SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                   FORM 10-KSB

(Mark One)

[X]      ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
         OF 1934 [Fee Required]

[ ]      TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
         EXCHANGE ACT OF 1934 [No Fee Required] For the transition period from
         _________________ to _________________

For the fiscal year ended: DECEMBER 31, 1995     Commission File Number: 0-13092

                              SPECTRASCIENCE, INC.
                 (Name of small business issuer in its charter)

       MINNESOTA                                         41-1448837
(State of incorporation)                    (I.R.S. Employer Identification No.)


             5909 BAKER ROAD, SUITE 580, MINNETONKA, MINNESOTA 55345
                               TEL: (612) 931-9000
          (Address and telephone number of principal executive offices)

Securities registered under Section 12(b) of the Exchange Act: NONE
Securities registered under Section 12(g) of the Exchange Act: COMMON STOCK,
                                                                $.25 PAR VALUE

Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
YES _X_     NO ___

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

Issuer's revenues for its fiscal year ended December 31, 1995, were: $134,652

The aggregate market value of the voting stock held by non-affiliates of the
registrant as of February 14, 1996 was approximately $20,534,836 based on the
average of the bid price of $6.50 and the ask price of $7.50 per share.

The number of shares of the Registrant's Common Stock outstanding on February
14, 1996 was 2,933,548.

                       DOCUMENTS INCORPORATED BY REFERENCE

Documents incorporated by reference herein: Portions of the (1) definitive Proxy
Statement for its 1996 Annual Meeting of Shareholders and (2) Form S-3
Registration Statement, to be filed with the Securities and Exchange Commission
on or before February 28, 1996 are incorporated herein by reference in Part III.
Transitional Small Business Disclosure Format (Check one): Yes ___ No _X_



                              SPECTRASCIENCE, INC.

                                   FORM 10-KSB

                   FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995

                                TABLE OF CONTENTS


                                                                           Page
                                     PART I

Item  1.  Description of Business............................................ 3

Item  2.  Description of Properties.......................................... 8

Item  3.  Legal Proceedings.................................................. 8

Item  4.  Submission of Matters to a Vote of Security Holders................ 9

                                     PART II

Item  5.  Market for Common Equity and Related Shareholder Matters........... 9

Item  6.  Management's Discussion and Analysis of Financial Condition and
              Results of Operations..........................................10

Item  7.  Financial Statements and Supplemental Data.........................12

Item  8.  Changes In and Disagreements With Accountants On Accounting and
              Financial Disclosure...........................................12

                                    PART III

Item  9. Directors, Executive Officers, Promoters and Control Persons; 
             Compliance with Section 16(a) of the Exchange Act...............12

Item 10. Executive Compensation..............................................13

Item 11. Security Ownership of Certain Beneficial Owners and Management......15

Item 12. Certain Relationships and Related Transactions......................15

Item 13. Exhibits, Financial Statement Schedules and Reports on Form 8-K.....16

Signatures...................................................................18



                              SPECTRASCIENCE, INC.
                                   FORM 10-KSB

                   FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995

                                     PART I


ITEM 1.      DESCRIPTION OF BUSINESS

(a)  BUSINESS DEVELOPMENT

GENERAL

         SpectraScience, Inc. (the "Company" or "SpectraScience"), is a
market-driven company which utilizes its expertise in the underlying core
technologies of spectroscopy, fiber optics, computer software and hardware, and
minimally-invasive medical delivery systems to design, develop, manufacture and
market medical products for the diagnosis and facilitation of treatment of a
broad range of human diseases.

         The Company was incorporated in the state of Minnesota on May 4, 1983
as GV Medical, Inc. Subsequently the Company changed its name to SpectraScience,
Inc. on October 16, 1992, which was approved by the shareholders on May 13,
1993.

         The executive offices of the Company are located at 5909 Baker Road,
Suite 580, Minnetonka, Minnesota 55345. Its telephone number is (612) 931-9000
and its fax number is (612) 933-9090.

         The Company declared a one-for-five reverse split of its common stock
effective June 30, 1994. As a result, the stated par value of the common stock
was increased from five cents ($.05) to twenty-five cents ($.25) per share and
the number of authorized shares of common stock was reduced from 20,000,000
shares to 4,000,000 shares (the "Common Stock"). The changes did not adversely
affect the rights or preferences of the holders of the Company's outstanding
Common Stock.

         In 1995, the Company raised a net total of $5,491,625 through the
completion of two private placements of preferred stock ("Private Placements"),
including the conversion of $525,000 of non-interest bearing bridge loans
("Bridge Loans") outstanding. A total of 1,467,498 shares of preferred stock,
par value $1.00, which are convertible to Common Stock, were sold to investors,
and warrants to purchase 796,508 shares of Common Stock ("Warrants"), were
issued to investors, lenders and selling agents. The Warrants, if exercised,
will raise a total of $4,900,213 for the Company. (Please refer to Item 5(d)
"Other Securities" for additional details.)

         Proceeds from the Private Placements will be applied to accelerate
product development, conduct clinical trials, conduct studies on alternative
medical applications, expand the scope of the Company's international and future
domestic sales and marketing activities and for general corporate purposes,
including working capital.

(b)  BUSINESS OF THE COMPANY

             The Company initially pursued the development, manufacture and sale
of laser-enhanced angioplasty catheter systems for the treatment of heart and
blood vessel disease through 1989, by focusing on its LASTAC(R) ("LASTAC")
system. In April 1990, the Company developed a new laser angioplasty system,
known as the Laser Angiosurgery System ("LAS"), in conjunction with
Massachusetts Institute of Technology ("MIT") and Cleveland Clinic Foundation
("CCF"), which utilized laser induced fluorescence spectroscopy for the
diagnosis of the nature of tissue, and a unique catheter which allowed selective
removal of only diseased tissue. In 1992, the Company changed its name to
SpectraScience, Inc. and refocused its development efforts on a new diagnostic
product for cardiovascular applications, the Spectroscopic Guidewire(TM) System
("SGS"). The Company is also currently developing a similar product for cancer
detection, called the Optical Biopsy(TM) System ("OBS").

PRODUCTS AND MARKETS

         Both the SGS and OBS (the "System(s)") are comprised of three
components, two of which are the Spectroscopic Diagnostic System console (the
"Console") and the proprietary system software (the "Software").

         The third component of the SGS is a disposable optical core
Spectroscopic Guidewire (the "Guidewire") which also functions both mechanically
as a conventional coronary guidewire and optically in the transmission and
collection of light energy when connected to the Console.

         The third component of the OBS is a disposable optical biopsy forceps
(the "Forceps") utilized in non-cardiovascular applications, instead of the
Guidewire.

         The target markets for the Systems are as follows:

(a) The SGS is currently targeted for the detection of intracoronary thrombus
and differentiation of atherosclerotic plaque.

         The primary market for this application is hospitals with
cardiovascular programs, both in the United States and overseas. Currently the
market size for all percutaneous transluminal coronary angioplasty ("PTCA")
procedures worldwide is estimated to be about 950,000 procedures worldwide, or
$1.3 billion. Slightly more than half of these procedures are performed at about
1,000 centers in the United States, 200 of which perform about 65% of the total
procedures in the United States. The number of PTCA procedures is growing
rapidly with the introduction of intracoronary stents that have been found to
reduce the rate of restenosis (i.e. reestablishment of blockage) in PTCA
procedures. The Company believes that the SGS would be able to provide
additional knowledge of the composition of plaque and detect the presence of
thrombus which may help the cardiologist select the most appropriate
cost-effective lesion-specific angioplasty modality. In addition, the use of the
SGS may offer significant benefits to the patient in terms of maximizing success
rate, minimizing complications and improving long-term patient outcomes. 

