Heron Therapeutics, Inc./DE – ‘10-K’ for 12/31/98

As of:  Tuesday, 3/30/99   ·   For:  12/31/98   ·   Accession #:  818033-99-12   ·   File #:  0-16109

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Annual Report   —   Form 10-K
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Document/Exhibit                   Description                      Pages   Size 

 1: 10-K        Annual Report                                         50±   229K 
 2: EX-27       Financial Data Schedule (Pre-XBRL)                     2      7K 

10-K   —   Annual Report
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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, 1998  or                       

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

Commission File Number  0-16109       

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

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

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

Registrant's telephone number, including area code:   (650) 366-2626            
                                          --------------

Securities registered pursuant to Section 12 (b) of the Act:    None            
                                                    ----

Securities registered pursuant to Section 12 (g) of the Act:                    
                             Common Stock ($.01 par value)
                           -----------------------------

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 28, 1999, was $64,091,712.      
(1)                                                                             

As of February 28, 1999, 19,993,311 shares of registrant's Common Stock,        
$.01 par value, were outstanding.                                               

--------------------------------------------------------------------------      
(1)Excludes 6,500,319 shares held by directors, officers and shareholders       
whose ownership exceeds 5% of the outstanding shares at February 28,            
1999.  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.            

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DOCUMENTS INCORPORATED BY REFERENCE                                             

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

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

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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                                                  

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PART I                                                                          

Item  1.  BUSINESS                                                              

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

To the extent that this report discusses future financial projections,          
information or expectations about our products or markets, or otherwise         
makes statements which are not historical fact, such statements 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, the costs associated with      
new product introductions, as well as 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 related               
proprietary technologies to enhance the safety, effectiveness and               
aesthetic quality of topical prescription, over-the-counter ("OTC") and         
personal care products.  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       
197 issued U.S. and foreign patents on its technology and has over 52           
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.               

Products under development or in the marketplace utilize the Company's          
Microsponge systems in three primary ways: 1) as reservoirs releasing           
active ingredients over an extended period of time, 2) as receptacles for       
absorbing undesirable substances, such as excess skin oils, or 3) as            
closed containers holding ingredients away from the skin for therapeutic        
action.  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 ("J&J") family of                
companies.  This product was launched in March 1997.  In September 1994,        
the Company submitted a New Drug Application ("NDA") for a melanin-             
Microsponge sunscreen.  The NDA was found to be non-approvable pending          
additional information which the Company would need to generate.                

APS has established several alliances with multinational corporations           
including J&J, Avon and Rhone-Poulenc Rorer for products which incorporate      
Microsponge systems.  The alliance partners receive certain marketing           
rights to the products developed.  In return, APS typically receives an         
initial cash infusion in the form of license fees, future payments              
contingent on the achievement of certain milestones, revenues from the          
manufacture 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.  J&J and Rhone-Poulenc Rorer also have made equity       
investments in the Company.                                                     

Effective January 1997, the Company licensed certain of its consumer            
products to Lander Company in the United States and Canada in return for        
guaranteed minimum royalties and revenues from the sale of Microsponge          
systems.  Lander is responsible for all aspects of commercialization            
including selling, marketing, manufacturing, distribution and customer          
service.                                                                        

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 provide second-source production capabilities to           
handle growing product demand.                                                  

APS TECHNOLOGY                                                                  
--------------                                                                  

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.  Cosmetics and skin         
care 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 is             
designed to allow a prolonged rate of release of the active ingredients,        
thereby offering potential reduction in the side effects while maintaining      
the 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.                         

Colon-specific Systems.  A Microsponge system offers the potential to hold      
active ingredients in a protected environment and provide controlled            
delivery of oral medication to the lower gastrointestinal ("GI") tract.         
This approach, if successful, should open up entirely new opportunities         
for APS.                                                                        

Bioerodible Systems.  The Company is also developing systems based on new       
bioerodible polymers for the delivery of small and large molecule drugs,        
including proteins and peptides, which, if successful, should open up new       
fields of opportunity in systemic drug delivery arenas.                         

PRODUCTS                                                                        
--------                                                                        

APS is currently focusing its efforts primarily on the ethical                  
dermatology, OTC skin care and personal care markets in which Microsponge       
and Polytrap systems can provide substantial advantages.  Certain               
additional applications for the Company's technology are also under             
development, as noted below.                                                    

Ethical Dermatology                                                             
-------------------                                                             

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 the drug side effects, maintain the therapeutic efficacy and          
potentially increase patient compliance with the treatment regimen.  The        
following ethical dermatology 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.       
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 patented 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).          

Melanin-Microsponge Sunscreen.  APS has developed a sun protectant              
designed to provide protection against the sun's UVA rays as well as            
protection from the burning UVB rays.  This unique APS product candidate        
incorporates the Company's melanin-Microsponge system containing                
genetically engineered melanin, a natural pigment found in skin.                

The Company filed its NDA in September 1994 for marketing clearance.  The       
NDA was found to be non-approvable pending additional information which         
the Company would need to generate. There can be no assurance that U.S.         
FDA approval will be received.  The Company has, however, begun to              
commercialize melanin-Microsponge systems through strategic partners in         
Europe and South America, where regulatory approval is not required for         
the sale of sunscreen products.                                                 

5-Fluorouracil.  Another ethical dermatology product candidate,                 
Microsponge-entrapped 5-Fluorouracil ("5-FU"), was the subject of an            
Investigational New Drug ("IND") filing in early 1995.  5-FU is an              
effective chemotherapeutic agent for treating actinic keratosis, a pre-         
cancerous, hardened-skin condition caused by excessive exposure to              
sunlight.  However, patient compliance with the treatment regimen is poor,      
due to significant, adverse side effects.  Through a joint agreement with       
Dermik, a subsidiary of Rhone-Poulenc Rorer, the Company is developing a        
Microsponge-enhanced topical formulation that potentially offers a less         
irritating solution for treating actinic keratosis.  Phase III clinical         
studies have been completed and Dermik is preparing for the filing of an        
NDA in 1999.                                                                    

Cosmeceutical Products                                                          
---------------------                                                           

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 eight 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 (Medicis), salons and spas (Sothys), plastic surgery             
(BioMedic), prestige (La Prairie), mass (Scott's Liquid Gold) and through       
infomercials (Guthy Renker).  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 possibly other vitamins.            

In May 1997, the Company entered into an agreement under which it licensed      
exclusive rights to broad-based patents covering the topical use of             
Vitamin K.  The Company has developed various Vitamin K formulations that       
it is planning to license to marketing partners in a variety of                 
distribution channels.                                                          

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

APS 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       
unique tactile qualities.                                                       

Other Product Applications                                                      
--------------------------                                                      

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 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 begun to      
develop standards for industrial use for the calibration of                     
spectrophotometers and colorimeters.                                            

MANUFACTURING                                                                   
-------------                                                                   

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.                                                                   

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          
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.  The Company initiated a plant expansion project during 1997      
in anticipation of higher volume requirements.  This was completed during       
1998.  APS also has established relationships with contract manufacturers       
which provide second-source production 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' capital resources to       
other areas, such as product development and marketing.  All products are       
manufactured according to CGMP.  In addition, APS has a process                 
development pilot plant in its Louisiana facility.                              

