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The following is an excerpt from a 10KSB SEC Filing, filed by BIOSHIELD TECHNOLOGIES INC on 10/16/2001.
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INTERNATIONAL BIOCHEMICAL INDUSTRIES INC - 10KSB - 20011016 - PART_I

PART I

ITEM 1. DESCRIPTION OF BUSINESS

Background Summary

BioShield Technologies, Inc. ("BSTI") is a Georgia corporation and was organized in 1995. The Company historically has engaged in research and development, patent filings, regulatory issues and related activities geared towards the sale of its retail, industrial and institutional products. Due largely to recent Environmental Protection Agency approvals, BioShield is currently selling and marketing primarily concentrated antimicrobial products. Many of these products provide long-term killing action of microorganisms responsible for cross contamination and viral contamination, along with inhibiting and controlling the growth of over 100 viral, bacteria, fungi and yeast organisms.

As a result of certain management decisions and bankruptcy proceedings involving Electronic Medical Distribution, Inc. ("eMD"), a Company subsidiary, referred to hereinafter, BioShield currently operates and produces antimicrobial and biostatic products for use within certain targeted markets (and no longer engages in those business activities in which eMD formerly engaged in). BSTI is currently engaged in sale, distribution, and development of antimicrobial, biostatic, and medical related products for the retail (recently discontinued), industrial and institutional, and Specialty Chemical markets. See also "Establishment of Healthcare Network Solutions, Inc. ("HNS") Subsidiary".

Recent Developments

Bioshield announced signed a licensing and distribution agreement with Megastar that calls for payments to BioShield in the amount of $35 million over a seven year period. BioShield management believes gross margins will reach 80% on this agreement and fully believes the customer will exceed the minimum purchase requirements required pursuant to this agreement. The contract calls for minimum $2.5 million in the first year with required 50% increases each year for the next 5 years. Bioshield also signed a licensing and distribution agreement for it's "Pet Stop" line of products with ``Direct America'' that calls for estimated revenues to BioShield in the amount of $2.5 million over a three year period. "direct America" plans to market the products through the advertising agency Fricks/Firestone, a firm that has done work for Papa John's, Protective Ins. and Suntory Water Group.

Bioshield management entered into an agreement with an East Coast based Institution to provide up to $1,000,000 of conventional accounts receivable financing. Bioshield will be able to draw down on the credit line to within 80% of the value of purchase orders. After the signing of this agreement Bioshield cancelled all lines of equity funding.

Bioshield has filed the required 10-SB for its subsidiary, Healthcare Network Solutions, Inc. It is anticipated that it will begin trading as a public company on the Over the Counter exchange. BioShield shareholders of record on the close of business on the date to be announced will receive one share of Healthcare Network Solutions, Inc. for every 10 shares they own of BioShield. Shareholders holding less than 10 shares will receive 1 share of Healthcare Network Solutions, Inc. Standard rounding rules will apply. Healthcare Network Solutions, Inc. is a healthcare company focusing on providing consolidated services to physician practices. There is a tremendous amount of inefficiency and waste in healthcare. Approximately $0.30 out of every healthcare dollar is wasted on clinical and administrative inefficiencies. Physicians are being pressured to see more and more patients on a daily basis. The average physician- patient interaction is about eight minutes, which does not leave a lot of time for patients to ask questions or get answers. New technologies must be introduced that conform to a doctor's workflow environment. Healthcare Network Solutions was designed to minimize the paper clutter in the physician's office and to improve the office processes. Healthcare Network Solutions also provides automation services that allow physicians to capture all charges, prescriptions and pertinent clinical information. In addition, Healthcare Network Solutions has partnering arrangements that provide additional value to the physicians who are a part of the cooperative arrangement.

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After recieving inquiries from military departments and contractors -- Camber; Objective Individual Combat Weapon (OTCW); Objective Crew Served Weapon (OCSW); Sam Whitfield, Commander of U.S. Army Infantry Center ATSH-OTY; Hospitals; Laboratories; and the International corporation of Airport security in Germany and Ireland regarding the use of BioShield's antimicrobial agent against Anthrax, management has proceeded with the process of locating a facility to test the effectiveness of it's chemicals against Anthrax.

BioShield's microbiologists believe BioShield's products are effective against the Bacillus Anthracis, the bacteria that causes Anthrax. BioShield's in-house laboratories have tested BioShield products against a wide variety of Gram-positive and Gram-negative bacteria from the same family of Bacillus Anthracis, such as Bacillus Subtilis, with a 100% success rate of eliminating the bacteria. An interview, seen on CNN Wednesday evening, with Dr. Larry Bush, Infectious Disease Specialist, who diagnosed the Florida patients with having Anthrax, reflected on the Bacillus Anthracis bacteria.

BioShield has been in contact with the CDC in Atlanta, GA; Los Alamos National Laboratory in Los Alamos, New Mexico; and a military research organization in an effort to secure a suitable testing facility and to discuss the value, if any, of using BioShield's technology as a protective agent against Bacillus Anthracis. Outside testing is necessary because of the high risk and level of transmission of spores. Specialists in the field of Anthrax are being sought out, as stated, to determine if the unique attributes of BioShield's chemical molecule agent can contribute to stopping the dissemination of Anthrax and reducing the potential risk of Anthrax

ANTIMICROBIAL BUSINESS

BioShield Technologies, Inc.'s primary focus is to exploit its proprietary technology to become the leader in antimicrobials and biocides for consumer, Original Equipment Manufacturing, industrial, institutional, environmental services, and medical device markets. BioShield products are an easily applied reactive coating technology that modifies surfaces of all types, by creating an invisible covalent bond between surfaces and a variety of chemical agents. Through the cross linking technology, these antimicrobial properties and other chemical agents can impart many performance-enhancing characteristics, such as residual antimicrobial activity, removal of surface-borne and air-borne allergens which may cause respiratory discomfort or asthma, infection resistance, anti-inflammation, lubricity and drug delivery onto many surfaces without changing the dimensions or physical properties of the modified surfaces.

BioShield Technologies, Inc. believes that its antimicrobial technologies have properties that make its products significantly more durable, effective and safer than currently available conventional antimicrobials, non- antibiotics, preservatives or biocides. BioShield Technologies, Inc. also believes that certain manufacturers who utilize its technologies will be able to significantly improve the performance of their products and in some situations differentiate their products in a highly competitive marketplace.

Consumer Products

BioShield Technologies, Inc. believes that significant opportunities for revenue generation continue to exist in the licensing and distribution of its technology in the mass-market retail outlets including supermarkets, mass merchandisers, drug outlets, home improvement centers, and selected chain specialty retailers. Household cleaners and odor eliminator products represent a retail market value in supermarkets alone of over $2 billion per year.

The Consumer Products Division has been restructed to license its technology, to retain the approximate margins as other licensing and distribution approaches in our industrial and institutional strategies. These strategies include:

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Private Label Products Licensing Value Added Products

Private Label Products

The Company currently produces private and controlled brand products for a select group of food retailers within the United States. As new products are developed some will be made available for private label distribution, particularly those that make non-pesticidal claims.

In addition, private label opportunities will be extended into other retail channels such as mass merchandisers. The expansion of private label sales will only be executed in situations where both the anticipated volume and pricing are such that positive profitability is available.

Licensing Value Added ("Co-Branded") Products

Utilization of Bioshield's patented technology in leading consumer goods offered by other organizations represents potentially lucrative licensing revenues for the Company . The unique attributes of BioShield's technology permit incorporation into existing products as a value-added ingredient that imparts anti-microbial properties to the base product. The Company has recently signed a $2.5 million Licensing Agreement for 3 years with DirectAmerica. The product (PetStop) is to be marketed by Fricks/Firestone, famous for Papa John's Pizza, Protective Ins. and Suntory Water Group.

Consumer goods categories that offer significant potential include household cleaners, gloves, feminine hygiene, laundry and fabric care as well as deodorants and body washes. Many other products that benefit from an antimicrobial claim will be added as the technology progresses.

Marketing programs for value-added products all designed to support the global licensing strategy of BioShield. The Company intends to pursue additional licensing agreements with manufacturers that the Company anticipates will contain a marketing portion that outlines the requirements that each joint product will bear a notification of "Protected By BioShield" or other similar awareness building program. This extension of the Company's trademarks into categories, products, and geographies will enhance the long term branding campaign.

Industrial and Institutional Markets (I&I)

The Company intends to follow a path taken by many other proprietary speciality chemical research and development companies and has targeted leading pharmaceutical and industrial and institutional products companies that currently formulate and market to this industry.

The Institutional & Industrial Division business strategy is profitable, accretive acquisitions and organic growth. The execution of both strategies simultaneously will provide accelerated growth within the Institutional and Industrial market segments, and the pharmaceutical companies.

Simultaneously with the acquisition strategy, the Institutional & Industrial Division will offer selected BioShield products to other I&I companies. This action will occur on a restricted basis, primarily with products similar in nature with antimicrobials and speciality chemicals.

The marketing of BioShield products with the Institutional & Industrial segments will be consistent with the other divisions of BioShield. All products that contain the BioShield technology will be clearly labeled. Advertising for the Company, its technology, and its products will consist of traditional media, printed material in high distribution trade journals, direct mail, and active, visible participation in all appropriate industry conventions.

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Specialty Chemical Division

BioShield is currently engaged in testing multiple applications of its core technology and products with leading manufacturers, many of whom are Fortune 500 companies. The Company is committed to a value-added strategy to have our antimicrobial technology incorporated into the products of these leading manufacturers. It is BioShield's intention to produce co-branded products in the future.

The Company has also entered into agreements with specialty chemical companies to achieve national distribution. In September 2000, BioShield entered into an agreement with SouthChem, Inc., a subsidiary of Brenntag, a leading chemical distributor in the Southeast. BioShield believes there will be significant volume in these agreements that will drive substantial revenue and licensing growth.

The following products have been developed for sale to the industrial and institutional markets but have not received regulatory approval except as hereinafter indicated under "Government Regulation and Approval". No assurances can be given that further EPA approvals will be obtained and in what time frame.

BioShield AM36.OI

- molecular bonding additive for formulating institutional and industrial disinfectants

- molecular bonding additive for formulating sanitizers and microbiocides for use in laundry additives

- additive for carpet treatment products for use in upholstery and drapery treatment products for use in building cleaning and treatment products

- additive for household cleaning products for use in food processing plants

- higher strength than BioShield AM500

BioShield AM1870pc

- molecular bonding additive for formulating institutional and industrial disinfectants

- can be used similar to BioShield AM36.OI

- produces coating with migrating properties

- for use as preservative in personal care products

Summary Information Regarding Current Bioshield Products

BioShield AM500, is a stable aqueous solution of a silicone quaternary ammonium salt, which can produce a durable microbiostatic coating on a broad range of surfaces. AM500 provides effective protection of treated surfaces against bacteria and fungi, including mold and mildew. BioShield Technologies has registered AM500 under FIFRA regulations and been given the EPA registration number 70871-1.

BioShield AM 3651PI is an EPA registered antimicrobial agent effective against common household germs. This antimicrobial agent helps prevent the spread of harmful germs on treated hard, non-porous surfaces. 3651P is also effective in controlling mold and mildew by inhibiting the growth of mold and mildew and also resists stains and discoloration associated with the growth of such organisms. BioShield's 3651P also disinfects hard, non-porous surfaces and kills Salmonella choleraesuis and Staphylococcus aureus.

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BSTI 1860 may be used for incorporation into or treatment of various materials to impart bacteriostatic/fungistatic properties. This formula molecularly bonds to most surfaces utilizing a silanol group. It is this feature that provides a durable coating on items it is incorporated into or applied to post-production. This molecular bonding does not allow the product to diffuse into the surrounding environment. It does not wash out, and maintains its effectiveness over time. The quaternary ammonium portion of the active ingredient provides antimicrobial activity. This product exhibits a broad spectrum of antimicrobial activity, and is effective in controlling various microbes. BioShield 1860 adds value to products by imparting a durable and effective microbiostatic coating that lasts.

