================================================================================
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                                   Form 10-KSB

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

                     For the fiscal year ended May 31, 2001

                         Commission file number 1-13527
                                                -------

                                  BIOQUAL, INC.
                                  -------------

        State of Delaware                                    13-3078199
 -------------------------------                         -------------------
 (State or other jurisdiction of                          (I.R.S. Employer
  incorporation or organization)                         Identification No.)

9600 Medical Center Drive, Rockville, Maryland                  20850
-----------------------------------------------               ----------
    (Address of principal executive office)                   (Zip Code)

Issuer's telephone number, including area code (301) 251-2801
                                               ---------------

Securities registered under Section 12(b) of the Exchange Act:

                                                        Name of each exchange on
       Title of class                                       which registered

Common Shares $.01 Par Value                             Chicago Stock Exchange
----------------------------                             ----------------------

         Securities registered under Section 12(g) of the Exchange Act:
                                      None
                                      ----
                                 Title of Class

Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act during the past 12 months, and (2)
has been subject to such filing requirement for the past 90 days.
Yes  X   No
    ---     ---

Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB.  X
                                      --

The issuer's revenues for the fiscal year ended May 31, 2001 were $12,256,453.

The aggregate market value of voting stock held by non-affiliates, valued using
the average closing bid-and-ask prices at July 26, 2001 is $1,749,246.

Common Stock, $.01 par value per share; authorized 25,000,000 shares; 880,925
shares outstanding as of July 26, 2001.

Documents Incorporated by Reference:  Parts III and IV - Exhibits to
Registration Statement dated July 13, 1983 and Form 10-K and 10-KSB for the
fiscal years ended May 31, 1989, 1992, 1995, 1996, 1997, 1998, 1999 and 2000.

Transitional Small Business Disclosure Format (check one):
Yes    ;  No   X
    ---       ---


                                     PART I

ITEM 1.  DESCRIPTION OF BUSINESS

GENERAL DEVELOPMENT OF BUSINESS

BIOQUAL, Inc., formerly Diagnon Corporation, (the "Company" or "BIOQUAL"), a
Delaware corporation, was founded in 1981 to develop, produce and sell
diagnostic test kits incorporating monoclonal antibodies to diagnose certain
anemias, infections, and parasitic diseases.  In fiscal year 1988, the Company
discontinued the diagnostic test kit segment of its business to concentrate on
and to expand its contract research base with the National Institutes of Health
(NIH).

Beginning with fiscal year 1988, the Company has reported a profit before income
tax each year.  Beginning in 1994, Company management, recognizing the limited
number of new NIH contract opportunities, has concentrated on maintaining its
core base of long-term contracts, competing on new opportunities when available,
and concurrently pursuing other related business elements.

In fiscal year 1996, the Company's Division of Bioresearch business element was
given responsibility for the Company's research and development activities in
cancer treatment and drug delivery and purified veterinary Immunoglobulin G
(IgG) products, and the first IgG product, equine IgG was introduced.
Immunoglobulins used therapeutically provide passive immunity against infectious
diseases.

At the end of fiscal year 1997, in order to better identify and segregate costs
related to its government research and research services contracts, the Company
reorganized into five divisions;  the Division of Primate Biology and Medicine,
the Division of Laboratory Animal Sciences, the Division of Reproductive
Endocrinology and Toxicology, the Division of Bioresearch and the Division of
Neurobiology and Behavior.

On October 22, 1997, the Company's shareholders voted to effect a one for six
reverse stock split.  This was to fulfill a requirement to become listed on the
Chicago Stock Exchange.  On October 23, 1997, the Company became listed on the
Chicago Stock Exchange.

On December 31, 1999, Diagnon Corporation ("Diagnon") changed its name to
BIOQUAL, Inc.  The name change was effected as a result of the merger of Diagnon
and its wholly - owned subsidiary, BIOQUAL, Inc., with Diagnon being the
surviving corporation.  In the merger Diagnon adopted the name BIOQUAL, Inc. as
the name of the surviving entity.

CURRENT OPERATIONS

The areas of research and research services  are comprised of the following
divisions:

DIVISION OF LABORATORY ANIMAL SCIENCES - immunological, reproductive and
transgenic studies and services with emphasis on small animal models.

DIVISION OF REPRODUCTIVE ENDOCRINOLOGY AND TOXICOLOGY - Immunoassays,
biochemistry, endocrine bioassays and safety testing as related to reproduction.

                                       2


DIVISION OF NEUROBIOLOGY AND BEHAVIOR - behavioral and neurological testing and
comparative studies in support of research on neurodegenerative disorders in
humans (e.g. Alzheimer's, Parkinson's, etc.).

DIVISION OF PRIMATE BIOLOGY AND MEDICINE - research and services in human
diseases using nonhuman primate models.

DIVISION OF BIORESEARCH - discovery research in digestive diseases and drug
delivery systems and developmental and applied research in veterinary
therapeutics and nutritional supplements.

The Government is the major source of funding for BIOQUAL's services. All of
BIOQUAL's government contracts are subject to renegotiation of profits or
termination at the election of the United States Government (the "Government").
Termination of a contract or failure to win a renewal competition would
adversely affect the Company's revenues and operating capital until the vacated
facility space was taken up by another contract, of which there is no assurance.
Government contracts generate more than 95% of the Company's revenue.

BIOQUAL plans to bid on renewals for its contracts as they come up for
recompetition.

The Company currently has one subsidiary, Enhanced Therapeutics, Inc. (ET) which
is inactive. ET was established to support a joint venture with The Johns
Hopkins University.  The venture did not materialize.

Medical Center Dr. Facility - Divisions of Laboratory Animal Sciences and
-------------------------------------------------------------------------
   Reproductive Endocrinology and Toxicology
   -----------------------------------------

For the past twenty-six years, BIOQUAL, Inc. (through its Medical Center Dr.
Division from February 25, 1991 until May 31, 1997 and presently as the Division
of Laboratory Animal Sciences and the Division of Reproductive Endocrinology and
Toxicology) has operated cost-plus-fixed-fee ("CPFF") contracts for the
Government to provide research and services in the areas of cancer, immunology,
transgenics, contraception and breeding and development of genetically defined
animals.  Currently, the two divisions operate four material contracts:

   1. Maintenance of an Animal Holding Facility and provision of Attendant
      Research Services.  (ends 10/31/01)

   2. Facility for Preparing and Housing Virus Infected Mice, Genetically
      Manipulated Mice and Chimeric Mice.  (ends 9/30/01)

   3. Biological Testing Facility.  (Efficacy and Safety of Reproductive
      Compounds) (ends 12/31/01)

   4. Provide Animal Housing/Maintenance/Bleeds/Immunizations as Specified
      Herein.  (ends 2/20/02)

The National Cancer Institute (NCI) has advertised a renewal Request for
Proposal (RFP) for the first and second contracts listed above combining the two
contracts into one contract.  The Company has submitted a proposal to compete
for the renewal of these contracts.

Contract revenues are charged on the basis of direct labor and supplies provided
by these divisions.  Due to the relatively constant required level of effort on
the contracts, revenue is evenly spread over each month of the

                                       3


year. The Government traditionally pays promptly (barring any unforeseen
circumstances such as a government shut-down). The divisions' revenues totaled
$6,732,400 for the most recent fiscal year.

   Medical Center Drive Facility - Division of Neurobiology and Behavior
   ---------------------------------------------------------------------

The Division of Neurobiology and Behavior implemented a comparative neurobiology
of aging research resource supported by the National Institute on Aging (NIA).
In May 1998 the Division was awarded a two-year Phase II Small Business
Innovative Research (SBIR) grant for the study of the effects of aging on the
brain.  The aims were to increase the understanding of normal aging processes
and to assist in developing improved methods of diagnosis, prevention,
treatment, and management of age-related neurodegenerative disorders such as
Alzheimer's disease.  The project yielded new discoveries regarding comparative
neuroanatomy and brain aging that was presented at scientific conferences.  The
two year grant was funded at $753,144.  During fiscal year 2000 the Company
requested and received approval for a one year extension for this grant at no
additional cost to the NIA.  The grant expired on April 30, 2001.  During fiscal
year 1999, the Division acquired a grant from the National Center for Research
Resources (NCRR) to provide genetic analyses and DNA profiling of chimpanzees.
During fiscal year 2000 the Company requested and received approval for a one
year extension (at no additional cost to the NCRR) for this grant which expired
on March 9, 2001 and totaled $282,499.  On March 2, 2000, the Company was
awarded a $99,153 Phase I grant from the National Institutes of Health as part
of its SBIR program.  The six month grant was to identify and characterize DNA
sequence variation in chimpanzees at four genes that contain mutations
implicated in the pathogenesis of Alzheimer's Disease. This grant expired on
September 30, 2000. The Company submitted a Phase II SBIR grant application for
this grant. This division's revenues totaled $169,366 for the most recent fiscal
year.

Research Blvd. Facility - Division of Primate Biology and Medicine
------------------------------------------------------------------

For over twenty-eight years, BIOQUAL, Inc., and SEMA, Inc., prior to its merger
with BIOQUAL (through its Research Blvd. Division from February 25, 1991 until
May 31, 1997 and presently through its Division of Primate Biology and
Medicine), have operated CPFF and Fixed Price contracts for the Government using
nonhuman primates to provide research and services in the disease areas of
cancer, AIDS, hepatitis and influenza.  Currently, this division operates five
material contracts:

   1. Care and Housing of Hepatitis Research Animals.  (ends 12/27/06)

   2. Facility for Animals Used in Infectious Disease Research. (ends 2/28/07)

   3. Non Human Primate Models of AIDS:  Prophylactic and Therapeutic Studies.
      (ends 12/18/05)

   4. Care and Housing of AIDS Research Animals.  (ends 01/31/07)

   5. Housing and Maintenance of Non-Human Primates for VRC.  (ends 02/28/08)

As part of a predecessor contract to the first contract listed above, the
division developed and has two patents on specially designed animal housing
units under the division's animal environmental enrichment program.

                                       4


Contract revenues are charged on the basis of direct labor and supplies provided
by the division.  Due to the relatively constant required level of effort on the
contracts, revenue is evenly spread over each month of the year.  The Government
traditionally pays promptly (barring any unforeseen circumstances such as a
government shut-down).  Contract revenues totalled $5,224,037 for the most
recent fiscal year.

Division of Bioresearch
-----------------------

The Division of Bioresearch has four products in the marketplace, a purified
equine IgG that is sold under the brand name Lyphomune(R), two equine
nutritional supplements sold under the brand names ImmunoGam and MiniGam(TM) and
partially purified equine albumin sold under the brand name Eqstend(TM). This
division is also responsible for the Company's research and development
activities.

   Equine IgG
   ----------

As previously reported, due to unsatisfactory sales volume, the Company will
continue to pursue the sale of its veterinary products business.

In January 1995, the Company entered into a Licensing and Manufacturing
Agreement with ZooQuest Technologies Ltd. under which the Company had an
exclusive worldwide license to manufacture and sell Equine Immunoglobulin for
oral administration (Lyphomune(R) IgG) purified by a patented process.  A sale
agreement was reached in the first quarter of fiscal year 1997 for the Company
to acquire the assets of ZooQuest.  On June 11, 1997, the Company was granted
United States Department of Agriculture approval to sell and distribute its
oral/intravenous equine IgG also being sold under the name Lyphomune(R).

The purified equine IgG is used for treatment for Failure of Passive Transfer
(FPT) of immunity in newborn foals.  During the first twenty-four hours
postpartum foals showing symptoms of FPT can be, under normal circumstances,
administered IgG orally; however, after twenty-four hours postpartum, the foals,
generally, must be treated using intravenous methods.

On October 1, 1998, the Company introduced two nutritional supplements for the
equine industry. The two equine immunoglobulin products are ImmunoGam and
MiniGam(TM). Both products are colostrum supplements that are recommended for
use in newborn foals. MiniGam(TM) is for use in miniature horses and ImmunoGam
is intended for use in all other horse breeds. These products provide an
inexpensive oral colostrum supplement that can be used by horse owners and
breeders, whereas Lyphomune(R) is recommended for veterinarian use only.

