of the $14.0 million notes to defer
the commencement of payments to August 1, 2001. The first scheduled payment
under the notes was otherwise required on January 1, 2001.

F-10

BIODELIVERY SCIENCES INTERNATIONAL, INC.
(A DEVELOPMENT STAGE COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INCLUDING NOTES APPLICABLE TO UNAUDITED PERIODS)

NOTE 3 -- BUSINESS COMBINATION -- (CONTINUED)

In conjunction with the business combination, the following was acquired:

Cash acquired............................................... $ 380,465
Fair value of non-cash assets acquired...................... 394,491
---------
Liabilities assumed, including minority interests of
$102,472.................................................. $(774,956)
=========

The following unaudited pro forma summary combines the historical results
of operations of BDSI with the historical operations of BioDelivery Sciences
Inc. (exclusive of the impact of minority interest) as if the acquisition had
occurred at January 1, 2000. This pro forma summary does not necessarily reflect
the results of operations as they would have been if BDSI and BioDelivery
Sciences Inc. operated as a single entity during such period.

YEAR ENDED DECEMBER 31, 2000
----------------------- ---------

Sponsored research revenues................................. $ 670,001
Net income (loss)........................................... $(981,207)
Net income (loss) per share -- basic........................ $ (0.28)
Net income (loss) per share -- diluted...................... $ (0.28)

All the BioDelivery Sciences Inc. common stock was subsequently acquired with
the settlement of certain litigation (see Note 7) and the merger of BioDelivery
Sciences Inc. with BDSI (see Note 1). The Series A Convertible Preferred Stock
of BioDelivery Sciences Inc. was retired as part of the merger.

NOTE 4 -- RESEARCH AND DEVELOPMENT ARRANGEMENTS

Upon its formation, BioDelivery Sciences Inc. originally secured license
rights from two universities that have exclusive rights to certain technology.
In exchange for these rights, BioDelivery Sciences Inc. issued shares of common
stock with anti-dilution provisions and agreed to make future royalty payments
to the universities upon a) the licensing of rights to sub-licensees (up to 25%
of fees); b) sales by sub-licensees (25% of BioDelivery Sciences Inc. proceeds);
or c) BioDelivery Sciences Inc. sales (3% of revenue). BioDelivery Sciences Inc.
has also entered into various collaborative research arrangements with third
parties, whereby the third parties ultimately obtain licensing rights for new
inventions/patents arising from the associated research. These agreements
generally provide for joint ownership of the patent rights developed from
collaborative efforts. The parties also agree to later negotiate a reasonable
royalty arrangement upon commercialization of any such product developed under
the collaborative efforts.

BioDelivery Sciences Inc. has entered into a research agreement with UMDNJ.
For the period from the acquisition of voting rights of BioDelivery Sciences
Inc. by BDSI through December 31, 2000 and for the year ended December 31, 2001,
BioDelivery Sciences Inc. incurred costs of $78,081 and $159,025, respectively,
to UMDNJ under the terms of the research agreement. For the three months ended
March 31, 2000 and 2001, respectively, BDSI incurred costs of approximately
$260,000 and $0 under the terms of the research agreement. At December 31, 2000,
BioDelivery Sciences Inc. owed UMDNJ $415,584 under this agreement, which is
included in due to related parties. The research agreement provides for the
procurement of supplies, rent (until April 2001 -- See Note 7), certain payroll
costs, and other expenses associated with research performed under the research
agreement. On April 1, 2001, the Company agreed to issue approximately 137,300
shares of common stock in consideration for payment in full of its approximate
$500,000 payable at March 31, 2001, to UMDNJ. At December 31, 2001, the Company
owes an additional $74,331 under this agreement. At March 31, 2002, the Company
owes $106,608 under this agreement.

F-11

BIODELIVERY SCIENCES INTERNATIONAL, INC.
(A DEVELOPMENT STAGE COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INCLUDING NOTES APPLICABLE TO UNAUDITED PERIODS)

NOTE 4 -- RESEARCH AND DEVELOPMENT ARRANGEMENTS -- (CONTINUED)

On July 1, 1996, BioDelivery Sciences Inc. entered into a license agreement
with a commercial pharmaceutical company ("Funding Company"). This agreement
allowed for the Funding Company to obtain an exclusive license in and to all
inventions, developments, improvements, or know-how relating to cochleates,
liposomes and proteoliposomes, owned, controlled or licensed to BioDelivery
Sciences Inc. The Funding Company would also have the rights to all BioDelivery
Sciences Inc. developed vaccines designed to induce an antigen specific immune
response in humans; including vaccines to prevent or treat allergies. In
exchange for the exclusive license, the Funding Company agreed to pay research
and royalty payments which ultimately totaled $6.7 million. The agreement
commenced upon execution and was to expire five years following the first
commercial sale of a licensed product or the date of expiration of the last
licensed patent having a valid claim covering any licensed product, whichever is
later. However, the Funding Company chose to terminate the agreement effective
in 2000. The Company incurred $56,000 of costs under this arrangement in 2000.

During 2001, the Company entered into agreements with RetinaPharma, Inc.
and Tatton Technology LLC. Both are biotechnology companies which are developing
neutraceutical neuroprotective therapies for treating neurodegenerative disease
such as macular degeneration and Parkinson's disease. To the extent that such
drugs utilize Bioral cochleate technology, the Company will support drug
development and will pay a royalty of ten percent (10%) on net revenues from
such sales of Bioral encapsulated drugs. The CEO/director is affiliated with
these companies. The Company incurred a deminimus amount of costs relating to
these agreements in 2001.

The Company has also entered into an agreement with Biotech Specialty
Partners, LLC, an emerging alliance of early stage biotechnology and specialty
pharmaceutical companies. Biotech Specialty Partners, LLC is in its formative
stage and to date has not distributed any pharmaceutical products. Under this
agreement, Biotech Specialty Partners, LLC will serve as a nonexclusive
distributor of the Company's Bioral drugs in consideration of a ten percent
(10%) discount to the wholesale price, which the board of directors has
determined commercially reasonable. The CEO/director is affiliated with this
company. The Company incurred a deminimus amount of costs relating to this
agreement in 2001.