MARKETING                                                                       
---------                                                                       

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 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 certain 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 is being      
marketed by Ortho Dermatological beginning 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.                                                              

Rhone-Poulenc Rorer.  In March 1992, APS and Rhone-Poulenc Rorer ("RPR")        
restructured their 1989 joint venture agreement.  Under the new terms, RPR      
received 705,041 shares of APS stock.  Furthermore, RPR 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 keratosis.  In 1995, RPR filed an IND       
application to begin human clinical testing of 5-FU.  Phase III clinical        
trials have been completed and RPR is preparing for the filing of an NDA        
in 1999.                                                                        

Lander Company.  Effective January 1997, APS established a strategic            
alliance with Lander under which Lander was granted full marketing rights       
in the United States and Canada to Microsponge-based Exact(R) acne              
medications, Take-Off facial cleansers, Everystep(R) Foot Powder, as well       
as in-licensed consumer products.  Under terms of the agreement, Lander is      
responsible for all aspects of commercialization including selling,             
marketing, manufacturing, distribution and customer service.  APS receives      
guaranteed minimum royalties and revenues from the sale of Microsponge          
systems.                                                                        

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 will receive                
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.                                                 

Medicis.  In October 1996, APS entered into an agreement with Medicis           
Pharmaceutical Corporation for the commercialization of certain                 
dermatology products.  Medicis is responsible for marketing two APS             
developed products in the United States.  In return, APS received upfront,      
non-refundable licensing fees and a share of revenues, with guaranteed          
minimums.  In November 1997, the Company licensed Vitamin K to Medicis for      
sale in the U.S. to dermatologists.                                             

La Prairie.  In October 1997, APS signed an agreement with La Prairie, a        
subsidiary of Beiersdorf AG for the supply of certain Microsponge-based         
formulations for the prestige high-end channel of distribution.  La             
Prairie also provided funding for research and development for new              
products.  Products subject to this agreement were shipped in the first         
quarter of 1998.                                                                

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 category in return for R&D fees and reimbursement of               
expenses.  Advanced Polymer's Microsponge system technology will be             
utilized to deliver a proprietary Pharmacia and Upjohn therapeutic agent        
topically.                                                                      

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 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.                                                   

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

Ethical Products                                                                
----------------                                                                

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 dermatology products as they are being developed.                   

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 received U.S. patent protection for its basic Microsponge system        
in 1987 and now has a total of 43 issued U.S. patents and an additional         
154 issued foreign patents.  The Company has over 52 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 on 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 and fabrication methods.                                                

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

As of February 28, 1999, the Company had 90 full-time employees, 5 of whom      
hold PhDs.  There were 31 employees engaged in research and development         
and quality control, 34 in manufacturing and production activities and 25       
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 2,800 square feet of            
office space in Greenwich, Connecticut.  The annual rent expense for the        
Redwood City facility is approximately $641,000.  The annual rent expense       
for the Greenwich office is approximately $76,000.                              

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.  Additional manufacturing capacity could be required as      
APS expands commercial production.  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 Biosource Technologies, Inc. ("Biosource") filed a            
complaint against the Company in the San Mateo Superior Court.  Biosource       
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               
Biosource for a net amount of $1,300,000, which consists of a $1,500,000        
settlement of Biosource's claims and a $200,000 settlement of the               
Company's cross claims.  Pursuant to the agreement, the Company paid            
Biosource $300,000 in January, 1999.  The remaining $1,000,000 is payable       
by any combination of cash and/or the issuance of shares of the Company's       
Common Stock.  The settlement agreement also provides for the termination       
of the license and supply agreement between the parties.                        

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

None.                                                                     

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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 28, 1999, there were 565 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.            

                                                                [Download Table]


1998             High      Low      1997               High     Low   
----------------------------------------------------------------------
                                                                      
First Quarter   9 3/8      5 15/16  First Quarter     10 3/8    7 3/8 
Second Quarter  9          5 7/8    Second Quarter     8 1/2    6 7/8 
Third Quarter   7 1/4      3 7/8    Third Quarter      8 5/8    6 7/8 
Fourth Quarter  7 1/8      4        Fourth Quarter     8 3/4    6     


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

                                                                [Download Table]


For the Years Ended and as of                                                   
December 31                        1998      1997      1996      1995      1994 
--------------------------------------------------------------------------------
                                                                                
Statements of Operations Data                                                   
-----------------------------                                                   
Product revenues                 $13,637    12,442     6,138     5,803    5,093 
Royalties, license fees and                                                     
  R&D fees                         6,354     4,391     2,059       451    1,402 
Consumer products                     --        --    10,468     9,104    9,389 
Milestone payments                    --     1,500        --       750       -- 
Cost of sales                      7,127     7,164    10,772    11,047   10,149 
Research and development, net      4,382     3,740     3,506     4,139    6,334 
Selling, marketing and                                                          
  advertising                      2,999     3,806     8,455     6,560    5,669 
General and administrative         3,009     3,552     2,984     3,082    2,844 
Loss on purchase commitment,                                                    
  including related inventory         --        --     1,400       600      685 
Net income (loss)                  1,896      (683)   (9,378)   (9,359)  (9,759)

Basic earnings (loss) per                                                       
  common share                      0.10     (0.04)    (0.52)    (0.57)   (0.65)
Diluted earnings (loss) per                                                     
  common share                      0.09     (0.04)    (0.52)    (0.57)   (0.65)
Weighted average common                                                         
  shares outstanding - basic      19,854    18,779    17,987    16,459   15,018 
Weighted average common                                                         
  shares outstanding - diluted    20,381    19,815    19,494    16,953   15,401 

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

Working capital                  $ 5,302     6,143     4,550     5,726    5,641 
Total assets                      23,081    24,180    18,444    23,082   23,508 
Long-term debt, excluding                                                       
  current portion                     --     3,055     5,579     6,355      979 
Shareholders' equity              14,535    10,241     5,010     5,233   11,786 


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
                             --------------------------------  ---------------
                               1998      1997      1996       98/97    97/96
                              ------    ------    ------      -----    -----

Product revenues               $13,637    12,442     6,138        10%     103%  
Royalties, license fees and                                                     
R&D fees                       6,354     4,391     2,059        45%     113%
Consumer products                   --        --    10,468        --%    (100%) 
Milestone payment                   --     1,500        --      (100%)     --%  
                              ------    ------    ------      -----    -----
 Total revenues                19,991    18,333    18,665         9%      (2%)

Cost of sales                    7,127     7,164    10,772        (1%)    (33%) 
Research and development, net    4,382     3,740     3,506        17%       7%  
Selling and marketing            2,999     3,806     5,405       (21%)    (30%) 
Advertising and promotion           --        --     3,050        --%    (100%) 
General and administrative       3,009     3,552     2,984       (15%)     19%  
Loss on purchase commitments,                                                   
 Including related inventory       --        --     1,400        --%    (100%)

                    1998        1997        1996
                    ----        ----        ----
Expenses expressed as a percentage                                              
of total revenues excluding                                                 
milestone payment:                                                          
Cost of sales                        36%         43%         58%                
Research and development, net        22%         22%         19%                
Selling and marketing                15%         23%         29%                
Advertising and promotion            --          --          16%                
General and administrative           15%         21%         16%                
Loss on purchase commitments,                                                   
including related inventory        --          --           8%              

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

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

These strategic alliances are intended to provide the Company with the          
marketing expertise and/or financial strength of other 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 acceptable collaborative agreements in the future.                    

