SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-K

(Mark One)

[X] Annual report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the fiscal year ended December 31, 1999 or

[ ] Transition report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from to
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Commission File Number 0-16109

ADVANCED POLYMER SYSTEMS, INC.
(Exact name of registrant as specified in its charter)

Delaware 94-2875566
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)

123 Saginaw Drive, Redwood City, California 94063
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(Address of principal executive offices) (Zip Code)

Registrant's telephone number, including area code: (650) 366-2626
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Securities registered pursuant to Section 12 (b) of the Act: None
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Securities registered pursuant to Section 12 (g) of the Act:
Common Stock ($.01 par value)
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that
the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
---- ----

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

The aggregate market value of the voting stock of the registrant held by
non-affiliates of the registrant as of February 29, 2000, was $57,415,437.
(1)

As of February 29, 2000, 20,119,042 shares of registrant's Common Stock,
$.01 par value, were outstanding.

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(1)Excludes 6,200,149 shares held by directors, officers and shareholders
whose ownership exceeds 5% of the outstanding shares at February 29,
2000. Exclusion of such shares should not be construed as indicating
that the holders thereof possess the power, directly or indirectly, to
direct the management or policies of the registrant, or that such
person is controlled by or under common control with the registrant.

DOCUMENTS INCORPORATED BY REFERENCE

Form
10-K
Document Part
- -------- ----

Definitive Proxy Statement to be used
in connection with the Annual Meeting
of Stockholders. III

TABLE OF CONTENTS

PART I

ITEM 1. Business

ITEM 2. Properties

ITEM 3. Legal Proceedings

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

PART II

ITEM 5. Market for the Registrant's Common Equity and Related
Shareholder Matters

ITEM 6. Selected Financial Data

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

ITEM 7A. Quantitative and Qualitative Disclosure About Market Risk

ITEM 8. Financial Statements and Supplementary Data

ITEM 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure

PART III

ITEM 10. Directors and Executive Officers of the Registrant

ITEM 11. Executive Compensation

ITEM 12. Security Ownership of Certain Beneficial Owners
and Management

ITEM 13. Certain Relationships and Related Transactions

PART IV

ITEM 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K

Signatures

PART I

Item 1. BUSINESS

INTRODUCTION-FORWARD LOOKING STATEMENTS
- ---------------------------------------

Except for statements of historical fact, the statements herein are
forward-looking and are subject to a number of risks and uncertainties
that could cause actual results to differ materially from the statements
made. These include, among others, uncertainty associated with timely
approval, launch and acceptance of new products, development of new
products, establishment of new corporate alliances, progress in research
and development programs, risks of consummation of contemplated action to
maximize shareholder value (as to which there is no assurance) and other
factors described below under the headings "APS Technology", "Products",
"Manufacturing", "Marketing", "Government Regulation", "Patents and Trade
Secrets" and "Competition". In addition, such risks and uncertainties
also include the matters discussed under Management's Discussion and
Analysis of Financial Condition and Results of Operations in Item 7 below.

THE COMPANY
- -----------

Advanced Polymer Systems, Inc. and subsidiaries ("APS" or the "Company")
is using its patented Microsponge(R) delivery systems and other
proprietary technologies to enhance the safety, effectiveness and
aesthetic quality of prescription, over-the-counter ("OTC") and personal
care products. It also has under development, patented new drug delivery
systems including bioerodible polymers for oral and implantable drug
delivery. The Company is currently manufacturing and selling Microsponge
Systems for use by corporate customers in approximately 100 different skin
care products sold worldwide. APS holds 215 issued U.S. and foreign
patents on its technology and has over 34 other patent applications
pending.

The Company, founded in February 1983 as a California corporation under
the name AMCO Polymerics, Inc., changed its name to Advanced Polymer
Systems, Inc. in 1984 and was reincorporated in Delaware in 1987.

Topical products under development or in the marketplace utilize the
Company's Microsponge Systems in two primary ways: as reservoirs releasing
active ingredients over an extended period of time; and, as receptacles
for absorbing undesirable substances, such as excess skin oils. The
resulting benefits include extended efficacy, reduced skin irritation,
cosmetic elegance, formulation flexibility and improved product stability.

In February 1997, the Company received FDA approval for the first ethical
pharmaceutical product based on its patented Microsponge technology, Retin
A(R)-Micro(TM), which has been licensed to Ortho-McNeil Pharmaceutical
Corporation, a member of the Johnson & Johnson family of companies. This
product was launched in March 1997. The Company has also licensed to
Dermik, a subsidiary of Aventis, another ethical pharmaceutical product
for which a New Drug Application ("NDA") has been filed and is awaiting
approval.

APS has established other alliances with multinational corporations for
products which incorporate Microsponge Systems. These alliance partners
receive certain marketing rights to the products developed. In return,
APS typically receives an initial license fee, future payments contingent
on the achievement of certain milestones, revenues from the supply of
Microsponge Systems, and royalty payments based on third party product
sales or a share of partner revenues. For products requiring FDA
approval, these alliances provide for the partners to pay the costs of
product development, clinical testing, regulatory approval and
commercialization.

Areas of focus for the Company's bioerodible systems under development
include acute pain management, growth hormones (both human and animal) and
post-surgical cancer treatment. A second family of bioerodible polymers
has potential for use as a targeted delivery system which may carry anti-
cancer drugs specifically to solid tumors. This targeted delivery, if
successful, would make possible very high drug concentration in a tumor
without excessive concentration in other normal tissues, thus greatly
decreasing the serious side effects of cancer chemotherapy.

Additionally, the Company is working on the development of oral delivery
systems for improved bioavailability. There are a number of approved
drugs whose efficacy could be substantially improved if their
bioavailability could be increased. Although the Company is still in the
early research and development stage, it has successfully concluded
significant in vitro and preliminary in vivo studies which indicate that a
modified Microsponge System enhances the rate of dissolution of insoluble
drugs. By appropriately modifying the Microsponge System, drugs such as
steroids have been entrapped and released at rates several times higher
than conventional dosage forms. Potential market opportunities include
drugs for the treatment of a wide variety of diseases.

Also in development are delivery systems which potentially allow for the
targeted delivery of drugs to the lower gastrointestinal tract;
specifically the colon. This could provide much better treatment of a
limited number of disease conditions including ulcerative colitis and
chronic constipation. A feasibility study in humans has demonstrated that
the APS system may be capable of bypassing the stomach and small intestine
and releasing drugs throughout the length of the colon.

To maintain quality control over manufacturing, APS has committed
significant resources to its production processes and polymer systems
development programs. The Company's manufacturing facility in Lafayette,
Louisiana, is responsible for large-scale production of Microsponge
Systems and related technologies. All products are manufactured according
to Current Good Manufacturing Practices guidelines ("CGMPs") established
by the FDA. In addition, APS has a process development pilot plant in its
Louisiana facility. APS also has established relationships with contract
manufacturers which could provide second-source production capabilities.

APS TECHNOLOGY
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The fundamental appeal of the Company's Microsponge technology stems from
the difficulty experienced with conventional formulations in releasing
active ingredients over an extended period of time. Topical preparations
are intended to work only on the outer layers of the skin. Yet, the
typical active ingredient in conventional products is present in a
relatively high concentration and, when applied to the skin, may be
rapidly absorbed. The common result is over-medication, followed by a
period of under-medication until the next application. Rashes and more
serious side effects can occur when the active ingredients rapidly
penetrate below the skin's surface. APS' Microsponge technology allows a
prolonged rate of release of the active ingredients, thereby offering
potential reduction in the side effects while maintaining therapeutic
efficacy.

Microsponge Systems. The Company's Microsponge Systems are based on
microscopic, polymer-based microspheres that can bind, suspend or entrap a
wide variety of substances and then be incorporated into a formulated
product such as a gel, cream, liquid or powder. A single Microsponge is
as tiny as a particle of talcum powder, measuring less than one-thousandth
of an inch in diameter. Like a true sponge, each microsphere consists of
a myriad of interconnecting voids within a non-collapsible structure that
can accept a wide variety of substances. The outer surface is typically
porous, allowing the controlled flow of substances into and out of the
sphere. Several primary characteristics, or parameters, of the
Microsponge System can be defined during the production phase to obtain
spheres that are tailored to specific product applications and vehicle
compatibility.

Polytrap(R) Systems. In January 1996, the Company signed a definitive
agreement with Dow Corning Corporation to acquire full rights to Dow
Corning's Polytrap technology and full responsibility for the continuing
commercialization of Polytrap Systems in exchange for 200,000 shares of
APS common stock. Polytrap Systems are designed to: 1) absorb skin oils
and eliminate shine; 2) provide a smooth and silky feel to product
formulation; 3) entrap and deliver various ingredients in personal care
products and; 4) convert liquids into powders.

Microsponge and Polytrap Systems are made of biologically inert polymers.
Extensive safety studies have demonstrated that the polymers are non-
irritating, non-mutagenic, non-allergenic, non-toxic and non-
biodegradable. As a result, the human body cannot convert them into other
substances or break them down. Furthermore, although they are microscopic
in size, these systems are too large to pass through the stratum corneum
(skin surface) when incorporated into topical products.

Bioerodible Systems. The Company has made a significant investment in the
development of bioerodible drug delivery systems and has recently been
granted a broad composition of matter patent for its bioerodible polymer
system known as poly(ortho esters). The major application for such
systems is systemic drug delivery, where a suitably shaped device
containing a drug physically dispersed in the polymer is implanted in a
body site, such as below the skin, or in the muscle. The implanted
polymer bioerodes at a controlled rate and as it bioerodes, a drug that
has been physically dispersed throughout the polymer is released. A
number of important applications are currently under development such as
post-operative pain control, post-surgical cancer treatment and delivery
of peptides and proteins.

APS has also developed a second family of bioerodible polymers, known as
block copolymers. These materials contain blocks of poly(ortho esters)
and poly(ethylene glycol) arranged in different sequences. A broad
composition of matter patent has also recently been granted. While these
materials also have applications as bioerodible drug delivery systems,
their most promising use is as a delivery system that can carry anti-
cancer drugs specifically to solid tumors. This "targeted" delivery may
make possible very high drug concentration in the tumor without excessive
high concentration in surrounding tissues, thus greatly decreasing the
serious side effects of cancer chemotherapy.

PRODUCTS
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APS' efforts in the ethical dermatology and OTC skin care markets include
additional applications using the Company's technology which are under
development, as noted below.

Ethical Dermatology
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APS defines "ethical dermatology" products as prescription and non-
prescription drugs that are promoted primarily through the medical
profession for the prevention and treatment of skin problems or diseases.
The Company is developing several ethical dermatology products which will
require approval of the FDA before they can be sold in the United States.
Although these pharmaceuticals are likely to take longer to reach the
marketplace than OTC and personal care products due to the regulatory
approval process, the Company believes that the benefits offered by
Microsponge delivery systems will allow valuable product differentiation
in this large and potentially profitable market. Results from various
human clinical studies reaffirm that this technology offers the potential
to reduce drug side effects, maintain the therapeutic efficacy and
potentially increase patient compliance with the treatment regimen. The
following ethical dermatological products have been developed or are under
development by APS:

Tretinoin Acne Medication. In February 1997, the Company received FDA
approval for Microsponge-entrapped tretinoin for improved acne treatment.
The approval of this submission to the FDA represented the culmination of
an intensive research and clinical development program involving
approximately 1,150 patients. Tretinoin has been marketed in the U.S. by
Ortho Dermatological, a Johnson & Johnson subsidiary, under the brand name
RETIN-A(R) since 1971. It has proven to be a highly effective topical
acne medication. However, skin irritation among sensitive individuals can
limit patient compliance with the prescribed therapy. The Company
believes its patent protected approach to drug delivery reduces the
potentially irritating side effects of tretinoin. Ortho Dermatological
began marketing this product in March 1997 under the brand name Retin-A(R)
Micro (TM).