RTU 50, This "ready to use" product provides a durable antimicrobial coating on most surfaces. It is a water-based solution for easy application to desired materials. The active ingredient in RTU 50 actually bonds to the objects in which it is applied. This means that once RTU 50 is applied to a surface, the mold and mildew protection lasts. It attacks malodor and cosmetic degradation at the source. Using RTU 50 provides effective protection against bacteria and fungi, and retards the formation of mold and mildew stains.

RTU 75 combines BioShield's proprietary technology into an aqueous system to provide a durable antimicrobial barrier. RTU 75 protects surfaces from fowl smelling odors and staining caused by mold and mildew. This is a non- flammable product that provides quick, uniform dispersion for easy application onto pre-cleaned surfaces.

CS Concentrate Protectant 15, this convenient formula is fast, easy to apply, and very effective. CS 15 incorporates Bioshield's patented technology into a convenient protectant spray. It provides lasting protection against mold and mildew. The protective coating is not destroyed by repeat cleanings, and offers a durable finish on most surfaces. CS 15 controls and retards the deterioration caused by most bacteria and fungi. It may also be used to prolong the life of fabrics and carpets.

As a result of the above, management of the Company has determined to turn its attention away from a general consumer or retail market and to focus intensively upon both the commercial and industrial markets where management believes that the potential for greater revenues with less overhead expenses may be obtained through utilization of its chemical patents.

GOVERNMENT REGULATIONS AND APPROVAL

Filings Made With the EPA to Date and Current Applications.

In September 1999 the Company received its first U.S. patent for the water stabilizer antimicrobial molecule.

In February 2000, the Company received US EPA registration for its concentrated active ingredient, BSTI 1860. This active ingredient is highly concentrated and is solvent based. It can be used to formulate microbiostatic agents and will be the Company's own source of active ingredient for formulated BioShield products. It is manufactured by the Company and eliminates the need to obtain this active ingredient from other registered sources. Also in February, the EPA approved a registration for AM500 and AM500I specific for commercial and industrial applications. The EPA approved AM500I for use in formulating laundry additives, carpet treatment products, upholstery and drapery treatment products to impart bacteriostatic/fungistatic activity in many of the foregoing products and others. The EPA also approved the use of AM500 against odor causing bacteria, bacteria that causes staining and discoloration, fungi (mold and mildew) and algae as a static agent. The EPA approved AM500 and AM500I to be used to impart durable, bacteriostatic and fungistatic protection to substrates for the following commercial and industrial applications:

"air filters/materials; aquarium filter material; bed sheets, blankets and bedspreads; buffer pads (abrasive and polishing); carpets and draperies; fiberfill; fiberglass duct board; fire hose fabric; humidifier belts; mattress pads and ticking; men's underwear and outerwear; non-woven disposable

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diapers; non-woven polyester; outerwear apparel; polyurethane and polyethylene foam, when covered; polyurethane foam for packaging and cushioning in non-food contact applications; roofing materials; sand bags, tents, tarpaulins, sails, and ropes; athletic and causal shoes; shoe insoles; shower curtains; socks; throw rugs; toilet tank and seat covers; umbrellas; upholstery vacuum cleaner bags and filters; women's hosiery; and women's intimate apparel, concrete additive for repair and renewal of sewer pipes and manholes and concrete sewer structures (not be used in the treatment of storm drains").

In July 2000, the US EPA approved the Company's patented antimicrobial for direct homeowner use applications. This allows the consumer to use AM500 within the home, bathroom and kitchen. Numerous homeowner applications have been approved such as:

"air purification systems, tubs, glazed tiles, shower curtains, shower stalls, washable walls, fiberglass, cabinets, floors, window sills, bed sheets, blankets, bedspreads, socks, athletic shoes, underwear, shoe insoles, carpeting, fabrics made of acrylic, cotton, nylon, polyester, rayon silk, etc."

The Company is awaiting EPA approval for additional products with the same active ingredient as AM500. These products are not water-based products and contain various active ingredients.

In September 2000, BioShield received two additional US patents, for a total of three patents, that covers and expands certain applications of the Company's base technology.

The Company received EPA approval for registration of BSTI 3651PI, to enable it to make certain claims regarding the antimicrobial and microbiostatic properties of the products. The Company believes BSTI 3651PI is a unique product. Formulation of the silane-integrated system, is solvent based. However, BSTI 3651PI provides stable aqueous solutions.

The primary use claims, included in the Registration for BSTI 3651PI, are as an active ingredient for formulating disinfectants and sanitizers for use on hard non-porous surfaces, and as a microbiocide for use in laundry additives, carpet treatment products, upholstery and drapery treatment products, and treatment products, and to give surface microbiostatic treatment effective against a wide variety of bacteria, fungi, and algae.

The strength of BSTI 3651PI lies in its intended use in sanitizers and disinfectants. BSTI 3651PI is a blend of active ingredients chosen for their performance. The interplay of the ingredients of the active blend provides high efficiency in small concentrations. The Company believes that because of this interplay of the ingredients and the resulting independence from toxic compounds such as chlorine, formaldehyde or formaldehyde donors, BSTI 3651PI is ideally suited as a preservative and as active components of sanitizers and disinfectants.

Materials treated with formulations containing antimicrobial agent BSTI 3651PI are preserved by the bacteriostatic, fungistatic and action imparted by the active ingredient. BSTI 3651PI inhibits the growth of microorganisms that are responsible for causing odor, discoloration and deterioration. It also provides residual inhibition of microorganisms to aid in the control of these deleterious effects. BSTI 3651PI forms a coating on a wide variety of substrates and microbiostatic action is exhibited on contact.

The Company received approval that BSTI 3651PI can be used for incorporation into and treatment of the following applications to impart durable, microbiostatic protection;

"air filters/materials; aquarium filter material; bed sheets, blankets, and bedspreads; buffer pads (abrasive and polishing); carpets and draperies; fiberfill; fiberglass duct board; fire hose fabric; humidifier belts; mattress pads and ticking; men's underwear and outerwear; non-woven disposable diapers; non-woven polyester; outerwear apparel; disposable polyurethane foam cushions; polyurethane foam polyethylene foam, polyurethane foam used as a growth medium for non-food

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crops and plants; roofing materials; sand bags, tents, tarpaulins, sails, and ropes; athletic and casual shoes; shoe insoles; shower curtains; socks; toilet tank and seat covers; umbrellas; upholstery vacuum cleaner bags and filters; vinyl wallpaper and wallpaper for non-food contact surfaces; women's hosiery; and women's intimate apparel, tubs, glazed tiles, shower curtains, shower stalls, washable walls, fiberglass etc."

The Company also intends to seek approval on BSTI 3651PI to be used to formulate disinfectants and sanitizers to be used on hard non-porous surfaces such as sinks; tiles; tubs; toilets; countertops; bathroom fixtures; stoves; exercise equipment; walls; doorknobs; telephones; garbage cans; floors; cabinets; and shower stalls. BSTI 3651PI is intended for formulating disinfectants and sanitizers to be used in areas such as homes, offices, hospitals, institutions, schools, restaurants, locker rooms, medical facilities and other like areas that are prone to bacteria and odors.

In January 2001, Bioshield received two additional EPA registrations for BioShield's core products. EPA registration numbers 70871-1 and 70871-12 to allow BioShield's 1860 (institutional) and AM500 (household) patented antimicrobial products to be used by firms manufacturing polyurethane and cellulose foam for household, industrial, and institutional sponges and mops.

BioShield received new EPA registered usages approvals on its two registered AM 1860 and AM 500 antimicrobials to be used as agents in paints, coatings and films as an antimicrobial protection for the surface control of bacteria.

In June 2001, the EPA under the Federal Insecticide, Fungicide and Rodenticide Act ("FIFRA"), approved BioShield's new antimicrobial AM 3651 PI. This new compound uniquely marries BioShield technology with a combination of potent quaternary ammonium disinfectants.

Based on independent laboratory results, AM 3651 PI had shown 99.99% efficacy against Gram positive and negative bacteria, yeast and different types of fungus and algae at 2, 7, 14, 21, and 28 days post application. The Company believes that with this EPA/FIFRA approval, there is a very substantial market for the technology in different areas which will be actively explored and opens the avenue for the Company to register additional new antimicrobial disinfectants with residual activity.

As a result of the above BioShield has received three U.S. patents and six EPA registrations, as follows:

Registrations:    BSTI1860                               EPA Reg. No. 70871-12
                  AM 500                                 EPA Reg. No. 70871-1
                  AM 5001                                EPA Reg. No. 708710-2
                  AM 3651p                               EPA Reg. No. 70871-13
                  BST Protectant Concentrate C-15        EPA Reg. No. 70871-3
                  BST Protectant RTU50                   EPA Reg. No. 70871-4
                  BST Protectant RTU75                   EPA Reg. No. 70871-5

Patents:          Water Stabilization Approval           U.S. Patent No. 5954869
                  Technology Application Approval        U.S. Patent No. 6113815
                  Technology Application Approval        U.S. Patent No. 6120587

The Company is seeking additional EPA and FDA registrations on new molecular compounds to be used as a preservative and to be used in food processing plants.

Future Filings

The Company plans to seek approval on a modified version of its core active ingredient. The modification of the product involves the elimination of the highly toxic solvent (methanol).

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This modified active ingredient is highly soluble, less toxic to the user during application and still delivers the micro-biostatic properties. This would be an alternate source of active ingredient manufactured by the Company. The Company also plans to seek approval on a variety of end use products with disinfectant and sanitization properties.

Over the next several years, when adequately capitalized, the Company intends to seek EPA and FDA food contact approvals for BioShield products as preservatives in FDA regulated products, including cosmetic articles, such as skin creams; hair treatment products, for example shampoos; non-regulated products, including detergents and detergent formulations; other preservative applications, such as interior and exterior paints, latex, concrete materials, machine oils, and lubricants; cutting fluids; water for cooling systems and swimming pools which may require EPA registration. However, no assurances can be given that the Company will be successful in commercializing any of these products or will receive any of the required regulatory approvals.

Research and Development

The Company's core technologies are both aqueous and non-aqueous reactive silanes and antimicrobial products. Combinations of both technologies are producing compounds with new properties and are setting new standards. The Company's new product releases in the near future will be based on these core technologies. Research on silane based and non-silane based antimicrobial will expand application of antimicrobial Company products from pesticides to medications and treatments to preventive care. Research on silane based durable products will provide the applicator with the opportunity to give surfaces new desired properties.

Future development efforts are anticipated to focus on development of antimicrobial products for medical applications, specifically, human and animal skin treatments, new formaldehyde-free product preservatives, agricultural and food antimicrobial and new active ingredients and formulations useful in the markets currently providing antimicrobial products. Products range from antimicrobial absorbents to cleaning solutions and disinfectants and household products. Products in this category include materials treated by the manufacturer, for example socks, shower curtains and carpets. Product development in this category is anticipated on a market-need basis in collaboration with the manufacturers. In addition, a number of new applications based on the uniqueness of the Company's products are anticipated. There can be no assurance that the Company will be successful in developing these or other products.

During the fiscal years ended June 30, 2001, and 2000, the Company incurred expenses of approximately $338,584 and $845,465, respectively, resulting from Company-sponsored research and development activities. Research and development is expected to remain a significant component of the Company's business. However, the Company may abandon or de-emphasize its research and development activities with respect to the primary development projects and expand research and development of other products as circumstances warrant. The Company has contracted out a substantial part of its research and intends to continue to do so while utilizing its staff for monitoring such research.

