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                    U.S. SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                                  FORM 10-KSB

/X/  Annual report under section 13 or 15(d) of the Securities Exchange Act of
     1934 for the fiscal year ended December 31, 1997.

/ /  Transition report under section 13 or 15(d) of the Securities Exchange Act
     of 1934 for the transition period from_________________to_________________.

COMMISSION FILE NUMBER:  0-24988

                    LABORATORY SPECIALISTS OF AMERICA, INC.
                 (NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)


                OKLAHOMA                                       73-145065
     (State or other jurisdiction of                       (I.R.S. Employer
      incorporation or organization)                      Identification No.)

       101 PARK AVENUE, SUITE 810
         OKLAHOMA CITY, OKLAHOMA                                 73102
(Address of principal executive offices)                     (Zip Code)

Issuer's telephone number:  (405) 232-9800

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

      Title of each class             Name of each exchange on which registered
              NONE                                       NONE

Securities to be registered under Section 12(g) of the Act:

                          COMMON STOCK, $.001 PAR VALUE
                                (Title of class)

Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act during the past 12 months (or such
shorter period that the registrant was required to file such reports), and has
been subject to such filing requirements for the past 90 days.  Yes  X    No
                                                                    ---      ---
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB.  / /
Issuer's revenues for its most recent fiscal year was $12,836,953.
The aggregate market value of the voting stock held by non-affiliates based
upon the average bid and asked prices of such stock as of March 26, 1998, was
$20,289,679.
The number of outstanding of Common Stock as of March 23, 1998, was 4,924,818.

                     TRANSITIONAL SMALL BUSINESS DISCLOSURE
                              FORMAT (CHECK ONE):
                                 Yes      No  X
                                     ---     ---
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                               TABLE OF CONTENTS
<TABLE>
                                                                            PAGE
                                                                            ----
<S>                                                                         <C>
Part I
Item 1.   Description of Business                                             1
          Background                                                          1
          Business                                                            3
          Industry Background                                                 4
          Expansion Strategy                                                  4
          Drug Testing Operations                                             6
          Contractual Arrangements                                            7
          Insurance Coverage                                                  7
          Competition                                                         8
          Certification and Government Regulation                             8
          Other Regulation                                                    8
          Environmental Matters                                               9
          Employees                                                           9
Item 2.   Description of Property                                             9
Item 3.   Legal Proceedings                                                   9
Item 4.   Submission of Matters to a Vote of Security Holders                10

Part II
Item 5.   Market for Common Equity and Related Stockholders Matters          10
Item 6.   Management's Discussion and Analysis or Plan of Operation          10
          Plan of Operation                                                  10
          Results of Operations                                              11
          Liquidity and Capital Resources                                    15
          Future Operations and Liquidity                                    15
          Future Assessment of Recoverability and Impairment of Goodwill
           and Customer List                                                 16
Item 7.   Financial Statements                                               16
Item 8.   Changes in and Disagreements with Accountants on Accounting and
          Financial Disclosure                                               17

Part III
Item 9.   Directors, Executive Officers, Promoters and Control Persons;
           Compliance with Section 16(a) of the Exchange Act                 17
Item 10.  Executive Compensation                                             19
          Aggregate Option Grants and Exercises in 1997 and Year-End
           Options Values                                                    19
          Compensation of Directors                                          20
          Employment Arrangements                                            20
          1994 Stock Option Plan                                             21
          1997 Non-Qualified Stock Option Plan                               21
          Officer and Director Liability                                     22
Item 11.  Security Ownership of Certain Beneficial Owners and Management     23
Item 12.  Certain Relationships and Related Transactions                     23
Item 13.  Exhibits and Reports on Form 8-K                                   24
          (a)  Exhibits                                                      24
          (b)  Reports on Form 8-K                                           25
</TABLE>
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          CAUTIONARY STATEMENT RELATING TO FORWARD LOOKING INFORMATION

     Certain statements under the captions "Item 1. Description of Business"
and "Item 6.  Management's Discussion and Analysis or Plan of Operation," and
elsewhere in this Report and the documents incorporated herein by reference
constitute "forward-looking statements" within the meaning of Section 21E of
the Securities Exchange Act of 1934, as amended.  Certain, but not
necessarily all, of such forward-looking statements can be identified by the
use of forward-looking terminology such as "believes," "expects," "may,"
"will," "should" or "anticipates" or the negative thereof or other variations
thereon or comparable terminology, or by discussions of strategies that
involve risks and uncertainties.  Such forward-looking statements involve
known and unknown risks, uncertainties and other factors which may cause the
actual results, levels of activity, performance or achievements of Laboratory
Specialists of America, Inc., or industry results, to be materially different
from any future results, levels of activity, performance or achievements
expressed or implied by such forward-looking statements.  As a result of the
foregoing and other factors, no assurance can be given as to future results,
levels of activity and achievements and neither Laboratory Specialists of
America, Inc. nor any other person assumes responsibility for the accuracy
and completeness of these statements.

PART I

ITEM 1.   DESCRIPTION OF BUSINESS.

     Laboratory Specialists of America, Inc. (the "Company" or "LSAI"),
through its wholly-owned subsidiary, Laboratory Specialists, Inc. ("LSI"),
owns and operates an independent laboratory providing drug testing services
to corporate and institutional clients seeking to detect and deter the use of
illegal drugs. The drug testing market is in an expansion mode in part due to
the recent adoptions of additional Department of Transportation regulations,
which became effective in 1995, that substantially expanded the previous
regulations which mandated random drug testing of workers, especially in such
safety-sensitive jobs such as trucking, aviation, railroads and pipelines.
Under these new regulations, 50 percent of transportation workers
(mass-transit workers and interstate truckers and bus drivers) will be
required to be tested annually.

     LSI is certified by the Substance Abuse and Mental Health Services
Administration ("SAMHSA"), a federal agency and regulatory successor to the
National Institute on Drug Abuse ("NIDA"), to conduct drug testing using
legally defensible (forensic) procedures required for legal defensibility of
test results.  The essential elements of these procedures are a secure
chain-of-custody for each specimen from collection to the reporting of test
results and accurate and reliable testing in which a second independent test
is performed to confirm each positive test result.  The drug testing services
offered by LSI also include assisting clients with the development of drug
testing programs, training client personnel, managing specimen collection,
arranging for transportation of specimens to LSI's laboratory, identifying
trends in local and national drug use, interpreting test results, and
providing expert testimony concerning challenged test results.  All of these
services are customized to the individual needs of the clients to assist in
the implementation and cost-effective maintenance of test programs.

     LSAI was incorporated in Oklahoma on March 24, 1994, and its executive
offices are located at 101 Park Avenue, Suite 810, Oklahoma City, Oklahoma
73102 and its telephone number is (405) 232-9800.  LSI was incorporated in
1978 in Louisiana, and its executive offices and laboratory are located at
1111 Newton Street, Gretna, Louisiana 70053, which is near New Orleans, and
its telephone numbers are (504) 361-8989 and (800) 433-3823.

BACKGROUND

     PETERSON SHARE EXCHANGE.  In April 1994, LSI issued 706,244 shares of
LSI Preferred Stock to MBf USA, Inc. ("MBf USA") with a stated value of $1.00
per share, and pursuant to a Stock Exchange Agreement, MBf USA transferred to
Arthur R. Peterson, Jr. all of the outstanding common stock of LSI in
exchange for 1,300,000 shares of the common stock of MBf USA (having a market
value of $1,178,125), and, effective February 23, 1994, LSI issued a
promissory note (the "MBf USA Promissory Note") in the principal amount of
$353,123 to MBf USA, which resulted in LSI ceasing to be a wholly-owned
subsidiary of MBf USA (the "Peterson Share Exchange").  The MBf Promissory
Note bears interest at the rate of seven percent per annum and becomes due
and payable on February 23, 1999. The acquisition of the LSI common stock by
Mr. Peterson was accounted for under the purchase method of accounting.  The
purchase price exceeded the fair market value of the net tangible assets of
LSI by approximately

                                     -1-
<PAGE>

$1,565,000 and represented a material payment for goodwill, an intangible
asset, which is being amortized over 40 years.

     LSI ACQUISITION.  Pursuant to an Exchange Agreement dated June 30, 1994,
Arthur R. Peterson, Jr. exchanged the outstanding common stock of LSI for
1,000,000 shares of Common Stock and 300,000 shares of Series I Preferred
Stock of LSAI, and MBf USA exchanged the LSI Preferred Stock for 239,405
shares of Common Stock of LSAI (the "LSI Acquisition").  As a result of the
LSI Acquisition, LSI became a wholly-owned subsidiary of LSAI on July 8,
1994.  The LSI Acquisition was accounted for as a reverse acquisition of LSAI
by LSI.  On July 10, 1995, the Series I Preferred Stock was redeemed by LSAI
in full and ceased to be issued and outstanding.

     PRIVATE PLACEMENT AND PRIOR OPERATIONS OF LSAI.  Prior to the LSI
Acquisition, the operations of LSAI were limited to completion of a private
placement of 150,000 shares of its Common Stock for net proceeds of
approximately $145,000 and the operations associated with the LSI Acquisition.

     INITIAL PUBLIC OFFERING.  On October 11, 1994, the Company completed its
offering of 1,320,000 shares of Common Stock and 660,000 1994 Warrants in
units of two shares of Common Stock and one 1994 Warrant at a price of $5.49
per unit, which represented a 10 percent discount of the public offering
price of $6.10 per unit (the "IPO Offering").  The proceeds after offering
expenses to the Company were $3,261,660.  As a portion of underwriting
compensation, the Company issued to Barron Chase Securities, Inc. and its
designees the warrants (the "Underwriters' Warrants") exercisable for the
purchase of 66,000 units for $7.32 per unit on or before October 11, 1999.

     NDAC ASSET PURCHASE.  On December 1, 1994, the Company acquired from
National Drug Assessment Corporation ("NDAC") certain intangible assets
pursuant to an Asset Purchase Agreement, dated November 30, 1994, ("NDAC
Asset Purchase").  The assets purchased included the customer list of NDAC
and certain other intangible assets (the "NDAC Purchased Assets").  In
connection with the acquisition of the NDAC Purchased Assets, the Company (i)
paid $750,000 and issued and delivered 189,000 shares of Common Stock and
(ii) assumed the obligations of NDAC under an office lease agreement.  The
$1,070,940 purchase price of the NDAC Purchased Assets was allocated entirely
to the customer list, which was recorded as an intangible asset, which is
being amortized over 15 years.

     NPLI ACQUISITION.  On January 2, 1996, LSAI acquired all of the issued
and outstanding capital stock (the "NPLI Stock") of National
Psychopharmacology Laboratory, Inc., a Tennessee corporation ("NPLI"), and
purchased goodwill (the "NPLI Goodwill"), pursuant to a Stock Purchase
Agreement dated January 1, 1996 (the "NPLI Purchase Agreement"), and NPLI
became a wholly-owned subsidiary of the Company.  NPLI was engaged in
forensic drug testing and clinical testing and analysis.

     Pursuant to the Purchase Agreement, the Company agreed to pay (i)
$1,585,000 for the NPLI Stock (the "NPLI Stock Purchase Price") of which
$1,075,000 was paid at closing to the shareholders of NPLI (the "NPLI
Shareholders"), two unsecured promissory notes (the "Promissory Notes"), in
the aggregate adjusted face value of $510,000, were issued and delivered to
the NPLI Shareholders, and NPLI conveyed to the NPLI shareholders an office
building and NPLI's leasehold interest in the real property on which the
office building is located and affixed at an agreed market value of $75,000,
and (ii) $140,000 for the NPLI Goodwill payable in 24 monthly installments
commencing on February 1, 1996.

     Pursuant to the NPLI Purchase Agreement, the aggregate principal amount
of the Promissory Notes was reduced to $510,000 effective January 2, 1996,
further reduced by principal payments, and pursuant to the Settlement
Agreement and General Release dated August 25, 1997, the Company issued and
delivered to the former NPLI shareholders 103,333 shares of Common Stock on
August 28, 1997, in full payment and elimination of the Promissory Notes.
Furthermore, pursuant to the NPLI Purchase Agreement, (i) the Company paid
certain NPLI shareholder loans in the aggregate amount of $275,000 and (ii)
entered into a certain First Amendment of Lease Agreement with DJ Associates,
a general partnership of which the NPLI Shareholders are the general
partners, and pursuant to which the Company and NPLI leased certain office
and laboratory facilities for a term of six months and agreed to pay monthly
rent of $3,000.  The total purchase price of approximately $3,400,000 was
recorded as intangible assets.

                                     -2-
<PAGE>

     The Company consolidated and assimilated the forensic drug testing
operations of NPLI with those of LSI during the first quarter of 1996.  The
Company discontinued the clinical testing and analysis operations of NPLI
during the fourth quarter of 1996 after several attempts to dispose of the
clinical testing and analysis operations.

     PLL ASSET PURCHASE.   On January 31, 1997, LSAI acquired from Pathology
Laboratories, Ltd., a Mississippi corporation ("PLL"), certain forensic drug
testing assets (the "PLL Asset Purchase") pursuant to an Asset Purchase
Agreement dated January 31, 1997 (the "PLL Purchase Agreement").  The assets
purchased included the customer list of PLL and all related assets, and all
assets owned by PLL used in connection with the PLL office in Greenville,
South Carolina.  Pursuant to the Purchase Agreement, LSAI (i) paid $1,600,000
at closing and $765,601 in four quarterly installments during the 12-month
period ended January 31, 1998, and (ii) assumed the obligations of PLL under
a certain Lease between Edith Schlien and PLL, dated September 16, 1996,
covering approximately 2,500 square feet of office space located in
Greenville, South Carolina, which requires monthly base rental payments of
$2,083 and which expires on September 16, 1999.

     WARRANT REDEMPTION.  In October 1997, LSAI completed the redemption of
its outstanding 1994 Warrants and, in connection therewith and pursuant to
exercise of the 1994 Warrants, issued 1,440,580 shares of its Common Stock
for $2.00 per share for net proceeds to LSAI of $2,470,951 (the "Warrant
Redemption Offering").  For services performed, LSAI issued to Barber &
Bronson Incorporated and its assigns warrants to purchase 144,058 shares of
Common Stock for $2.20 per share during the three-year period ending October
14, 2000, and paid Barber & Bronson Incorporated aggregate fees of $190,829.
In addition, 30,000 of the Underwriter's Warrants were exercised for the
purchase 30,000 units (60,000 shares of Common Stock) and the Company
received net proceeds of $216,000.

     ACCU-PATH ASSET PURCHASE.  On December 1, 1997, the Company acquired
from Accu-Path Medical Laboratory, Inc. ("Accu-Path") certain intangible
assets pursuant to an Asset Purchase Agreement, dated December 1, 1997,
("Accu-Path Asset Purchase").  The assets purchased included the customer
list of Accu-Path and all related assets and certain assets utilized in the
office of Accu-Path at its offices in Ruston, Louisiana (the "Accu-Path
Assets"). In connection with the acquisition of the Accu-Path Assets, the
Company agreed to pay 180 percent of the forensic testing revenues during the
period of June through November 1998, with an advance payment of $100,000 on
December 1, 1997, and the remaining purchase price balance will be paid
through four quarterly installment payments with the first of such payments
due on December 31, 1998.  The purchase price of the Accu-Path Assets was or
will be allocated entirely to the customer list, which was recorded as an
intangible asset, which is being amortized over 15 years.  At December 31,
1997, the accrued installment payments totaled $260,000.

BUSINESS

     The Company, through LSI, its wholly-owned subsidiary, owns and operates
an independent laboratory providing drug testing services to corporate and
institutional clients seeking to detect and deter the use of illegal drugs.
LSI is certified by SAMHSA, to conduct drug testing using procedures required
for legal defensibility ("forensic") of test results.  These procedures
provide reliable and accurate test results and a secure chain-of-custody for
each specimen from its collection to the reporting of test results.  LSI
tests for a number of drugs of abuse, including cocaine, methamphetamine,
heroin, PCP, marijuana and alcohol, primarily by urinalysis.  In addition to
forensic drug testing, LSI offers a range of services which are customized to
assist clients in implementing cost-effective drug testing programs.  LSI's
high volume clients have enabled it to develop cost-efficient means of
delivering its services while maintaining forensic testing standards.

INDUSTRY BACKGROUND

     The Office of National Drug Control Policy estimates that Americans
spend more than $40 billion a year on illegal drugs.  A NIDA 1990 National
Survey concluded that 12.9 million Americans had used illegal drugs in the
one-month period prior to the survey, including an estimated 10.2 million who
had used marijuana and 1.6 million who had used cocaine.  This study also
estimated that 1.6 million Americans had used heroin in their lifetime.  In
addition, law enforcement data indicate that drugs are involved in a majority
of the nation's violent crimes and that more than 60 percent of arrestees in
1990 had illegal drugs in their bodies.  Government data indicate that drug
abuse costs American business $100 billion annually in lost productivity,
increased accidents, absenteeism, medical claims and employee theft.

                                     -3-
<PAGE>

     In the 1970s, drug testing was limited largely to criminal justice
agencies and drug treatment programs.  In the 1980s, however, increased
awareness of the drug abuse problem and its consequences led to increased
drug testing in the workplace.  This, in turn, led to litigation which has
settled many of the formerly open legal and constitutional questions on drug
testing.  These court decisions, generally favoring properly implemented drug
testing programs, have reinforced the acceptance of drug testing in the
workplace.  In 1986, President Reagan signed an Executive Order which
mandated drug testing for many key federal employees, and there are now
comprehensive federal regulations for drug testing by many agencies.  In the
private sector, the number of the nations 200 largest corporations screening
applicants and employees for drug use rose from three percent to 98 percent
from 1983 to 1991, according to the Institute for a Drug Free Workplace.
Furthermore, the Department of Transportation adopted additional regulations,
which became effective in 1995, that substantially expanded the former
regulations which mandated random drug testing of workers, especially in such
safety-sensitive jobs such as trucking, aviation, transportation, railroads
and pipelines.  Under these recently adopted regulations, 50 percent of
transportation workers (mass-transit workers, interstate truckers and bus
drivers) are required to be tested annually.  It is expected that under these
additional regulations, 7.5 million workers are required to undergo drug
testing each year, up from 3.5 million in years prior to 1995.  Based upon
industry studies, the Company believes the market for legally defensible
("forensic") drug testing services was more than $500 million in 1992, and as
a result of expanded mandatory drug testing regulations adopted by the
Department of Transportation, it is estimated that the drug testing market
will exceed $625 million in 1997.

     Historically, the drug testing market has been served by national
clinical laboratory chains, independent national drug testing laboratories
and numerous regional and local laboratories such as LSI.  Thousands of
general clinical laboratories nationwide can conduct non-forensic drug
testing.  Over the past 10 years, however, many corporations and government
agencies have begun to require drug testing laboratories to be certified to
conduct forensic drug tests and to offer testing services on a cost-effective
basis.  In addition, many of the largest of these organizations, particularly
those in the public sector, utilize a competitive bidding procedure to select
their drug testing laboratories.  The bidding process for these competitive
contracts is increasingly limited to SAMHSA certified drug testing
laboratories, such as LSI's laboratory, which can demonstrate the ability to
meet the service and volume levels specified by the customers.  As of June 4,
1997, there were approximately 69 laboratories certified by SAMHSA.

GROWTH STRATEGY

     The Company's strategy is to become a leading drug testing laboratory
providing legally defensible ("forensic") test results through the
acquisition of additional companies that perform and provide drug testing
services and expansion of its current client base and services.  There are no
assurances that the Company will be able to achieve its expansion strategy or
that its expanded operations will be successful.  The Company's strategy
includes the following key elements:

     ACQUISITIONS.  The Company has and intends to continue the expansion of
its client base and drug testing services through the acquisition of
companies and the assets of companies providing drug testing services
compatible with and comparable to those provided by LSI.  The Company
completed the NDAC Asset Purchase in 1994, the NPLI Acquisition in 1996 and
the PLL Asset Purchase in January 1997 and Accu-Path Asset Purchase in
December 1997.  See "--Background." In connection with the NPLI Acquisition,
the Company acquired, in addition to the drug testing operations, the
clinical testing and analysis operation conducted by NPLI.  After several
attempts to sell the clinical testing and analysis operation of NPLI, the
Company discontinued the clinical testing and analysis operation in the
fourth quarter of 1996.  This resulted in a net loss from discontinued
operation of $500,636 and a net loss on disposal of the clinical business of
$773,580.  See "Item 3. Legal Proceedings," and "Item 6. Management's
Discussion and Analysis or Plan of Operation--Results of Operations."