Product revenues for 1998 totaled $13,637,000, an increase of $1,195,000        
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 $1,963,000 or 45% from        
the prior year to a total of $6,354,000.  Approximately 59% of the              
increase is attributable to higher R&D fees.  Increased royalties               
accounted for approximately 37% of the increase.  The remaining 4% of the       
increase is due to upfront non-refundable license fees from corporate           
partners for access to new products.  Upfront non-refundable license fees       
totaled $1,925,000 in 1998, an increase of $75,000 or 4% from the prior         
year.  Upfront non-refundable license fees that allow customers to sell         
the Company's proprietary products in a specific field on territory are         
recognized by the Company as earned when all contractual obligations have       
been satisfied and there are no contingencies or future obligations of the      
Company associated with the fee.                                                

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 total revenues excluding milestone payments for 1998 was        
$12,865,000, an increase of $3,196,000 or 33% over the prior year.              
Approximately 61% of the increase is attributable to higher revenues from       
royalties, license fees and R&D fees.  The remainder of the gross profit        
improvement was mainly due to increased sales of higher margin proprietary      
cosmeceutical products.                                                         

Research and development expenses 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 favorable            
settlement of the lawsuit from Biosource 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 $1,896,000, an improvement of $2,579,000 over the       
prior year's net loss of $683,000.                                              

Results of Operations for the years ended December 31, 1997 and 1996            
--------------------------------------------------------------------            

Product revenues excluding revenues from consumer products for 1997             
totaled $12,442,000, an increase of $6,305,000 or 103% over the prior           
year.  This increase resulted primarily from the launches of a variety of       
new products incorporating the Microsponge(R) system technology by the          
Company's marketing partners.  These product launches included Anew             
Retinol Recovery Complex PM Treatment which is marketed by Avon, and            
TxSystems(TM) AFIRM retinol formulation and Beta Lift peel kits which are       
marketed by Medicis Pharmaceutical.                                             

Royalties, license fees and R&D fees increased by $2,331,000 or 113% to         
$4,391,000 due mainly to royalties received from Ortho on sales of Retin-       
A(R) Micro(TM) and from Lander on sales of certain consumer products.           
License fees received from new corporate partners for access to new             
products also contributed to the increase.                                      

Total revenues for 1997 of $18,333,000 also included recognition of             
$1,500,000 as a portion of a milestone payment received from J&J upon           
receipt of marketing clearance from the Food and Drug Administration            
("FDA") for Retin-A Micro in February 1997.                                     

Total revenues of $18,665,000 for 1996 included $10,468,000 from sales of       
consumer products most of which were licensed out to Lander Company             
effective January 1, 1997.                                                      

Gross profit on total revenues excluding milestone payment for 1997 was         
$9,669,000, an increase of $1,776,000 over the prior year.  Expressed as a      
percentage of total revenues excluding milestone payment, gross profit          
increased from 42% to 57%.  Approximately 71% of the increase was               
attributable to increased royalties, license fees and R&D fees.  The            
remainder was attributable to increased sales of higher margin proprietary      
cosmeceutical products and increased manufacturing volume.                      

Operating expenses for 1997 of $11,098,000 represented a decrease of            
$5,247,000 or 32% from the prior year total of $16,345,000.  Operating          
expenses for the prior year included a loss on purchase commitment for the      
purchase of melanin for $1,400,000.                                             

Selling and marketing expense decreased by $1,599,000 or 30% from the           
year-ago period to $3,806,000 in 1997.  This substantial decrease was due       
primarily to the execution of the Company's strategic plan whereby it is        
no longer responsible for the direct selling, advertising and distribution      
of consumer products.  Effective January 1, 1997, the Company out-licensed      
most of its consumer products to Lander Company in return for a royalty         
stream.  This also resulted in the elimination of spending on advertising       
and promotion of products which had been $3,050,000 in the prior year.          

Research and development expenses increased by $234,000 or 7% to                
$3,740,000 in 1997 as the Company continued to invest in the expansion of       
its technology base.                                                            

General and administrative expense increased by $568,000 or 19% to              
$3,552,000 in 1997 due mainly to increased spending on a variety of             
outside services.                                                               

Interest income increased by $47,000 or 15% to $370,000 due to higher           
average cash balances.  Interest expense decreased by $171,000 or 14% to        
$1,053,000 due mainly to scheduled principal repayments during the year.        

The net loss for the year of $683,000 represented a decrease of 93% or          
$8,695,000 from the year-ago loss of $9,378,000.                                

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

Total assets as of December 31, 1998 were $23,081,000 compared with             
$24,180,000 at December 31, 1997.  Working capital decreased to $5,302,000      
from $6,143,000 for the same period and cash and cash equivalents               
decreased to $4,088,000 from $8,672,000.  For the year ended December 31,       
1998, the Company's operating activities used $1,548,000 of cash compared       
to $30,000 in the prior year.  The Company invested approximately               
$4,382,000 in product research and development and $2,999,000 in selling        
and marketing the Company's products and technologies.                          

Accounts receivable increased to $2,533,000 at December 31, 1998 from           
$2,288,000 at December 31, 1997.  Days sales outstanding increased to 68        
days in 1998 from 67 days in 1997.  Receivables from royalties, license         
fees and R&D fees increased to $2,297,000 in 1998 from $1,100,000 in 1997       
due mainly to an increase in related revenues in the fourth quarter of          
1998.  Royalty payments are not typically due from customers until 45 days      
after the end of each quarter.  Research and development fees are               
typically billed at the end of each quarter.                                    

Capital expenditures for the year ended December 31, 1998 totaled               
$2,710,000 compared to $2,800,000 in the prior year.  Capital expenditures      
were incurred for plant expansion projects at the Company's manufacturing       
facility in Lafayette, Louisiana which are necessary to meet anticipated        
higher volume requirements.  This stage of the plant expansion has been         
completed.  Capital expenditures were also incurred for leasehold               
improvements to the newly-leased corporate offices and research and             
development facility in Redwood City and for 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 1998, the company received approximately $1,651,000 from the             
exercise of approximately 310,000 warrants to purchase common stock which       
had been issued in conjunction with a 1994 private placement.                   

In March 1999, the Company received 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 the 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 is conducting a comprehensive review of its internal computer       
systems to ensure these systems are adequate to address the issues              
expected to arise in connection with the Year 2000.  These issues include       
the possibility that software which uses only the last two digits to refer      
to the year will no longer function properly for years that begin with 20       
rather than 19.  In addition, the Company is reviewing the status of its        
customers and suppliers with regard to this issue and assessing the             
potential impact of non-compliance by such parties on the Company's             
operations.                                                                     

The Company has developed a phased program to address Year 2000 issues.         
The first phase consists of identifying necessary changes to application        
software used by the Company.  The Company utilizes an integrated ERP           
system for the majority of its manufacturing and financial systems and has      
received the Year 2000 compliant version of the software from the vendor.       
Implementation of the upgraded software was completed on September 30,          
1998.                                                                           

The second phase consists of determining whether Company systems not            
addressed in Phase One (including non-IT systems) are Year 2000 compliant.      
Identification of systems that are not Year 2000 compliant has been             
completed.  The Company is now in the process of upgrading or replacing         
these systems.  The Company expects to upgrade or replace these non-            
compliant systems by the third quarter of 1999.                                 

The third phase consists of determining the extent to which the Company         
may be impacted by third parties' systems, which may not be Year 2000-          
compliant.  The Year 2000 computer issue creates risk for the Company from      
third parties with whom the Company deals on financial transactions             
worldwide.  While the Company expects to complete efforts in the second         
quarter of 1999, there can be no assurance that the systems of other            
companies with which the Company deals or on which the Company's systems        
rely will be converted on a timely basis, or that any such failure to           
convert by another company could not have an adverse effect on the              
Company.                                                                        

Based on current estimates, management expects the total cost to remediate      
non-compliant systems will be less than $650,000 (approximately $580,000        
of which was incurred in 1998).  Most of the costs incurred were for            
purchases of new systems and related equipment.  The estimate may change        
materially as the Company continues to review and audit the result of its       
work.  The Company expects to fund all costs to upgrade or replace systems      
that are not Year 2000-compliant through operating cash flows.                  