Antimicrobial Biobarriers: Burn Care/Synthetic Skin. Commonly, the greater the skin damage, the greater the risk of infection. The skin damage and the risk of infection are especially serious in burn victims. To this day, proper treatment of burn patients remains a challenge to the healthcare professional. In addition to direct wound application, the Company believes that the Company's technology may, under certain conditions, be appropriate for application to skin grafts, either manufactured or harvested from cadavers and most importantly, animal collagen matrixes. Collagen matrix based products are frequently applied graft materials. In addition to their importance as skin grafts, their chemical composition is such that a very favorable bonding with the Company's antimicrobial products and the graft may be possible. The Company believes that the unique properties of the Company's core technology may, in the future and under certain circumstances, allow certain products based upon its technology to form a bound protective layer that allows the grafted skin to breathe and transport liquids, but reduce and/or prohibit the entry of microorganisms.

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Integration of the Company's products and research in the future may lead to new skin treatment products that the Company believes may provide effective skin condition treatment. Adverse skin conditions caused by microbes may be susceptible to treatment by the Company's products. However, no assurances can be given that the Company will be successful in commercializing any of these products or will receive any of the required regulatory approvals.

Transplant/Medical Device Treatments. A common problem in the transplant of organs or artificial implants is rejection by the receiving body's immune system. The rejection is often based on the recognition of the implant as a foreign body. This recognition is affected by the surface of the implant. Silane treatment of implants changes the surface of the implant. The treatment can be durable or temporary. One approach in the future may be to chemically bond currently available anti-rejection medication to the silane. This application will require FDA approval prior to clinical testing and commercial introduction. However, no assurances can be given that the Company will be successful in commercializing any of these products or will receive any of the required regulatory approvals.

Cleaning and Maintenance Products. The residual activity of the Company products provides protection to many surfaces. Application of the products is primarily to clean surfaces. Integration of the Company products into new cleaning products may lead to new products providing protection to surfaces and equipment while cleaning. These new cleaning and maintenance products will be developed for industrial and institutional applications, for example, hospitals, food processing plants and commercial cleaning and consumer applications, for example, bathroom, carpet and kitchen cleaning. However, no assurances can be given that the Company will be successful in licensing any of these products or will receive any of the required regulatory approvals. OdorFree(TM) is a new odor eliminator product that was recently developed which does not require regulatory approval. The product incorporates one of BioShield's proprietary chemical additives and is available for household use on upholstery, rugs and clothing. OdorFree(TM) is effective in eliminating odors, which include odors associated with food, cigarette smoke, tobacco and fire smoke; mold or mildew
(musty), certain human body odors (on fabrics) and garbage odors, among others. OdorFree(TM) is available in regular and extra strength. OdorFree(TM) has been clinically tested and is hypoallergenic.

In April of 1999, Bioshield founded a subsidiary to develop electronic commerce via the Internet originally known as Allegy Superstore.com Inc. with its name thereafter changed to Electronic Medical Distribution, Inc . ("eMD"). eMD was created to integrate services for healthcare providers with a comprehensive Internet-based product and healthcare website and had launched its web site in January 2000. On December 7, 2000, the Board of Directors of Bioshield, elected to cease eMD operations and filed for protection under Chapter 7 of the federal bankruptcy laws in the U.S. Bankruptcy Court for the Northern District of Georgia Atlanta Division currently under Case No. 00-75633 (Judge Bihary). Before the 7 election was completed, the Company elected to change from Chapter 7 to 11, and has recently moved to a liquidating 11. In accordance with Motion filed with the Court on July 9, 2001 by the Chapter 11 Trustee, the Court ordered, on August 29, 2001, that the case be converted to a case under Chapter 7 of the Bankruptcy Code.

On or about December 12, 2000, Bioshield reorganized and restructured the Company, including a change in directors, to focus on the core Bio-Technical antimicrobial products in which the Company has received E.P.A. approvals.

Establishment of Healthcare Network Solutions, Inc. ("HNS") Subsidiary

Bioshield founded HNS in April 2001 for the purpose of providing non-medical services to physician practices. It currently owns approximately 52% of all outstanding HNS common stock and expects to own approximately 35% post spin-off with the difference of 17% to be owned by Bioshield shareholders in accordance with Bioshield's September 24, 2001 press release wherein it indicated that it intends to spin-off, to its stockholders and on a 1 for 10 basis, a portion of those shares owned by it in HNS.

HNS filed a Form 10-SB Registration Statement with the Securities and Exchange Commission ("SEC") which provides certain information about HNS, its current and proposed business activities and its management team.

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The Form 10-SB was filed under SEC on September 27, 2001 under File No. 001-16703 utilizing the Edgar system. Accordingly, all information contained in such Form 10-SB including financial statements and exhibits thereto may be obtained at the SEC's web site at http:\\www.sec.gov.

Employees

The Company as of June 30, 2001 has 11 employees (and 1 consultant who handles filing of EPA registrations), inclusive of its 2 officers (each of whom are also directors). 2 of such persons are engaged in research and development, 2 are in marketing and sales and 4 of such persons are engaged in shipping, administrative and clerical functions with the other 2 persons being the Company's two full-time officers (Timothy C. Moses and Angela B. Howell). In addition to the 2 named officers who are also directors the Company has 3 additional directors.

Licensing and International Agreements

The Company has developed several international agreements that encompass licensing agreements and highlight Bioshield's global presence. For example (a) a customer, based in the U.S., has an exclusive agreement with Bioshield to distribute a proprietary line of cleaner/biostat products (incorporating BSTI 3651) for the automotive after-market in Japan, (b) in Mexico, non-woven wiping cloths produced by Milyon incorporate Bioshield's active agent to inhibit the growth of bacteria and mold on the wet cloth during household use, (c) distribution agreements signed with major sailcloth producers provide coverage in the Americas, Europe and Asian regions in the marine industry and (d) a global distribution alliance involves the agreement with Southchem to distribute Bioshield products to the textile industry. Southchem's parent company is Brenntag AG, a German company with a major global presence in the chemical industry.

The Company has also entered into additional agreements with specialty chemical companies in its efforts to achieve national distribution. Bioshield believes there is a significant potential volume in these agreements that may derive potential substantial revenues and licensing opportunities and growth although no assurance can be given.

Agreement with Megastar Universal Unlimited ("Megastar")

In February 2001 Bioshield announced that Megastar Universal Unlimited, a Chinese conglomerate, signed a two year distribution agreement with Bioshield to sell Bioshield products in South-East Asia with Megastar being required to meet certain agreed to minimum purchase requirements. In accordance therewith an order was placed (in June 2001) for $300,000 worth of the Company's patented antimicrobial. The agreement allows Megastar to utilize its own sub-distributors to further increase opportunities for sales with Bioshield retaining the right to approve sub-distribution agreements. Megastar will be able to grant the right to other companies within the territory assigned to produce different products using Bioshield's patented technology AM500 or 1860.

Megastar indicated that it plans to commit $2 million dollars to a vigorous marketing campaign of Bioshield products through their newly formed subsidiary Megastar Bioshield, L.L.C., a Hong Kong corporation.

Selected 2001 Milestones and Web Site

In December 2000/January 2001 the Company conducted a private placement of $500,000 which was comprised of the sale of units consisting of shares of common stock at $0.25 per share and a promissory note equal to the dollar amount of the investment with the latter being due 12 months from date of issuance. Bioshield retained the right to convert the note into common stock at a 25% discount from market at the then current price of the common stock on the one year anniversary date of the February 15, 2001 closing of the private placement.

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In January 2001 Bioshield announced that it had shipped its EPA registered antimicrobial product to be incorporated in concrete sewers for the city of Atlanta. To Bioshield's knowledge, this marks the first time that an EPA approved antimicrobial product has been ordered for use in a federal or state funded project to repair concrete sewer pipes. Application of the Bioshield antimicrobial product is designed to help protect the concrete infrastructure from damage caused by organisms. Shipment of the product for this project was preceded by an 18 month compliance study conducted in house to prove the effectiveness of the product in this type of application.

In May 2001 the Company signed a purchase agreement with Ken Barlow International, a firm based in Virginia which calls for an initial purchase of Bioshield's patented antimicrobial products AM 500 for cleaning and restoration of the Pentagon, one of the most important and one of the largest buildings in the world.

In June 2001 Bioshield announced receipt of a one year loan for $500,000 from a corporate investor represented by a promissory note bearing interest at the rate of 10% per annum.

In order to keep both shareholders and the investment community informed of current Company business activities as well as progress with respect thereto, the Company has established a web site:
http://www.bioshield.com/about_bio`shield/index.html. Bioshield patents can be viewed online at: http://www.delphion.com by either conducting a search on the name Bioshield or entering the number of the patent: US06113815, US05954869 or US06120587.

ITEM 2. DESCRIPTION OF PROPERTY

During fiscal year 2000, the Company, entered into a contract to lease 55,300 square feet in a free standing building in a high-tech executive office park located at 5655 Peachtree Parkway Norcross, Georgia. In December 2000 the Company relocated back to its offices at its research and development center located at 4405 International Blvd., Suite B109, Norcross, Georgia as part of its ongoing efforts to reduce overhead and operating expenses. This 6,900 square foot facility contains necessary offices, conference rooms and an organic chemistry laboratory with biological storage area. At the present time management believes that its current facilities are adequate for its present needs. See also notes to financial statements with respect to term of lease and commitments thereunder.

ITEM 3. LEGAL PROCEEDINGS

On September 7, 2000, AHT Corporation ("AHT") filed suit against the Company and certain of its officers and directors in the Superior Court of Fulton County, Georgia (the "Georgia Action") alleging breach of a June 30, 2000 acquisition agreement and related common laws claims and seeking damages in excess of $70,000,000. On September 21, 2000, the Company filed its Answer and Counterclaim. On September 22, 2000, AHT filed, in the U.S. Bankruptcy Court for the Southern District of New York, a petition for relief under Chapter 11 of the Federal Bankruptcy Code. Following the filing of its Chapter 11 petition, AHT filed a motion seeking approval of an asset purchase agreement dated as of September 22, 2000 (the "APA"), which provided, for the sale of substantially all of AHT's assets to the Company and AHT Acquisition Corp. for approximately $15,000,000. Such sale is subject to Bankruptcy Court approval.

Pursuant to a Debtor in Possession ('DIP") Financing, Escrow and Settlement Agreement dated as of September 22, 2000, which was approved by the Bankruptcy Court, the Company agreed to provide approximately $1.5 million in postpetition financing to AHT. That agreement also provided for the dismissal of the Georgia Action with prejudice, subject to certain conditions contained therein.

-14-

At September 30, 2000, AHT had requested and received $378,338 from the Company under the DIP financing arrangement. Subsequent to September 30, 2000, AHT had requested and received an additional $1,121,662 under the DIP financing agreement.

The Bankruptcy Court had initially scheduled a hearing to approve the APA for November 8, 2000. However, due to the decline in the Company's stock price, in early November, the Company notified AHT that it would need additional time beyond November 8, 2000 to obtain sufficient capital to acquire AHT's assets. The Bankruptcy Court did not approve the APA on November 8, 2000. Rather, on November 21, 2000, the Bankruptcy Court approved the sale of substantially all of AHT's assets to Cybear, Inc.

On November 28, 2000, AHT Acquisition Corp. commenced a new lawsuit (in its Bankruptcy case) against the Company, as well as the other defendants in the Georgia Action. The prepetition claims asserted and relief sought in that action are essentially the same as the claims and relief sought in the Georgia Action. The lawsuit in the bankruptcy case also alleges breach of the APA and seeks damages related to the APA, and to equitably subordinate the Company's $1.5 million claim against AHT relating to the postpetition advances made by the Company to AHT under the DIP Financing, Escrow and Settlement Agreement. On February 9, 2001, the Company filed an answer and counterclaim and intends to vigorously defend the action. Motions to dismiss the action and/or abstain from hearing the action have been denied and the parties are currently engaged in discovery proceedings under Bankruptcy Order that same be concluded by October 31, 2001.