On October 25, 1999, at the Bluegrass Equine Critical Care Symposium in
Lexington, Kentucky, the Company introduced Eqstend(TM) (partially purified
equine albumin). Albumin is the main protein, of three blood plasma proteins,
which is important in regulating blood volume and in transportation of elements
within the blood stream. Eqstend(TM) is a natural product for use in horses
following blood loss, dehydration, diarrhea, and several other protein deficit
disorders. The primary users of Eqstend(TM) are large animal surgical hospitals
and critical care units.

In addition to direct sales by the Company, the product is being distributed
throughout the United States by several distributors.  Product sales for the
year ended May 31, 2001 totaled $131,653.  During fiscal year 2001 the

                                       5


Company signed an agreement with Veterinary Sales and Marketing, LLC to act as
its exclusive sales and marketing representative. In fiscal year 2001 the
Company expended sufficient funds to maintain operational viability and to
produce sufficient quantities of product to meet individual product line demand.
For fiscal year 2002, the Company plans to continue at this level of operation
while continuing to pursue the sale of its veterinary products business as
mentioned previously.

   Research and Development Activities
   -----------------------------------

      Discovery Research Department
      -----------------------------

Initially this Department directed its discovery research toward the development
of new antibiotics and protective vaccines for the treatment and prevention of
Helicobacter pylori infection which is of significant interest to the medical
community.  H. pylori is a bacterium associated with duodenal and gastric ulcers
and considered a risk factor in the development of gastric adenocarcinoma.  The
Company mounted a dual effort directed toward both vaccine and antibiotic
development.  This work led to a broader research base in targeting specific
enzymes of a variety of pathogenic organisms.

The Company succeeded in the development of an assay designed to identify and
validate antibiotics that specifically target critical enzymes related to
disease causing bacteria and fungi.  This success prompted the Company to focus
on this technology.  The expansion of the Department into a program to support
the discovery of new antibiotics and antifungals coupled with continued progress
may lead the Company to seek capital and/or partnerships to fulfill its overall
goals.

In May 1997, the Company entered into a two year Cooperative Research and
Development Agreement (CRADA) with the National Institute of Diabetes and
Digestive and Kidney Diseases (NIDDK) for the "Identification and
Characterization of Novel Targets for the Development of Antibiotics and
Protective Vaccines Directed Against Helicobacter pylori" (expired May 2000) and
a two year cooperative agreement with the Uniform Services University of the
Health Sciences (USUHS) for the "Identification of Helicobacter pylori Antigens
for the Development of Protective Vaccines" (expired May 1999).

Due to significant opposition described in the notice from the United States
Patent and Trademark Office in fiscal year 2001, the Company decided to abandon
the 1999 patent application entitled "High Throughput Assay Method for Enzymes
Which Metabolically Hydrolyze Nucleoside Triphosphates and an Assay System
Therefor".

As previously reported, the Company will continue to present the HT-SANE
technology to potential investors, drug discovery companies and/or
pharmaceutical firms.


   Small Business Innovative Research Program (SBIR)
   -------------------------------------------------

The Government offers to commercial entities "Phase I" SBIR grants which fund
feasibility studies costing up to $100,000 and lasting six months. If the
feasibility study shows sufficient promise, a "Phase II" program providing
grants up to $750,000 may be awarded. "Phase III" of the program consists of
establishing the project on a commercial basis. The Company regularly submits
SBIR proposals and has been awarded and completed seven Phase I grants and has
been awarded and completed two Phase II grants.

                                       6


As described in Item 1. Description of Business, Medical Center Drive Facility -
Division of Neurobiology and Behavior, on May 15, 1998, BIOQUAL was awarded and
began work on the Phase II SBIR grant titled "Comparative Neurobiology of Aging
Resource" totaling $753,144 for two years.  After a one-year extension this
grant expired on April 30, 2001.  During fiscal year 2000 the Company was
awarded and began work on a six-month Phase I SBIR grant titled "Comparative DNA
Sequence Variation in Alzheimer Genes" totaling $99,153 from the National
Institute on Aging.  This grant expired on September 30, 2000.

On July 26, 2000 the Company was awarded a Phase I SBIR grant from the National
Institute of Dental and Craniofacial Research titled "The Hyrax as a Model for
Facial Biomechanics and Growth".  The six-month grant totaled $98,711.  This
grant expired January 31, 2001.

The Company continues to compete for the Government's SBIR contract and grant
mechanisms to further the Company's proprietary research. Proprietary positions
and/or patents arising from these programs will be the property of the Company
with free licensing available to the Government. There can be no assurance,
however, that additional SBIR grants will be awarded, or that grants, if
awarded, will result in proprietary positions or patents for the Company.

Backlog
-------

The divisions of Laboratory Animal Sciences, Reproductive Endocrinology and
Toxicology and Primate Biology and Medicine operate under Government contracts
which typically run three to seven years.  Therefore, the backlogs of the
divisions are significantly increased in a year in which a long-term contract is
awarded.  Most of the contracts included in the following totals are
incrementally funded on an annual basis.  Therefore much of the backlog is not
"firm" in that the funds will not be committed until a later date as described
in the third column titled Backlog Unfilled in FY02 Projected.





                                                          Backlog
                               Backlog       Backlog      Unfilled
                                 FY01          FY02        in FY02
                             as of 6/1/00  as of 6/1/01   Projected
                             ------------  ------------  -----------
                                                

   Med. Ctr. Dr. Facility     $ 6,785,000   $ 3,644,000  $   200,000
   Res. Blvd. Facility         30,032,000    37,895,000   33,666,000
                              -----------   -----------  -----------

   TOTAL                      $36,817,000   $41,539,000  $33,866,000


Supervision and Regulation
--------------------------

   Animal Model Contracts
   ----------------------

Over the last few decades, there has been an increasing awareness of the need
for adequate oversight and regulation of the utilization and husbandry of
animals.

BIOQUAL, Inc. utilizes animals and, under its government contracts, is required
to observe the regulations and guidelines of the Institute of Laboratory Animal
Resources, Guide for the Care and Use of Laboratory Animals. Furthermore,
           ------------------------------------------------
BIOQUAL, Inc. must meet the Public Health Service (PHS) Policy on Humane Care
                            -------------------------------------------------
and Use of Laboratory Animals. This policy mandates that BIOQUAL, Inc. file
-----------------------------
annually an assurance as to compliance with the NIH

                                       7


Office of Laboratory Animal Welfare. BIOQUAL, Inc. also comes under the
jurisdiction of the U.S. Department of Agriculture (USDA), which regularly
inspects both of the Company's facilities for adherence to its rules and
regulations regarding care and treatment of animals. To ensure compliance with
the several laws and regulations regarding animal care, both facilities are
fully accredited as complying laboratories by the Association for Assessment and
Accreditation of Laboratory Animal Care International (AAALAC).

The supervision and regulation programs described herein are costly in terms of
ongoing operation and maintenance, but are essential because lack of compliance
can lead to cessation of operations and loss of contracts.

   Environmental Compliance
   ------------------------

The Company incurs minimal costs in the disposal of the waste generated by its
operations.  These costs are reimbursable under government contracts.

   Veterinary Products
   -------------------

The USDA is responsible for regulation of certain veterinary products and the
Company's product testing, approval, production and packaging are governed by
Part 9 of the Code of Federal Regulations (CFR).

Competition
-----------

   Animal Model Contracts
   ----------------------

The Company is classified as a "small business" in Government contracting
procedures.  So long as the Company continues to qualify as a "small business,"
this classification effectively limits competition for several of the Company's
current research contracts to other "small businesses" in the Washington, D.C.
area.  Other barriers to competition include the general requirement of location
in the Washington, D.C. area (to serve the NIH scientists) and the high capital
costs to establish animal holding facilities.

The Company's main "small business" competitors are Taconic Farms and BIOCON.

The Company also competes on open contracts for animal research work and its
competitors at this level are Covance, ABL, Priority One, Charles River,
Southern Research Institute, BioReliance and universities.

Due to the specialized nature of the work and the facilities, relatively few
companies compete for contracts in small animal and nonhuman primate
applications.  The Government generally selects winners among the competitors
through evaluation of the merit of the written technical proposals with price
being an important but not an overriding factor.

   Veterinary Products
   -------------------

The Company's Equine IgG products, which began to be introduced into the market
in fiscal year 1996, are purified and unpurified immunoglobulin sold as
lyophilized (freeze-dried) products.  Competing products currently on the market
involve the use of unpurified equine serum/plasma maintained in a liquid or
frozen state (thawed for use).  Principal suppliers of these competing
alternative products are Veterinary Dynamics, Inc. and Sera, Inc.

                                       8


Employees
---------

At the end of fiscal year 2001, the Company employed 117 people (108 of whom
were full-time) as follows:  general and administrative, 16 employees; Research
Blvd. Facility, 49 employees; and Medical Center Dr. Facility, 52 employees. The
Company expects to encounter competition for the technical management positions
necessary for the Company's business, but believes there is an ample labor pool
of laboratory technicians, animal caretakers, support/maintenance personnel and
the like.

Forward Looking Information
---------------------------

Statements herein that are not descriptions of historical facts are forward-
looking and subject to risk and uncertainties.  Actual results could differ
materially from those currently anticipated due to a number of factors including
those set forth in the Company's Securities and Exchange Commission filings
under "Risk Factors", including risks relating to the early stage of products
under development; the ability to continue to extend its government contracts
and obtain new contracts; uncertainties relating to clinical trials; dependence
on third parties' future capital needs; and risks relating to the
commercialization, if any, of the Company's proposed products (such as
marketing, safety, regulatory, patent, product liability, supply, competition
and other risks).

ITEM 2.  DESCRIPTION OF PROPERTY

The Company's current leases are as follows:

Division/Facility             Location     Sq. Ft.     Exp. Date     Option
-----------------             --------     -------     ---------     ------

9600 Med. Ctr. Dr. Fac.     Rockville, MD    61,655  5/31/02         5 years
Res. Blvd. Fac.             Rockville, MD    30,000  5/31/02         5 years
9610 Med. Ctr. Dr. Fac.     Rockville, MD     3,130  month to month  none

The Company's laboratory facilities are suitable and adequate for the purposes
for which they are used.

ITEM 3.  LEGAL PROCEEDINGS

None.

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

Annual Meeting  -  October 25, 2000

Election of Directors

   Four directors were elected:
                                         For     Withheld
                                         ---     --------

   J. Thomas August, M.D.              764,344     2,180
   Charles C. Francisco                763,410     2,114
   Charles F. Gauvin                   763,410     2,114
   John C. Landon, Ph.D.               763,375     2,209

There were no other directors whose term of office as a director continued after
the meeting.

There were no other matters voted upon at the meeting.

                                       9


                                     PART II

ITEM 5.  MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

The approximate number of holders of record of the Registrant's Common Stock on
July 26, 2001 was 1,000.  The Registrant paid a dividend of $.03 per share of
common stock outstanding at September 11, 2000.  This was the second dividend
paid by the Company.  On August 8, 2001, the Company's Board of Directors
declared a dividend of $0.04 a share for shareholders of record on September 7,
2001, payable on September 26, 2001. The Company's Line-of-Credit Agreement
requires that no dividends be declared or paid until all obligations to the
lender have been satisfied.  The Company's lender (Allfirst Bank) has agreed to
waive this requirement for this dividend.

The Common Stock is traded in the over-the-counter (O-T-C) market and the
Chicago Stock Exchange (CHX).

The following table sets forth, for the periods indicated, the high and low sale
prices of the Common Stock as advised by the CHX.

                                          Sale Prices
                 Fiscal Year           High         Low
                 -----------           ----         ---

                  2002
               1st Quarter (1) (3)
               (thru 7/26/01)

                  2001
               4th Quarter             2.75         2.75
               3rd Quarter (2) (3)
               2nd Quarter             3.00         2.50
               1st Quarter             4.25        2.875

                  2000
               4th Quarter            10.00         3.75
               3rd Quarter             3.50         2.50
               2nd Quarter             4.50         3.06
               1st Quarter             3.00         2.63

(1)  During the 1st quarter of 2002, the high and low bid or closing quotations
     from the O-T-C were 2.58 and 2.56.  There were no sales on the CHX during
     this quarter.

(2)  During the 3rd quarter of 2001, the high and low bid or closing quotations
     from the O-T-C were 2.6875 and 2.125.  There were no sales on the CHX
     during this quarter.