(b) The OBS is currently targeted for the detection and differentiation of
cancerous, pre-cancerous and healthy tissues.

         The Company will initially target the detection and differentiation of
cancer in the gastro-intestinal tract using minimally invasive endoscopic and
laparoscopic techniques. There are approximately 165,000 new cases of
gastro-intestinal cancer detected annually. The current method of detection is
through biopsies, which entails the insertion of an endoscope with a pair of
biopsy forceps, to harvest tissue samples to be analyzed in the pathology
laboratory. Both the physician and patient have to wait approximately two weeks
to obtain confirmation of results. The Company believes that the OBS could
potentially offer immediate feedback to the doctor with this application thereby
possibly reducing cost in biopsies and waiting time. The annual expenditure on
cancer screenings has been estimated to be between $3-$4 billion annually in the
United States alone. These include Pap smears, mammograms and colorectal exams.
Other areas that are also targeted by the Company include the detection of
cancer in the lung, bladder, prostate, and cervix. Direct annual expenditures in
the treatment of lung cancer and prostate cancer are approximately $5 billion.

DISTRIBUTION, MARKETING AND CUSTOMERS

         The Company intends to build an in-house marketing department to
commercialize the Company's products worldwide and to provide clinical education
to physicians, nurses, and laboratory technicians. This department will consist
of marketing and clinical education personnel.

         For cardiovascular applications in international markets, marketing and
distribution will be serviced by a strong strategic partner. To this end, in
August 1994, the Company and SCIMED Life Systems, Inc. ("SCIMED"), a company
which became a wholly-owned subsidiary of Boston Scientific Corporation
(NYSE:BSX) in February 1995, signed a three-year exclusive international
distribution agreement to distribute the SGS. SCIMED and Boston Scientific
Corporation ("BSC") are world leaders in the field of angioplasty and have a
strong subsidiary network throughout the world. There is no assurance that
SCIMED will be able to perform its role successfully. The Company's product is
one of many products that SCIMED or BSC, sells worldwide.

         On August 14, 1995, the Company received the European Community
Certificate of Conformity from the TUV Product Service GmbH, Munich, Germany,
for the SGS. The TUV Product Service GmbH is a designated Competent Body in
accordance with the Council Directive on the harmonization of the laws of the
member countries of the European Community. This enabled the Company to put the
Conformite Europeane ("CE") mark on the SGS systems that the Company sells in
Europe. The CE mark is recognized worldwide as an assurance of product quality
and the Company believes that it will enhance market penetration in the European
markets.

         For cardiovascular applications in the United States, the Company will
focus its marketing efforts on approximately 200 interventional cardiology
centers that perform a majority of the coronary angioplasty procedures. The
Company is currently in negotiations with possible strategic partners for the
distribution of the Company's products in the United States, once future
regulatory approval is obtained.

         The Company is currently exploring various strategies for the
distribution of the Company's products worldwide for non-cardiovascular
purposes. These strategies may include forming the Company's own sales
organization or selling through distributors in various territories or a
combination of both of these strategies.

COMPETITION

         The Company has no direct competitors in cardiovascular spectroscopic
diagnostics. While there are no similar products, the potentially competing
technologies presently in the cardiovascular market are intravascular ultrasound
imaging ("IVUS") and angioscopy. Companies currently marketing products
utilizing IVUS technology are Cardiovascular Imaging Systems/CVIS (Sunnyvale,
California), a wholly-owned subsidiary of BSC, Endosonics (Pleasanton,
California) and Hewlett Packard (Milpitas, California). Companies marketing
products based upon angioscopy technology are Baxter-Edwards (Irvine,
California), Olympus (Rye, New York) and A.D. Krauth (Germany).

         Several prominent universities and medical institutions have basic
research projects involving "in-vivo" spectroscopic diagnostics. There is a
growing interest in the application of spectroscopic diagnostics for other
medical specialties, though few products, if any, have been commercialized. The
Company believes that Mediscience (New Jersey), Xillix (Canada) and Lifespex
(Texas) are development stage companies utilizing spectroscopic diagnostic
techniques for the identification of cancerous tissue.

MANUFACTURING AND SOURCES OF SUPPLY

         The SGS is comprised of three components: the Console, the Software,
and the Guidewire. The OBS is comprised of the Console, the Software, and the
Forceps.

         The basic assembly of the Console is completed by an outside
contractor. The Software is developed in-house in conjunction with outside
consultants. The Guidewire is produced by another contract manufacturer that is
experienced and specialized in the manufacture of medical guidewires and related
products. The Forceps is still in the design and pilot stage. The Company then
assembles certain proprietary components, inspects and tests the completed
Systems at the Company's facility.

         There are risks involved in having sole sources of supply for the basic
assembly of the Console, and also the manufacturing of the Guidewire. While the
performance of these manufacturers have been satisfactory to-date, there is no
assurance that they will continue to perform up to the Company's high standards,
meet governmental regulations and handle labor unrest, if any. Any shortfalls in
the ability of these contract manufacturers to meet standards and regulations
could severely impact the Company's ability to test and sell its products.

         The Company purchases many components from various suppliers that are
either standard components or are built to the Company's proprietary
specifications. In addition, the Company contracts with third parties to perform
certain manufacturing processes. Most of the purchased components and processes
are available from more than one vendor. Any supply interruption would have a
material adverse effect on the Company's ability to sell its products and could
have an adverse effect on the Company's business, financial condition and
results of operations. Although the Company is in the process of identifying
alternative vendors, the qualification of additional or replacement vendors for
certain components or services is a lengthy process, especially in the heavily
regulated medical device industry.

PATENTS

         The Company has 8 United States and 16 foreign patents issued in 1994.
In 1995, the Company was issued 2 new patents in the United States, entitled
"Guidewire Catheter and Apparatus for Diagnostic Imaging" (Patent No. 5383467)
and "Method of Diagnosing Tissue with Guidewire" (Patent No. 5439000). The
Company expects to file additional patent applications in 1996. There is no
assurance that any additional patents will be issued, or if issued, that such
patents will afford the Company any competitive advantage.

         In addition to the above, the Company also has an exclusive licensing
agreement with MIT for 31 issued patents and pending applications, relative to
the use of spectroscopy for the diagnosis of atherosclerotic cardiovascular
disease. This licensing agreement runs for the life of the patents and includes
technology developed under National Institute of Health funding.

         The Company also has a licensing arrangement with the Massachusetts
General Hospital's Wellman Laboratory of Photomedicine ("Wellman Lab"). Any
patents that result from the Wellman Lab's research on cancer detection will be
licensed exclusively to the Company. There are currently 2 pending patent
applications in this area.

         In 1989, the Company entered into a licensing agreement with the Patlex
Corporation ("Patlex"), which holds a number of laser patents granted in the
name of Mr. Gordon Gould, which involves the payment to Patlex of a nominal
license fee. Currently, the Company's Systems do not utilize any components or
technology that would entail the payment of any license fees to Patlex.

         The Company believes its patent position to be strong and will assist
the Company in its research and development and marketing efforts.