During 1999, Ortho also filed an NDA in Canada for this formulation and
completed Phase III clinical trials in Europe in preparation for a
European Union filing. Additionally, Ortho completed Phase III clinical
trials in the U.S.A. on a second Retin-A Micro formulation and has
initiated the preparation of an NDA filing for the product.

5-Fluorouracil. In the fourth quarter of 1999, Dermik filed an NDA for an
APS-developed formulation containing Microsponge entrapped 5-fluorouracil
(5-FU) for the treatment of actinic keratoses. Subsequently, the Company
expanded its agreement with Dermik to include two additional indications,
in return for milestone payments, royalties and product supply upon
successful development.

Cosmeceutical Products
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Retinol. Retinol is a highly pure form of Vitamin A which has
demonstrated a remarkable ability to maintain the skin's youthful
appearance. However, it has been commercialized on only a limited basis
because it becomes unstable when mixed with other ingredients. APS has
been able to stabilize retinol in a formulation which is cosmetically
elegant and which has a low potential for skin irritation. The Company
has executed agreements with several companies, each of which has
marketing strength in a particular channel of distribution. The channels
for which the Company has licensed retinol are direct marketing (Avon),
dermatologists (Bioglan), salons and spas (Sothys), plastic surgery
(BioMedic), prestige (La Prairie and Mana), mass (Alberto-Culver and
Scott's Liquid Gold), through infomercials (Guthy Renker) and
internationally through Boots in the U.K. and Embil in Turkey. The
Company retains full rights to alternate channels of distribution.
Additionally, the Company formed an alliance with R.P. Scherer to develop
and commercialize unit-dose skin care treatments for aging skin using
retinol and other vitamins.

The Company has also developed various Vitamin K formulations which it has
commenced to license to marketing partners in a variety of distribution
channels. A number of other cosmeceutical products are at various stages
of development and in clinical trials. They will also be licensed to
marketing partners.

Personal Care and OTC Products
- ------------------------------

APS' Microsponge technologies are ideal for skin and personal care
products. They can retain several times their weight in liquids, respond
to a variety of release stimuli, and absorb large amounts of excess skin
oil; all while retaining an elegant feel on the skin's surface. In fact,
APS technologies are currently employed in approximately 100 products sold
by major cosmetic and toiletry companies worldwide. Among these products
are skin cleansers, conditioners, oil control lotions, moisturizers,
deodorants, razors, lipsticks, makeup, powders, and eye shadows.

Entrapping cosmetic ingredients in APS' proprietary Microsponge delivery
systems offers several advantages, including improved physical and
chemical stability, greater available concentrations, controlled release
of the active ingredients, reduced skin irritation and sensitization, and
uniquely pleasing tactile qualities.

Other Product Applications
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While not the principal focus of APS development efforts, other products
could benefit from the value-added application of the Company's polymer
technology. To date, the Company has applied its technology to its
analytical standards business.

Analytical Standards. APS initially developed microsphere precursors to
the Microsponge System for use as a testing standard for gauging the
purity of municipal drinking water. Marketed by APS nationwide, these
microspheres are suspended in pure water to form an accurate, stable,
reproducible turbidity standard for the calibration of turbidimeters used
to test water purity.

APS believes its analytical standards technology has much broader
application than testing the turbidity of water. The Company has also
developed standards for industrial use for the calibration of
spectrophotometers and colorimeters.

MANUFACTURING
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Polymer Raw Material. Raw materials for the Company's polymers are
petroleum-based monomers which are widely available at low cost. The
monomers have not been subject to unavailability or significant price
fluctuations for the past five years.

Process Engineering and Development. The Company employs chemical
engineers and operates a pilot-plant facility for developing production
processes. The equipment used for manufacturing and process development
is commercially available in industrial sizes and is installed in the
Company's production facility in Lafayette, Louisiana.

Microsponge Production. APS has committed significant resources to the
production process and polymer systems development required to
commercialize its products. The Company has to date manufactured most of
its Microsponge Systems in company-owned and operated facilities.

The Company's manufacturing facility in Lafayette, Louisiana, is
responsible for large-scale production of Microsponge Systems and related
technologies. All products in the Lafayette facility are manufactured
according to CGMP. The Company initiated a plant expansion project during
1997 in anticipation of higher volume requirements. This was completed
during 1999. APS also has established relationships with contract
manufacturers which provide compounding, tube filling and packaging
capabilities. The Company's objective is to utilize these third parties
selectively, so that it can maintain its flexibility and direct the bulk
of APS' working capital to other areas, such as product development and
marketing.

MARKETING
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A key part of APS' business strategy is to ally the Company with major
marketing partners. The Company has therefore negotiated several
agreements covering Microsponge delivery systems, the supply of entrapped
ingredients, and the marketing of formulated products. To create an
incentive for APS to develop products as quickly as possible, these
development and license agreements provide, in some cases, for substantial
payments by the client companies during the period of product development
and test marketing. Additionally, some agreements provide for non-
refundable payments on the achievement of certain key milestones,
royalties on sales of formulated products, and minimum annual payments to
maintain exclusivity.

In general, APS grants limited marketing exclusivity in defined markets
for defined periods to client companies, while retaining the right to
manufacture the Microsponge delivery systems it develops for these
clients. However, after development is completed and a client
commercializes a formulated product utilizing the Company's delivery
systems, APS can exert only limited influence over the manner and extent
of the client's marketing efforts.

The Company's key relationships are set forth below:

Johnson & Johnson Inc. In May 1992, APS and Ortho-McNeil Pharmaceutical
Corporation ("Ortho"), a subsidiary of J&J, entered into a development and
license agreement related to tretinoin-based products incorporating APS'
Microsponge technology. As part of the agreement, certain license fees
and milestone payments were paid by Ortho to APS. The license fees
provided Ortho with exclusive distribution or license rights for all Ortho
tretinoin products utilizing the APS Microsponge System. Ortho's
exclusivity will continue as long as annual minimum royalty payments are
made.

In February 1997, APS received FDA approval for the first product covered
by this agreement, Microsponge-entrapped tretinoin. This product has been
marketed by Ortho Dermatological since March 1997 as Retin-A(R) Micro
(TM). APS received a payment of $3,000,000 from Ortho upon receipt of the
FDA approval, of which half is a milestone payment which was recognized as
revenue in 1997 and half is prepaid royalties which was recorded as
deferred revenues.

Dermik. In March 1992, APS and Aventis Pharmaceuticals, formerly known as
Rhone-Poulenc Rorer restructured their 1989 joint venture agreement.
Under the new terms, Aventis received 705,041 shares of APS stock.
Furthermore, Aventis agreed to continue funding the exploration and
development of certain dermatology applications of APS' technology.
Product applications include a 5-FU treatment for pre-cancerous actinic
keratoses. In the fourth quarter of 1999, Dermik filed an NDA for this
product and expanded its agreement with APS to cover two additional
applications, in return for milestone payments, royalties and payments for
product supply upon successful development.

Avon. In August 1996, APS signed a license and supply agreement with Avon
under which APS is providing Avon with a formulation incorporating
Microsponge delivery systems and retinol, an ingredient developed to
improve the appearance of aging skin. Under terms of the agreement, APS
received upfront, non-refundable licensing fees and receives manufacturing
revenues on supply of product. In 1998, the Company announced that Avon
had launched a second product using the Company's Microsponge Systems
technology.

Pharmacia and Upjohn. In January 1998, the Company announced an agreement
with Pharmacia and Upjohn to develop and commercialize a new product for a
major global topical skincare category in return for R&D fees and
reimbursement of expenses. Advanced Polymer's Microsponge System
technology will be utilized topically to deliver a proprietary Pharmacia
and Upjohn therapeutic agent.

Scott's Liquid Gold. In June 1998, APS signed an agreement with Scott's
Liquid Gold under which APS provides Scott's with products incorporating a
Microsponge-based retinol formulation for the mass marketing channel.
Under terms of the agreement, APS received an upfront, non-refundable
license fee and receives manufacturing revenues on the supply of product
which commenced in the third quarter of 1998.

Alberto-Culver. In April 1999, APS signed an agreement with Alberto-
Culver to commercialize retinol and Vitamin K formulations in the U.S. and
Canada through the mass channel. In September 1999, the agreement was
expanded to incorporate APS' Microsponge-entrapped hydroquinone
formulation.

R.P. Scherer. In 1999, APS began to commercialize its retinol and retinol
combination formulations in unit-dose capsules through its alliance with
R.P. Scherer, both in the U.S. and Europe.

Guthy-Renker. In the fourth quarter of 1999, APS made its first shipment
to Guthy-Renker, the infomercial company. Under an agreement signed in
1998, Guthy-Renker will promote the "Natural Advantage" line of products
incorporating the APS Microsponge technology in 2000, through infomercials
and a television shopping channel ("QVC").

GOVERNMENT REGULATION
- ---------------------

Ethical Products
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In order to clinically test, produce and sell products for human
therapeutic use, mandatory procedures and safety evaluations established
by the FDA and comparable agencies in foreign countries must be followed.
The procedure for seeking and obtaining the required governmental
clearances for a new therapeutic product includes pre-clinical animal
testing to determine safety and efficacy, followed by human clinical
testing, and can take many years and require substantial expenditures. In
the case of third-party agreements, APS expects that the corporate client
will fund the testing and the approval process with guidance from APS.
The Company intends to seek the necessary regulatory approvals for its
proprietary products as they are developed.

Manufacturing
- -------------

APS' facilities, utilized to manufacture pharmaceutical raw materials, are
subject to periodic governmental inspections. If violations of applicable
regulations are noted during these inspections, significant problems may
arise affecting the continued marketing of any products manufactured by
the Company.

The Company's plant in Lafayette, Louisiana operates according to CGMP
prescribed by the FDA. This compliance has entailed modifying certain
manufacturing equipment, as well as implementing certain record keeping
and other practices and procedures which are required of all
pharmaceutical manufacturers. The Company believes it is in compliance
with federal and state laws regarding occupational safety, laboratory
practices, environmental protection and hazardous substance control.

Personal Care Products
- ----------------------

Under current regulations, the market introduction of non-medicated
cosmetics, toiletries and skin care products does not require prior formal
registration or approval by the FDA or regulatory agencies in foreign
countries, although this situation could change in the future. The
cosmetics industry has established self-regulating procedures and the
Company, like most companies, performs its own toxicity and consumer
tests.

PATENTS AND TRADE SECRETS
- -------------------------

As part of the Company's strategy to protect its current products and to
provide a foundation for future products, APS has filed a number of United
States patent applications on inventions relating to specific products,
product groups, and processing technology. The Company also has filed
foreign patent applications on its polymer technology with the European
Union, Japan, Australia, South Africa, Canada, Korea and Taiwan. The
Company has a total of 50 issued U.S. patents and an additional 165 issued
foreign patents. Currently, the Company has over 34 pending patent
applications worldwide.

Although the Company believes the bases for these patents and patent
applications are sound, they are untested, and there is no assurance that
they will not be successfully challenged. There can be no assurance that
any patent already issued will be of commercial value, or that any patent
applications will result in issued patents of commercial value, or that
APS' technology will not be held to infringe patents held by others.

APS relies on unpatented trade secrets and know-how to protect certain
aspects of its production technologies. APS' employees, consultants,
advisors and corporate clients have entered into confidentiality
agreements with the Company. These agreements, however, may not
necessarily provide meaningful protection for the Company's trade secrets
or proprietary know-how in the event of unauthorized use or disclosure.
In addition, others may obtain access to, or independently develop, these
trade secrets or know-how.

COMPETITION
- -----------

Although Microsponge and Polytrap Systems, by virtue of their highly
porous structure, are unique delivery systems, there are many alternate
delivery systems available. However, in the cosmetic and cosmeceutical
fields, Microsponge and Polytrap Systems are particularly versatile at
allowing the entrapment of active agents and controlled release by simple
changes in vehicles.

Other delivery systems based on microparticulate materials could compete
with Microsponge and Polytrap Systems. Among these are liposomes,
microcapsules and microspheres. Liposomes are small phospholipid vesicles
capable of entrapping and releasing active agents. However, they are
significantly more expensive to manufacture, less versatile and their
stability is a concern. While they are primarily used in systemic
applications, they are also used in the cosmetic arena.

