<PAGE>

Gamma '98 Annual Report

From patent to product . . .

Tom Frame, senior vice president - research & development, became the "father
of ReACT" when Gamma was awarded U.S. Patent #5,665,558, "Method and Apparatus
Useful for Detecting Bloodgroup Antigens and Antibodies," the first patent
related to the Gamma-ReACT Test System. The red cell adherence test procedure
used in this microcolumn technology differs from the agglutination method used
by competitors.

                               -cover-
<PAGE>


Contents
11-year summary                                     Inside front cover
Company profile                                                      1
Letter to shareholders                                               2
From patent to product...                                            4
Management's discussion and analysis                                17
Income statements                                                   23
Balance sheets                                                      24
Shareholders' equity                                                25
Cash flows                                                          26
Notes to consolidated financials                                    27
Independent auditors' report                                        35
Management's report                                                 35
Quarterly financial data                                            36
Market for common equity                                            36
Corporate data                                       Inside back cover

11-year Summary of Selected Financial Data

<TABLE>
Year Ended March 31,                 1998     1997
--------------------               -------   -------
<S>                                  <C>       <C>
Financial
Net sales                          $18,254   $17,555
Operating income (loss)                654     1,576
Income (loss) before
  extraordinary item**               1,310     1,116
Net income (loss)**                  1,310     1,116
Working capital                      9,122    10,167
Total assets                        22,133    19,870
Long-term obligations                  851       345
Shareholders' equity                18,506    17,665

Statistical
Operating margin                       3.6%      9.0%
Return on net sales                    7.2%      6.4%
Return on average equity               7.2%      6.5%
Current ratio                          5.9       8.7

Per Share Amounts
Income (loss) before
  extraordinary item-diluted**     $   .28   $   .24
Net income (loss)-diluted**            .28       .24
Dividends                              .10       .10
Book value                            3.94      3.83

Weighted average common shares
 outstanding assuming dilution       4,698     4,608
</TABLE>


**Includes a $1,154,000 adjustment to carrying value of facility related to
insurance recoveries in 1998

                              -inside front cover-
<PAGE>

<TABLE>
   1996       1995       1994       1993      1992       1991*      1990        1989        1988
--------------------------------------------------------------------------------------------------
                                  (In thousands, except per share amounts)
 <S>        <C>        <C>        <C>        <C>        <C>        <C>        <C>         <C>
 $16,941    $18,261    $17,213    $16,390    $16,942    $15,674    $19,257    $18,089     $18,385
     899      2,193      1,546       (966)       678      1,402      2,288     (2,631)        938

     824      1,467      1,348       (904)       533        896        727     (3,510)        (83)
     824      1,467      1,348       (904)       721      1,253      1,299     (3,510)        (83)
  10,299     10,675     11,261      9,772     10,543      6,714      8,719      9,410       7,722
  18,426     18,384     18,030     16,925     17,800     19,005     23,158     22,056      28,548            
     353         19        630        734        815      1,122      1,240      4,168       2,531
  16,852     16,454     15,620     14,507     15,397     14,818     14,354     12,383      16,582

     5.3%      12.0%       9.0%      (5.9)%      4.0%       8.9%      11.9%     (14.5)%       5.1 %
     4.9%       8.0%       7.8%      (5.5)%      4.3%       8.0%       6.7%     (19.4)%       (.5)%
     4.9%       9.1%       9.0%      (6.0)%      4.8%       8.6%       9.7%     (24.2)%       (.5)%
    11.9        7.5        8.3        6.8        7.6        3.2        2.2        2.7         1.8

 $   .18    $   .32    $   .28    $  (.20)   $   .12    $   .20    $   .17    $  (.77)     $ (.02)
     .18        .32        .28       (.20)       .16        .28        .29       (.77)       (.02)
     .10        .10        .05       
    3.66       3.55       3.29       3.16       3.35       3.26       3.15       2.72        3.67

   4,609      4,638      4,744      4,594      4,661      4,551      4,551      4,546       4,542
</TABLE>

*The company sold its Italian subsidiaries in 1991.

The Company

Gamma Biologicals, Inc. manufactures and sells a wide variety of highly refined
and specialized testing products known as IN-VITRO diagnostic reagents. These
reagents, which are restricted to specific uses and for which there are no
substitutes, are used - to test blood to ensure safe transfusions, - to detect
hemolytic disease of the newborn, - to determine the presence or absence of the
Rh factor, - to study inherited blood factors, and - to aid in the diagnosis of
certain human diseases, such as autoimmune hemolytic anemia.

Operating in a niche market, Gamma supplies products and services to
immunohematology, commonly called "blood banking". Immunohematology is one of
the major disciplines within the $2+ billion clinical (laboratory) medicine
market.

The company sells its products to blood collection centers (blood banks),
transfusion departments of hospitals, medical laboratories, and research
institutions through a direct sales force and a dealer network. Gamma
distributes its products to more than 50 countries.

                                   -1-
<PAGE>

Letter to Shareholders

Dear Shareholder:

Introducing a new product as complex as ReACT has been a real challenge for
Gamma. Over the past several years, this company's management and employees
have used their experience and skills to build the Gamma-ReACT-TM- Test System
from research to patent to product and now to sales.

     While ReACT was too new to have contributed significantly to fiscal 1998
earnings, Gamma was again profitable through sales of traditional reagents. The
company earned $1,310,000 (28 cents per share) on net sales of $18,254,000.
[Detailed financial information begins on page 17.]

     Earnings reflect an adjustment to the cost basis of our manufacturing 
facility due to fire damage suffered last September. The after-hours fire in 
a sterilizing oven, while minor in nature, nevertheless resulted in 
approximately $2.5 million of heat and water damage. It didn't stop us from 
opening for business the next day, although it took about a week to resume 
certain manufacturing activities. Some raw material had to be discarded, but 
that didn't affect either final product quality or customer shipments.

The Year's Highlights

Gamma-ReACT-TM- Test System

Fiscal 1998 saw ReACT progress out of the development stage and into the
production and marketing stage. In mid-September 1997, Gamma received a patent
related to the ReACT adherence technology. U.S. Patent #5,665,558, "Method and
Apparatus Useful for Detecting Bloodgroup Antigens and Antibodies," is the
first issued of several patents applied for the ReACT Test System.

     Then in late September, just prior to the American Association of Blood 
Banks (AABB) annual meeting, the Food and Drug Administration gave us 
clearance to market the product domestically, only 11 months after 510K 
submission. On track with projections, the company has shipped 127 ReACT 
systems to our overseas dealers and 41 to domestic customers, and has orders 
pending for approximately 50 additional systems. Disposable test strips, 
filled, sealed, labeled and packaged in house, will provide an ongoing 
revenue stream from ReACT.

     We developed a unique red cell product line specifically for ReACT. 
Studies show that the line functions well in other gel column systems, which 
could expand sales. Over time, we will develop a complete line of reagents 
specifically for ReACT, a complement to our complete line of traditional and 
specialty reagent products.

     By the way, ReACT's ease of use, marked by our ready-to-use cell 
suspension, generated considerable interest at the AABB meeting.

Canadian Dealer

With the premarketing phase of ReACT complete, Gamma appointed Dominion
Biologicals, Ltd., of Nova Scotia as the exclusive distributor in Canada. We
chose the Canadian market leader because of its direct sales force. Gamma has
no sales representatives based in Canada, although several of our U.S. reps
have a few Canadian customers for traditional reagents and cell products. The
initial five-year contract is valued at more than $1 million, equivalent to
about 5% of Gamma's fiscal 1998 revenues.

                                   -2-
<PAGE>

Screening Cell Pool

There are two segments of our customer base: donors, who give blood, and
patients, who receive it. Initially, we marketed ReACT for the antibody
screening of presurgery patients. In April 1998, we secured FDA clearance to
market a ReACT blood donor screening cell pool. Screening of blood donors is a
required routine test on all donations. Gamma's product allows the technologist
to screen large numbers of donors quickly, saving time and money. In addition
to extending the ReACT product line, we have opened a new market for the
estimated 12 million annual blood donations in the United States.

Long-term Project

Shanghai Gamma Biologicals Co. Ltd., the company's 50/50 joint venture with the
Shanghai Blood Center (SBC), though strictly long-term, is progressing through
government requirements much more quickly than expected because of substantial
support from SBC officials. In May 1998, we signed the contract and articles of
association, two more steps in the approval process.  So far, we have:

-  registered the Shanghai Gamma name and received a tax identification number;
-  submitted two plans for the interior construction for our full floor in the
   new Shanghai Blood Center;
-  developed the equipment list for items available locally and those that must
   be imported; and
-  started recruiting an American-trained business person to become general
   manager of the joint venture.

     Additionally, the Shanghai Blood Center sent two people to Houston for a 
month to study business practices related to our industry and to 
profit-making ventures in general. We could begin limited shipments of bulk 
product from the joint venture as early as this fall. To date, we have 
shipped small amounts of finished reagents for the center's in-house 
evaluation and samples for its large customers. In all cases, Gamma's 
reagents were found to be of exceptional quality.