The Company has not yet determined its most likely worst case Year 2000         
scenario.  Potential Year 2000 scenarios are going to be considered in the      
Company's contingency plans.                                                    

The Company is currently in the process of developing formal contingency        
plans for addressing any problems which may result if the work performed        
in phase two and three do not successfully resolve all issues by the Year       
2000.  The Company expects to complete its contingency plans in the second      
quarter of 1999.                                                                

Failure to complete any necessary remediation by the Year 2000 may have a       
material adverse impact on the operations of the Company.  Failure of           
third parties, such as customers and suppliers, to remediate Year 2000          
problems in their IT and non-IT systems would also have a material adverse      
impact on the operations of the Company.                                        

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" (SFAS 133) which will be effective for      
all fiscal quarters of fiscal years beginning after June 15, 1999.  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.                                       

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Item  8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA                           

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

                                                                [Download Table]

                                                December 31,        
                                         -------------------------  
                                            1998           1997     
                                            ----           ----     
                                                                    
Assets                                                              
Current Assets:                                                     
 Cash and cash equivalents              $  4,088,173      8,672,021 
 Accounts receivable less allowance                                 
  for doubtful accounts of $96,284 and                              
  $57,453 at December 31, 1998 and 1997,                            
  respectively                             2,532,527      2,288,297 
 Receivables for royalties, license fees                            
  and R&D fees                             2,296,852      1,100,368 
 Accrued interest receivable                   3,801         13,606 
 Inventory                                 2,959,443      2,639,129 
 Advances to officers and employees          338,947         96,706 
 Prepaid expenses and other                  592,599        430,839 
                                          ----------     ---------- 
  Total current assets                    12,812,342     15,240,966 

Property and equipment, net                8,643,856      6,771,173 
Deferred loan costs, net                      90,428        353,693 
Prepaid license fees, net                         --         82,880 
Goodwill and other intangibles, net of                              
 accumulated amortization of $1,286,873                             
 and $1,102,480 at December 31, 1998                                
 and 1997, respectively                    1,351,813      1,477,542 
Other long-term assets                       182,892        254,180 
                                          ----------     ---------- 
Total Assets                            $ 23,081,331     24,180,434 
                                          ==========     ========== 

Liabilities and Shareholders' Equity                                

Current Liabilities:                                                
 Accounts payable                       $  1,347,737      1,636,189 
 Accrued expenses                          1,057,287      2,832,299 
 Accrued settlement liability              1,300,000      1,800,000 
 Current portion - long-term debt          3,055,460      2,523,389 
 Deferred revenue                            750,000        306,014 
                                          ----------     ---------- 
    Total current liabilities              7,510,484      9,097,891 

Deferred revenue - long-term               1,035,855      1,785,855 
Long-term debt                                    --      3,055,460 
                                          ----------     ---------- 
Total Liabilities                          8,546,339     13,939,206 

Commitments and Contingencies                                       

Shareholders' Equity:                                               
 Preferred stock, authorized 2,500,000                              
  shares; none issued or outstanding at                             
  December 31, 1998 and 1997                      --             -- 
 Common stock, $.01 par value,                                      
  authorized 50,000,000 shares; issued                              
  and outstanding 19,993,311 and                                    
  19,464,821 at December 31, 1998 and                               
  1997, respectively                         199,933        194,648 
 Warrants, issued and outstanding:                                  
  196,538 at December 31, 1998 and                                  
  506,816 at December 31, 1997               497,192        983,192 
 Additional paid-in capital               84,206,508     81,327,554 
 Accumulated deficit                     (70,368,641)   (72,264,166)
                                          ----------     ---------- 
Total Shareholders' Equity                14,534,992     10,241,228 
                                          ----------     ---------- 
Total Liabilities and Shareholders'                                 
 Equity                                 $ 23,081,331     24,180,434 
                                          ==========     ========== 

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

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

                                                                [Download Table]

                                         For the Years Ended December 31,    
                                         --------------------------------    
                                          1998          1997          1996   
                                          ----          ----          ----   
                                                                             
Revenues                                                                     
 Product revenues                    $13,637,093    12,441,484     6,138,094 
 Royalties, license fees and R&D                                             
  fees                                 6,354,186     4,391,175     2,059,301 
 Consumer products                            --            --    10,467,512 
 Milestone payments                           --     1,500,000            -- 
                                      ----------    ----------    ---------- 
   Total revenues                     19,991,279    18,332,659    18,664,907 

Expenses                                                                     
 Cost of sales                         7,126,573     7,164,120    10,771,766 
 Research and development, net         4,381,913     3,740,337     3,506,161 
 Selling and marketing                 2,999,424     3,806,030     5,404,774 
 Advertising and promotion                    --            --     3,050,180 
 General and administrative            3,009,488     3,551,977     2,984,213 
 Loss on purchase commitment,                                                
  including related inventory                 --            --     1,400,000 
                                      ----------    ----------    ---------- 
    Operating income (loss)            2,473,881        70,195    (8,452,187)
                                      ----------    ----------    ---------- 

Interest expense                        (805,364)   (1,052,715)   (1,223,303)
Interest income                          246,260       370,478       322,986 
Other expense, net                       (19,252)      (71,119)      (25,595)
                                      ----------    ----------    ---------- 
Net income (loss)                    $ 1,895,525      (683,161)   (9,378,099)
                                      ==========    ==========    ========== 

Basic earnings (loss) per common                                             
  Share                              $      0.10         (0.04)        (0.52)
                                      ==========    ==========    ========== 
Diluted earnings (loss) per                                                  
  common share                       $      0.09         (0.04)        (0.52)
                                      ==========    ==========    ========== 
Weighted average common shares                                               
  outstanding - basic                 19,854,103    18,778,921    17,987,153 
                                      ==========    ==========    ========== 
Weighted average common shares                                               
  Outstanding - diluted               20,380,832    19,814,833    19,494,412 
                                      ==========    ==========    ========== 
<FN>                                                                         
See accompanying notes to consolidated financial statements.                 
</FN>                                                                        
</TABLE                                                                      

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

For the Years Ended December 31, 1998, 1997 and 1996                         

                                                        [Enlarge/Download Table]


                                                                                 Accumulated                           
                                                   Common Stock       Additional    Other                              
                              Common Stock           Warrants           Paid-In Comprehensive Accumulated Shareholders'
                           Shares     Amount    Shares      Amount      Capital     Income      Deficit       Equity   
                        -----------  --------  ---------  ----------  ----------- ---------- ------------  ----------- 
                                                                                                                       