     The principal objective of the Company's acquisition strategy is to
acquire companies that, through the consolidation and assimilation of the
operations of drug testing companies acquired with and into the operations of
LSI, will result in increased testing volume with minimal additional specimen
processing cost, resulting in increased profitability and cash flows.
Although the Company will not consummate an acquisition unless, at the time
of the acquisition, it is anticipated that such acquisition will contribute
to the profitability and provide positive cash flows from operations
following consolidation and assimilation of the operations of the acquired
company with those of LSI, there can be no assurance of such increased
profitability and positive cash flows, as well as operations other than
forensic drug testing may be acquired, which may be discontinued or disposed
of at a loss.  In the event the Company

                                     -4-
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fails to make acquisitions which contribute to the profitability of the
Company and provide positive cash flows to the Company, the Company may be
required to reduce general and administrative expenses, possibly including
consolidation of Company operations into the offices of LSI and reduction of
management compensation, and may be required to utilize borrowings to fund
negative cash flows from operations until such reductions of general and
administrative expenses are achieved.  See "Item 6. Management's Discussion
and Analysis or Plan of Operation-- Future Operations and Liquidity."

     In selecting companies for acquisition, the various criteria that will
be considered include (i) the ability to consolidate and assimilate the
operations of the acquisition target with and into those of LSI with the
objective of achieving the anticipated increase in profitability and cash
flows from operations, (ii) the ability on a post-acquisition basis to
maintain the acquisition target's client base and market share, (iii) the
ability to preserve the essential marketing personnel of the acquisition
target, (iv) the terms of the acquisition, such as the cash requirements and
willingness of the target's owners to accept equity securities of LSAI, (v)
the revenue base of the acquisition target, and (vi) the legal and
accounting costs of the acquisition.

     Such acquisitions will be completed through the issuance of Common Stock
or Preferred Stock of LSAI, cash acquisitions utilizing available cash and
cash equivalents, borrowings or other sources of equity capital.  The
non-specific nature of the acquisitions makes an estimation of amount to be
allocated to acquisitions from these sources impossible to estimate or
determine at the date of this Report.  LSAI's growth strategy will require
expanded customer services and support, increased personnel, expanded
operational and financial systems and implementation of control procedures.
There can be no assurance that LSAI will be able to manage expanded
operations effectively and efficiently.  LSAI's acquisitions may involve a
number of risks including the diversion of management's attention to the
assimilation of the acquired company, adverse short-term effects on the
Company's results of operations, the amortization of acquired intangible
assets, and the possibility that the acquired company will not contribute to
the Company's profitability and cash flows as expected, and the acquisition
may include business operations, other than forensic drug testing, the may be
discontinued or disposed of at a loss.

     LSAI's shareholders will, in all likelihood, not be afforded the
opportunity to approve the terms of any such acquisitions because the Board
of Directors will, in most cases, have the authority to consummate
acquisitions without shareholder approval.  Shareholders will also not have
an opportunity, prior to consummation of an acquisition, to review the
financial statements of an acquisition candidate, except where shareholder
approval is required.

     EXPANDING CLIENT BASE.  LSI intends to continue to compete aggressively
for clients, with a greater emphasis on potential clients currently served by
competitors.  In this effort, LSI intends to focus in particular on the
institutional and private employers, where LSI believes demand for drug
testing services is the greatest and the average price per specimen
historically has been higher.  LSI also is targeting numerous moderate volume
clients which have yet to implement drug testing programs.

     EMPHASIZING CLIENT SERVICE.  SAMHSA certification requirements have
established a quality baseline for forensic drug testing.  As a result, it
has become increasingly difficult for laboratories to differentiate their
drug testing services on the basis of quality.  LSI has chosen to
differentiate itself by providing drug testing services, customized to
address each client's needs including assisting clients with the development
of drug testing programs, training client personnel, managing specimen
collection, arranging for transportation of specimens to LSI's laboratory,
identifying trends in local and national drug use, interpreting test results
and providing expert testimony concerning challenged test results.  Unlike
most of LSI's competitors, LSI specializes in drug testing, and, through
specialization, LSI believes that its customer services equal or exceed those
provided by its competitors.

     IMPROVING OPERATING EFFICIENCIES.  LSI believes that price continues to
be an important factor in obtaining new clients and maintaining current
clients. LSI intends to continue focusing on being a low-cost provider by
improving the efficiency of both its laboratory operations and customer
services.  Achievement of improved efficiency is primarily a function of
increased specimen testing volume.  Increased specimen testing volume reduces
the cost per specimen tested because of the somewhat fixed nature of general
and administrative costs and permits LSI to obtain volume purchase price
concessions from its vendors which also lower the direct cost per specimen
tested.  See "Item 6.  Management's Discussion and Analysis or Plan of
Operation--Results of Operations."

                                     -5-
<PAGE>

DRUG TESTING OPERATIONS

     The essential elements of legally defensible (forensic) drug testing are a
secure chain-of-custody for each specimen from its collection to the reporting
of test results, and accurate and reliable testing in which a second independent
test is performed to confirm each positive test result.  LSI carefully controls
each step of the testing process by following detailed written procedures and by
using the specific forensic testing methods required for legal defensibility of
results.  LSI tests for drugs of abuse, including cocaine, methamphetamine,
heroin, PCP, marijuana and alcohol, primarily by urinalysis.  LSI performs all
testing at its laboratory in Gretna, Louisiana which operates 24 hours per day,
six days per week.  The steps in LSI's forensic drug testing process are as
follows:

     COLLECTION AND TRANSPORTATION.  Forensic drug testing begins with specimen
collection conducted under carefully controlled conditions.  Once a donor has
provided a specimen which consists of two specimen bottles, each specimen is
assigned a unique specimen identification number.  A bar-coded or numbered label
with this specimen identification number is affixed to each specimen bottle as a
tamper-proof seal.  The donor is then required to sign a statement on a
chain-of-custody form which is bar-coded or numbered to match the specimen
bottles.  The donor certifies that the urine in the bottles belongs to the
donor, that the bottles were sealed and labeled in the donor's presence and
that the identification number on the bottles matches the number on the form.
The collector also signs the form to certify the integrity of the collection
process and then prepares the specimen for shipment to LSI's laboratory,
together with a signed chain-of-custody form, which are delivered to LSI by
overnight or same day courier or by U.S. mail.

     RECEIVING AND ACCESSIONING.  LSI receives specimens in its restricted
accessioning rooms, where they are inspected for tampering and checked for
proper chain-of-custody documentation.  The unique specimen identification
number is entered into the laboratory computer which automatically orders the
proper screening and confirmation testing and directs the reporting of test
results.  A small portion, or aliquot, of the specimen is then poured from one
of the specimen bottles and prepared for screening.  The specimen bottle is
resealed with a tamper-proof seal and placed in locked cold storage for
approximately 12 months.

     SCREENING.  Each specimen submitted to LSI is screened for the presence of
the drugs specified by the client.  During 1997, LSI performed more than
5,700,000 screening tests on more than 68,000 specimens per month to determine
the presence of drugs.  In conducting these tests, LSI employs several different
screening methods using automated analyzers and procedures which provide rapid,
reliable screening of large numbers of specimens.

     CONFIRMATION TESTING.  Specimens that screen negative are reported to the
client without further testing.  Specimens that screen positive are confirmed by
testing a separate portion or aliquot using a different and independent
technology from that used for initial screening.  The confirmation technologies
employed by LSI include those required by SAMHSA.

     QUALITY ASSURANCE AND CONTROL.  LSI carefully monitors the accuracy and
reliability of its test results by internal and external quality assurance and
control programs.  LSI's staff evaluates laboratory performance by inserting
"open" and "blind" quality control samples into each batch of client specimens
during both screening and confirmation testing.  An "open" sample is a urine
specimen sample containing known quantities of one or more drugs of which the
testing operator may have been informed contains drugs, but is not made aware of
the kind and quantity of drugs contained in the sample.  A "blind" sample is a
urine specimen sample containing unknown quantities and kinds of drugs and which
is indistinguishable from other specimen samples contained within a testing
batch of samples.  All specimens in a testing batch are retested if the results
obtained for these control samples are not within specified limits.  In
addition, LSI is subject to frequent proficiency testing by various certifying
bodies which send their own open and blind samples to the laboratory.

     LSI's laboratory is certified by SAMHSA, the College of American Pathology
("CAP"), as well as eight states and local jurisdictions.  Of the various
certifications, SAMHSA certification is considered the most important by LSI.
SAMHSA is a federal regulatory agency charged with the responsibility and
authority to license laboratories performing forensic drug testing services for
the Federal Government and its agencies and industries which are federally
regulated, such as the Department of Transportation, Department of Defense, etc.
SAMHSA certifies, inspects, and monitors laboratories that perform forensic drug
testing services under numerous specific mandated


                                     -6-

<PAGE>

guidelines, including (i) strict adherence to chain-of-custody procedures,
(ii) strict security of urine specimens from collection through testing,
(iii) qualifications of technicians and the procedures employed in testing
and the supervision thereof, (iv) segregation of SAMHSA-related specimens
from non-SAMHSA-related specimens, (v) proficiency testing standards, and
(vi) strict adherence to confidential reporting of test results.

     SAMHSA certification is essential to LSI's business because a major number
of its clients are required to use certified laboratories, and many of its
clients look to certification as an indication of reliability and accuracy of
tests.  In order to remain certified, LSI is subject to frequent inspections and
proficiency tests.  Failure to meet any of the numerous certification
requirements, to which LSI is subject, could result in suspension or loss of
certification.  Such suspension or loss of certification could have a material
adverse effect on LSI and LSAI.  In such event, until the suspension is lifted
or certification reobtained, LSI would be required to utilize the drug testing
services of a SAMHSA certified competitor to process SAMHSA-related specimens,
which would result in a substantial reduction in the number of specimens tested
at LSI's laboratory and the price received per specimen received net of such
competitor's cost to LSI of performing such testing services.  In the event such
suspension or loss of certification continued for a substantial period, LSI may
be required to downsize its laboratory personnel and operations and, upon
lifting of the suspension or reobtaining of SAMHSA certification, restaffing of
the laboratory could occur over an extended period, and client base and market
share may be required to be reestablished, all at substantial cost and expense
to LSI.

     DATA REVIEW.  Each test result, whether negative or positive, undergoes
four independent levels of review before being reported.  A result is first
reviewed by the laboratory analyst conducting the test.  Following the analyst's
review, the screening or confirmation laboratory supervisor reviews the result.
Next, a quality assurance and control technician reviews the result.  Finally,
the test result, including all chain-of-custody and testing documentation, is
reviewed by a certifying scientist.  It is only after all of these reviews have
been successfully completed and all documentation is in order that the
certifying scientist signs and releases a test result.

     REPORTING OF RESULTS.  LSI transmits an increasing number of its test
results electronically through a secured national communications network.  This
network immediately encrypts and transmits each test result from the laboratory
computer to the client's personal computer or secure fax machine as soon as it
has been released by the certifying scientist.  Using this network, LSI
routinely reports results for specimens that screen negative within 24 hours of
receipt in the laboratory and within 48 hours for specimens that require
confirmation.  Other clients receive test results via overnight courier or U.S.
mail.

CONTRACTUAL ARRANGEMENTS

     Most large drug testing clients, including the majority of public employers
and criminal justice agencies, use a formal competitive bid process in which the
potential client provides a detailed specification of the drug testing services
it requires.  While price is an important factor, in most cases these
organizations are not required to accept the lowest bid, but rather may choose
the winning bidder on the basis of technical superiority and client service.
LSI has previously obtained contracts through biding and procurement procedures
and will continue to attempt to obtain such contracts through competitive
bidding.  Such contracts are typically long-term, but are also subject to
termination on short notice with little or no penalty.

     Other than drug testing services performed pursuant to contracts obtained
through competitive bidding procedures, LSI performs most of its drug testing
services without a formal contract.  In most cases, LSI accepts and tests
specimens for an agreed price which is generally renegotiated periodically.
Because LSI does not currently have any long-term contracts, which is typical of
high volume clients, LSI is not dependent to any significant degree upon any one
client or contractual relationship with a client, the termination of which would
have a material adverse effect upon LSI.

INSURANCE COVERAGE

     Employees of LSI, like those of all companies that provide drug testing
services dealing with urine analysis specimens, may be exposed to risks of
urine-borne infections, possible including infection from AIDS and hepatitis,
if appropriate laboratory practices are not followed.  Although no infections
of this type have been reported in LSI's history, no assurance can be
provided that such infections will not occur in the future.  In the ordinary
course of its business, LSI from time to time is sued by individuals who have
tested positive for drugs of abuse.  To date, LSI has


                                     -7-

<PAGE>

not experienced any material liability related to these claims, although
there can be no assurance that LSI will not at some time in the future
experience significant liability in connection with these types of claims, in
which event, such legal actions could have a material adverse effect on the
Company's financial condition and results of operations.

     LSI maintains various policies of casualty, commercial and worker
compensation insurance.  In addition, LSI maintains professional liability
insurance with limits of $1 million per incident with an aggregate limit of $2
million per incident.  Although the Company presently is covered by malpractice
and general liability insurance, there can be no assurance that the insurance
coverage will provide sufficient funds to satisfy any judgments which could be
entered against LSI in the future or that liability insurance in such amounts
will be available or affordable in the future.  In addition, there can be no
assurance that all of the activities encompassed within the Company's business
are covered under LSI's insurance policies.  The lack of such coverage could
have a material adverse effect on the Company's financial condition and results
of operations.  Moreover, although the Company maintains casualty and business
interruption insurance and has taken what it believes to be adequate safeguards,
the catastrophic loss of the Company's laboratory facility could have a material
adverse effect on the continued growth of the Company in a manner which would
not be compensated fully by insurance.

COMPETITION

     Drug testing laboratories compete primarily on the basis of technical
superiority, client service and price.  The price per specimen is an important
factor in obtaining and maintaining customers.  See "Item 6.  Management's
Discussion and Analysis or Plan of Operation--Results of Operations."  The
Company believes that LSI competes favorably in each of these categories.  LSI
competes with three types of companies which offer forensic drug testing
services, I.E., national SAMHSA laboratory chains such as Smith-Kline Beecham
Clinical Laboratories and Laboratory Corporation of America, regional SAMHSA
laboratories such as LabOne, Inc. and Clinical Reference Lab and companies
providing on site screening devices.  Many of these competitors have greater
financial resources than the Company.  In addition, some clients and potential
clients of LSI operate their own drug testing facilities, or may develop such
facilities in the future.

CERTIFICATION AND GOVERNMENT REGULATION

     Companies which compete in the forensic drug testing market generally must
be certified by SAMHSA and may be required to have other types of certification
imposed by certain states or clients.  LSI's laboratory is currently certified
by SAMHSA and CAP, as well as eight states and local jurisdictions.  LSI is
subject to frequent inspections by certifying bodies, including two SAMHSA
inspections per year, and is also subject to frequent proficiency testing by
SAMHSA, CAP and other certifying bodies.  Failure to meet certification
requirements could result in suspension or loss of certification.  Certification
is essential to LSI's business because some of its clients are required to use a
certified laboratory, and many of its clients look to certification as an
indication of reliability and accuracy of test results.  With respect to its
operations, LSI considers SAMHSA certification to be the most important of its
various certifications.  In order to obtain SAMHSA certification, a laboratory
must apply for certification, meet certain minimum facility requirements and
then successfully complete a series of proficiency tests, which takes
approximately 12 months to complete at substantial cost and expense.  See
"--Drug Testing Operations--Quality Assurance and Control."

     Employee drug testing by federal agencies and certain private employers is
subject to regulation by certain federal agencies.  Legislation currently exists
in a number of states regulating the circumstances under which employers may
test employees and the procedures under which such tests must be conducted.  In
addition, the circumstances under which drug testing can legally be required by
employers is subject to court precedent and judicial review.

OTHER REGULATION

     The operations of LSAI and LSI are also subject to various federal, state
and local requirements which affect businesses generally, such as taxes, postal
regulations, labor laws, and environment and zoning regulations and ordinances.


                                     -8-

<PAGE>

ENVIRONMENTAL MATTERS

     LSI and consequently the Company is subject to federal, state and local
laws, regulations and policies governing the use, generation, storage, effluent
discharge, handling and disposal of certain materials, chemicals and wastes.
LSI utilizes the services of an independent third party to dispose of hazardous
material and chemical waste.  The Company believes that the procedures and
methods utilized to dispose of the hazardous waste by such third party comply in
all material respects with all applicable federal, state and local laws,
regulations and policies.  Although since beginning operations in 1978, LSI has
not been required to take any extraordinary action to correct any noncompliance,
there can be no assurance that LSI will not be required to incur significant
costs to comply with environmental and health and safety regulations in the
future.  During 1997, LSI incurred $2,957 costs in compliance with the
applicable federal, state and local laws, regulations and policies governing the
use, generation, storage, effluent discharge, handling and disposal of certain
materials, chemicals and wastes.

     LSI's drug testing activities involve the controlled use of certain
hazardous materials and chemicals, including possibly the testing of infectious
urine specimens.  LSI believes that it has adequately warned employees of
potential risks associated with working at LSI and has provided a workplace safe
from hazard, as required by the Occupational Safety and Health Administration
and certain Louisiana laws.  Although LSI believes that its safety procedures
for handling and disposing of such materials and chemicals comply with the
standards prescribed by federal, state and local laws and regulations, the risk
of accidental contamination or injury from these materials cannot be eliminated.
In the event of any such accident, LSI and consequently the Company could be
held liable for any damages that result and any such liability could exceed any
applicable insurance coverage and the financial resources of the Company.

EMPLOYEES

     As of December 31, 1997, LSAI had three full-time employees, and LSI had
111 full-time and 43 part-time employees, none of which are represented by a
labor organization.  LSAI considers its and LSI's relations with their employees
to be good.

ITEM 2.   DESCRIPTION OF PROPERTY.

     LSAI maintains its executive office in approximately 1800 square feet at
Suite 810, 101 Park Avenue,  Oklahoma City, Oklahoma 73102.  The office premises
are occupied under a long-term lease which expires August 31, 2000, and the
monthly rental payment is $1,685.  LSAI considers such space to be adequate for
its current needs.

     LSI's executive offices and laboratory are located in approximately 20,000
square feet at 1111 Newton Street, Gretna, Louisiana 70053, in a building owned
by LSI.  The building was acquired in December 1996 and remodeling was completed
in June 1997 at an estimated aggregate cost of $890,000.  The Company believes
that, with the acquisition of the building, the new location of the offices and
laboratory will be adequate for the current and anticipated future needs of LSI.
In addition, LSI's owns and holds for sale a 7,390 square foot building located
at 113 Jarrell Drive, Belle Chasse, Louisiana, in which the laboratory and
executive offices of LSI were formerly located.

     In connection with the PLL Asset Purchase, the Company assumed the
obligations of Pathology Laboratories Limited ("PLL") under a certain Lease
between Edith Schlien and PLL, dated September 16, 1996, covering approximately
2,500 square feet of office space located in Greenville, South Carolina.  This
lease requires monthly base rental payments of $2,083, and will expire on
September 16, 1999.  See "Item 1. Description of Business-- Background--PLL
Asset Purchase."

ITEM 3.  LEGAL PROCEEDINGS.