     Our basis for the joint venture is that China has no manufacturer 
dedicated to producing a complete line of blood group typing reagents. The 
country does collect approximately 30 million blood donations annually, 
making it potentially the world's largest market for diagnostic reagent 
products.

The Year To Come

After all our efforts, expertise, time and money devoted to developing ReACT,
it should come as no surprise that our fiscal 1999 focus will be to sell ReACT
systems and disposable test strips in the domestic and international
marketplace. Gamma will continue marketing traditional reagents, but our
emphasis will be on ReACT.

We look forward to reporting to you a successful year.

Sincerely,


/s/ David E. Hatcher

David E. Hatcher
Chairman, President & Chief Executive Officer

June 15, 1998


                                   -3-
<PAGE>

From patent to product . . .

Humans have been advancing technology since at least 6500 BC, when the potter's
wheel was invented in Asia Minor. With the 1611 AD invention of the double
convex microscope and the 1658 discovery of red blood cells, healthcare
scientists leaped forward in the study of the human blood system. Their
experiments carried risks, such as with early blood transfusion attempts,
partially because of what they did NOT know.

Opportunities arose when the major blood groups were discovered around the turn
of the Twentieth Century. But not until the mid-1940s, with the first antibody
detection tests, did companies like Gamma begin to develop better products and
technologies for identifying antibodies and antigens. Each product was driven
by the need for improved patient care; each technology, by the laboratory
technologist's demand for accuracy and speed.

Today, as from its founding in 1970, Gamma manufactures and sells IN-VITRO
diagnostic reagents that test blood to ensure safe transfusions and to
determine certain blood factors.

                                   -4-
<PAGE>

Over the years, company scientists have contributed to the detection and
identification of more than 25 unique blood group factors (of 400 so-far
known). Along the way, Gamma has researched, developed and received FDA
clearance for a complete line of traditional reagents, the profession's most
comprehensive line of monoclonal reagents, and a variety of specialized
products for use in the immunohematology laboratory.

The Gamma-ReACT-TM- Test System, the company's newest product, was developed
because blood bank technologists asked for an easy-to-use, gel-based system
that could lower human error rates. We've received FDA clearance to market the
product. We've received a patent on the adherence technology used in the
system. Now comes the real challenge - marketing and selling ReACT to a
diverse, worldwide customer base - with the inherent risks associated with new
products, the individual's natural reluctance to change, and healthcare's ever-
shifting rules.

                                   -5-
<PAGE>

[photo of G. Parrish goes here]

                                   -6-
<PAGE>

"Domestic customers want quality products and service. Gamma gives them more."

Gary Parrish, senior vice president - national sales, sold Gamma reagents back
when building a relationship with the head of immunohematology (the chief blood
bank technologist) guaranteed repeat orders. Now he oversees 19 domestic sales
representatives who, to sell a capital item like the ReACT Test System, must
submit a proposal to laboratory managers, administration personnel, purchasing
agents, materials managers and the technologists who will actually use the
product.

When introducing a custom product like ReACT, demonstration and training are
key to a sale. Thoroughly indoctrinated in using the ReACT system, the Gamma
sales force tutors customers on-site. Large group presentations at regional and
national meetings, advertising, and even customer-produced posters for
professional meetings all present a more complete picture of the product's
value than instruction manuals and direction inserts alone. Gamma now offers
the ReACT system both to individual customers and as an option on group bids
and government contracts.

[photo of four sales representatives goes here]

In addition to servicing their own territories, Ruth Usuriello, MT(ASCP)
[left], Marian Fortmann, MT(ASCP)SBB, Nancy Cornwell, MT(ASCP)SBB [seated], and
Jim Hall, MT(ASCP), comprise the regional team that helps the rest of Gamma's
domestic sales force troubleshoot installation questions and train customers on
ReACT.

                                   -7-
<PAGE>

[two-page photo of filling equipment goes here]

Gamma built a cleanroom around its new Swiss-made, multipart machine that
fills, seals, labels (both user label and bar code) and packages the custom
disposable strips that will provide a cash flow stream from each ReACT system
sold. Rudy Vargas (foreground) and Romina Williams have operated the equipment
during the installation phase and will be responsible for ongoing production.

                                   -8 & 9-
<PAGE>

"Our job internationally is to increase distributors' business and Gamma's
profits."

Raul Alvarez, senior vice president - international business, works in
partnership with distributors around the world to sell Gamma reagents, cell
products and, now, ReACT.  The purchasing process for equipment and disposables
varies by country and depends on how the healthcare system is organized.
Marketing ReACT in Mexico requires a different strategy from that used in
Germany. Economics, politics, local currencies, and blood banking culture all
play a role.

Most countries have government-controlled healthcare systems, but they aren't
all at the same development stage. For European laboratories, which regularly
perform sophisticated antibody screening tests, ReACT is an evolution in gel
technology. For South American countries that began screening donors and
patients just a few years ago, ReACT is an innovation. In conservative, heavily
regulated Japan, the health ministry may evaluate diagnostic products for up to
three years before allowing sales to begin. In China, Gamma will have to
develop a market for traditional tests before it can introduce an advanced
product like ReACT. Meanwhile, through its headquarters and its Netherlands
subsidiary, the company provides tutorial programs for both distributors'
representatives and their customers on all Gamma products. International
customers know they can call on Gamma's Consultation Department to solve
complex serological problems and for training in new techniques.

                                   -10-
<PAGE>

[photo of R. Alvarez goes here]


                                   -11-

<PAGE>

[two-page photo of workstation goes here]

The ReACT system takes little space in the customer's laboratory. A workstation
to hold test tubes and ReACT strips, a small incubator for this fast process, a
desktop centrifuge and a viewbox make short work of specific antibody detection
tests. Gloria Schlanser, MT(ASCP), trains international distributors and
customers in performing tests, using the equipment and reading results.



                                   -12 & 13-
<PAGE>

[photo of J. Turner goes here]


                                   -14-
<PAGE>

"Introducing a new product challenges manufacturing, QC, finance, sales,
everyone."

Jimmie Turner, executive vice president and chief operating officer, makes sure
reagent products remain on track, while introducing ReACT into the
manufacturing process at Gamma's Houston facility. Making room for massive
machinery, training technicians, reworking schedules, and seeking FDA
clearances of product and process all affect the day-to-day operations.
Regardless of the sales effort, products must still be produced before they can
be sold, and customer service capabilities must be in place if the ReACT Test
System is to succeed as Gamma desires.

To accommodate its new diagnostic product, Gamma remodeled an area for the
filling equipment, increased one laboratory's workload by adding 11 new cell
products just for ReACT, designed boxes, produced direction inserts, collected
data and obtained FDA clearances. Because of the time required to manufacture a
single lot of the gel base, Gamma instituted a different procedure from
traditional antiserum production. The Quality Control Department added on
responsibility for checking each lot of gel, as well as the new cell products.
The greatest challenge was the time and money Gamma invested in research;
patent applications; outside suppliers for the centrifuge, incubator and
disposable strip mold; a ReACT project manager; and staff training, not to
mention the hours of meetings required to deal with strategies and details.

                                   -15-
<PAGE>

[10 bar charts, representing five years each, go here]

Net sales, in $millions
Sales foreign & domestic, in $millions
Net sales per employee, in $thousands
Net income, in $millions
Net income per share - diluted, in $
Working capital, in $millions
Cash flows provided by operations, in $millions
Shareholders' equity, in $millions
Total debt, in $millions
Book value, in $

                                   -16-
<PAGE>

Management's Discussion and Analysis of Financial Condition and Results of
Operations

Results of Operations

The successful market introduction of the Gamma-ReACT-TM- Test System required
the commitment of a significant portion of the company's financial and human
resources during fiscal 1998. The investments made to promote the system
worldwide, including those to automate the filling and sealing of the
disposable test strips used in the system and to build an inventory of the
equipment comprising the test system, had a material effect on the company's
financial position and results of operations. Promotion and sales of the system
outside the U.S. began prior to FDA clearance for domestic marketing, which
arrived in September 1997. The domestic sales campaign was launched in late
March 1998 after the automated filling equipment was placed on-line. Initial
ReACT sales, representing sales of equipment, test strips and specially
formulated reagent red cell products, accounted for $400,000, or 2% of total
sales in fiscal 1998.

     Current year results also include a $1,154,359 adjustment to the carrying 
value of the company's facility in Houston, Texas, related to insurance 
recoveries of damages caused by a fire in September 1997. This nonrecurring 
item had a significant impact on earnings, raising net income to $1,309,616, a 
17% increase over net income of $1,115,820 in 1997. The financial results of 
fiscal 1997 reflected a payback on previous investments in infrastructure with 
a 75% increase in operating income to $1,576,255 and a 35% increase in net 
income to $1,115,820, compared with $898,974 and $823,530 in 1996, 
respectively.