In the matter entitled Edward U. Miller v. BioShield Technologies, Inc., Superior Court of Gwinnett County, Georgia, Civil Action No. 01-A-0096103, a former COO of the Company ("plaintiff") has brought action against the Company alleging breach of the plaintiff's employment agreement by the Company and claims that he is entitled to severance pay in the amount of approximately $80,000 following his termination on December 5, 2000. The Company disputes this claim and has filed a counterclaim against the plaintiff for violation of his fiduciary duties to the Company. The matter is currently in the discovery phase of litigation with the expectation that (absent settlement) trial will commence in early 2002.

In the matter entitled Douglas Calvert v. BioShield Technologies, Inc., Superior Court of Gwinnett County, Georgia, Civil Action No. 01-A-102272-4, a former employee of the Company ("plaintiff") has brought action against the Company alleging breach of employment contract. The plaintiff claims that the Company wrongfully refused to pay him severance pay of $28,558 following his termination on December 5, 2000. The Company has admitted that severance pay is due and owing and continues to seek a realistic payment play to pay out the sum owed.

In the matter entitled Bioshield, Inc. v. BioShield Technologies, Inc., United States District Court, Eastern District, Michigan, Civil Action No. 00-CV-10181-BC, a Michigan corporation has brought a trademark violation suit against the Company, which claims superior right to the use of the "Bioshield" name and claims damages in an amount not less than $75,000. The Company denies the claims and has filed a counterclaim for damages for infringement upon the Company's intellectual property. The Company intends to vigorously defend the action.

In the matter of Duke Construction Limited Partnership v. Bioshield Technologies, Inc., American Arbitration Association Arbitration No. 30-110-00023-01, Superior Court of Gwinnett County, Civil Action No. 01-A-7161-5, Duke Construction received its arbitration award in the amount of $219,000 on June 8, 2001. On July 18, 2001, Duke Construction filed a complaint in the Superior Court of Gwinnett County seeking confirmation of the award. The Company is contesting approximately $5,000 of interest, which was included in the award. Settlement negotiations regarding the payment of this judgement are ongoing.

In the matters of Jamestown Management Corp. v. Bioshield Technologies, Inc., Mountain National Bank (garnishee) and Summit Marketing Group, Inc. v. Bioshield Technologies, Inc., Mountain National Bank (garnishee), Jamestown received condemned funds as a result of the garnishment it filed in DeKalb County, as well as the garnishment filed by Summit in Gwinnett County with a principal amount of $78,699 remained outstanding on this judgement as of August 15, 200l.

Summit was involved in two garnishment actions, one filed in DeKalb County by Jamestown and the other filed in Gwinnett County by Summit. Summit received a total of $29,201 under the garnishments and has indicated that $36,000 remained outstanding on Summit's judgement, including interest as of August 15, 2001.

See also notes to audited financial statements.

-15-

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

On August 16, 2000 NASDAQ staff notified the Company that it had not held an Annual Meeting for fiscal year ended June 30, 1999 as required by certain cited NASDAQ Marketplace Rules. Thereafter, the Company subsequently postponed its Annual Meeting scheduled to be held November 20, 2000 and then again postponed such Meeting on the adjourned date of December 15, 2000 due to its failure to obtain a quorum.

The Company thereafter filed preliminary Proxy material on April 27, 2001 for an Annual Meeting tentatively scheduled to be held on June 11, 2001. A number of proposals tentatively scheduled to be submitted to stockholders for approval (in an effort to comply with certain NASDAQ requirements) subsequently became moot, partially as a result of May 8, 2001 NASDAQ delisting. Thereafter and in response to SEC comment letter dated June 8, 2001 the Company advised the Commission (on July 31, 2001) that owing to the passage of time and the significant additional costs involved, it had determined not to hold an Annual Meeting for Stockholders for fiscal year ended June 30, 2000 but rather to take such steps as are necessary so as to hold an Annual Meeting of Stockholders for fiscal year ended June 30, 2001 in as timely a manner as possible and in such manner so as to be able to include its Annual Report for fiscal year ended June 30, 2001 in its mailing to stockholders.

The Company currently intends to hold its Annual Meeting for fiscal year ended June 30, 2001 in late December, 2001. The proposed agenda currently consists of such standard items as (a) nominations to the Company's Board of Directors and (b) ratification of the Company's auditors. Additional proposals for stockholder consideration (including a proposal to increase authorized shares of common stock) are currently under consideration. Once a specific agenda and meeting date has been established, all stockholders of record, as of the chosen record date, will be notified through mailing of necessary Proxy material accompanied by an Annual Report with the latter including the Company's audited financial statements (as contained in this 10-KSB).

-16-

                                     PART II

ITEM 5.           MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

         (a)      Market Information

         The Registrant's common stock, no par value (the "Common Stock") was
listed on the Nasdaq SmallCap Market and traded under the symbol BSTI until May
8, 2001 delisting (2). Since May 8, 2001 the Company's common stock has been
trading on the Electronic Over-the-Counter Bulletin Board under the same symbol.
The following table sets forth, for the periods indicated, the range of high and
low bid prices on the dates indicated for the Registrant's securities indicated
below for each full quarterly period within the two most recent fiscal years (if
applicable) and any subsequent interim period for which financial statements are
included and/or required to be included.

Fiscal Year Ended June 30, 2000     Quarterly Common Stock Price
           By Quarter                        Ranges (1)
Quarter    Date                            High       Low
-------    ----                           ------     -----
1st .......September 30, 1999.............$19.56     $8.750
2nd .......December 31, 1999..............$12.00     $6.563
3rd .......March 31, 2000.................$40.00     $7.250
4th .......June 30, 2000..................$26.37     $9.500

Fiscal Year Ended June 30, 2001     Quarterly Common Stock Price
           By Quarter                        Ranges (1)
Quarter    Date                            High       Low
-------    ----                           ------     -----
1st .......September 30, 2000             $13.25     $7.250
2nd .......December 31, 2000              $ 9.87     $0.125
3rd .......March 31, 2001                 $ 0.81     $0.125
4th .......June 30, 2001                  $ 0.55     $0.188

(1)      The following statement specifically refers to the Common Stock
activity, if any, prior to and subsequent to NASDAQ delisting. The existence of
limited or sporadic quotations should not of itself be deemed to constitute an
"established public trading market." All prices indicated since May 8, 2001 are
as reported to the Registrant by broker-dealer(s) making a market in its common
stock in the Electronic Over-the-Counter Bulletin Board. During the indicated
periods of time the Registrant's Common Stock was not traded or quoted on any
automated quotation system other than as indicated herein. The market quotes
indicated reflect inter-dealer prices without retail mark-up, mark-down or
commission and do not necessarily represent actual transactions.

(2)      On the date of NASDAQ's delisting (May 8, 2001) the common stock price
was $0.55 per share.

         (b)      Holders

         As of the close of business on September 30, 2001 there were 76
stockholders of record of the Registrant's Common Stock and 31,213,446 shares
issued and outstanding.

         (c)      Dividends

         The payment by the Registrant of dividends, if any, in the future rests
within the discretion of its Board of Directors and will depend, among other
things, upon the Company's earnings, its capital requirements and its financial
condition, as well as other relevant factors. The Registrant has not paid or
declared any dividends upon its Common Stock since its inception and, by reason
of its present financial status and its contemplated financial requirements,
does not contemplate or anticipate paying any dividends upon its Common Stock in
the foreseeable future.

         (d)      Nasdaq Delisting

         By letter dated May 7, 2001 (and after oral hearing held on April 19,
2001) NASDAQ determined to delist the Company's securities from the NASDAQ Stock
Market effective with the close of business May 7, 2001.

                                      -17-


ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION OR
PLAN OF OPERATIONS

MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS

BioShield Technologies, Inc. ("BSTI") is a Georgia corporation and was organized in 1995. The Company historically has engaged in research and development, patent filings, regulatory issues and related activities geared towards the sale of its retail, industrial and institutional products. BioShield is currently selling antimicrobial products via licensing and distribution contracts . Many of these products provide long-term killing action of microorganisms responsible for cross contamination and viral contamination, along with inhibiting and controlling the growth of over 100 viral, bacteria, fungi and yeast organisms. The Company has continued to successfully build recognition and market penetration of its recently approved E.P.A. antimicrobial product line.

As a result of certain management decisions and bankruptcy proceedings involving Electronic Medical Distribution, Inc. ("eMD"), a Company subsidiary, referred to herein, BioShield currently operates and produces antimicrobial and biostatic products for use within certain targeted markets (and no longer engages in those business activities in which eMD formerly engaged in). BSTI is currently engaged in sale, distribution, and development of antimicrobial, biostatic, and medical related products for the retail (recently discontinued), industrial and institutional, and Specialty Chemical markets. See also "Establishment of Healthcare Network Solutions, Inc. ("HNS") Subsidiary".

Bioshield founded HNS in April 2001 for the purpose of providing non-medical services to physician practices. It currently owns approximately 52% of all outstanding HNS common stock and expects to own approximately 35% post spin-off with the difference of 17% to be owned by Bioshield shareholders in accordance with Bioshield's September 24, 2001 press release wherein it indicated that it intends to spin-off, to its stockholders and on a 1 for 10 basis, a portion of those shares owned by it in HNS.

HNS filed a Form 10-SB Registration Statement with the Securities and Exchange Commission ("SEC") which provides certain information about HNS, its current and proposed business activities and its management team. The Form 10-SB was filed under SEC on September 27, 2001 under File No. 001-16703 utilizing the Edgar system. Accordingly, all information contained in such Form 10- SB including financial statements and exhibits thereto may be obtained at the SEC's web site at http:\\www.sec.gov.

FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
Years Ended June 30, 2001 and 2000

The Company's revenue increased to $1,500,648 for the fiscal year ended June 30, 2001, from $935,669 for the fiscal year ended June 30, 2000. The increase was attributable to an increase in the distribution and licensing of the Company's core antimicrobial product line and the restructuring of the marketing method in December of 2000. Gross profit of $854,093 for the fiscal year ended June 30, 2001 represents 57% of net sales as compared to $303,298, or 32% of net sales, for the fiscal year ended June 30, 2001. The increase in gross margin is due to a change in the restructuring of the way in which the Company sells its products after changing to a licensing and distribution model to large multi-national corporations. During the third and fourth quarters of fiscal 2001,under the Company's restructuring certain of the Company's customers began purchasing high levels of the Company's antimicrobial products.

The Company's research and development expenses decreased to $338,584 for the year ended June 30, 2001 from $845,465 for the year ended June 30, 2000. The decrease in expenses related primarily to the restructuring of the Company in December 2000.

-17-

Marketing and selling expenses decreased to $547,012 for the year ended June 30, 2001 from $4,405,509 for the fiscal year ended June 30, 2000.

General and administrative expenses increased to $7,324,270 for the year ended June 30, 2001 from $5,141,111for the year ended June 30, 2000. These higher costs related primarily to an increase in personnel and personnel related cost to improve market share.

Interest expense was $958,076 in fiscal year 2001 compared to $ - in fiscal year 2000. The interest expense relates mainly to increased borrowings in fiscal year 2001. .

LIQUIDITY

At June 30, 2001, the Company had cash and cash equivalents totaling $348,605 compared to $6,172,914 at June 30, 2000. The increase in cash of $5,824,309 is primarily due loss from operations and discontinued operations offset by equity financing.