INDUSTRY ECONOMICS

         In the United States, the market for the Company's products are medical
institutions. The health care services that they provide to their patients are
paid by various third-party payers, such as Medicare, Medicaid, other government
programs and private insurance plans. Medicare and Medicaid determine whether a
particular procedure should be covered. Hospitals are reimbursed for medical
procedures at a fixed rate according to Diagnosis Related Groups ("DRG's")
established by the Health Care Financing Administration ("HCFA"). The fixed rate
of reimbursement is based on the procedure performed and is typically unrelated
to the specific devices used in that procedure. If a procedure is not covered by
a DRG, payers may deny reimbursement. In addition, payers may deny reimbursement
if they determine that the device used in a treatment was unnecessary,
inappropriate, experimental, used for a non-approved indication, or not
cost-effective.

         Currently, there are no established DRG's covering spectroscopic
diagnostic procedures for either cardiovascular or cancer detection procedures.

         Although reimbursement for PTCA procedures is covered under a DRG, the
amount of reimbursement is fixed. Therefore, the profit relating to the
procedure would be reduced to the extent the physician performs additional
procedures such as spectroscopic diagnostics. Nevertheless, the additional
information provided by the SGS may help physicians select the appropriate
treatment method, potentially reducing the number of therapeutic catheters used
during a PTCA procedure which would produce a more effective result.
Accordingly, physicians must determine that the clinical benefits of the SGS
justify the additional cost.

         Governmental prospective reimbursement programs, which provide fixed
reimbursement based on DRG's, provide economic incentives for health care
institutions to reduce operating costs by being more efficient and productive.
For every illness to be treated or procedure to be performed, only an average
rate will be reimbursed. Therefore, the more cases that can be treated below the
designated rate with less major surgery and shorter hospitals stays, the higher
the level of profitability.

         Capital costs for medical equipment purchased by hospitals are
reimbursed separately from DRG payments. Therefore, the market for the Company's
products could be adversely affected by changes in governmental and private
third-party payers' policies or by federal legislation that reduces
reimbursements under the capital cost pass through systems for the Medicare
program for capital equipment, such as the Company's Systems.

         Certain trends are emerging in the medical device industry. These are
outlined below:

(a)  Emphasis on lower cost of medical procedures.

         This has led to increasing use of capitation pricing (i.e. fixed price
for one procedure, rather than the number of disposables or hospital supplies
used), and consignment sales from many hospital suppliers. It is possible that
this trend could accelerate and thereby affect the Company's selling strategies.

(b)  More strident views on Medicare reimbursements.

         This could lead to cuts in reimbursements for new procedures or
experimental procedures, which would affect the ability of smaller companies
with new technologies, like SpectraScience, to compete with larger established
firms. 

(c) Emergence of dominant vendors to hospitals.

         There is a trend towards consolidations in the medical device industry.
It appears that the ability of vendors to offer a range of products is important
to gain entry to hospitals, whether it be competition for shelf space or on the
basis of price. The spate of acquisitions by BSC exemplifies this trend. BSC in
1995 alone has acquired SCIMED, CVIS Corp, Meadox, and Heart Technology. The
pending acquisition of Cordis by Johnson & Johnson, which currently has the most
widely accepted intravascular stent in the market, is another example. 

(d) Food and Drug Administration ("FDA") emphasis on clinical safety as well as
economic utility.

         It is possible that this could lead to less advances in innovative
developmental technologies which will need to prove economic advantages
up-front.

(e)  Foreign governmental issues.

         These could potentially get more difficult, again with the emphasis on
costs and reimbursement levels. Other regulations such as import tariffs, duties
and taxes could severely impact the Company's ability to compete and enter those
foreign markets.

GOVERNMENT REGULATIONS

         The Company's development, manufacturing and marketing activities are
subject to regulation by numerous governmental authorities in the United States
and other countries, particularly regarding safety and efficacy. In the United
States, medical device products are subject to approval and review by the Food
and Drug Administration ("FDA"). The Food, Drug, and Cosmetic Act, as amended by
the Safe Medical Devices Act of 1990, and modified by the Medical Device
Amendments of 1992, the Public Health Service Act and other federal statutes and
regulations, govern or influence the testing, manufacture, safety, labeling,
storage, record keeping, approval, advertising and promotion of such products.

         In order to obtain FDA approval of a new medical device, the Company
must submit either a pre-market notification (510(k)) or Pre-Market Approval
("PMA") application. Receipt of 510(k) clearance normally takes at least three
months and may require the submission of clinical safety and efficacy data.

         For cardiovascular applications, the SGS will require clinical trials
on humans to prove the safety and efficacy of the product. The Company received
an Investigational Device Exemption ("IDE") from the FDA on December 5, 1995,
which allowed the Company to begin its clinical trials at two clinical sites
with 15 patients each. These clinical trials began January 1996 and will require
approximately three months to complete.

         For cancer detection, the Company will be starting clinical testing of
the OBS before the end of the second quarter 1996 at Wellman Lab.

         If the FDA determines that the SGS is a "new" system (as opposed to
being "substantially equivalent" to what already existed in the market
pre-1976), then it will require a more rigorous review and approval process
through a full PMA application. The full PMA review and approval process
generally takes more than a year to complete from the date of filing and there
can be no assurance if or when a PMA may be approved.

         There can be no assurance that FDA clearance for these products, any
future product or any modification of an existing product will be granted, or
that the process will not be unduly lengthy.

         Clinical testing is also taking place in Europe. International sales of
the Company's products are subject to regulatory agency requirements of each
country. The regulatory review process varies from country to country. There can
be no assurance, however, that such approvals will be obtained on a timely basis
or at all.

         The Company is required to register as a medical device manufacturer
with the FDA and state agencies. As such, the Company and/or its contract
manufacturers are inspected on a routine basis by the FDA for compliance with
the FDA's Good Manufacturing Practices ("GMP") regulations and various FDA
requirements for labeling. These regulations require that the Company
manufacture its products and maintain its documents in a prescribed manner with
respect to manufacturing, testing and control activities. One of the Company's
contract manufacturers was audited by the FDA in 1995 and no material
deficiencies were noted. Failure to comply with regulatory requirements could
have a material adverse effect on the Company's business, financial condition
and results of operations. The Company believes that it complies in all material
respects with such applicable regulations; however, failure to comply could
subject the Company to fines or other enforcement actions.

         The Company is also subject to other federal, state and local
regulations regarding environmental protection and hazardous substance controls,
among others. To-date, the costs or effects of compliance with federal, state
and local environmental laws are routine and customary for a development stage
medical device company.

PRODUCT RESEARCH AND DEVELOPMENT

         During the years ended December 31, 1995, 1994 and 1993, the Company's
research and development expenditures were $660,504, $869,670 and $1,363,795,
respectively.

         The Company's product research and development is focused on finalizing
the design of the Console that incorporates the Guidewire, and to continue
clinical research and gain FDA regulatory approval in the United States. As the
Company is seeking regulatory approval of the first generation SGS, it is
anticipated that the Company will continue to enhance the Systems, focusing on
other medical applications. The Company will also continue research and
development in tissue recognition algorithms and analysis software for
diagnostic spectroscopy in order to further advance the technology and enhance
the effectiveness of its innovative products.

EMPLOYEES

         As of December 31, 1995, the Company's full-time work force consisted
of seven employees; four of whom were engaged in product design and development
and manufacturing, and the remaining three were engaged in marketing, management
and general finance and administration. The Company also relies on external
consultants in the areas of regulatory, software development and others. The
Company has been successful in attracting and retaining qualified technical
personnel. There is no assurance, however, that the Company will be able to
attract or retain the skilled employees it requires for profitable operations.
The Company is not subject to any collective bargaining agreement and believes
that its employee relations are good.

ITEM 2.  DESCRIPTION OF PROPERTY.