Revenues

Revenues rose 4% to $18,253,763 after a similar increase in 1997. International
sales originating from the United States rose 16%, with ReACT products
accounting for half of the increase. To date, Gamma has placed 127 ReACT Test
Systems internationally. Gamma Biologicals, B.V., acquired in September 1996,
contributed an additional $317,000 to revenues in its first full year as a
consolidated subsidiary, a 121% increase over 1997. Domestic sales declined 4%
as certain contracts for routine high-volume products were awarded to
competitors, several products at the ends of their life cycles were phased out,
and pricing pressure remained constant. A 47% increase in revenues from third-
party products partially offset declines in other areas. The Gamma-ReACT Test
System offers the best opportunity to regain lost ground domestically. Since
the ReACT technology is not covered by in-force group contracts, these products
may open the door to some purchasing groups from which the company has been
excluded. In addition, ReACT reagent red cell products can be used with
competing microcolumn test systems, enlarging the base of potential customers.
As of June 1998, Gamma has placed 41 ReACT Test Systems domestically and has
orders pending for approximately 30 additional systems.

     In May 1998, the contract and articles of association were signed with 
the Shanghai Blood Center (SBC) of Shanghai, P.R. China to market Gamma 
reagent products through a 50/50 joint venture named Shanghai Gamma 
Biologicals Co. Ltd. (Shanghai Gamma). At present, China has no manufacturer 
dedicated to producing a complete line of blood group typing reagents. The 
China market for diagnostic blood banking reagents, with approximately 30 
million blood donations annually, is 2-1/2 times the size of the U.S. market 
of 12 million donations and growing. Shanghai Gamma is strictly long-term; 
progress through government requirements is being made more quickly than 
expected because of support from SBC officials. The first large order for bulk 
reagents is under negotiation. Limited product shipments from the joint 
venture could begin as early as September 1998.

                                   -17-
<PAGE>

     Under the agreement with Olympus America Inc., Clinical Instruments 
Division, Gamma is to manufacture a custom line of monoclonal reagents 
dedicated to the PK series of immunohematology analyzers. Applications for the 
necessary license supplements were made before the end of calendar 1997 for 
the first group of reagents. Reagents for Rh phenotyping and typing for the K 
antigen on the PK 7200 have been developed, and field-test studies to provide 
data to support an application to the FDA started in June 1998. The Olympus 
agreement is for an initial term of three years following FDA clearance of 
the first group, which is not expected before late fiscal 1999. Gamma estimates
sales of approximately $500,000 during the first full year of the contract.

     In 1997, revenues rose 4% to $17,554,502 after a 7% decline to 
$16,940,588 in 1996. Increased sales volume of reagent red cell, RQC and 
potentiator products and one third-party product offset the loss of $338,000 
in revenues from mature, noncore lines that were being phased out. Gamma 
Biologicals, B.V., our former distributor in the Netherlands, also contributed 
$262,000 to consolidated revenues. During the six months ended March 31, 1997, 
Gamma Biologicals, B.V. sold directly to customers in the Netherlands and to 
certain distributors in Europe and other areas.

Gross Margin

Gross margin as a percentage of sales declined to 54% in 1998 after rising to
55% in 1997. The significant increase in third-party product sales reduced
overall margins in 1998. Margins on sales of these products average 17%, versus
a 57% margin on revenues from core products. Initial ReACT sales carried a
lower gross margin than can be expected in the future, due to the emphasis on
equipment rather than consumables (reagent red cell products and test strips).
Additionally, manufacturing efficiency was lower than usual because of
production slowdowns related to the September fire and to decreased domestic
demand for certain products mentioned above. In January 1997, we began the
process leading to ISO 9001 certification. More and more customers and
regulatory bodies are requesting and/or demanding such certification of
suppliers; we anticipate certification by the end of fiscal 1999. Although the
required validation and documentation of all manufacturing processes and
procedures has increased short-term operating costs, the investment in the
certification process should generate future savings through efficiencies
achieved by enhancing our quality system.

     The 1997 increase in margin was attributed to economies achieved in 
converting primary reagent product lines to clone-based raw materials grown 
in-house and the extension of reagent red cell product shelf life which 
resulted in reduced manufacturing lead time and allowed for more efficient use 
of raw materials.

Selling Expenses

Selling expenses rose 17% compared with 1997 and included a full year of 
expenses for Gamma Biologicals, B.V., as well as increased personnel, travel 
and entertainment costs necessary to promote Gamma-ReACT and support the 
increase in export sales. In 1997, selling expenses rose 7% compared with 
1996 due to the September 1996 acquisition of 

                                   -18-
<PAGE>

Gamma Biologicals, B.V., increased expenditures for the annual American 
Association of Blood Banks (AABB) meeting where the ReACT test system was 
presented, and for travel and promotional materials required to establish new 
international distributors. Selling expenses should decrease in fiscal 1999 
following completion of the market introduction of ReACT.

General and Administrative Expenses

General and administrative expenses rose 25% after falling 14% in 1997. Fees
for investor relations and financial advisory services contributed
significantly to the increase, as did a full year of depreciation expense on
assets related to the computer upgrade implemented in the latter part of fiscal
1997. Other expenses returned to normal levels after decreasing in 1997 due to
a reduction in the allowance for doubtful accounts to reflect recent loss
experience and the reclassification of state income taxes.

     General and administrative expenses in 1997 did not bear the singular
expenditures that burdened 1996. These included legal fees related to patent
applications covering ReACT and biosensor technologies, travel associated with
the evaluation of potential sites outside the United States to manufacture
products awaiting FDA approval, and financial advisory services to assist the
company in identifying and reviewing strategic alternatives to enhance
shareholder value.

Shipping and Warehouse Expenses

Shipping and warehouse expenses returned to 1996 levels after declining 13% in
1997. Gains in productivity following implementation of a new shipment
processing system and product bar coding were more than offset by a 3% rate
increase from our predominant domestic freight carrier which has not been
passed on to customers and increased depreciation expense.

Research and Development Expenses

Research and development expenses declined 14% after increasing 7% in 1997.
Research and development costs associated with ReACT fell as the system
received FDA clearance in September 1997 and moved into the production phase.
Funding commitments for electro-biosensor research at the University of
Wollongong, Australia expired and were not renewed. Although feasibility and
specificity of the test system were proven in a laboratory setting, estimates
of additional time and cost required to commercialize the technology exceeded
the company's expectations. Management believes that currently available
resources will be better utilized in projects with greater short- and
intermediate-term potential, such as the development of additional microcolumn
products and the automation of the ReACT Test System.

                                   -19-
<PAGE>

Unusual Item

On September 11, 1997, the company's manufacturing facility in Houston, Texas 
sustained damage from a fire that occurred while the building was unoccupied 
(see Note 14). Insurance recoveries for property damage associated with 
events of this type require the recognition of a new cost basis for the 
rebuilt or replaced assets. As a result, the company recognized an adjustment 
to the carrying value of the facility to the extent of recoveries received 
amounting to $1,154,359.

Interest and Other Income

Interest income decreased 4% in 1998 and 22% in 1997 due to a reduction in the
amount of funds invested and a change in the investment mix in the prior
period. Interest expense declined 23% in 1998 due to normal debt retirement; a
9% domestic reduction in 1997 was offset by interest expense on debt carried by
Gamma Biologicals, B.V.

     Other expense increased $41,000 in 1998 due to losses on assets retired 
and currency exchange losses experienced by Gamma Biologicals, B.V. The other 
income decline in 1997 was related to the sale of a noncore product technology 
in 1996.

Income Taxes

The 1998 provision for income taxes remained level with the 1997 provision. The
1997 provision rose 96% due to a 52% increase in income and to deferred taxes
provided for temporary differences between the book and tax basis of property
additions.

Other

In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income,"
and SFAS No. 131, "Disclosures About Segments of an Enterprise and Related
Information". SFAS No. 130 establishes standards for reporting and displaying
of comprehensive income and its components. SFAS No. 131 establishes standards
for the way that public business enterprises report information about operating
segments and related information in interim and annual financial statements.
SFAS Nos. 130 and 131 are effective for periods beginning after December 15,
1997. These two statements did not have any effect on the company's 1998
financial statements; however, management is evaluating what, if any,
additional disclosures may be required when these statements are implemented.

     The company recognizes the need to ensure that its operations will not be
adversely affected by Year 2000 software failures. Software failures due to
processing errors arising from calculations using the Year 2000 date are a
known risk. The company is addressing this risk to the availability and
integrity of financial systems and the reliability of operational systems and
is communicating with suppliers of goods and services to coordinate Year 2000
compliance. The risks and costs associated with the company's current computing
portfolio have been assessed; estimated costs to achieve compliance should not
exceed $50,000 and will be incurred in fiscal 1999.

                                   -20-
<PAGE>

Liquidity and Capital Resources

Operating Activities

Net cash flows decreased $2,097,000 during the fiscal year ended March 31, 1998
and $2,034,000 during the fiscal year ended March 31, 1997. Reduced cash flows
from operating activities accounted for most of the 1998 decline. Although
sales increased 4% over the prior period, operating expenses, excluding
depreciation and amortization, rose 12%, or $870,000, as outlined above in
"Results of Operations". In June 1997, a fee of $200,000 was paid to acquire a
nonexclusive license from the owner of a patent issued in several European
countries, covering certain technology utilized in the ReACT test strips. A
planned buildup of ReACT equipment inventory in connection with the market
introduction reduced operating cash by $612,000. Finally, operating cash flows
were temporarily restricted by unreimbursed expenditures related to the fire,
as mentioned in Note 14; the company was fully reimbursed by its insurance
carrier on May 5, 1998.