The Company has also entered into an agreement with BioKeys Pharmaceutical,
Inc., a biotechnology company, which is developing several potential products
which are vaccine based. To the extent that BioKeys Pharmaceutical, Inc.
utilizes the Company's Bioral drug delivery technology, the Company will earn a
royalty ranging between 15% to 30% of product sales incorporating its technology
and between 10% and 20% of any royalty income earned by BioKeys Pharmaceutical,
Inc. with regard to licenses involving its technology. BioKeys has provided a
$35,000 advance to the Company under their agreement, which is included with
accounts payable and accrued expenses. The CEO/director and the senior executive
vice president are affiliated with this company. The Company incurred a
deminimus amount of costs relating to this agreement in 2001.

F-12

BIODELIVERY SCIENCES INTERNATIONAL, INC.
(A DEVELOPMENT STAGE COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INCLUDING NOTES APPLICABLE TO UNAUDITED PERIODS)

NOTE 5 -- OTHER ASSETS

Other assets consist of the following.

YEAR ENDED
DECEMBER 31, MARCH 31,
------------------- ----------
2000 2001 2002
-------- -------- ----------
(UNAUDITED)

Goodwill............................................ $ -- $517,445 $ 517,445
Deferred offering costs............................. -- 365,340 598,022
Other............................................... 42,520 43,821 43,821
-------- -------- ----------
42,520 926,606 1,159,288
Less: Accumulated amortization...................... (12,396) (13,796) (14,497)
-------- -------- ----------
Total other assets, net................... $ 30,124 $912,810 $1,144,791
======== ======== ==========

The Company has incurred and capitalized offering costs of approximately
$366,000 and $598,000 at December 31, 2001 and March 31, 2002, respectively,
related to the anticipated proposed public offering (see Note 16).

NOTE 6 -- EQUIPMENT

Equipment consists of the following:

DECEMBER 31,
-------------------- MARCH 31,
2000 2001 2002
-------- --------- -----------
(UNAUDITED)

Office and laboratory equipment.................. $236,466 $ 321,338 $ 321,338
Leased equipment................................. 39,679 39,679 39,679
-------- --------- ---------
276,145 361,017 361,017
Less accumulated depreciation and amortization... (22,755) (127,455) (167,112)
-------- --------- ---------
Net equipment.................................... $253,390 $ 233,562 $ 193,905
======== ========= =========

Depreciation and amortization expense related to equipment for the years
ended December 31, 2000 and 2001 and the three month periods ended March 31,
2002 and 2001 was approximately $23,000, $104,000, $23,000 and $40,000,
respectively.

NOTE 7 -- COMMITMENTS AND CONTINGENCIES

LITIGATION

During May 2001, the Company entered into a settlement agreement with a
former consultant and certain stockholders related to the consultant (together,
the Plaintiffs). Under the terms of the settlement agreement, the Company agreed
to pay $150,000 in cash and $125,000 in a note payable to the Plaintiffs. The
$125,000 note is payable in monthly installments through June 2002 and bears
interest at 9%. The Company also agreed to re-purchase all of the BioDelivery
Sciences Inc. common stock owned by the Plaintiffs valued at $116,375 for cash
of $200,000 and a note payable of $300,000. The $300,000 note is payable monthly
through June 2004 and bears interest at 9%. The notes are secured by all of
BDS's tangible and intangible assets, including license agreements. Relating to
this litigation, the Company accrued approximately $300,000 at

F-13

BIODELIVERY SCIENCES INTERNATIONAL, INC.
(A DEVELOPMENT STAGE COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INCLUDING NOTES APPLICABLE TO UNAUDITED PERIODS)

NOTE 7 -- COMMITMENTS AND CONTINGENCIES -- (CONTINUED)

December 31, 2000 and recorded an additional $380,000 of legal expense for the
year ended December 31, 2001.

At December 31, 2001 maturities of these notes payable are as follows:

YEAR ENDING DECEMBER 31,
------------------------

2002........................................................ $149,524
2003........................................................ 105,089
2004........................................................ 46,644
--------
$301,257
========

The Company has received notification of a potential claim for a finder's
fee, and a lawsuit has been filed by Michael J. Pennesi and SSP Consultants, who
are not affiliated with the Company, arising out of an introduction to
BioDelivery Sciences, Inc. in 2000. Settlement discussions have been conducted.
Informal telephonic settlement discussions prior to the filing of the lawsuit,
have ranged between an approximately $120,000 cash demand upon the Company to
the Company's counter-offer of approximately $5,000 in cash and 5,000 shares of
stock. The Company intends to vigorously defend this litigation. It is the
Company's belief that the potential claim is neither material nor meritorious.

OPERATING LEASE

Beginning in April 2001, the Company leases a facility from UMDNJ under an
operating lease that runs through December 31, 2005. Lease expense for the year
ended December 31, 2001 was approximately $30,000. The future minimum
commitments on this operating lease at December 31, 2001 are as follows:

2002........................................................ $44,580
2003........................................................ 50,580
2004........................................................ 56,580
2005........................................................ 62,580

CAPITAL LEASE

The Company leases certain equipment under a capital lease. Future minimum
lease payments at December 31, 2001 remaining on this capital lease are as
follows.

2002........................................................ $22,070
2003........................................................ 14,713
2004........................................................ 4,905
Less amount representing interest........................... (8,515)
-------
$33,173
=======

NOTE 8 -- PREFERRED STOCK

During 2000, the Company issued 462,243 shares of Preferred Stock for
$1,010,000. The Preferred Stock was convertible to Common Stock on a one-for-one
basis, is non-redeemable, and does not pay dividends. In

F-14

BIODELIVERY SCIENCES INTERNATIONAL, INC.
(A DEVELOPMENT STAGE COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INCLUDING NOTES APPLICABLE TO UNAUDITED PERIODS)

NOTE 8 -- PREFERRED STOCK -- (CONTINUED)

December 2001, the Company rescinded the 462,243 shares of preferred stock as
replacement for issuance of 462,243 shares of common stock.

NOTE 9 -- LINE OF CREDIT

In September 2001, the Company entered into a line of credit facility with
a bank. Originally the available line of credit was $250,000 and was increased
to $350,000 at December 31, 2001 and has been subsequently increased to
$950,000. Interest on the line of credit accrues at a rate of prime plus 2.0%
(6.75% at December 31, 2001) and principally matures in May 2002. Borrowings
under the line of credit are collateralized by all business assets of the
Company and personal guarantees by certain stockholders. There are no
restrictive covenants associated with the line of credit.