         The Company's offices are located at 5909 Baker Road, Suite 580,
Minnetonka, Minnesota 55345. The facility consists of approximately 2,940 square
feet of office, laboratory, quality testing, and warehouse space. The lease
provides for monthly rental payments of $3,011 including a pro rata share of
operating expenses and real estate taxes. The lease expires in August, 1996. The
Company maintains adequate levels of standard property and casualty insurance
coverage on its property.

         The Company is seeking additional adjacent space to accommodate normal
expansion, failing which the Company might be forced to move. The Company
anticipates that it will need a total of about 6,000 square feet.

ITEM 3.  LEGAL PROCEEDINGS.

         There is no current, pending or on-going litigation which involves the
Company.

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

         There were no matters submitted to a vote of the security holders since
the 1995 annual meeting.

                                     PART II

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

(a)  MARKET INFORMATION

         The Common Stock had been traded in the over-the-counter ("OTC") market
and quoted on the National Association of Security Dealers Automated Quotation
System ("NASDAQ") Small-Cap Market since November 13, 1984. In September 1992,
the stock symbol was changed from "GVMI" to "SPSC". On March 21, 1994, the
Company's stock was delisted by NASDAQ for a two-week period. It was relisted
until June 9, 1994, and then was again delisted after NASDAQ denied the
Company's request for a further extension to the minimum bid price exception
previously granted. The stock symbol was then changed to "SPSI". The Common
Stock is currently being traded on the OTC Bulletin Board. The Company intends
to seek relisting on NASDAQ in 1996.

         On June 30, 1994, the Company had a 1 for 5 reverse stock split. The
following table sets forth (unadjusted for the reverse split in the quarters
ending March 31 and June 30, 1994), for the periods indicated, high and low bid
and ask prices as reported by NASDAQ and OTC Bulletin Board and also prices that
the Company obtained from third party sources, e.g. MetroData Services. To the
best of its knowledge, the Company believes that the information obtained from
these sources to be accurate.

<TABLE>
<CAPTION>
STOCK PRICES(1):                          1995                                             1994
(in $ per share)        High Bid   Low Bid     High Ask   Low Ask        High Bid   Low Bid     High Ask   Low Ask
Quarter Ended

<S>                     <C>        <C>         <C>        <C>            <C>        <C>         <C>        <C>  
March 31(2)             3.125      2           3.3125     2.25           0.75       0.125       1          0.625
June 30(2)              4.875      2.9375      5.25       3.125          0.625      0.0625      1          0.3125
September 30            6.125      3.5         6.375      4.25           3.75       0.375       4          0.625
December 31             7.625      4.625       8.375      5.125          3.5        1.625       4.125      1.875
</TABLE>

(1)      The prices of the Company's stock reflect inter-dealer prices and do
         not necessarily reflect the prices of actual transactions. The bid
         prices reflect prices without retail mark-up, mark-down or commission.

(2)      On June 30, 1994, the Company had a 1 for 5 reverse stock split. Stock
         prices in the quarters ending March 31 and June 30, 1994, were not
         adjusted to reflect this split.

         On February 14, 1996, the closing bid and ask prices quoted for the
Common Stock were $6.50 and $7.50, respectively.

(b)  HOLDERS

         On February 14, 1996, there were 720 holders of record of 2,933,548
shares of the Common Stock, excluding shareholders that are registered in
"street-names".

(c)  DIVIDENDS

         Since its incorporation, the Company has not paid any dividends, and no
dividend payments are contemplated in the foreseeable future. The Company will
retain any earnings it may generate to provide for the operation and expansion
of its business.

(d)  OTHER SECURITIES

         On September 30, 1994, the Company raised a total of $300,000 in Bridge
Loans. Lenders were given five-year Warrants to purchase 100,000 shares of
Common Stock exercisable at $3.00 per share. In the first fiscal quarter of
1995, the Company raised $225,000 in additional Bridge Loans with the same
terms. This group of lenders was given five-year Warrants to purchase 74,998
shares of Common Stock exercisable at $3.00 per share. The Bridge Loans were
converted to preferred stock in the Private Placement which closed on June 29,
1995. The total number of Warrants issued to Lenders were 174,998, which if
exercised would raise an additional $524,994 for the Company.

         Two Private Placements of convertible preferred stock with attached
Warrants were completed in 1995. Neither the shares of preferred stock nor the
Warrants are intended for trading in any official exchanges.

         The first Private Placement, which closed on June 29, 1995, involved
the placement with qualified investors of 674,998 shares of Series A Preferred
Stock ("Preferred A"), par value $1.00, at $3.00 per share. A net amount of
$1,965,000 was raised. Of this amount, $525,000 was from the conversion of
Bridge Loans on March 31, 1995. Preferred A shares are non-voting, do not yield
dividends or interests, and are convertible to an equivalent number of shares of
Common Stock, after March 31, 1996, but generally one year from the date of
receipt of funds. Each Preferred A share was issued with a three-year Warrant to
buy one-third share of Common Stock at a price of $5.00 per share. A total of
225,000 Warrants was issued to investors in this Private Placement, which if
exercised would raise an additional $1,125,000 for the Company.

         The second Private Placement, which closed on December 28, 1995,
involved the placement with qualified investors of 792,500 shares of Series B
Preferred Stock ("Preferred B"), par value $1.00, at $5.00 per share. A net
amount of $3,526,625 was raised. Preferred B shares are non-voting, do not yield
dividends, unless the holders of Common Stock fail to authorize sufficient
additional shares of Common Stock for the conversion of the Preferred B, and are
convertible to an equivalent number of shares of Common Stock on or after
December 28, 1996. Each Preferred B share was issued with a three-year Warrant
to buy one-third share of Common Stock at a price of $9.50 per share. A total of
264,175 Warrants was issued to investors in this Private Placement, which if
exercised would raise an additional $2,509,663 for the Company.

        In addition, the selling agent for Preferred A, R.J. Steichen & Co.,
received two Warrants: a five-year Warrant to purchase 20,000 shares of Common
Stock at $3.00 per share and a three-year Warrant to purchase 6,667 shares of
Common Stock at $5.00 per share. The selling agent for Preferred B, Miller,
Johnson & Kuehn, received a five-year Warrant to purchase 79,250 shares of
Common Stock at $5.00 per share and a conditional five-year Warrant to purchase
up to an additional 26,418 shares of Common Stock at $9.50 per share. If all the
Warrants issued to the selling agents were exercised, it would raise another
$740,556 for the Company.

         In all, there are a total of 1,467,498 preferred shares and 796,508
Warrants for the purchase of Common Stock outstanding.

         As of February 14, 1996, there were 842,072 stock options outstanding,
77.0% of which were held by employees.

ITEM 6.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
         RESULTS OF OPERATIONS.

         The following discussion and analysis provides information that the
Company's management believes is relevant to an assessment and understanding of
the Company's results of operations and financial condition. This discussion
should be read in conjunction with the financial statements and footnotes which
follow.

PLAN OF OPERATION

         In 1995, the Company raised a net total of $5,491,625 through the
completion of two Private Placements, including the conversion of Bridge Loans
outstanding. Proceeds from these Private Placements will be applied to
accelerate product development, conduct clinical trials, conduct studies on
alternative medical applications, expand the scope of the Company's
international and future domestic sales and marketing activities and for general
corporate purposes, including working capital.

         The Company believes that this cash will last about two years, and thus
does not believe it will have to raise additional funds in the next twelve
months.

         Due to acceleration of clinical studies and product development, the
Company expects to lease approximately 3,000 square feet of additional space. As
the current market for commercial space is tight, it is anticipated that the
Company will have to pay lease rates at least comparable to its current space,
or slightly higher.