(3)  Prices are interdealer quotations and do not necessarily reflect retail
     markups, markdowns or commissions, and may not necessarily represent actual
     transactions.  There were no sales on the CHX during these quarters.

The Company's Common Stock, $.01 par value per share, carries one vote per
share.  There are no outstanding shares of preferred stock.

                                       10


ITEM 6.  MANAGEMENT'S DISCUSSION AND ANALYSIS OR
         PLAN OF OPERATION

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

The Company currently has a $1,000,000 secured revolving line of credit with
Allfirst Bank.  This line of credit is annually renewable and the Company
believes, although there is no assurance, that the line of credit will be
renewed in October 2001.  The line of credit is callable on demand.  Currently,
the interest rate of the line of credit is the prime rate plus .25%.  As of May
31, 2001, there were $194,681 of borrowings under this line of credit.  In the
opinion of the Company, total current assets, the line of credit resources and
the capital provided by future operations will provide adequate liquidity and
capital resources to maintain operations.

The Company leases equipment under various capital leases which expire in fiscal
year 2002.  At May 31, 2001 the present value of the annual minimum capital
lease payments was $16,074.

The Company entered into notes payable with a bank to finance the purchase of
equipment.  The notes mature in 2003.  At May 31, 2001 the principal due on the
notes was $174,124.

The Company's revenues result primarily from Government CPFF and Fixed Price
contracts.  Continued success in winning these contracts and the continuation of
the Government's solicitation of contracts in these areas are essential to
maintaining liquidity and capital resources.  The Company has and will submit
proposals as described in Item 1, Description of Business, Current Operations,
on renewal competitions during fiscal year 2002.  Since the 2000 FORM 10-KSB
report, the following material new contracts have been awarded to the Company:

1. Title:            Non Human Primate Model of AIDS: Prophylactic
                     and Therapeutic Studies.
   Institute:        National Cancer Institute
   Dates Funded:     12/19/2000 - 12/18/2005
   Contract Funding: $4,628,783

2. Title:            Housing and Maintenance of Non-Human Primates
                     for VRC.
   Institute:        National Institute of Allergy and Infectious Diseases
   Dates Funded:     3/1/2001 - 2/28/2008
   Contract Funding: $8,230,253

Changes in Financial Position - 2001 versus 2000
------------------------------------------------

Assets

In the twelve months of operations in this fiscal year, total assets decreased
$451,669 from $5,326,074 at May 31, 2000 to $4,874,405 at May 31, 2001.  This
amount was primarily attributable to a decrease in accounts receivable of $7,606
consisting mainly of 1) a decrease of $220,632 in trade accounts receivable
reflecting a faster collection rate compared to the previous fiscal year end (as
of July 26, 2001 approximately 99.2% or $1,401,383 of the May 31, 2001 trade
receivables balance had been collected), 2) a $215,816 net increase in unbilled
accounts receivable (current plus noncurrent) primarily resulting from a
$223,427 increase in reimbursable indirect rate variances for the current fiscal
year, a net $2,328 decrease in month end accrued sales on accrued direct labor,
and a $5,283 decrease in prior year rate variance billed in fiscal year 2001,
and 3) a $2,790 decrease

                                       11


in other accounts receivable. Prepaid expenses decreased $18,828 primarily due
to a $19,901 decrease to deposits. Fixed assets, net of accumulated depreciation
and amortization decreased $193,218 reflecting depreciation and amortization of
$399,295 offset by fixed asset purchases of $206,077 (mainly nonhuman primate
enclosures, lab equipment, and facility improvements). Deferred income tax
decreased $232,000 primarily as a result of utilizing a portion of the income
tax loss carryforward. Inventories decreased $44,919 reflecting increased sales
and reduced production of veterinary products during fiscal year 2001. Other
noncurrent assets decreased $20,000 reflecting the final payment on the
fabrication of a new chimpanzee enclosure order from the previous fiscal year
end.

The above decrease is partially offset by a $60,940 increase in cash value of
officer's split dollar life insurance policies.  The balance of the increase was
due to miscellaneous factors.

Liabilities

In the twelve months of operations in fiscal year 2001, total liabilities
decreased $712,658 from $1,757,815 at May 31, 2000 to $1,045,157 at May 31,
2001.  This decrease is primarily attributable to a decrease in borrowings under
line-of-credit of $493,502 reflecting the faster collection rate of trade
accounts receivable, a decrease in long-term debt of $123,060 reflecting
payments made on capital leases and notes payable, an $80,661 decrease to other
accrued liabilities primarily due to the reimbursement of an errant payment from
the National Institutes of Health ($77,243) from fiscal year 2000, and a
decrease in accounts payable of $33,006.

The above decrease is partially offset by an increase in accrued compensation
and related costs of $17,571.  The balance of the increase was due to
miscellaneous factors.

Stockholders' Equity

In the twelve months of operation in fiscal year 2001, stockholders' equity
increased $260,989 primarily due to the Company realizing $285,102 of net income
offset by a cash dividend totaling $26,401 to shareholders of record as of
September 11, 2000 paid by the Company during the second quarter of this fiscal
year.  The balance of the increase was due to miscellaneous factors.

Changes in Financial Position - 2000 versus 1999
------------------------------------------------

Assets

In the twelve months of operations in fiscal year 2000, total assets increased
$702,340 from $4,623,734 at May 31, 1999 to $5,326,074 at May 31, 2000.  This
amount was primarily attributable to an increase in accounts receivable of
$661,403 consisting mainly of 1) an increase of $666,756 in trade accounts
receivable reflecting a slower collection rate compared to the previous fiscal
year end, 2) a $1,697 net increase in unbilled accounts receivable (current plus
noncurrent) primarily resulting from a $41,329 increase in reimbursable indirect
rate variances for fiscal year 2000, a net $65,446 increase in month end accrued
sales on accrued direct labor, the billing and payment of $51,789 previously
unbilled contract fee retention, and a $53,289 decrease for a cost overrun, due
to indirect rate variances from prior years, on a contract that expired on
December 27, 1999, and 3) a $7,050 decrease in other accounts receivable.
Prepaid expenses increased $3,547.  Fixed assets, net of accumulated
depreciation and amortization

                                       12


increased $133,615 reflecting fixed asset purchases of $484,607 (mainly nonhuman
primate enclosures, lab equipment, and facility improvements) offset by
depreciation and amortization of $350,992. Cash value of officer's split dollar
life insurance policies increased $38,105. Other noncurrent assets increased
$20,000 reflecting a deposit on the fabrication of a new chimpanzee enclosure.

The above increase was partially offset by 1) a decrease in loans to officers of
$32,906 due to payments made during fiscal year 2000, 2) a deferred income tax
decrease of $63,000 primarily as a result of utilizing a portion of the federal
income tax loss carryforward, and 3) a $61,755 decrease to inventories
reflecting increased sales and reduced production of veterinary products during
fiscal year 2000.  The balance of the increase was due to miscellaneous factors.

Liabilities

In the twelve months of operations in fiscal year 2000, total liabilities
increased $630,217 from $1,127,598 at May 31, 1999 to $1,757,815 at May 31,
2000.  This increase was primarily attributable to an increase in borrowings
under line-of-credit of $412,901 reflecting the slow collection of trade
accounts receivable, an increase in long-term debt of $190,954 due to entering
into notes payable of $269,661 for nonhuman primate housing units and a back up
generator offset by $78,707 in payments on capital leases and notes payable, and
a $70,581 increase to other accrued liabilities primarily due to a receipt of an
errant payment from NIH ($77,243) which the Company returned during fiscal year
2001.

The above increase was partially offset by 1) a decrease in accrued compensation
and related costs of $5,236, 2) a decrease in accrued income taxes of $24,281,
and 3) a decrease in accounts payable of $14,702.  The balance of the increase
was due to miscellaneous factors.

Stockholders' Equity

In the twelve months of operation in fiscal year 2000, stockholders' equity
increased $72,123 primarily due to the Company realizing $97,246 of net income
offset by the cash dividend totaling $17,360 to shareholders of record as of
September 7, 1999 paid by the Company during the second quarter of fiscal year
2000.  The balance of the increase was due to miscellaneous factors.

Results of Operations  - 2001 versus 2000
-----------------------------------------

Revenues

Contract revenues increased by 5.0% or $580,806 to $12,124,800 compared to
$11,543,994 for fiscal year 2000.  This increase was primarily due to 1)
increased government contract activity, 2) the fiscal year 2000 reserve of
$50,000 loss due to an indirect cost overrun on a contract that expired on
December 27, 1999, and 3) the funding in fiscal year 2001 of a $25,858 indirect
rate variance cost overrun of a contract that expired in fiscal year 1996 (the
contract was administratively closed out on August 24, 2000).  Product sales
increased to $131,653 compared to $119,638 in fiscal year 2000.

Operating Expenses

Contract operating expenses increased 2.3% or $204,241 compared to fiscal year
2000 primarily due to increased government contract activity, offset by

                                       13


a decrease in contract overhead expenses as a percentage of contract sales and a
decrease in overhead expenses of approximately $69,000 in support of the equine
production facility compared to fiscal year 2000. Cost of goods sold increased
to $115,200 from $99,708 in fiscal year 2000. This increase was primarily due to
the increase in units sold during this fiscal year. Research and development
(R&D) expenses decreased to $31,771 compared to $166,943 in fiscal year 2000.
This decrease is primarily due to a voluntary reduction in staffing in BIOQUAL's
Department of Discovery Research. General and administrative expenses increased
8.3% compared to fiscal year 2000 primarily due to increases in accounting fees
and additional indirect labor costs incurred by senior technical staff. Total
operating expenses increased 2.3% due to the above.

Operating Income

Operating income increased to $568,854 for fiscal year 2001 compared to $235,106
for fiscal year 2000.  The increase is primarily due to 1) the funding in fiscal
year 2001 of a $25,858 indirect rate variance cost overrun of a contract that
expired in fiscal year 1996 as mentioned above, 2) the increase in contract
revenues exceeding the increase in related contract expenses resulting in an
increase in the gross margin percentage on contracts in fiscal year 2001, 3) the
decrease in R&D expenses of approximately $135,000, 4) the decrease in overhead
expenses supporting the equine production facility and 5) the fiscal year 2000
reserve for a $50,000 loss due to an indirect cost overrun on a contract that
ended on December 27, 1999.

Provision For Income Tax

In accordance with SFAS No. 109, "Accounting for Income Taxes", the Company
reported a deferred federal income tax expense of $232,000 for the year ended
May 31, 2001.  The Company will utilize available federal and state net
operating loss ("NOL") carryforwards to offset future taxable income.  The state
NOL carryforwards became available for use as a result of the December 31, 1999
merger between Diagnon Corporation and its wholly owned subsidiary, BIOQUAL,
Inc.

Earnings Per Share (EPS)

Options to purchase 5,335 shares of common stock at a price of $3.375 per share
were outstanding at May 31, 2001 but were not included in the computation of
diluted EPS because the option exercise prices were greater than the market
price of the common shares. Options to purchase 29,502 shares of common stock at
prices ranging from $2.8875 per share to $3.375 per share were outstanding at
May 31, 2000 but were not included in the computation of diluted EPS because the
option exercise prices were greater than the market price of the common shares.

Results of Operations  - 2000 versus 1999
-----------------------------------------

Revenues

Contract revenues increased by 4.8% or $526,013 to $11,543,994 compared to
$11,017,981 for fiscal year 1999.  This increase was primarily due to increased
government contract activity including two one-time purchases totaling
approximately $210,000 during the second quarter of fiscal year 2000 and
$103,000 in costs incurred related to two toxicity studies which began during
the third and fourth quarter of fiscal year 2000 offset by a decrease in
commercial contracts.  Product sales increased to $119,638 for fiscal year 2000
compared to $66,683 for fiscal year 1999.