The Company's ability to fund its operating requirements and maintain an adequate level of working capital until it achieves positive cash flows will depend primarily on its ability to borrow money against it's accounts receivable. The Company's failure to generate substantial growth in the sales orders and/or of its antimicrobial and its products; progress in research and development programs; the cost and timing of seeking regulatory approvals of the Company's product under development; the Company's ability to manufacture products at an economically feasible cost; cost in filing, prosecuting, defending and enforcing patent claims and other intellectual property rights and changes in economic, regulatory, or competitive conditions or the Company's planned business could cause the Company to require additional capital. and substantial delay or reduction of the scope of business. In the event the Company must raise additional capital to fund its working capital needs, it may seek to raise such capital through loans or issuance of debt securities, issuance of equity securities, or through private placements. Moreover, there can be no assurance that the Company will be successful in its efforts to obtain additional capital, and that capital will be available on terms acceptable to the Company or on terms that will not significantly dilute the interests of existing shareholders.

FORWARD-LOOKING STATEMENTS

When used in this form 10-KSB, the words or phrases "will likely result", "are expected to," "will continue," "is anticipated," "estimate," "project," or similar expressions are intended to identify "forward looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are subject to certain risks and uncertainties including changes in economic conditions in the Company's market area, changes in policies by regulatory agencies, fluctuations in interest rates, demand for loans in the Company's market area and competition, that could cause actual results to differ materially from historical earnings and those presently anticipated or projected. The Company wishes to caution readers not to place undue reliance on any such Forward- looking statements, which speak only as to the date made. The Company wishes to advise readers that the factors listed above could affect the Company's financial performance and could cause the Company's actual results for future periods to differ materially from any opinions or statements expressed with respect to future periods in any current statements. The Company does not undertake, and specifically disclaims any obligation, to publicly release the result of any revisions which may be made to any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events.

-18-

ITEM 7. FINANCIAL STATEMENTS

BIOSHIELD TECHNOLOGIES, INC. AND SUBSIDIARIES

FINANCIAL STATEMENTS

INDEX

Page Number

INDEPENDENT AUDITORS' REPORT                                                 F-2

CONSOLIDATED FINANCIAL STATEMENTS:

       Balance Sheet at June 30, 2001                                        F-3

       Statements of Operations for the years ended June 30, 2001
         and 2000                                                            F-4

       Statements of Stockholders' Deficit for the two years ended
         June 30, 2001                                                       F-5

       Statements of Cash Flows for the for the years ended
         June 30, 2001                                                       F-6

       Notes to Consolidated Financial Statements                       F-7-F-20

F-1

INDEPENDENT AUDITORS' REPORT

To the Stockholders and Board of Directors BioShield Technologies, Inc. and Subsidiaries

We have audited the accompanying consolidated balance sheet of BioShield Technologies, Inc. and Subsidiaries as of June 30, 2001 and the related consolidated statements of operations, changes in stockholders' deficit and cash flows for the years ended June 30, 2001 and 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 audits.

We conducted our audit in accordance with generally accepted auditing standards 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 audit provides a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of BioShield Technologies, Inc. and Subsidiaries as of June 30, 2001 and the results of its operations, changes in stockholders' deficit and cash flows for the years ended June 30, 2001 and 2000 in conformity with generally accepted accounting principles in the United States of America.

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. The Company incurred losses of $19,992,222 for the year ended June 30, 2001. Additionally, the Company had a working capital deficiency of $3,708,825 at June 30, 2001. These conditions raise substantial doubt about the Company's ability to continue as a going concern. Management's plans with respect to these matters are also described in Note 2 to the financial statements. The accompanying financial statements do not include any adjustments that might result should the Company be unable to continue as a going concern.

                                               /s/Feldman Sherb & Co. P.C.
                                               FELDMAN SHERB & CO., P.C.
                                               Certified Public Accountants

New York, New York
September 14, 2001

F-2

BIOSHIELD TECHNOLOGIES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEET

JUNE 30, 2001

ASSETS

CURRENT ASSETS:

 Cash                                                         $         384,605
 Accounts receivable, net of allowance
  for doubtful accounts of $100,000                                     449,554
 Deferred financing costs                                               626,561
                                                                ----------------
         TOTAL CURRENT ASSETS                                         1,460,720

PROPERTY AND EQUIPMENT                                                  215,110

OTHER ASSETS                                                             11,721
                                                                ----------------

                                                              $       1,687,551
                                                                ================

LIABILITIES AND STOCKHOLDERS' DEFICIT

CURRENT LIABILITIES:

     Accounts payable                                         $       1,089,687
     Notes payable                                                    1,023,329
     Common stock to be issued                                          835,960
     Accrued expenses                                                 2,220,569
                                                                ----------------
         TOTAL CURRENT LIABILITIES                                    5,169,545
                                                                ----------------

OTHER LIABILITY                                                          25,000

MINORITY INTEREST                                                           740

STOCKHOLDERS' DEFICIT:
     Common stock, no par value;
      50,000,000 shares authorized,
      21,847,403 issued                                              29,868,577
     Series B convertible preferred stock                             9,854,500
     Series C convertible preferred stock                             4,100,460
     Additional paid-in capital                                       4,692,810
     Accumulated deficit                                            (51,487,181)
     Less 35,000 shares of common stock
      in treasury - at cost                                            (536,900)
                                                                ----------------
         TOTAL STOCKHOLDERS' DEFICIT                                 (3,507,734)
                                                                ----------------

                                                              $       1,687,551
                                                                ================

See notes to consolidated financial statements.

F-3

BIOSHIELD TECHNOLOGIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

                                                          Year Ended June 30,
                                                     ---------------------------
                                                       2001             2000
                                                     ------------   ------------

NET SALES                                       $      1,500,648    $   935,669
COST OF SALES                                            646,555        632,371
                                                     ------------   ------------
GROSS PROFIT                                             854,093        303,298
                                                     ------------   ------------

OPERATING COSTS AND EXPENSES:
 Marketing and selling                                   547,012      4,405,509
 General and administrative                            7,324,370      5,141,111
 Research and development                                338,584        845,465
                                                     ------------   ------------
                                                       8,209,966     10,392,085
                                                     ------------   ------------

LOSS FROM OPERATIONS                                  (7,355,873)   (10,088,787)
                                                     ------------   ------------

OTHER INCOME (EXPENSES):
     Interest  and dividend income                        55,772        138,003
     Interest expense                                   (958,076)          -
     Other expense                                      (303,610)          -
     Loss on legal settlement                         (1,522,500)          -
                                                     ------------   ------------
      TOTAL OTHER EXPENSES                            (2,728,414)       138,003
                                                     ------------   ------------

NET LOSS FROM CONTINUING OPERATIONS                  (10,084,287)    (9,950,784)
                                                     ------------   ------------

DISCONTINUED OPERATIONS:
     Loss from discontinued operations                (6,794,716)   (14,639,355)
     Loss on disposal                                 (2,522,671)          -
                                                     ------------   ------------
LOSS FROM DISCONTINUED OPERATIONS                     (9,317,387)   (14,639,355)
                                                     ------------   ------------

NET LOSS                                             (19,401,674)   (24,590,139)

INDUCEMENTS FOR ISSUANCE AND REDEMTION OF
     PREFERRED STOCK                                    (590,548)    (1,272,500)
                                                     ------------   ------------

NET LOSS APPLICABLE TO COMMON SHAREHOLDERS      $    (19,992,222)  $(25,862,639)
                                                     ============   ============

BASIC AND DILUTED NET LOSS PER
 COMMON SHARE:
  Continuing operations                         $          (0.84)  $      (1.59)
  Discontinued operations                                  (0.74)         (2.07)
                                                      -----------   ------------
  Net loss to common stockholders               $          (1.58)  $      (3.66)
                                                      ===========   ============

NUMBER OF SHARES USED IN CALCULATING BASIC
     AND DILUTED NET LOSS PER SHARE                   12,639,693      7,066,812
                                                      ===========   ============

See notes to consolidated financial statements.

F-4

BIOSHIELD TECHNOLOGIES, INC. AND SUBSIDIARIES

STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIT

                                                                                   Preferred Stock           Preferred Stock
                                                              Common stock            Series A                   Series B
                                                         ------------------------  --------------------   ---------------------
                                                           Shares       Amount     Shares     Amount       Shares       Amount
                                                         ------------ -----------  -------   ----------   ---------  -----------

Balance - June 30, 1999                                   6,322,315  $  7,336,318     -    $     -            -     $      -

 Net loss                                                      -             -        -          -            -            -
 Unrealized loss on securities                                 -             -        -          -            -            -

 Total comprehensive loss                                      -             -        -          -            -            -


 Proceeds from exercise of stock warrants                 1,644,236     9,053,150     -          -            -            -
 Proceeds from exercise of stock options                     74,263        82,570     -          -            -            -
 Stock warrants issued for services rendered                   -             -        -          -            -            -
 Compensation related to stock options issued                  -             -        -          -            -            -
 Contributions to capital                                      -             -        -          -            -            -
 Proceeds from issuance of shares under preferred
  stock agreements                                             -             -        200    4,000,000        -            -
 Conversion of preferred stock                              213,259     2,000,000    (100)  (2,000,000)       -            -
 Repurchase of preferred stock                                 -             -       (100)  (2,000,000)       -            -
 Repurchase of common stock                                    -             -        -           -           -            -
 Proceeds from issuance of shares under
  credit agreement                                          100,000     2,000,000     -           -           -            -
 Proceeds from issuance of shares under preferred
  stock agreement                                              -             -        -           -           500    10,000,000
                                                          ----------- ------------ -------   ----------   ---------  ----------   --

Balance - June 30, 2000                                   8,354,073    20,472,038     -           -           500    10,000,000

 Net loss                                                      -             -        -           -           -            -
 Realized loss on securities                                   -             -        -           -           -            -
 Issuance of stock in payment of legal fees                 300,000        15,000     -           -           -            -
 Issuance of stock from exercise of options                  99,000       262,500     -           -           -            -
 Compensation related to stock options issued                  -             -        -           -           -            -
 Issuance of stock upon conversion of eMD stock           1,380,308     2,025,800     -           -           -            -
 Proceeds from issuance of shares under
  credit agreement                                        3,527,063     5,299,562     -           -           -            -
 Proceeds from issuance of shares under preferred
  stock conversion                                        1,106,999       145,500     -           -            (7)      (145,500)
 eMd stock converted to Series C preferred                     -             -        -           -           -             -
 Dividend on Series B preferred stock                          -             -        -           -           -             -
 Beneficial conversion feature                                 -             -        -           -           -             -
 Issuance of stock in payment of dividends                  862,833       327,081     -           -           -             -
 Issuance of stock in payment of consulting fees          2,258,157       472,302     -           -           -             -
 Issuance of stock resulting from exercise of warrants       74,000       424,880     -           -           -             -
 Stock based compensation                                 3,884,970       423,914     -           -           -             -
                                                         -----------  ------------ -------   ----------   ---------   --------------


Balance - June 30, 2001                                  21,847,403  $ 29,868,577     -    $      -            493  $  9,854,500
                                                         ===========  ============ =======   ==========   =========   ==============


                                      F-5



                                      Preferred Stock                    Accumulated
                                          Series C         Additional       other                         Common
                                      -----------------     Paid-in       comprehensive    Accumulated   Stock in
                                       Shares     Amount    Capital     earnings (loss)      Deficit     Treasury       Total
                                      ---------- -------  -----------   ---------------    ------------  ----------    ----------

Balance - June 30, 1999                    -   $     -    $  870,900  $     (1,750)      $  (5,632,320)  $    -       $   2,573,148