         The Company anticipates adding two individuals, one with strong
disposable medical products research and development background and the other
with strong spectroscopy, software and systems development background, to
spearhead its development efforts. It is possible that the Company might add an
additional two to three people in manufacturing, probably one manufacturing
engineer and the other(s) technician(s), if it is beneficial for the Company to
bring certain aspects of the manufacturing process, currently contracted by
outside vendors, in-house.

RESULTS OF OPERATIONS

Revenue

         Gross revenue for the year ended December 31, 1995 was $134,652. This
compares favorably with $0 for 1994, and $35,002 in 1993.

Research and Development

         Research and development expenses in 1995 totaled $660,504 compared
with $869,670 1994 and $1,363,795 in 1993. The reduction in research and
development expenses primarily resulted from the reduction in the engineering
prototype materials used in the development of the SGS and payroll expenses due
to fewer people employed in research and development activities.

         In 1995, the Company signed a two-year research and development
agreement with Wellman Lab, to commence research on the detection and
differentiation of cancerous, pre-cancerous and healthy tissues. This agreement
called for the payment of approximately $50,000 per quarter to Wellman Lab. A
total of approximately $150,000 was expensed in 1995. The agreement expires in
March 1997.

         In the fourth quarter of 1993, the Company reduced the license fees
paid to MIT by renegotiating its patent licensing agreement, which allowed the
Company to retain exclusive rights to the MIT patents. The license fees paid to
MIT annually is currently $50,000 per year until 2003, after which it decreases
to $30,000 per year until the expiration of the licensed patents. The Company
also realized additional expense savings during the year with the elimination of
eight employees and lower purchases of materials for engineering prototypes.

Selling, General & Administrative Expenses

         Selling, general and administrative expenses in 1995 totaled $711,753,
compared with $701,278 in 1994, and $1,119,793 in 1993. The slight increase in
1995 was the result of the hiring of the Chief Financial Officer, who was
necessary to relieve the President in administrative matters, and enable the
President to focus on strategic business development, clinical studies and
international marketing. Nevertheless, the expenses in both 1995 and 1994 were
lower than 1993 because of a strong effort to curb costs through lower salary
expense resulting from fewer employees, reduced building rent due to significant
office space down sizing, and a lower asset base following the sale of unneeded
assets.

Interest and Other Income

         Interest and other income was $16,608 in 1995 compared to $66,468 in
1994, and $181,897 in 1993, principally due to a reduction in interest income
resulting from a decrease in cash balances coupled with a lower interest rate
environment. This was partially offset by a gain on the sale of unneeded assets.

Net Losses

         As a result of the above factors, the Company reported a net loss for
the year ended December 31, 1995 of $1,345,910 compared to $1,504,480 in 1994
and $2,443,006 in 1993. The loss per share was $.47 in 1995, $.55 in 1994 and
$.93 in 1993 (adjusted for splits).

LIQUIDITY AND SOURCES OF CAPITAL

         On December 31, 1995, the working capital (current assets less current
liabilities) of the Company was $4,231,371. The positive working capital
position compares favorably to a deficit of $280,271 in 1994. The increased
working capital in 1995 resulted from the Private Placements in 1995 (previously
discussed) and the conversion of Bridge Loans outstanding.

         Net cash used in operating activities was $1,399,518 in 1995, compared
with $1,593,130 in 1994 and $2,826,073 in 1993. This was achieved through a
combination of reduced operating expenses and asset levels. An increase in
accounts receivable and inventories in 1995 partially offset this result. Even
though net cash used in operating activities decreased from 1993 to 1994, it was
offset by a rapid increase in inventories which grew from $-0- to more than
$200,000.

         Net cash (used in) provided by investing activities was ($107,079) in
1995, $25,742 in 1994 and $60,614 in 1993. The positive cash generated in both
1994 and 1993 was due to the sale of unneeded assets for $56,540 in 1994 and
$78,609 in 1993. The expenditure for the purchase of fixed assets in 1995
reflected acquisition of more current equipment needed for research and
development purposes.

         Net cash provided by financing activities was $5,571,625 in 1995,
compared to $375,000 in 1994 and $3,230,814 in 1993. The increase in 1995 was
provided primarily in the Private Placements, and the exercise of stock options.
The 1995 amount only included $225,000 of the $525,000 Bridge Loans converted to
Preferred A, since $300,000 of the Bridge Loans was provided in 1994.

ITEM 7.  FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA

         Reference is made to the Report of Independent Auditors and Financial
Statements included in the Index to Financial Statements at Page F of this
Annual Report on Form 10-KSB.

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

         Not Applicable.

                                    PART III

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

         The directors and executive officers of the Company and their ages as
of February 14, 1996 are as follows:

<TABLE>
<CAPTION>
                                                                                                Served as Officer or
Name                             Age    Term        Title                                          Director Since
<S>                              <C>    <C>         <C>                                              <C> 
Brian T. McMahon(1)              42     1995/96     President, Chief Executive Officer and              1993
                                                    Director

Ching-Meng Chew(2)               39     1995/96     Vice President Finance and                          1995
                                                    Administration, Chief Financial Officer,
                                                    Treasurer, Secretary

Henry M. Holterman(3)            40     1995/96     Director                                            1992

Nathaniel S. Thayer(4)           71     1995/96     Director                                            1992

</TABLE>

(1)      BRIAN T. MCMAHON was elected Director, President and Chief Executive
         Officer in May, 1993, and assumed the position of Acting Chairman of
         the Board on May 27, 1994. Mr. McMahon joined the Company in the
         capacity of Executive Vice President and Chief Operating Officer in
         July, 1992, and prior to this, served as an independent consultant to
         the Company since May, 1992. Mr. McMahon held a succession of
         marketing, business development and sales management positions during a
         10-year career with a prominent medical device company, SCIMED, his
         last position there being the Director of Marketing and Business
         Development.

(2)      CHING-MENG CHEW joined the Company on August 30, 1995 as the Vice
         President of Finance and Administration. He also holds the titles of
         Chief Financial Officer, Treasurer and Secretary of the Company. Prior
         to joining the Company, Mr. Chew served SCIMED for three years, his
         last position as Treasurer. Prior to SCIMED, his background included
         eight years with Norwest Bank Minnesota, N.A., his last position being
         Vice President, International Banking, and a Master of Business
         Administration from the Wharton School, University of Pennsylvania.

(3)      HENRY M. HOLTERMAN is Managing Director of Reggeborgh Beheer BV, a
         company located in Netherlands that invests in companies and owns
         property projects generally located in Netherlands. Mr. Holterman is a
         chartered accountant, and from 1987 to 1991, was group controller for
         Transport Development Group PLC and the Dutch Holding Company ETOM NV.
         From 1984 to 1988, Mr. Holterman was the President of the Board of
         Directors of LETO Recycling, a Swedish-Dutch company involved in
         recycling chemical waste.

(4)      NATHANIEL S. THAYER has been a partner in the law firm of Blais
         Cunningham & Crowe Chester since 1969.

         All directors hold office until the next annual meeting of the
shareholders and until their successors have been duly elected and qualified.
The executive officers of the Company hold office at the discretion of the board
of directors.

DISCLOSURE OF SECTION 16(a) FILINGS

         The Company's officers and directors and persons who are beneficial
owners of more than 10% of the Common Stock ("10% Shareholders") are required to
file reports of their holdings and transactions in the Common Stock with the
Securities and Exchange Commission and to furnish the Company with copies of
such reports. Based solely upon its review of the copies the Company has
received or upon written representations from certain reporting persons, the
Company believes that no such persons failed to file any of such forms on a
timely basis or any of the forms required by Section 16(a) during the most
recent fiscal year. In addition, the Company believes that no filings on Form 5
were required for such persons. The Company believes that during the year ended
December 31, 1995, all Section 16(a) filing requirements applicable to its
officers, directors, and 10% Shareholders were complied with.