NOTE 10 -- STOCK OPTIONS

In October 2001, the Company approved a stock option plan, which covers a
total of 572,082 shares of common stock. The Board has approved, subject to
stock holder approval at the next meeting, to increase the shares available
under the 2001 stock option plan to 1,100,000. Options may be awarded during the
ten-year term of the 2001 stock option plan to Company employees, directors,
consultants and other affiliates.

The Company has adopted only the disclosure provisions of Financial
Accounting Standard No. 123, "Accounting for Stock-Based Compensation," as it
relates to employment awards. It applies APB Opinion 25, "Accounting for Stock
Issued to Employees," and related interpretations in accounting for its plans
and does not recognize compensation expense based upon the fair value at the
grant date for awards under these plans consistent with the methodology
prescribed by SFAS 123, the Company's net loss and loss per share would be
reduced to the proforma amounts indicated below:

2000 2001
--------- -----------

Net Loss................................ As Reported $(672,731) $(4,444,561)
ProForma $(672,731) $(4,588,120)
Net Loss Per Common Stock............... Basic As Reported $ (0.19) $ (1.15)
Basic ProForma $ (0.19) $ (1.19)
Net Loss Per Common Share............... Diluted As Reported $ (0.19) $ (1.15)
Diluted ProForma $ (0.19) $ (1.19)

The fair value of each option grant is estimated on the date of grant using
the Black Scholes options-pricing model with the following weighted-average
assumptions used for grants in 2001: No dividend yield, expected volatility of
73%; risk-free interest rates of 5.5%, and expected lives of 3 years.

F-15

BIODELIVERY SCIENCES INTERNATIONAL, INC.
(A DEVELOPMENT STAGE COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INCLUDING NOTES APPLICABLE TO UNAUDITED PERIODS)

NOTE 10 -- STOCK OPTIONS -- (CONTINUED)

Activity related to options is as follows:

WEIGHTED AVERAGE
EXERCISE
NUMBER OF SHARES PRICE PER SHARE
---------------- ----------------

Outstanding at inception (January 6, 1997) through
December 31, 2000................................... -- $ --
Granted in 2001:
Officers and Directors........................... 610,983 $8.59
Others........................................... 222,112 $5.01
Options Expired..................................... -- $ --
------- -----
Outstanding at December 31, 2001...................... 833,095 $7.64
======= =====

OUTSTANDING SHARES

WEIGHTED AVERAGE
REMAINING
RANGE OF NUMBER CONTRACTUAL LIFE WEIGHTED AVERAGE
EXERCISE PRICES OUTSTANDING (YEARS) EXERCISE PRICE
--------------- ----------- ----------------- ----------------

$2.87 -- $3.06 481,587 4.8 $ 3.03
$6.60 30,000 4.8 $ 6.60
$11.80 160,754 4.8 $11.80
$17.48 160,754 4.8 $17.48

EXERCISABLE SHARES

RANGE OF NUMBER WEIGHTED AVERAGE
EXERCISE PRICES OUTSTANDING EXERCISE PRICE
--------------- ----------- ---------------------

$2.87 -- $3.06 36,443 3.01

The options outstanding at December 31, 2001 expire on various dates
throughout 2006.

The weighted average grant date fair value of options granted during 2001
whose exercise price is equal to the market price of the stock at the grant date
was $1.58. The weighted average grant date fair value of options granted whose
exercise price is less than the estimated market price of the stock at the grant
date is $1.63. The weighted average grant date fair value of options granted
whose exercise price is greater than the estimated market price of the stock at
the grant date is $1.37.

Compensation expense in connection with the issuance of stock options
totaled approximately $53,000 for the year ended December 31, 2001.

NOTE 11 -- INCOME TAXES

Other than a $18,000 income tax benefit recognized in 2001 due to the prior
year understatement of income taxes receivables, the Company has no income tax
expense or benefit for 2001 and 2000 as the Company has incurred net operating
losses since inception and has recognized valuation allowances for all deferred
tax assets.

F-16

BIODELIVERY SCIENCES INTERNATIONAL, INC.
(A DEVELOPMENT STAGE COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INCLUDING NOTES APPLICABLE TO UNAUDITED PERIODS)

NOTE 11 -- INCOME TAXES -- (CONTINUED)

Reconciliation of the Federal statutory income tax rate of 34% to the
effective rate is as follows:

YEAR ENDED THREE MONTHS ENDED
DECEMBER 31, MARCH 31,
--------------- -------------------------
2000 2001 2001 2002
------ ------ ----------- -----------
(UNAUDITED) (UNAUDITED)

Federal statutory income tax rate........... 34.00% 34.00% 34.00% 34.00%
State taxes, net of federal benefit......... 4.95 4.95 4.95 4.95
Permanent differences -- compensation
expense................................... -- (21.23) -- --
Valuation allowance......................... (38.95) (17.30) (38.95) (14.44)
------ ------ ------ ------
--% 0.42% --% 24.51%
====== ====== ====== ======

In March 2002, a new tax law changed the carryback period from two to five
years. This allowed the Company to carryback its net operating losses to 1996
and 1997, which resulted in an additional benefit of $95,843.

The tax effects of temporary differences and net operating losses that give
rise to significant portions of deferred tax assets and liabilities consisted of
the following:

DECEMBER 31,
-----------------------
2000 2001
--------- -----------

Deferred tax assets (liabilities)
Depreciation.............................................. $ (37,000) $ (21,000)
Accrued liabilities and other............................. 128,000 21,000
Net operating loss carryforward........................... 214,000 1,077,000
--------- -----------
305,000 1,077,000
Less valuation allowance.................................... (305,000) (1,077,000)
--------- -----------
Net deferred tax............................................ $ -- $ --
========= ===========

At December 31, 2001, the Company has a federal and state net operating
loss carryforward of approximately $2.7 million, which expires beginning in
2007.