     LSAI does not have any pending litigation.  In the ordinary course of its
business, LSI from time to time is sued by individuals who have tested positive
for drugs of abuse.  To date, LSI has not experienced any material liability
related to these claims, although there can be no assurance that LSI will not at
some time in the future experience significant liability in connection with
these types of claims.  Based upon the prior successful defense of similar-type
litigation, management believes LSI has valid defenses to the plaintiffs' claims
in all pending litigation, and LSI intends to vigorously defend itself in such
litigation.  LSI is not currently defendant parties in any legal proceedings
other than routine litigation that is incidental to the business of LSI, and
management of LSI believes the outcome of


                                     -9-

<PAGE>

such legal proceedings will not have a material adverse effect upon the
results of operations or financial condition of LSI.  Furthermore, management
of LSI believes that the liability insurance coverage is adequate with
respect to the pending litigation and, in general, for the business of LSI.

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

     During the fourth quarter of the fiscal year ended December 31, 1997, the
Company did not submit any matters to a vote of its shareholders through the
solicitation of proxies or otherwise.

PART II

ITEM 5.  MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDERS MATTERS.

     The LSAI's Common Stock is traded in the over-the-counter market and is
quoted on Nasdaq Small Cap Market under the symbol LABZ.  The following table
sets forth, for the periods presented, the high and low closing bid quotations
in the over-the-counter market as quoted by Nasdaq Small Cap Market.  The bid
quotations reflect inter-dealer prices without adjustment for retail markups,
markdowns or commissions and may not reflect actual transactions.

<TABLE>
                                                         CLOSING BID
                                                     --------------------
                                                      HIGH           LOW
                                                     -----          -----
     <S>                                              <C>            <C>
     1997:
         First Quarter Ended March 31, 1997          $3.13          $2.25
         Second Quarter Ended June 30, 1997           2.88           2.13
         Third Quarter Ended September 30, 1997       3.69           2.56
         Fourth Quarter Ended December 31, 1997       6.19           3.16

     1996:
         First Quarter Ended March 31, 1996          $4.00          $2.88
         Second Quarter Ended June 30, 1996           3.69           3.00
         Third Quarter Ended September 30, 1996       3.38           2.38
         Fourth Quarter Ended December 31, 1996       3.26           2.56
</TABLE>


     On March 26, 1998, the closing sale price of the Common Stock as quoted on
Nasdaq Small Cap Market was $5.06.  On March 26, 1998, there were approximately
1,600 holders of LSAI's Common Stock.

     LSAI has never paid a cash dividend on its Common Stock.  LSAI's dividend
policy is to retain its earnings to support the expansion of its operations.
The Board of Directors of LSAI does not intend to pay cash dividends on the
Common Stock in the foreseeable future.  Any future cash dividends will depend
on future earnings, capital requirements, LSAI's financial condition and other
factors deemed relevant by the Board of Directors.  LSAI's future earnings and
cash flow currently are dependent principally upon the operating results of LSI
and such dependency may continue indefinitely in the future, even following
expansion of LSAI's operations through acquisitions as anticipated.  No
dividends may be paid on the Common Stock of LSAI until all dividends then due
on the Series I Cumulative Convertible Preferred Stock of LSAI have been paid.
As of December 31, 1994, the cumulative dividends in arrears were $11,404.

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

     THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE FINANCIAL
STATEMENTS AND NOTES THERETO APPEARING ELSEWHERE IN THIS REPORT.

PLAN OF OPERATION

     The Company's plan of operation for the next 12 months is focused on growth
through (i) the acquisition and consolidation of companies and the assets of
companies providing drug testing services compatible with and comparable to
those provided by LSI, (ii) expansion of its client base with focus in
particular on the institutional and private employers, (iii) increased emphasis
on providing client services and (iv) improvement of operating efficiencies.
See "Item 1.  Description of Business--Growth Strategy."


                                    -10-

<PAGE>

RESULTS OF OPERATIONS

     The following table sets forth selected results of operations for the
fiscal years ended December 31, 1997, 1996 and 1995, which are derived from the
audited consolidated financial statements of the Company appearing elsewhere in
this Report. The results of operations for the periods presented are not
necessarily indicative of the Company's future operations.

<TABLE>
                                                          FOR THE YEAR ENDED DECEMBER 31,
                                       -----------------------------------------------------------------
                                               1995                   1996                  1997
                                       -------------------   -------------------   ---------------------
                                         AMOUNT    PERCENT     AMOUNT    PERCENT     AMOUNT     PERCENT
                                       ----------  -------   ----------  -------   -----------  -------
<S>                                    <C>         <C>       <C>         <C>       <C>          <C>
Revenues                               $6,925,716   100.0%   $8,726,799   100.0%   $12,836,953   100.0%
Cost of laboratory services             3,246,470    46.9%    3,816,114    43.7%     5,828,665    45.4%
                                       ----------   -----    ----------   -----    -----------   -----
Gross profit                            3,679,246    53.1%    4,910,685    56.3%     7,008,288    54.6%
                                       ----------   -----    ----------   -----    -----------   -----
Operating expenses:
  Selling                                 561,470     8.1%      601,945     6.9%       654,284     5.0%
  General and administrative            2,157,410    31.2%    2,442,602    28.0%     3,230,117    25.2%
  Depreciation and
     amortization                         232,535     3.3%      504,123     5.8%       690,268     5.4%
  Asset impairment                             --      --%      124,531     1.4%            --      --%
                                       ----------   -----    ----------   -----    -----------   -----
Total operating expenses                2,951,415    42.6%    3,673,201    42.1%     4,574,669    35.6%
                                       ----------   -----    ----------   -----    -----------   -----
                                          727,831    10.5%    1,237,484    14.2%     2,433,619    19.0%
Other income (expense)                    421,134     6.1%      (21,808)     .3%      (151,252)    1.2%
                                       ----------   -----    ----------   -----    -----------   -----
Income from continuing
  operations before income taxes        1,148,965    16.6%    1,215,676    13.9%     2,282,367    17.8%
Income tax expense                        474,405     6.9%      527,171     6.0%       953,264     7.4%
                                       ----------   -----    ----------   -----    -----------   -----
Income from continuing operations         674,560     9.7%      688,505     7.9%     1,329,103    10.4%
Discontinued Operations:
  Loss from operations of
        discontinued clinical
        business, net of tax benefit           --      --%     (500,636)    5.7%            --      --%
  Loss on disposal of clinical
        business, net of tax benefit           --      --%     (773,580)    8.9%            --      --%
                                       ----------   -----    ----------   -----    -----------   -----
Net income (loss)                      $  674,560     9.7%   $ (585,711)    6.7%   $ 1,329,103    10.4%
                                       ----------   -----    ----------   -----    -----------   -----
                                       ----------   -----    ----------   -----    -----------   -----
</TABLE>


     During each of the fiscal years ended December 31, 1997 and 1996, LSI
experienced a two percent and 4.7 percent decrease in the price per specimen,
respectively, compared to the preceding fiscal year, principally due to
increased price competition amongst providers of drug testing services, price
per specimen being an important factor in obtaining and maintaining customers.
Management of LSI closely monitors its price per specimen, the prices of its
competitors and the costs of processing specimens to remain competitive, as well
as profitable.  There can be no assurance that the price decline per specimen
will not further decline during 1998 and thereafter.  In the event price
stabilization has not occurred, LSI will, as it has in the past, take
appropriate measures to downsize its drug testing personnel and possibly further
automate the testing processes and employ additional technology to continue
profitability from operations, although there can be no assurance that such
measures will assure profitability in the event of substantial price reductions
within the short term.  During each of the fiscal years ended December 31, 1997
and 1996, the number of specimens analyzed increased 51.6 percent and 34.5
percent, respectively, compared to the preceding fiscal year ended.

     In connection with NPLI Acquisition, the Company acquired the clinical
testing and analysis operation conducted by NPLI.  After several attempts to
sell the clinical testing analysis operation of NPLI, the Company discontinued
the clinical testing and analysis operation in the fourth quarter of 1996.  This
resulted in a loss from the discontinued operation of $500,636 (after giving
effect to the associated tax benefit of $257,904) and a loss on disposal of the
clinical business of $773,580 (after giving effect to the associated tax benefit
of $489,420), which resulted in a loss of $.39 per weighted average number of
common shares and common share equivalents used to compute basic earnings per
share for the fiscal year ended December 31, 1996.  Before such discontinued
operation, the Company's income from continuing operations for the fiscal year
ended December 31, 1996 was $688,505 or $.21 per weighted


                                    -11-

<PAGE>

average number of common shares and common share equivalents used
to compute basic earnings per share.  See "Item 1.  Description of
Business--Background--NPLI Acquisition."

     Through the Company's acquisition strategy, management anticipates,
although there can be no assurance, that the consolidation and assimilation
of the operations associated with additional companies or the assets of
forensic drug testing companies that may be acquired will result in increased
testing volume with minimal additional indirect specimen processing cost,
resulting in increased profitability from operations.  See "Item 1.
Description of Business--Growth Strategy."  In the event the Company fails to
make acquisitions which contribute to the profitability of the Company,  LSI
and LSAI may be required to reduce general and administrative expenses,
possibly including consolidation of Company operations into the offices of
LSI and reduction of management compensation.

     COMPARISON OF FISCAL 1997 AND 1996

     Revenues increased $4,110,154 to $12,836,953 in 1997 from $8,726,799 in
1996, an increase of 47.1 percent.  The increase in revenues was due to a 51.6
percent increase in the number of specimens analyzed during 1997 as compared to
1996, although partially offset by a decrease of two percent in the average
price per specimen.  The increase in number of specimens analyzed was
attributable to the PLL Asset Purchase and Accu-Path Asset Purchase as well as
the obtaining of additional accounts through LSI's normal sales and marketing
efforts.  Because the increase in the number of specimens analyzed during 1995
was in part due to factors beyond the control of LSI, i.e., improved economy and
new business starts, there is no assurance that the increase in the volume of
specimens analyzed will increase or such volume will be maintained in future
periods of operations.  The decrease in the average price per specimen was
principally due to increased price competition among providers of drug testing
services, price per specimen being the most important factor in obtaining and
maintaining clients.  There can be no assurance that the price per specimen will
not further decline in 1998 which will directly impact profitability.  See
"Item 1. Description of Business--Competition."  Cost of laboratory services
increased $2,012,551 from $3,816,114 in 1996 to $5,828,665 in 1997, an increase
of 52.7 percent.  This increase was primarily due to the increased volume of
specimen testing and increased as a percentage of revenues by 1.7 percent.
Gross profit on revenues decreased as a percentage of revenues from 56.3 percent
in 1996 to 54.6 percent in 1997.

     Operating expenses increased $901,468 from $3,673,201 in 1996 to $4,574,669
in 1997, an increase of 24.5 percent, but decreased as a percentage of revenues
from 42.1 percent to 35.6 percent.  The increase in operating expenses was
attributable to the increase in general and administrative expenses of $787,515,
selling expense of $52,339, and depreciation and amortization of $186,145.  The
Company did not recognize an asset impairment in 1997, while during 1996 the
Company recognized an asset impairment of $124,531, which was attributable
primarily to the write-down, to the estimated fair market value, of LSI's former
laboratory facilities which are held for sale as of the date of this Report.
The increase in general and administrative expenses was principally due to the
increase in executive officer compensation of LSAI and bonuses for certain key
employees of LSI and increased overhead as a result of the PLL Asset Purchase
and the Accu-Path Asset Purchase.  The increase in selling expenses was due to
the addition of two sales representatives and increased personnel to assist in
maintaining forensic drug testing customers obtained in connection with the PLL
Asset Purchase and the Accu-Path Asset Purchase.  Depreciation increased due to
the acquisition of new laboratory equipment in 1997 and the acquisition and
renovation of LSI laboratory and office facilities, and amortization increased
due to the amortization of the customer list and goodwill acquired in
connection with the PLL Asset Purchase and the Accu-Path Asset Purchase.

     Interest expense increased $163,248 from $67,185 in 1996 to $230,433 in
1997, a 243 percent increase.  The increase in interest expense was the result
of the effect of a full year of a capital lease agreement, entered into in
February 1996, for certain laboratory equipment and the increase in long-term
debt associated with the acquisition and renovation of LSI's current laboratory
and office facilities, and the PLL Acquisition.  Interest income increased from
$41,208 in 1996 to $78,035 in 1997, a 89.4 percent increase.  The increase
resulted from an increase in cash equivalents held for investment attributable
to cash flows from operations and the net proceeds from the issuance of Common
Stock in connection with the Warrant Redemption Offering.  See "Item 1.
Description of Business--Background--Warrant Redemption Offering."  Other income
decreased from $4,169 in 1996 to $1,146 during 1997.  Income from continuing
operations, after provision for income taxes, increased $640,598 from $688,505
in 1996 to $1,329,103 in 1997, a 93 percent increase.  Income per share of
common stock from continuing operations on a basic basis was $.36 ($.31 per
share on a diluted basis) in 1997, compared to net income per share of common
stock on a basic basis of $.21 ($.17 per share on a diluted basis) in 1996.


                                    -12-

<PAGE>

     COMPARISON OF FISCAL 1996 AND 1995

     Revenues increased to $8,726,799 in 1996 from $6,925,716 in 1995, an
increase of 26 percent.  The increase in revenues was due to a 34.5 percent
increase in the number of specimens analyzed during 1996 as compared to 1995,
although partially offset by a decrease of 4.7 percent in the average price per
specimen.  The increase in number of specimens analyzed was attributable to the
NPLI Acquisition as well as the obtaining of additional accounts through LSI's
normal sales and marketing efforts.  Because the increase in the number of
specimens analyzed during 1995 was in part due to factors beyond the control of
LSI, i.e., improved economy and new business starts, there is no assurance that
the increase in the volume of specimens analyzed will increase or such volume
will be maintained in future periods of operations.  The decrease in the
average price per specimen was principally due to increased price competition
among providers of drug testing services, price per specimen being the most
important factor in obtaining and maintaining clients.  Cost of laboratory
services increased $569,644 from $3,246,470 in 1995 to $3,816,114 in 1996.  This
increase was primarily due to the increased volume of specimen testing and
decreased as a percentage of revenues by 3.2 percent.  Gross profit on revenues
increased as a percentage of revenues from 53.1 percent in 1995 to 56.3 percent
in 1996.

     Operating expenses increased from $2,951,415 in 1995 to $3,673,201 in 1996,
an increase of 24.5 percent, but decreased as a percentage of revenues from 42.6
percent to 42.1 percent.  The increase in operating expenses was attributable to
the increase in general and administrative expenses of $285,192, selling expense
of $40,475, depreciation and amortization of $271,588, and the recognition of
asset impairment of $124,531.  The increase in general and administrative
expenses was principally due to the increase in executive officer compensation
of LSAI and accrued bonuses for certain key employees of LSI.  The increase in
selling expenses was due to the addition of one sales representative and
increased personnel to assist in maintaining forensic drug testing clients and
customers obtained in connection with the NPLI Acquisition, although partially
offset by a reduction in commission expenses.  Depreciation increased due to the
acquisition of new laboratory equipment in February 1996, and amortization
increased due to the amortization of the customer list and goodwill acquired in
connection with the NPLI Acquisition.  Asset impairment was attributable
principally to the write-down, to the estimated fair market value, of LSI's
current laboratory facilities which are held for sale as of the date of this
Report.

     Interest expense increased from $29,651 in 1995 to $67,185 in 1996, a 126.6
percent increase.  The increase in interest expense was the result of a capital
lease agreement for certain laboratory equipment.  Interest income decreased
from $126,939 in 1995 to $41,208 in 1996, a 67.5 percent decrease.  The decrease
resulted from a reduction of cash equivalents held for investment due to the
NPLI Acquisition and other acquisition activities.  Other income decreased from
$323,846 in 1995 to $4,169 in 1996.  The decrease in other income was primarily
due to the receipt during 1995 of a non-reoccurring settlement of a lawsuit in
which LSI was the plaintiff.  Income from continuing operations, after provision
for income taxes, increased from $674,560 in 1995 to $688,505 in 1996, a 2.1
percent increase.  Income per share of common stock from continuing operations
on a basic basis was $.21 ($.17 per share on a diluted basis) in 1996, compared
to net income per share of common stock on a basic basis of $.20 ($.17 per share
on a diluted basis) in 1995.

     During the fourth quarter of 1996, the clinical testing and analysis
operation conducted by NPLI was discontinued, which resulted in a loss from
discontinued operation of $500,636 (after giving effect to the associated tax
benefit of $257,904) and a loss on disposal of the clinical business of $773,580
(after giving effect to the associated tax benefit of $489,420), which resulted
in a net loss from continued and discontinued operations of $585,711.  Net loss
from continued and discontinued operations per share of common stock on a basic
basis was $.18 and $.15 per share of common stock on a diluted basis.

     PRO FORMA EFFECT OF STOCK-BASED COMPENSATION

      The Company has historically used options to retain and compensate its
officers, directors, employees and others.  During 1997, 1996 and 1995, the
Company granted 590,000 stock options for the purchase of the Common Stock of
LSAI to certain officers, directors, employees and others.  In accordance with
Accounting Principles Board Opinion No. 25, the compensation cost of such stock
options is not recognized in the consolidated financial statements of the
Company.  The outstanding stock options granted in 1997 had an estimated fair
value at the date of grant of the options of $473,958, utilizing the methodology
prescribed under SFAS No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION. After
giving effect to the estimated fair value of such options, the Company had net
pro forma income of $1,053,706 ($.29 per common share on a basic basis and $.24
per common share on a diluted basis) for the year


                                    -13-

<PAGE>

ended December 31, 1997, and had net pro forma loss of $673,516 ($.20 per
common share on a basic basis and $.17 per common share on a diluted basis)
for the year ended December 31, 1996.

     YEAR 2000 COMPUTER SYSTEM COMPLIANCE

     The Company has numerous computer systems which were developed employing
two digit year date format rather than four digit date format.  Where date logic
requires the year 2000 or beyond, such data structures may produce inaccurate
results.  Management has implemented a program to comply with year 2000
requirements on a system-by-system basis.  The program includes extensive
systems testing and is expected to be completed in 1998, at which time the
Company's computer systems will be year 2000 compliant.  Each of the systems has
a solution that is potentially unique and often dependent on third-party
software and developers.  A failure of the Company to ensure that its computer
systems are year 2000 compliant could have a material adverse effect on the
Company's operations.

     ACCOUNTING STANDARDS ISSUED BUT NOT YET ADOPTED

     In February 1997, FASB issued SFAS No. 129, "Disclosure of Information
about Capital Structure," which establishes standards for disclosure of capital
structure.  This statement is effective for financial statements of the Company
for the year ending December 31, 1997.  Management believes that adoption of
SFAS No. 129 will not have a material effect on the Company's financial
statements.

     In June 1997, FASB issued SFAS No. 130, "Reporting Comprehensive Income,"
which requires the reporting of all items of income that are recognized under
accounting standards as components of comprehensive income, consisting of both
net income and those items that bypass the income statement and are reported in
the balance within a separate component of stockholders' equity, be reported in
a financial statement and displayed with the same prominence as other financial
statements.  This statement is effective for financial statements of the Company
for the year ending December 31, 1998.  Management of the Company believes that
adoption of SFAS No. 130 will not have a material effect on the Company's
financial statements.

     Furthermore, in June 1997, FASB issued SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information," which modifies segment
reporting requirements and establishes certain criteria for reporting
disclosures concerning a company's products and services, geographic areas and
major customers in annual and interim financial statements.  This statement is
effective for financial statements of the Company for the year ending December
31, 1998.  Management of the Company believes that adoption of SFAS No. 131 will
not have a material effect on the Company's financial statements, other than
possibly the disclosure related to the Company's services, geographic service
area and major customers.