ITEM 10. EXECUTIVE COMPENSATION.

CASH COMPENSATION OF EXECUTIVE OFFICERS

         The following table sets forth the Chief Executive Officer ("CEO")and
each other officer ("Named Executive(s)") of the Company who received in excess
of $100,000 cash compensation paid for the year ended December 31, 1995. The
Company has adopted a 1991 Stock Option Plan, As Amended (the "Plan") to succeed
the stock option plans adopted in 1983 and 1988 which had expired. The Company
has not granted any restrictive stock awards or stock appreciation rights or
made any long-term incentive plan payouts.


<TABLE>
<CAPTION>
                           SUMMARY COMPENSATION TABLE
                                                                                 Long-Term Compensation

                                   Annual Compensation                       Awards                   Payouts

                                                       Other Annual Restricted   Securities
                                                          Compen-       Stock     Underlying        LTIP        All Other
Name and                             Salary     Bonus     sation      Award(s)    Options/       Payments    Compensation
Principal Position       Year          ($)       ($)        ($)         ($)       SAR's (#)         ($)          ($)

<S>                      <C>        <C>          <C>      <C>          <C>       <C>               <C>          <C>
Brian T. McMahon,        1995       $146,490      N/A     $8,580(2)      N/A      150,000(6)        N/A          N/A
President and CEO(1)     1994       $110,000      N/A    $20,976(3)      N/A      350,000(5)        N/A          N/A
                         1993       $104,494      N/A        N/A(4)      N/A      150,000(5)        N/A          N/A

</TABLE>

(1)      Mr. McMahon was elected President, Chief Executive Officer and Director
         of the Company on May 13, 1993, and assumed the position of Acting
         Chairman of the Board on May 27, 1994. Prior to his election, Mr.
         McMahon was the Company's Executive Vice President and Chief Operating
         Officer since July 1992.

(2)      This included a $5,400 automobile allowance, $2,838 medical benefit,
         and other fringe benefits.

(3)      On June 30, 1994, the Company had a 1 for 5 reverse stock split which
         had the effect of reducing the number of stock options granted while
         increasing the exercise price by a factor of five. On October 14, 1994,
         Mr. McMahon's 50,000 shares of non-qualified pre-split options were
         canceled and reissued for 50,000 post-split shares at $2.50. The fair
         market value at the date of reissuance was $2.75 which resulted in
         $12,500 (50,000 shares x $.25) of compensation expense. Additional
         perquisites include a $5,400 automobile allowance.

(4)      The aggregate amount of perquisites and other personal benefits,
         securities, or property is less than $50,000 or 10% of the total of
         annual salary and bonus.

(5)      In 1992, Mr. McMahon received incentive stock options for 150,000
         shares and non-qualified stock options for 50,000 shares under the Plan
         expiring in five years. In 1993, Mr. McMahon received incentive stock
         options for an additional 150,000 shares expiring in five years. On
         June 30, 1994, the Company had a 1 for 5 reverse stock split. On
         October 14, 1994, these stock options were canceled and replaced with
         non-qualified stock options for 50,000 shares and incentive stock
         options for 300,000 shares at $2.50 and $3.00 per share, respectively.

(6)      In 1995, Mr. McMahon received incentive stock options for 150,000
         shares. On December 31, 1995, the total number of stock options that
         Mr. McMahon held was 500,000. On January 24, 1996, Mr. McMahon received
         an additional incentive stock option for 50,000 shares, expiring in ten
         years, vesting one-third per year over 3 years, at an exercise price of
         $7.00 per share. The total number of stock options that Mr. McMahon
         held on February 14, 1996 was 550,000.

STOCK OPTIONS

         The Company adopted the Plan to succeed the stock option plans adopted
in 1983 and 1988 which have expired. Management intends to seek approval from
shareholders to increase the number of shares available to be issued under the
Plan and also ratify other changes to the plan at the next shareholder meeting.

         The following table sets forth information concerning individual grants
of stock options made to Named Executive(s) having cash compensation in excess
of $100,000 during the year ended December 31, 1995.



                        OPTION GRANTS IN LAST FISCAL YEAR

<TABLE>
<CAPTION>
                                                 Individual Grants

                                             % of Total                            Market
                                          Options Granted       Exercise          Price on
Name and                      Options       to Employees      or Base Price     Date of Grant       Expiration
Principal Position           Granted #     in Fiscal Year      (U.S. $/Sh)       (U.S. $/Sh)           Date

<S>                          <C>                <C>              <C>                <C>           <C>
Brian T. McMahon             150,000(1)         62.5%            $3.00              $3.00         April 12, 2000

</TABLE>

(1)      The five-year incentive stock options were granted pursuant to the
         Plan. One third of the options vest on each anniversary date from the
         date of grant, so that all the options are vested by the third
         anniversary date.

OPTION VALUE TABLE

         The following table sets forth certain information concerning
individual exercises of stock options during the year ended December 31, 1995
and the value of unexercised stock options as of December 31, 1995 for Mr.
McMahon. No shares were acquired through the exercise of options by Mr. McMahon
during 1995.

               AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
                      AND FISCAL YEAR END OPTION/SAR VALUES

<TABLE>
<CAPTION>
                                                               Number of unexercised         Value of unexercised
                                Shares                      options/SARs at FY-end (#)   in-the-money options/SARs at
                             acquired on        Value              exercisable/             FY-end ($) exercisable/
Name                         exercise (#)    realized ($)          unexercisable               unexercisable(1)

<S>                            <C>             <C>                <C>                          <C>        
Brian T. McMahon                  N/A            N/A                   350,000/                     $1,468,750/
                                                                       150,000                       $618,750
</TABLE>

(1)      Upon the exercise of an option, the Optionee must pay the exercise
         price in cash or stock. For the purpose of evaluating the value of the
         stock options, the fair market value would be the closing bid price,
         which is the realistic price at which the Common Stock can be readily
         sold. Stock options are "in-the-money" if the closing bid price for the
         Common Stock is greater than the exercise price of the stock options.
         The closing bid price for the Common Stock on December 29, 1995 (last
         business day of the fiscal year) was $7.125 per share. The value of the
         options is calculated by taking the difference between the exercise
         price and the closing bid price, and multiplying this difference by the
         number of option shares.

COMPENSATION OF DIRECTORS

         Non-employee directors are paid $500 for each Board or Committee
meeting that the directors attend. Directors are also reimbursed for
out-of-pocket expenses.

         Non-employee directors are eligible to participate in the Plan. Under
the Plan, non-employee directors received options at fair market value to
purchase 25,000 shares when first elected to serve on the Board and 3,000 stock
options annually thereafter upon re-election. Options granted to non-employee
directors are ten-year options and vest in their entirety, six months after
grant date. The annual grant to non-employee directors was increased to 5,000 at
an October 1995 Board meeting. Shareholder ratification will be sought in the
upcoming annual meeting for this increase.

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

         The following table sets forth certain information regarding the
beneficial ownership of the Common Stock as of February 14, 1996, by: (i)
persons known to the Company to be beneficial owners of more than 5% of the
Common Stock; (ii) each of the Company's directors and Named Executives; and
(iii) the officers and directors of the Company as a group. Except as otherwise
indicated, the Company believes that the beneficial owners of the Common Stock
listed below, based on information furnished by such owners, have sole
investment and voting power with respect to such shares. The number of shares of
the Common Stock outstanding on February 14, 1996 was 2,933,548.