     The company has contracted with a medical equipment manufacturer to 
provide automated dispensing and reading devices for use with the Gamma-ReACT 
Test System. The contract commits the company to purchase 50 dispensers and/or 
readers during the first three years following FDA clearance to market the 
devices in the United States. Our estimated cost should range between $650,000 
and $1,700,000, depending on product mix. During the third quarter, Gamma 
Biologicals, B.V. purchased one complete system, consisting of a dispenser and 
reader, and five readers at a cost of approximately $100,000. These units were 
purchased in anticipation of the European market introduction planned for 
mid-1998.

     On May 12, 1998, a claim of patent infringement was filed in the U.S. 
District Court in Miami, Florida, alleging that the Gamma-ReACT Test System 
infringes a patent granted to Stiftung fur Diagnostiche, a Swiss foundation. 
(See Note 15.) Management is confident that the ReACT technology does not 
infringe any claims made in the plaintiff's patent and intends to vigorously 
defend the company's position.  Since the suit is in the earliest stage of 
proceedings, management cannot assess the likelihood of a particular outcome 
or estimate the financial impact of an unfavorable resolution. We do expect 
that defense costs will have a material impact on fiscal 1999 financial 
condition and results of operations.

     In 1997, cash flows from operating activities declined $105,000. Cash 
received from customers increased $462,000. This improvement in cash flow was 
offset by increased investment in inventory, license fees paid and insurance 
deposits.

Investing Activities

Cash flows from investing activities remained relatively constant for 1998 
after they decreased $1,965,000 in 1997. The company continued to invest in 
building improvements and the computer network at above-normal levels. 
Reconstruction following the fire created an opportunity to make other 
improvements to the manufacturing areas that otherwise might not have been 
undertaken at this time. We also continued to invest in the computer network 
to improve efficiency in all areas of the company.

     Fiscal 1999 cash flows from investing activities will be affected by the 
ramp-up of production at Shanghai Gamma. The company is committed to 
providing manufacturing equipment and know-how to the joint venture, as well 
as working capital, consisting of cash and inventory. The timing and amount 
of the noncash contributions has not yet been 

                                         -21-
<PAGE>

determined; the company expects to fund a cash contribution of $225,000 in 
late August or September 1998. Limited product shipments from the joint 
venture could begin as early as September 1998.

     In 1997, completing improvements to the shipping area and the computer 
system, and projects in progress to relocate and streamline the packaging 
function and to double the monoclonal laboratory capacity, kept capital 
expenditures at a higher than normal level. The downswing in cash flow from 
investing activities was partially offset by $143,000 acquired with Gamma 
Biologicals, B.V.

Financing Activities

Cash flows used in financing activities increased $32,000 in 1998 with the 
addition of payments on debt acquired with Gamma Biologicals, B.V. Reduced 
long-term debt payments, with the termination of certain capital leases in 
October 1996, was responsible for the 1997 decrease in cash flows used in 
financing activities.

     Customized equipment to automate the filling, sealing and labeling of 
ReACT test strips was delivered as scheduled in January 1998 and was on-line 
by March 1998. The installed cost of this equipment was approximately 
$815,000; the company has entered into a lease agreement to finance the 
equipment purchase. Modifications to existing space to house the equipment, 
including the "clean room" required for the filling and sealing operation, 
were substantially completed prior to the delivery date, at a cost of 
approximately $100,000.

Future Needs

Although the additional cost of defending the company's position in the 
patent infringement suit will strain operating cash flows during fiscal 1999, 
management believes that operating cash flows will be sufficient to meet 
future operating needs, providing that ReACT sales reach targeted levels. Our 
existing capital resources, consisting of $1,520,000 in cash and short-term 
investments and a $1,500,000 revolving credit line, should be sufficient to 
support development of the Shanghai Gamma joint venture and planned capital 
improvements during the next 12 months.

     Costs of materials and services have remained relatively stable over the 
past three years, with the exception of the shipping rate increase in 1998 and 
the shipping supply increase in 1996. We do not expect operations to be 
influenced significantly by rising costs in the foreseeable future.

     Management's Discussion and Analysis includes certain forward-looking 
statements reflecting the company's expectations in the near future, 
particularly the anticipated contributions of the Gamma-ReACT Test System and 
the Shanghai Gamma joint venture. However, many factors which may affect 
actual results, especially market conditions and changing regulations, are 
difficult to predict. Accordingly, there is no assurance that the company's 
expectations will be realized.

                                         -22-
<PAGE>

Statements of Consolidated Income

<TABLE>
Year ended March 31,                                     1998           1997          1996
-----------------------------------------------------------------------------------------------
<S>                                                 <C>            <C>            <C>

Net sales                                           $  18,253,763  $  17,554,502  $  16,940,588
Cost of sales                                           8,396,753      7,857,815      7,825,828
-----------------------------------------------------------------------------------------------
  Gross margin                                          9,857,010      9,696,687      9,114,760
-----------------------------------------------------------------------------------------------
Operating expenses:
 Selling                                                4,447,107      3,792,115      3,530,721
 General and administrative                             2,654,985      2,122,075      2,468,584
 Shipping and warehouse                                   854,190        756,848        867,209
 Research and development                               1,246,754      1,449,394      1,349,272
-----------------------------------------------------------------------------------------------
   Total operating expenses                             9,203,036      8,120,432      8,215,786
-----------------------------------------------------------------------------------------------
Operating income                                          653,974      1,576,255        898,974
-----------------------------------------------------------------------------------------------
Unusual item: Adjustment
    to carrying value of facility
    related to insurance recoveries                     1,154,359
Other income (expense):
 Interest income                                          195,544        204,554        262,228
 Interest expense                                         (37,430)       (48,449)       (48,350)
 Other income (expense)                                   (50,431)        (9,623)        19,578
-----------------------------------------------------------------------------------------------
  Other income (expense) - net                            107,683        146,482        233,456
-----------------------------------------------------------------------------------------------
Income before income taxes                              1,916,016      1,722,737      1,132,430
Income taxes                                              606,400        606,917        308,900
-----------------------------------------------------------------------------------------------
  Net income                                         $  1,309,616   $  1,115,820     $  823,530
-----------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------
  Weighted average number of common
   shares outstanding assuming dilution                 4,697,694      4,607,518      4,608,771
-----------------------------------------------------------------------------------------------
  Net income per common share - basic                $        .28   $        .24     $      .18
-----------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------
  Net income per common share - diluted              $        .28   $        .24     $      .18
-----------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------
</TABLE>

See Notes to Consolidated Financial Statements.

                                         -23-
<PAGE>

Consolidated Balance Sheets

<TABLE>
March 31,                                                 1998          1997
--------------------------------------------------------------------------------
<S>                                                   <C>            <C>
Assets
Current assets:
 Cash and cash equivalents                            $ 1,416,768    $ 3,618,970
 Short-term investments                                   100,000        100,000
 Receivables - net of allowance for doubtful
  accounts: 1998 - $118,000; 1997 - $105,505            4,489,387      3,524,585
 Inventories                                            3,969,444      3,658,642
 Prepaid expenses                                         918,333        515,660
 Deferred taxes                                            85,100         73,400
--------------------------------------------------------------------------------
  Total current assets                                 10,979,032     11,491,257
--------------------------------------------------------------------------------
Property:
 Land                                                     284,147        284,147
 Building and improvements                              7,291,220      6,091,377
 Machinery and equipment                                6,449,950      5,261,132
 Furniture and fixtures                                   596,586        599,056
--------------------------------------------------------------------------------
  Total                                                14,621,903     12,235,712
 Less accumulated depreciation and amortization         6,297,958      6,241,338
--------------------------------------------------------------------------------
  Property - net                                        8,323,945      5,994,374
--------------------------------------------------------------------------------
Cash value of life insurance                            2,026,250      1,858,672
Excess of cost over net assets acquired - net             108,645        139,686
Other                                                     695,368        385,538
--------------------------------------------------------------------------------
   Total assets                                       $22,133,240    $19,869,527
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------

Liabilities and Shareholders' Equity
Current liabilities:
 Current portion of long-term obligations             $   226,835    $   127,761
 Accounts payable - trade                               1,226,771        786,214
 Dividends payable                                        115,270        115,077
 Accrued salaries and other expenses                      288,455        294,748
--------------------------------------------------------------------------------
  Total current liabilities                             1,857,331      1,323,800
--------------------------------------------------------------------------------
Long-term obligations                                     851,240        345,120
--------------------------------------------------------------------------------
Deferred taxes                                            918,200        535,700
--------------------------------------------------------------------------------
Commitments and contingencies
Shareholders' equity:
 Preferred stock - $10.00 par value; 1,000,000 shares
  authorized; none outstanding
 Common stock - $.10 par value; 25,000,000 shares
  authorized; outstanding: 1998 - 4,776,115 shares;
  1997 - 4,762,615 shares                                 477,611        476,261
 Capital in excess of par value                        13,711,791     13,674,209
 Retained earnings                                      5,493,805      4,644,801
 Accumulated translation adjustment                       (25,268)       (10,456)
 Treasury stock at cost: 1998 - 165,353 shares;
  1997 - 159,563 shares                                (1,151,470)    (1,119,908)
--------------------------------------------------------------------------------
  Total shareholders' equity                           18,506,469     17,664,907
--------------------------------------------------------------------------------
   Total liabilities and shareholders' equity         $22,133,240    $19,869,527
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
</TABLE>

See Notes to Consolidated Financial Statements.