Balance, December 31,                                                                                                  
 1995                   17,026,666   $170,267  1,628,611  $2,653,076  $64,600,516  $12,348   $(62,202,906)  $5,233,301 
                        ----------    -------  ---------   ---------   ----------  -------     ----------   ---------- 
Options exercised          416,219      4,162         --          --    1,993,017       --             --    1,997,179 
Shares retired             (12,836)      (128)        --          --      (97,747)      --             --      (97,875)
Private placement,                                                                                                     
 net of $62,149 in                                                                                                     
 offering costs            201,922      2,019     86,538     295,751    1,640,081       --             --    1,937,851 
Common stock to be                                                                                                     
 issued in connection                                                                                                  
 with the agreement with                                                                                               
 Johnson & Johnson        (432,101)    (4,321)        --          --        4,321       --             --           -- 
Common stock issued in                                                                                                 
 connection with the                                                                                                   
 agreement with Johnson                                                                                                
 & Johnson                 432,101      4,321         --          --       (4,321)      --             --           -- 
Common stock issued in                                                                                                 
 connection with the                                                                                                   
 agreement with Lander                                                                                                 
 Company, net of $39,547                                                                                               
 in offering costs         356,761      3,567         --          --    2,956,976       --             --    2,960,543 
Common stock issued to                                                                                                 
 Dow Corning, net of                                                                                                   
 $4,000 in offering costs  200,000      2,000         --          --    1,194,000       --             --    1,196,000 
Common stock issued to                                                                                                 
 Biosource                  94,000        940         --          --      599,060       --             --      600,000 
Securities issued in debt                                                                                              
 financing arrangements     10,675        107      4,325     (50,935)      78,353       --             --       27,525 
Fair value of stock                                                                                                    
 options issued to                                                                                                     
 non-employees                  --         --         --          --      161,299       --             --      161,299 
Warrants exercised          66,337        663    (87,500)   (155,200)     539,537       --             --      385,000 
Warrants expired                --         --   (200,000)   (285,000)     285,000       --             --           -- 
Reclassification                                                                                                       
 adjustment for                                                                                                        
 unrealized holding                                                                                                    
 gains included                                                                                                        
 in net income                  --         --         --          --           --  (12,348)            --      (12,348)
Net loss                        --         --         --          --           --       --     (9,378,099)  (9,378,099)
                        ----------    -------  ---------   ---------   ----------  -------     ----------   ---------- 
Balance December 31,                                                                                                   
 1996                   18,359,744   $183,597  1,431,974  $2,457,692  $73,950,092 $     --   $(71,581,005) $ 5,010,376 
                        ----------    -------  ---------   ---------   ----------  -------     ----------   ---------- 
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                        --         --         --          --           --       --       (683,161)    (683,161)
                        ----------    -------  ---------   ---------   ----------  -------     ----------   ---------- 
Balance, December 31,                                                                                                  
 1997                   19,464,821   $194,648    506,816  $  983,192  $81,327,554 $     --   $(72,264,166) $10,241,228 
                        ----------    -------  ---------   ---------   ----------  -------     ----------   ---------- 
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         --          --       99,857       --             --      100,857 
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                      --         --         --          --           --       --      1,895,525    1,895,525 
                        ----------    -------  ---------   ---------   ----------  -------    -----------   ---------- 
Balance, December 31,                                                                                                  
 1998                   19,993,311   $199,933    196,538  $  497,192  $84,206,508 $     --   $(70,368,641) $14,534,992 
                        ==========    =======  =========   =========   ==========  =======    ===========   ========== 
<FN>                                                                                                                   
See accompanying notes to consolidated financial statements.                                                           
</FN>                                                                                                                  

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

                                                        [Enlarge/Download Table]

                                                      For the Years Ended December 31,                       
                                                  --------------------------------------                     
                                                      1998         1997         1996                         
                                                   ---------     ---------    ---------                      
                                                                                                             
Cash flows from operating activities:                                                                        
 Net income (loss)                               $ 1,895,525      (683,161)  (9,378,099)                     
 Adjustments to reconcile net income (loss)                                                                  
  to net cash used in operating activities:                                                                  
    Depreciation and amortization                  1,104,337       980,933    1,393,805                      
    Provision for loss on purchase                                                                           
      commitments, including inventory                    --            --    1,400,000                      
    Allowance for doubtful accounts                   38,830        22,967        9,331                      
    Stock compensation awards to non-employees        42,200        96,757      161,299                      
    Restricted stock awards                          100,857            --           --                      
    Amortization of deferred loan costs              263,265       263,265      215,366                      
    Changes in operating assets and liabilities:                                                             
    Accounts receivable                             (283,060)   (1,286,817)     958,682                      
    Receivables for royalties, license fees and                                                              
      R&D fees                                    (1,196,484)     (458,667)    (197,346)                     
    Accrued interest receivable                        9,805        (9,643)      12,510                      
    Inventory                                       (320,314)     (554,056)   5,573,511                      
    Advances to officers and employees              (242,241)       (3,727)     (23,058)                     
    Prepaid expenses and other                      (161,760)     (199,753)     684,192                      
    Assets held for sale                                  --            --   (2,181,004)                     
    Other long-term assets                            71,288      (194,577)     129,425                      
    Accounts payable and accrued expenses         (2,063,464)      654,324   (6,075,821)                     
    Accrued settlement liability                    (500,000)           --    1,200,000                      
    Deferred revenue                                (306,014)    1,341,869           --                      
                                                   ---------     ---------   ----------                      
Net cash used in operating activities             (1,547,230)      (30,286)  (6,117,207)                     
                                                   ---------     ---------   ----------                      

Cash flows from investing activities:                                                                        
 Purchases of property and equipment              (2,709,747)   (2,799,683)    (719,640)                     
 Purchases of intangible assets                      (58,664)     (400,000)          --                      
 Proceeds from sale of equipment and                                                                         
   assets held for sale                                   --     2,181,004           --                      
 Purchases of marketable securities                       --            --     (512,513)                     
 Maturities and sales of marketable                                                                          
   securities                                             --            --      500,165                      
                                                   ---------     ---------   ----------                      
Net cash used in investing activities             (2,768,411)   (1,018,679)    (731,988)                     
                                                   ---------     ---------   ----------                      

Cash flows from financing activities:                                                                        
  Repayment of long-term debt                     (2,523,389)   (1,490,779)    (870,598)                     
  Proceeds from long-term debt and warrants               --            --      758,795                      
  Proceeds from private placements, net of                                                                   
    offering costs                                        --            --    1,937,851                      
  Proceeds from stock issued to Lander                                                                       
    Company, net of offering costs                        --            --    2,960,543                      
  Proceeds from the exercise of common                                                                       
    stock options and warrants, net of                                                                       
    common stock retired                           2,064,547     5,729,986    2,284,304                      
  Proceeds from issuance of shares under                                                                     
    the employee Stock Purchase Plan                 190,635        87,270           --                      
                                                   ---------     ---------   ----------                      
Net cash (used in) provided by financing                                                                     
  activities                                        (268,207)    4,326,477    7,070,895                      
                                                   ---------     ---------   ----------                      

Net (decrease) increase in cash and cash                                                                     
  equivalents                                     (4,583,848)    3,277,512      221,700                      
Cash and cash equivalents at the beginning                                                                   
  of the year                                      8,672,021     5,394,509    5,172,809                      
                                                   ---------     ---------   ----------                      
Cash and cash equivalents at the end of                                                                      
  the year                                       $ 4,088,173     8,672,021    5,394,509                      
                                                   =========     =========    =========                      
Cash paid in interest                            $   559,664       790,379      893,239                      
                                                   =========     =========    =========                      
<FN>                                                                                                         
Supplemental disclosure of non-cash financing transactions:                                                  
During the first quarter of 1996, the Company acquired all rights to the Polytrap technology from Dow Corning
Corporation ("DCC") in exchange for 200,000 shares of common stock valued at $1,200,000.                     
During the first quarter of 1996, the Company paid Biosource for the 1995 purchase commitment totaling       
$600,000 by issuing 94,000 shares of common stock.                                                           
In 1996, the Company offset a deposit of approximately $188,000 with a creditor against a loan from the same 
creditor (Note 8).                                                                                           

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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                                      
------------------------------------------                                      
DECEMBER 31, 1998, 1997 AND 1996                                                
--------------------------------                                                

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.  Prior to           
1997, APS also marketed and distributed a range of consumer products for        
personal care through its subsidiary, Premier, Inc. ("Premier").                
Effective January 1, 1997, APS licensed the consumer products to a third        
party.                                                                          

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".                                                                          

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 cash, receivables, accounts payable, 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, not exceeding twenty years (Note 7).                                    