NOTE 12 -- NET LOSS PER COMMON SHARE

The following table reconciles the numerators and denominators of the basic
and diluted income per share computations. The 3,512,586 shares of common stock
outstanding in 2000 reflects the recapitalization of the Company in 2000. The
recapitalization included the cancellation of all but 80,092 shares and the
issuance of 3,432,494 shares for nominal consideration to founding members of
management during 2000. The weighted average shares outstanding at December 31,
2001 includes the 520,313 shares of common stock exchanged in the Merger (see
Note 1) which was consummated on January 7, 2002. The Company considers

F-17

BIODELIVERY SCIENCES INTERNATIONAL, INC.
(A DEVELOPMENT STAGE COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INCLUDING NOTES APPLICABLE TO UNAUDITED PERIODS)

NOTE 12 -- NET LOSS PER COMMON SHARE -- (CONTINUED)

December 31, 2001 to be the acquisition date as the rights of ownership of BDS
had been essentially transferred to BDSI, without restrictions, by that date.

THREE MONTHS ENDED MARCH
YEAR ENDED DECEMBER 31, 31,
------------------------ ---------------------------
2000 2001 2001 2002
---------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
----------- -----------

Net loss -- (numerator).................... $ (672,731) $(4,444,561) $ (392,471) $ (295,214)
========== =========== ========== ==========
Basic:
Weighted average Shares outstanding
(denominator).......................... 3,512,586 3,851,587 3,518,179 5,000,863
========== =========== ========== ==========
Net loss per common share -- basic....... $ (0.19) $ (1.15) (.11) (.06)
========== =========== ========== ==========
Diluted:
Weighted average shares outstanding...... 3,512,586 3,851,587 3,518,179 5,000,863
Effect of dilutive options............... -- -- -- --
---------- ----------- ---------- ----------
Adjusted weighted average shares
(denominator).......................... 3,512,586 3,851,587 3,518,179 5,000,863
========== =========== ========== ==========
Net loss per common share -- diluted..... $ (0.19) $ (1.15) $ (.11) $ (.06)
========== =========== ========== ==========

The effects of all Preferred Stock and stock options have been excluded
from Common Stock equivalents because their effect would be anti-dilutive.

NOTE 13 -- RELATED PARTY TRANSACTIONS

During the year ended December 31, 2000, the Company sold 45,767 shares of
Preferred Stock to a relative of a principal stockholder for $100,000. The terms
of the Preferred Stock sold to this related party were identical to those for
Preferred Stock sold to unrelated parties.

NOTE 14 -- NATIONAL INSTITUTES OF HEALTH GRANT

In 2001, the National Institutes of Health (NIH) awarded the Company a
Small Business Innovation Research Grant (SBIR), which will be utilized in
research and development efforts. NIH has formally awarded the Company a 2001
grant of $883,972. Additionally, this award refers to funding levels of $814,398
and $989,352 that the Company expects to be awarded in 2002 and 2003,
respectively, subject to availability and satisfactory progress of the project.
Therefore, the Company expects to receive a total of approximately $2.7 million
related to its initial application for the grant through June 2004. The initial
application was for approximately $3.0 million. However, due to the expected
purchase of certain materials from sources outside the United States, the
expected funding was accordingly reduced. The grant is subject to provisions for
monitoring set forth in NIH Guide for Grants and Contracts dated February 24,
2000, specifically, the NIAID Policy on Monitoring Grants Supporting Clinical
Trials and Studies. If NIH believes that satisfactory progress is not achieved,
the 2002 and 2003 amounts noted above may be reduced or eliminated. The company
incurred approximately $477,000 and $260,000 of costs related to this agreement
in 2001 and the three month period ended March 31, 2002, respectively.

During the year ended December 31, 2001, the Company received $479,000
(inclusive of $37,000 of deferred revenue) and recognized revenue of $442,000
from this grant. During the three month period ended

F-18

BIODELIVERY SCIENCES INTERNATIONAL, INC.
(A DEVELOPMENT STAGE COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INCLUDING NOTES APPLICABLE TO UNAUDITED PERIODS)

NOTE 14 -- NATIONAL INSTITUTES OF HEALTH GRANT -- (CONTINUED)

March 31, 2002, the Company received $148,000 and recognized revenue of $259,000
from this grant. As awarded on September 19, 2001, the grant provided for
reimbursement of, or advances for, future research and development efforts.
During October 2001, the Company negotiated a lump sum payment of $220,000. The
terms that were negotiated in October 2001 allowed the Company to recover
$220,000 of costs principally incurred in the third quarter of 2001, which were
recognized as revenue upon agreement of those negotiated terms in October 2001.
Upon receiving funding under the grant and utilizing the funds as specified, no
amounts are refundable.

NOTE 15 -- PLAN OF OPERATIONS

Since inception, the Company has financed its operations principally from
the sale of equity securities. Historically, the Company's subsidiary financed
its operations principally from funded research arrangements. The Company has
not generated revenue from the sale of any product or from any licensing
arrangement since inception. The Company intends on financing its research and
development efforts and its working capital needs from existing and new sources
of financing. For instance, the Company was granted up to approximately $2.7
million from the National Institutes of Health to fund specific research efforts
conducted by the Company (see Note 14). The Company has also recently filed Form
SB-2 and expects to offer for sale up to 2,000,000 units, each consisting of one
share of common stock and one warrant to purchase an additional share of common
stock (see Note 16). The expected offering price for each unit is between $5.00
and $6.00 per unit. There can be no assurance that the offering will result in
the sale of any such securities. Should the offering not occur nor additional
funding be obtained, the principal shareholder has committed to fund the
operations of the Company through 2002. The Company expects to raise additional
funding from traditional financing sources, including term notes from unrelated
parties or advances from related parties. While there can be no assurance that
such sources will provide adequate funding for the Company's operations,
management believes such sources will be available to the Company.

NOTE 16 -- SUBSEQUENT EVENTS

In April 2002, the Company filed Form SB-2 with the Securities and Exchange
Commission. The proposed public offering consists of up to 2,000,000 Units, each
comprised of one share of common stock and one redeemable Class A common stock
purchase warrant.

F-19

REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

To the Board of Directors and Stockholders of
BioDelivery Sciences, Inc.

We have audited the accompanying statement of operations of BioDelivery
Sciences, Inc. (a development stage company) and the related statement of cash
flows for the nine months ended September 30, 2000. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audit.

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

In our opinion, the financial statements referred to above present fairly,
in all material respects, the results of operations of BioDelivery Sciences,
Inc. and cash flows for the nine months ended September 30, 2000, in conformity
with accounting principles generally accepted in the United States of America.