                                       14


Operating Expenses

Contract operating expenses increased 8.4% or $701,335 compared to fiscal year
1999 primarily due to increased government contract activity (including the two
one-time purchases totaling approximately $210,000 and the $103,000 toxicity
studies mentioned above), an increase in overhead expenses supporting the equine
production facility of approximately $109,000 compared to fiscal year 1999,
offset by the decrease in commercial contracts. Cost of goods sold increased to
$99,708 from $55,238 in fiscal year 1999.  This increase was primarily due to
the increase in units sold during fiscal year 2000 and the expensing of 23 free
doses of Eqstend(TM). Research and development (R&D) expenses decreased to
$166,943 compared to $203,167 in fiscal year 1999. This decrease is primarily
due to the temporary reassignment of R&D staff (during the third and fourth
quarter of fiscal year 2000) to prepare Small Business Innovative Research
(SBIR) grant proposals to possibly provide additional funding for the research
associated with the high throughput assay system developed by the Company's
Department of Discovery Research. General and administrative expenses increased
8.4% compared to fiscal year 1999 primarily due to the increased costs
associated with the preparation of the SBIR grant proposals during the third
quarter of fiscal year 2000 compared to fiscal year 1999, offset by a decrease
in legal expenses during fiscal year 2000 compared to fiscal year 1999. Total
operating expenses increased 8.3% due to the above.

Operating Income

Operating income decreased to $235,106 for fiscal year 2000 compared to $529,128
for fiscal year 1999.  The decrease was primarily due to several factors: 1) the
increase in contract expenses exceeding the increase in related contract
revenues resulting in a decrease in the gross margin percentage on contracts in
fiscal year 2000, including the increase in overhead expenses supporting the
equine production facility of approximately $109,000 as mentioned above, 2) a
$53,289 indirect cost overrun on a contract that ended on December 27, 1999 and
3) $82,920 increased funding during the fiscal year 1999 to cover an indirect
cost overrun for three expired contracts from 1995 and 1998 without a similar
item in fiscal year 2000.

Provision For Income Tax

In accordance with Statement of Financial Accounting Standards (SFAS) No. 109,
"Accounting for Income Taxes", the Company reported a deferred federal income
tax provision of $63,000 for the year ended May 31, 2000 as a result of using
previous net operating loss carryforwards.  The Company made a provision for
state income tax which was estimated at $22,000.  State income tax expense is
reimbursable under government contracting regulations.

Earnings Per Share (EPS)

Options to purchase 29,502 shares of common stock at prices ranging from $2.8875
per share to $3.375 per share were outstanding at May 31, 2000 but were not
included in the computation of diluted EPS because the option exercise prices
were greater than the market price of the common shares. Options to purchase
51,845 shares of common stock at prices ranging from $1.80 per share to $3.375
per share were outstanding at May 31, 1999 but were not included in the
computation of diluted EPS because the option exercise prices were greater than
the market price of the common shares.

                                       15


Inflation and Price Changes for Fiscal Year
-------------------------------------------

For fiscal years 2000 and 2001 neither inflation nor price changes had any
material effect on net sales, revenues, or income from operations.

ITEM 7.  FINANCIAL STATEMENTS

Financial statements are listed in the Table of Contents on page 30 as Financial
Statements filed as part of this FORM 10-KSB.

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

As reported in an 8-K filed by the Company on November 13, 2000, effective
November 7, 2000, BIOQUAL, Inc. (the "Company") has terminated the engagement of
Deloitte & Touche LLP as its independent public accountants.  On the same day,
the Company retained Aronson, Fetridge & Weigle as its public accountants.  The
engagement of Aronson, Fetridge & Weigle was recommended by the Audit Committee
of the Company's Board of Directors and approved by the Board of Directors (the
"Board").

The audit reports by Deloitte & Touche LLP on the Company's financial statements
for each of the last two fiscal years ended May 31, 1999 and May 31, 2000,
respectively, did not contain an adverse opinion or a disclaimer of opinion and
were not qualified or modified as to uncertainty, audit scope, or accounting
principles.

In connection with the audits of the Company's financial statements for each of
the two fiscal years ended May 31, 1999 and May 31, 2000, respectively, and in
the subsequent interim period, there have been no disagreements between the
Company and Deloitte & Touche LLP on any matters of accounting principles or
practices, financial statement disclosure, or auditing scope and procedures
which, if not resolved to the satisfaction of Deloitte & Touche LLP would have
caused it to make reference to the subject matter of the disagreement in
connection with its reports on the audited financial statements.

                                    PART III

ITEM 9.  DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
         COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT

Set forth below is information with respect to the present directors, and
executive officers.

NAME                      DIRECTOR SINCE  AGE  POSITIONS
----                      --------------  ---  ---------

John C. Landon, Ph.D.          1986        64  Chairman of the Board; President
                                               & Chief Executive Officer;
                                               Director

J. Thomas August, M.D.         1982        73  Director; Consultant; Scientific
                                               Advisor

Charles C. Francisco           1991        63  Director; Member of Compensation
                                               Committee; Member of Audit
                                               Committee

                                       16


Charles F. Gauvin              1992        45  Director; Member of Compensation
                                               Committee; Member of Audit
                                               Committee

Michael P. O'Flaherty                      63  Secretary; Chief Operating
                                               Officer

David A. Newcomer                          40  Chief Financial Officer

Leanne DeNenno                             47  Vice President

Jerry R. Reel, Ph.D.                       63  Vice President

Marisa St. Claire, DVM                     36  Vice President

Each director is elected to hold office until the next annual meeting of
stockholders and until his successor is elected and qualified.  Officers serve
at the discretion of the Board of Directors.

Dr. John C. Landon was elected President and Chief Executive Officer of the
Company in May 1986 and has been Chairman of the Board since February, 1987. Dr.
Landon's experience includes positions with the National Cancer Institute and
with Litton Industries as Scientific Director of the Frederick Cancer Research
Facility and as President of EG&G Mason Research Institute.

Dr. J. Thomas August is a consultant to the Company, a principal stockholder and
a founder of the Company, as well as a Director.  Since 2001, he is a
Distinguished Service Professor of Pharmacology and Molecular Sciences and
Oncology at the Johns Hopkins University School of Medicine, Baltimore, Maryland
and is the Director of the Johns Hopkins Singapore Biomedical Centre.  From 1976
to 2001, he was a Professor and Director in the Department of Pharmacology and
Molecular Sciences at the Johns Hopkins University School of Medicine.  Dr.
August's previous experience includes positions as Director of the Division of
Biological Sciences and Chairman of the Department of Molecular Biology at the
Albert Einstein College of Medicine.  He has also held posts as a Research
Fellow in Medicine at Harvard Medical School, as an Instructor and Assistant
Professor of Medicine at Stanford University School of Medicine, and as an
Associate Professor in Medicine (assigned to microbiology) at the New York
University School of Medicine.

Mr. Charles C. Francisco is CEO and Managing Member (since 1998) of EdgeTech,
Inc., a manufacturer of acoustic underwater imaging instruments located in
Milford, Massachusetts.  Mr. Francisco is also CEO, President and a Director
(since 1999) of C&W Fabricators, Inc., a manufacturer of inlet and exhaust
systems for gas turbine electric generators located in Gardner, Massachusetts.
From 1993 to March of 1998 he was CEO and a Director of Victoreen, Inc., a
manufacturer of radiation measuring instrumentation, located in Cleveland, Ohio.

Mr. Charles F. Gauvin is the President and CEO (since 1993) of Trout Unlimited,
located in Arlington, Virginia, a non-profit organization dedicated to
protection and conservation of trout and salmon and their habitats.  From 1986 -
1991, he was associated with the law firm of Beveridge & Diamond, P.C. in
Washington, D.C., where his practice included corporate and securities work for
the Company.

Mr. Michael P. O'Flaherty joined the Company in June 1986, as a Vice President
of BIOQUAL.  Mr. O'Flaherty is currently the Chief Operating Officer and the
Secretary of the Company.  Mr. O'Flaherty's duties for the Company include most
functions of general management.

                                       17


Mr. David A. Newcomer joined the Company in May 1989 as the Acting Controller of
the Company.  Mr. Newcomer is currently the Chief Financial Officer of the
Company.  Mr. Newcomer's duties include managing the Company's financial
functions.

Ms. Leanne DeNenno has been an employee of the Company since its inception.
From that date to the present, she has been a Project Manager on a major
National Cancer Institute contract and its successor contracts.  In 1988, Ms.
DeNenno was named Head of Animal Research Programs for BIOQUAL, Inc., in 1991
she was named the Vice President in charge of the Medical Center Dr. Division of
BIOQUAL, Inc. and, in 1997, the Vice President of the Division of Laboratory
Animal Sciences.

Dr. Jerry R. Reel, Ph.D., an American Board of Toxicology Diplomate, joined the
Company in 1991 as Vice President, Science and, in 1997, became the Vice
President of the Division of Reproductive Endocrinology and Toxicology.

Dr. Marisa St. Claire, D.V.M., a Diplomate of the American College of Laboratory
Animal Medicine, joined the Company in 1996 as the Deputy Director of the
Division of Primate Biology and Medicine and, in 2000, was appointed Vice
President of the Division of Primate Biology and Medicine.  From 1995 to 1996,
Dr. St. Claire was a Clinical Laboratory Animal Veterinarian at the University
of Virginia Center for Comparative Medicine.

                                       18


Item 10. EXECUTIVE COMPENSATION

The following table sets forth information with respect to remuneration paid
during the last three fiscal years to the Chief Executive Officer of the Company
and other Company officers whose compensation exceeded $100,000.

                           SUMMARY COMPENSATION TABLE

                               Annual Compensation
                                                          Other
Name and Principal                  Salary    Bonus    Compensation
     Position                Year     ($)      ($)      ($) /1/,/2/
--------------------------  ------  -------   ------   ------------

John C. Landon                2001  275,000   40,000      32,723
                              ----
CEO, President, Chairman      2000  275,000   30,000      32,723
                              ----
 of the Board                 1999  275,000   40,000      32,723
                              ----

Michael P. O'Flaherty         2001  156,250   36,564      10,593
                              ----
Chief Operating Officer,      2000  134,593   35,099      10,593
                              ----
 Secretary                    1999  127,286   44,292      10,593
                              ----

Jerry R. Reel                 2001  134,876    6,946
                              ----
Vice President                2000  121,402    5,550
                              ----
                              1999  120,652    3,789
                              ----

David A. Newcomer             2001   99,092   20,193       4,500
                              ----
Chief Financial Officer       2000   91,726   19,378       4,500
                              ----
                              1999   88,600   26,292       4,500
                              ----

Marisa St. Claire             2001   98,002    5,000
                              ----
Vice President                2000   84,058
                              ----
                              1999   80,054
                              ----

/1/ Other Annual Compensation for the CEO for the years 2001, 2000 and 1999
    represents premiums for a $1,000,000 Split Dollar Life Insurance
    Policy.

/2/ Other Annual Compensation for the Chief Operating Officer and Chief
    Financial Officer for the years 2001, 2000 and 1999 represents premiums
    for a $250,000 Split Dollar Life Insurance Policy.

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


Stock Option Grants in Last Fiscal Year



                       Number of       % of Total
                       Securities    Stock Options
                       Underlying      Granted to
                     Stock Options    Employees in     Exercise    Expiration
Name                  Granted (#)     Fiscal Year    Price ($/SH)     Date
-------------------  --------------  --------------  ------------  ----------
                                                       

Marisa St. Claire           500/1/        100.0%        $3.375      9/08/10



/1/ All options reported in this table are fully exercisable.

                                       19


Aggregated Stock Option Exercised in Last Fiscal Year, and FY-End Option Value




                                                                             Value of
                                                          Number of         Unexercised
                                                         Unexercised       In-the-Money
                               Shares                       Options           Options
                              Acquired     Value         at FY-End (#)     at FY-End ($)/3
                            on Exercise   Realized
Name                            (#)        ($)           Exercisable       Exercisable
--------------------------  ------------  --------      ------------       ---------------
                                                                

John C. Landon                                             25,167  /1/           6,757
CEO, President,
 Chairman of the Board

Michael P. O'Flaherty                                      10,001  /1/          13,732
Chief Operating Officer,                                    1,667  /1/,2           N/A
 Secretary

Jerry R. Reel                                               1,167  /1/           1,054
Vice President                                                667  /1/,2           N/A

David A. Newcomer                                           1,334  /1/           1,034
Chief Financial Officer                                       667  /1/,2           N/A

Marisa St. Claire                                           1,134  /1/           1,073
Vice President                                                500  /1/,2           N/A


/1/  All options reported in the table are fully exercisable.
/2/  Options are out-of-the-money.
/3/  Represents the difference between the exercise price and the market value.