The most closely related systems are microcapsules and microspheres.
Microcapsules are spherical particles containing an active agent in the
core, surrounded by a polymeric membrane. Microspheres are spherical
particles containing the active agent dispersed in a polymeric matrix.
The major distinguishing feature between Microsponge and Polytrap Systems
and microcapsules, or microspheres, is that the structure of Microsponge
and Polytrap Systems is highly porous, while microspheres or microcapsules
are solid particles with no internal voids.

Thus, while one type of Microsponge System can be used to entrap a variety
of active agents and release these at desired rates by vehicle changes,
different active agents and different release profiles can only be
achieved with microcapsules or microspheres by a complete change in
polymer composition and fabrication methods.

HUMAN RESOURCES
- ---------------

As of February 29, 2000, the Company had 83 full-time employees, 6 of whom
hold PhDs. There were 30 employees engaged in research and development
and quality control, 31 in manufacturing and production activities and 22
working in customer service, finance, marketing, human resources and
administration.

The Company considers its relations with employees to be satisfactory.
None of the Company's employees is covered by a collective bargaining
agreement.

Item 2. PROPERTIES

The Company occupies 26,067 square feet of laboratory, office and
warehouse space in Redwood City, California and 2,100 square feet of
office space in Greenwich, Connecticut. The annual rent expense for the
Redwood City facility is approximately $641,000. The net annual rent
expense for the Greenwich office is approximately $36,000.

The Company occupies a production facility and warehouse in Lafayette,
Louisiana, with a current annual capacity, depending upon the application,
to produce 1,000,000 to 3,000,000 pounds of entrapped materials. The
existing plant, with contiguous acreage, has been designed to allow
significant expansion. The construction of the facility in 1986 was
financed primarily by 15-year, tax-exempt industrial development bonds.
In 1990, the bonds were refinanced. In 1995, the Company extinguished the
bond liability through an "insubstance defeasance" transaction by placing
U.S. government securities in an irrevocable trust to fund all future
interest and principal payments. In 1995 the Company sold certain assets
and subsequently leased them back for a certain fixed monthly rent over a
period of forty-eight months. The Company reported this transaction as a
financing transaction.

The Company's existing research and development and administrative
facilities are not yet being used at full capacity and management believes
that such facilities are adequate and suitable for its current and
anticipated needs. It is anticipated that any additional production
facilities would be built on land the Company presently occupies in
Lafayette, Louisiana.

Item 3. LEGAL PROCEEDINGS

In November, 1997 Large Scale Biology Corporation ("LSB Corp.") formerly
known as Biosource Technologies, Inc. filed a complaint against the
Company in the San Mateo Superior Court. LSB Corp. claimed damages from
the Company on the grounds that the Company had failed to pay certain
minimum amounts allegedly due under a contract for the supply of melanin.

In December 1998, the Company reached a settlement agreement with LSB
Corp. for a net amount of $1,300,000, which consists of a $1,500,000
settlement of LSB Corp claims and a $200,000 settlement of the Company's
cross claims. Pursuant to the agreement, the Company paid LSB Corp.
$1,300,000 in cash in 1999. The settlement agreement also provided for
the termination of the license and supply agreement between the parties.

In February 2000, Douglas Kligman and Albert Kligman filed a complaint
against the Company in the U.S. District Court for the Eastern District of
Pennsylvania. The complaint alleges that the plaintiffs entered into a
partnership with the Company to pursue development and sales of a product
developed by the plantiffs. The complaint states various claims,
dissolution of partnership, implied-in-law contract and other claims. The
complaint alleges damages in excess of $75,000, but otherwise makes no
specific damage claim.

The Company has denied liability and is vigorously defending the claims,
basing its defense on the assertion that its rights to the product are
governed by a binding license agreement that was executed in November 1995
and amended in September 1996.

The Company expects that the outcome of this legal proceeding will not
have a material adverse effect on the consolidated financial statements.

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

None.

PART II

Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS

Shares of the Company's common stock trade on the Nasdaq National Market,
under the symbol APOS. As of February 29, 2000, there were 527 holders of
record of the Company's common stock.

The Company has never paid cash dividends and does not anticipate paying
cash dividends in the foreseeable future. The following table sets forth
for the fiscal periods indicated, the range of high and low sales prices
for the Company's common stock on the NASDAQ National Market System.

1999 High Low 1998 High Low
- ----------------------------------------------------------------------

First Quarter 5 5/8 4 1/8 First Quarter 9 3/8 5 15/16
Second Quarter 7 1/4 4 1/8 Second Quarter 9 5 7/8
Third Quarter 7 1/8 3 7/8 Third Quarter 7 1/4 3 7/8
Fourth Quarter 4 3/4 2 3/4 Fourth Quarter 7 1/8 4

Item 6. SELECTED FINANCIAL DATA
(in thousands, except per share data)

For the Years Ended and as of
December 31 1999 1998 1997 1996 1995
- --------------------------------------------------------------------------------

Statements of Operations Data
- -----------------------------
Product revenues $14,624 13,637 12,442 6,138 5,803
Royalties, license fees and
R&D fees 5,481 6,984 3,266 1,056 451
Consumer products -- -- -- 10,468 9,104
Milestone payments 300 -- 1,500 -- 750
Cost of sales 6,857 7,127 7,164 10,772 11,047
Research and development, net 4,267 4,382 3,740 3,506 4,139
Selling, marketing and
advertising 2,798 2,999 3,806 8,455 6,560
General and administrative 3,657 3,009 3,552 2,984 3,082
Loss on purchase commitment,
including related inventory -- -- -- 1,400 600
Net income (loss) 2,372 2,525 (1,808) (10,381) (9,359)

Basic earnings (loss) per
common share 0.12 0.13 (0.10) (0.58) (0.57)
Diluted earnings (loss) per
common share 0.12 0.12 (0.10) (0.58) (0.57)
Weighted average common
shares outstanding - basic 20,079 19,854 18,779 17,987 16,459
Weighted average common
shares outstanding - diluted 20,252 20,381 19,815 19,494 16,953

Balance Sheet Data
- ------------------

Working capital $ 9,434 4,760 5,151 3,860 5,725
Total assets 23,503 23,081 24,180 18,444 23,082
Long-term debt, excluding
current portion 2,409 -- 3,055 5,579 6,355
Shareholders' equity 12,036 9,036 4,113 7 1,233

Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (DOLLAR AMOUNTS ARE ROUNDED TO
NEAREST THOUSAND)

The following tables summarize highlights from the statements of
operations expressed as a percentage change from the prior year and as a
percentage of product revenues.

STATEMENTS OF OPERATIONS HIGHLIGHTS (in thousands)
- --------------------------------------------------

For the Years Ended December 31, Annual % Change
-------------------------------- ---------------
1999 1998 1997 99/98 98/97
------ ------ ------ ----- -----

Product revenues $14,624 13,637 12,442 7% 10%
Royalties, license fees and
R&D fees 5,481 6,984 3,266 (22%) 114%
Milestone payments 300 -- 1,500 N/A (100%)
------ ------ ------ ---- -----
Total revenues 20,405 20,621 17,208 (1%) 20%

Cost of sales 6,857 7,127 7,164 (4%) (1%)
Research and development, net 4,267 4,382 3,740 (3%) 17%
Selling and marketing 2,798 2,999 3,806 (7%) (21%)
General and administrative 3,657 3,009 3,552 22% (15%)

1999 1998 1997
---- ---- ----
Expenses expressed as a percentage
of total revenues excluding
milestone payments:
Cost of sales 34% 35% 46%
Research and development, net 21% 21% 24%
Selling and marketing 14% 15% 24%
General and administrative 18% 15% 23%

Results of Operations for the years ended December 31, 1999 and 1998
- --------------------------------------------------------------------

Except for statements of historical fact, the statements herein are
forward-looking and are subject to a number of risks and uncertainties
that could cause actual results to differ materially from the statements
made. These include, among others, uncertainty associated with timely
approval, launch and acceptance of new products, development of new
products, establishment of new corporate alliances, progress in research
and development programs, risks of consummation of contemplated action to
maximize shareholder value (as to which there is no assurance) and other
risks described below or identified from time to time in the Company's
Securities and Exchange Commission filings.

The Company's revenues are derived principally from product sales, license
fees, royalties and R&D fees. Under strategic alliance arrangements
entered into with certain corporations, APS can receive an access/license
fee, milestone payments, commitments for future minimum purchases,
royalties based on third party product sales or a share of partners'
revenues, and revenues from the supply of Microsponge and Polytrap
Systems. The Company is currently manufacturing and selling
Microsponge(R) delivery systems for use by customers in approximately 100
different skin care products.

These strategic alliances are intended to benefit the Company with the
marketing expertise and/or financial strength of partner companies. In
this respect, the Company's periodic financial results are dependent upon
the degree of success of current collaborations and the Company's ability
to negotiate profitable collaborative agreements in the future.

Product revenues for 1999 totaled $14,624,000, an increase of $987,000 or
7% from the prior year. This increase resulted from the launches of a
variety of new cosmeceutical products incorporating the Microsponge system
technology.

Royalties, license fees and R&D fees decreased by $1,503,000 or 22% from
the prior year to a total of $5,481,000. Approximately 82% of the
decrease is attributable to lower R&D fees. The remainder of the decrease
is primarily attributable to reduced royalties from Procter and Gamble for
a baby wipe product which was discontinued in 1998.

Total revenues for 1999 included milestone payments totaling $300,000 from
Dermik upon acceptance for filing by the FDA of the NDA for 5-FU.

Gross profit on product revenues for 1999 was $7,767,000, an increase of
$1,257,000 or 19% over the prior year. The gross profit improvement was
mainly due to increased sales of higher margin proprietary cosmeceutical
products.

Research and development expenses (net) decreased by $115,000 or 3% to
$4,267,000 due mainly to lower clinical studies expenses.

Selling and marketing expense decreased by $201,000 or 7% from the prior
year to $2,798,000 primarily as a result of reduced headcount and reduced
advertising expenses.

General and administrative expenses increased by $648,000 or 22% to
$3,657,000. This increase is mainly due to increased professional fees
resulting from a potential proxy contest which was resolved in the second
quarter of 1999 and a new director compensation plan for 1999. In
addition, the prior year included a reduction in G&A expenses resulting
from a beneficial settlement of the lawsuit with LSB Corp..

Interest income decreased by $46,000 or 19% from the prior year due to
lower average cash balances. Interest expense decreased by $220,000 or
27% due mainly to scheduled principal repayments during the year.

Net income for 1999 was $2,372,000, a decrease of $153,000 or 6% from the
prior year.

Results of Operations for the years ended December 31, 1998 and 1997
- --------------------------------------------------------------------

Product revenues for 1998 totaled $13,637,000, an increase of $1,196,000
or 10% from the prior year. This increase resulted from the launches of a
variety of new cosmeceutical products incorporating the Microsponge system
technology.

Royalties, license fees and R&D fees increased by $3,718,000 or 114% from
the prior year to a total of $6,984,000. Approximately 31% of the
increase is attributable to higher R&D fees. Increased royalties
accounted for approximately 20% of the increase. The remaining 49% of the
increase is due to license fees from corporate partners for access to new
products and termination of exclusive supply agreements that resulted in
recognition of the unamortized portion of the related license fees.
License fees totaled $2,555,000 in 1998, an increase of $1,830,000 or 252%
from the prior year. Approximately $1,500,000 of the increase relates to
license fees for terminated or renegotiated supply agreements.

Total revenues for 1997 included a milestone payment of $1,500,000 from
Ortho upon receipt of marketing clearance from the FDA for Retin-A Micro
in February 1997.

Gross profit on product revenues for 1998 was $6,511,000, an increase of
$1,233,000 or 23% over the prior year. The gross profit improvement was
mainly due to increased sales of higher margin proprietary cosmeceutical
products.