Prepaid License Fees                                                            
--------------------                                                            

A fee paid to Biosource in 1992 was amortized over a seven-year period          
consistent with the term of the agreement (Note 3). Amortization of             
prepaid license fees totalled $82,880, $82,872 and $137,880 in 1998,            
1997 and 1996, respectively.  As of December 31, 1998, the prepaid              
license fee has been fully amortized.                                           

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

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

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

In accordance with 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.   If such circumstances arise, recoverability           
is determined by comparing the undiscounted net cash flows of long-             
lived assets to their respective carrying values.  The amount of                
impairment, if any, is measured based on the projected discounted cash          
flows using an appropriate discount rate.  At this time, the Company            
believes that no significant impairment of long-lived assets, including         
goodwill and other intangibles, has occurred and that no reduction of           
the estimated useful lives of such assets is warranted.                         

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 the first quarter of 1996, APS acquired all patents and rights to            
the Polytrap technology from Dow Corning Corporation in exchange for            
200,000 shares of its common stock. APS recorded intangible assets              
totalling $1,200,000 relating to this transaction.  The 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 $184,392, $188,259 and               
$279,756, in 1998, 1997 and 1996, respectively.                                 

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

The Company has chosen to account for stock-based compensation 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 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.  Upfront non-refundable             
fees, including license fees, are recognized as earned when all                 
contractual obligations have been satisfied and there are no                    
contingencies or future obligations of the Company associated with the          
fee.                                                                            

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 achieved a milestone payment with the receipt of marketing              
clearance from the FDA for Retin-A(R) Micro(TM) (Note 15).                      

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             
Statement of Financial Accounting Standards No. 128 "Earnings per               
Share" ("FAS 128") for all periods presented.  FAS 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).                                                                      

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

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 reported as deferred            
revenues (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.                                               

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

Financial instruments which potentially expose the Company to                   
concentrations of credit risk, as defined by Statement of Financial             
Accounting Standards No. 105, consist primarily of trade accounts               
receivable.  Approximately 65% and 51% of the recorded trade                    
receivables were concentrated with five and five customers in the               
cosmetic and personal care industries as of December 31, 1998 and 1997,         
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 1998.                            

Note 3   Related Party Transactions                                             

The Company has entered into agreements with Biosource Technologies, Inc.       
("Biosource") 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 Biosource have been, and will continue to be, considered and            
approved by a vote of the disinterested directors.  The agreements              
provided APS worldwide rights to use and sell Biosource's biologically-         
synthesized melanin in Microsponge systems for all sun protection,              
cosmetic, ethical dermatology and over-the-counter skin care purposes.  In      
return, APS was required to make annual minimum purchases of melanin, pay       
royalties on sales of APS melanin-Microsponge products and was required to      
prepay $500,000 of royalties.  For estimated losses on purchase                 
commitments and related inventory, the Company accrued $0,$0 and                
$1,400,000 in 1998, 1997 and 1996, respectively.  All minimum financial         
commitments under the current agreements have been expensed by APS.             

In 1996, APS paid Biosource the 1995 minimum purchase commitment by             
issuing Biosource 94,000 shares of APS common stock.                            

In November, 1997 Biosource filed a complaint against the Company in the        
San Mateo Superior Court.  In December 1998, the Company reached a              
settlement agreement with Biosource for a net amount of $1,300,000, which       
consists of a $1,500,000 settlement of Biosource's claims and a $200,000        
settlement of the Company's cross claims (Note 4).  The Company's               
consolidated financial statemements for the period ended December 31, 1998      
include a favorable decrease in accrued settlement liability of $500,000        
resulting from the settlement agreement.                                        

As of December 31, 1998, the Company has an outstanding secured loan            
receivable of $253,000 from an officer of the Company.  The loan bears an       
interest rate of approximately 5% and is secured by the shares of Company       
stock owned by the officer.  The loan was approved by the Compensation          
Committee of the Company's Board of Directors.  Repayment of the loan is        
due by December 31, 1999.                                                       

Note 4   Legal Proceeding                                                       

In November, 1997 Biosource filed a complaint against the Company in the        
San Mateo Superior Court.  Biosource 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               
Biosource for a net amount of $1,300,000, which consists of a $1,500,000        
settlement of Biosource's claims and a $200,000 settlement of the               
Company's cross claims.  Pursuant to the agreement, the Company paid            
Biosource $300,000 in January, 1999.  The remaining $1,000,000 is payable       
by any combination of cash and/or the issuance of shares of the Company's       
Common Stock.  The settlement agreement also provides for the termination       
of the license and supply agreement between the parties.                        

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, 1998 and 1997, the amortized cost and estimated market          
value of investments in debt securities are set forth in the tables below:      

   December 31, 1998
    --------------------------------
                         Estimated
      Cost              Marked 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                        
   =========           =========

   December 31, 1997
    --------------------------------
                         Estimated
      Cost              Market Value
    --------------------------------
Available-for-Sale:                                                             
Corporate debt securities $6,726,919           6,726,919                        
Other debt securities        869,634             869,634                        
   ---------           ---------
Totals                    $7,596,553           7,596,553                        
   =========           =========

Note 6  Inventory                                                               

The major components of inventory are as follows:                               

                  December 31,
             ---------------------------
                1998            1997
                ----            ----
Raw materials and work-in-process $  743,383         834,496                    
Finished goods                     2,216,060       1,804,633                    
               ---------       ---------
Total inventory                   $2,959,443       2,639,129                    
               =========       =========

Note 7   Property and Equipment                                                 

Property and equipment consist of the following:                                

              December 31,
             ---------------------------
             1998           1997
             ----------     ----------
Building                         $ 1,831,392      1,823,625                     
Land and improvements                163,519        163,519                     
Leasehold improvements             1,423,584      1,233,074                     
Furniture and equipment           14,504,305     13,001,437                     
             ----------     ----------
Total property and equipment      17,922,800     16,221,655                     
Accumulated depreciation                                                        
and amortization                 (9,278,944)    (9,450,482)                   
             ----------     ----------
Property and equipment, net      $ 8,643,856      6,771,173                     
             ==========     ==========

Depreciation expense amounted to $837,064, $709,802 and $976,163 for the        
years ended December 31, 1998, 1997, and 1996, respectively.                    

Note 8   Long-Term Debt                                                         

Long-term debt consists of the following:                                       

                                                                [Download Table]


                                                     December 31,   
                                                --------------------
                                                  1998        1997  
                                                  ----        ----  
                                                                    
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  2,550,000

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  1,402,500

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  1,626,349
                                                ---------  ---------
Total                                           3,055,460  5,578,849
Less current portion                            3,055,460  2,523,389
                                                ---------  ---------
Long-term debt                                 $       --  3,055,460
                                                =========  =========


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 (7.75%        
as of December 31, 1998).  The loan is secured by the assets and operating      
cash flows of a subsidiary of the Company and guaranteed by the Company.        

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 is also        
secured by the assets and operating cash flows of a subsidiary of the           
Company and guaranteed by the Company.  The security interest of the debt       
holders is subordinated to the bank loan's security interest.                   

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 and 1997.  This transaction has been reflected in the         
table above as a term loan.                                                     

The terms of certain financing agreements contain, among other provisions,      
requirements for a subsidiary of the Company to maintain defined levels of      
earnings, net worth and various financial ratios, including debt to net         
worth.  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 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.                                                               

All costs incurred in obtaining the financing arrangements have been            
capitalized as deferred charges, and are being amortized over the life of       
the loans using the effective interest method.  Interest paid in 1998,          
1997 and 1996 approximated interest expense reflected in the Consolidated       
Statements of Operations.                                                       

Note 9   Commitments                                                            

Lease Commitments:  Total rental expense for property and equipment was         
$1,019,534, $770,187 and $655,283 for 1998, 1997 and 1996, respectively.        