Compensation of Directors
-------------------------

During fiscal year 2001, the Company paid to Directors:



                                            Attendance of
                                            Board Meetings         Travel to
                            Directors      and Consultation      Board Meetings
                            Fees ($)           Fees ($)          $ Expenses ($)
                            ---------      ---------------       ---------------
                                                        
J. Thomas August, M.D.        8,000            19,600                  332
Charles C. Francisco          8,000             3,000                  904
Charles F. Gauvin             8,000             3,000                1,795



 Messrs. Francisco, August and Gauvin have agreements with the Company extending
through the term of their election.  For fiscal year 2001, Messrs. Francisco,
August and Gauvin received $2,000 each per quarter as Directors fees and $1,000
each for each Board meeting attended.  The agreement for Dr. August also
provides payments of $2,500 per quarter for services rendered to the Company as
Scientific Adviser.  Dr. August had a separate agreement providing payment of
$300 per hour for acting as the Interim Scientific Director of the Department of
Discovery Research.  This latter agreement expired on June 27, 2001.  The
Company also reimburses Company related travel expenses incurred by any of the
Directors.

                                       20


Employment Contracts and Termination of Employment and Change-in-Control
------------------------------------------------------------------------
Arrangements
------------

Dr. Landon has an employment agreement with the Company, extending through July
13, 2002.  Pursuant to this agreement, Dr. Landon's base compensation is
$275,000 per year.  The agreement provides for various additional incentive
compensation dependent upon the results of the Company's operations each year
through the term of employment.  The Compensation Committee of the Board of
Directors determines the amount of incentive compensation for Dr. Landon.

Dr. Landon's Employment Agreement has the following compensation upon
termination provisions:  1. If Dr. Landon's employment is terminated due to his
death, the Company shall pay his estate bi-weekly amounts equal to his base
annual salary for the twelve month period following his death, 2. If Dr. Landon
becomes disabled, he will receive base salary compensation up to six months
after becoming disabled and at the end of the six-month period his employment
will be terminated, 3. If, during the five-year term of Dr. Landon's agreement,
there is a change-in-control of the company, the Agreement shall remain in
effect for the remainder of the five-year term or an additional two and one-half
years, whichever is greater, 4. If Dr. Landon is terminated for cause, or if the
Company and Dr. Landon mutually agree to terminate Dr. Landon's employment, the
Company shall have no further obligation to Dr. Landon under the Agreement.

Michael O'Flaherty and David Newcomer have severance agreements with the
Company.  The terms of the severance agreements provide that in the event the
Company terminates the executive's employment with the Company for other than
the following reasons: termination for cause, voluntary resignation, disability
or death, the executive is entitled to receive severance pay equal to one year
compensation, based on the base annual salary in effect at the time of
termination.

COMPENSATION PURSUANT TO PLANS

Annual Incentives
-----------------

Annual incentives for the Named Executive Officers, excluding the CEO, provide
cash compensation opportunity for achieving various performance objectives.
These objectives include but are not limited to the following:  financial
performance measures such as profit, sales, indirect cost controls, contract
renewal and contract award.  Certain objectives have minimum and maximum levels
of performance set.  No payment is made if performance fails to meet the minimum
level for a particular objective.

Stock Option Plan - The Company adopted the 1998 Stock Option Plan (the "Plan")
-----------------
in August 1997 which permits the granting of options to all employees to
purchase up to an aggregate of ten percent of the outstanding shares of Common
Stock.  The Plan is designed to qualify as an "incentive stock option plan"
under Section 422 of the Internal Revenue Code, but also permits the Company to
grant nonqualified options to persons, such as consultants and outside
directors.  Under the Plan, options to purchase shares of Common Stock are
granted at not less than 100% of the fair market value of the underlying shares
on the date granted.  The Plan is administered by a committee of the Board of
Directors, which has the authority to select optionees, evaluate suggestions
presented by the Company in order to determine the number of options to be
granted to the selected optionees, designate the number of shares to be covered
by each option and, subject to certain restrictions, specify other terms of the
options.  During fiscal year 2001, the committee was comprised of Messrs. Gauvin
and Francisco.

                                       21


On February 25, 1999, the Company filed a Form S-8 with the Securities and
Exchange Commission to register 100,000 shares of common stock, par value $.01,
to cover previously issued options granted under the BIOQUAL, Inc. 1988 Stock
Option Plan and the BIOQUAL, Inc. 1998 Stock Option Plan as well as future
options to be offered pursuant to the Plans.

As of May 31, 2001, the following options to the officers and directors were
outstanding:



                                                  Percentage    Option        Date
Name                         Service      Shares   of Total     Price       Granted
-----------------------  ---------------  ------  -----------  --------    ----------
                                                            
John C. Landon           CEO, President,   1,667         2.9%   $2.2686     7/29/96
                          Director,       23,500        39.9%   $2.8875     2/24/99
                          Chairman
Michael P. O'Flaherty    Chief Operating     834         1.4%   $  1.80     8/14/92
                          Officer,         1,667         2.9%   $ 3.375      6/5/95
                          Secretary        1,667         2.9%   $  2.52     5/30/97
                                           7,500        12.7%   $1.5625    12/31/98
Leanne DeNenno           Vice President      334          .5%   $  1.80     8/14/92
                                             667         1.1%   $ 3.375      6/5/95
                                             500          .8%   $ 2.525     5/30/97
Jerry Reel               Vice President      500          .8%   $  1.80     8/14/92
                                             667         1.1%   $ 3.375      6/5/95
                                             667         1.1%   $  2.52     5/30/97
David A. Newcomer        Chief Financial     334          .5%   $  1.80     8/14/92
                          Officer            667         1.1%   $ 3.375      6/5/95
                                           1,000         1.7%   $  2.52     5/30/97
Marisa St. Claire        Vice President      334          .5%   $ 2.064     9/30/96
                                             500          .8%   $  2.52     5/30/97
                                             300          .5%   $  1.70      7/9/98
                                             500          .8%   $ 3.375      9/8/00
Charles C. Francisco     Director          1,667         2.9%   $   .54     8/14/92
                                           1,667         2.9%   $2.0625     7/29/96
                                             500          .8%   $ 2.625     2/24/99
Charles F. Gauvin        Director          1,667         2.9%   $  1.80     8/14/92
                                           1,667         2.9%   $2.0625     7/29/96
                                             500          .8%   $ 2.625     2/24/99
J. Thomas August         Director          1,667         2.9%   $2.2686     7/29/96
                                             500          .8%   $2.8875     2/24/99
                                          ------      ------
All officers and                          53,640        90.9%   $ .54 to    8/14/92 to
directors as a group                                            $3.375      9/8/00
(9 persons)


A total of 58,976 options were granted and outstanding at May 31, 2001.  During
fiscal year 2001, options for 334 shares were exercised by a former employee.
All options are exercisable. Of the options granted and outstanding, 19,841 are
from the 1988 Stock Option Plan which was terminated in accordance with its
terms and conditions on June 20, 1998 but allows the exercise of outstanding
options in accordance with their terms.  There are 33,134 options granted under
the 1998 stock option plan (described herein) which was established for a ten
year period beginning August 15, 1997.  The 1998 stock option plan is authorized
to grant options to purchase up to 83,333 shares of common stock.  The remaining
6,001 options were granted outside the plan.

The options granted from the 1988 Plan are effective for a ten year period from
the date of grant, with the exception of the options for 1,667 shares that were
exercised July 29, 2001 and 23,500 shares that expire February 24, 2004, granted
to John C. Landon, and the options for 1,667 shares that expired July 29, 2001
and 500 shares that expire February 24, 2004, granted to J. Thomas August.

                                       22


ITEM 11.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Security ownership of certain beneficial owners
-----------------------------------------------

The following table sets forth information as of July 26, 2001, with respect to
the stock ownership of all holders of 5% or more of the Company's Common Stock.



Name and Address              Number of Shares    Percentage (1)
---------------------------  -------------------  --------------
                                            

Dr. John C. Landon
8213 Raymond Lane
Potomac, MD  20854               154,049 (2),(3)          17.00

S. David Leibowitt
2295 South Ocean Blvd.
Palm Beach, FL  33480             88,563                  10.05

Dr. J. Thomas August
905 Poplar Hill Road
Baltimore, MD  21210             179,006 (4)              20.27

David H. Bishop
100 W. 57th Street
New York, New York  10019         60,509 (5)               6.87

      (1)  Assumes the exercise by such person or persons of the currently
           exercisable options and does not give effect to any shares issuable
           upon exercise by any other person or persons of options.

      (2)  Includes 4,178 shares in the names of members of Dr. Landon's spouse.

      (3)  Assumes the exercise of currently exercisable options to purchase
           25,167 shares.

      (4)  Assumes the exercise of currently exercisable options to purchase
           2,167 shares.

      (5)  Includes 1,506 shares in the name of David H. Bishop's spouse.

Security ownership of management
--------------------------------

The following table sets forth information as of July 26, 2001, with respect to
the ownership of the Company's Common Stock of all:  directors, executive
officers included in the Summary Compensation Table on page 19, and directors
and officers as a group.

Name and Address              Number of Shares    Percentage (1)
---------------------------  -------------------  --------------

Dr. John C. Landon
8213 Raymond Lane
Potomac, MD  20854               154,049 (2),(3)        17.00

Charles C. Francisco
96 Old Littleton Road
Harvard, MA  01451                 3,834 (4)              .43

Dr. J. Thomas August
905 Poplar Hill Road
Baltimore, MD  21210             179,006 (5)            20.27

Charles F. Gauvin
97-Cobbs Bridge Road
New Gloucester, ME  04260          3,834 (4)              .43


                                       23


Michael P. O'Flaherty
1213 Bradfield Drive
Leesburg, VA  22075               18,218 (6)             2.04

Dr. Jerry R. Reel
302 Watkins Pond Blvd.
Rockville, MD  20850               1,884 (7)              .21

David A. Newcomer
9 Eternity Court
Germantown, MD  20874              2,718 (8)              .31

Dr. Marisa St. Claire
1202 New Design Road
Adamstown, MD  21710               2,184 (9)              .25

All executive officers
and directors (8, of
whom all beneficially
own shares) as a group           365,727 (10)           39.36

      (1)   Assumes the exercise by such person or persons of the currently
            exercisable options owned by him or them and does not give effect to
            any shares issuable upon exercise by any other person or persons of
            options.

      (2)   Includes 4,178 shares in the names of members of Dr. Landon's
            spouse.

      (3)   Assumes the exercise of currently exercisable options to purchase
            25,167 shares.

      (4)   Assumes the exercise of currently exercisable options to purchase
            3,834 shares.

      (5)   Assumes the exercise of currently exercisable options to purchase
            2,167 shares.

      (6)   Assumes the exercise of currently exercisable options to purchase
            11,668 shares.

      (7)   Assumes the exercise of currently exercisable options to purchase
            1,834 shares

      (8)   Assumes the exercise of currently exercisable options to purchase
            2,001 shares.

      (9)   Assumes the exercise of currently exercisable options to purchase
            1,634 shares

     (10)   See Notes (2) through (9) above.

                                       24


ITEM 12.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

On June 1, 1988 the Company and Dr. Landon agreed to consolidate the previous
loan facilities available to Dr. Landon into a single loan of $100,000.  The
loan had a five-year term with repayment of principal deferred for three years.
The loan bore interest at the six month certificate of deposit rate paid by
Signet Bank, Maryland and the rate was adjusted quarterly.  On September 29,
1989, the Company agreed to increase the loan to $125,000.  On September 21,
1990, the Company agreed to increase the loan to $150,000.  Pursuant to Dr.
Landon's previous employment agreement, the loan was to be repaid in five
installments of $30,000 plus interest within six weeks after the end of each of
the next five fiscal years beginning with fiscal year 1992.

On July 1, 1994, Dr. Landon made a payment of $2,745 on accrued interest.  On
June 6, 1994, the Company agreed to defer Dr. Landon's third $30,000 repayment
and make the payment due as two $15,000 installments paid with the fourth and
fifth $30,000 repayments respectively.  On October 11, 1995, the Company's
shareholders affirmatively voted to approve the purchase of Company stock from
Dr. Landon at market value to fund the repayment by Dr. Landon of the remainder
of the Company loan.  On October 16, 1996 the Board of Directors affirmatively
voted to extend the due date of the loan, maintaining all other terms and
conditions, until October 31, 1998.