     QUARTERLY RESULTS OF OPERATIONS

     LSI's operations are affected by seasonal trends to which drug testing
laboratories are generally subject.  In LSI's experience, testing volume tends
to be higher in the second calendar quarter and lower in the winter holiday
season and the beginning of the first calendar quarter primarily due to hiring
patterns which affect pre-employment drug testing.  Because the general and
administrative expenses associated with maintaining and adding to LSI's testing
work force are relatively fixed over the short term, LSI's margins tend to
increase in periods of higher testing volume and decrease in periods of lower
testing volume.  These effects are not always apparent because of the impact and
timing of the startup of new businesses and other factors such as the timing and
amount of price increases or decreases and additional acquisitions.
Nevertheless, LSI's results of operations for a particular quarter may not be
indicative of the results to be expected during other quarters.

     INCOME TAXES

     The provisions for income taxes from continuing operations on pretax income
were based on the effective combined federal and state graduated corporate
income tax rates of approximately 42 percent in 1997 and 43 percent for 1996,
and were $953,264 and $527,171 for the years ended December 31, 1997 and 1996,
respectively.


                                    -14-
<PAGE>

LIQUIDITY AND CAPITAL RESOURCES

     Historically, the Company has financed its growth from bank borrowings and
the sale of equity securities.  Net cash provided by operating activities
totaled $1,654,806 and $472,801 during the years ended December 31, 1997 and
1996, respectively.  As of December 31, 1997, the Company had working capital of
$3,305,983, compared to working capital of $1,002,712 at December 31, 1996.
During October 1997, the Company redeemed its outstanding 1994 Warrants and in
connection therewith issued 1,440,580 shares of its Common Stock and received
net proceeds of $2,470,951.  In addition, 30,000 of the Underwriter's Warrants
were exercised for the purchase 30,000 units (60,000 shares of Common Stock) and
the Company received net proceeds of $216,000.  See "Item 1.  Description of
Business--Background--Warrant Redemption Offering."  At December 31, 1997, the
Company had not expended the net proceeds, all of which were held in short-term
investments.  In the event the Company's revenues increase as anticipated by
management, the Company's working capital requirements will also increase and
such requirements may exceed the net cash provided by operating activities and
require that cash be used in operating activities from sources other than
operations, including the available cash and cash equivalents (which were
$2,863,639 at December 31, 1997) and borrowings.  The increase in cash used in
operations will principally be due to the timing differential between Company's
payment for materials and services to its suppliers and employee work force, and
the time at which the Company receives payment from its customers.

     On January 9, 1997, LSI entered in to a loan agreement with Hibernia
National Bank (the "Bank") which established a credit facility comprised of a
five-year term loan of up to $1,700,000 and a one-year revolving loan of
$250,000 to be used for the acquisition of Pathology Laboratories Limited.  As
of December 31, 1998, the outstanding principal amount of the five-year term
loan was $1,388,333.  Advances on the revolving loan are based upon LSI
maintaining certain ratios and compliance with the covenants of the loan
agreement and LSI's liquid assets including its accounts receivable.  The
outstanding principal amount of the revolving loan bears interest at the
Citibank, N.A. rate (which was nine percent at December 31, 1997) and the term
loan bears interest at such rate plus one-half percent.  The loan is secured by
the accounts receivable, intangible assets, and by a mortgage on the building
owned by LSI, and is guaranteed by LSAI.  The loan agreement contains various
covenants, including certain financial ratios, all of which the Company was in
full compliance with as of December 31, 1997.

FUTURE OPERATIONS AND LIQUIDITY

     In connection with the Peterson Share Exchange, LSI issued to MBf USA, its
former parent, the MBf Promissory Note (in the principal amount of $353,123,
providing for interest at seven percent per annum).  See "Item 1. Description of
Business--Background--LSI Acquisition."  The MBf Promissory Note is secured by
substantially all of the assets of LSI and becomes due February 23, 1999.  On
March 10, 1998, the MBf Promissory Note was paid in full for $315,000.

     Through its acquisition strategy, management of the Company intends to
continue its growth through the acquisition of drug testing companies and the
assets of such companies, and assimilation of the acquired drug testing
operations and assets with and into LSI, to obtain increased testing volume with
minimal additional specimen processing cost, resulting in increased
profitability and cash flows.  See "Item 1.  Description of Business--Growth
Strategy."  Although the Company will not consummate an acquisition unless, at
the time of the acquisition, it is anticipated that such acquisition will
contribute to the profitability and provide positive cash flows from operations
following consolidation and assimilation of the operations of the acquired
company with those of the Company, there can be no assurance of such
profitability and positive cash flows.  In the event the Company fails to make
acquisitions which contribute to the profitability of the Company and provide
positive cash flows to the Company, LSI and LSAI may be required to reduce
general and administrative expenses, possibly including consolidation of Company
operations into the offices of LSI and reduction of management compensation, and
may be required to utilize borrowings to fund negative cash flows from
operations until such reductions of general and administrative expenses are
achieved.

     In February 1996, LSI entered into a capital lease obligation of
approximately $650,000 with a vendor for the purchase equipment and certain lab
supplies at a fixed price per drug screen performed.  The minimum monthly amount
payable under the agreement is approximately $59,750, with approximately $13,000
per month allocated to the principal and interest of the capital lease
obligation, and the remaining cost being allocated to the cost of laboratory

                                    -15-

<PAGE>

supplies.  The agreement resulted in LSI recording approximately $650,000 in
additional equipment, with an equal amount of capital lease obligation recorded
as a long-term debt obligation payable over five years.  As of December 31,
1997, the outstanding capital lease obligation was $442,567.

     On December 3, 1996, LSI purchased a building which has been renovated and
in which LSI's laboratory has been relocated.  The building purchase was
financed by a note payable to the seller due on June 3, 1997, with no stated
interest rate.  This note was classified as long-term based on a written
commitment from a bank to refinance the purchase and renovation costs of up to
$720,000.  On July 2, 1997, LSI entered into a loan agreement with Hibernia
National Bank for a term loan in the principal amount of $720,000 to refinance
the building as renovated.  This loan is payable in 36 monthly installments of
approximately $9,800, followed by 23 monthly installments of approximately
$6,000, with a final payment becoming due on July 2, 2002, of approximately
$484,700.  The outstanding principal balance of this loan bears interest at a
rate of 8.65 percent per annum.  See "Item 2.  Description of Property."  As of
December 31, 1997, the outstanding principal amount of such loan was $697,101.

      On January 31, 1997, the Company acquired from Pathology Laboratories,
Ltd. ("PLL") certain intangible assets pursuant to an Asset Purchase Agreement
dated January 31, 1997 (the "Purchase Agreement").  See "Item 1.  Description of
Business--Background--PLL Asset Purchase."  Pursuant to the Purchase
Agreement, (i) the Company paid $1,600,000 at closing and (ii) the Company
assumed the obligations of PLL under a certain lease, dated September 16, 1996,
which requires monthly base rental payments of $2,083 and which expires on
September 16, 1999.  See "Item 2.  Description of Property."  Furthermore, the
Company made installment payments to PLL in 1997 which aggregated $733,568 and
made a final installment payment of $42,033 during January 1998.  The
installment payments were based on gross revenues directly attributable to each
customer comprising the customer base of PLL for the year ending January 31,
1998, in excess of $1,600,000.

     As of the date of this Report, other than as described above, the Company
does not have any significant future capital commitments.  The Company
anticipates that existing cash and cash equivalent balances, short-term
investments and funds to be generated from future operations will be sufficient
to fund operations and budgeted capital expenditures of the Company through
1998.

     FUTURE ASSESSMENT OF RECOVERABILITY AND IMPAIRMENT OF GOODWILL AND CUSTOMER
LIST.  In connection with the Peterson Share Exchange, the NDAC Asset Purchase,
the NPLI Acquisition, PLL Asset Purchase and Accu-Path Asset Purchase, the
Company recorded goodwill and customer lists, which are being amortized over
periods of 15 to 40 years on a straight-line basis over the estimated period
that the Company will be benefitted by such assets.  At December 31, 1997, the
unamortized portion of the goodwill and the customer lists was $2,316,302 and
$4,587,814, respectively.  The carrying value and recoverability of unamortized
goodwill and customer lists will be periodically reviewed by management of the
Company.  If the facts and circumstances suggest that the goodwill or customer
list may be impaired, the carrying value of goodwill or customer list will be
adjusted which will result in an immediate charge against income during the
period of the adjustment and/or the length of the remaining amortization period
may be shortened, which will result in an increase in the amount of goodwill or
customer list amortization during the period of adjustment and each period
thereafter until fully amortized.  Once adjusted, there can be no assurance that
there will not be further adjustments for impairment and recoverability in
future periods.  Of the various factors to be considered by management of the
Company in determining goodwill or customer list impairment, the most
significant will be (i) losses from operations, (ii) loss of customers, (iii)
developments within the drug testing industry, including the Company's inability
to maintain its market share, development of drug testing technologies,
imposition of additional regulatory and certification requirements, and (iv)
loss or suspension for an extended period of laboratory certification,
especially by SAMHSA.  See "Item 1.  Description of Business--Certification and
Government Regulation."  In the event management of the Company determines that
goodwill or the customer lists have become impaired, the adjustment for
impairment and recoverability will most likely occur during a period of
operations in which the Company has sustained losses or has only marginal
profitability from operations, and the impairment and/or increased amortization
amount will either increase such losses from operations or further reduce
profitability.


                                    -16-

<PAGE>

ITEM 7.  FINANCIAL STATEMENTS

     The response to this Item is set forth herein in a separate section of this
report, appearing on page F-2 through F-21.

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

     There have been no disagreements of the type required to be reported under
this Item between management of the Company and its independent accountants
during 1997 and 1996.

PART III

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

     The following table sets forth certain information with respect to each
executive officer and director of LSAI and LSI.  Directors are generally elected
at the annual shareholders' meeting and hold office until the next annual
shareholders' meeting and until their successors are elected and qualified.
Executive officers are elected by the Board of Directors and serve at its
discretion.  LSAI's Bylaws authorize the Board of Directors to be constituted of
not less than one and such number as the Board of Directors may from time to
time determine by resolution or election.  The Board currently consists of seven
members.

<TABLE>
         NAME                AGE    POSITION WITH LSAI                  POSITION WITH LSI
         ----                ---    ------------------------       -----------------------------
<S>                          <C>    <C>                            <C>
John Simonelli               51     Chairman of the Board,
                                    Chief Executive Officer,
                                    Secretary, and Director

Larry E. Howell              51     President and Chief
                                    Operating Officer, and
                                    Director

Arthur R. Peterson, Jr.(1)   52     Treasurer and Director         President and Chief Executive
                                                                   Officer, and Director

Robert A. Gardebled, Jr.(2)  33     Director                       Controller, Secretary and
                                                                   Director

Jerome P. Welch(1)(2)        60     Director                       --

Michael E. Dunn(1)(2)        51     Director                       --
</TABLE>

--------------------
(1)  Member of the Compensation Committee.
(2)  Member of Audit Committee.

     The executive officers of LSI devote their full-time to LSI's business,
while Messrs. Simonelli and Howell will devote such time to the business and
affairs of LSAI as may be required, but not less than 50 percent of their time
will be devoted to the business and affairs of LSAI.

     The following is a brief description of the business background of the
executive officers and directors of LSAI:

     JOHN SIMONELLI is Chairman of the Board, Chief Executive Officer, Secretary
and a Director of LSAI. Mr. Simonelli served as a Director, Chief Executive
Officer and Secretary of Vantage Capital Resources, Inc. from March 1996 until
its merger with Applied Intelligence Group, Inc. and thereafter served as a
Director and Vice President of Applied Intelligence Group, Inc. until October
14, 1996.  He served as Chairman of the Board and Chief Executive Officer of MBf
USA, Inc. (formerly American Drug Screens, Inc.), a publicly-held company
engaged in the medical products and services industry, from February 1988
through June 1992.  He served as Chief Executive Officer of Unico, Inc.
(formerly CMS Advertising, Inc.), a publicly-held company engaged in the
franchising of cooperative direct mail advertising businesses, from June 1986 to
June 1988.  From July 1981 through June 1985, he served in various capacities,
including President and Director, with Moto Photo, Inc., a publicly-held company
engaged in the business of franchising one-hour, photo development laboratories.
Mr. Simonelli served as President and CEO, from


                                    -17-

<PAGE>

May 1985 until November 1985, and a Director, from May 1985 through 1988, of
TM Communications, Inc. (formerly Video Image, Inc. and TM Century, Inc.), a
publicly-held company engaged in radio broadcasting and corporate
communications.

     LARRY E. HOWELL is President and Chief Operating Officer, and a Director of
LSAI.  Mr. Howell served as a Director, President and Treasurer of Vantage
Capital Resources, Inc. from March 1996 until its merger with Applied
Intelligence Group, Inc. and thereafter served as a Director and Vice President
of Applied Intelligence Group, Inc. until October 14, 1996.  He served as
President and Chief Operating Officer of MBf USA, Inc. (formerly American Drug
Screens, Inc.), a publicly-held company engaged in the medical products and
services industry, from February 1988 through June 1992.  From June 1986 to
April 1988, Mr. Howell served first as Vice President and than as President and
Chief Operating Officer of Unico, Inc. (formerly CMS Advertising, Inc.), a
publicly-held company engaged in the franchising of cooperative direct mail
advertising businesses.  Since January 1982, Mr. Howell, as the sole proprietor
of Howell and Associates, provides consulting services principally related to
corporate acquisitions and mergers.

     ARTHUR R. PETERSON, JR. was elected Treasurer and a Director of LSAI in
July 1994 in connection with the LSI Acquisition.  Mr. Peterson founded LSI in
1978 and served as its President and Chief Executive Officer and a Director from
inception.  From March 1989 until April 1994, he served as a Director of MBf
USA, Inc. (formerly American Drug Screens, Inc.), a publicly held company in the
medical products and services industry and former parent of LSI.  Prior to 1978,
Mr. Peterson was Chairman of the Board and Chief Executive Officer of Clinical
Laboratories of La., Inc., a company he founded which served the medical
community in clinical studies.

     ROBERT A. GARDEBLED, JR. was elected a Director of LSAI in July 1994 in
connection with the LSI Acquisition.  Since July 1989, he has served as an
assistant to the President and was elected Controller of LSI and in connection
with the LSI Acquisition, he was elected Secretary of LSI.  From July 1991 until
April 1994, Mr. Gardebled served as a Director of MBf USA, Inc. (formerly
American Drug Screens, Inc.), a publicly held company in the medical products
and services industry and former parent of LSI.  Prior to joining LSI, he was a
Production Manager for Halter Yachts, Inc., a Louisiana ship building company.

     JEROME P. WELCH was elected a Director of LSAI in August 1994.  Mr. Welch
is President of Prospect Publishers, Inc., a publisher of literary hardback
anthologies and newsletters.  From May 1990 through June 1992, he served as a
Director and in July 1990 was elected Secretary of MBf USA, Inc. (formerly
American Drug Screens, Inc.), a publicly-held company engaged in the medical
products and services industry.  From July 1988 to January 1990, Mr. Welch
served as President of Simon & Schuster Supplementary Publishers, a subsidiary
of Paramount Communications, Inc. and was Senior Vice President and Publisher of
McGraw Hill Educational Publishing from July 1987 to July 1988.

     MICHAEL E. DUNN was elected a Director of LSAI in August 1994.  Since April
1980 to January 1995, he was a member, shareholder and director of the law firm
of Zrenda Dunn & Swan, A Professional Corporation (formerly Bright Zrenda &
Dunn), in Oklahoma City, Oklahoma, and President from April 1992 until January
1995.  Mr. Dunn has been a member, shareholder and President of Dunn Swan &
Cunningham, A Professional Corporation, since February 28, 1995.  He has been
the owner of the Woodlake Racquet Club, a recreational athletic club, since
1981.  From November 1991 to November 1992, he served as a director of Tide West
Oil Company, a publicly-held, independent oil and gas exploration and production
company.  Mr. Dunn was graduated from the University of Oklahoma College of Law
in 1972, and holds a Bachelor of Science in Accounting and pursued graduate
studies at the University of Oklahoma.

     COMPLIANCE WITH SECTION 16 OF THE SECURITIES EXCHANGE ACT OF 1934.
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires the
company's directors and officers, and persons who own more than 10 percent of a
registered class of the Company's equity securities, to file reports of
ownership and changes in ownership with the Securities and Exchange Commission
("SEC").  Officers, directors and greater than 10 percent stockholders are
required by SEC regulation to furnish the Company with copies of all Section
16(a) forms they file.

     Based solely on the Company's review of the copies of such forms received
by it during the year ended December 31, 1997, and written representations that
no other reports were required, the Company believes that each


                                    -18-

<PAGE>

person who, at any time during such year, was a director, officer or
beneficial owner of more than 10 percent of the Company's Common Stock
complied with all Section 16(a) filing requirements during such fiscal year,
except that five reports covering the three purchase and two sale
transactions were filed late by Jerome P. Welch.

ITEM 10.  EXECUTIVE COMPENSATION

     The following table sets forth certain information with respect to the
total cash compensation, paid or accrued, of the President and Chief Executive
Officer of LSAI and each of the executive officers that during 1997 received
compensation in excess of $100,000.

                          OFFICER COMPENSATION TABLE

<TABLE>
                                                          ANNUAL COMPENSATION
                                                --------------------------------------
                                                                         ALL OTHER
NAME AND PRINCIPAL POSITION              YEAR   SALARY(1)   BONUS(2)   COMPENSATION(3)
---------------------------              ----   ---------  ---------   ---------------
<S>                                      <C>    <C>        <C>         <C>
John Simonelli                           1997   $112,500   $ 72,000        $13,088
   Chief Executive Officer of LSAI       1996    100,000         --         12,600
                                         1995     75,000         --         12,000

Larry E. Howell                          1997   $112,500   $ 72,000        $14,501
   President and Chief Operating         1996    100,000         --         14,100
    Officer of LSAI                      1995     75,000         --         12,000

Arthur R. Peterson, Jr.                  1997   $125,000   $122,000        $22,124
  Treasurer of LSAI and Chief Executive  1996    120,133     50,000         21,700
    Officer of LSI                       1995    100,000     76,956         16,000
</TABLE>

------------------------
(1)  Dollar value of base salary (both cash and non-cash) earned during the
     year.
(2)  Dollar value of bonus (both cash and non-cash) earned during the year.
(3)  The amounts reflected are for an automobile allowance and life and
     disability insurance premiums paid by the Company.

AGGREGATE OPTION GRANTS AND EXERCISES IN 1997 AND YEAR-END OPTION VALUES

     STOCK OPTIONS AND OPTION VALUES.  The following table sets forth
information related to options granted to the executive officers named in the
Officer Compensation Table during 1997.

<TABLE>

                                              INDIVIDUAL GRANTS(1)                    POTENTIAL REALIZABLE VALUE AT
                          ---------------------------------------------------------      ASSUMED RATES OF STOCK
                                       PERCENT OF TOTAL                                    PRICE APPRECIATION
                            NUMBER    OPTIONS GRANTED  EXERCISE OR                          FOR OPTION TERM(2)
                          OF OPTIONS   TO EMPLOYEES     BASE PRICE                    -----------------------------
NAME                       GRANTED         1997         PER SHARE   EXPIRATION DATE   FIVE PERCENT     TEN PERCENT
----                      ----------  ---------------  -----------  ---------------   ------------     -----------
<S>                       <C>         <C>              <C>          <C>               <C>              <C>
John Simonelli             100,000         29.4%          $3.18     October 1, 2007     $517,988         $824,810
Larry E. Howell            100,000         29.4%          $3.18     October 1, 2007     $517,988         $824,810
Arthur R. Peterson, Jr.    100,000         29.4%          $3.18     October 1, 2007     $517,988         $824,810
</TABLE>

------------------------
(1)  On March 28, 1997, the Company issued to the holders of options previously
     granted under the Laboratory Specialists of America, Inc. 1994 Stock Option
     Plan (the "1994 Stock Option Plan") options in replacement and modification
     of the terms of options previously granted under the 1994 Plan in 1995 and
     1996.  Each of the named executive officers received 60,000
     replacement-modified options, each exercisable for the purchase of one
     share of Common Stock for $2.00 on or before March 28, 2007.  Such
     replacement-modified options, for purposes of this table have been
     considered granted in 1995 and 1996 and not as having been granted in 1997.
     If such options were considered granted in 1997, with respect to each
     named executive officer, such options would have potential realizable
     value, assuming five and 10 percent price appreciation, of $325,779 and
     518,748, respectively.
(2)  The potential realizable value portion of the foregoing table illustrates
     the value that might be realized upon exercise of the options immediately
     prior to the expiration of their term, assuming the specified compound
     rates of appreciation of LSAI's Common Stock over the term of the options.
     These amounts do not take into consideration provisions restricting
     transferability and represent certain assumed rates of appreciation only.
     Actual gains on stock option exercises are dependent on the future
     performance of LSAI's Common Stock


                                    -19-

<PAGE>

     and overall stock market conditions.  There can be no assurance that the
     potential values reflected in this table will be achieved.  All amounts
     have been rounded to the nearest whole dollar amount.