                                         -24-
<PAGE>

Statements of Changes in Shareholders' Equity

<TABLE>
Year ended March 31,                           1998                       1997                        1996
----------------------------------------------------------------------------------------------------------------------
                                      Shares        Amount        Shares        Amount        Shares           Amount
<S>                                  <C>           <C>           <C>           <C>           <C>              <C>
Common Stock
Balance, beginning of year           4,762,615     $476,261      4,711,365     $471,136      4,700,303        $470,030
Acquisition of wholly
 owned subsidiary                                                   50,000        5,000
Exercise of stock options               13,500        1,350          1,250          125         11,062           1,106
-----------------------------------------------------------------------------------------------------------------------
 Balance, end of year                4,776,115      477,611      4,762,615      476,261      4,711,365         471,136
-----------------------------------------------------------------------------------------------------------------------

Capital in Excess
of Par Value
Balance, beginning of year                       13,674,209                  13,512,836                     13,482,615
Acquisition of wholly
 owned subsidiary                                                               157,500
Exercise of stock options                            37,582                       3,873                         30,221
-----------------------------------------------------------------------------------------------------------------------
 Balance, end of year                            13,711,791                  13,674,209                     13,512,836
-----------------------------------------------------------------------------------------------------------------------

Retained Earnings
Balance, beginning of year                        4,644,801                   3,988,022                      3,619,289
Net income                                        1,309,616                   1,115,820                        823,530
Dividends declared                                 (460,612)                   (459,041)                      (454,797)
-----------------------------------------------------------------------------------------------------------------------
 Balance, end of year                             5,493,805                   4,644,801                      3,988,022
-----------------------------------------------------------------------------------------------------------------------

Translation Adjustments
Balance, beginning of year                          (10,456)
Current year translation
 adjustments                                        (14,812)                    (10,456)
-----------------------------------------------------------------------------------------------------------------------
 Balance, end of year                               (25,268)                    (10,456)
-----------------------------------------------------------------------------------------------------------------------

Treasury Stock
Balance, beginning of year            (159,563)  (1,119,908)      (159,563)  (1,119,908)     (159,169)      (1,118,258)
Purchase of treasury stock              (5,790)     (31,562)                                     (394)          (1,650)
-----------------------------------------------------------------------------------------------------------------------
 Balance, end of year                 (165,353)  (1,151,470)      (159,563)  (1,119,908)     (159,563)      (1,119,908)
-----------------------------------------------------------------------------------------------------------------------
Total shareholders' equity           4,610,762  $18,506,469      4,603,052  $17,664,907     4,551,802      $16,852,086
-----------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------
</TABLE>

See Notes to Consolidated Financial Statements.

                                              -25-
<PAGE>

Statements of Consolidated Cash Flows

<TABLE>
Year ended March 31,                                     1998           1997           1996
-----------------------------------------------------------------------------------------------
<S>                                                  <C>            <C>            <C>
Cash Flows from Operating Activities
Cash received from customers                         $ 18,246,883   $ 17,916,399   $ 17,454,501
Interest received                                         190,916        204,315        149,118
Cash paid to suppliers and employees                  (17,902,748)   (15,722,474)   (15,060,164)
Interest paid                                             (37,430)       (48,444)       (48,350)
Income taxes paid                                        (470,228)      (302,680)      (343,000)
-----------------------------------------------------------------------------------------------
 Net cash provided by operating activities                 27,393      2,047,116      2,152,105
-----------------------------------------------------------------------------------------------

Cash Flows from Investing Activities
Property additions                                     (2,853,738)    (1,609,727)    (1,668,145)
Purchase of investments                                                                (892,709)
Investment in subsidiary                                                 142,659
Increase in cash value of life insurance                 (167,578)      (128,898)      (197,776)
Proceeds from:
 Investments                                                4,909          4,786      3,093,608
 Assets disposed of                                     1,379,359             50         38,618
-----------------------------------------------------------------------------------------------
 Net cash (used in) provided by investing activities   (1,637,048)    (1,591,130)       373,596
-----------------------------------------------------------------------------------------------

Cash Flows from Financing Activities
Payments on long-term obligations                        (128,758)       (96,199)      (172,324)
Exercise of stock options                                  38,932          3,998         31,327
Dividends paid                                           (460,421)      (457,760)      (454,529)
Purchase of treasury stock                                (31,562)                       (1,650)
-----------------------------------------------------------------------------------------------
 Net cash used in financing activities                   (581,809)      (549,961)      (597,176)
-----------------------------------------------------------------------------------------------

Effect of exchange rate fluctuation on cash               (10,738)       (11,434)
Net (decrease) increase in cash                        (2,202,202)      (105,409)     1,928,525
Cash and cash equivalents at beginning of period        3,618,970      3,724,379      1,795,854
-----------------------------------------------------------------------------------------------
  Cash and cash equivalents at end of period         $  1,416,768   $  3,618,970   $  3,724,379
-----------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------

Reconciliation of Net Income to Net Cash
provided by Operating Activities
Net income                                           $  1,309,616   $  1,115,820   $    823,530
Adjustments to reconcile net income
 to cash provided by operating activities:
 Depreciation                                           1,026,506        822,368        650,471
 Amortization of intangibles                               38,817         15,521
 (Gain) loss on disposal of fixed assets               (1,141,181)         3,312            148
 Gain on sale of investments                               (4,628)          (239)      (206,718)
 Deferred taxes                                           361,900        295,600         28,500
 Net effect of changes in operating accounts           (1,563,637)      (205,266)       856,174
-----------------------------------------------------------------------------------------------
     Net cash provided by operating activities       $     27,393   $  2,047,116   $  2,152,105
-----------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------
</TABLE>

See Notes to Consolidated Financial Statements.

                                              -26-
<PAGE>

Notes to Consolidated Financial Statements

Note 1. Summary of Significant Accounting Policies

Business

The company manufactures and sells a wide variety of highly refined and 
specialized testing products known as in-vitro diagnostic reagents. The 
company operates in one industry segment and two geographic areas, the United 
States and Europe. Customers include numerous hospitals, blood collection 
centers, medical laboratories and research institutions in more than 50 
countries. The company does not have a concentration of credit risk due to 
its large customer base.

Consolidation

The consolidated financial statements include the accounts of Gamma 
Biologicals, Inc. and all subsidiaries (the company). All significant 
intercompany items have been eliminated in consolidation.

Translation of Foreign Currencies

All assets and liabilities in the balance sheet of the company's foreign 
subsidiary are translated at year-end exchange rates. Translation gains and 
losses are not included in determining net income but are accumulated in a 
separate component of shareholders' equity.

Inventories

Inventories are valued at the lower of cost or market value.

Property and Depreciation

Property, including improvements, is stated at cost, including interest 
charges incurred during construction. Expenditures for maintenance and 
repairs are charged to operations as incurred. Costs of assets sold or 
retired and the related amounts of accumulated depreciation are eliminated 
from the accounts, and the resulting gains or losses are recognized in 
current operations.

     Depreciation on machinery and equipment and furniture and fixtures is 
computed using the straight-line method over estimated useful lives of five 
to 10 years. Depreciation and amortization on building and improvements are 
computed using the straight-line and 150% declining balance methods over 
estimated service lives of five to 30 years.

Excess of Cost Over Net Assets Acquired

The excess cost over net assets acquired in the purchase of Gamma 
Biologicals, B.V. was $155,207 and is being amortized over five years on a 
straight-line basis. The accumulated amortization was $46,562 at March 31, 
1998 and $15,521 at March 31, 1997.

Research and Development Expenditures

The company capitalizes certain costs relating to the development of new 
technologies. Capitalization does not begin until technological feasibility 
is established. All other research and development expenditures are charged 
to expense in the period incurred.

Revenue Recognition

Revenue is recognized when products are shipped or services are performed.

Income Taxes

The company utilizes an asset and liability approach in the calculation of 
deferred income taxes. This approach gives consideration to the future tax 
consequences of differences between the tax basis of assets and liabilities 
and their reported amounts in the financial statements. The net taxable or 
deductible amounts in future years are adjusted for the effect of any 
available tax credits.