 Net loss                                  -         -          -             -            (24,590,139)       -         (24,590,139)
 Unrealized loss on securities             -         -          -          (75,250)               -           -             (75,250)
                                                                                                                      --------------
 Total comprehensive loss                  -         -          -             -                   -           -         (24,665,389)


 Proceeds from exercise
   of stock warrants                       -         -          -             -                   -           -           9,053,150
 Proceeds from exercise
  of stock options                         -         -          -             -                   -           -              82,570
 Stock warrants issued
   for services rendered                   -         -     2,161,500          -                                           2,161,500
 Compensation related to
  stock options issued                     -         -       360,200          -                   -           -             360,200
 Contributions to capital                  -         -       100,000          -                   -           -             100,000
 Proceeds from issuance
  of shares under preferred
  stock agreements                         -         -          -             -                251,250)       -           3,748,750
 Conversion of preferred stock             -         -          -             -                   -           -
 Repurchase of preferred stock             -         -          -             -               (300,000)       -          (2,300,000)
 Repurchase of common stock                -         -          -             -                   -       (536,900)        (536,900)
 Proceeds from issuance of
  shares under
  credit agreement                         -         -          -             -                   -           -           2,000,000
 Proceeds from issuance of
  shares under preferred
  stock agreement                          -         -          -             -                (721,250)      -           9,278,750
                                       ---------- -------    -------      --------           ----------   ---------    -------------

Balance - June 30, 2000                    -         -      3,492,600     (77,000)          (31,494,959)  (536,900)       1,855,779

 Net loss                                  -         -           -           -              (19,401,674)      -         (19,401,674)
 Realized loss on securities               -         -           -         77,000                  -          -              77,000
 Issuance of stock
  in payment of legal fees                 -         -           -           -                     -          -              15,000
 Issuance of stock from
  exercise of options                      -         -           -           -                     -          -             262,500
 Compensation related to
  stock options issued                     -         -      1,037,710        -                     -          -           1,037,710
 Issuance of stock upon
  conversion of eMD stock                  -         -           -           -                     -          -           2,025,800
 Proceeds from issuance
  of shares under
  credit agreement                         -         -           -           -                     -          -           5,299,562
 Proceeds from issuance of
  shares under preferred
  stock conversion                         -         -           -           -                     -          -                -
 eMd stock converted to
  Series C preferred                        205   4,100,460      -           -                     -          -           4,100,460
 Dividend on Series B
  preferred stock                          -         -                                         (590,548)      -            (590,548)
 Beneficial conversion feature             -         -        162,500        -                     -          -             162,500
 Issuance of stock in
  payment of dividends                     -         -          -            -                     -          -             327,081
 Issuance of stock in
  payment of consulting fees               -         -          -            -                     -          -             472,302
 Issuance of stock resulting
  from exercise of warrants                -         -          -            -                     -          -             424,880
 Stock based compensation                  -         -          -            -                     -          -             423,914
                                        --------  -----------  ----------   ----------     ------------   ------------  ------------


Balance - June 30, 2001                     205  $ 4,100,460   4,692,810  $    -         $  (51,487,181) $ (536,900)   $ (3,507,734)
                                        ========  ===========  ==========   ==========     =============   ===========  ============

See notes to consolidated financial statements.

F-5

BIOSHIELD TECHNOLOGIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

                                                                      Year Ended June 30,
                                                              ---------------------------------------
                                                                    2001                 2000
                                                             ------------------   ------------------

CASH FLOWS FROM OPERATING ACTIVITIES:
     Net loss                                             $       (10,084,287) $        (9,950,784)
                                                             ------------------   ------------------
     Adjustments to reconcile net loss to net cash used
         in operating activities:
            Loss from discontinued operations                      (6,794,716)         (14,639,355)
            Loss on disposal of dicontinued operations             (2,522,671)            (479,507)
            Depreciation and amortization                             378,977              984,912
            Issuance of stock, stock options and stock
                 warrants for services rendered                     1,933,926            2,521,700
            Preferred stock issued for conversion of eMD            2,253,426                    -

     Changes in assets and liabilities:
         (Increase) decrease in:
            Accounts receivable                                       256,659              (96,584)
            Inventory                                                 103,456               47,947
            Prepaid expenses and other current assets                 106,160               14,633
            Deposits and other assets                                   6,998               98,107
         Increase (decrease) in:
            Accounts payable                                          701,220              509,081
            Officer loan payable                                            -              110,000
            Accrued liabilities and payroll                           848,348            1,851,929
            Other liability                                            25,000                    -
                                                              ------------------   ------------------
NET CASH USED IN OPERATING ACTIVITIES                             (12,787,504)         (19,027,921)
                                                              ------------------   ------------------

CASH FLOWS FROM INVESTING ACTIVITIES
     Capital expenditures                                             (45,247)          (5,131,646)
                                                              ------------------   ------------------
NET CASH USED IN INVESTING ACTIVITIES                                 (45,247)          (5,131,646)
                                                              ------------------   ------------------

CASH FLOWS FROM FINANCING ACTIVITIES:
     Contribution to capital                                                 -              100,000
     Proceeds from stock warrants exercised                            424,880            9,053,150
     Proceeds from stock options exercised                             262,500               82,570
     Proceeds from issuance of Series A preferred stock, net                 -            3,748,750
     Redemption of Series A preferred stock                                  -           (2,300,000)
     Proceeds from issuance of Series B preferred stock, net                 -            9,278,750
     Proceeds frm common stock issuances, net                                -            2,000,000
     Proceeds from issuance of  stock under credit agreement         5,299,562                    -
     Proceeds from private placement                                   487,500                    -
     Proceeds from note issuance                                       500,000                    -
     Proceeds from shareholder notes                                    34,000                    -
     Repurchase of common stock for the treasury                             -             (536,900)
     Proceeds from common stock issuances of subsidiary, net                 -            6,405,600
                                                                ----------------     ------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES                            7,008,442           27,831,920
                                                                ----------------     ------------------

INCREASE (DECREASE) IN CASH                                         (5,824,309)           3,672,353

CASH - BEGINNING OF YEAR                                             6,172,914            2,500,561
                                                                ----------------     ------------------

CASH - END OF YEAR                                         $           348,605  $         6,172,914
                                                                ================     ==================

SUPPLEMENTAL DISCLOSURE OF CASH FLOW
     INFORMATION:

     Cash paid during the period for interest               $                 -  $                 -
                                                                ================     ==================


Non-cash investing and financing activities

                 See notes to consolidated financial statements.

                                       F-6


BIOSHIELD TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2001 AND 2000

NOTE 1 - NATURE OF OPERATIONS

BioShield Technologies, Inc. ("BSTI"), was incorporated on June 1, 1995 under the laws of the state of Georgia. BSTI was formed to develop, manufacture and distribute certain antimicrobial agents and products. BSTI continues to develop distribution channels for these products throughout the United States and internationally.

On April 27, 1999, BSTI acquired 99% of the outstanding common stock of a newly formed entity, Allergy Superstore.com, Inc. which name was subsequently changed to Electronic Medical Distribution, Inc. ("eMD"). eMD was formed to develop electronic commerce via the Internet. eMD launched its consumer and physician web site during January 2000.

On January 31, 2001, eMD filed petitions for relief under Chapter 11 of the federal bankruptcy laws in the United States Bankruptcy Court for the Northern District of Georgia. On August 29, 2001 the Chapter 11 filing was changed to Chapter 7 of the Bankruptcy Code in accordance with a motion filed with the Court on July 9, 2001. The financial statements have been adjusted to reflect the Chapter 7 filing. Accordingly, all assets and liabilities of eMD have been written off effective June 30, 2001 and all operations have been recorded as discontinued.

On April 23, 2001 the Company formed Healthcare Network Solutions, Inc. ("HNS"). HNS was incorporated under the laws of the state of Delaware. HNS is in the business of providing non-medical services to physicians. These services are intended to include billing and scheduling, supply ordering, personnel staffing, marketing and providing access to patient information services.

NOTE 2 - GOING CONCERN

The accompanying financial statements have been prepared assuming the Company will continue as a going concern. The Company has experienced significant losses since its inception and there is substantial doubt that it will be able to continue as going concern without additional funding. In the year ended June 30, 2001, the Company raised an additional $6,474,442 in equity financing and management intends to continue to seek additional financing to fund its operations, although there can be no assurances that any such financing will be available. The financial statements do not include any adjustments that might be necessary should the Company be unable to continue as a going concern.

F-7

NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

1. Basis of presentation

The consolidated financial statements include the accounts of BSTI, and its majority-owned subsidiaries, eMD and HNS (collectively, the "Company"). All material intercompany accounts and transactions have been eliminated in the consolidated financial statements.

2. Cash and cash equivalents

The Company considers all highly liquid debt instruments with a maturity of three months or less to be cash equivalents. The carrying value of cash and cash equivalents approximates fair value due to the relatively short-term nature of the instruments.

3. Marketable securities

The Company categorizes marketable securities as available-for-sale securities, as defined by Statement of Financial Accounting Standards No. 115, Accounting for Certain Investments in Debt and Equity Securities. A separate component of stockholders' equity reports the net amount of unrealized holding gains and losses until realized.

4. Impairment of long - lived assets

In the event that facts and circumstances indicate that the cost of an asset may be impaired, an evaluation of recoverability would be performed. If an evaluation is required, the estimated future undiscounted cash flows associated with the asset would be compared to the asset's carrying amount to determine if a write-down to market value is required. At June 30, 2001, the Company believes that the balance of long - lived assets in the accompanying balance sheet are appropriately valued.

5. Property, equipment and depreciation

Property and equipment are recorded at historical cost. Depreciation is provided for in amounts sufficient to relate the cost of depreciable assets to operations over their estimated service lives on a straight-line basis. Depreciation expense related to property and equipment charged to operations was approximately $115,000 and $276,000 for the years ended June 30, 2001 and 2000 respectively.

Estimated service lives are as follows:

Office equipment                                      3 years
Machinery, leasehold improvements,
  furniture and equipment                          5-10 years

F-8

6. Use of estimates in the preparation of financial statements

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and 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 these estimates.

7. Revenue recognition

The Company follows the guidelines of SEC Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements". The Company recognizes revenue and provides for the estimated cost of returns and allowances in the period the products are shipped and title transfers to the customer.

8. Income taxes

The Company accounts for income taxes using the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates applied to taxable income. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is provided for deferred tax assets when it is more likely than not that the asset will not be realized.

9. Research and development costs

The costs of research and development include, among other things, consumable supplies and materials to be used for the development of the Company's intended products, and the cost of testing and consulting related to filing with the Environmental Protection Agency (EPA) and patent filings. Research and development costs are expensed when incurred and amounted to $338,584 and $845,465 for the years ended June 30, 2001 and 2000 respectively.

10. Advertising costs

The Company expenses the cost of advertising the first time advertising takes place. Costs of developing advertising materials are expensed at the time the advertising materials are produced and distributed to customers. Advertising expense was $632,429 and $1,757,219 for the years ended June 30, 2001 and 2000 respectively.

F-9

Included in advertising expense was $606,655 and $987,312 of slotting fees paid to retailers or their agents for the year ended June 30, 2001 and 2000, respectively.

11. Loss per common share

Basic loss per common share has been calculated using the weighted average number of shares of common stock outstanding during each period. Diluted loss per common share is not disclosed because the effect of the exchange or exercise of common stock equivalents would be antidilutive.

At June 30, 2001, options and warrants for the purchase of shares of BSTI were outstanding and are potentially dilutive.

12. Stock-based compensation

Financial Accounting Statement No. 123, Accounting for Stock Based Compensation, encourages, but does not require companies to record compensation cost for stock-based employee compensation plans at fair value. The Company has chosen to continue to account for stock-based compensation using the intrinsic method prescribed in Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations. Accordingly, compensation cost for stock options is measured as the excess, if any, of the quoted market price of the Company's stock at the date of the grant over the amount an employee must pay to acquire the stock.