     AGGREGATE STOCK OPTION EXERCISE AND YEAR-END AND OPTION VALUES.  The
following table sets forth information related to the number of options
exercised in 1996 and the value realized by the named executive officers, as
well as, information related to the to the number and value of options held
by the named executive officers at the end of 1997.  During 1997, there were
no options to purchase LSAI's Common Stock exercised by the named executive
officers.

<TABLE>
                             NUMBER OF OPTIONS       VALUE OF UNEXERCISED IN-THE-MONEY
                          AS OF DECEMBER 31, 1997    OPTIONS AS OF DECEMBER 31, 1997(1)
                         --------------------------  ----------------------------------
NAME                     EXERCISABLE  UNEXERCISABLE   EXERCISABLE       UNEXERCISABLE
----                     -----------  -------------   ------------      -------------
<S>                      <C>          <C>             <C>               <C>
John Simonelli             60,000        100,000        $157,800           $145,000
Larry E. Howell            60,000        100,000         157,800            145,000
Arthur R. Peterson, Jr.    60,000        100,000         157,800            145,000
</TABLE>

------------------------
(1)  The closing sale price of the Common Stock as quoted on Nasdaq SmallCap
     Market on December 31, 1997, was $4.63.  Value is calculated on the basis
     of the difference between the option exercise price and $4.63 multiplied
     by the number of shares of Common Stock underlying the option.

COMPENSATION OF DIRECTORS

     The directors of LSAI that are employees of LSAI or LSI are not
currently compensated for attending meetings of directors and committees of
the Board of Directors, but are reimbursed out-of-pocket expenses.  The
compensation of non-employee directors has not been determined by the Board
of Directors, but non-employee directors are reimbursed out-of-pocket
expenses incurred in attending meetings of directors and committees on which
they serve.  During 1997, the Board of Directors of LSAI held one meeting, at
which all directors were present in person or participated by telephonic
communications, except Michael E. Dunn.  The directors of LSAI did not
receive any compensation nor was any compensation accrued during 1997.

EMPLOYMENT ARRANGEMENTS

     LSAI has employment agreements with Messrs. Simonelli and Howell, which
were amended and restated on September 26, 1997, each of which provides,
among other things, (i) a five-year term commencing April 15, 1996, which is
automatically extended an additional year for each year of service under the
agreement, (ii) an annual base salary of $112,500, (iii) bonuses at the
discretion of the Board of Directors, but not in excess of 10 percent of the
net income of LSAI, (iv) eligibility for stock options under LSAI's stock
option plans, (v) health and disability insurance benefits and life
insurance, (vi) an automobile allowance, and (vii) benefits consistent with
similar executive employment agreements.  The agreements require Messrs.
Simonelli and Howell to devote not less than 50 percent of their time and
attention to the business and affairs of LSAI.  The agreements also restrict
the employee's right to participate in other activities outside of LSAI to
the extent such activities conflict with the employee's ability to perform
his duties and that would violate his duty and loyalty to LSAI.

     LSI has an employment agreement with Mr. Peterson, which was amended and
restated on September 26, 1997, and which provides, among other things, (i) a
four-year term commencing April 15, 1996, which is automatically extended an
additional year for each year of service under the agreement, (ii) an annual
base salary of $125,000, (iii) annual bonuses equal to the lesser of $50,000
or 10 percent of the net income of LSAI before provision for income taxes,
(iv) eligibility for stock options under LSAI's stock option plans, (v)
health and disability insurance benefits and life insurance, maintained at
the Company's cost and expense, covering the life of Mr. Peterson in the face
amount of $1,000,000, (vi) an automobile allowance, and (vii) benefits
consistent with similar executive employment agreements.  The agreement
requires Mr. Peterson to devote his full time and attention to the business
and affairs of LSI.

     Furthermore, on November 20, 1997, LSI entered into an Employment
Severance Agreement with Robert A. Gardebled, Jr. which remains in effect
during the period Mr. Gardebled remains employed by LSI.  This agreement
obligates LSI to pay Mr. Gardebled 12 months of compensation in the event of
and following his employment termination by LSI other than for cause (I.E. a
good faith determination by the Board of Directors of LSI of the misconduct
or willful and material breach of the agreement in the performance of
services).  Termination (other than with cause) includes the termination of
employment by LSI or Mr. Gardebled's resignation upon the occurrence of a


                                    -20-

<PAGE>

"change in control."  "Change in control" generally includes (i) any person
or group that becomes the beneficial owner of shares of LSI (which would
include the Common Stock of LSAI) or of proxies or other rights pertaining to
LSI (including LSAI) which carry 25 percent or more of the total number of
votes for the election of the Board of Directors of LSI (including LSAI),
(ii) a merger or consolidation, (iii) the sale or a business combination,
lease or disposition of all or substantially all of the assets of LSI, or
(iv) during a 24 month period a majority of  the members of LSI's Board of
Directors cease to constitute a majority of the members of the Board.

     Each of the employment agreements with the officers of LSAI and LSI may
be terminated by LSAI or LSI in the event the Board of Directors determines
in good faith that the officer is guilty of gross negligence or fraud
materially injurious to LSAI or LSI.

1994 STOCK OPTION PLAN

     LSAI established the Laboratory Specialists of America, Inc. 1994 Stock
Option Plan (the "1994 Stock Option Plan" or the "Plan") in May 1994.  The
Plan was amended and restated on October 30, 1996.

     The Plan provides for the issuance of incentive stock options ("ISO
Options") with or without stock appreciation rights ("SARs") and nonincentive
stock options ("NSO Options") with or without SARs to directors, employees
and consultants of the Company and its subsidiaries.  The total number of
shares of Common Stock authorized and reserved for issuance under the Plan is
425,000. As of the date of this Report, NSO Options to purchase 235,000
shares (exercisable on or before March 28, 2007) at an exercise price of
$2.00 per share have been granted under the Plan, of which 7,500 NSO Options
have been exercised through January 1998. The outstanding NSO Options were
granted on March 28, 1997, in replacement of the then outstanding NSO Options
which consisted of 50,000 (exercisable on or before July 20, 2005), and
185,000 shares (exercisable after April 30, 1997 and on or before October 30,
2006) of Common Stock at an exercise price of $3.00 and $2.75 per share,
respectively, were outstanding.   No ISO Options have been granted under the
Plan.

     The Board of Directors administers and interprets the Plan and has the
authority to grant options to all eligible employees and determine the types
of options granted, with or without SARs, the terms, restrictions and
conditions of the options at the time of grant, and whether SARs, if granted,
are exercisable at the time of exercise of the Option to which the SAR is
attached.  The Board of Directors may at any time appoint a committee of two
or more members of the Board of Directors and delegate to such committee
administration of the Plan.

     Options under the Plan may be granted only to persons who at the time of
grant are directors, executive officers, key employees and independent
contractors and consultants of the Company and its subsidiaries.
Non-employee directors are not eligible to be granted ISO Options.  Any ISO
Options granted under the Plan must be consistent with the qualification
requirements set forth in the Internal Revenue Code of 1986, as amended.  The
maximum number of shares of stock for which employee-directors may be granted
options in any calendar year may not exceed 25 percent of the aggregate
number of share of stock with respect to which Options may be granted under
the Plan.  The Board of Directors determines the period during which any
Option may be exercised; but may not be exercisable more than 10 years after
the date of grant.  The exercise prices of Options are determined by the Plan
Administrator, but in no event may such price be less than 85 percent (100
percent for ISO Options) of the fair market value of the stock on the date of
grant.  Options granted are non-transferable except by will or by the laws of
descent and distribution.  No option may be granted under the Plan after June
30, 2005.

     Options are exercisable only by eligible persons while serving as a
director, an employee, an independent contractor or a consultant of the
Company or a subsidiary, except that such Options will be exercisable if an
eligible person's termination was due to (i) death, in which case the
personal representative of a deceased eligible person may exercise such
options within 12 months after the eligible person's death, (ii) retirement,
in which case such Options will be exercisable within three months of such
date of termination, or (iii) disability, in which case such Options will be
exercisable at any time within 12 months of such date of termination, but in
no event may an Option be exercised beyond the exercise period of such
Option.  However, the Board of Directors, in its sole discretion, may permit
an eligible person who is terminated due to retirement or disability, or upon
the occurrence of special circumstances (as determined by the Board), or the
personal representative of a deceased eligible person to exercise and
purchase (within three years of such termination) all or any part of the
shares of Common Stock subject to Options on the date of termination.


                                    -21-
<PAGE>

1997 NON-QUALIFIED STOCK OPTION PLAN

     LSAI established the Laboratory Specialists of America, Inc. 1997
Non-Qualified Stock Option Plan (the "1997 Plan") in October 1997.  The 1997
Plan provides for the grant of non-qualified stock options ("Options"), with
stock appreciation rights ("SARs") to employees, directors, independent
contractors and consultants of the Company.  The total number of shares of
Common Stock authorized and reserved for issuance under the 1997 Plan is
400,000.  As of the date of this Report, Options to purchase 340,000 shares
(exercisable after March 1, 1998 and on or before October 1, 2007) at an
exercise price of $3.18 per share have been granted under the 1997 Plan, of
which none have been exercised.  The outstanding NSO Options were granted on
March 28, 1997, in replacement of the then outstanding NSO Options which
consisted of 50,000 (exercisable on or before July 20, 2005), and 185,000
shares (exercisable after April 30, 1997 and on or before October 30, 2006)
of Common Stock at an exercise price of $3.00 and $2.75 per share,
respectively, were outstanding.

     The Board of Directors (the "Board") administers the Plan and the
authority to interpret and construe the Plan, and determine all questions
arising under the Plan and any agreement made pursuant to the Plan.  Options
under the 1997 Plan may be granted only to persons ("Eligible Persons") who
at the time of grant are directors, executive officers, key employees and
independent contractors and consultants of the Company and its subsidiaries.
The Board has have the power where consistent with the general purpose and
intent of the 1997 Plan to (i) modify the requirements of the Plan to conform
with the law or to meet special circumstances not anticipated or covered in
the Plan, (ii) suspend or discontinue the Plan, (iii) establish policies, and
(iv) adopt rules and regulations and prescribe forms for carrying out the
purposes and provisions of the Plan.  The Options are granted pursuant to the
provisions of stock option agreements (the "Stock Option Agreements").  The
form and provisions of the stock option agreements are determined by the
Board.  A majority of the members of the Board shall constitute a quorum, and
an act of the majority of the members of the Board present at any meeting at
which a quorum is present shall be the act of the Board.  Unless otherwise
provided in the Plan, the Board has the authority to interpret and construe
the Plan, and determine all questions arising under the Plan and any
agreement made pursuant to the Plan.  Any interpretation, decision or
determination made by the Board shall be final, binding and conclusive upon
the participants and the Company.

     The terms and conditions of the Options granted to each participant will
be set forth in the Stock Option Agreement evidencing the grant of such
Options.  Options may be granted by the Board on terms and conditions
determined solely by the Board.  No Option shall be exercisable more than 10
years after the date of grant.  The maximum number of shares of stock for
which an Eligible Person may be granted Options in any calendar year may not
exceed 25 percent of the aggregate number of shares of stock with respect to
which Options may be granted under the 1997 Plan. The exercise prices of
Options are determined by the Board, but in no event may such price be less
than 85 percent of the fair market value of the stock on the date of grant.
Options granted are not transferable except by will or by the laws of descent
and distribution or with the consent of the Company.  No Option under the
Plan may be granted after October 1, 2007.

     Options may be exercisable only by the Option holder ("Participant")
while serving as a director of the Company or a subsidiary or while actively
employed as an employee, an independent contractor or a consultant by the
Company or a subsidiary, except that (i) any such Option granted and which is
otherwise exercisable, may be exercised by the personal representative of a
deceased Participant within 12 months after the death of such Participant
(but not beyond the exercise period of such Option), (ii) if a Participant is
terminated as a director, an employee, an independent contractor or a
consultant of the Company or a subsidiary on account of (A) retirement, such
Participant may exercise any Option which is otherwise exercisable at any
time within three months of such date of termination, or (B) a disability,
such Participant may exercise any Option which is otherwise exercisable at
any time within 12 months of such date of termination.  If a Participant dies
during the applicable three-month or 12-month period following the date of
such Participant's retirement or termination on account of disability, the
rights of the personal representative of such deceased Participant as such
relate to any Options granted to such deceased Participant shall have similar
rights to exercise the Options and during the remainder of the three-month or
12-month period.

     The Board, in its sole discretion, may permit a Participant who is
terminated as a non-employee director, an employee, an independent contractor
or a consultant due to retirement or disability, or upon the occurrence of
special circumstances (as determined by the Board), or the personal
representative of a deceased Participant to exercise and purchase (within
three years of such termination) all or any part of the shares subject to
Option on the date of termination.

STOCK APPRECIATION RIGHTS

The Board may also grant SARs to Eligible Persons in connection with Options
granted under the Plan.  SARs terminate at such time as the Board determines
and are exercisable only upon the exercise of the related Option.

Upon the exercise of a SAR, the holder is entitled to receive the excess
amount of the fair market value of the Stock, as of the date of exercise, for
which the SAR is exercised over the exercise price of the Option.  The
Eligible Person may request the method and combination of payment upon the
exercise of a SAR; however, the Board has the final authority to determine
whether the SAR shall be paid in cash or shares of stock or both.  An amount
equal to the income tax resulting to the Company on the exercise of the SAR
is required to be paid to the Company at the time of exercise by the Eligible
Person who exercises.

Upon the exercise of an Option, the Option exercise must be paid in full, in
cash or in Common Stock or a combination of cash and Common Stock in the
event that the purchase is pursuant to exercise of rights under an SAR which
is attached to an Option and which is exercisable on the date of exercise of
the Option.

Subject to the foregoing, Options are exercisable only by participants who
are directors, actively employed as employees, independent contractors or
consultants by the Company or a subsidiary of the Company, except that
Options may, with the consent of the Board, be exercised at any time within
three years after the participant's retirement, death, disability or the
occurrence of other special circumstances as determined by the Board, but in
no event beyond the expiration date of the Option.  If a participant's
services as a director, employment as an employee, independent contractor or
a consultant by the Company or its subsidiary terminates for any reason other
than death, disability or retirement, any Option granted to such participant
immediately terminates, unless permitted to be exercised by the Board in its
sole discretion.  Options are not transferable except by will or by the laws
of descent and distribution.  Compliance with Section 16(a) of the Securities
Exchange Act of 1934

The Company's Directors, Executive Officers and shareholders who beneficially
own more than 10 percent of the Common Stock are required to file with the
Securities and Exchange Commission and provide the Company with copies of the
initial reports of ownership and reports of changes in ownership of Common
Stock.  Specific due date

CERTAIN LEGAL PROCEEDINGS

On September 28, 1990, the Securities and Exchange Commission (the
"Commission") filed a civil action against John Simonelli, Chairman and Chief
Executive Officer of LSAI, alleging violations of (i) Sections 13(d) and
16(a) (which require that officers, directors and certain shareholders file
securities ownership reports with the Commission) and (ii) Section 10(b) and
Rule 10b-6 (which, in general, proscribe affiliates of issuers from
purchasing securities during a distribution) of or promulgated under the
Securities Exchange Act of 1934, as amended (the "Exchange Act").  Such
alleged violations, which occurred at various times from February 1985
through September 1987, pertained to Mr. Simonelli's purchase of securities
of an issuer unrelated to LSAI and LSI, and the reporting of ownership of
such securities.  On the same day, Mr. Simonelli, without admitting or
denying any of the Commission's allegations, agreed to make restitution
payment to Unico, Inc. (formerly CMS Advertising, Inc.), the issuer of the
securities, and consented to a permanent injunction, pursuant to which Mr.
Simonelli was permanently enjoined from violating the foregoing sections of
and rule promulgated under the Exchange Act.  See "--Directors and Executive
Officers," above.

OFFICER AND DIRECTOR LIABILITY

     As permitted by the provisions of the Oklahoma General Corporation Act,
the Certificate of Incorporation (the "Certificate") eliminates in certain
circumstances the monetary liability of directors of LSAI for a breach of
their fiduciary duty as directors. These provisions do not eliminate the
liability of a director for (i) a breach of the director's duty of loyalty to
LSAI or its shareholders, (ii) acts or omissions by a director not in good
faith or which involve intentional misconduct or a knowing violation of law,
(iii) liability arising under Section 1053 of the Oklahoma General
Corporation Act (relating to the declaration of dividends and purchase or
redemption of shares in violation of the Oklahoma General Corporation Act),
or (iv) any transaction from which the director derived an improper personal
benefit.  In addition, these provisions do not eliminate liability of a
director for violations of federal securities laws, nor do they limit the
rights of LSAI or its shareholders, in appropriate circumstances, to seek
equitable remedies such as injunctive or other forms of non-monetary relief.
Such remedies may not be effective in all cases.

                                     -22-
<PAGE>

     The Certificate and Bylaws of LSAI provide that LSAI shall indemnify all
directors and officers of LSAI to the full extent permitted by the Oklahoma
General Corporation Act.  Under such provisions, any director or officer, who
in his capacity as such, is made or threatened to be made, a party to any
suit or proceeding, may be indemnified if the Board of Directors determines
such director or officer acted in good faith and in a manner he reasonably
believed to be in or not opposed to the best interest of LSAI.  The
Certificate and Bylaws of LSAI and the Oklahoma General Corporation Act
further provide that such indemnification is not exclusive of any other
rights to which such individuals may be entitled under the Certificate, the
Bylaws, an agreement, vote of shareholders or disinterested directors or
otherwise.  Insofar as indemnification for liabilities arising under the Act
may be permitted to directors and officers of LSAI pursuant to the foregoing
provisions, or otherwise, LSAI has been advised that in the opinion of the
Commission such indemnification is against public policy as expressed in the
Act and is, therefore, unenforceable.

ITEM 11.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

     The following table presents certain information as to the beneficial
ownership of LSAI's Common Stock as of March 25, 1998, and the beneficial
ownership of the Common Stock of (i) each person who is known to LSAI to be
the beneficial owner of more than five percent thereof, (ii) each current
director and executive officer of LSAI, and (iii) all current executive
officers and directors as a group, together with their percentage holdings of
the outstanding shares.  All persons listed have sole voting and investment
power with respect to their shares unless otherwise indicated, and there is
no family relationship between the executive officers and directors of LSAI.