Research and development expenses (net) increased by $642,000 or 17% to
$4,382,000 due mainly to increased headcount, increased expenditure on new
technology, and expenses resulting from the move to new facilities in the
first quarter of 1998.

Selling and marketing expense decreased by $807,000 or 21% from the prior
year to $2,999,000 primarily as a result of reduced headcount, reduced
outside services and one-time expenses related to the relocation of a
senior executive in the prior year.

General and administrative expenses decreased by $543,000 or 15% to
$3,009,000. This decrease was primarily attributable to a beneficial
settlement of the lawsuit from LSB Corp. and a reduction in a variety of
outside services.

Interest income decreased by $124,000 or 34% from the prior year due to
lower average cash balances. Interest expense decreased by $247,000 or
23% due mainly to scheduled principal repayments during the year.

Net income for 1998 was $2,525,000, an improvement of $4,333,000 over the
prior year's net loss of $1,808,000.

Capital Resources and Liquidity
- -------------------------------

Total assets as of December 31, 1999 were $23,503,000 compared with
$23,081,000 at December 31, 1998. Working capital increased to $9,434,000
from $4,760,000 for the same period and cash and cash equivalents
decreased to $3,705,000 from $4,088,000. For the year ended December 31,
1999, the Company's operating activities used $647,000 of cash compared to
$1,548,000 in the prior year. Cash used in operations in 1999 included a
payment of $1,300,000 for the settlement of the LSB Corp. lawsuit. The
Company invested approximately $4,267,000 in product research and
development and $2,798,000 in selling and marketing the Company's products
and technologies.

Accounts receivable, net of allowances increased to $3,580,000 at December
31, 1999 from $2,533,000 at December 31, 1998. Days sales outstanding
increased to 89 days in 1999 from 68 days in 1998. The increase in days
sales outstanding is mainly due to the timing of product shipments, which
was heavily weighted towards the last month of the quarter. Receivables
from royalties, license fees and R&D fees decreased to $1,493,000 in 1999
from $2,297,000 in 1998 due mainly to collection of R&D and license fees
outstanding at December 31, 1998.

Capital expenditures for the year ended December 31, 1999 totaled $261,000
compared to $2,710,000 in the prior year. Prior year capital expenditures
included plant expansion projects at the Company's manufacturing facility
in Lafayette, Louisiana, leasehold improvements to the newly-leased
corporate offices and research and development facility in Redwood City
and replacement of non-Year 2000 compliant systems.

The Company has financed its operations, including technology and product
research and development, from amounts raised in debt and equity
financings, the sale of Microsponge and Polytrap delivery systems and
analytical standard products; payments received under licensing
agreements; and interest earned on short-term investments.

During 1999, the Company received $210,000 from the exercise of 70,000
warrants to purchase common stock which had been issued in conjunction
with a 1995 debt financing arrangement.

In March 1999, the Company obtained a $4,000,000 term loan with a fixed
interest rate of 13.87%. The loan is secured by the assets of the
Company's manufacturing facility in Louisiana and a portion of the
Company's accounts receivable. Principal and interest payments are due in
equal monthly installments over a period of forty-eight months commencing
March 1999. The term loan was obtained mainly to refinance scheduled debt
repayments made in the first quarter of 1999.

The Company's existing cash and cash equivalents, collections of trade
accounts receivable, together with interest income and other revenue
producing activities including licensing fees, royalties and research and
development fees are expected to be sufficient to meet the Company's
working capital requirements for the foreseeable future, assuming no
changes to existing business plans.

Year 2000
- ---------

The Company completed a comprehensive review of its internal computer
systems to ensure these systems were adequate to address the issues
expected to arise in connection with the Year 2000. The Company has not
experienced any business disruptions as a result of year 2000 issues nor
incurred material expenditures. The Company will continue to monitor its
internal operating systems as well as third parties with whom the Company
does business, to identify and address any potential risk situations
related to year 2000. However, there can be no assurances that the
Company will not be adversely affected by these suppliers and service
providers in the future and that these expenditures will not be material.

New Accounting Standards
- ------------------------

In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131 "Disclosures about Segments of A
Business Enterprise" (SFAS 131) which is effective for financial
statements beginning after December 15, 1997, and establishes standards
for disclosures about segments of an enterprise. Currently the Company
operates in a single segment.

In June 1998, the FASB issued SFAS No. 133 "Accounting for Derivative
Instruments and Hedging Activities" which is effective for all fiscal
quarters of fiscal years beginning after June 15, 1999. In June 1999, the
FASB issued SFAS No. 137, which defers the implementation of SFAS 133 to
be effective for all fiscal quarters of fiscal years beginning after June
15, 2000. The Company anticipates that adoption of this Statement will
not have a material effect on the financial position or results of
operations of the Company. SFAS 133 establishes accounting and reporting
standards for derivative instruments and for hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those
instruments at fair value. SFAS 133 generally provides for matching the
timing of gain or loss recognition on the hedging instrument with the
recognition of (a) the changes in the fair value of the hedged asset or
liability that are attributed to the hedged risk or (b) the earnings
effect of hedged forecasted transactions. Earlier application of all
provisions of this statement is encouraged but it is permitted only as of
the beginning of any fiscal quarter that begins after issuance of this
statement. The Company anticipates that adoption of this statement will
not have a material effect on the consolidated financial statements.

Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

The Company does not believe that there is any material market risk
exposure with respect to derivative or other financial instruments which
would require disclosure under this item.

Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Consolidated Balance Sheets
- ---------------------------

December 31,
-------------------------
1999 1998
---- ----

Assets
Current Assets:
Cash and cash equivalents $ 3,705,194 4,088,173
Accounts receivable less allowance
for doubtful accounts of $27,301 and
$96,284 at December 31, 1999 and 1998,
respectively 3,580,026 2,532,527
Receivables for royalties, license fees
and R&D fees 1,492,634 2,296,852
Accrued interest receivable 520 3,801
Inventory 4,584,997 2,959,443
Advances to officers and employees 84,632 338,947
Prepaid expenses and other 378,449 592,599
---------- ----------
Total current assets 13,826,452 12,812,342

Property and equipment, net 8,031,076 8,643,856
Deferred loan costs, net 39,853 90,428
Goodwill and other intangibles, net of
accumulated amortization of $1,488,936
and $1,286,873 at December 31, 1999
and 1998, respectively 1,259,020 1,351,813
Other long-term assets 346,397 182,892
---------- ----------
Total Assets $ 23,502,798 23,081,331
========== ==========

Liabilities and Shareholders' Equity

Current Liabilities:
Accounts payable $ 1,029,534 1,347,737
Accrued expenses 1,263,186 1,057,287
Income taxes payable 13,480 --
Accrued settlement liability -- 1,300,000
Current portion - long-term debt 891,111 3,055,460
Deferred revenue 1,195,396 1,291,540
---------- ----------
Total current liabilities 4,392,707 8,052,024

Deferred revenue - long-term 4,665,390 5,993,245
Long-term debt 2,408,933 --
---------- ----------
Total Liabilities 11,467,030 14,045,269

Commitments and Contingencies

Shareholders' Equity:
Preferred stock, authorized 2,500,000
shares; none issued or outstanding at
December 31, 1999 and 1998 -- --
Common stock, $.01 par value,
authorized 50,000,000 shares; issued
and outstanding 20,119,042 and
19,993,311 at December 31, 1999 and
1998, respectively 201,190 199,933
Warrants, issued and outstanding:
40,000 at December 31, 1999 and
196,538 at December 31, 1998 73,400 497,192
Deferred compensation (299,578) (499,294)
Additional paid-in capital 85,555,940 84,705,802
Accumulated deficit (73,495,184) (75,867,571)
---------- ----------
Total Shareholders' Equity 12,035,768 9,036,062
---------- ----------
Total Liabilities and Shareholders'
Equity $ 23,502,798 23,081,331
========== ==========

<FN>
See accompanying notes to consolidated financial statements.
</FN>

Consolidated Statements of Operations
- -------------------------------------

For the Years Ended December 31,
--------------------------------
1999 1998 1997
---- ---- ----

Revenues
Product revenues $14,624,110 13,637,093 12,441,484
Royalties, license fees and R&D
fees 5,480,926 6,983,702 3,266,095
Milestone payments 300,000 -- 1,500,000
---------- ---------- ----------
Total revenues 20,405,036 20,620,795 17,207,579

Expenses
Cost of sales 6,857,004 7,126,573 7,164,120
Research and development, net 4,266,553 4,381,913 3,740,337
Selling and marketing 2,798,434 2,999,424 3,806,030
General and administrative 3,656,858 3,009,488 3,551,977
---------- ---------- ----------
Operating income (loss) 2,826,187 3,103,397 (1,054,885)
---------- ---------- ----------

Interest expense (585,313) (805,364) (1,052,715)
Interest income 200,650 246,260 370,478
Other expense, net (4,157) (19,252) (71,119)
--------- --------- ----------

Income (loss) before income taxes 2,437,367 2,525,041 (1,808,241)
Income tax expense 64,980 -- --
---------- ---------- ----------

Net income (loss) $ 2,372,387 2,525,041 (1,808,241)
========== ========== ==========

Basic earnings (loss) per common
Share $ 0.12 0.13 (0.10)
========== ========== ==========
Diluted earnings (loss) per
common share $ 0.12 0.12 (0.10)
========== ========== ==========
Weighted average common shares
outstanding - basic 20,078,912 19,854,103 18,778,921
========== ========== ==========
Weighted average common shares
outstanding - diluted 20,252,381 20,380,832 19,814,833
========== ========== ==========
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE

Consolidated Statements of Shareholders' Equity
- -----------------------------------------------

For the Years Ended December 31, 1999, 1998 and 1997

Common Stock Additional
Common Stock Warrants Paid-In Deferred Accumulated Shareholders'
Shares Amount Shares Amount Capital Compensation Deficit Equity
----------- -------- --------- ---------- ----------- ---------- ------------ -----------

Balance December 31,
1996 18,359,744 $183,597 1,431,974 $2,457,692 $73,950,092 $ -- $(76,584,371) $ 7,010

Options exercised 165,374 1,654 -- -- 777,452 -- -- 779,106
Fair value of stock
options issued to
non-employees -- -- -- -- 96,757 -- -- 96,757
Common stock issued to
employees under the
Employee Stock Purchase
Plan 14,545 145 -- -- 87,125 -- -- 87,270
Warrants exercised 925,158 9,252 (925,158) (1,474,500) 6,416,128 -- -- 4,950,880
Net loss -- -- -- -- -- -- (1,808,241) (1,808,241)
---------- ------- --------- --------- ---------- -------- ---------- ----------
Balance, December 31,
1997 19,464,821 $194,648 506,816 $ 983,192 $81,327,554 $ -- $(78,392,612) $ 4,112,782
---------- ------- --------- --------- ---------- -------- ---------- ----------
Options exercised 79,598 796 -- -- 413,072 -- -- 413,868
Fair value of stock
options issued to
non-employees -- -- -- -- 42,200 -- -- 42,200
Restricted stock
awards 100,000 1,000 -- -- 599,151 (599,151) -- 1,000
Amortization of restricted
stock -- -- -- -- -- 99,857 -- 99,857
Common stock issued to
employees under the
Employee Stock Purchase
Plan 38,614 386 -- -- 190,249 -- -- 190,635
Warrants exercised 310,278 3,103 (310,278) (486,000) 2,133,576 -- -- 1,650,679
Net income -- -- -- -- -- -- 2,525,041 2,525,041
---------- ------- --------- --------- ---------- -------- ----------- ----------
Balance, December 31,
1998 19,993,311 $199,933 196,538 $ 497,192 $84,705,802 $(499,294) $(75,867,571) $ 9,036,062
Options exercised 3,719 37 -- -- 19,489 -- -- 19,526
Fair value of stock
issued to
non-employees 8,506 85 -- -- 37,415 -- -- 37,500
Amortization of restricted
stock -- -- -- -- -- 199,716 -- 199,716
Common stock issued to
employees under the
Employee Stock Purchase
Plan 43,506 435 -- -- 160,142 -- -- 160,577
Warrants exercised 70,000 700 (70,000) (128,450) 337,750 -- -- 210,000
Warrants expired -- -- (86,538) (295,342) 295,342 -- -- --
Net income -- -- -- -- -- -- 2,372,387 2,372,387
---------- ------- --------- --------- ---------- -------- ----------- ----------
Balance, December 31,
1999 20,119,042 $201,190 40,000 $ 73,400 $85,555,940 $(299,578) $(73,495,184) $12,035,768
========== ======= ========= ========= ========== ======== =========== ==========
<FN>
See accompanying notes to consolidated financial statements.
</FN>