Net Income Per Common Share

In February 1997, the Financial Accounting Standards Board (FASB) issued SFAS 
No. 128, "Earnings Per Share". SFAS No. 128 establishes standards for 
computing and presenting earnings per share (EPS) and requires restatement of 
all prior-period EPS data presented. 


                                              -27-
<PAGE>

The company adopted SFAS No. 128 on October 1, 1997. The adoption of SFAS No. 
128 did not have a material effect on the company's EPS.

Net income per common share - basic is computed using the weighted average 
number of shares outstanding during each year. Net income per common share 
-diluted is computed using the weighted average number of shares and dilutive 
equivalent shares outstanding during each year. [See Note 9.]

Statements of Consolidated Cash Flows

For purposes of reporting cash flows, cash and cash equivalents include cash 
on hand and in banks, amounts deposited in money market funds, and 
certificates of deposit with original maturities of three months or less.

Fair Value of Financial Instruments

The company's financial instruments consist of cash and cash equivalents, 
short-term investments, accounts receivable, accounts payable and long-term 
obligations. As of March 31, 1998 and 1997, the fair value of these items 
approximated the carrying value.

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 and disclosure of 
contingent assets and liabilities at the date of the financial statements and 
the reported amounts of revenues and expenses during the reporting period. 
Actual results could differ from those estimates.

Note 2. Inventories

Inventory is valued at the lower of cost (principally FIFO) or market, as
follows:

<TABLE>
March 31,                                                  1998           1997
-----------------------------------------------------------------------------------
<S>                                                    <C>            <C>
Raw materials                                          $  932,210     $1,144,949
Products in process                                       464,719        432,357
Finished products                                       1,087,878      1,319,605
ReACT equipment                                           611,618
Supplies                                                  873,019        761,731
-----------------------------------------------------------------------------------
  Total                                                $3,969,444     $3,658,642
-----------------------------------------------------------------------------------
-----------------------------------------------------------------------------------
</TABLE>

Note 3. Cash Value of Life Insurance

Cash value of life insurance consists primarily of contractual rights under
split-dollar life insurance agreements on the lives of certain officers and
directors. The company owns the policies and pays the premiums. Each insured
party is required to reimburse the company for the annual economic benefit that
the insured party receives. The premiums paid by the company less amounts
reimbursed by the insured party (net premiums) accrue interest at 3% per year.
The company can borrow against the policies. With the company's permission, the
insured parties can also secure loans against the policies. The company can
elect to pay the interest accruing on loans secured by insured parties.

     Upon death of an insured party, the insured party's estate must repay 
all loans against the policy and accrued interest (plus 3%) previously paid 
by the company. Additionally, policy proceeds in excess of the amount (net 
premiums paid plus interest) due to the company under terms of the 
split-dollar insurance agreements will be distributed to the designated 
beneficiaries of the insured party.

                                      -28-
<PAGE>

Note 4. Long-term Obligations and Credit Agreement

Long-term Obligations

Long-term obligations consist of:

<TABLE>
March 31,                                                    1998           1997
------------------------------------------------------------------------------------
<S>                                                      <C>              <C>
Mortgage note, due monthly through 2000                  $  265,523       $353,485
Note payable - foreign, due semiannually through 2000        67,192        119,396
Capital lease, due quarterly through 2004                   745,360
------------------------------------------------------------------------------------
                                                          1,078,075        472,881
Less current portion                                        226,835        127,761
------------------------------------------------------------------------------------
 Total long-term obligations                             $  851,240       $345,120
------------------------------------------------------------------------------------
------------------------------------------------------------------------------------
</TABLE>

     The mortgage note bears interest at the bank's base rate, but not less 
than 7% nor more than 13%. At March 31, 1998, the note bore interest at 9.5%. 
The mortgage note is collateralized by a first lien on the company's land and 
building. The foreign note payable bears interest at 7%. The capital lease 
for a filling and sealing machine for ReACT strips bears interest at 8.82%.

     Long-term obligations mature as follows: $226,835 in 1999; $262,181 in 
2000; $238,379 in 2001; $160,336 in 2002; $175,059 in 2003; and $15,285 in 
2004.

Credit Agreement

The company has a revolving line of credit agreement under which the company
can borrow $1,500,000 at the bank's floating base rate plus 0.5%. The agreement
was renewed in August 1997. At March 31, 1998 or during the year then ended,
no borrowings were outstanding under this agreement. The company pays no fees
nor is required to maintain any compensating balances under this agreement.

     The line of credit agreement provides for maximum amounts that can be 
outstanding, based on the company's receivables and inventories. Prepayments 
on this loan may be required when the bases of receivables and inventories, 
as determined under the agreement provisions, are less than certain defined 
levels.

     The agreement also contains various provisions that restrict borrowings, 
capital expenditures, advances and other distributions, and certain direct or 
contingent liabilities. Dividend payments are restricted to 25% of the 
company's prior year net income. This restriction was waived for the years 
ended March 31, 1998, 1997 and 1996. The agreement also provides for the 
maintenance of certain ratios or amounts relative to working capital, net 
worth and debt-to-equity. At March 31, 1998, the company was in compliance 
with the provisions of the agreement.

     Security for the company's obligations under the line of credit agreement 
includes substantially all of the company's assets, except for the cash value 
of all life insurance policies and the company's land and building which are 
pledged as collateral for the mortgage note.

Note 5. Cash Flows Information

Following is a summary of the changes in operating assets and liabilities.

<TABLE>
Year ended March 31,                                     1998            1997            1996
-------------------------------------------------------------------------------------------------
<S>                                                  <C>              <C>             <C>
Decrease (increase) in:
  Receivables                                        $    38,535      $ 373,941       $ 290,400
  Inventories                                           (306,435)      (483,338)        567,135
  Prepaid expenses                                    (1,408,095)      (142,903)        136,359
  Other assets                                          (317,607)      (121,873)         61,842
Increase (decrease) in:
  Accounts payable                                       422,043        225,179         (77,968)
  Accrued salaries and other expenses                      7,922        (56,272)       (121,594)
-------------------------------------------------------------------------------------------------
Net effect of change in operating accounts           $(1,563,637)     $(205,266)      $ 856,174
-------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------
</TABLE>

                                      -29-
<PAGE>

      In March 1996, the company outsourced the assembly of plastic droppers 
and SegmentSamplers-TM-. As a result, inventory of component parts totaling 
$282,886 was transferred to outside vendors and a corresponding receivable 
due from the vendors was recorded. This receivable was reduced as assembled 
parts were delivered, with the cost of components deducted from the vendors' 
selling price. Additional inventory of $105,000 was transferred to the 
outside vendors, and the remaining balance was recovered in full by March 31, 
1998.

     The company purchased 100% of the outstanding shares of Gamma 
Biologicals, B.V., effective September 30, 1996, for 50,000 shares of common 
stock. In conjunction with the acquisition, assets of $336,000 (including 
$143,000 cash) were received, and liabilities of $313,000 were assumed.

     In June 1997, the company entered into a capital lease agreement for 
$745,360 for the design, manufacture and installation of a special filling 
and heat-sealing machine for the ReACT strips. The machine was accepted in 
March 1998.

Note 6. Stock Option Plans

Under the company's incentive stock option plan, 250,000 shares of its common
stock are reserved for grant to various employees. The options become
exercisable at 25% per year. The number of shares reserved under the plan will
be adjusted for stock splits and stock dividends.

     Options have been granted to certain nonemployee members of the board of 
directors to purchase shares of common stock. The 1997 Outside Director Stock 
Option Plan (nonqualified) reserves 100,000 shares of the company's common 
stock for grant to nonemployee directors.

     The following is a summary of the company's stock option plans:

<TABLE>
Year ended March 31,                  1998                   1997                     1996
-----------------------------------------------------------------------------------------------------
<S>                          <C>          <C>       <C>            <C>       <C>            <C>
                               Number     Average     Number       Average     Number       Average
                             of Shares     Price    of Shares       Price    of Shares       Price
Options outstanding
 at beginning of year         465,775      $4.14     469,025        $4.14     411,337        $4.07
 Options granted              101,680       4.03           0                   73,500         4.25
 Options exercised            (13,500)      2.88      (1,250)        3.20     (11,062)        2.83
 Options canceled             (48,500)      4.41      (2,000)        4.50      (4,750)        3.12
-----------------------------------------------------------------------------------------------------
 Options outstanding
  at end of year              505,455      $4.12     465,775        $4.14     469,025        $4.14
-----------------------------------------------------------------------------------------------------
 Options exercisable
  at end of year              421,455      $4.06     383,399        $4.08     320,900        $3.96
-----------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------
 Options available
  at end of year              303,570                256,750                  334,750
-----------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------
</TABLE>

     The company accounts for its stock option plans in accordance with 
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to 
Employees," and related interpretations, under which no compensation cost has 
been recognized for stock option awards. In fiscal 1998, had compensation cost 
of the plans been determined consistent with SFAS No. 123, "Accounting for 
Stock-Based Compensation," the company's pro forma net income would have been 
$1,158,758 and pro forma basic and diluted earnings per common share would have 
been $.25 and $.25, respectively. The fair value of options under the 
company's plans during 1998 was estimated on the date of grant using the 
Black-Scholes option pricing model with the following weighted average 
assumptions used: dividend yield of 2.33%, expected volatility of 31.97%, 
risk-free interest rate of 6.50% and expected lives of 10 years.