<TABLE>
<CAPTION>

 Title of        Name and Address                         Amount and Nature of     Percent
  Class         of Beneficial Owner                       Beneficial Ownership     of Class

<S>             <C>                                              <C>                <C> 
  Common        Reggeborgh Beheer BV                              184,000            6.3%
                   Postbox 319, Industrieweg 12
                   7460 AH Rijssen, Netherlands

  Common        Perkins Capital Management, Inc                   558,205(1)        19.4%
                   730 East Lake Street,
                   Wayzata, MN 55391-1769

  Common        Brian T. McMahon                                  350,000(2)        10.7%

  Common        Henry M. Holterman                                 36,000(3)         1.2%

  Common        Nathaniel S. Thayer                               487,238(4)        16.4%

  Common        Officers and Directors as a Group                 873,238(5)        26.0%
                   (3 persons)

</TABLE>

(1)      The Company relied upon information obtained from Schedule 13G under
         the Securities Exchange Act of 1934, filed by Perkins Capital
         Management, Inc. ("Perkins") on or about February 1, 1996. The number
         of shares of Common Stock beneficially owned by Perkins is 558,205,
         which includes 359,766 shares for which Perkins has sole voting power.

(2)      Includes 350,000 shares issuable upon exercise of options held by Mr.
         McMahon that are exercisable within 60 days of February 14, 1996.

(3)      Includes 36,000 shares issuable upon exercise of options held by Mr.
         Holterman that are exercisable within 60 days of February 14, 1996.

(4)      Includes 33,000 shares issuable upon exercise of options held by Mr.
         Thayer that are exercisable within 60 days of February 14, 1996. Mr.
         Thayer owns 454,238 shares of Common Stock, which includes 200 shares
         representing Mr. Thayer's beneficial ownership of a 50% interest in 400
         shares held in a joint account.

(5)      Includes 419,000 shares issuable upon exercise of options held by all
         officers and directors that are exercisable within 60 days of February
         14, 1996.

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

         In October 1993, the Company entered into a consulting agreement with
Strategic Business Development Inc. ("SBDI"), a wholly-owned corporation of Mr.
Stephen M. Fry, Ph.D., who at that time was a Director of the Company. Under the
agreement, SBDI was to provide technical and management consulting services to
the Company in the areas of research and development, quality assurance,
regulatory affairs and manufacturing. Under the arrangement, the Company paid a
total of $41,567 and $70,860 to SBDI during 1994 and 1993, respectively,
including reimbursement for travel and entertainment expenses. No payments were
made to SBDI in 1995 and the Company does not anticipate any future payments to
be made to SBDI.

         On May 27, 1994, the Company entered into a Severance and Settlement
Agreement with Mr. Daryl F. Yurek, the former Chairman of the Board of Directors
and a former employee. The agreement gave Mr. Yurek a lump sum severance amount
and he retained the rights to stock options that had been vested as of May 27,
1994, along with certain other nominal obligations of the Company and Mr. Yurek.
The options were all exercised in the first and second quarters of 1995. No
other payments were made to Mr. Yurek in 1995, and the Company does not
anticipate any future payments to be made to Mr. Yurek.

ITEM 13. EXHIBITS, FINANCIAL STATEMENTS, AND REPORTS ON FORM 8-K.

(A) The following documents are filed as part of this Form 10-KSB:

(1) FINANCIAL STATEMENTS. Audited financial statements for each of the three
years ended December 31, 1995, 1994 and 1993 are filed as part of this Form
10-KSB. See Index to financial Statements on Page F.

(2) REPORTS ON FORM 8-K. No Reports on Form 8-K were filed during the fourth
quarter of 1995.

(3) EXHIBITS REQUIRED BY ITEM 601 OF REGULATION S-B:

Exhibit
Number  Description

  3.1   Articles of Incorporation, As Amended, filed herein.

  3.2   Bylaws, As Amended, filed herein.

 10.1   Incentive Stock Option Plan adopted by the Company's Board of Directors
        and shareholders on August 1, 1983, as amended March 5, 1987, and May 5,
        1987. (Incorporated by reference to the Company's Registration Statement
        on Form S-8, Commission File No. 2-93693-C, as filed on March 28, 1986,
        effective April 17, 1986, as amended on June 2, 1987 and March 21,
        1988.)

 10.2   Incentive Stock Option Plan As Amended as adopted by the Company's Board
        of Directors and shareholders on March 10, 1988 (Incorporated by
        reference to the Company's Annual Report on Form 10-K for the year ended
        December 31, 1988.)

 10.3   1988 Stock Option Plan adopted by the Company's Board of Directors on
        March 10, 1988 and shareholders on May 5, 1988 (Incorporated by
        reference to the Company's Registration Statement on Form S-8,
        Commission File No. 33-22052, as filed on May 25, 1988, effective 
        June 14, 1988.)

 10.4   1990 Restricted Stock Plan adopted by the Company's Board of Directors
        on March 15, 1990 and shareholders on May 17, 1990 (Incorporated by
        reference to the Company's Registration Statement on Form S-8,
        Commission File No. 33-36385, as filed on August 15, 1990, effective
        August 15, 1990.)

 10.5   1991 Stock Option Plan adopted by the Company's Board of Directors on
        July 11, 1991 and shareholders on January 30, 1992. (Incorporated by
        reference to the Company's Annual Report on Form 10-K for the year ended
        December 31, 1991.)

 10.6   Amendment to 1991 Stock Option Plan adopted by the Company's Board of
        Directors on July 11, 1991 and shareholders on January 30, 1992.
        (Incorporated by reference to the Company's Form 8-K Report filed with
        the Securities and Exchange Commission on or about February 3, 1992.)

 10.7   Amendment to 1991 Stock Option Plan adopted by the Company's
        shareholders on June 28, 1995 (Incorporated by reference to the
        Company's Registration Statement on Form S-8, Commission File No.
        033-63047, as filed on September 28, 1995)

 10.8   Amendment to 1991 Stock Option Plan adopted by the Company's Board of
        Directors on October 4, 1995, to be submitted to shareholders for
        ratification at the 1996 Annual Meeting of Shareholders (Incorporated by
        reference to the Company's definitive Proxy Statement for its 1996
        Annual Meeting of Shareholders, to be filed with the Securities and
        Exchange Commission on or before February 28, 1996).

 10.9   Self-Insurance Trust Agreement between the Company and Richfield Bank
        and Trust Co., as trustee dated March 5, 1987 (Incorporated by reference
        to the Company's Annual Report on Form 10-K for the year ended December
        31, 1986).

 10.10  Form of Indemnification Agreement that the Company has provided to all
        officers and directors. (Incorporated by reference to the Company's
        Annual Report on Form 10-K for the year ended December 31, 1986.)

 10.11  Yurek Employment Agreement dated February 3, 1992 by and between the
        Company and Mr. Daryl F. Yurek. (Incorporated by reference to the
        Company's Form 8-K report filed with the Securities and Exchange
        Commission on or about February 17, 1992.)

 10.12  Employment Agreement and Severance Agreement between the Company and
        Brian T. McMahon dated September 30, 1992 (Incorporated by reference to
        the Company's Annual Report on Form 10-KSB for the year ended December
        31, 1992.)

 10.13  Lease between the Company and Plymouth Business Center dated September
        1, 1992. (Incorporated by reference to the Company's Annual Report on
        Form 10-KSB for the year ended December 31, 1992.)