On October 28, 1998, the Compensation Committee of the Board of Directors agreed
to extend the repayment period of the Company loan to Dr. Landon from October
31, 1998 to April 30, 2000.  In accordance with the shareholders' prior approval
of the Company's plan to purchase shares of stock from Dr. Landon at market
value, the Company purchased, on a quarterly basis for four quarters, 9,000
shares and, for one quarter, 2,039 shares, of Company stock from Dr. Landon at
market value. Dr. Landon made a cash payment of $20,000 on accrued interest at
the end of the sixth quarter.  Dr. Landon paid the remaining balance of $753 on
accrued interest on June 23, 2000.  During fiscal year 1999, Dr. Landon made
repayments totaling $57,094.  During fiscal year 2000, Dr. Landon repaid the
balance ($32,906) of the note.  The largest amount owed by Dr. Landon during the
fiscal year ended May 31, 2000 in respect to his loan facilities was $32,906,
excluding accrued interest amounting to $753.  There was no addition to the loan
during this fiscal year.

ITEM 13.   EXHIBITS AND REPORTS ON FORM 8-K

         (a) See Table of Contents to Financial Statements, on page 30.

         (b) The Registrant filed no reports on FORM 8-K during the final
             quarter of its fiscal year ended May 31, 2001.

         (c) Exhibits filed (Exhibits incorporated by reference listed
             ---------------------------------------------------------
             separately.)
             -----------

             (21)      List of Subsidiaries

             Exhibits incorporated by reference to the Company's FORM 10-KSB for
             -------------------------------------------------------------------
             the fiscal year ended May 31, 2001 (filed with the Company's FORM
             -----------------------------------------------------------------
             10-QSB for the quarter ended February 28, 2001).
             -----------------------------------------------

             (10)      Government Contracts.
                       ---------------------
                       1.  Title:        Non Human Primate Model of AIDS:
                                         Prophylactic and Therapeutic Studies.
                           Institute:    National Cancer Institute
                           Dates Funded: 12/19/00 - 12/18/05

                                       25


                       2.  Title:        Housing and Maintenance of Non-Human
                                         Primates for VRC.
                           Institute:    National Institute of Allergy and
                                         Infectious Diseases
                           Dates Funded: 3/1/01 - 2/28/08

             Exhibits incorporated by reference to the Company's FORM
             --------------------------------------------------------
             10-K for the fiscal year ended May 31, 1989.
             -------------------------------------------

             (10) (a)  The Company's 1988 Stock Option Plan, adopted November
                       17, 1988.

             Exhibits incorporated by reference to the Company's FORM
             --------------------------------------------------------
             10-K for the fiscal year ended May 31, 1992.
             -------------------------------------------

             (10) (a)  Leases.
                       -------

                       1. Medical Center Drive Facility
                       2. Research Boulevard Facility

             Exhibits incorporated by reference to the Company's FORM 10-KSB for
             -------------------------------------------------------------------
             the fiscal year ended May 31, 1995 (filed with the Company's FORM
             -----------------------------------------------------------------
             10-QSB for the quarter ended February 28, 1995).
             -----------------------------------------------

             (10) (a)  Licensing and Manufacturing Agreement dated January 12,
                       1995 between ZooQuest Technologies Ltd., Inc., Equilab
                       Associates, Inc., and Diagnon Corporation.

                  (b)  Government Contracts.
                       ---------------------
                       1. Title:        Care and Housing of
                                        Research Animals for Hepatitis
                                        Studies.
                          Institute:    National Institute of Allergy and
                                        Infectious Diseases
                          Dates Funded: 12/28/94 - 12/27/99

                       2. Title:        Facility for Non-Human
                                        Primates Utilized in Infectious
                                        Disease Research.
                          Institute:    National Institute of Allergy
                                        and Infectious Diseases
                          Dates Funded: 12/31/94 - 12/30/99

                       3. Title:        Care and Housing of SIV
                                        Infected Research Animals.
                          Institute:    National Institute of Allergy
                                        and Infectious Diseases
                          Dates Funded: 1/19/95 - 1/18/00

                       4. Title:        Development of New
                                        Methods and Strategies for
                                        Diagnosis, Treatment, and
                                        Prevention of Invasive Fungal
                                        Infection in Patients with Cancer
                                        and HIV Infection.
                          Institute:    National Cancer Institute
                          Dates Funded: 10/1/94 - 9/30/99


                                       26


             Exhibits incorporated by reference to the Company's FORM 10-KSB for
             -------------------------------------------------------------------
             the fiscal year ended May 31, 1996.
             ----------------------------------

             (10)      Government Contracts.
                       ---------------------

                       Title:         Biological Testing Facility.
                       Institute:     National Institute of Child Health and
                                      Human Development
                       Dates Funded:  7/1/96 - 12/31/01

             Exhibits incorporated by reference to the Company's FORM 10-KSB for
             -------------------------------------------------------------------
             the fiscal year ended May 31, 1996 (filed with the Company's FORM
             -----------------------------------------------------------------
             10-QSB during the quarter ended November 30, 1995).
             --------------------------------------------------

             (10)     Government Contracts.
                      ---------------------

                       1.  Title:        MAO/Evaluation of AIDS Vaccines in
                                         Non-Human Primates.
                           Institute:    National Institute of Allergy and
                                         Infectious Diseases
                           Dates Funded: 9/30/95 - 3/31/00


                       2.  Title:        Mechanisms of Chemical Carcinogenesis
                                         in Old World Monkeys.
                           Institute:    National Cancer Institute
                           Dates Funded: 12/19/95 - 12/18/00

             Exhibits incorporated by reference to the Company's FORM 10-KSB
             ----------------------------------------------------------------
             for the fiscal year ended May 31, 1996.
             --------------------------------------

             (10)(a)   Leases.
                       -------

                       1. Amendment to Lease Agreement - Medical Center Drive
                          Facility

                       2. Second Amendment to Lease Agreement - Research
                          Boulevard Facility


                 (b)   Employment Agreement dated July 14, 1997 by and between
                       John C. Landon and Diagnon Corporation.

             Exhibits incorporated by reference to the Company's FORM 10-KSB for
             -------------------------------------------------------------------
             the fiscal year ended May 31, 1998 (filed with the Company's FORM
             -----------------------------------------------------------------
             10-QSB for the quarter ended August 31, 1997.
             ---------------------------------------------

             (10)      Government Contracts.
                       ---------------------

                       1. Title:        Facility for Preparing and Housing Virus
                                        Infected Mice, Genetically Manipulated
                                        Mice, and Chimeric Mice.
                          Institute:    National Cancer Institute
                          Dates Funded: 10/1/97 - 9/30/01

                                       27


             Exhibits incorporated by reference to the Company's Registration
             ----------------------------------------------------------------
             Statement No. 1-13527 (filed on October 22, 1997.
             -------------------------------------------------

             (3) (1)   Second Amended and Restated Certificate of Incorporation
                       dated October 22, 1997.

                 (2)   By-laws.

                 (3)   Form of Common Stock Certificate.

                 (4)   Restated 1988 Stock Option Plan.

             Exhibits incorporated by reference to the Company's FORM 10-KSB for
             -------------------------------------------------------------------
             the fiscal year ended May 31, 1998 (filed with the Company's FORM
             -----------------------------------------------------------------
             10-QSB for the quarter ended November 30, 1997.
             -----------------------------------------------

             (10)(a)   Government Contracts.
                       ---------------------

                       1. Title:        Maintenance of an Animal Holding and
                                        Breeding Facility and Provision of
                                        Attendant Research Services.
                          Institute:    National Cancer institute
                          Dates Funded: 11/1/97 - 10/31/01

                 (b)   The Company's 1998 Stock Option Plan, adopted
                       October 22, 1997.

             Exhibits incorporated by reference to the Company's FORM 10-KSB for
             -------------------------------------------------------------------
             the fiscal year ended May 31, 2000 (filed with the Company's FORM
             -----------------------------------------------------------------
             10-QSB for the quarter ended February 29, 2000).
             -----------------------------------------------

             (10)      Government Contracts.
                       ---------------------
                       1. Title:        Care and Housing of Hepatitis
                                        Research Animals.
                          Institute:    National Institute of Allergy and
                                        Infectious Diseases
                          Dates Funded: 12/28/99 - 12/27/06

                       2. Title:        Care and Housing of AIDS Research
                                        Animals.
                          Institute:    National Institute of Allergy and
                                        Infectious Diseases
                          Dates Funded: 2/1/00 - 1/31/07

                       3. Title:        Facility for Animals Used in
                                        Infectious Disease Research.
                          Institute:    National Institute of Allergy and
                                        Infectious Diseases
                          Dates Funded: 3/1/00 - 2/28/07

                                       28


                                       SIGNATURES
                                       ----------

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this Annual Report to be signed on
its behalf by the undersigned thereunto duly authorized on August 27, 2001.


                       BIOQUAL, INC.



                       /s/ John C. Landon
                       ---------------------------------
                       BY:  John C. Landon
                            Chairman of the Board
                            President and Director

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


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

                             Chairman of the
                             Board, President and
                             Director (Chief Executive
/s/ John C. Landon           Officer)                     8/27/01
-------------------------
John C. Landon, Ph.D.


/s/ J. Thomas August         Director                     8/27/01
-------------------------
J. Thomas August M.D.


/s/ Charles C. Francisco     Director                     8/27/01
-------------------------
Charles C. Francisco


/s/ Charles F. Gauvin        Director                     8/27/01
-------------------------
Charles F. Gauvin


/s/ Michael P. O'Flaherty    Chief Operating Officer
-------------------------    and Secretary                8/27/01
Michael P. O'Flaherty


/s/ David A. Newcomer        Chief Financial Officer      8/27/01
-------------------------
David A. Newcomer

                                       29


                         BIOQUAL, INC. AND SUBSIDIARY
                         ----------------------------

                   TABLE OF CONTENTS TO FINANCIAL STATEMENTS
                   -----------------------------------------



Independent Auditors' Report........................................   31

Independent Auditors' Report........................................   32

Financial Statements:
     Consolidated Balance Sheets, May 31, 2001 and 2000.............   33

     Consolidated Statements of Operations for the
      years ended May 31, 2001 and 2000.............................   34

     Consolidated Statements of Stockholders' Equity for
      the years ended May 31, 2001 and 2000.........................   35

     Consolidated Statements of Cash Flows for the
      years ended May 31, 2001 and 2000.............................   36

     Notes to Financial Statements..................................   37

All financial statement schedules are omitted because they are not
applicable or required.

                                       30


Aronson, Fetridge & Weigle
700 King Farm Blvd.
Rockville, Maryland 20850
Telephone: (301) 231-6200
Facsimile: (301) 231-7630



INDEPENDENT AUDITORS' REPORT

Board of Directors
BIOQUAL, Inc.
Rockville, Maryland

We have audited the accompanying consolidated balance sheet of BIOQUAL, Inc. and
Subsidiary as of May 31, 2001, and the related consolidated statements of
operations, stockholders' equity, and cash flows for the year then ended. These
consolidated financial statements are the responsibility of the Company's
management.  Our responsibility is to express an opinion on these consolidated
financial statements based on our audit.

We conducted our audit in accordance with auditing standards generally accepted
in the United States of America.  Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement.  An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements.  An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation.  We believe that our audit provides 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 BIOQUAL, Inc. and
Subsidiary at May 31, 2001, and the results of their operations and their cash
flows for the year then ended in conformity with accounting principles generally
accepted in the United States of America.


/s/  Aronson, Fetridge & Weigle
Aronson, Fetridge & Weigle
Rockville, Maryland
July 13, 2001 (except for Note 10, as to which the date is August 8, 2001)

                                       31


Deloitte & Touche LLP
100 S. Charles Street
12th Floor
Baltimore, Maryland 21201
Telephone: (410) 576-6700
Facsimile: (410) 837-0510
ITT Telex: 4995614



INDEPENDENT AUDITORS' REPORT


BIOQUAL, Inc.:

We have audited the accompanying consolidated balance sheet of BIOQUAL, Inc. and
Subsidiary (formerly Diagnon Corporation and Subsidiaries) as of May 31, 2000,
and the related consolidated statements of operations, stockholders' equity, and
cash flows for the year ended May 31, 2000.  These consolidated financial
statements are the responsibility of the Corporation's management.  Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit.