                                     -30-
<PAGE>

Note 7. Shareholder Rights Plan

The company has a shareholder rights plan which expires in September 1999.
Under terms of the plan: a) the rights are not exercisable until 10 days after
a public announcement that a person or group has acquired or intends to acquire
20% or more of the company's common stock without the consent of the board of
directors; and b) each share of common stock has the right to purchase common
stock with a value of two times the right's purchase price. The right's
purchase price, which is subject to adjustment by the board of directors, is
currently $15.00 per right. If exercisable, based upon a closing market price
of $4.75 per share at March 31, 1998, a shareholder could purchase, by
exercising such right, approximately 6.3 shares of common stock for each share
held. The board of directors may elect to redeem the outstanding rights at $.01
per right at any time before the expiration date.

Note 8. Employee Retirement Savings Plan

The company has a 401(k) Retirement Savings Plan. Under the plan's provisions,
the company may, at the discretion of the board of directors, match a portion
of the employee's annual contribution. All employees over 21 years of age with
at least one year of service are eligible for the plan. Company contributions,
which are 100% vested after five years of continuous service, were $39,588 in
1998; $37,043 in 1997; and $35,194 in 1996.


Note 9. Earnings Per Share

<TABLE>
Year ended March 31,                           1998                              1997                            1996
----------------------------------------------------------------------------------------------------------------------------------
<S>                             <C>         <C>        <C>        <C>         <C>        <C>        <C>        <C>      <C>
                                  Income      Shares   Per Share    Income      Shares   Per Share    Income    Shares  Per Share
                                                         Amount                            Amount                         Amount

Net income                      $1,309,616                        $1,115,820                        $823,530
Basic EPS
 Income available to
 common shareholders             1,309,616  4,604,826    $0.28     1,115,820  4,577,729   $0.24      823,530  4,545,747   $0.18
Effect of Dilutive Securities:
 Options and Warrants                          92,868                            29,789                          63,024
----------------------------------------------------------------------------------------------------------------------------------
Diluted EPS
  Income available to
  common shareholders
  plus assumed
  conversion                    $1,309,616  4,697,694    $0.28    $1,115,820  4,607,518   $0.24     $823,530  4,608,771   $0.18
----------------------------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------------------------
</TABLE>


                                     -31-
<PAGE>

Note 10. Income Taxes

Income taxes consist of the following:

<TABLE>
Year ended March 31,                                       1998           1997           1996
-----------------------------------------------------------------------------------------------
<S>                                                      <C>            <C>            <C>
Current:
 Federal                                                 $185,300       $273,000       $280,400
 State                                                     14,200         13,900
 Foreign                                                   45,000         24,417
-----------------------------------------------------------------------------------------------
  Total current                                           244,500        311,317        280,400
-----------------------------------------------------------------------------------------------
Deferred:
 Federal                                                  361,900        295,600         28,500
-----------------------------------------------------------------------------------------------
  Total deferred                                          361,900        295,600         28,500
-----------------------------------------------------------------------------------------------
   Total                                                 $606,400       $606,917       $308,900
-----------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------
</TABLE>

     Income taxes as shown in the statements of consolidated income differ from
the amount that would be computed if income before income taxes was multiplied
by the United States federal income tax rate (statutory rate) applicable in each
year. The reasons for this difference are as follows:

<TABLE>
Year ended March 31,                                       1998           1997           1996
-----------------------------------------------------------------------------------------------
<S>                                                       <C>            <C>             <C>
Statutory rate                                             34.0%          34.0%          34.0%
Increase (decrease) resulting from:
 Exempt export earnings                                    (2.0)          (2.3)          (4.1)
 Temporary differences related to property                 22.5            8.7           (2.3)
 Research and development credit                                          (7.9)
 Software development                                      (2.7)
 Gain on insurance recoveries                             (20.5)
 Other - net                                                 .3            2.7            (.3)
-----------------------------------------------------------------------------------------------
  Effective tax rate                                       31.6%          35.2%          27.3%
-----------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------
</TABLE>

     Significant components of the company's deferred tax assets (liabilities) 
are as follows:

<TABLE>
Year ended March 31,                                        1998           1997
-----------------------------------------------------------------------------------------------
<S>                                                     <C>            <C>            <C>
Allowance for doubtful accounts                         $  40,100      $  35,900
Inventory costs capitalized                                31,200         37,500
Other                                                      13,800
-----------------------------------------------------------------------------------------------
 Net current deferred tax asset                            85,100         73,400
-----------------------------------------------------------------------------------------------
Difference between book and tax basis of property,
 plant and equipment                                     (891,900)      (523,900)
Other                                                     (26,300)       (11,800)
-----------------------------------------------------------------------------------------------
 Net noncurrent deferred tax liability                   (918,200)      (535,700)
-----------------------------------------------------------------------------------------------
  Net deferred tax liability                            $(833,100)     $(462,300)
-----------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------
</TABLE>

                                          -32-
<PAGE>

Note 11. Operations by Geographic Area

The company operates within one dominant segment - the manufacture and sale of
blood bank and diagnostic products - and has no customer which accounts for 10%
or more of its total sales. During the year ended March 31, 1998, the company
operated in two geographic areas, the United States and Europe. Prior to the
September 30, 1996 acquisition of Gamma Biologicals, B.V., the company operated
in one geographic area from which it sold to numerous countries.

<TABLE>
Year ended March 31,                                       1998           1997           1996
-----------------------------------------------------------------------------------------------
                                                                     (In thousands)
<S>                                                       <C>            <C>            <C>
Net sales to unaffiliated customers:
 United States                                            $11,884        $12,317        $12,260
 Europe                                                     2,565          1,697          1,553
 Mexico, Central and South America                          1,518          1,297          1,020
 Pacific Region                                             1,239          1,382          1,244
 Middle East                                                  754            651            620
 Other                                                        294            211            244
-----------------------------------------------------------------------------------------------
  Total                                                   $18,254        $17,555        $16,941
-----------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------
Export sales from United States to unaffiliated customers:
 Europe                                                   $ 1,433        $ 1,284        $ 1,553
 Mexico, Central and South America                          1,513          1,297          1,020
 Pacific Region                                             1,209          1,382          1,244
 Middle East                                                  742            651            620
 Other                                                        290            211            244
-----------------------------------------------------------------------------------------------
  Total                                                   $ 5,187        $ 4,825        $ 4,681
-----------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------
Export sales from United States to affiliated customers:  $   605        $   151
-----------------------------------------------------------------------------------------------
Income from operations:                                          
 United States                                            $ 1,190        $ 1,078        $   824
 Europe                                                       120             38
-----------------------------------------------------------------------------------------------
  Total                                                   $ 1,310        $ 1,116        $   824
-----------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------
Identifiable assets:                                             
 United States                                            $19,213        $17,468        $16,696
 Europe                                                       595            318
 Corporate                                                  2,325          2,084          1,730
-----------------------------------------------------------------------------------------------
  Total                                                   $22,133        $19,870        $18,426
-----------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------
</TABLE>

Note 12. Acquisition of Wholly Owned Subsidiary

Effective September 30, 1996, the company acquired 100% of the outstanding
shares of its distributor in the Netherlands, Gamma Biologicals, B.V.
Consideration for the acquisition was 50,000 shares of Gamma common stock,
valued at $3.25 per share, the market price on the effective date. The
acquisition has been accounted for using the purchase method of accounting, and
accordingly, the purchase price has been allocated to the assets purchased and
the liabilities assumed based upon the fair values at the acquisition date. The
excess of the purchase price over the fair values of the net assets acquired
was $155,207 and has been recorded as goodwill, which is being amortized over
five years.

     Gamma Biologicals, B.V. was formed in November 1993 to market Gamma
products and certain noncompeting product lines in the Netherlands. Subsequent
to the acquisition, the subsidiary continues to sell directly in the
Netherlands, as well as serving as a European distribution center.

                                          -33-
<PAGE>

Note 13. Sales of Exempt Securities

In June 1997, the company granted to Cyn Del & Co., Inc., a warrant to purchase
100,000 shares of the company's common stock at an exercise price of $5.00 per
share (the warrant) pursuant to Section 4(2) of the Securities Act of 1933. The
warrant is exercisable by Cyn Del & Co., Inc. at any time prior to June 19,
2002. The company granted the warrant as partial consideration for consulting
services to be provided to the company's board of directors by Cyn Del & Co.,
Inc.

Note 14. Damage to Facility

On September 11, 1997, the company's manufacturing facility in Houston, Texas
sustained damage from a fire that occurred while the building was unoccupied.
The company was open for business on September 12, and most manufacturing
activities resumed within seven days. Reconstruction of affected areas was
completed after fiscal year-end.