<TABLE>
                                                                COMMON STOCK
                                                       -----------------------------
                                                          SHARES          PERCENT OF
                                                       BENEFICIALLY          SHARE
NAME AND ADDRESS OF BENEFICIAL OWNER                       OWNED           OWNERSHIP
------------------------------------                   ------------       ----------
<S>                                                    <C>                <C>
Arthur R. Peterson, Jr.(1)
  1111 Newton Street
  Gretna, Louisiana 70053                                 650,000             12.8%
John Simonelli(1)
  101 Park Avenue, Suite 810
  Oklahoma City, Oklahoma 73102                           360,000              7.1%
Larry E. Howell(1)
  101 Park Avenue, Suite 810
  Oklahoma City, Oklahoma 73102                           360,000              7.1%
Robert A. Gardebled, Jr.(2)                                75,000              1.5%
Jerome P. Welch(3)                                             --              -- %
Michael E. Dunn(3)                                             --              -- %
Executive Officers and Directors as a group
   (six persons)                                       1,465,000              26.8%
</TABLE>

------------------------------------------------
(1)  The number and percent of shares includes stock options for the purchase
     of 160,000 shares of Common Stock, of which 100,000 are exercisable after
     April 1, 1998.
(2)  The number and percent of shares includes stock options exercisable for
     the purchase of 50,000 shares of Common Stock, of which 25,000 are
     exercisable after April 1, 1998.
(3)  Each named Director holds stock options for the purchase of 10,000 shares
     of Common Stock, of which 5,000 are exercisable after April 1, 1998.

ITEM 12.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

     Set forth below is a description of transactions entered into between
LSI and LSAI and certain of its officers, directors and shareholders during
the last two years.  Certain of these transactions will continue in effect
and may result in conflicts of interest between the Company and such
individuals.  Although these persons have fiduciary duties to the Company and
its shareholders, there can be no assurance that conflicts of interest will
always be resolved in favor of the Company.

     Until June 1996, LSAI's offices located at 1101-A Sovereign Row in
Oklahoma City were subleased from Unico, Inc. ("Unico") on a month-to-month
basis currently for $1,500 per month, and the lessors of such premises

                                      -23-
<PAGE>

to Unico include Messrs. Simonelli and Howell, who are officers and directors
of LSAI.  Messrs. Simonelli and Howell own, in the aggregate, a 50 percent
undivided interest in such premises, and are former directors of Unico.
During 1996, LSAI paid Unico, pursuant to the sublease, aggregate monthly
rent of $6,000.

     During 1997 and 1996, Michael E. Dunn, a Director of the Company, was
President, a Director and a shareholder of Dunn Swan & Cunningham.  During
1997 and 1996, LSAI paid Dunn Swan & Cunningham, A Professional Corporation,
$143,785 and $27,525, respectively, for services rendered and $20,374 and
$3,576.91, respectively, in reimbursement of expenses advanced on behalf of
LSAI.  In addition, Michael E. Dunn received $10,000 for legal services
rendered during 1997 on behalf of LSAI.

     On March 28, 1997, the Company issued to each of Jerome P. Welch,
Michael E. Dunn and Harry Gray Browne, M.D. (a former Director), stock
options exercisable for the purchase of 5,000 shares of Common Stock in
replacement of options previously granted in 1995.  The replacement options
effectively reduced the exercise price of options granted in 1995 from $3.00
to $2.00 and extended the exercise period to March 28, 2007.  In addition, on
October 1, 1997, the Company issued to each of Jerome P. Welch and Michael E.
Dunn stock options pursuant to the 1997 Plan to purchase 5,000 shares of LSAI
Common Stock at $3.18 per share, which will become exercisable after April 1,
1998 and until October 1, 2007.  See "Item 10. Executive Compensation--1997
Non-Qualified Stock Option Plan."

     The Board of Directors of LSAI believes that the terms of the
transactions described above were at least as favorable as could be obtained
from unaffiliated third parties.  LSAI has adopted policies that any loans to
officers, directors and five percent or more shareholders ("affiliates") are
subject to approval by a majority of the disinterested independent directors
of LSAI and that further transactions with affiliates will be on terms no
less favorable than could be obtained from unaffiliated parties and approved
by a majority of the disinterested independent directors.

ITEM 13.  EXHIBITS AND REPORTS ON FORM 8-K.

(a)  EXHIBITS:

          2.1  The Asset Purchase Agreement between the Registrant and
               Pathology Laboratories, Ltd., dated January 31, 1997.(1)

          2.2  Amendment to Asset Purchase Agreement between Registrant and
               Pathology Laboratories, Ltd., dated July 30, 1997.(2)

          2.3  Settlement Agreement and General Release by and between
               Registrant, National Psychopharmacology Laboratory, Inc.,
               Kenneth O. Jobson and Haroutune K. Dekirmenjian, dated August
               25, 1997.(2)

          2.4  The Asset Purchase Agreement between the Registrant and
               Accu-Path Medical Laboratory, Inc., dated December 1, 1997.

          3.1  The Registrant's Certificate of Incorporation.(3)

          3.2  The Registrant's Bylaws.(3)

          4.1  Form of Certificate of Common Stock of the Registrant.(4)

          4.2  Form of 1994 Warrant.(4)

          4.3  Form of Warrant Agreement Between the Registrant and Liberty
               Bank and Trust Company of Oklahoma City, N.A., dated
               September 27, 1994.(4)

          4.4  Form of Representative's Warrants.(4)

          4.5  Laboratory Specialists of America, Inc. 1994 Stock Option Plan,
               as amended and restated October 30, 1996.(3)

                                     -24-
<PAGE>

          4.6  Form of Warrant for Purchase of Common Stock issued to Barber &
               Bronson, Incorporated and its designees.(2)

         10.1  Employment Agreement with John Simonelli, as amended and restated
               September 26, 1997.

         10.2  Employment Agreement with Larry E. Howell, as amended and
               restated September 26, 1997.

         10.3  Employment Agreement between Arthur R. Peterson, Jr. and
               Laboratory Specialists, Inc.,as amended and restated September
               26, 1997.

         10.4  Loan Agreement between Hibernia National Bank and Laboratory
               Specialists, Inc., dated July 2, 1997.(5)

         10.5  Promissory Note issued by Laboratory Specialists, Inc. to
               Hibernia National Bank, dated July 2, 1997.(5)

         10.6  Investment Banking Agreement between Registrant and Barber &
               Bronson, Incorporated, dated June 5, 1997.(2)

         10.7  Employment Severance Agreement between Robert A. Gardebled, Jr.
               and Laboratory Specialists, Inc., dated November 20, 1997.

         21.1  Subsidiaries of Registrant.(2)

         27    Financial Data Schedule.

-----------------------------
(1)  Incorporated by reference to Form 10-QSB Quarterly Report for the quarterly
     period ended March 31, 1996. as filed with the Commission on May 9, 1997.
(2)  Incorporated by reference to Amendment No. 1 to Form SB-2 Registration
     Statement No. 333-30997, as filed with the Commission on September 5, 1997.
(3)  Incorporated by reference to Form SB-2 Registration Statement No. 333-30997
     as filed with the Commission on July 10, 1997.
(4)  Incorporated by reference to Amendment No. 2 to Form SB-2 Registration
     Statement No. 33-82058-D as filed with the Central Regional Office of the
     Commission on September 21, 1994.
(5)  Incorporated by reference to Form 10-QSB Quarterly Report for the quarter
     ended June 30, 1997, as filed with the Commission on August 14, 1997.

(b)  REPORTS ON FORM 8-K.

On December 15, 1994, Registrant filed Form 8-K, which was amended by filing
of Amendment No. 1 to Form 8-K/A on March 29, 1994 (the "Amendment"), with
the Commission reporting, under Item 2.  Acquisition or Disposition of
Assets, the purchase by Registrant of certain assets from National Drug
Assessment Corporation.  See "Item 1. Description of Business--Background--
NDAC Asset Purchase" of this Report. The date of the Form-8-K is December 1,
1994.   The Amendment included under (a) Financial Statements and Exhibits of
Item 7. Financial Statements and Exhibits of the Form 8-K, the following
financial statements of National Drug Assessment Corporation:

-- Report of Independent Public Accountants.
-- Statements of Revenues and Expenses Excluding Income Taxes for the Nine
    Months Ended September 30, 1994 and for the Year Ended December 31, 1993.
-- Notes to Financial Statements for September 30, 1994 and December 31, 1993.

The Amendment included under (b) Pro Forma Financial Information of Item 7.
Financial Statements and Exhibits of the Form 8-K, the following financial
statements of the Registrant:

-- Unaudited Pro Forma Condensed Consolidated Balance Sheet as of September 30,
    1994.
-- Unaudited Pro Forma Condensed Consolidated Statement of Operations for the
    Year Ended December 31, 1993.
-- Unaudited Pro Forma Condensed Consolidated Statement of Operations for the
    Nine Months Ended September 30, 1994.
-- Notes to Unaudited Pro Forma Condensed Consolidated Financial Statements.

     During the last quarter of 1997, the Company did not file any reports on
Form 8-K.


                                     -25-
<PAGE>

SIGNATURES

     In accordance with Section 13 or 15(d) of the Exchange Act, the
Registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.

                              LABORATORY SPECIALISTS OF AMERICA, INC.
                                   (Registrant)


                              By: /S/ JOHN SIMONELLI
                                  -------------------------------------------
                                   John Simonelli, Chief Executive Officer

Date:  March 27, 1998

     In accordance with the Exchange Act, this Report has been signed below
by the following persons on behalf of the Registrant and in the capacities
and on the dates indicated.

NAME                          TITLE                          DATE
----                          -----                          ----
/S/ JOHN SIMONELLI            Chief Executive Officer,       March 27, 1998
----------------------------  Secretary and Director
    John Simonelli



/S/ LARRY E. HOWELL           President, Chief Operating     March 27, 1998
----------------------------  Officer, and Director
    Larry E. Howell



/S/ ARTHUR R. PETERSON, JR.   Treasurer and Director         March 27, 1998
----------------------------
    Arthur R. Peterson, Jr.



/S/ ROBERT A. GARDEBLED, JR.  Director                       March 27, 1998
----------------------------
    Robert A. Gardebled, Jr.



/S/ JEROME P. WELCH           Director                       March 27, 1998
----------------------------
    Jerome P. Welch



/S/ MICHAEL E. DUNN           Director                       March 27, 1998
----------------------------
    Michael E. Dunn



                                     -26-
<PAGE>

                         INDEX TO FINANCIAL STATEMENTS


LABORATORY SPECIALISTS OF AMERICA, INC.:

     Report of Independent Public Accountants                              F-2

     Consolidated Balance Sheets, December 31, 1997 and 1996               F-3

     Consolidated Statements of Income for the Years Ended
         December 31, 1997, 1996 and 1995                                  F-5

     Consolidated Statements of Stockholders' Equity for the
         Years Ended December 31, 1997, 1996 and 1995                      F-6

     Consolidated Statements of Cash Flows for the Years
         Ended December 31, 1997, 1996 and 1995                            F-7

     Notes to Consolidated Financial Statements                            F-8



                                      F-1
<PAGE>

                   REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS


To the Board of Directors of
Laboratory Specialists of America, Inc.:


We have audited the accompanying consolidated balance sheets of Laboratory
Specialists of America, Inc. (an Oklahoma corporation) and subsidiaries as of
December 31, 1997 and 1996, and the related consolidated statements of
income, stockholders' equity and cash flows for each of the three years in
the period ended December 31, 1997.  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, the financial statements referred to above present fairly, in
all material respects, the financial position of Laboratory Specialists of
America, Inc. and subsidiaries as of December 31, 1997 and 1996, and the
results of their operations and their cash flows for each of the three years
in the period ended December 31, 1997, in conformity with generally accepted
accounting principles.



                                     ARTHUR ANDERSEN LLP




Oklahoma City, Oklahoma,
 March 6, 1998

                                      F-2
<PAGE>

                                                                    Page 1 of 2

           LABORATORY SPECIALISTS OF AMERICA, INC. AND SUBSIDIARIES


                          CONSOLIDATED BALANCE SHEETS

                          DECEMBER 31, 1997 AND 1996


<TABLE>
                                                                        1997               1996
                                                                     -----------        ----------
<S>                                                                  <C>                <C>
                         ASSETS
CURRENT ASSETS:
 Cash and cash equivalents                                           $ 2,863,639        $  727,381

 Accounts receivable, net of allowance of
   $568,237 in 1997 and $597,499 in 1996                               2,262,990         1,696,744
 Income tax refund receivable                                            190,498           312,664
 Inventories                                                             109,929            99,754
 Prepaid expenses and other                                              115,219           146,859
 Deferred tax asset                                                      160,709           211,078
                                                                     -----------        ----------

    Total current assets                                               5,702,984         3,194,480
                                                                     -----------        ----------


PROPERTY, PLANT AND EQUIPMENT, net of accumulated
 depreciation of $1,123,909 in 1997 and $900,948 in 1996               2,376,885         1,592,599
                                                                     -----------        ----------

OTHER ASSETS:

 Goodwill, net of accumulated amortization of $272,148
  in 1997 and $171,355 in 1996                                         2,316,302         2,663,850

 Customer lists, net of accumulated amortization of $518,105
  in 1997 and $216,429 in 1996                                         4,587,814         1,863,061
 Deferred costs                                                           32,595            80,818
                                                                     -----------        ----------

    Total other assets                                                 6,936,711         4,607,729
                                                                     -----------        ----------

    Total assets                                                     $15,016,580        $9,394,808
                                                                     -----------        ----------
                                                                     -----------        ----------
</TABLE>

                                      F-3
<PAGE>

                                                                    Page 2 of 2

           LABORATORY SPECIALISTS OF AMERICA, INC. AND SUBSIDIARIES


                          CONSOLIDATED BALANCE SHEETS

                          DECEMBER 31, 1997 AND 1996




<TABLE>
                                                                        1997               1996
                                                                     -----------        ----------
<S>                                                                  <C>                <C>
           LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
 Accounts payable                                                    $   742,292        $  521,705
 Accrued payroll expenses                                                411,364           300,103
 Accrued customer list installment payments                              510,345              -
 Other accrued expenses                                                   78,491            57,310
 Short-term debt                                                            -              410,293
 Current portion of long-term debt                                       527,696           118,085
 Obligations related to discontinued operation                           126,813           784,272
                                                                     -----------        ----------

    Total current liabilities                                          2,397,001         2,191,768
                                                                     -----------        ----------

LONG-TERM DEBT, net of current portion                                 2,353,428         1,245,690
                                                                     -----------        ----------

DEFERRED INCOME TAXES                                                    359,848           307,100

COMMITMENTS AND CONTINGENCIES(Note 9)

STOCKHOLDERS' EQUITY:


 Common stock, $0.001 par value, 20,000,000 shares
  authorized, 4,924,818 shares issued and outstanding in 1997
  and 3,313,405 shares issued and outstanding in 1996                      4,925             3,313
 Paid in capital in excess of par                                      8,291,365         5,366,027
 Retained earnings                                                     1,610,013           280,910
                                                                     -----------        ----------

    Total stockholders' equity                                         9,906,303         5,650,250
                                                                     -----------        ----------

    Total liabilities and stockholders' equity                       $15,016,580        $9,394,808
                                                                     -----------        ----------
                                                                     -----------        ----------
</TABLE>




                The accompanying notes are an integral part of
                     these consolidated balance sheets.

                                      F-4
<PAGE>

           LABORATORY SPECIALISTS OF AMERICA, INC. AND SUBSIDIARIES

                       CONSOLIDATED STATEMENTS OF INCOME

             FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995

<TABLE>
                                                                  1997           1996           1995
                                                              -----------     ----------     ----------
<S>                                                           <C>             <C>            <C>
REVENUES                                                      $12,836,953     $8,726,799     $6,925,716
COST OF LABORATORY SERVICES                                     5,828,665      3,816,114      3,246,470
                                                              -----------     ----------     ----------
   Gross profit                                                 7,008,288      4,910,685      3,679,246
                                                              -----------     ----------     ----------
OPERATING EXPENSES:
 Selling                                                          654,284        601,945        561,470
 General and administrative                                     3,230,117      2,442,602      2,157,410
 Depreciation and amortization                                    690,268        504,123        232,535
 Asset impairment                                                   -            124,531          -
                                                              -----------     ----------     ----------
   Total operating expenses                                     4,574,669      3,673,201      2,951,415
                                                              -----------     ----------     ----------
OTHER (EXPENSE) INCOME:
 Interest expense                                                (230,433)       (67,185)       (29,651)
 Interest income                                                   78,035         41,208        126,939
 Other income                                                       1,146          4,169        323,846
                                                              -----------     ----------     ----------
   Total other (expense) income                                  (151,252)       (21,808)       421,134
                                                              -----------     ----------     ----------
   Income from continuing operations before income taxes        2,282,367      1,215,676      1,148,965
INCOME TAX EXPENSE                                                953,264        527,171        474,405
                                                              -----------     ----------     ----------
   Income from continuing operations                            1,329,103        688,505        674,560
DISCONTINUED OPERATION:
 Loss from operations of discontinued clinical business,
  net of tax benefit of $257,904                                    -           (500,636)         -
 Loss on disposal of clinical business, net of tax
  benefit of $489,420                                               -           (773,580)         -
                                                              -----------     ----------     ----------
   Net income (loss)                                            1,329,103       (585,711)       674,560
DIVIDENDS ON PREFERRED STOCK                                        -              -             13,344
                                                              -----------     ----------     ----------
   Net income (loss) available to common stockholders         $ 1,329,103     $ (585,711)    $  661,216
                                                              -----------     ----------     ----------
                                                              -----------     ----------     ----------
BASIC EARNINGS PER COMMON SHARE:
 Weighted average number of common stock shares outstanding     3,693,146      3,309,594      3,298,405
                                                              -----------     ----------     ----------
                                                              -----------     ----------     ----------
 Continuing operations                                        $      0.36     $     0.21     $     0.20
 Discontinued operation                                             -              (0.39)         -
                                                              -----------     ----------     ----------
   Total                                                      $      0.36     $    (0.18)    $     0.20
                                                              -----------     ----------     ----------
                                                              -----------     ----------     ----------
DILUTED EARNINGS PER COMMON SHARE:
 Weighted average number of common stock shares and common
  stock equivalents outstanding                                 4,325,618      3,954,787      3,843,391
                                                              -----------     ----------     ----------
                                                              -----------     ----------     ----------
 Continuing operations                                        $      0.31     $     0.17     $     0.17
 Discontinued operation                                             -              (0.32)         -
                                                              -----------     ----------     ----------
   Total                                                      $      0.31     $    (0.15)    $     0.17
                                                              -----------     ----------     ----------
                                                              -----------     ----------     ----------
</TABLE>

                The accompanying notes are an integral part
                of these consolidated financial statements.

                                     F-5
<PAGE>

           LABORATORY SPECIALISTS OF AMERICA, INC. AND SUBSIDIARIES

                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

             FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995

<TABLE>
                                                                 1997           1996           1995
                                                              ----------     ----------     ----------
<S>                                                           <C>            <C>            <C>
Preferred stock, $0.001 par value, $1 stated value:
 Balance, beginning of period                                 $    -         $    -         $  300,000
 Redemption of stock (Note 5)                                      -              -           (300,000)
                                                              ----------     ----------     ----------
    Balance, end of period                                         -              -              -
                                                              ----------     ----------     ----------
Common stock, $0.001 par value:
 Balance, beginning of period                                      3,313          3,298          3,298
 Exercise of common stock warrants (Note 11)                       1,501          -              -
 Issuance of stock in connection with the settlement
  of a note payable (Note 7)                                         103          -              -
 Other issuance of stock                                               8             15          -
                                                              ----------     ----------     ----------
    Balance, end of period                                         4,925          3,313          3,298
                                                              ----------     ----------     ----------
Paid in capital in excess of par:
 Balance, beginning of period                                  5,366,027      5,341,667      5,341,667
 Exercise of common stock warrants (Note 11)                   2,677,950          -              -
 Issuance of stock in connection with the settlement
  of a note payable (Note 7)                                     232,396          -              -
 Other issuance of stock                                          14,992         24,360          -
                                                              ----------     ----------     ----------
    Balance, end of period                                     8,291,365      5,366,027      5,341,667
                                                              ----------     ----------     ----------
Retained earnings:
 Balance, beginning of period                                    280,910        866,621        205,405
 Net income (loss)                                             1,329,103       (585,711)       674,560
 Preferred stock dividends                                         -              -            (13,344)
                                                              ----------     ----------     ----------
    Balance, end of period                                     1,610,013        280,910        866,621
                                                              ----------     ----------     ----------
    Total stockholders' equity                                $9,906,303     $5,650,250     $6,211,586
                                                              ----------     ----------     ----------
                                                              ----------     ----------     ----------
</TABLE>

                  The accompanying notes are an integral part
                  of these consolidated financial statements.