The Company's future minimum lease payments under noncancellable operating      
leases for facilities as of  December 31, 1998, are as follows:                 

Years Ending                     Minimum            
December 31,                     Payments           
------------                    -----------         
1999                         $  768,279     
2000                            770,849     
2001                            747,455     
2002                            737,333     
2003                            675,135     
Thereafter                      573,474     
                        ----------
                        $4,272,525
                        ==========

Note 10   Shareholders' Equity                                                  

Private Placements and Common Stock Warrants:  In January 1996, in              
accordance with a 1994 private placement agreement, 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 to J&J in            
conjunction with this private placement expired in 1996 (Note 15).              

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 accordance with the warrant             
agreements, the exercise price was reduced to $3.00 on December 31, 1997        
as a result of the Company reporting a net loss for the 1997 fiscal year.       
These warrants expire on March 27, 2000.                                        

In the first quarter of 1996, the Company formed a collaborative agreement      
with Lander Company under which the Company received approximately              
$2,961,000 in net proceeds from the sale of 356,761 shares of common            
stock.  The agreement also provided for licensing fees, research and            
development funding and royalties on product sales.                             

In 1996, APS acquired all patents and rights to the Polytrap technology         
from Dow Corning in exchange for 200,000 shares of APS common stock (Note       
2).                                                                             

During the second quarter of 1996, APS received $1,937,851 net of offering      
costs, through a private placement and sale of 201,922 shares of common         
stock and 86,538 warrants exercisable over a three-year period.  The            
warrants are exercisable at the following prices:                               

Number of Shares      Exercise Price                                  
----------------      --------------                                  
28,846                $ 7.43                                    
28,846                  9.90                                    
28,846                 12.38                                    

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 50 percent of eligible employees        
participated in the Plan in 1998.  Under the Plan, the Company issued           
38,614 shares in 1998, 14,545 shares in 1997 and no shares in 1996.  The        
weighted average fair value of purchase rights granted during 1998 and          
1997 were $1.65 and $2.77, respectively.  The weighted average exercise         
price of the purchase rights exercised during 1998 and 1997 were $3.83 and      
$6.00, respectively.  As of December 31, 1998, the Company had 346,841          
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.                                                                          

The following table summarizes option activity for 1998, 1997 and 1996:         

                                                        [Enlarge/Download Table]

     1998                 1997                 1996                                        
                               -----------------   ------------------  --------------------
                                        Weighted             Weighted             Weighted 
                                         Average              Average              Average 
                                        Exercise             Exercise             Exercise 
                                 Shares   Price     Shares     Price     Shares     Price  
                               -----------------   ------------------  --------------------
                                                                                           
Outstanding at beginning                                                                   
 of year                       2,947,755   $6.63   2,901,440   $6.46   2,972,324   $5.98   
Granted                          777,000    5.18     313,500    7.50     502,500    7.89   
Exercised                        (79,598)   5.20    (165,374)   4.71    (416,219)   4.80   
Expired or Cancelled             (77,974)   7.83    (101,811)   8.36    (157,165)   6.25   
                               ---------           ---------           ---------           
Outstanding at end of year     3,567,183    6.32   2,947,755    6.63   2,901,440    6.46   
                               =========           =========           =========           
Options exercisable at                                                                     
   year-end                    2,698,960           2,259,683           1,945,056           
Shares available for future                                                                
 grant at year end               293,269             358,295             569,984           
Weighted-average fair                                                                      
 value of options granted                                                                  
 during the year                           $2.45               $4.25               $5.12   


The following table summarizes information about fixed stock options            
outstanding at December 31, 1998:                                               

                                                                [Download Table]


                   OPTIONS OUTSTANDING              OPTIONS EXERCISABLE  
              ----------------------------------    -------------------  
                           Weighted     Weighted                Weighted 
                            Average      Average                 Average 
Range of        Number     Remaining   Remaining    Number      Remaining
Exercise      Outstanding  Contractual  Exercise  Exercisable    Exercise
Prices         12/31/98      Life        Price    at 12/31/98     Price  
-----------   -----------  ----------- ---------  -----------   ---------
                                                                         
$3.44-$5.25    1,205,490     6.8 years  $  4.55      875,285    $  4.64  
$5.38-$6.25      939,620     5.9           5.66      796,079       5.59  
$6.38-$8.13      933,073     7.3           7.28      538,596       7.28  
$9.25-$15.00     489,000     4.0          10.12      489,000      10.12  
               ---------                           ---------             
$3.44-$15.00   3,567,183     6.3           6.32    2,698,960       6.44  
               =========                           =========             


The Company has adopted the disclosure only provisions of Statement of          
Financial Accounting Standards No. 123, ("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 $142,057, $96,800 and $161,300 for 1998, 1997 and       
1996, 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 loss and loss per common          
share would have increased to the pro-forma amounts indicated below:            

                     1998            1997           1996
                 -----------    -----------    ---------
Net income (loss)                                                               
- as reported              $ 1,895,525      (683,161)   (9,378,099)         
Net income (loss)                                                               
- pro-forma                    165,570    (2,010,319)  (10,462,871)         
Basic earnings (loss) per                                                       
common share                      0.10         (0.04)        (0.52)         
Diluted earnings (loss) per                                                     
common share                      0.09         (0.04)        (0.52)         
Basic earnings (loss) per                                                       
common share - pro-forma          0.01         (0.11)        (0.58)         
Diluted earnings (loss) per                                                     
common share - pro-forma          0.01         (0.11)        (0.58)         

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 1998, 1997 and        
1996, respectively:  dividend yield of 0 for all years; expected                
volatility of 48 percent, 60 percent and 85 percent; risk-free interest         
rates of 4.7 percent, 5.7 percent and 6.1 percent; and expected life of         
five years, five years and four 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 1998, 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 5.1%; volatility of 54%;         
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.           
There were no grants under the stock purchase plan in 1996.                     

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 Statement of Financial Accounting Standards 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:                                                                          

                                                                [Download Table]

                                  1998            1997            1996       
                                  ----            ----            ----       
                                                                             
Net income (loss) (numerator)     $ 1,895,525       (683,161)     (9,378,099)
                                   ==========     ==========      ========== 

Shares calculation (denominator):                                            
Weighted average shares                                                      
  outstanding - basic              19,854,103     18,778,921      17,987,153 
Effect of dilutive securities:                                               
 Stock options and employee                                                  
  stock purchase plan                 381,518        634,655         859,767 
 Warrants                             145,211        401,257         647,492 
                                   ----------     ----------      ---------- 
Weighted average shares                                                      
 outstanding - diluted             20,380,832     19,814,833      19,494,412 
                                   ==========     ==========      ========== 
Earnings (loss) per share -                                                  
 basic                                   0.10          (0.04)          (0.52)
                                   ==========     ==========      ========== 

Earnings (loss) per share -                                                  
 diluted                                 0.09          (0.04)          (0.52)
                                   ==========     ==========      ========== 

The following options with expiration dates ranging from December 18, 2001 to   
June 10, 2008 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:                                                                  

                                                                [Download Table]

                                1998              1997            1996   
                                ----              ----            ----   
                                                                         
Number outstanding              1,362,432         757,417         522,000
Range of exercise prices   $6.81 - $15.00  $7.88 - $15.00  $9.25 - $11.13

Note 12   Comprehensive Income                                                  

During the first quarter of 1998, the Company adopted Statement of              
Financial Accounting Standards 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, 1998 and 1997, comprehensive      
income (loss) was the same as net income (loss).  For the year ended            
December 31, 1996, a reclassification adjustment for gains included in net      
income is reported in the Statement of Shareholders' Equity.                    