     The company has insurance for both property damage and business
interruption. The full cost of repair or replacement was determined to be
$2,506,121. As of March 31, 1998, $1,500,000 had been advanced to the company,
and a receivable of $1,001,121 was recorded. Final reimbursement was received
from the insurance carrier on May 5, 1998.

     Insurance recoveries for property damage exceeded the depreciated value
of the affected assets. As a result, the company recognized in income for the
period ended March 31, 1998, an adjustment to the carrying value of the
facility amounting to $1,154,359.

Note 15. Commitments and Contingencies

Operating Leases

The company leases certain facilities, equipment and automobiles under
operating leases which range from one month to five years. Rent expense charged
to income was approximately $333,000 in 1998; $262,000 in 1997; and $239,000 in
1996. Future minimum rental commitments at March 31, 1998 are $834,000, due
between two and five years.

Contingencies

On May 12, 1998, a patent infringement claim was filed in U.S. District Court
in Florida by Micro Typing Systems, Inc. and Stiftung fur Diagnostiche
Forschung (the foundation) alleging that the Gamma ReACT Test System infringes
U.S. Patent #5,512,432 granted to the foundation April 30, 1996. The plaintiffs
seek a permanent injunction against the continued alleged infringement, an
award of treble damages with interest and costs, and reasonable attorney's
fees. On January 23, 1998, a former employee filed suit in Harris Country
District Court, Texas alleging that the company breached a verbal contract to
provide certain post-employment benefits. The plaintiff seeks specific
performance of the contract or not less than $1,500,000 in monetary damages.
Management is confident that the ReACT technology does not infringe any claims
made in the foundation's patent and that the company has not breached any
obligations to the former employee.

     Since these matters are in the earliest stages of proceedings and due to
uncertainties involved in litigation, management cannot predict the likelihood
of a particular outcome or estimate the financial impact of an unfavorable
resolution of either matter. However, an unfavorable outcome could have a
material adverse effect upon the business and the results of operations in a
given reporting period.

                                          -34-
<PAGE>

Independent Auditors' Report
Gamma Biologicals, Inc.

We have audited the accompanying consolidated balance sheets of Gamma
Biologicals, Inc. and subsidiaries (the company) as of March 31, 1998 and 1997,
and the related consolidated statements of income, changes in shareholders'
equity, and cash flows for each of the three years in the period ended March
31, 1998. These financial statements are the responsibility of the company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.

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

     In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of the company at March 31, 1998
and 1997, and the results of its operations and its cash flows for each of the
three years in the period ended March 31, 1998, in conformity with generally
accepted accounting principles.

/s/ Deloitte & Touche LLP

Houston, Texas
May 22, 1998

Management's Responsibility for Financial Reporting
The management of Gamma Biologicals, Inc. has prepared and is responsible for
the financial statements and related financial data contained in this report.
The financial statements were prepared in accordance with generally accepted
accounting principles and necessarily include certain amounts based upon
management's best estimates and judgments. The financial information contained
elsewhere in this annual report is consistent with that in the financial
statements.

The company maintains internal accounting control systems that are adequate 
to prepare financial records and to provide reasonable assurance that the 
assets are safeguarded from loss or unauthorized use. We believe these 
systems are effective, and the cost of the systems does not exceed the 
benefits obtained.

     The Audit Committee, composed exclusively of outside directors, meets 
periodically with the company's management and independent public accountants 
on financial reporting matters. The independent public accountants have free 
access to the Audit Committee and may meet with the committee, without 
management present, to discuss their audit results and opinions on the 
quality of financial reporting.

     The role of independent public accountants is to render a professional, 
independent opinion on management's financial statements to the extent 
required by generally accepted auditing standards. Gamma's responsibility is 
to conduct its affairs according to the highest standards of personal and 
corporate conduct.

/s/ Margaret J. O'Bannion

Margaret J. O'Bannion
Senior Vice President - Finance

                                          -35-
<PAGE>

Quarterly Financial Data (unaudited)
<TABLE>
                                                 Operating                  Basic        Diluted
                        Net          Gross         Income        Net     Net Income    Net Income
                       Sales        Margin         (Loss)       Income    Per Share     Per Share
--------------------------------------------------------------------------------------------------
<S>                   <C>           <C>          <C>            <C>       <C>           <C>
                                        (In thousands, except per share amounts)
Fiscal 1998
First Quarter         $ 4,828        $2,663        $  454       $  309       $.07           $.07
Second Quarter          4,612         2,587           287          321        .07            .07
Third Quarter           4,400         2,411           198          518        .11            .11
Fourth Quarter          4,414         2,196          (285)         162        .04            .03
--------------------------------------------------------------------------------------------------
                      $18,254        $9,857        $  654       $1,310       $.28           $.28
--------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------
Fiscal 1997
First Quarter         $ 4,212        $2,227        $  332       $  220       $.05           $.05
Second Quarter          4,177         2,445           455          332        .07            .07
Third Quarter           4,650         2,464           351          330        .07            .07
Fourth Quarter          4,516         2,561           438          234        .05            .05
--------------------------------------------------------------------------------------------------
                      $17,555        $9,697        $1,576       $1,116       $.24           $.24
--------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------
</TABLE>

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

The company's common stock trades on the American Stock Exchange under the 
symbol GBL. The bid prices included in the following table are from the 
American Stock Exchange and may not reflect prices in actual transactions. 
The prices do not include markups, markdowns or commissions.

<TABLE>
                        High Closing   Low Closing
                         Bid Price      Bid Price       Dividend
----------------------------------------------------------------
<S>                     <C>            <C>              <C>
Fiscal 1998
First Quarter             $  4.81        $  3.56         $  .025
Second Quarter               5.75           4.38            .025
Third Quarter                6.38           4.13            .025
Fourth Quarter               5.38           4.31            .025

Fiscal 1997
First Quarter             $  4.50        $  3.75         $  .025
Second Quarter               4.00           2.88            .025
Third Quarter                3.75           3.00            .025
Fourth Quarter               4.00           3.06            .025
</TABLE>

     As of June 22, 1998, there were 438 holders of record of the company's 
common stock. The number does not include shares held in broker or nominee 
name.

                                        -36-
<PAGE>

Corporate Data

Officers

David E. Hatcher
Chairman, President & Chief Executive Officer

Jimmie L. Turner
Executive Vice President & Chief Operating Officer

Betty Francis Hatcher
Executive Vice President

Raul F. Alvarez
Senior Vice President - International Business

John Case
Senior Vice President - Regulatory Affairs

Thomas H. Frame
Senior Vice President - Research & Development

Margaret J. O'Bannion
Senior Vice President - Finance & Chief Financial Officer

Gary L. Parrish
Senior Vice President - National Sales

Susan A. Batcha
Vice President - Assistant to Regulatory Affairs

Marilyn K. Moulds
Vice President - Consultation & Education

Lawrence E. Letwin
Corporate Secretary

Directors

David E. Hatcher
Chairman

Richard H. Aster, MD *+
Chairman
Genetic Testing Institute, Inc.
Milwaukee,  Wisconsin
(Medical diagnostic products manufacturer)

Bryan J. Brieden *+
Consultant & former president
Bryan Biologicals, Inc.
Detroit,  Michigan
(Laboratory supplies distributor)

H.H. (Will) Hardee  *+
Senior Vice President
Dain Rauscher
Houston, Texas
(Regional securities firm)

Betty Francis Hatcher

Hayle B. Randolph *+
Blood Services Consultant
Rio Verde and Flagstaff, Arizona

* Member, Audit Committee
+ Member, Compensation/Stock Option Committee

General Counsel
Liddell, Sapp, Zivley, Hill & LaBoon, L.L.P.
Houston, Texas

Auditors
Deloitte & Touche LLP
Houston, Texas

Stock Transfer Agent and Registrar
<PAGE>

Please direct communications concerning stock transfer requirements, lost
certificates or changes of address to:
     Harris Trust and Savings Bank
     ATTN: Shareholder Services
     P.O. Box A3504
     Chicago, IL 60690-3504
     1-800/577-5042.

Stock Trading

Gamma Biologicals, Inc. common stock trades on the American Stock Exchange
using the symbol GBL.

SEC Form 10-K

Gamma will provide its shareholders, without charge, a copy of the company's
Annual Report on Form 10-K for the fiscal year ended March 31, 1998, as filed
with the Securities and Exchange Commission. Please direct requests to:
     Margaret J. O'Bannion
     Gamma Biologicals, Inc.
     3700 Mangum Road
     Houston, TX  77092.

Financial Mailing List

Shareholders whose stock is held in trust or by a brokerage firm may receive
timely financial mailings directly from Gamma by writing to Ms. Margaret J.
O'Bannion at the above address.

Annual Meeting

The directors and officers of Gamma Biologicals, Inc. invite interested
shareholders to attend the annual meeting at 3:00 p.m. CDT on Tuesday, August
11, 1998, at the company's offices, 3700 Mangum Road, Houston, Texas.

                            -inside back cover-
<PAGE>

Gamma Biologicals, Inc.

3700 Mangum Road
Houston, Texas  77092

713/681-8481
FAX  713/956-3333


www.gammabio.com

                                      -back cover-