/s/ GRANT THORNTON LLP

Tampa, Florida
December 15, 2000

F-20

BIODELIVERY SCIENCES, INC.
(A DEVELOPMENT STAGE COMPANY)

STATEMENTS OF OPERATIONS

PERIOD FROM
MARCH 28, 1995
NINE MONTHS (DATE OF
ENDED INCORPORATION)
SEPTEMBER 30, TO SEPTEMBER 30,
2000 2000
------------- ----------------
(UNAUDITED)

Sponsored research revenues................................. $ 614,001 $7,338,501
EXPENSES:
Research and development.................................. 820,551 6,816,444
General and administrative................................ 62,480 423,233
--------- ----------
Total expenses......................................... 883,031 7,239,677
OTHER INCOME (EXPENSE)
Interest income........................................... 21,570 169,318
Other income.............................................. 3,720 17,856
--------- ----------
Net income (loss) before income tax benefit (expense)....... (243,740) 285,998
Income tax benefit (expense)................................ 37,736 (183,925)
--------- ----------
Net income (loss)........................................... $(206,004) $ 102,073
========= ==========

The accompanying notes are an integral part of these financial statements.
F-21

BIODELIVERY SCIENCES, INC.
(A DEVELOPMENT STAGE COMPANY)

STATEMENTS OF CASH FLOWS

PERIOD FROM
MARCH 28, 1995
NINE MONTHS (DATE OF
ENDED INCORPORATION)
SEPTEMBER 30, TO SEPTEMBER 30,
2000 2000
------------- ----------------
(UNAUDITED)

Net income (loss)........................................... $(206,004) $ 102,073
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization.......................... 70,422 243,688
Changes in assets and liabilities:
Prepaid expenses and other assets.................... (31,124) (87,558)
Accounts payable and accrued liabilities............. 14,734 86,955
Deferred revenue..................................... (46,000) 56,000
Due to related party................................. 234,471 337,503
--------- ---------
Net cash provided by operating activities......... 36,499 738,661

INVESTING ACTIVITIES:
Purchases of equipment.................................... (18,391) (468,458)
Purchase of other assets.................................. -- (42,484)
--------- ---------
Net cash used in investing activities............. (18,391) (510,942)

FINANCING ACTIVITIES:
Issuance of common stock.................................. -- 2,746
Proceeds from notes payable............................... 350,000 350,000
--------- ---------
Net cash provided by financing activities......... 350,000 352,746
NET CHANGE IN CASH.......................................... 368,108 580,465
CASH AT BEGINNING OF PERIOD................................. 212,357 --
--------- ---------
CASH AT END OF PERIOD....................................... $ 580,465 $ 580,465
========= =========
SUPPLEMENTAL INFORMATION
Cash paid for taxes....................................... $ -- $ 221,661
========= =========

The accompanying notes are an integral part of these financial statements.
F-22

BIODELIVERY SCIENCES, INC.
(A DEVELOPMENT STAGE COMPANY)

NOTES TO FINANCIAL STATEMENTS

NOTE 1 -- ORGANIZATION

BioDelivery Sciences, Inc. ("BDS" or the "Company") was incorporated in the
State of Delaware on March 28, 1995. The Company was formed to develop and
commercialize the delivery of certain pharmaceutical drugs and vaccines orally.

The Company is a development stage company, which has devoted substantially
all of its efforts to research and product development and has not yet generated
any revenues from the sale of products. At this time, there can be no assurance
of future revenues. In addition, the Company expects to continue to incur losses
for the foreseeable future, and there can be no assurance that the Company will
successfully complete the transition from a development stage company to
successful operations.

In order to continue its research and product development activities as
planned, the Company has raised capital through sponsored research agreements
with commercial entities and other third parties. The Company has also raised
capital from investors subsequent to September 30, 2000, as more fully discussed
in Note 7, which management believes will provide adequate funding through
September 30, 2001. The Company intends to obtain additional funds for research
and development through collaborative arrangements with corporate partners,
additional financings, and from other sources; however, there can be no
assurance that the Company will be able to obtain necessary financing when
required or what the terms of any such financing, if obtained, might be.
Accordingly, there can be no assurance of the Company's future success.

NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

REVENUE RECOGNITION

Sponsored research amounts are recognized as revenue when the research
underlying such payments has been performed or when the funds have otherwise
been utilized, such as for the purchase of operating assets. Research and
development expenses are charged to operations as incurred. Research and
development expenses principally include, among other things, consulting fees
and cost reimbursements to the University of Medicine and Dentistry of New
Jersey ("UMDNJ"), testing of compounds under investigation, and salaries and
benefits of employees engaged in research and development activities. Patent
costs are expensed as incurred as research and development expenses.

CASH AND CASH EQUIVALENTS

The Company considers all highly liquid debt instruments with an original
maturity of three months or less to be cash equivalents.

EQUIPMENT

Office and laboratory equipment are carried at cost less accumulated
depreciation, which is computed on a straight-line basis over their estimated
useful lives, generally 5 years. Accelerated depreciation methods are utilized
for income tax purposes. Depreciation and amortization expense related to
equipment for the nine months ended September 30, 2000 was $68,265.

INCOME TAXES

Deferred income tax assets and liabilities are computed annually for
differences between the financial statement and tax bases of assets and
liabilities that will result in taxable or deductible amounts in the future
based on enacted tax laws and rates applicable to the periods in which the
differences are expected to affect taxable income. Income tax expense is the tax
payable or refundable for the period plus or minus the change during the period
in deferred tax assets and liabilities.

F-23

BIODELIVERY SCIENCES, INC.
(A DEVELOPMENT STAGE COMPANY)

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)

USE OF ESTIMATES IN FINANCIAL STATEMENTS

The preparation of the accompanying financial statements conforms with
accounting principles generally accepted in the United States of America and
requires management to make certain estimates and assumptions that affect the
reported amounts of 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 and
assumptions.

ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS

The Company reviews long-lived assets to be held and used or disposed of,
for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. The Company uses an estimate
of the undiscounted cash flows over the remaining life of its long-lived assets
in measuring whether the assets to be held and used will be realizable.

CONCENTRATION OF CREDIT RISK

As described in Note 3, the Company derived substantially all of its
working capital from a research and development arrangement that was terminated
during 1999.