                                     F-6
<PAGE>

           LABORATORY SPECIALISTS OF AMERICA, INC. AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF CASH FLOWS

             FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995

<TABLE>
                                                                   1997           1996          1995
                                                              ------------   ------------   ------------
<S>                                                           <C>            <C>            <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net income (loss)                                           $  1,329,103   $   (585,711)  $    674,560
  Adjustments to reconcile net income (loss) to net cash
   provided by operating activities-
    Depreciation and amortization                                  690,268        550,933        232,535
    Provision for bad debts and other                               40,000        446,087         84,246
    Gain on sales of assets                                              -        (50,000)             -
    Deferred income taxes                                          103,117       (744,936)       (18,694)
    Asset impairment                                                     -        174,531              -
    Disposal of clinical business                                        -      1,263,000              -
    Impact of changes in assets and liabilities-
      Accounts receivable                                         (606,246)      (411,079)      (222,300)
      Income tax refund receivable                                 275,139        (54,939)         8,600
      Inventories                                                  (10,175)        43,582         (3,745)
      Prepaid expenses and other                                    17,342         64,182        (13,045)
      Accounts payable and accrued expenses                       (183,742)      (222,849)        (7,682)
                                                              ------------   ------------   ------------
          Net cash provided by operating activities              1,654,806        472,801        734,475
                                                              ------------   ------------   ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
  Capital expenditures                                          (1,038,561)      (127,915)      (211,886)
  Proceeds from sales of assets                                          -         50,000              -
  Purchase of PLL customer list                                 (2,406,593)             -              -
  Purchase of Accu-Path customer list                             (101,018)             -              -
  Purchase of NPLI stock, net of cash acquired                           -     (1,022,597)             -
  Acquisition costs                                                (98,569)      (301,816)      (101,826)
                                                              ------------   ------------   ------------
          Net cash used in investing activities                 (3,644,741)    (1,402,328)      (313,712)
                                                              ------------   ------------   ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
  Dividends paid                                                         -              -        (24,748)
  Redemption of preferred stock                                          -              -       (300,000)
  Warrant offering costs                                                 -              -        (38,821)
  Net proceeds from exercise of warrants and stock options       2,733,272              -              -
  Payments on short-term debt                                      (91,833)      (598,515)             -
  Payments on long-term debt                                      (902,651)      (155,628)       (90,585)

  Proceeds from long-term borrowings, net of loan
    origination fees                                             2,387,405              -              -
                                                              ------------   ------------   ------------
          Net cash provided by (used in) financing activities    4,126,193       (754,143)      (454,154)
                                                              ------------   ------------   ------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                 2,136,258     (1,683,670)       (33,391)

CASH AND CASH EQUIVALENTS, beginning of period                     727,381      2,411,051      2,444,442
                                                              ------------   ------------   ------------
CASH AND CASH EQUIVALENTS, end of period                      $  2,863,639   $    727,381   $  2,411,051
                                                              ------------   ------------   ------------
                                                              ------------   ------------   ------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
  Cash paid during the period for interest                    $    218,298   $    112,698   $     29,651
                                                              ------------   ------------   ------------
                                                              ------------   ------------   ------------
  Cash paid during the period for income taxes                $    823,000   $    631,564   $    480,405
                                                              ------------   ------------   ------------
                                                              ------------   ------------   ------------
</TABLE>

                      The accompanying notes are an integral part of
                         these consolidated financial statements.

                                          F-7

<PAGE>

           LABORATORY SPECIALISTS OF AMERICA, INC. AND SUBSIDIARIES


                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                          DECEMBER 31, 1997 AND 1996



1.   GENERAL:

Laboratory Specialists of America, Inc. (the "Company" or "LSAI"), an
Oklahoma corporation, was organized in March 1994.  Effective July 8, 1994,
and January 2, 1996, respectively, LSAI acquired all of the capital stock of
Laboratory Specialists, Inc. ("LSI"), a Louisiana corporation, and National
Psychopharmacology Laboratory, Inc. ("NPLI"), a Tennessee corporation, and
LSI and NPLI became wholly owned subsidiaries of LSAI.

Through LSI, the Company operates an independent forensic drug testing
laboratory providing integrated drug testing services to corporations and
governmental bodies, by negotiated contract, for detection of illegal drug
use by employees and prospective employees.  The Company's customers are
primarily in the construction, transportation, service, mining and
manufacturing industries, principally located in the southeast and southwest
United States. See Note 3 for a discussion of NPLI.

2.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

PRINCIPLES OF CONSOLIDATION

The consolidated financial statements include the accounts of all subsidiary
companies.  All material intercompany transactions have been eliminated.

EARNINGS PER COMMON SHARE

The Company adopted the disclosure requirements of Statement of Financial
Accounting Standards ("SFAS") No. 128, "Earnings per Share," during 1997 and
restated all previously presented amounts in conformity with SFAS No. 128.
Basic earnings per common share includes no dilution and is computed by
dividing income available to common stockholders by the weighted-average number
of common stock shares outstanding for the period.  Diluted earnings per common
share is computed by dividing income available to common stockholders by the
weighted-average number of common stock shares and common stock equivalents
outstanding which includes the dilutive impact of a convertible note payable
and outstanding warrants and options using the treasury stock method.


                                     F-8

<PAGE>

The following table summarizes the calculation of basic earnings per common
share and diluted earnings per common share:

<TABLE>
                                                         For the Year Ended December 31,
                                       ------------------------------------------------------------------
                                               1997                   1996                  1995
                                       --------------------    ------------------    --------------------
                                        Income      Shares      Income    Income      Shares     Income
                                       (Numer-     (Denomi-    (Numer-   (Denomi-    (Numer-    (Denomi-
                                         ator)       nator)      ator)     nator)      ator)      nator)
                                       ---------   ---------   --------  ----------  --------   ---------
<S>                                    <C>         <C>         <C>       <C>         <C>        <C>

Income from continuing operations      $1,329,103              $688,505               $674,560
  Less- Preferred stock dividends               -                     -                 13,344
                                       ----------              --------               --------
BASIC EARNINGS PER COMMON SHARE
Income from continuing operations
  available to common stockholders      1,329,103  3,693,146    688,505   3,309,594    661,216   3,298,405

Per Common Share Amount                         $0.36                  $0.21                  $0.20
                                                -----                  -----                  -----
                                                -----                  -----                  -----
DILUTED EARNINGS PER COMMON SHARE
Effect of dilutive securities:
  Convertible note payable                   -        67,662       -        154,303       -           -
  Warrants                                   -       460,226       -        484,286       -        541,809
  Options                                    -       104,584       -          6,604       -          3,177
                                       ----------- ---------   --------  ----------   --------  ----------
Income from continuing operations
  available to common stockholders
  plus assumed conversions             $1,329,103  4,325,618   $688,505  $3,954,787   $661,216  $3,843,391
                                       ----------- ---------   --------  ----------   --------  ----------
                                       ----------- ---------   --------  ----------   --------  ----------
Per Common Share Amount                         $0.31                  $0.17                  $0.17
                                                -----                  -----                  -----
                                                -----                  -----                  -----
</TABLE>


During 1997, 66,000 warrants to purchase two shares of common stock at $7.20
per warrant were outstanding but were not included in the computation of
diluted earnings per common share because the warrants' exercise price was
greater than the average market price of the common shares.  Of these warrants,
30,000 were exercised to purchase 60,000 shares of common stock in November
1997, and the common shares issued are included as outstanding for the period
from exercise through December 31, 1997, in both the basic earnings per common
share and diluted earnings per common share calculations.  The remaining 36,000
warrants, which expire on October 10, 1999, were outstanding at the end of 1997
(see Note 11).

CASH AND CASH EQUIVALENTS

Cash equivalents consist of all highly liquid debt instruments with an initial
maturity of three months or less at the date of purchase.  The Company invests
excess cash overnight in repurchase agreements, which are government
collateralized securities.  The carrying amount of cash and cash equivalents
approximates fair value of those instruments due to their short maturity.

INVENTORIES

Inventories consist of supplies of laboratory chemicals and specimen collection
materials.  Inventories are valued at the lower of cost or market, using the
first-in, first-out method.


                                     F-9

<PAGE>

PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment are recorded at cost, and are depreciated over
the estimated useful lives of the assets using the straight-line method as
follows:

<TABLE>
                                                Estimated
                                               Useful Lives       1997         1996
                                               ------------   -----------   ----------
         <S>                                   <C>            <C>           <C>
         Land                                      N/A        $   169,353   $   29,353
         Building and improvements             7 - 40 Years     1,457,097      867,110
         Equipment                             5 - 12 Years     1,765,377    1,492,633
         Vehicles                                   5 Years        32,419       32,419
         Furniture and fixtures                5 - 10 Years        76,548       72,032
                                                              -----------   ----------
                                                                3,500,794    2,493,547
         Less- Accumulated depreciation and
           amortization                                        (1,123,909)    (900,948)
                                                              -----------   ----------
                                                              $ 2,376,885   $1,592,599
                                                              -----------   ----------
                                                              -----------   ----------
</TABLE>


IMPAIRMENT OF LONG-LIVED ASSETS

Effective January 1, 1996, the Company adopted the provisions of SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to Be Disposed Of."  This standard requires that long-lived assets, certain
identifiable intangibles and goodwill related to those assets be reviewed for
impairment by asset group for which the lowest level of independent cash flows
can be identified.  The adoption of SFAS No. 121 in 1996 resulted in no
adjustment to the consolidated financial statements of the Company.  However,
during the fourth quarter of 1996, the Company made a decision to hold for sale
a former laboratory building, which resulted in an impairment of approximately
$111,000 being recorded, which reduced the net book value of the building to
$225,000.  The impairment is included in "Asset Impairment" in the accompanying
consolidated income statement.

GOODWILL AND CUSTOMER LISTS

Goodwill is amortized on a straight-line basis over 20 or 40 years and the
customer lists are amortized on a straight-line basis over fifteen years.  The
Company continually evaluates whether events and circumstances have occurred
that indicate the remaining estimated useful life of goodwill or the customer
lists may warrant revision or that the remaining unamortized balance of
goodwill or the customer lists may not be recoverable.  When factors, such as
operating losses, loss of customers, loss or suspension of laboratory
certification for an extended period, or changes in the drug testing industry,
if present, indicate that goodwill or the customer lists should be evaluated
for possible impairment, the Company uses an estimate of the related
undiscounted net cash flows over the remaining life of the goodwill or the
customer lists in measuring whether they are recoverable.  Although management
believes that goodwill and the customer lists are currently recoverable over
the respective remaining amortization periods, it is possible, due to a change
in circumstances, that the carrying value could become impaired in the future.
Such impairment could have a material effect on the results of operations in a
particular reporting period.


                                    F-10

<PAGE>

DEFERRED COSTS

At December 31, 1997, deferred costs of $32,595 related to loan origination
fees for two notes payable to a bank which were issued during 1997.  These
costs are being amortized over the related lives of the associated notes
payable.  Deferred costs at December 31, 1996, included $38,821 of legal and
accounting expenses incurred in connection with the registration of the
Company's outstanding warrants (see Note 11), $33,523 related to construction
in progress, and $8,474 other.  In 1997, the deferred registration costs were
recorded as a reduction of the proceeds from the exercise of the warrants.
Also in 1997, the Company transferred the construction in progress to property,
plant and equipment and began depreciating the costs when the related building
was placed in use.

EMPLOYEE STOCK OPTION PLAN

The Company accounts for its employee stock option plan using the intrinsic
value method in accordance with Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (see Note 10).

INCOME TAXES

Deferred income taxes are provided to reflect the future tax consequences of
differences between the tax bases of assets and liabilities and their reported
amounts in the financial statements.

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, the 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 as additional information
becomes known.

3.   BUSINESS ACQUISITIONS:

NATIONAL PSYCHOPHARMACOLOGY LABORATORY, INC.

On January 2, 1996, the Company acquired all of the issued and outstanding
capital stock (the "NPLI Stock") of NPLI, and purchased goodwill (the "NPLI
Goodwill"), pursuant to a Stock Purchase Agreement dated January 1, 1996 (the
"NPLI Purchase Agreement"), and NPLI became a wholly owned subsidiary of the
Company (the "NPLI Acquisition").  NPLI was engaged in forensic drug testing
(urine drug screening with chain of custody) and clinical testing and analysis.

Pursuant to the Purchase Agreement and in connection with the NPLI Acquisition,
the Company (i) agreed to pay $1,585,000 for the NPLI Stock of which $1,075,000
was paid at closing to the shareholders of NPLI (the "NPLI Shareholders"), and
two unsecured promissory notes, with an aggregate adjusted face value of
$510,000, were issued and delivered to the NPLI Shareholders, (ii) agreed to
pay $140,000 for the NPLI Goodwill payable in 24 monthly installments
commencing on February 1, 1996, (iii) assumed net liabilities of NPLI of
approximately $875,000, and (iv) incurred deferred income taxes of
approximately $800,000 as a result of NPLI's tax basis being significantly less
than the purchase price of the NPLI Stock.  All of the above resulted in a
total purchase price of approximately $3,400,000, substantially all of which
was recorded as intangible assets.


                                    F-11

<PAGE>

The forensic portion of NPLI's business was merged into LSI's operation
effective February 1996.  The Company intended to sell the clinical business
during 1996, but after negotiations with three potential buyers failed, the
Company shut down the clinical operations effective in the fourth quarter of
1996.  The revenues related to the discontinued clinical operation for the year
ended December 31, 1996, were approximately $3,413,000.  The related operating
loss and shut down expenses of the clinical business are included in the
accompanying consolidated income statement as "Discontinued Operation" and
"Disposition of Discontinued Operation," respectively.  Assuming the
acquisition had occurred at the beginning of 1995, the unaudited consolidated
pro forma results of operations (excluding the clinical business) for the year
ended December 31, 1995, are as follows (in thousands of dollars, except per-
share amounts):

<TABLE>
                                                                    (Unaudited)
                                                                    -----------
     <S>                                                            <C>
     Revenues                                                         $ 8,626

     Net income from continuing operations                            $   851

     Basic earnings per common share from continuing operations       $  0.26

     Diluted earnings per common share from continuing operations     $  0.22
</TABLE>


PATHOLOGY LABORATORIES, LTD.

On January 31, 1997, the Company acquired from Pathology Laboratories, Ltd.
("PLL") certain intangible assets pursuant to an Asset Purchase Agreement dated
January 31, 1997.  PLL is a privately held corporation.  The assets purchased
included the forensic drug testing customer list of PLL and all contracts,
contract rights and agreements, correspondence with the customers for which PLL
has provided forensic drug testing services, and all assets owned by PLL used
in connection with the PLL office in Greenville, South Carolina.  Pursuant to
the Purchase Agreement, the Company (i) paid $1,600,000 at closing and (ii)
assumed the obligations of PLL under a certain lease, dated September 16, 1996,
which requires monthly base rental payments of $2,083 and which expires on
September 16, 1999.  Furthermore, the Company agreed to make four additional
quarterly installment payments to PLL within 60 days following the end of each
three-month period during the twelve months ending January 31, 1998.  These
quarterly payments are based on ninety percent of gross revenues directly
attributable to each customer comprising the customer base of PLL for the year
ending January 31, 1998, exceeding $1,600,000.  Excluding the obligations
assumed under the lease, the Company has estimated the total purchase price
will be $2,560,000, which was allocated entirely to the customer list to be
amortized over 15 years.  In the accompanying consolidated balance sheet at
December 31, 1997, the Company has $250,345 accrued for the remainder of the
estimated purchase price as "accrued customer list installment payments."  The
initial purchase price of $1,600,000 was financed with additional long-term
bank indebtedness.  The Company consolidated the drug testing services with
LSI's laboratory in March 1997.

Assuming the acquisition had occurred at the beginning of 1996, the unaudited
consolidated pro forma results of operations for the year ended December 31,
1996, are as follows (in thousands of dollars, except per-share amounts):


                                    F-12

<PAGE>

<TABLE>
                                                                    (Unaudited)
                                                                    -----------
     <S>                                                            <C>
     Revenues                                                         $ 11,287

     Net income from continuing operations                            $  1,093

     Basic earnings per common share from continuing operations       $   0.33

     Diluted earnings per common share from continuing operations     $   0.28
</TABLE>


ACCU-PATH MEDICAL LABORATORIES, INC.

On December 1, 1997, the Company acquired from Accu-Path Medical Laboratories,
Inc. ("Accu-Path") certain intangible assets pursuant to an Asset Purchase
Agreement dated December 1, 1997.  Accu-Path is a privately held corporation.
The assets purchased included the forensic drug testing customer list of Accu-
Path, all contracts and contract rights for the providing of drug testing
services, and certain of the assets owned by Accu-Path used in connection with
the Accu-Path office in Ruston, Louisiana.  The purchase price for these assets
was established as 180% of the collected and collectible forensic drug testing
customer list revenues during the period from June 1998 through November 1998.
The Company paid $100,000 at closing and will pay within 30 days following the
end of each three-month period after closing, 50% of the forensic testing
revenue for each of the first three quarters.  The remaining purchase price
balance will be paid through four quarterly installment payments with the first
of such payments due 30 days following the end of the first twelve-month
anniversary date of the acquisition.  The Company has estimated the total
purchase price will be $360,000, which was allocated entirely to the customer
list to be amortized over 15 years.  In the accompanying consolidated balance
sheet at December 31, 1997, the Company has $260,000 accrued for the remainder
of the estimated purchase price as "accrued customer list installment
payments."  The Company consolidated the drug testing services with LSI's
laboratory in December 1997.  Had the acquisition occurred at the beginning of
1997, the Company's results of operations for the year ended December 31, 1997,
would not have been materially different from those presented in the
accompanying consolidated statement of income.

4.   OTHER INCOME:

Other income, as reflected in the consolidated statement of income for the year
ended December 31, 1995, includes proceeds of $320,000 received from the
settlement of litigation brought by LSI.

5.   TRANSACTIONS WITH RELATED PARTIES:

During the years 1997, 1996 and 1995, LSAI incurred approximately $170,000,
$30,000 and $130,000, respectively, for legal services rendered by a director
of the Company who also serves as legal counsel for the Company.  Management
believes that the amounts incurred approximate those which would have been paid
to unrelated parties for the same services.

In 1994, LSI issued a note payable in the amount of $353,123 to MBf USA, Inc.
("MBf") in connection with LSI's President and former owner, Arthur R.
Peterson, Jr.'s acquisition of LSI's common stock.  Peterson later exchanged
all of the outstanding common stock of LSI for 1,000,000 shares of common stock
and 300,000 shares of Series I Cumulative Redeemable Convertible Preferred
Stock (the "Series I Preferred Stock") of LSAI.  The Series I Preferred Stock
was entitled to annual cumulative dividends based upon the national prime rate
which initially was 6.75% subject to a maximum 2% rate increase or decrease
adjustment.  LSAI redeemed the Series I Preferred Stock in July 1995 at $1.00
per share totaling $300,000.


                                    F-13

<PAGE>

6.   LINE OF CREDIT:

In December 1995, LSI entered into a $1 million line of credit arrangement,
which matured in December 1996.  The line of credit was renewed for $250,000 in
January 1997, maturing in January 1998, with an interest rate equal to the
Citibank N.A. rate, which was 8.25% at the date of renewal.  LSAI is a
guarantor of any balances outstanding under the line of credit, which is
collateralized by LSI's accounts receivable, intangibles, inventories,
equipment, and furniture and fixtures.  No borrowings were made against the
line of credit during 1997, and no balance was outstanding as of December 31,
1997.