Consolidated Statements of Cash Flows
- --------------------------------------

For the Years Ended December 31,
--------------------------------------
1999 1998 1997
--------- --------- ---------

Cash flows from operating activities:
Net income (loss) $ 2,372,387 2,525,041 (1,808,241)
Adjustments to reconcile net income (loss)
to net cash used in operating activities:
Depreciation and amortization 1,075,989 1,104,337 980,933
Amortization of deferred revenue (1,713,999) (1,810,530) (883,051)
Allowance for doubtful accounts 7,891 38,830 22,967
Stock compensation awards to non-employees 37,500 42,200 96,757
Restricted stock awards 199,716 100,857 --
Amortization of deferred loan costs 50,575 263,265 263,265
Changes in operating assets and liabilities:
Accounts receivable (1,055,390) (283,060) (1,286,817)
Receivables for royalties, license fees and
R&D fees 804,218 (1,196,484) (458,667)
Accrued interest receivable 3,281 9,805 (9,643)
Inventory (1,625,554) (320,314) (554,056)
Advances to officers and employees 254,315 (242,241) (3,727)
Prepaid expenses and other 214,150 (161,760) (199,753)
Other long-term assets (163,505) 71,288 (194,577)
Accounts payable 205,899 (288,452) (721,463)
Accrued expenses (318,203) (1,775,012) 1,375,787
Income taxes payable 13,480 -- --
Accrued settlement liability (1,300,000) (500,000) --
Deferred revenue 290,000 875,000 3,350,000
--------- --------- ----------
Net cash used in operating activities (647,250) (1,547,230) (30,286)
--------- --------- ----------

Cash flows from investing activities:
Purchases of property and equipment (261,146) (2,709,747) (2,799,683)
Purchases of intangible assets (109,270) (58,664) (400,000)
Proceeds from sale of equipment and
assets held for sale -- -- 2,181,004
--------- --------- ----------
Net cash used in investing activities (370,416) (2,768,411) (1,018,679)
--------- --------- ----------

Cash flows from financing activities:
Repayment of long-term debt (3,755,416) (2,523,389) (1,490,779)
Proceeds from long-term debt and warrants
issued 4,000,000 -- --
Proceeds from the exercise of common
stock options and warrants 229,526 2,064,547 5,729,986
Proceeds from issuance of shares under
the Employee Stock Purchase Plan 160,577 190,635 87,270
--------- --------- ----------
Net cash provided by (used in) financing
activities 634,687 (268,207) 4,326,477
--------- --------- ----------

Net (decrease) increase in cash and cash
equivalents (382,979) (4,583,848) 3,277,512
Cash and cash equivalents at the beginning
of the year 4,088,173 8,672,021 5,394,509
--------- --------- ----------
Cash and cash equivalents at the end of
the year $ 3,705,194 4,088,173 8,672,021
========= ========= =========
Cash paid in interest $ 478,375 559,664 790,379
========= ========= =========
Cash paid in taxes $ 51,500 39,621 12,456
========= ========= =========
<FN>
See accompanying notes to consolidated financial statements.
</FN>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
DECEMBER 31, 1999, 1998 AND 1997
- --------------------------------

Note 1 Business

Advanced Polymer Systems, Inc. ("APS" or the "Company") develops,
manufactures and sells patented delivery systems that allow for the
controlled release of active ingredients which have benefits in the
ethical dermatology, cosmetic and personal care areas. Certain projects
are conducted under development and licensing arrangements with large
companies, others are part of joint ventures in which APS is a major
participant, and a number of projects are exclusive to APS. New products
and technologies under development include bioerodible polymers for oral
or implantable drug delivery.

Note 2 Summary of Significant Accounting Policies

Principles of Consolidation: The consolidated financial statements
include the financial statements of the Company and its wholly owned
subsidiaries, Premier, Advanced Consumer Products, Inc. ("ACP") and APS
Analytical Standards. All significant intercompany balances and
transactions have been eliminated in consolidation.

Cash Equivalents and Marketable Securities
- ------------------------------------------

For purposes of the Consolidated Statements of Cash Flows and
Consolidated Balance Sheets, the Company considers all short-term
investments that have original maturities of less than three months to
be cash equivalents. Short-term investments consist primarily of
commercial paper, master notes and repurchase agreements. All
investments were classified as cash equivalents in the accompanying
financial statements since there were no investments with original
maturities longer than three months. The Company has classified its
investments in certain debt and equity securities as "available-for-
sale" (Note 5).

Financial Instruments
- ---------------------

The Company's investments are recorded at fair value with unrealized
holding gains and losses reported as a separate component of
shareholders' equity. The carrying amounts reported in the balance
sheets for accrued liabilites and short-term and long-term debt
approximate fair values due to the short-term maturities.

Inventory
- ---------

Inventory is stated at the lower of cost or market value, utilizing the
average cost method (Note 6).

Property and Equipment
- ----------------------

Property and equipment are carried at cost. Depreciation is computed
using the straight-line method over the estimated useful lives of the
assets as follows: equipment and machinery, 5 to 10 years; furniture
and fixtures, 5 years; buildings, 19 years; and leasehold improvements,
over the shorter of the respective lease terms or the respective useful
lives of the leasehold improvements(Note 7).

Deferred Loan Costs
- -------------------

Deferred loan costs relate to costs incurred in obtaining certain
loans. These costs are being amortized over the life of the loans
using the interest method (Note 8).

Long-Lived Assets, Including Goodwill and Other Intangibles
- -----------------------------------------------------------

In accordance with Statement of Financial Accounting Standards ("SFAS")
No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of" as circumstances dictate, the
Company evaluates whether changes have occurred that would require
revision of the remaining estimated lives of recorded long-lived
assets, including goodwill, or render those assets not recoverable.
Recoverability of assets to be held and used is determined by comparing
the undiscounted net cash flows of long-lived assets to their
respective carrying values. If such assets are considered to be
impaired, the amount of impairment to be recognized is measured based
on the projected discounted cash flows using an appropriate discount
rate.

In 1999, APS paid $100,000 for rights relating to the topical
application of Vitamin K. The rights are being amortized on a
straight-line basis over the estimated life of the product.

In 1997, APS acquired all the rights to Exact(R) acne medication from
Johnson & Johnson Consumer Products, Inc. for $350,000. Effective
January 1, 1997, APS licensed Exact and other consumer products to
Lander Company. The rights are being amortized on a straight-line
basis over the length of the licensing agreement with Lander.

In 1996, APS acquired all patents and rights to the Polytrap technology
from Dow Corning Corporation for $1,200,000. These intangible assets
are being amortized on a straight-line basis over a period of
approximately 10 years, which is the remaining life of the main patent
acquired.

In 1992, APS acquired for 157,894 shares of its common stock, the
outstanding 25% interest in ACP, APS' over-the-counter
consumer products subsidiary. The acquisition was accounted for as a
purchase. Excess of cost over net assets acquired arising from the
purchase was amortized over five years on a straight-line basis.

Amortization of intangible assets totalled $202,063, $184,392 and
$188,259, in 1999, 1998 and 1997, respectively.

Stock-Based Compensation
- ------------------------

The Company follows the provisions of SFAS No. 123 "Accounting for
Stock Based Compensation" and has elected to account for stock-based
compensation related to employees using the intrinsic value method
prescribed in Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees" and related interpretations.
Accordingly, except for stock options issued to non-employees and
restricted stock awards to employees, no compensation cost has been
recognized for the Company's fixed stock option plans and stock
purchase plan (Note 10).

Use of Estimates
- ----------------

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the consolidated
financial statements and related notes to financial statements.
Changes in such estimates may affect amounts in future periods.

Revenue Recognition
- -------------------

Product revenues are recorded upon shipment of products.

The Company has several licensing agreements that generally provide for
the Company to receive periodic minimum payments, royalties, and/or
non-refundable license fees. These licensing agreements typically
require a non-refundable license fee and allow customers to sell the
Company's proprietary products in a specific field or territory. The
license agreements provide for APS to earn future revenue through
product sales and/or, in some cases, royalty payments. The license
fees are non-refundable even if the agreements are terminated before
their term or APS fails to supply product to the licensee. These
amounts are reported as deferred revenues and amortized over the
estimated life of the product to which they relate. Amortization of
license fees are classified as Royalties, License Fees and R&D Fees in
the accompanying consolidated statements of operations.

Contractually required minimum royalties are recorded ratably
throughout the contractual period. Royalties in excess of minimum
royalties are recognized as earned when the related product is shipped
to the end customer by the Company's licensees based on information
received by the Company from its licensees.

A milestone payment is a payment made by a third party or corporate
partner to the Company upon the achievement of a predetermined
milestone as defined in a legally binding contract. Milestone payments
are recognized as revenue when the milestone event has occurred and the
Company has completed all milestone related services such that the
milestone payment is currently due and is non-refundable. In 1997, the
Company earned a milestone payment with the receipt of marketing
clearance from the FDA for Retin-A(R) Micro(TM) (Note 15). In 1999,
the Company earned milestone payments from Dermik upon the acceptance
for filing by the FDA of the New Drug Application ("NDA") for 5-
Fluorouracil.

Deferred Revenue
- ----------------

Non-refundable license fees received by the Company are reported as
deferred revenues and amortized over the estimated life of the product
to which they relate.

Prepaid royalties paid to APS by Ortho-McNeil Pharmaceutical
Corporation ("Ortho"), a subsidiary of Johnson & Johnson Inc. ("J&J"),
as part of the retinoid licensing agreement are also reported as
deferred revenue (Note 15). In accordance with the licensing
agreement, 25% of the royalties earned by APS are applied against the
deferred revenues after certain annual minimum royalty payments are
met.

Advertising and Promotion Costs
- -------------------------------

Advertising and promotion costs are expensed as incurred.

Earnings (Loss) Per Share
- -------------------------

The Company has adopted and retroactively applied the provisions of
SFAS No. 128 "Earnings per Share" for all periods presented. SFAS No.
128 requires the Company to report both basic earnings per share, which
is computed by dividing net income by the weighted-average number of
common shares outstanding, and diluted earnings per share, which is
computed by dividing net income by the total of weighted-average number
of common shares outstanding and dilutive potential common shares
outstanding (Note 11).

Concentrations of Credit Risk
- -----------------------------

Financial instruments which potentially expose the Company to
concentrations of credit risk, as defined by SFAS No. 105, consist
primarily of trade accounts receivable and receivables from royalties,
license fees and R&D fees. Approximately 57% and 65% of the recorded
trade receivables and receivables from royalties, license fees and R&D
fees were concentrated with four and five customers in the
pharmaceutical, cosmetic and personal care industries as of December
31, 1999 and 1998, respectively. Approximately 51% and 51% of the
recorded net sales were concentrated with seven and six customers for
the years ended December 31, 1999 and December 31, 1998, respectively.
To reduce credit risk, the Company performs ongoing credit evaluations
of its customers' financial conditions. The Company does not generally
require collateral.

Reclassifications
- -----------------

Certain reclassifications have been made to the prior year financial
statements to conform with the presentation in 1999.

Note 3 Related Party Transactions

The Company has entered into agreements with Large Scale Biology
Corp.("LSB Corp.") formerly known as Biosource Technologies, Inc. of which
Toby Rosenblatt, a member of the Company's Board of Directors, is a
stockholder and a former director. All agreements between APS and LSB
Corp. have been considered and approved by a vote of the disinterested
directors (Note 4).