STOCK OPTIONS, WARRANTS, AND SARS

The Company follows SFAS No. 123, "Accounting for Stock-Based Compensation"
(SFAS 123), which establishes a fair value based method of accounting for
stock-based employee compensation plans; however, the Company has elected to
continue to account for its employee stock compensation plans under Accounting
Principles Board Opinion No. 25 with pro forma disclosures of net earnings and
earnings per share, as if the fair value based method of accounting defined in
SFAS 123 has been applied. Through September 30, 2000 no options or warrants
have been granted by the Company.

NOTE 3 -- RESEARCH AND DEVELOPMENT ARRANGEMENTS

As part of the Company's grant of an exclusive technology license to a
third party, the Company agreed to conduct research in certain areas in exchange
for funding. Research funding received under this agreement was $325,000 in
2000, respectively. This agreement was terminated by the third party during 1999
and the Company was relieved of its obligations to provide exclusive technology
licensing. Additionally, the Company has entered into various other
collaborative research arrangements with third parties, whereby the third
parties ultimately obtain licensing rights for new inventions/patents arising
from the associated research.

In 1996, the Company issued 7,300 shares of common stock each to UMDNJ and
Albany Medical College ("AMC") for exclusive, worldwide license agreement
rights. Under the terms of the license agreement, the Company is obligated to
pay royalties of 3% for sales of product and 25% of its income arising from
sales of product sold by sub-licensees that the Company may contract with in the
future.

The Company has also entered into a research agreement with UMDNJ. For the
nine month period ended September 30, 2000, the Company incurred costs of
$243,805, to UMDNJ under the terms of the research agreement. At September 30,
2000, the Company owed UMDNJ $337,503, under this agreement. The research
agreement provides for the procurement of supplies, rent, certain payroll costs,
and other expenses associated with research performed under the research
agreement.

F-24

BIODELIVERY SCIENCES, INC.
(A DEVELOPMENT STAGE COMPANY)

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 4 -- COMMITMENTS AND CONTINGENCIES

LITIGATION

During 1996, the Company entered into an agreement with a
consultant/stockholder under which the Company is obligated to pay a monthly
consulting fee of $15,000 for services through January 2001. The agreement also
provides for additional costs payable to the consultant beginning in 2000
through 2004, upon the Company obtaining certain levels of financing. In August
1999, the Company unilaterally terminated the contract with this consultant and
ceased making further payments. The consultant subsequently filed suit against
the Company alleging that, among other things, the Company is required to pay
the monthly consulting fees. The Company has filed a counter suit against the
consultant and management believes that the Company is not liable for any
alleged damages and that the Company is entitled to a refund of a portion of
previously paid consulting fees. Accordingly, no reserve has been recognized
associated with this dispute.

The Company is subject to claims arising in the ordinary course of
business, but does not believe that any such claims presently identified will
have a material adverse effect on its financial condition or results of
operations.

OPERATING LEASES

The Company leases a facility from UMDNJ under an operating lease. Lease
expense for the nine months ended September 30, 2000 was approximately $30,000.
While the Company intends to continue leasing this facility, there are no future
minimum commitments on operating leases at September 30, 2000.

CAPITAL LEASES

The Company leases certain equipment under a capital lease. Future minimum
lease payments remaining on this capital lease are as follows.

2000 (3 months)............................................. $ 3,678
2001........................................................ 14,713
2002........................................................ 14,713
2003........................................................ 14,713
2004........................................................ 4,904
Less amount representing interest........................... (13,042)
--------
$ 39,679
========

NOTE 5 -- STOCK OPTIONS, WARRANTS, AND OTHER INCENTIVE COMPENSATION

In 1999, the board of directors of the Company approved the 1999 Stock
Option Plan (1999 Plan) and reserved 500,000 shares of common stock for issuance
of stock options to employees and consultants. No options were granted under
this plan.

During 1999, certain employees of the Company purchased 1,470,000 shares of
redeemable common stock for $0.22 per share (the fair value of the stock less a
permanent discount) in exchange for cash and notes payable. The Company is
obligated to re-purchase the stock at fair value less the original discount at
the option of the holder beginning in 2004, or earlier upon termination of the
respective employee. The notes amount to approximately $321,000, bear interest
of 6% annually, and mature in 2009. Upon the fair value of the common stock
exceeding $2.22 per share, the Company will recognize compensation expense for
the

F-25

BIODELIVERY SCIENCES, INC.
(A DEVELOPMENT STAGE COMPANY)

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 5 -- STOCK OPTIONS, WARRANTS, AND OTHER INCENTIVE
COMPENSATION -- (CONTINUED)

amount in excess of $2.22 per share and adjust compensation in future periods
based on variable accounting requirements. Through September 30, 2000, no
compensation expense has been recognized.

NOTE 6 -- INCOME TAXES

The Company's provision (benefit) for income taxes for the nine months
ended September 30, 2000 is as follows:

Current Tax:
Federal................................................... $(37,736)
State..................................................... --
Deferred Tax:
Federal................................................... --
State..................................................... --
--------
$(37,736)
========

The Company's Federal net operating loss carryforward of $93,312 expires in
2020. The Company's State net operating loss of $289,836 expires in 2007. The
Company's effective tax rate of approximately 15% in 2000 varies from the
statutory rate primarily due to the valuation allowance associated with net
operating loss carryforwards and the effect of graduated tax rates.

NOTE 7 -- SUBSEQUENT EVENT

On October 10, 2000, the Company sold 210,006 shares of Series A
Convertible Preferred Stock representing 84.8% of the voting rights of the
Company to BioDelivery Sciences International, Inc. in exchange for cash and
notes receivable of $1.0 million and $14.0 million, respectively. The shares of
Series A Preferred are convertible to Common Stock on a 50-for-1 basis, subject
to customary anti-dilution adjustments. Dividends shall accrue on the Series A
Preferred at the rate of 8% per annum. In the event of liquidation, dissolution,
or winding up of the Company, the Series A Preferred Stockholders will be
entitled to receive, in preference to the Company's Common Stockholders, an
amount per share equal to the original purchase price plus any accrued dividends
per share. The Series A Preferred Stock is convertible at the earlier of
voluntary conversion by the preferred stockholders, initial public offering of
the Company's common stock, or 2005.

F-26

[BIODELIVERY LOGO]

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION

The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by the Company in connection
with the sale of common stock being registered. All amounts are estimates except
the SEC registration fee and the NASD filing fee and the Nasdaq Small Cap Market
listing fee.