13. Fair value of financial instruments

The Company's financial instruments include cash, marketable securities, accounts receivable and accounts payable. Because of their short maturities, the carrying amount approximates fair market value.

14. Shipping and handling costs

The Company accounts for shipping and handling costs as a component of "Cost of Sales".

15. New accounting pronouncements

The Company has adopted Statement of Financial Accounting Standard No. 133 ("SFAS No. 133"), "Accounting for Derivative Instruments and Hedging Activities" for the year ended June 30, 2001. SFAS No. 133 establishes a new model for accounting for derivatives and hedging activities and supersedes and amends a number of existing standards. The application of the new pronouncement did not have a material impact on the Company's financial statements.

F-10

In March 2000, the Financial Accounting Standards Board issued FASB Interpretation No. 44, "Accounting for Certain Transactions Involving Stock Compensation, an Interpretation of APB Opinion No. 25". With the exception of certain provisions that required earlier application, this interpretation is effective for all applicable transactions beginning July 1, 2000. The adoption of this interpretation did not have a material impact on the Company's consolidated financial statements.

In 2000, the Emerging Issues Task Force ("EITF") of the FASB issued EITF Issue No. 00-2, "Website Development Costs," which established guidelines for accounting for website development costs and became effective for quarters beginning after June 30, 2000. The adoption of EITF Issue No. 00-2 did not have a significant effect on the Company's financial statements.

In June 2001, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards No. 141, Business Combinations, and No. 142, Goodwill and Other Intangible Assets, effective for fiscal years beginning after December 15, 2001. Under the new rules, goodwill and intangible assets deemed to have indefinite lives will no longer be amortized but will be subject to annual impairment tests in accordance with the Statements. Other intangible assets will continue to be amortized over their useful lives. The Company will apply the new rules on accounting for goodwill and other intangible assets beginning in the first quarter of 2002. Application of the non-amortization provisions of the Statement is not expected to have a material effect on the Company's financial position or operations.

NOTE 4 - PROPERTY AND EQUIPMENT

Property and equipment consist of the following:

                                                            June 30,
                                                              2001
                                                          -----------
Capitalized software                                        $ 135,000
Office furniture and equipment                                178,515
Machinery and equipment                                        97,995
Leasehold improvements                                         40,544
                                                          -----------
                                                              452,054
Less accumulated depreciation                                 236,944
                                                          -----------
                                                            $ 215,110
                                                              =======

F-11

NOTE 5 - NOTES PAYABLE

(a) As of June 30, 2001, the Company had borrowed funds from two shareholders, one a current officer and the other a former officer, amounting to $154,000. The loans are non-interest bearing and payable on demand.

(b) On December 15, 2000, the Company conducted a private placement which was comprised of the sale of units consisting of shares of common stock and a promissory note equal to the dollar amount of the investment; with the latter being due 12 months from the date of issuance. The unit holder at his option can convert such note at a 25% discount based on the cost average closing cost of the common stock for the twenty business days prior to conversion. Cash totaling $487,500 was received under this placement but the stock was not issued until July 18, 2001. Accordingly this amount which bears interest at 6% per annum is showed in the financial statements as notes payable. In addition the beneficial feature on the note amounting to $162,500 has been recorded as is being amortized over the life of the note. Furthermore the stock that was issued subsequent to year end, having a fair market value on the date that the funds were received, of $835, 960 has been recorded as common stock to be issued and as deferred financing costs The deferred financing costs are being amortized over the life of the respective note.

(c) On June 19, 2001, the Company borrowed $500,000 from Jackson LLC. The loan bears interest at 8% per annum and is payable on demand.

NOTE 6 - COMMITMENTS AND CONTINGENCIES

Operating Leases

The Company leases certain office and operating facilities and certain equipment under operating lease agreements that expire on various dates through 2003 and require the Company to pay all maintenance costs. Rent expense under these leases was $128,094 and $481,592 for the years ended June 30, 2001 and 2000 respectively.

Commitments under noncancelable operating leases including leases entered into after June 30, 2001 are summarized as follows:

Fiscal Year:
     2002                                 $ 55,000
     2003                                   56,000

Employment Agreements

On December 1, 2000 the Company signed an employment agreement with the chief executive officer of BSTI expiring December 12, 2005. The agreement provides for an annual base salary of $250,000, an annual performance bonus not to exceed 100% of base salary per year but in no case less than 30% of base and/or up to $2,000,000 in stock incentive plan, and a severance package in the event of termination other than for cause or good reason as defined within the agreement. The agreement also provides for, amongst other things (a) the issuance of 2,000,001 immediately vesting options to purchase a like number of shares at $0.05 per share, (b) certain fringe benefits relating to health, life and disability insurance coverage and (c) permits the Company to terminate the agreement without cause, in which event it is required to compensate the chief executive officer for the full 5 year term. The agreement is automatically renewed each year on December 1, commencing December 1, 2001.

F-12

Employment Termination Agreement

On June 21, 2000, the Executive Vice President and Co-Chairman of the Board of Directors of BSTI resigned. Effective August 1, 2000, the Company entered into a semi-retirement agreement with the former officer. Under this agreement, the Company must pay the former officer $25,000 upon execution of the agreement, $30,833 per month for twelve months, followed by $20,833 per month for thirty months for consulting services to be rendered over the term of the agreement. Additionally, the Company must provide health, dental, life insurance and disability benefits on the same basis as he received prior to his resignation and an automobile allowance of $1,500 per month and a stipend of $1,500 per month for an executive suite for 42 months. Furthermore, the former officer will receive options to purchase 150,000 shares of BSTI common stock at $24.414 per share. As of June 30, 2001 the Company has accrued and recognized all future payments due under this agreement.

Litigation

The former COO ("plaintiff") of the Company has brought action against the Company alleging breach of the plaintiff's employment agreement by the Company. The plaintiff claims that the Company refused to pay him severance pay in the amount of approximately $80,000 following his termination on December 5, 2000. The Company disputes this claim and has filed a counterclaim against the plaintiff for violation of his fiduciary duties to the Company. The matter is currently in the discovery phase of litigation.

A former employee ("plaintiff") of the Company has bought action against the Company alleging breach of employment contract. The plaintiff claims that the Company wrongfully refused to pay him severance pay of $28,558 following his termination on December 5, 2000. The Company has admitted the severance pay is due and owing and continues to seek a realistic payment plan to pay out the sum owed.

A Michigan corporation has brought a trademark violation suit against the Company, which claims superior right to the use of the "Bioshield" name and claims damages in an amount not less than $75,000. The Company denies the claims and has filed a counterclaim for damages for infringement upon the Company's intellectual property.

Duke Construction Limited Partnership ("Duke") received its arbitration award in the amount of $219,000 on June 8, 2001. On July 18, 2001, Duke filed a complaint in the Superior Court of Gwinnett County seeking confirmation of the award. The Company is contesting approximately $5,000 of interest, which was included in the award. Settlement negotiations regarding the payment of this judgement are ongoing. Such amount has been included in accounts payable at June 30, 2001.

Jamestown Management Corp. received condemned funds as a result of the garnishment against the Company it filed in DeKalb County, as well as the garnishment filed by Summit in Gwinnett County. Jamestown's counsel has advised that a principal amount of $78,699 remained outstanding on this judgement as of August 15, 2001.

AHT Corporation ("AHT") asserts several claims including claims that: (a) the Company breached a June 30, 2000 Merger Agreement to acquire AHT; (b) the Company breached a September 22, 2000 Asset Purchase Agreement to acquire certain assets of AHT; (c) the Company and others fraudulently induced AHT to enter in to the Merger Agreement; and (d) the Company's $1.5 million advances to AHT should be equitably subordinated. AHT seeks in excess of $20 million in damages and $50 million in punitive damages.

F-13

The Company has filed an answer to the complaint in which it has denied all material allegations therein. The Company has also asserted counterclaims including claims that (a) AHT breached the merger agreement; (b) AHT fraudulently induced the Company to enter into the Merger Agreement; (c) AHT acted with fraudulent intent concerning the merger agreement; and (c) AHT breached the Debtor-in-Possession Financing, Escrow and Settlement Agreement dated as of September 22, 2000, pursuant to which the Company advanced $1.5 million to AHT and obtained a security interest in and lien upon AHT's assets, subordinated to existing liens, and a superiority administrative expense claim in AHT's bankruptcy case. The Company has informed us that it does not believe it is liable for any injuries or damages AHT may have suffered and it intends to vigorously defend this action. The Bankruptcy Court denied a motion previously made by the Company and other defendants to dismiss the action. A motion made by the Company and the other defendants requesting that the Bankruptcy Court abstain from the hearing the action was also denied. The parties are currently engaged in discovery. The Bankruptcy Court has directed that discovery be completed by October 31, 2001.

NOTE 7 - STOCKHOLDERS' DEFICIT

BSTI has 10,000,000 authorized shares of preferred stock, in accordance with its Articles of Incorporation. During the year ended June 30, 2000, 200 shares were designated as Series A Convertible Preferred Stock ("Series A"), 500 shares were designated as Series B Convertible Preferred Stock ("Series B"). All Series have a stated value of $20,000 per share, convey no voting rights and are convertible into BSTI common stock at the options of the holder. The Series A conversion rate is based on 80% of the average market price of BSTI common stock twenty days preceding the conversion date and provides for a 4% cumulative return. The Company may redeem Series A shares at 105% of the stated value within 30 days of issuance, at 110% of the stated value from 31 to 120 days of issuance, and at 120% of stated value thereafter. The Series B conversion rate is based on the lesser of $19.70 per share or 90% of the lowest average market price of BSTI common stock for any three days in any ten consecutive trading days preceding the conversion date and provides for a 5% cumulative return.

In January 2000, 200 shares of Series A were issued for $4,000,000. In April 2000, BSTI redeemed 100 of these shares for $2,300,000. The remaining 100 shares were converted into 213,259 shares of BSTI common stock in June 2000. The discount of $251,250 on issuance and the excess of the redemption price over the carrying amount are included in the statement of operations as an increase in the loss applicable to common shareholders.

F-14

In June 2000, 500 shares of Series B were issued for $10,000,000 and are convertible until June 14, 2003. As of June 30, 2001, 493 shares are outstanding. The discount of $751,250 on issuance is included in the statement of operations as an increase in the loss applicable to common shareholders.

During the year ended June 30, 2001, 500 shares were designated as Series C Convertible Preferred Stock ("Series C"). The Series C has a stated value of $20,000 per share, conveys no voting rights and is convertible into BSTI common stock at the options of the holder. The Series C conversion rate ranges from $1.50 to $2.00 per share commencing one year from date of agreement and at market thereafter.

In June 2001, 205 - shares of Series C were issued in exchange for the guaranty of conversion of EMD common into shares of Bioshield including interest and penalties. Such amount, $4,100,460 were converted into this Series.

On June 30, 1999, EMD, BSTI, and certain investors entered into a securities purchase agreement whereby EMD would sell up to an aggregate of 3,218,884 shares of common stock to the investors at a price of $4.67 per share. As of June 30, 2001, investors had purchased 1,284,797 shares for an aggregate purchase price of approximately $6,000,000 under this agreement.

The securities purchase agreement provides for a conversion feature which allows the holder of EMD common stock to exchange their shares for BSTI common stock at a predetermined exchange rate provided EMD has not consummated an initial public offering within twelve months of the purchase of stock under this agreement. Since EMD did not consummate an initial public offering the investors have moved to exercise their conversion rights. In response Bioshield has issued 205 shares of Series C convertible preferred stock to one investor in full satisfaction and accrued $817,860 included in accrued expenses to reflect its obligation to the other investors.