As of December 31, 1998, the Company had an outstanding secured loan
receivable of $253,000 from an officer of the Company with an interest
rate of approximately 10%, the maximum allowed under California law. The
loan was secured by the shares of Company stock owned by the officer and
was approved by the Compensation Committee of the Company's Board of
Directors. Repayment of the loan and related interest was received in
1999.

Note 4 Legal Proceeding

In November, 1997 LSB Corp. filed a complaint against the Company in the
San Mateo Superior Court. LSB Corp. claimed damages from the Company on
the grounds that the Company had failed to pay certain minimum amounts
allegedly due under a contract for the supply of melanin.

In December 1998, the Company reached a settlement agreement with LSB
Corp. for a net amount of $1,300,000, which consisted of a $1,500,000
settlement of LSB Corp. claims and a $200,000 settlement of the Company's
cross claims. The Company's consolidated financial statemements for the
period ended December 31, 1998 included a favorable decrease in accrued
settlement liability of $500,000 resulting from the settlement agreement.
The settlement liability was paid to LSB Corp. in cash in 1999.

The Company expects that the outcome of this legal proceeding will not
have a material adverse effect on the consolidated financial statements.

Note 5 Cash Equivalents

All investments in debt securities have been classified as cash
equivalents in the accompanying balance sheets as they had original
maturities of 90 days or less.

At December 31, 1999 and 1998, the amortized cost and estimated market
value of investments in debt securities are set forth in the tables below:

December 31, 1999
--------------------------------
Estimated
Cost Marked Value
--------------------------------
Available-for-Sale:
Corporate debt securities $2,518,000 2,518,000
Other debt securities 102,660 102,660
--------- ---------
Totals $2,620,660 2,620,660
========= =========

December 31, 1998
--------------------------------
Estimated
Cost Market Value
--------------------------------
Available-for-Sale:
Corporate debt securities $1,984,204 1,984,204
Other debt securities 152,119 152,119
--------- ---------
Totals $2,136,323 2,136,323
========= =========

Note 6 Inventory

The major components of inventory are as follows:

December 31,
---------------------------
1999 1998
---- ----
Raw materials and work-in-process $ 675,106 743,383
Finished goods 3,909,891 2,216,060
--------- ---------
Total inventory $4,584,997 2,959,443
========= =========

Note 7 Property and Equipment

Property and equipment consist of the following:

December 31,
---------------------------
1999 1998
---------- ----------
Building $ 1,831,392 1,831,392
Land and improvements 163,519 163,519
Leasehold improvements 1,380,779 1,423,584
Furniture and equipment 14,765,451 14,504,305
----------- ----------
Total property and equipment 18,141,141 17,922,800
Accumulated depreciation
and amortization (10,110,065) (9,278,944)
---------- ----------
Property and equipment, net $ 8,031,076 8,643,856
=========== ==========

Depreciation expense amounted to $873,928, $837,064 and $709,802 for the
years ended December 31, 1999, 1998, and 1997, respectively.

Note 8 Long-Term Debt

Long-term debt consists of the following:

December 31,
--------------------
1999 1998
---- ----

Term loan, principal and interest due in equal
monthly installments commencing March 1999
through February 2003, secured by certain
real and personal property and a portion of
the Company's accounts receivable 3,300,044 --

Bank loan, interest payable monthly, principal
due in non-equal installments commencing
December 1, 1996 through March 1, 1999,
secured by the assets and operating cash
flow of a subsidiary of the Company and
guaranteed by the Company $ -- 1,550,000

Term loan, subordinated to bank loan, interest
payable quarterly, principal due in non-equal
installments commencing December 1, 1996
through March 1, 1999, secured by the assets
and operating cash flows of a subsidiary of
the Company and guaranteed by the Company -- 852,500

Term loan, principal and interest due in equal
monthly installments commencing October 1996
through December 1999, secured by certain
real and personal property -- 652,960
--------- ---------
Total 3,300,044 3,055,460
Less current portion 891,111 3,055,460
--------- ---------
Long-term debt $2,408,933 --
========= =========

In 1995, the Company received an aggregate amount of $8,122,334 from three
financing arrangements.

The first financing arrangement was a $3,000,000 bank loan with an
interest rate equal to two percentage points above the Prime Rate. The
loan was secured by the assets and operating cash flows of a subsidiary of
the Company and guaranteed by the Company. Final scheduled payment of
principal was made during the first quarter of 1999.

The second financing arrangement was a $1,650,000 term loan with a
syndicate of lenders and a fixed interest rate of 14%. The loan was also
secured by the assets and operating cash flows of a subsidiary of the
Company and guaranteed by the Company. Final scheduled payment of
principal was made during the first quarter of 1999.

In the third quarter of 1995, the Company consummated a transaction
whereby certain assets were sold to a third party and subsequently leased
back for a fixed rental stream over a period of forty-eight months. The
Company has the option either to purchase all the properties at the
expiration of the term of the lease or extend the term of the lease. The
Company reported this transaction as a financing transaction since the
requirements for consummation of a sale were not met. A deposit of
$188,000 with the lender was offset against the loan balance as of
December 31, 1998. This transaction has been reflected in the table above
as a term loan. As of December 31, 1999, the term loan was fully repaid.

In conjunction with the debt financing agreements, APS issued a total of
197,500 warrants with an original exercise price of $7.00 per share of
common stock. In 1996, 87,500 of the warrants were exercised. In
accordance with the original terms of the warrant agreements, the exercise
price on 110,000 of the warrants outstanding at December 31, 1997 was
reduced to $3.00 per share on December 31, 1997 as a result of the Company
reporting a net loss for the 1997 fiscal year. During 1999, 70,000 of
these warrants were exercised. The remaining 40,000 warrants expire on
March 27, 2000.

All costs incurred in obtaining the financing arrangements have been
capitalized as deferred loan costs, and are being amortized over the life
of the loans using the interest method. Interest paid in 1999, 1998 and
1997 totalled $478,375, $559,664 and $790,379, respectively.

Note 9 Commitments

Lease Commitments: Total rental expense for property and equipment was
$1,173,193, $1,019,534 and $770,187 for 1999, 1998 and 1997, respectively.

The Company's future minimum lease payments under noncancellable operating
leases for facilities as of December 31, 1999, are as follows:

Years Ending Minimum
December 31, Payments
------------ -----------
2000 $1,337,829
2001 748,055
2002 737,383
2003 675,135
2004 573,474
Thereafter --
----------
$4,071,876
==========

Note 10 Shareholders' Equity

Private Placements and Common Stock Warrants: During 1997, 925,158
warrants issued in connection with a 1994 private placement were
exercised. In March 1998, the remaining 310,278 warrants from the 1994
private placement were exercised.

In conjunction with certain debt financing agreements made in 1995 (Note
8), APS issued a total of 197,500 warrants with an original exercise price
of $7.00 per share of common stock. In 1996, 87,500 of the warrants were
exercised. In accordance with the warrant agreements, the exercise price
on 110,000 of the warrants outstanding at December 31, 1997 was reduced to
$3.00 on December 31, 1997 as a result of the Company reporting a net loss
for the 1997 fiscal year. During 1999, 70,000 of these warrants were
exercised. The remaining 40,000 warrants expire on March 27, 2000.

In May 1999, 86,538 warrants issued in connection with a 1996 private
placement expired.

Shareholders Rights Plan: On August 19, 1996, the Board of Directors
approved a Shareholders Rights Plan under which shareholders of record on
September 3, 1996 received a dividend of one Preferred Stock purchase
right ("Rights") for each share of common stock outstanding. The Rights
were not exercisable until 10 business days after a person or group
acquired 20% or more of the outstanding shares of common stock or
announced a tender offer which could have resulted in a person or group
beneficially owning 20% or more of the outstanding shares of common stock
(an "Acquisition") of the Company. The Board of Directors approved an
increase in threshold to 30% in December 1997. Each Right, should it
become exercisable, will entitle the holder (other than acquirer) to
purchase company stock at a discount. The Board of Directors may
terminate the Rights plan or, under certain circumstances, redeem the
rights.

In the event of an Acquisition without the approval of the Board, each
Right will entitle the registered holder, other than an acquirer and
certain related parties, to buy at the Right's then current exercise price
a number of shares of common stock with a market value equal to twice the
exercise price.

In addition, if at the time when there was a 30% shareholder, the Company
were to be acquired by merger, shareholders with unexercised Rights could
purchase common stock of the acquirer with a value of twice the exercise
price of the Rights.

The Board may redeem the Rights for $0.01 per Right at any time prior to
Acquisition. Unless earlier redeemed, the Rights will expire on August
19, 2006.

Stock-Based Compensation Plans: The Company has two types of stock-based
compensation plans, a stock purchase plan and stock option plans.

In 1997, the stockholders approved the Company's 1997 Employee Stock
Purchase Plan (the "Plan"). Under the 1997 Employee Stock Purchase Plan,
the Company is authorized to issue up to 400,000 shares of common stock to
its employees, nearly all of whom are eligible to participate. Under the
terms of the Plan, employees can elect to have up to a maximum of 10
percent of their base earnings withheld to purchase the Company's common
stock. The purchase price of the stock is 85 percent of the lower of the
closing prices for the Company's common stock on: (i) the first trading
day in the enrollment period, as defined in the Plan, in which the
purchase is made, or (ii) the purchase date. The length of the enrollment
period may not exceed a maximum of 24 months. Enrollment dates are the
first business day of May and November provided that the first enrollment
date was April 30, 1997. Approximately 53 percent of eligible employees
participated in the Plan in 1999. Under the Plan, the Company issued
43,506 shares in 1999, 38,614 shares in 1998 and 14,545 shares in 1997.
The weighted average fair value of purchase rights granted during 1999,
1998 and 1997 were $3.05, $1.65 and $2.77, respectively. The weighted
average exercise price of the purchase rights exercised during 1999, 1998
and 1997 were $3.69, $3.83 and $6.00, respectively. As of December 31,
1999, the Company had 303,335 shares reserved for issuance under the stock
purchase plan.

The Company has various stock option plans for employees, officers,
directors and consultants. The options are granted at fair market value
and expire no later than ten years from the date of grant. The options
are exercisable in accordance with vesting schedules that generally
provide for them to be fully exercisable four years after the date of
grant. Any shares that are issuable upon exercise of options granted
under the 1992 Stock Option Plan that expire or become unexercisable for
any reason without having been exercised in full are available for future
grant and issuance under the same stock option plan.