AMOUNT
TO BE PAID
----------

SEC registration fee........................................ $ 20,000
NASD filing fee............................................. 8,600
NASDAQ SmallCap Market listing fee.......................... 9,000
Boston Stock Exchange....................................... 14,250
Printing and engraving expenses............................. 216,000
Legal fees and expenses..................................... 375,000
Accounting fees and expenses................................ 150,000
Blue Sky qualification fees and expenses.................... 15,000
Transfer Agent and Registrar fees........................... 7,500
Miscellaneous fees and expenses............................. 10,750
--------
Total............................................. $826,100
========

INDEMNIFICATION OF DIRECTORS AND OFFICERS

We have re-incorporated into the state of Delaware Section 145 of the
Delaware General Corporation Law (the "Delaware Law") authorizes a court to
award, or a corporation's Board of Directors to grant, indemnity to directors
and officers in terms sufficiently broad to permit such indemnification under
certain circumstances for liabilities (including reimbursement for expenses
incurred) arising under the Securities Act of 1933, as amended (the "Securities
Act"). Article 8 of the Company's Certificate of Incorporation and Article 10 of
the Company's Bylaws provide for indemnification of the Company's directors,
officers, employees and other agents to the maximum extent permitted by Delaware
Law. In addition, the Company has entered into Indemnification Agreements with
its officers and directors. The Underwriting Agreement also provides for
cross-indemnification among the Company and the Underwriters with respect to
certain matters, including matters arising under the Securities Act.

RECENT SALES OF UNREGISTERED SECURITIES

(a) Over the last 36 months, we have sold the following unregistered
securities (all presented post-split):

In July 2000, we entered into an contribution agreement with certain
individuals and entities led by the Hopkins Capital Group II, LLC and also
included Friday Harbour LLC, the Spencer Charles Duffey Irrevocable Trust,
the Elizabeth Rosemary Duffey Irrevocable Trust, Jim McNulty, Carlos
Santos, and Nicole Longridge. Pursuant to the contribution agreement, we
issued 3,432,494 shares of common stock to this group in exchange for the
investment group providing a deposit of $100,000 as part of the
negotiations of a conditional agreement with BioDelivery Sciences, Inc. to
acquire a controlling interest in them. The issuance of the shares of
common stock effectively resulted in a change of control of our company
over to the investment group led by Hopkins Capital Group II, LLC.

In November 2000, we issued 462,242 shares of common stock resulting
from a cash investment of $1,010,000 as part of a private placement
offering. These shares were originally issued as preferred stock, which
were rescinded and subsequently reissued as common stock.

II-1

We issued 368,421 shares from March 2001 through August 2001,
resulting from a cash investment of $805,000 as part of a private placement
offering. All investors in this transaction were accredited.

We issued 137,300 shares in April 2001 in satisfaction of
approximately $500,000 in debt obligation to the University of Medicine and
Dentistry of New Jersey incurred under our research agreement and rental of
the facilities.

As part of the merger with BioDelivery Sciences, Inc. consummated in
January 2002, we issued 520,313 shares of common stock to the BioDelivery
Sciences, Inc. stockholders.

There were no underwriters or placement agents employed in connection with
any of the transactions set forth above.

For additional information concerning these equity investment transactions,
please see the section entitled "Certain Transactions" in the prospectus.

The issuances described above were deemed exempt from registration under
the Securities Act in reliance on Section 4(2) of the Securities Act as
transactions by an issuer not involving a public offering. Certain issuances
described above were deemed exempt from registration under the Securities Act in
reliance on Rule 701 promulgated thereunder as transactions pursuant to
compensatory benefit plans and contracts relating to compensation. The
recipients of securities in each such transaction represented their intention to
acquire the securities for investment only and not with a view to or for sale in
connection with any distribution thereof and appropriate legends were affixed to
the share certificates and other instruments issued in such transactions. All
recipients either received adequate information about us or had access, through
employment or other relationships, to such information.

EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a) Exhibits

NUMBER
------ DESCRIPTION

II-2

NUMBER
------ DESCRIPTION

10.9 License Agreement with Biotech Specialty Partners,
LLC********
10.10 National Institutes of Health Grant Letter********
10.11 Merger Agreement with BioDelivery Sciences, Inc., dated July
20, 2001**
10.12 Settlement Agreement and Stock Purchase Agreement with
Irving Berstein, et al.**
10.13 Employment Agreement with Christopher Chapman**
10.14 Employment Agreement with James A. McNulty**
10.15 Employment Agreement with Dr. Frank E. O'Donnell**********
10.16 Confidentiality Agreement for Dr. Frank E.
O'Donnell**********
10.17 Covenant Not to Compete with Dr. Frank E.
O'Donnell**********
10.18 2001 Incentive Stock Option Plan********
10.19 Promissory Note for BioKeys Pharmaceuticals, Inc. dated
August 22, 2001***********
10.20 Research Agreement with PharmaResearch Corporation*********
10.21 Credit Facility Loan Agreement**********
10.22 Purchase Agreement between MAS Capital, Inc. and Hopkins
Capital Group II, LLC**********
10.23 Amendment to Purchase Agreement dated March 29,
2002**********
10.24 Agreement between Mr. Aaron Tsai and BioDelivery Sciences
International, Inc.**********
23.1 Consent of Grant Thornton LLP
24 Consent of Ellenoff Grossman Schole & Cyrulli, LLP, included
in Exhibit 5.1

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

* Previously filed with Form SB-2 November 7, 2001.

** Previously filed with Form 10QSB, for the quarter ended March 31,
2001

*** Previously filed with Form 10KSB, for the fiscal year ended
December 31, 2000 filed on August 15, 2001.

***** Previously filed with Form 8K filed October 26, 2000 under our
prior name of MAS Acquisition XXIII Corp.

****** Previously filed with Form 10SB filed January 18, 2000 under our
prior name of MAS Acquisition XXIII Corp.

******* To be filed by amendment

******** Previously filed with Form SB-2, Amendment No. 2, February 1, 2002.

********* Previously filed with Form SB-2, Amendment No. 3, March 26, 2002.

********** Previously filed with Form SB-2, Amendment No. 4, April 29, 2002.

*********** Previously filed with Form SB-2, Amendment No. 5, May 23, 2002.

All other documents are filed herewith.