F-15

NOTE 8 - ACCRUED EXPENSES

Accrued expenses consisted of the following at June 30, 2001:

Accrued interest                          $             317,285
Accrued dividends                                       263,467
Compensation                                            198,556
Guaranty for emd stock                                  817,860
Other                                                    13,431
                                               -----------------
                                          $           1,610,569
                                               =================

NOTE 9 - STOCK OPTIONS AND WARRANTS

The Board of Directors of BSTI has approved three stock options plans. Under the 2001Non-Statutory Stock Option Plan, the Company may grant options for up to 14,000,000 shares to officers, directors, employees, consultants, attorneys and advisors to the Company. Options are non-qualified. Options vest at the discretion of the Board of Directors. The exercise price of options granted must equal at least 10% of the market value of such share on date of grant. The maximum term of an option is ten years. Under the 1997 Stock Incentive Plan, the Company may grant options to officers and key employees for up to 1,200,000 shares of common stock. This plan provides for the expiration of options ten years from the date of grant, with the exception of options issued to an over 10% owner, for which expiration is five years from the date of grant. The exercise price of options granted must equal at least 100% of the market value, or 110% of the market value for over 10% owners, on the date granted. Under the 1996 Directors' Stock Option Plan, the Company may grant options to directors of the Company for up to 1,000,000 shares of common stock. This plan provides for options to be immediately exercisable and provides for the expiration of options five years from the date of grant. Options are granted at market value at the date of grant.

Employee stock option transactions for BSTI for the years ended June 30, 2001 and 2000 are summarized as follows:

                                      Year ended               Year ended
                                     June 30, 2001            June 30, 2000
                                 --------------------       -------------------
                                             Weighted                  Weighted
                                             average                    average
                                             exercise                  exercise
                                  Shares       price        Shares        price
                                 ---------   --------      ---------    --------
Outstanding, beginning of
  year                            640,500     $ 7.41        820,000     $  5.87
  Granted                       6,967,357        .25        173,500       10.56
  Exercised                    (6,542,127)        -        (153,000)       4.15
  Forfeited                      (312,500)       7.41      (200,000)       6.30
                                 --------       -------    --------      -------
   Outstanding, end of year       753,230     $  2.50       640,500     $  7.41
                                  ======         ====        ======        ====

   Options exercisable at year end                                  753,230

   Weighted average fair value of options granted during 2001     $    2.50

F-16

The following table summarizes information about employee stock options for BSTI outstanding at June 30, 2001:

       Options Outstanding                                Options Exercisable
-------------------------------------  -----------------------------------------
                                        Weighted     Weighted
 Range of     Number        Average      Average     Number        Weighted
Exercise   Outstanding at  Contractual   Exercise  Exercisable at    Average
  Price    June 30, 2001  Life (Years)    Price   June 30, 2001   Exercise Price
----------  ------------- ------------ ---------- --------------  -------------
$ .05-.35    425,230        3.00       $    .25     425,230         $   .25
 2.00- 3.00   62,500        2.94           2.78      62,500            2.78
 5.00         42,000        2.86           5.00      42,000            5.00
 5.75-10.00   35,000        4.11           8.40      25,000            7.96
11.00-20.00  172,500        4.13          16.53     170,000           16.60
22.00-31.50   16,000        4.70          23.51        -                -
             -------        ----       ----------  -----------    -------------
             753,230        3.35        $  7.41     753,230         $ 6.94
             =======        ====          =====     =========       =========

The Company uses the intrinsic value method in accounting for stock options issued to employees and directors. In applying this method, compensation cost of $621,037 and $360,200 has been recognized for the years ended June 30, 2001 and 2000 respectively. Had compensation cost for the Company's option plans been determined based on the fair value at the grant dates for awards under those plans, the Company's net loss and loss per share would have resulted in the pro forma amounts indicated below:

                                              June 30, 2001       June 30, 2000
                                             ----------------    --------------
Net loss applicable to common shareholders

  As reported                                 $  (19,401,674)   $  (25,862,639)
  Adjustment related to BSTI                           -            (2,158,507)
                                               --------------     --------------
  Pro forma                                   $  (19,401,674)   $  (28,021,146)
                                               ==============      =============

Basic net loss per common share

  As reported                                 $       (1.58)    $        (3.66)
  Adjustment related to BSTI                            -                (0.30)
                                               ---------------    --------------

  Pro forma                                   $       (1.58)    $        (3.96)
                                                  ==========         ==========

The fair values were estimated using the Black Scholes options-pricing model with the following weighted average assumptions:

                                          June 30, 2001      June 30, 2000
                                         --------------     ------------------
Expected dividend yield                         0.0%               0.0%
Expected price volatility                       100%             85.20%
Risk-free rate of return                        7.0%              7.0%
Expected life of options                       3.0 years        3.0 years

F-17

Warrants

In connection with a private placement offering during the year ended June 30, 1998, warrants for the purchase of 490,000 shares of BSTI were issued with an exercise price ranging from $5.00 to $5.25 expiring April 2003. Also, during the year ended June 30, 1998, warrants for the purchase of 18,750 shares of BSTI were issued in connection with other private placement offerings. These warrants have a five-year term and an exercise price of $0.50.

In connection with its initial public offering during the year ended June 30, 1999, warrants for the purchase of 1,365,000 shares of BSTI were issued with an exercise price ranging from $6.00 to $7.50 expiring September 2003.

In connection with the issuance of Series B Convertible Preferred Stock during the year ended June 30, 2000, warrants for the purchase of 79,281 shares of BSTI were issued with an exercise price of $18.92 expiring June 14, 2000.

During the year ended June 30, 2000, warrants for the purchase of 375,000 shares of BSTI were issued for services rendered in lieu of cash with exercise prices ranging from $5.00 to $17.00 expiring July and August 2004. Consulting expense of $1,923,900 has been recognized for the year ended June 30, 2000 related to these warrants.

Stock warrant transactions for BSTI for the years ended June 30, 2001, and 2000 are summarized as follows:

                                            Year ended           Year ended
                                           June 30, 2001       June 30, 2000
                                          -------------       -----------------
Outstanding, beginning of year               882,281               1,890,977
  Granted                                       -                    454,281
  Exercised                                  (74,000)             (1,458,586)
  Forfeited                                  (79,281)                 (4,391)
                                          -------------           -------------
Outstanding, end year                       (729,000)                882,281
                                            ========               =========

NOTE 10 - INCOME TAXES

The following is a summary of the significant components of the Company's deferred income tax assets which are reduced to zero by a related valuation allowance:

                                                            June 30,
                                                             2001
                                                         ------------
Deferred income tax assets:
 Operating loss carryforwards                           $  16,500,000
 Options for services                                       1,300,000
                                                         ------------
Gross deferred tax assets                                  17,800,000
Deferred tax asset valuation allowance                    (17,800,000)
                                                         ------------
Net deferred income tax asset                           $      --
                                                         ============

The income tax provisions for the years ended June 30, 2001 and 2000 differ from the amounts determined by applying the applicable U.S. statutory federal income tax rate to pretax results of operations. These differences are the result of applying valuation allowances against the deferred tax assets.

F-18

Reconciliations of statutory Federal tax rates to the effective tax rate for the years ended June 30, 2001 and 2000 are as follows:

                                                        Year Ended June 30,
                                                     2001                 2000
                                                  ------------     ------------
Income tax benefit at applicable
Federal rate of 34%                             $  6,596,000       $  9,607,420
State tax benefit, net of Federal
 income tax effect                                    50,000            107,000
Effect of permanent differences                      510,000               -
Other                                                   -               (22,874)
                                                 ------------       ------------
                                                   7,156,000          9,691,546
Increase in deferred income tax
 asset valuation allowance                        (7,156,000)        (9,691,546)
                                                 ------------      -------------
Net income tax benefit                          $      --          $       --
                                                 ===========       =============

At June 30, 2001, the Company had net operating loss carryforwards for U.S. income tax purposes of approximately $33,000,000 available to reduce future taxable income. These loss carryforwards will expire in fiscal years 2004 through 2021.

The Company experienced a change in control, as defined under Section 382 of the Internal Revenue Code, during 1999. As a result, the utilization of the net operating losses that expire in 2019 and prior will be limited to a maximum amount annually as defined by the Internal Revenue Code. As a result of these limitations, a significant portion of the tax loss carryforwards could expire unused.

NOTE 11 - SIGNIFICANT CUSTOMERS AND FOREIGN SALES

Sales to one customer located in Hong Kong totaled approximately $400,000, or 27% of total sales during the year ended June 30, 2001. Sales to four customers totaled approximately $270,000 or 26% of total sales for the year ended June 30, 2000. No other customer represented more than 10% of sales during the periods presented.

NOTE 12 - RELATED PARTY TRANSACTIONS

At June 30, 2000, the Company owed $110,000 to an officer and principal shareholder of the Company. This officer loan payable is non-interest bearing and is due on demand.

During 2000, a principal stockholder contributed $100,000 to additional paid-in capital of the Company without further consideration.

F-19

NOTE 13 - PRIVATE EQUITY CREDIT AGREEMENTS

On June 30, 1999, BSTI entered into an equity agreement with an investor whereby the Company may issue and sell to the investor, from time to time, up to $6,250,000 of BSTI's common stock. Subsequently, this agreement was amended to increase the issuance limit to $10,000,000 of BSTI's common stock.

Pursuant to the agreement, the Company may exercise a put by giving notice to the investor of the investment amount that the Company intends to require the investor to purchase. The number of shares, which the investor will receive, is determined by dividing the investment amount by the purchase price, determined as the market price of the common stock on the date that the notice of the put is delivered to the investor less 20% of the market price. Unless the Company obtains requisite approval of its shareholders in accordance with the corporate laws of the State of Georgia and the applicable rules of NASDAQ, no more than 19.99% of the outstanding common stock may be issued and sold under this agreement.

The Company must reserve at all times the maximum number of common shares to enable the Company to issue a sufficient number of shares having an aggregate purchase price of the lesser of $10,000,000 or number of shares having an aggregate purchase price of the lesser of $10,000,000 less the number of shares actually delivered under the agreement. Additionally, the average market bid prices for the twenty trading days preceding the Company's notice to put the shares to the investor must equal or exceed $1.00 per share.

On June 14, 2000, BSTI entered into another equity agreement with the same investor whereby the Company may issue and sell to the investor, from time to time, up to $50,000,000 of BSTI's common stock.

This agreement has terms similar to the $10,000,000 agreement with the following exceptions. The purchase price for the put is determined as the market price of the common stock on the date that the notice of the put is delivered to the investor less 10% of the market price. The aggregate average daily trading volume must equal or exceed $500,000 and the average of the market bid prices must equal or exceed $7.50 per share for the ten trading days immediately preceding both the date of the Company's notice to put the shares to the investor and the date of the closing of the sale of shares to the investor.

F-20

ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL MATTERS

None - excepting that on January 10, 2001 the Registrant received a letter of resignation from its former independent accountants, Grant Thornton, LLP, dated January 9, 2001. On January 29, 2001 the Company engaged its current auditors, Feldman Sherb & Co., P.C., having indicated in a Form 8-K/A with date of report of February 6, 2001 that "During the Company's two most recent fiscal years and any subsequent interim periods preceding the date of resignation, there were no disagreements between the Company and its former independent accountants on any matters relating to accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which, if not resolved to the satisfaction of the former independent accounts, would have caused them to make reference to the subject matter of the disagreement in their report." For more specific information regarding the resignation of former auditors and engagement of new auditors, reference is made to Company's 8-Ks and/or 8-K/As with dates of reports of January 10, 2001 and February 6, 2001.

BROKERAGE PARTNERS