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, $4,750 and $4,750 for         
the 1998, 1997 and 1996 calendar years, respectively.  The Company may          
also contribute additional discretionary amounts as it may determine.  For      
the years ended December 31, 1998, 1997 and 1996, the Company contributed       
to the plan approximately $124,000, $110,000 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
                              ------------------------
                             1998      1997     1996
                             ----      ----     ----
U.S. Federal statutory rate (benefit)     34.00%   (34.00)%  (34.00)%           
State taxes, net of federal income                                              
tax benefit                                 --        --        --            
Net losses without benefits                  --     31.40     33.75             
Utilization of temporary differences                                            
for which no benefit was previously                                           
recognized                              (34.76)       --        --            
Nondeductible expenses                     0.76      2.60      0.25             
                             -----     -----     -----
Total tax expense (benefit)                  --        --        --             
                             =====     =====     =====

At December 31, 1998, the Company had net federal operating loss                
carryforwards of approximately $73,400,000 for income tax reporting             
purposes and California operating loss carryforwards of approximately           
$3,460,000.  The federal net operating losses expire beginning in 1999          
through the year 2018.  The California net operating loss carryforwards         
expire beginning in 1999 through the year 2003.  A federal net operating        
loss carryforward from 1983 in the approximate amount of $147,000 expired       
December 31, 1998.  A California net operating loss carryforward from 1993      
in the approximate amount of $370,000 expired on December 31, 1998.             

The Company also has investment tax credits and research and experimental       
tax credits aggregating approximately $1,692,000 and $909,000 for federal       
and California purposes, respectively.  The federal credit carryforwards        
expire beginning in 1999 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           
$20,000; these credits expire beginning in 2003 through the year 2006.          

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, 1998 and 1997 are presented below:                                 

                                                                [Download Table]

                                        1998         1997     
                                    ------------  ----------- 
                                                              
Deferred tax assets:                                          
 Deferred research expenditures    $ 1,544,000      1,367,000 
 Accruals and reserves not                                    
  currently deductible for tax                                
  purposes                             977,000      1,934,000 
 Net operating loss carryforwards   25,260,000     25,680,000 
 Credit carryforwards                2,621,000      2,445,000 
 Other                                 286,000        246,000 
                                    ----------     ---------- 
Gross deferred tax assets           30,688,000     31,672,000 
 Less valuation allowance          (29,927,000)   (31,522,000)
                                    ----------     ---------- 
Total deferred tax assets              761,000        150,000 
                                    ----------     ---------- 
Deferred tax liabilities:                                     
 Property and equipment               (761,000)      (150,000)
                                    ----------     ---------- 
Total deferred tax liabilities        (761,000)      (150,000)
                                    ----------     ---------- 
 Net deferred taxes                $        --             -- 
                                    ==========     ========== 

The net change in the valuation allowance for the year ended December 31,       
1998 was a decrease of approximately $1,595,000.  The net change in the         
valuation allowance for the years ended December 31, 1997 and 1996 was an       
increase of approximately $340,000 and $3,756,000, 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, 1998 include approximately         
$2,800,000 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, 1998, 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 is a milestone payment which was        
recognized as revenue in 1997 and half is prepaid royalties which was           
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.                                                                       

Note 16   Subsequent Event (Unaudited)                                          

In March 1999, the Company received 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.  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 the scheduled debt               
repayments made in the first quarter of 1999.                                   

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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, 1998 and 1997,        
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, 1998.  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, 1998         
and 1997, and the results of their operations and their cash flows for          
each of the years in the three-year period ended December 31, 1998, 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                                                       
March 12, 1999                                                                  

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

Not applicable.                                                           

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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 16, 1999.                                    

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.                          

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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.                                                                 

(c) Exhibits                                                                    
The Company hereby files as part of this Form 10-K the exhibits listed          
in Item 14(a)3 as set forth above.                                              

(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.                                   

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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.                       

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    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                          

                                                                [Download Table]
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, 1999
John J. Meakem, Jr.                                           --------------

/S/ Michael O'Connell       Executive Vice President,                       
-------------------------   Chief Administrative Officer and                
Michael O'Connell           Chief Financial Officer           March 29, 1999
                                                              --------------

/S/ Carl Ehmann             Director                          March 29, 1999
-------------------------                                     --------------
Carl Ehmann                                                                 

/S/ Jorge Heller            Director                          March 29, 1999
-------------------------                                     --------------
Jorge Heller                                                                

/S/ Peter Riepenhausen      Director                          March 29, 1999
-------------------------                                     --------------
Peter Riepenhausen                                                          

/S/ Toby Rosenblatt         Director                          March 29, 1999
-------------------------                                     --------------
Toby Rosenblatt                                                             

/S/ Gregory H. Turnbull     Director                          March 29, 1999
-------------------------                                     --------------
Gregory H. Turnbull                                                         

/S/ C. Anthony Wainwright   Director                          March 29, 1999
-------------------------                                     --------------
C. Anthony Wainwright                                                       

/S/ Dennis Winger           Director                          March 29, 1999
-------------------------                                     --------------
Dennis Winger                                                               


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Schedule II                                                                     

Valuation Accounts                                                              

                                                                [Download Table]

                                            Additions                      
                                  Beginning  Charged to             Ending 
                             Balance    Expense   Deductions  Balance      
---------------------------------------------------------------------------
                                                                           
December 31, 1996                                                          
Accounts receivable, allowance                                             
  for doubtful accounts             $68,650     9,331     30,454    47,527 

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 


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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 March 12, 1999, relating to the       
consolidated balance sheets of Advanced Polymer Systems, Inc. and               
subsidiaries as of December 31, 1998 and 1997, 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, 1998,         
and the related schedule, which report appears in the December 31, 1998         
annual report on Form 10-K of Advanced Polymer Systems, Inc.                    

 /s/KPMG LLP

San Francisco, California                                                       
March 26, 1999                                                                  

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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.                                   

Dates Referenced Herein   and   Documents Incorporated by Reference

				Referenced-On Page
This ‘10-K’ Filing		Date		First		Last			Other Filings
		6/10/08		11
		8/19/06		11
		12/18/01		11
		3/27/00		11
		12/31/99		11					10-K,  10-K/A,  11-K
		6/16/99		13					DEF 14A
		6/15/99		6					11-K
Filed on:		3/30/99
		3/29/99		16
		3/26/99		18
		3/12/99		12		18
		3/1/99		11
		2/28/99		1		5
For Period End:		12/31/98		1		18			10-K/A,  11-K
		9/30/98		6					10-Q
		8/4/98		15					S-8
		12/31/97		6		19			10-K,  11-K
		12/15/97		6
		11/17/97		14		19
		9/8/97		15					S-8
		4/30/97		11					DEF 14A
		3/5/97		14		19
		1/1/97		6		11
		12/31/96		6		19			10-K,  11-K
		12/1/96		11
		9/3/96		11
		8/19/96		11					8-K
		6/26/96		15					S-8
		3/31/96		14		19			10-Q
		1/23/96		14		19
		12/31/95		14		19			10-K405,  11-K
		9/30/95		14		19			10-Q
		9/27/95		14		19
		9/1/95		14		19
		1/1/95		11
		12/31/92		14		19
		8/11/92		14		19
		4/14/92		14		19
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