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

In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of BIOQUAL, Inc. and Subsidiary at May
31, 2000, and the results of their operations and their cash flows for the year
ended May 31, 2000 in conformity with accounting principles generally accepted
in the United States of America.


/s/  Deloitte & Touche LLP
Deloitte & Touche LLP
Baltimore, Maryland
August 4, 2000

                                       32


BIOQUAL, INC. AND SUBSIDIARY
----------------------------
CONSOLIDATED BALANCE SHEETS, MAY 31, 2001 AND 2000
--------------------------------------------------


ASSETS                                                                                            2001          2000
------                                                                                        -----------   -----------
                                                                                                      
CURRENT ASSETS:
Cash and cash equivalents                                                                     $    76,061   $    72,099
Accounts receivable:
  Trade                                                                                         1,412,478     1,633,110
  Unbilled - current                                                                              309,686       317,296
  Other                                                                                            17,027        19,817
Prepaid expenses                                                                                   76,241        95,069
Inventories                                                                                       180,922       225,841
Deferred income taxes - current                                                                   183,700       116,800
                                                                                              -----------   -----------
Total current assets                                                                            2,256,115     2,480,032
                                                                                              -----------   -----------
FIXED ASSETS:
Leasehold improvements                                                                            995,837     1,007,976
Furniture, fixtures and equipment                                                               3,688,799     3,545,423
                                                                                              -----------   -----------
Total                                                                                           4,684,636     4,553,399
Less accumulated depreciation and amortization                                                  3,271,154     2,946,699
                                                                                              -----------   -----------
Fixed assets, net                                                                               1,413,482     1,606,700
                                                                                              -----------   -----------
DEFERRED INCOME TAXES - NONCURRENT                                                                199,000       497,900
UNBILLED ACCOUNTS RECEIVABLE - NONCURRENT                                                         664,113       440,687
OTHER NONCURRENT ASSETS                                                                                          20,000
CASH VALUE OF OFFICERS' LIFE INSURANCE POLICIES                                                   341,695       280,755
                                                                                              -----------   -----------
TOTAL                                                                                         $ 4,874,405   $ 5,326,074
                                                                                              ===========   ===========
LIABILITIES
-----------
CURRENT LIABILITIES:
Borrowings under line of credit                                                               $   194,681   $   688,183
Current maturities of long-term debt                                                              107,031       123,114
Accounts payable                                                                                  168,248       201,254
Accrued compensation and related costs                                                            486,932       469,361
Other accrued liabilities                                                                           5,098        85,759
                                                                                              -----------   -----------
Total current liabilities                                                                         961,990     1,567,671
LONG-TERM DEBT                                                                                     83,167       190,144
                                                                                              -----------   -----------
Total liabilities                                                                               1,045,157     1,757,815
                                                                                              -----------   -----------
STOCKHOLDERS' EQUITY
--------------------
Preferred stock - par value of $1.00 per share; 500,000 shares authorized; no shares
 issued and outstanding
Common stock - par value of $.01 per share; 25,000,000 shares authorized; 1,600,408
 shares issued; May 31, 2001, 880,925 shares, May 31, 2000, 880,091 shares outstanding             16,004        16,004
Additional paid-in capital                                                                      7,476,577     7,475,035
Accumulated deficit                                                                            (2,971,435)   (3,230,136)
                                                                                              -----------   -----------
Total                                                                                           4,521,146     4,260,903

Less - treasury stock May 31, 2001, 719,483 shares, May 31, 2000, 720,317 shares, at cost        (691,898)     (692,644)
                                                                                              -----------   -----------
Total stockholders' equity                                                                      3,829,248     3,568,259
                                                                                              -----------   -----------
TOTAL                                                                                         $ 4,874,405   $ 5,326,074
                                                                                              ===========   ===========


See notes to consolidated financial statements.

                                       33


BIOQUAL, INC. AND SUBSIDIARY
----------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
FOR THE YEARS ENDED MAY 31,
---------------------------


                                                                        2001                       2000
                                                                    -----------                -----------
                                                                                       
REVENUES AND SALES:
  Contract revenues                                                 $12,124,800                $11,543,994
  Product sales                                                         131,653                    119,638
                                                                    -----------                -----------
  Total Revenues and Sales                                           12,256,453                 11,663,632
                                                                    -----------                -----------

OPERATING EXPENSES:
  Contract                                                            9,259,633                  9,055,392
  Cost of goods sold                                                    115,200                     99,708
  Research and development                                               31,771                    166,943
  General and administrative                                          2,280,995                  2,106,483
                                                                    -----------                -----------

  Total Operating Expenses                                           11,687,599                 11,428,526
                                                                    -----------                -----------

OPERATING INCOME                                                        568,854                    235,106

INTEREST INCOME                                                           4,473                      4,253
INTEREST EXPENSE                                                        (56,225)                   (57,113)
                                                                    -----------                -----------

INCOME BEFORE INCOME TAXES                                              517,102                    182,246

PROVISION FOR INCOME TAXES                                             (232,000)                   (85,000)
                                                                    -----------                -----------

NET INCOME                                                          $   285,102                $    97,246
                                                                    ===========                ===========

BASIC EARNINGS PER SHARE                                            $      0.32                $      0.11
                                                                    ===========                ===========
DILUTED EARNINGS PER SHARE                                          $      0.32                $      0.11
                                                                    ===========                ===========
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING
 FOR BASIC EARNINGS PER SHARE                                           880,638                    872,693
EFFECT OF DILUTIVE SECURITIES - OPTIONS                                  10,468                      8,866
                                                                    -----------                -----------
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING                           891,106                    881,559
 FOR DILUTED EARNINGS PER SHARE                                     ===========                ===========


See notes to consolidated financial statements.

                                       34


BIOQUAL, INC. AND SUBSIDIARY
----------------------------
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
-----------------------------------------------
FOR THE YEARS ENDED MAY 31,
---------------------------



                                    COMMON STOCK                                    TREASURY STOCK
                                    ------------                                    --------------
                                                     ADDITIONAL
                                NUMBER OF     PAR     PAID-IN    ACCUMULATED     NUMBER OF        AT
                                  SHARES     VALUE    CAPITAL      DEFICIT        SHARES         COST        TOTAL
                                ---------   -------  ----------  -----------    ---------     ----------  -----------
                                                                                     
BALANCE, June 1, 1999           1,600,408   $16,004  $7,475,035  $(3,310,022)   (727,736)      $(684,881)  $3,496,136

STOCK RECEIVED FOR OFFICER                                                       (11,039)        (32,906)     (32,906)
 LOAN REPAYMENT

DIVIDEND PAID                                                        (17,360)                                 (17,360)

STOCK GIFT TO
 EMPLOYEES                                                                         4,285           9,391        9,391

STOCK AWARD TO
 EMPLOYEE                                                                          1,000           2,250        2,250

EXERCISE OF STOCK
 OPTIONS                                                                          13,173          13,502       13,502

NET INCOME                                                            97,246                                   97,246
                                -------------------------------------------------------------------------------------

BALANCE, MAY 31, 2000           1,600,408   $16,004  $7,475,035  $(3,230,136)   (720,317)      $(692,644)  $3,568,259

DIVIDEND PAID                                                        (26,401)                                 (26,401)

STOCK AWARD TO
 EMPLOYEE                                                 1,240                      500             447        1,687

EXERCISE OF STOCK
 OPTIONS                                                    302                      334             299          601

NET INCOME                                                           285,102                                  285,102
                                -------------------------------------------------------------------------------------

BALANCE, MAY 31, 2001           1,600,408   $16,004  $7,476,577  $(2,971,435)   (719,483)      $(691,898)  $3,829,248
                                =====================================================================================


See notes to consolidated financial statements.

                                       35


BIOQUAL, INC. AND SUBSIDIARY
----------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
FOR THE YEARS ENDED MAY 31,
---------------------------


                                                                                                             2001        2000
                                                                                                          ---------   ---------
                                                                                                                
CASH FLOWS FROM OPERATING ACTIVITIES:
 Net Income                                                                                               $ 285,102   $  97,246
                                                                                                          ---------   ---------
 Adjustments to reconcile net income to net cash
  provided by (used for) operating activities:
    Depreciation and amortization                                                                           399,295     350,992
    Deferred income taxes                                                                                   232,000      63,000
    Decrease (increase) in accounts receivable                                                                7,606    (661,403)
    Decrease (increase) in prepaid expenses                                                                  18,828      (3,547)
    Decrease in inventories                                                                                  44,919      61,755
    Increase in other assets                                                                                (40,940)    (58,105)
    (Decrease) increase in accounts payable and
      accrued expenses                                                                                      (96,096)     50,642
    Common stock gifted and awarded to employees                                                              1,687      11,641
    Decrease in income taxes payable                                                                                    (24,281)
                                                                                                          ---------   ---------
      Total Adjustments                                                                                     567,299    (209,306)
                                                                                                          ---------   ---------
 NET CASH PROVIDED BY (USED FOR) OPERATING ACTIVITIES                                                       852,401    (112,060)
                                                                                                          ---------   ---------
CASH FLOWS USED FOR INVESTING ACTIVITIES:
 Net capital expenditures                                                                                  (206,077)   (484,607)
                                                                                                          ---------   ---------
 NET CASH USED FOR INVESTING ACTIVITIES                                                                    (206,077)   (484,607)
                                                                                                          ---------   ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
 Net (payments) proceeds under line-of-credit agreement                                                    (493,502)    412,901
 Principal payments on long-term debt                                                                      (123,060)    (78,706)
 Proceeds from long-term debt                                                                                           269,661
 Proceeds from exercise of stock options                                                                        601      13,502
 Dividends paid                                                                                             (26,401)    (17,360)
                                                                                                          ---------   ---------
NET CASH (USED FOR) PROVIDED BY FINANCING ACTIVITIES                                                       (642,362)    599,998
                                                                                                          ---------   ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS                                                                     3,962       3,331
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR                                                               72,099      68,768
                                                                                                          ---------   ---------
CASH AND CASH EQUIVALENTS AT END OF YEAR                                                                  $  76,061   $  72,099
                                                                                                          =========   =========

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION

 Cash paid during the year for:
  Interest                                                                                                $  58,618   $  55,707
                                                                                                          =========   =========
  Income taxes                                                                                                        $  58,725
                                                                                                                      =========

SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
 FINANCING ACTIVITIES:

   Treasury stock received for payment                                                                                $  32,906
    of loans to officer                                                                                               =========


See notes to consolidated financial statements.

                                       36


BIOQUAL, INC. AND SUBSIDIARY
----------------------------

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
___________________________________________________________________________


1.  NATURE OF THE BUSNESS

BIOQUAL, Inc. ("BIOQUAL" or the "Company"), a Delaware corporation, was founded
in 1981.  The Company supports the National Institutes of Health by providing
research services in the following research areas:  cancer, AIDS, hepatitis,
influenza, immunology, transgenics, contraception, breeding and development of
genetically defined animals, and neurobiology and behavior.  The Company also
has a small line of equine immunoglobulin products sold primarily to equine
veterinarians.

2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Consolidation
-------------

The accompanying consolidated financial statements include the accounts of
BIOQUAL, Inc. ("BIOQUAL") and its wholly - owned subsidiary Enhanced
Therapeutics, Inc. (collectively the "Company"). All significant intercompany
transactions and balances have been eliminated in consolidation.

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

Contract research revenue is generally earned based on CPFF arrangements and is
recognized on the basis of direct costs plus indirect costs incurred and an
allocable portion of the fixed fee.  As soon as it is determined that it is
probable a contract will result in a loss and the loss can be reasonably
estimated, the entire loss is charged to operations.

Government Contracts
--------------------

Substantially all of the Company's revenue is from U.S. Government contracts
(primarily the National Institutes of Health).  The indirect rates used in cost-
plus-fixed-fee (CPFF) contracts are subject to final negotiated settlements for
each fiscal year.  In management's opinion, final settlement of indirect rates
will not have a material effect on the Company's financial position or results
of operations when settled.  The Company does not require collateral for its
government billings and does not consider its accounts receivable to be at
significant risk.