7.   DEBT:

Short-term debt at December 31, 1996, consisted of notes payable to the former
shareholders of NPLI with a recorded amount of $334,460, representing the
discounted value of approximately 153,282 shares reserved for issuance pursuant
to the NPLI Purchase Agreement.  The Company did not issue and deliver these
shares to the former shareholders during 1996, based upon certain
representations made by the NPLI Shareholders which the Company believed to
have been misleading and false at the closing of the NPLI Acquisition.  In
August 1997, 103,333 shares of stock were issued to the NPLI shareholders to
settle the note payable.  The issuance of these shares of common stock has been
excluded from the accompanying consolidated statement of cash flows as it is a
non-cash transaction.  The remaining short-term debt at December 31, 1996, of
$75,833 related to the note payable for NPLI Goodwill (see Note 3), was paid in
1997.

Long-term debt consists of the following at December 31, 1997 and 1996:

<TABLE>
                                                                   1997         1996
                                                               -----------   -----------
<S>                                                            <C>           <C>
Note payable to MBf, due February 1999, interest rate 7%,
  collateralized by substantially all of the assets of LSI
  (see Note 5)                                                 $   353,123   $   353,123

Note payable for purchase of laboratory building                      -          450,000


Capital lease agreement with Boehringer-Mannheim Corporation       442,567       560,652

Note payable to a bank bearing interest at 8.65%, with
  principal and interest payable monthly through June 2002
  and the balance of principal and interest due in a balloon
  payment in July 2002, collateralized by substantially all
  of the assets of LSI                                             697,101          -

Term loan with a bank bearing interest at the prime rate plus
  0.5% (9.0% at December 31, 1997), with principal and interest
  payable monthly through January 2002, collateralized by
  substantially all of the assets of LSI                         1,388,333          -
                                                               -----------   -----------
    Total long-term debt                                         2,881,124     1,363,775
                                                               -----------   -----------
    Less- Current portion                                         (527,696)     (118,085)
                                                               -----------   -----------

                                                               $ 2,353,428   $ 1,245,690
                                                               -----------   -----------
                                                               -----------   -----------
</TABLE>

                                    F-14

<PAGE>

In late 1996, the Company purchased a building to be renovated for its new
laboratory.  The purchase was financed by a note payable to the seller due in
June 1997, with no stated interest rate.  This was a noncash transaction and
was excluded from the accompanying 1996 consolidated statement of cash flows.
In 1996, this note payable to the seller was classified as long-term based on a
written commitment from a bank to refinance the purchase and construction costs
up to the lesser of 80% of appraised value or cost, not to exceed $720,000.
Upon maturity in 1997, the note was refinanced through a note payable to a
bank.

During February 1996, LSI entered into an agreement with Boehringer-Mannheim
Corporation through February 2001, to purchase equipment and certain lab
supplies at a fixed price, per drug screen performed.  The agreement resulted
in the Company recording approximately $650,000 in additional equipment, with
an equal amount recorded as a capital lease obligation payable over five years.
The amortization of the capital lease assets is included in depreciation
expense in the accompanying consolidated statements of income.  The total
monthly payment through November 1996 was $46,740.  The agreement was amended
during December 1996, due to increased drug testing volumes and the new monthly
payment became $59,750, with $13,223 allocated to the principal and interest of
the capital lease obligation, and the remaining cost allocated to the cost of
laboratory supplies.  In July 1997, due to further increases in drug testing
volumes, the original lease term was extended from five years to six years and
additional equipment was added.  The total monthly payment and capital lease
obligation did not change as a result of this amendment, and the portion of the
monthly payment which is allocated to the principal and interest of the capital
lease obligation during the first five years of the agreement will be treated
as equipment rental expense during the sixth year.  The future minimum lease
payments related to this obligation are as follows:

<TABLE>
                                                         Capital    Operating
                                                       ----------  -----------
          <S>                                          <C>         <C>
          1998                                         $  158,670  $   558,330
          1999                                            158,670      558,330
          2000                                            158,670      558,330
          2001                                             26,446      690,555
          2002                                               -         119,500
                                                       ----------  -----------
                                                          502,456    2,485,045

          Less- Interest on capital lease obligation       59,889         -
                                                       ----------  -----------
          Total future minimum lease payments          $  442,567  $ 2,485,045
                                                       ----------  -----------
                                                       ----------  -----------
</TABLE>


8.   INCOME TAXES:

Prior to 1995, the Company had no material differences between the tax bases of
assets and liabilities and their reported amounts in the financial statements,
except for certain goodwill which is not deductible for tax purposes, and
treated as a permanent difference.


                                    F-15

<PAGE>

The 1997, 1996 and 1995 provision (benefit) for income taxes on income from
continuing operations is summarized below:

<TABLE>
                                            1997          1996         1995
                                          --------     ---------     --------
<S>                                       <C>          <C>           <C>
U.S. Federal-
 Current                                  $690,916     $ 581,467     $390,008
 Deferred                                   57,829      (166,115)      (8,735)
                                          --------     ---------     --------

                                           748,745       415,352      381,273
State                                      204,519       111,819       93,132
                                          --------     ---------     --------

  Total                                   $953,264     $ 527,171     $474,405
                                          --------     ---------     --------
                                          --------     ---------     --------
</TABLE>

The results of the discontinued operation for the year ended December 31,
1996, include a tax benefit of $747,324.

Deferred tax liabilities (assets) at December 31, 1997 and 1996, are composed
of the following:

<TABLE>
                                                           1997         1996
                                                        ---------     ---------
<S>                                                     <C>           <C>
Net current deferred tax asset:
 Allowance for doubtful accounts                        $(133,660)    $(134,273)
 Accrued liabilities                                      (58,564)     (105,180)
 Deferred taxable revenue, short-term                       4,848        28,375
 Customer list, net of amortization, short-term            26,667          -
                                                        ---------     ---------

                                                         (160,709)     (211,078)
                                                        ---------     ---------

Net non-current deferred tax liability:
 Accelerated depreciation                                  42,515       (69,748)
 Customer list, net of amortization, long-term            317,333       372,000
 Deferred taxable revenue, long-term                         -            4,848
                                                        ---------     ---------

                                                          359,848       307,100
                                                        ---------     ---------

 Total deferred taxes                                   $ 199,139     $  96,022
                                                        ---------     ---------
                                                        ---------     ---------
</TABLE>

In the following table, the U.S. Federal income tax rate is reconciled to the
Company's 1997, 1996 and 1995 effective tax rates from continuing operations
for income as reflected in the consolidated statements of income.

<TABLE>
                                                 1997       1996      1995
                                                 -----      -----     -----
<S>                                              <C>        <C>       <C>
U.S. statutory rate                              34.0%      34.0%     34.0%
 Increases resulting from-
  State income taxes                              6.1        6.1       5.4
  Goodwill amortization                           1.5        2.9       1.2
  Other                                           0.2        0.4       0.7
                                                 ----       ----      ----

                                                 41.8%      43.4%     41.3%
                                                 ----       ----      ----
                                                 ----       ----      ----
</TABLE>

                                     F-16
<PAGE>

9. COMMITMENTS AND CONTINGENCIES:

CONTINGENT LIABILITIES

Incidental to its business, the Company from time to time is sued by
individuals who have tested positive for drugs of abuse, generally arising
from LSI's alleged failure to properly administer drug urinalysis tests.  LSI
is currently a defendant in several such lawsuits.  Based upon prior
successful defense of similar-type lawsuits, the Company believes it has
valid defenses to each of such lawsuits, and intends to vigorously defend
itself in such actions. Although LSI maintains insurance to protect itself
against such liability, and LSI's insurance carriers have assumed the defense
of LSI in connection with certain actions, the extent of such insurance
coverage is limited, both in terms of types of risks covered by the policies
and the amount of coverage.  In the opinion of the Company's management and
its legal counsel, these suits and claims should not result in judgments or
settlements which would have a material adverse effect on the Company's
results of operations or financial position.  Although LSI has not
experienced any material liability related to such claims, there can be no
assurance that LSI, and possibly LSAI, will not at some time in the future
experience significant liability in connection with such claims and such
liability may exceed the extent of such insurance coverage, both in terms of
risks covered by the policies and the amount of coverage, which could have a
material effect on the results of operations and financial condition of the
Company.

CERTIFICATION

The Company's laboratory is certified by the Substance Abuse and Mental
Health Services Administration ("SAMHSA"), the successor to the National
Institute on Drug Abuse, as well as certain state and local jurisdictions.
Certification by SAMHSA is essential to the Company's business, as certain
clients are required to use certified laboratories, and many of its clients
look to certification as an indication of reliability and accuracy of tests.
In order to remain certified, the Company is subject to frequent inspections
and proficiency tests.  Failure to meet any of the numerous certification
requirements could result in suspension or loss of certification.  Such
suspension or loss of certification could have a material adverse effect on
the Company.

EMPLOYMENT AGREEMENTS

LSAI has written employment agreements with its President and its Chief
Executive Officer which provide, among other things, the following: (i) a
term of four years from April 16, 1996, which automatically extends one
additional year after each year of service; (ii) a base salary of $112,500
each; (iii) bonuses at the discretion of the Board of Directors not to exceed
10 percent of the net income of LSAI; (iv) eligibility for stock options
under LSAI's stock option plans (see Note 10); and (v) health and disability
insurance benefits and life insurance of $500,000.  Subsequent to December
31, 1997, these agreements were verbally amended to increase the base salary
to $114,750 each. The agreements also restrict the right to participate in
other activities outside of LSAI to the extent such activities conflict with
the ability to perform duties and that would violate duty and loyalty to LSAI.

LSI has a written employment agreement with its President which provides,
among other things, the following: (i) a term of four years from April 16,
1996, which automatically extends one additional year after each year of
service; (ii) a base salary of $125,000, (iii) a bonus equal to 10 percent of
the pre-tax income of LSAI, not to exceed $50,000; (iv) eligibility for stock
options under LSAI's stock option plans (see Note 10); and (v) health and
disability insurance benefits and life insurance of $1,000,000.  Subsequent
to December 31, 1997, this agreement was verbally amended to increase the
base salary to $127,500.  The agreement requires the President to devote his
full time and attention to the business of LSI.

                                     F-17
<PAGE>

LSI has verbal employment agreements with five key employees which provide,
among other things, the following: (i) bonuses equal to one percent of the
pre-tax income of LSI or equal to one percent of the net income of LSAI; (ii)
other bonuses at the discretion of the Board of Directors; (iii) eligibility
for stock options under LSAI's stock option plans (see Note 10); and (iv)
eligibility for health, disability and life insurance benefits on the same
terms as other employees.  Additionally, LSI has a written employment
severance agreement with one of these employees providing for salary
continuation for a period of twelve months upon termination for any reason
other than cause.  The agreements require the five key employees to devote
their full time and attention to the business of LSI.

JUDICIAL DECISIONS AND GOVERNMENT POLICY

Employee drug testing by federal agencies and certain private employers is
subject to regulation by certain federal agencies.  Legislation currently
exists in a number of states regulating the circumstances under which
employers may test employees and the procedures under which such tests must
be conducted. In addition, the circumstances under which drug testing can
legally be required by employers is subject to court precedent and judicial
review.

HAZARDOUS MATERIALS

Certain testing procedures employed by the Company require the use of
hazardous materials.  Failure to comply with current or future federal, state
or local environmental laws or regulations could have a material adverse
effect on the Company.

10. STOCK OPTION PLANS:

LSAI established the 1994 Stock Option Plan (the "1994 Plan") on May 10,
1994. On October 30, 1996, the 1994 Plan was amended, and the total number of
shares of common stock authorized and reserved for issuance was increased
from 225,000 to 425,000.  The 1994 Plan provides for the issuance of both
incentive stock options ("ISO Options") and nonqualified stock options with
or without stock appreciation rights ("SARs") to directors, executive
officers, key employees and independent contractors and consultants of the
Company and its subsidiaries.  ISO Options may be granted only to employees
of the Company and its subsidiaries.

On October 1, 1997, LSAI established the 1997 Non-Qualified Stock Option Plan
(the "1997 Plan"), with 400,000 shares of common stock authorized to be
granted.  The 1997 Plan provides for the issuance of non-qualified stock
options, with stock appreciation rights attached, to directors, executive
officers, key employees and independent contractors and consultants of the
Company and its subsidiaries.

The Board of Directors interprets both Plans and establishes certain
committees to administer the Plans.  These committees or the Board of
Directors have authority to grant options to all eligible employees and
determine the types of options granted, with or without SARs, the terms,
restrictions and conditions of the options at the time of grant, and whether
SARs, if granted, are exercisable at the time of the exercise of the option
to which the SAR is attached.  Under both Plans, the option price of the
common stock is determined by the Board of Directors or the various
committees.  The price may not be less than 85% of the fair market value of
the shares on the date of the grant of the option, with the exception of ISO
options, which may not be less than the fair market value of the shares on
the date of grant.  The Company's stock options are fixed-price options
generally granted at the fair market value of the underlying common stock on
the date of grant.  Generally, the options vest and become exercisable six
months from the grant date and expire five to ten years after the grant date.

                                     F-18
<PAGE>

The following table shows the activity for options issued under the Plans as
well as other options issued:

<TABLE>
                                                                 1994 Plan
                                                          and Other Options Issued           1997 Plan
                                                         --------------------------   ------------------------
                                                                      Weighted                    Weighted
                                                                       Average                     Average
                                                                    Exercise Price              Exercise Price
                                                          Options     Per Option      Options     Per Option
                                                         --------     ----------      -------     ----------
<S>                                                      <C>        <C>               <C>       <C>
  Balance outstanding December 31, 1994                      -             -              -            -
   Options granted                                        125,000         3.00            -            -
                                                         --------                      -------
  Balance outstanding December 31, 1995                   125,000         3.00            -            -
   Options granted                                        185,000         2.75            -            -
                                                         --------                      -------
  Balance outstanding December 31, 1996                   310,000         2.85            -            -
   Options cancelled                                     (250,000)        2.82            -            -
   Options granted                                        250,000         2.00         340,000        3.18
   Options exercised                                       (7,500)        2.00            -            -
                                                         --------                      -------
  Balance outstanding December 31, 1997                   302,500         2.20         340,000        3.18
                                                         --------                      -------
                                                         --------                      -------
   Options exercisable-
    December 31, 1995                                      10,000         3.00            -            -
    December 31, 1996                                     125,000         3.00            -            -
    December 31, 1997                                     302,500         2.20            -            -
</TABLE>

Following is the range of exercise prices, the weighted-average remaining
life of all stock options outstanding at December 31, 1997, and the
weighted-average price within each price range of those options outstanding
and those options exercisable at December 31, 1997.

<TABLE>
                                                             Options Exercisable at
        Options Outstanding at December 31, 1997               December 31, 1997
---------------------------------------------------------   -----------------------
                              Weighted-
                               Average       Weighted-                 Weighted-
                              Remaining       Average                   Average
           Exercise Price    Contractual   Exercise Price            Exercise Price
 Options     Per Option      Life (Years)    Per Option     Options    Per Option
 -------   --------------    ------------  --------------   -------  --------------
<S>        <C>               <C>           <C>              <C>      <C>
 242,500       $2.00             9.3           $2.00        242,500       $2.00
  60,000        3.00             2.9            3.00         60,000        3.00
 340,000        3.18             9.8            3.18           -            -
 -------                                                    -------
 642,500     2.00-3.18           8.9            2.72        302,500        2.20
 -------                                                    -------
 -------                                                    -------
</TABLE>

SFAS No. 123, "Accounting for Stock-Based Compensation," prescribes a fair-
value method of accounting for employee stock options under which compensation
expense is measured based on the estimated fair value of stock options at the
grant date and recognized over the period that the options vest.  The Company
will continue to account for its stock option plans under the optional
intrinsic value method of APB No. 25, whereby no compensation expense is
recognized for fixed-price stock options with a grant price equal to or in
excess of the fair market value of the underlying stock at the grant date.  Had
compensation expense been determined in accordance with SFAS No. 123, the
estimated weighted-average, grant-date fair value would have been $0.94, $1.14
and $1.23 per option

                                      F-19
<PAGE>

for those options granted in 1997, 1996 and 1995, respectively, and the
resulting compensation expense would have reduced net income and earnings per
share as shown in the following pro forma amounts. These amounts may not be
representative of compensation expense that might be expected to result in
future years using the fair-value method of accounting for employee stock
options, as the number of options granted in a particular year may not be
indicative of the number of options granted in future years.

<TABLE>
                                               1997         1996        1995
                                            ----------   ---------    --------
<S>                                         <C>          <C>          <C>
Net income (loss) available for
 common stockholders:
 As reported                                $1,329,103   $(585,711)   $661,216
 Pro forma                                   1,053,706    (673,516)    614,771

Earnings (loss) per share:
 Basic, as reported                         $     0.36   $   (0.18)   $   0.20
 Diluted, as reported                             0.31       (0.15)       0.17
 Basic, pro forma                                 0.29       (0.20)       0.19
 Diluted, pro forma                               0.24       (0.17)       0.16
</TABLE>

The fair value of each option granted in 1997, 1996 and 1995 was estimated as
of the grant date using the Black-Scholes option pricing model with the
following weighted-average assumptions:

<TABLE>
                                        1997           1996           1995
                                        ----           ----           ----
<S>                                     <C>            <C>            <C>
Expected life (years)                     5              5              5
Risk-free interest rate                   6%             6%             6%
Expected dividend yield                   -              -              -
Expected volatility                      38%            35%            35%
</TABLE>

11. COMMON STOCK WARRANTS:

In connection with the Company's public offering on October 11, 1994, the
Company issued 660,000 warrants.  No warrants had been exercised at December
31, 1996.  Until April 15, 1997, each warrant could be exercised to purchase
two shares of common stock for $3.50 per share.  After April 15, 1997, each
warrant could be exercised to purchase two shares of common stock for $2.00
per share.  On September 3, 1997, LSAI gave notice to the holders of these
warrants of the Company's election to redeem the outstanding warrants at
$0.01 each on October 14, 1997, unless extended, at the sole discretion of
the Company, to a date not later than November 7, 1997 (the "Warrant
Redemption").  As a result, 658,290 of the warrants were exercised in
September and October 1997, and the remaining 1,710 warrants were redeemed.

As a portion of the public offering underwriting compensation, the Company also
issued warrants to purchase 66,000 units at $7.32 per unit, consisting of two
shares of common stock and one warrant for two additional shares of common
stock, exercisable during a four-year period commencing on October 11, 1995
(the "Underwriter Warrants").  The warrants included within each unit were
exercisable under the same terms as the warrants issued in connection with the
public offering as described above.  As a result of the Warrant Redemption,
62,000 of these warrants were exercised for $0.12 per warrant plus $2.00 per
share in September and October 1997, and the remaining 4,000 warrants were
redeemed.  After the Warrant Redemption, the holders of the Underwriter
Warrants continue to have the right to exercise the Underwriter Warrants with
respect to the two shares of common stock comprising the unit for $7.20.  In
November 1997, 30,000 of the Underwriter Warrants were exercised with respect
to the two shares of common stock comprising the unit for $7.20.  The

                                     F-20
<PAGE>

remaining 36,000 of the Underwriter Warrants with respect to the two shares
of common stock had not been exercised and were outstanding at December 31,
1997.  The proceeds from the exercise of all warrants during 1997 are
included in "net proceeds from exercise of warrants and stock options" in the
accompanying consolidated statement of cash flows and was approximately $2.7
million, net of commissions and other offering expenses.

In connection with the Warrant Redemption, LSAI issued warrants to purchase
144,058 shares of common stock to various investment bankers as a portion of
their compensation for serving as managers of the Warrant Redemption and
certain other services.  These warrants have an exercise price per share of
$2.20 and expire on October 14, 2000.  Both the number of shares and the
exercise price per share are subject to adjustment under certain
circumstances. The value of these warrants, recognized as compensation paid
to the investment bankers for services provided, was treated as a reduction
in the recognized net proceeds to the Company from the Warrant Redemption.
The value of the outstanding warrants is included in paid in capital in
excess of par and entirely offsets the recognized compensatory value of the
warrants, resulting in no net effect on stockholders' equity.















                                      F-21