The following table summarizes option activity for 1999, 1998 and 1997:

1999 1998 1997
----------------- ------------------ --------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
----------------- ------------------ --------------------

Outstanding at beginning
of year 3,567,183 $6.32 2,947,755 $6.63 2,901,440 $6.46
Granted 125,047 5.69 777,000 5.18 313,500 7.50
Exercised (3,719) 5.25 (79,598) 5.20 (165,374) 4.71
Expired or Cancelled (28,463) 6.81 (77,974) 7.83 (101,811) 8.36
--------- --------- ---------
Outstanding at end of year 3,660,048 6.30 3,567,183 6.32 2,947,755 6.63
========= ========= =========
Options exercisable at
year-end 3,013,164 6.46 2,698,960 6.44 2,259,683 6.60
Shares available for future
grant at year end 196,185 293,269 358,295
Weighted-average fair
value of options granted
during the year $3.00 $2.45 $4.25

The following table summarizes information about fixed stock options
outstanding at December 31, 1999:

OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------- -------------------
Weighted Weighted Weighted
Average Average Average
Range of Number Remaining Remaining Number Remaining
Exercise Outstanding Contractual Exercise Exercisable Exercise
Prices 12/31/99 Life Price at 12/31/99 Price
- ----------- ----------- ----------- --------- ----------- ---------

$3.44-$5.25 1,198,136 5.8 years $ 4.55 928,969 $ 4.65
$5.38-$6.13 917,620 5.3 5.58 725,745 5.51
$6.25-$8.13 1,057,292 6.3 7.14 871,450 7.11
$9.25-$15.00 487,000 3.0 10.12 487,000 10.12
--------- ---------
$3.44-$15.00 3,660,048 5.4 $ 6.30 3,013,164 $ 6.46
========= =========

The Company has adopted the disclosure only provisions of SFAS No. 123
"Accounting for Stock-Based Compensation." Accordingly, except for stock
options issued to non-employees and restricted stock awards to employees,
no compensation cost has been recognized for the various fixed stock
option plans and stock purchase plan. The compensation cost that has been
charged against income for the stock options issued to non-employees and
restricted stock awards to employees was $199,716, $142,057 and $96,800
for 1999, 1998 and 1997, respectively. Had compensation cost for the
Company's stock-based compensation plans been determined consistent with
the fair value method provisions of SFAS No. 123, the Company's net income
(loss) and income (loss) per common share would have changed to the pro-
forma amounts indicated below:

1999 1998 1997
----------- ----------- ---------
Net income (loss)
- as reported $ 2,372,387 2,525,041 (1,808,241)
Net income (loss)
- pro-forma 1,073,712 795,086 (3,135,399)
Basic earnings (loss) per
common share 0.12 0.13 (0.10)
Diluted earnings (loss) per
common share 0.12 0.12 (0.10)
Basic earnings (loss) per
common share - pro-forma 0.05 0.04 (0.17)
Diluted earnings (loss) per
common share - pro-forma 0.05 0.04 (0.17)

For stock options, the fair value of each option grant is estimated on the
date of grant using the Black-Scholes option pricing model with the
following weighted-average assumptions used for grants in 1999, 1998 and
1997, respectively: dividend yield of zero for all years; expected
volatility of 52 percent, 48 percent and 60 percent; risk-free interest
rates of 6.6 percent, 4.7 percent and 5.7 percent; and expected life of
five years for all the stock option plans.

For the stock purchase plan, the fair value of each award is also
estimated using the Black-Scholes option pricing model. For purchase
rights granted in 1999, the multiple option approach with the following
assumptions were used for expected terms of six, twelve, eighteen and
twenty-four months: risk-free interest rate of 4.6 percent; volatility of
55 percent; and dividend yield of zero. The purchase rights granted in
1998 were valued using the following assumptions for expected terms of
six, twelve, eighteen and twenty-four months, respectively: risk-free
interest rate of 5.1 percent; volatility of 54 percent; and dividend yield
of zero. The purchase rights granted in 1997 were valued using the
following assumptions for expected terms of six, twelve, eighteen and
twenty-four months, respectively: risk-free interest rates of 5.7
percent, 5.8 percent, 6.0 percent and 6.0 percent; volatility of 40
percent for all four terms; and dividend yield of zero for all terms.

The amounts disclosed above under the fair value method of SFAS No. 123
include compensation costs and fair values for options and purchase rights
granted since January 1, 1995 and may not be representative of the effects
in future years.

Note 11 Earnings Per Share

In the fourth quarter of 1997, the Company adopted and retroactively applied
the requirements of SFAS No. 128, "Earnings Per Share", to all periods
presented. The following table sets forth the computation of the Company's
basic and diluted earnings (loss) per share:

1999 1998 1997
---- ---- ----

Net income (loss) (numerator) $ 2,372,387 2,525,041 (1,808,241)
========== ========== ==========

Shares calculation (denominator):
Weighted average shares
outstanding - basic 20,078,912 19,854,103 18,778,921
Effect of dilutive securities:
Stock options and employee
stock purchase plan 125,762 381,518 634,655
Warrants 47,707 145,211 401,257
---------- ---------- ----------
Weighted average shares
outstanding - diluted 20,252,381 20,380,832 19,814,833
========== ========== ==========
Earnings (loss) per share -
basic 0.12 0.13 (0.10)
========== ========== ==========

Earnings (loss) per share -
diluted 0.12 0.12 (0.10)
========== ========== ==========

The following options with expiration dates ranging from December 18, 2001 to
June 6, 2009 were outstanding during the periods presented, but were not
included in the computation of diluted earnings per share since the exercise
prices of the options were greater than the average market price of the
common shares:

1999 1998 1997
---- ---- ----

Number outstanding 2,816,970 1,362,432 757,417
Range of exercise prices $5.00 - $15.00 $6.81 - $15.00 $7.88 - $15.00

Note 12 Comprehensive Income

During the first quarter of 1998, the Company adopted SFAS No. 130
"Reporting Comprehensive Income" which establishes standards for reporting
and display of comprehensive income and its components in a full set of
general purpose financial statements. For the years ended December 31,
1999, 1998 and 1997, comprehensive income (loss) was the same as net
income (loss).

Note 13 Defined Contribution Plan

The Company sponsors a defined contribution plan covering substantially
all of its employees. In the past three calendar years, the Company made
matching contributions equal to 50% of each participant's contribution
during the plan year up to a maximum amount equal to the lesser of 3% of
each participant's annual compensation or $4,800, $4,800 and $4,750 for
the 1999, 1998 and 1997 calendar years, respectively. The Company may
also contribute additional discretionary amounts as it may determine. For
the years ended December 31, 1999, 1998 and 1997, the Company contributed
to the plan approximately $122,000, $124,000 and $110,000, respectively.
No discretionary contributions have been made to the plan since its
inception.

Note 14 Income Taxes

A reconciliation of the federal statutory rate of 34% to the Company's
effective tax rate is as follows:

December 31
------------------------
1999 1998 1997
---- ---- ----
U.S. federal statutory rate (benefit) 34.00% 34.00% (34.00)%
State taxes, net of federal income
tax benefit 1.02 -- --
Net losses without benefits -- -- 31.40
Alternative minimum tax 1.12 -- --
Utilization of temporary differences
for which no benefit was previously
recognized (35.04) (34.76) --
Nondeductible expenses 1.57 0.76 2.60
----- ----- -----
Total tax expense (benefit) 2.67% -- --
===== ===== =====

At December 31, 1999, the Company had net federal operating loss
carryforwards of approximately $72,300,000 for income tax reporting
purposes and California operating loss carryforwards of approximately
$2,500,000. The federal net operating losses expire beginning in 2000
through the year 2018. The California net operating loss carryforwards
expire beginning in 2000 through the year 2002. A California net
operating loss carryforward from 1994 in the approximate amount of
$249,000 expired on December 31, 1999. The Company also has federal
alternative minimum tax credit carryforwards of approximately $27,000,
which can be carried forward indefinitely.

The Company also has investment tax credits and research and experimental
tax credits aggregating approximately $1,681,000 and $1,016,000 for
federal and California purposes, respectively. The federal credit
carryforwards expire beginning in 2000 through the year 2018. The
California credits carry over indefinitely until utilized.

In addition, there are California credit carryforwards for qualified
manufacturing and research and development equipment of approximately
$22,000; these credits expire beginning in 2004 through the year 2009.

The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities as of
December 31, 1999 and 1998 are presented below:

1999 1998
------------ -----------

Deferred tax assets:
Deferred research expenditures $ 441,000 1,544,000
Accruals and reserves not
currently deductible for tax
purposes 253,000 977,000
State taxes 13,000 --
Net operating loss carryforwards 24,728,000 25,260,000
Credit carryforwards 2,745,000 2,621,000
Other 307,000 286,000
---------- ----------
Gross deferred tax assets 28,487,000 30,688,000
Less valuation allowance (26,615,000) (29,927,000)
---------- ----------
Total deferred tax assets 1,872,000 761,000
---------- ----------
Deferred tax liabilities:
Property and equipment (1,872,000) (761,000)
---------- ----------
Total deferred tax liabilities (1,872,000) (761,000)
---------- ----------
Net deferred taxes $ -- --
========== ==========

The net change in the valuation allowance for the year ended December 31,
1999 was a decrease of approximately $3,312,000. The net change in the
valuation allowance for the years ended December 31, 1998 and 1997 was a
decrease of approximately $1,595,000 and an increase of approximately
$340,000, respectively. Management believes that sufficient uncertainty
exists regarding the realizability of its deferred asset and, accordingly,
a valuation allowance is required.

Gross deferred tax assets as of December 31, 1999 include approximately
$2,927,000 relating to the exercise of stock options, for which any
related tax benefits will be credited to equity when realized.

Note 15 Ortho-McNeil Pharmaceutical Corporation

In May 1992, APS entered into development, and licensing and investment
agreements with Ortho-McNeil Pharmaceutical Corporation ("Ortho") for the
development of retinoid products. The first product is a Microsponge
system entrapment of tretinoin (trans-retinoic acid or "t-RA"), a
prescription acne drug for which FDA approval was received in February
1997. A second product licensed to Ortho is a Microsponge entrapment of a
retinoid to be used for the treatment of photodamaged skin.

The terms of the agreements included an $8,000,000 investment in APS for
723,006 newly issued shares of APS common stock and the payment to APS of
$6,000,000 in R&D fees by J&J.

J&J made a second equity investment in the Company in May 1994. Under
this agreement, J&J purchased 1,000,000 shares of newly issued common
stock in consideration for $5,000,000. In January 1996, APS issued J&J
432,101 shares of common stock as a result of the APS stock price not
achieving certain predetermined levels. The 200,000 warrants issued in
1994 to J&J in conjunction with this equity investment expired in 1996.
As of December 31, 1999, J&J owned approximately 7% of the APS common
shares outstanding.

In February 1995, APS received $750,000 in prepaid royalties and an
additional $750,000 as a milestone payment on the submission to the FDA of
its New Drug Application for the tretinoin prescription acne treatment.
The milestone payment was recognized as revenue upon receipt. The prepaid
royalties of $750,000 were recorded as deferred revenues. In February
1997, upon receipt of approval from the FDA to market Retin-A(R) Micro
(tretinoin gel) microsphere for the treatment of acne, APS received
$3,000,000 from Ortho of which one half was a milestone payment which was
recognized as revenue in 1997 and half was prepaid royalties which were
recorded as deferred revenues. APS earns a mark-up on Microsponge Systems
supplied to Ortho and Ortho pays APS a royalty on product sales, subject
to certain minimums. Should these minimums not be achieved, Ortho would
lose its exclusivity and APS would regain marketing rights to the retinoid
products. APS has the ability to earn an additional $4,750,000 in fees if
certain research milestones are achieved.

Independent Auditors' Report

The Board of Directors and Shareholders
Advanced Polymer Systems, Inc.:

We have audited the accompanying consolidated balance sheets of Advanced
Polymer Systems, Inc. and subsidiaries as of December 31, 1999 and 1998,
and the related consolidated statements of operations, shareholders'
equity, and cash flows for each of the years in the three-year period
ended December 31, 1999. In connection with our audits of the
consolidated financial statements, we also have audited the consolidated
financial statement schedule as listed in Item 14(a)2. These consolidated
financial statements and consolidated financial statement schedule are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements and the
financial statement schedule based on our audits.

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

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
Advanced Polymer Systems, Inc. and subsidiaries as of December 31, 1999
and 1998, and the results of their operations and their cash flows for
each of the years in the three-year period ended December 31, 1999, in
conformity with generally accepted accounting principles. Also in our
opinion, the related financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
presents fairly, in all material respects, the information set forth
therein.

/s/KPMG LLP

San Francisco, California
February 18, 2000

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

Not applicable.

Part III

Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

APS incorporates by reference the information set forth under the captions
"Nomination and Election of Directors" and "Executive Compensation" of the
Company's Proxy Statement (the "Proxy Statement") for the annual meeting
of shareholders to be held on June 14, 2000.

EXECUTIVE OFFICERS

NAME AGE POSITION WITH COMPANY
- ----------------------- --- ---------------------

Michael O'Connell 50 Executive Vice President,
Chief Financial and
Administrative Officer of
Company, President of
Pharmaceutical Sciences
Les Riley 55 Senior Vice President;
President of Dermatology
and Skin Care
Subhash Saxena, Ph.D 53 Senior Vice President,
Research and Development/
Regulatory Affairs

Michael O'Connell - chief financial officer of APS since July 1992; senior
vice president and chief administrative officer since 1993; executive vice
president and president of APS' Pharmaceutical Sciences since 1998. From
1980 to 1992, he held various positions with The Cooper Companies
including vice president, finance and corporate controller from 1989 to
1991, vice president, finance and administration of Coopervision Surgical
from 1987 to 1989 and vice president, finance and administration of
Coopervision International from 1986 to 1987.