Segment Information
-------------------

The Company has determined that it only has one material operating segment and,
in accordance with SFAS No. 131 Disclosures About Segments of an Enterprise and
Related Information, has described and reported the Company as such.  The
Company's principal business consists of government contract research
operations.

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

The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period.  Actual results could differ from those estimates.

                                       37


Fixed Assets and Depreciation
-----------------------------

Fixed assets are stated at cost.  Depreciation is provided for financial
reporting purposes using the straight-line method over the estimated useful
lives of the assets (generally three to ten years).  Tax depreciation is
provided on the straight-line method.  Leasehold improvements are amortized over
the lease period or the estimated useful life of the improvements, whichever is
shorter.

Inventories
-----------

Inventories are stated at the lower of cost or market using the average cost
method.

Research and Development
------------------------

All costs incurred in connection with any research and development activities
are expensed as incurred.

Fair Value of Financial Instruments
-----------------------------------

The fair market values of the financial instruments included in the financial
statements approximate their carrying value.

Earnings Per Share
------------------

The Company uses Statement of Financial Accounting Standard No. 128 ("SFAS 128")
Earnings Per Share for the calculation of basic and diluted earnings per share.

Cash and Cash Equivalents
-------------------------

The Company considers cash equivalents to include short-term investments which
have a maturity of 90 days or less at the date of purchase.  The Company
maintains cash balances which may exceed federally insured limits.  The Company
does not believe that this results in any significant risk.

3.  STOCKHOLDERS' EQUITY

Stock Awards to Employees
-------------------------

During fiscal year 2001, the Company awarded a total of 500 shares of the
Company's common stock to one employee.  The value of those shares at the award
date was $1,687 which has been recorded as an expense of the period.

During fiscal year 2000, the Company gifted and awarded a total of 5,285 shares
of the Company's common stock to certain employees.  The value of those shares
at the award date was $11,641 which was recorded as an expense of the period.

Stock Options
-------------

The Company has adopted Accounting Principles Board Opinion No. 25 Accounting
for Stock Issued to Employees and related interpretations in accounting for its
1988 and 1998 Stock Option Plans.  Accordingly, no compensation has been
recognized for options issued under the plans.  Had compensation costs for the
plans been determined based on fair value at the grant date under the plans in
accordance with Statement of Financial Accounting Standards No. 123, Accounting
for Stock-Based Compensation, the Company's net income and income per share

                                       38


would not have been materially affected for the years ended May 31, 2001 and
2000.

The Company has granted options to purchase 52,975 shares of its Common Stock
under its 1988 and 1998 stock option plans.  The 1998 stock option plan is
authorized to grant options to purchase up to 83,333 shares of common stock.
Except for certain options granted to an officer and a director, options expire
ten years from date of grant under the plan, or upon the optionee's separation
from the Company and are granted at the average of the closing bid and ask price
of the Company's Common Stock at the date of grant.  Options for 3,334 and
24,000 common shares granted to an officer and a director for a period of five
years expire in 2001 and 2004, respectively.  The Company has reserved an
additional 6,001 shares of its Common Stock to cover the exercise of options
granted outside of its 1988 and 1998 stock option plans.  The 1988 plan was
terminated in accordance with its terms and conditions on June 20, 1998.

The fair value of each option is estimated on the date of grant using the Black-
Scholes option pricing model with the following weighted average assumptions for
the years ended May 31, 2001 and 2000:

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

  Expected volatility                         63.54%     82.85%
  Risk-free interest rate                      5.73%      6.29%
  Expected term of options                  10 years   10 years
  Expected dividend yield                      1.19%       -0-

Information regarding the Company's stock option plans for the years ended
May 31, 2001 and 2000 is as follows:

                                        2001                2000
                                ------------------   ------------------
                                          Weighted              Weighted
                                          Average               Average
                                          Exercise              Exercise
                                Options    Price     Options     Price
                                -------   --------   --------  --------
Outstanding at
  beginning of year             60,177     $ 2.46     73,684      $2.19
Granted                            500      3.375        834       2.38
Forfeited                       (1,367)      2.82     (1,168)      1.94
Exercised                         (334)      1.80    (13,173)      1.02
                               -------              --------
Outstanding at
 end of year                    58,976     $ 2.46     60,177      $2.46
                               =======              ========
Options exercisable at
 end of year                    58,976     $ 2.46     60,177      $2.46
                               =======              ========
Weighted average
 fair value of
 options granted
 during year                   $  2.59                $ 1.28


                                       39


                                Outstanding and Exercisable
                            -----------------------------------
                                           Weighted
                                           Average     Weighted
                                          Remaining    Average
                              Options    Contractual   Exercise
Range of exercise prices    Outstanding  Life (years)   Price
--------------------------  -----------  ------------  --------
    .54   to 1.80             14,137         4.94       $1.50
   2.0625 to 2.625            15,504         4.71        2.36
   2.8875 to 3.375            29,335         3.05        2.98
                              ------
                              58,976         3.94       $2.46
                              ======

4.  LINE OF CREDIT

The Company has a line of credit of $1,000,000 with a bank to meet periodic cash
flow needs.  As of May 31, 2001, there were $194,681 of borrowings under this
line of credit. During fiscal year 2001 the maximum amount borrowed was
$914,434, the average balance outstanding was $354,398, and the average interest
rate was 9.28%.  The line bears interest at the bank's prime rate plus .25% and
is collateralized by trade accounts receivable.  The line is subject to renewal
on or before October 29, 2001.

5.  LONG-TERM DEBT

Notes payable
-------------

In March 2000, the Company entered into a $166,376 (80% of the original purchase
price) term note payable with a bank to finance the purchase of non-human
primate housing units.  The term is three years and bears interest at a rate of
9.13% per annum.

In May 2000, the Company entered into a $103,285 (80% of the original purchase
price) term note payable with a bank to finance the purchase and installation of
a back-up generator.  The term is three years and bears interest at a rate of
9.15% per annum.

The term notes above are collateralized by the subject equipment having net book
value of $290,982 at May 31, 2001.

Capital leases
--------------
                                                   2001      2000
                                                 -------  --------

Capitalized Lease Obligations                    $16,074   $56,211

Less Current Maturities                           16,074    40,177
                                                 -------   -------

Long-Term                                        $   -0-   $16,034
                                                 =======  ========

Future annual minimum payments under the capital leases as of May 31, 2001,
were:

    2002                                              $16,474
    Less:  Amount representing interest                   400
                                                      -------
    Present value of minimum lease payments           $16,074
                                                      =======

                                       40


The Company leases equipment under various capital leases that expire in fiscal
year 2002.  Property held under the capital leases at May 31, 2001 and 2000
consisted of the following:

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

    Equipment                        $589,402  $589,402
    Less accumulated amortization     327,806   268,866
                                     --------  --------
                                     $261,596  $320,536
                                     ========  ========

The equipment is amortized on a straight-line basis over the estimated useful
life of the equipment.  Amortization expense amounted to $58,940 in 2001 and
2000, and is included with depreciation expense in the financial statements.

Future annual maturities of long-term debt are as follows:

                      Year Ending
                         May 31         Amount
                     -------------     --------
                          2002         $107,031
                          2003           83,167
                                       --------
                         Total         $190,198
                                       ========

The fair value of long-term debt is estimated to approximate its carrying value
at May 31, 2001, based on borrowing rates currently available with similar terms
and maturity.

6.  INCOME TAXES

Income taxes are accounted for using Statement of Financial Accounting Standards
No. 109, Accounting for Income Taxes (SFAS No. 109), which requires an asset and
liability approach to financial accounting and reporting for income taxes.
Under SFAS No. 109, deferred tax assets and liabilities are provided for
differences between the financial statement and income tax bases of assets and
liabilities that will result in future taxable or deductible amounts.  The
deferred tax assets and liabilities are measured using the enacted tax laws and
rates.  Income tax expense is computed as the income tax payable or refundable
for the period plus or minus the change during the period in deferred tax assets
and liabilities.

In accordance with SFAS No. 109, management evaluates the ultimate realizability
of its deferred income tax asset.  If management estimates that it is more
likely than not that some portion of the deferred tax asset will not be
realized, a valuation allowance is provided.  Revisions in management's
estimates of the required valuation allowance are a component of expense in the
period revised.

The components of income tax expense are as follows:


                              2001      2000
                            --------   -------
    Current tax expense     $    -0-   $22,000
    Deferred tax expense     232,000    63,000
                            --------   -------
                            $232,000   $85,000
                            ========   =======


                                       41


A reconciliation of actual income tax expense to that which would have resulted
from applying the federal statutory tax rates is as follows:

                                           2001         2000
                                        ---------    ---------
Federal taxes at statutory
  rate                                  $ 176,000    $  62,000
State taxes at statutory rate              24,000       14,500
Net executive life insurance
  expense                                    (400)       8,500
Decrease in previously
  recognized tax loss
  carryforwards, net of other
  adjustments to deferred taxes            32,400            -
                                        ---------   ----------
                                        $ 232,000   $   85,000
                                        =========   ==========

The components of deferred income taxes are as follows:

                                            May 31,      May 31,
                                             2001         2000
                                           ---------   ----------
Financial statement accruals               $  53,700   $   46,735
Different useful lives for
  depreciation of fixed assets
  for tax purposes                          (166,000)    (158,000)
Research & development costs
  deferred for tax purposes                  222,000      250,000
Tax loss carryforward                        529,000    1,185,000
Less valuation allowance                    (256,000)    (709,035)
                                           ---------   ----------
Total deferred income taxes                $ 382,700   $  614,700
                                           =========   ==========

As of May 31, 2001, the Company has cumulative tax operating loss carryforwards
of approximately $1,245,000 available to reduce future federal taxable income
and approximately $2,300,000 available to reduce future state taxable income.
The operating loss carryforwards expire in fiscal year 2002 for federal tax
purposes and 2002 to 2014 for state tax purposes.  Management believes that it
is more likely than not that the Company will generate future taxable income
sufficient to realize a portion of the remaining tax loss carryforwards and that
the valuation allowance is appropriate given the current estimates of future
taxable income.

7.  COMMITMENTS AND CONTINGENCIES

Leases
------

The Company is a lessee under various noncancelable operating leases, covering
the facilities in which its operations are conducted and certain equipment and
vehicles.  The aggregate minimum annual rental commitments under these leases
are as follows:

                         2002         $1,618,000
                         2003             34,000
                         2004             16,000
                         2005              3,000
                                      ----------
                         Total        $1,671,000
                                      ==========

Two of the three facility leases contain an option for a five-year extension.

Rental expense was approximately $1,640,000 and $1,579,000, for the years ended
May 31, 2001 and 2000, respectively.

                                       42


8.  RELATED PARTY TRANSACTIONS

During the year ended May 31, 2000, the Company's shareholders affirmatively
voted to approve the purchase of common stock of the Company held by the
President at fair market value in an amount sufficient to fund the repayment of
his loan to the Company, plus accrued interest.  During fiscal year 2000, the
Company purchased shares valued at $32,906 to complete the repayment of the loan
in full.

The President has an employment agreement with the Company which provides a base
compensation and additional incentive compensation dependent upon annual
operations.  This agreement expires on July 13, 2002.

9.  RETIREMENT PLAN

The Company sponsors a tax deferred savings plan to provide retirement benefits
for all eligible employees under Section 401(k) of the Internal Revenue Code.
The Company's annual contribution to the plan is based on eligible employee
participation.  Participating employees may voluntarily contribute up to 15% of
their annual salaries, not to exceed certain limits provided by the Code.  The
Company may make discretionary matches to each participant's contribution.
Rights to benefits provided by the Company's contributions vest 20% each year
after the second year of service.  Participants are fully vested in their
voluntary contributions.  The Company's contributions for the years ended May
31, 2001 and 2000 were $45,083 and $49,572, respectively.

10. SUBSEQUENT EVENT

On August 8, 2001, the Board of Directors declared a dividend of $0.04 per share
to shareholders of record on September 7, 2001, payable on September 26, 2001.

                                       43


                                       EXHIBITS

                                       44