UNDERTAKINGS

The undersigned registrant hereby undertakes to provide to the underwriters
at the closing specified in the underwriting agreements certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.

The undersigned Registrant hereby undertakes:

(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:

(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;

II-3

(ii) To reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or the most
recent post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement; and

(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the registration statement
or any material change to such information in the registration
statement.

(2) That, for the purpose of determining any liability under the Act,
each such post-effective amendment shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of
such securities at that time shall be deemed to be the initial bona fide
offering thereof.

(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at the
termination of the offering.

The undersigned registrant hereby undertakes that:

(1) For purposes of determining any liability under the Securities
Act of 1933, the information omitted from the form of prospectus filed as
part of this registration statement in reliance upon Rule 430A and
contained in a form of prospectus filed by the registrant pursuant to Rule
424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be
part of this registration statement as of the time it was declared
effective.

(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the Offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.

Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act, and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer, or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.

II-4

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the city of Newark, State of New
Jersey on June 18, 2002.

BIODELIVERY SCIENCES INTERNATIONAL,
INC.

By: /s/ FRANCIS E. O'DONNELL, JR.

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

Francis E. O'Donnell, Jr., M.D.

President and Chief Executive Officer
(Principal Executive Officer)

Pursuant to the requirements of the Securities Act, this Amendment to
Registration Statement on Form SB-2 has been signed by the following persons in
the capacities and on the dates indicated.

NAME AND SIGNATURE TITLE DATE
------------------ ----- ----

/s/ FRANCIS E. O'DONNELL, JR. Director, President, Chief June 18, 2002
----------------------------------------------- Executive Officer, and Chairman of
Francis E. O'Donnell, Jr., M.D. the Board

/s/ JAMES A. MCNULTY Secretary, Treasurer, and Chief June 18, 2002
----------------------------------------------- Financial Officer
James A. McNulty

/s/ RAPHAEL J. MANNINO Director, Executive Vice President June 18, 2002
----------------------------------------------- and Chief Scientific Officer
Raphael J. Mannino

/s/ L.M. STEPHENSON Director June 18, 2002
-----------------------------------------------
L.M. Stephenson

/s/ WILLIAM STONE Director June 18, 2002
-----------------------------------------------
William Stone

/s/ JAMES R. BUTLER Director June 18, 2002
-----------------------------------------------
James R. Butler

/s/ JOHN J. SHEA Director June 18, 2002
-----------------------------------------------
John J. Shea

/s/ ROBERT G.L. SHORR Director June 18, 2002
-----------------------------------------------
Robert G.L. Shorr

II-5

EXHIBIT INDEX

NUMBER
------ DESCRIPTION

1.1 Form of Underwriting Agreement.***********
3.1 Articles of Incorporation of the Company as an Indiana
corporation******
3.2 Articles of Amendment of the Article of Incorporation as an
Indiana corporation*****
3.3 Bylaws of the Company as an Indiana corporation******
3.4 Articles of Incorporation of the Company after
reincorporation merger into Delaware********
3.5 Bylaws of the Company after reincorporation merger into
Delaware********
4.1 Form of Class A Warrant Agreement with Forms of Class A
Warrant Certificate*********
4.2 Form of Representative's Unit Purchase Option***********
4.3 Form of Specimen of Unit Certificate
4.4 Form of Specimen of Common Stock Certificate
4.5 Form of Specimen of Warrant Certificate
5.1 Opinion of Ellenoff Grossman Schole & Cyruli, LLP
10.1 Research Agreement with the University of Medicine and
Dentistry of New Jersey**
10.2 Licensing Agreement with the University of Medicine and
Dentistry of New Jersey***
10.3 Licensing Agreement with Albany Medical College***
10.4 License Agreement with BioKeys Pharmaceuticals, Inc.********
10.5 License Agreement with Tatton Technologies, LLC********
10.6 Addendum to License Agreement with Tatton Technologies,
LLC**********
10.7 License Agreement with RetinaPharma, Inc.********
10.8 Addendum to License Agreement with Retina Pharmaceuticals,
Inc.**********
10.9 License Agreement with Biotech Specialty Partners,
LLC********
10.10 National Institutes of Health Grant Letter********
10.11 Merger Agreement with BioDelivery Sciences, Inc., dated July
20, 2001**
10.12 Settlement Agreement and Stock Purchase Agreement with
Irving Berstein, et al.**
10.13 Employment Agreement with Christopher Chapman**
10.14 Employment Agreement with James A. McNulty**
10.15 Employment Agreement with Dr. Frank E. O'Donnell**********
10.16 Confidentiality Agreement for Dr. Frank E.
O'Donnell**********
10.17 Covenant Not to compete with Dr. Frank E.
O'Donnell**********
10.18 2001 Incentive Stock Option Plan********
10.19 Promissory Note for BioKeys Pharmaceuticals, Inc. dated
August 22, 2001***********
10.20 Research Agreement with PharmaResearch Corporation*********
10.21 Credit Facility Loan Agreement**********
10.22 Purchase Agreement between MAS Capital, Inc. and Hopkins
Capital Group II, LLC**********
10.23 Amendment to Purchase Agreement dated March 29,
2002**********
10.24 Agreement between Mr. Aaron Tsai and BioDelivery Sciences
International, Inc.**********
23.1 Consent of Grant Thornton LLP
24 Consent of Ellenoff Grossman Schole & Cyrulli, LLP, included
in Exhibit 5.1

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

* Previously filed with Form SB-2, November 7, 2001.

** Previously filed with Form 10QSB, for the quarter ended March 31,
2001

*** Previously filed with Form 10KSB, for the fiscal year ended
December 31, 2000 filed on August 15, 2001.

***** Previously filed with Form 8K filed October 26, 2000 under our
prior name of MAS Acquisition XXIII Corp.

****** Previously filed with Form 10SB filed January 18, 2000 under our
prior name of MAS Acquisition XXIII Corp.

******* To be filed by amendment

******** Previously filed with Form SB-2, Amendment No. 2, February 1, 2002.

********* Previously filed with Form SB-2, Amendment No. 3, March 26, 2002.

********** Previously filed with Form SB-2, Amendment No. 4, April 29, 2002.

*********** Previously filed with Form SB-2, Amendment No. 5, May 23, 2002.

All other documents are filed herewith.