Les Riley - senior vice president of APS and president of APS' Dermatology
and Skin Care since January 1996. From 1993 to 1995, he was the chief
executive officer and president of Tristrata Incorporated ("Tristrata"), a
member of the board of directors of Neostrata Company ("Neostrata") a
subsidiary of Tristrata, and chief executive officer of Neostrata. From
1976 to 1993, he held various positions with Ortho Pharmaceutical
Corporation where he was president of the Dermatology Division from 1991
to 1993 in addition to being a member of the Board of Directors.

Subhash J. Saxena, Ph.D. - senior vice president of research and
development/regulatory affairs of APS since 1998; vice president of
research and development/regulatory affairs of APS since 1994; director of
pharmaceutical sciences of APS since 1988. From 1983 to 1988, he was a
director of research and development for VLI Corporation.

Item 11. EXECUTIVE COMPENSATION

APS incorporates by reference the information set forth under the caption
"Executive Compensation" of the Proxy Statement.

Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT

The Company incorporates by reference the information set forth under the
caption "Beneficial Stock Ownership" of the Proxy Statement.

Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The Company incorporates by reference the information set forth under the
caption "Certain Transactions" of the Proxy Statement.

Part IV

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

(a) 1. Financial Statements
The financial statements and supplementary data set forth in Part
II of the 10-K Annual Report are incorporated herein by
reference.
2. Financial Statement Schedules
Schedule II Valuation Accounts
All other schedules have been omitted because the information is
not required or is not so material as to require submission of
the schedule, or because the information is included in the
financial statements or the notes thereto.
3. Exhibits
3-A-Copy of Registrant's Certificate of Incorporation. (1)
3-B-Copy of Registrant's Bylaws. (1)
10-C-Registrant's 1992 Stock Plan dated August 11, 1992. (2)*
10-D-Registrant's 1997 Employee Stock Purchase Plan dated March
5, 1997 (9)*
10-E-Lease Agreement between Registrant and Metropolitan Life
Insurance Company for lease of Registrant's executive offices
in Redwood City dated as of November 17, 1997. (11)
10-N-Agreement with Johnson & Johnson dated April 14, 1992. (3)
10-P-Warrant to Purchase Common Stock. (5)
10-S-Lease Agreement between Registrant and Financing for Science
International dated September 1, 1995 (6)
10-T-Security and Loan Agreement between Registrant and Venture
Lending dated September 27, 1995 (6)
10-U-Asset Purchase Agreement with Dow Corning Corporation dated
January 23, 1996 (7)
10-V-Investment Agreement between Registrant and Lander Company.
(8)
10-W-License, Assignment and Supply Agreement between Registrant
and Lander Company. (10)
21-Proxy Statement for the Annual Meeting of Shareholders. (4)
23-Consent of Independent Auditors.
27-Financial Data Schedules

(b) Reports on Form 8-K
None.

(d) Financial Statement Schedules
See Item 14(a)2 of this Form 10-K.
- --------------------------------------------------------------------------
(1)Filed as an Exhibit with corresponding Exhibit No. to Registrant's
Registration Statement on Form S-1 (Registration No. 33-15429) and
incorporated herein by reference.
(2)Filed as Exhibit No. 28.1 to Registrant's Registration Statement on
Form S-8 (Registration No. 33- 50640), and incorporated herein by
reference.
(3)Filed as an Exhibit with corresponding Exhibit No. to Registrant's
Annual Report on Form 10-K for the year ended December 31, 1992, and
incorporated herein by reference.
(4)To be filed supplementally.
(5)Filed as an Exhibit with corresponding Exhibits 4.1, 4.2, 4.3 and
4.4 to Registrant's Registration Statement on Form S-3 (Registration
No.33-82562) and incorporated herein by reference.
(6)Filed as an Exhibit with corresponding Exhibit No. to Registrant's
Quarterly Report on Form 10-Q for the quarterly period ended
September 30, 1995.
(7)Filed as an Exhibit with corresponding Exhibit No. to Registrant's
Annual Report on Form 10-K for the year ended December 31, 1995, and
incorporated herein by reference.
(8)Filed as an Exhibit with corresponding Exhibit No. to Registrant's
Quarterly Report on Form 10-Q for the quarterly period ended March
31, 1996, and incorporated herein by referenced.
(9)Filed an Exhibit No. 99.1 to Registrant's Registration Statement on
Form S-8 (Registration No. 333-35151), and incorporated herein by
reference.
(10)Filed as an Exhibit with corresponding Exhibit No. to Registrant's
Annual Report on Form 10-K for the year ended December 31, 1996 and
incorporated herein by reference.
(11)Filed as an Exhibit with corresponding Exhibit No. to Registrant's
Annual Report on Form 10-K for the year ended December 31, 1997, and
incorporated herein by reference.

* Management Contract or Compensatory plans.

For purposes of complying with the amendments to the rules governing
Registration Statements on Form S-8 (effective July 13, 1990) under the
Securities Act of 1933 ("the Act"), as amended, the undersigned registrant
hereby undertakes as follows, which undertaking shall be incorporated by
reference into Part II of the registrant's Registration Statements on Form
S-8 Nos. 33-18942, 33-21829, 33-29084, 33-50640, 333-06841, 333-35151 and
333-60585 filed on April 25, 1990, May 12, 1988, September 30, 1991,
August 11, 1992, June 26, 1996, September 8, 1997 and August 4, 1998,
respectively.

Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or
otherwise, the registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other
than the payment by the registrant of expenses incurred or paid by a
director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities
being registered, the registrant will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.

SIGNATURES

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

ADVANCED POLYMER SYSTEMS, INC.

By: /s/John J. Meakem, Jr.
----------------------------------------------
John J. Meakem, Jr.
Chairman, President, Chief Executive Officer

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

Signature Title Date
- --------------------------------------------------------------------------

/S/ John J. Meakem, Jr. Chairman, President,
- ------------------------- Chief Executive Officer March 29, 2000
John J. Meakem, Jr. --------------

/S/ Michael O'Connell Executive Vice President,
- ------------------------- Chief Administrative Officer and
Michael O'Connell Chief Financial Officer March 29, 2000
--------------

/S/ Stephen Drury Director March 29, 2000
- ------------------------- --------------

/S/ Carl Ehmann Director March 29, 2000
- ------------------------- --------------
Carl Ehmann

/S/ Jorge Heller Director March 29, 2000
- ------------------------- --------------
Jorge Heller

/S/ Peter Riepenhausen Director March 29, 2000
- ------------------------- --------------
Peter Riepenhausen

/S/ Toby Rosenblatt Director March 29, 2000
- ------------------------- --------------
Toby Rosenblatt

/S/ Richard Spizzirri Director March 29, 2000
- ------------------------- --------------

/S/ Gregory H. Turnbull Director March 29, 2000
- ------------------------- --------------
Gregory H. Turnbull

/S/ C. Anthony Wainwright Director March 29, 2000
- ------------------------- --------------
C. Anthony Wainwright

/S/ Dennis Winger Director March 29, 2000
- ------------------------- --------------
Dennis Winger

Schedule II

Valuation Accounts

Additions
Beginning Charged to Ending
Balance Expense Deductions Balance
- ---------------------------------------------------------------------------

December 31, 1997
Accounts receivable, allowance
for doubtful accounts 47,527 22,967 13,040 57,454

December 31, 1998
Accounts receivable, allowance
for doubtful accounts 57,454 38,830 -- 96,284

December 31, 1999
Accounts receivable, allowance
for doubtful accounts 96,284 7,891 76,874 27,301

CONSENT OF INDEPENDENT AUDITORS

The Board of Directors and Shareholders
Advanced Polymer Systems, Inc.:

We consent to incorporation by reference in the Registration Statements
(Nos. 33-18942, 33-21829, 33-29084, 33-50640, 333-06841, 333-35151 and
333-60585) on Forms S-8 of Advanced Polymer Systems, Inc. and in the
Registration Statements (Nos. 33-47399, 33-51326, 33-67936, 33-82562, 33-
88972, 333-00759, 333-042527 and 333-69815) on Forms S-3 of Advanced
Polymer Systems, Inc. of our report dated February 18, 2000, relating to
the consolidated balance sheets of Advanced Polymer Systems, Inc. and
subsidiaries as of December 31, 1999 and 1998, and the related
consolidated statements of operations, shareholders' equity and cash flows
for each of the years in the three-year period ended December 31, 1999,
and the related schedule, which report appears in the December 31, 1999
annual report on Form 10-K of Advanced Polymer Systems, Inc.

/s/KPMG LLP

San Francisco, California
March 23, 2000

EXHIBIT INDEX
Form 10-K Annual Report

3-A-Copy of Registrant's Certificate of Incorporation. (1)
3-B-Copy of Registrant's Bylaws. (1)
10-C-Registrant's 1992 Stock Plan dated August 11, 1992. (2)*
10-D-Registrant's 1997 Employee Stock Purchase Plan dated March 5, 1997
(9)*
10-E-Lease Agreement between Registrant and Metropolitan Life Insurance
Company for lease of Registrant's executive offices in Redwood City
dated as of November 17, 1997. (11)
10-N-Agreement with Johnson & Johnson dated April 14, 1992. (3)
10-P-Warrant to Purchase Common Stock. (5)
10-S-Lease Agreement between Registrant and Financing for Science
International dated September 1, 1995 (6)
10-T-Security and Loan Agreement between Registrant and Venture Lending
dated September 27, 1995 (6)
10-U-Asset Purchase Agreement with Dow Corning Corporation dated January
23, 1996 (7)
10-V-Investment Agreement between Registrant and Lander Company. (8)
10-W-License, Assignment and Supply Agreement between Registrant and
Lander Company. (10)
21-Proxy Statement for the Annual Meeting of Shareholders. (4)
23-Consent of Independent Auditors.
27-Financial Data Schedules
- --------------------------------------------------------------------------
(1)Filed as an Exhibit with corresponding Exhibit No. to Registrant's
Registration Statement on Form S-1 (Registration No. 33-15429) and
incorporated herein by reference.
(2)Filed as Exhibit No. 28.1 to Registrant's Registration Statement on
Form S-8 (Registration No. 33- 50640), and incorporated herein by
reference.
(3)Filed as an Exhibit with corresponding Exhibit No. to Registrant's
Annual Report on Form 10-K for the year ended December 31, 1992, and
incorporated herein by reference.
(4)To be filed supplementally.
(5)Filed as an Exhibit with corresponding Exhibits 4.1, 4.2, 4.3 and 4.4
to Registrant's Registration Statement on Form S-3 (Registration
No.33-82562) and incorporated herein by reference.
(6)Filed as an Exhibit with corresponding Exhibit No. to Registrant's
Quarterly Report on Form 10-Q for the quarterly period ended September
30, 1995.
(7)Filed as an Exhibit with corresponding Exhibit No. to Registrant's
Annual Report on Form 10-K for the year ended December 31, 1995, and
incorporated herein by reference.
(8)Filed as an Exhibit with corresponding Exhibit No. to Registrant's
Quarterly Report on Form 10-Q for the quarterly period ended March 31,
1996, and incorporated herein by referenced.
(9)Filed an Exhibit No. 99.1 to Registrant's Registration Statement on
Form S-8 (Registration No. 333-35151), and incorporated herein by
reference.
(10)Filed as an Exhibit with corresponding Exhibit No. to Registrant's
Annual Report on form 10-K for the year ended December 31, 1996, and
incorporated herein by reference.
(11)Filed as an Exhibit with corresponding Exhibit No. to Registrant's
Annual Report on Form 10-K for the year ended December 31, 1997, and
incorporated herein by reference.

* Management Contract or Compensatory plans.