 10.14  Distribution Agreement between SCIMED Life Systems, Inc. and the
        Company dated August 19, 1994 (Incorporated by reference to Annual
        Report on Form 10-KSB, Exhibit 10.29, for the year ended December 31,
        1994).

 10.15  Clinical Research Agreement between The General Hospital Corporation,
        doing business as Massachusetts General Hospital, and the Company dated
        June 1, 1995, filed herein.

 10.16  Bridge Loan Agreement, including form of Promissory Note and form of
        Warrant by and between the Company and Qualified Lenders, dated
        September 30, 1994 (Incorporated by reference to the Company's Annual
        Report on Form 10-KSB, Exhibit 10.28, for the year ended December 31,
        1994)

10.17   Form of Promissory Note that was issued in conjuction with the Bridge
        Loan Agreement by and between the Company and Qualified Lenders, dated
        September 30, 1994 (Incorporated by reference to the Company's Annual
        Report on Form 10-KSB, Exhibit 10.28, page 45, for the year ended
        December 31, 1994)

 10.18  Form of Warrant (Incorporated by reference to the Company's Annual
        Report on Form 10-KSB, Exhibit 10.28, for the year ended December 31,
        1994; also incorporated by reference to the Company's Form S-3 
        Regisration Statement under The Securities Act of 1933, Exhibit 4.2,
        to be filed with the Securities and Exchange Commission on or before
        February 28, 1996.)

 10.19  List of Lenders in the Bridge Loans, and Investors in the Company's
        Preferred Stock (Incorporated by reference to the Company's Form S-3
        Registration Statement under The Securities Act of 1933, Exhibit 99, to
        be filed with the Securities and Exchange Commission on or before 
        February 28, 1996.)

 10.20  Form of Subscription Agreement that was used in conjunction with the
        Private Placements of the Company's Preferred Stock, filed herein.

 23.1   Consent of Independent Auditors, filed herein.



                                   SIGNATURES

         Pursuant to the requirements of Sections 13 and 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

                                                   SPECTRASCIENCE, INC.
                                                      (Registrant)


Date:     February 14, 1996                      By: /s/ Brian T. McMahon
                                                     BRIAN T. MCMAHON
                                                     PRESIDENT AND CHIEF
                                                       EXECUTIVE OFFICER


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


/s/ Brian T. McMahon      President, Chief Executive          February 14, 1996
Brian T. McMahon          Officer and Director
                          (Principal Executive Officer)


/s/ Ching-Meng Chew       Vice President Finance and          February 14, 1996
Ching-Meng Chew           Administration, Chief Financial
                          Officer, Treasurer, Secretary
                          (Principal Financial and Accounting
                          Officer)

/s/ Dawn M. Leuer         Controller                          February 14, 1996
Dawn M. Leuer


/s/ Henry M. Holterman    Director                            February 14, 1996
Henry Holterman


/s/ Nathaniel S. Thayer   Director                            February 14, 1996
Nathaniel S. Thayer


ITEM 13. (a)(1) FINANCIAL STATEMENTS.

         The following financial statements of SpectraScience, Inc. are included
in Item 7.


CONTENTS
                                                                 Page Reference

Report of Independent Auditors                                        F-1

Balance Sheets -- December 31, 1995 and 1994                          F-2

Statements of Operations -- Years Ended                               F-3
    December 31, 1995, 1994 and 1993

Statement of Changes in Shareholders' Equity (Deficit)                F-4
    -- Years Ended December 31, 1995, 1994 and 1993

Statements of Cash Flows -- Years Ended                               F-5
    December 31, 1995, 1994 and 1993

Notes to Financial Statements -- December 31, 1995                    F-6



                              SPECTRASCIENCE, INC.

                          AUDITED FINANCIAL STATEMENTS

                                DECEMBER 31, 1995






                         Report of Independent Auditors


Board of Directors
SpectraScience, Inc.

We have audited the accompanying balance sheets of SpectraScience, Inc. as of
December 31, 1995 and 1994, and the related statements of operations,
stockholders' equity (deficit) and cash flows for each of the three years in the
period ended December 31, 1995. 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 SpectraScience, Inc. at
December 31, 1995 and 1994, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1995, in conformity
with generally accepted accounting principles.


                                             Ernst & Young LLP

Minneapolis, Minnesota
January 19, 1996


<TABLE>
<CAPTION>
                              SpectraScience, Inc.

                                 Balance Sheets


                                                                                    DECEMBER 31
                                                                              1995               1994
                                                                       --------------------------------------
<S>                                                                         <C>              <C>           
ASSETS
Current assets:
   Cash and cash equivalents                                                $  4,123,326     $       58,298
   Accounts receivable (net of allowances of $50,000
     in 1995 and $171,000 in 1994)                                               100,641                781
   Inventory                                                                     181,871            200,468
   Other current assets                                                           80,197             78,245
                                                                       --------------------------------------
Total current assets                                                           4,486,035            337,792

Fixed assets:
   Office furniture and equipment                                                232,492            232,492
   Machinery and equipment                                                       447,645            381,585
   Tooling                                                                             -            359,704
                                                                       --------------------------------------
                                                                                 680,137            973,781
   Less accumulated depreciation                                                (521,907)          (870,328)
                                                                       --------------------------------------
                                                                                 158,230            103,453
Other assets                                                                           -             37,444
                                                                       --------------------------------------
                                                                            $  4,644,265      $     478,689
                                                                       ======================================
LIABILITIES AND STOCKHOLDERS' EQUITY 
Current liabilities:
   Accounts payable                                                        $     150,278      $     139,890
   Accrued compensation and taxes                                                 74,328             29,337
   Accrued expenses                                                               30,058            122,836
   Deferred income                                                                     -             26,000
   Notes payable                                                                       -            300,000
                                                                       --------------------------------------
Total current liabilities                                                        254,664            618,063

Commitments

Stockholders' equity (deficit):
   Convertible preferred stock, Series A, par value
     $1.00 per share:
        Authorized shares--5,000,000
        Issued and outstanding shares--674,998 in 1995                           674,998                  -
   Convertible preferred stock, Series B, par value
     $1.00 per share:
        Authorized shares--1,000,000
        Issued and outstanding shares--792,500 in 1995                           792,500                  -
   Common stock, $.25 par value:
     Authorized shares--4,000,000
     Issued and outstanding shares--2,933,348 in
       1995 and 2,785,348 in 1994                                                733,337            696,337
Additional paid-in capital                                                    43,136,284         38,765,897
Accumulated deficit                                                          (40,947,518)       (39,601,608)
                                                                       --------------------------------------
Total stockholders' equity (deficit)                                           4,389,601           (139,374)
                                                                       --------------------------------------
Total liabilities and stockholders' equity                                  $  4,644,265      $     478,689
                                                                       ======================================
</TABLE>

See accompanying notes.



<TABLE>
<CAPTION>
                              SpectraScience, Inc.

                            Statements of Operations


                                                                    YEAR ENDED DECEMBER 31
                                                           1995              1994             1993
                                                     -----------------------------------------------------
<S>                                                     <C>            <C>                             
NET REVENUES
Product revenues                                        $    134,652   $                  $      28,683
                                                                                     -
Service revenues                                                   -                 -            6,319
                                                     -----------------------------------------------------
Total net revenues                                           134,652                 -           35,002

Cost of products sold                                        124,913                 -          176,317
                                                     -----------------------------------------------------
                                                               9,739                 -         (141,315)

EXPENSES
Research and development                                     660,504           869,670        1,363,795
Selling, general and administrative                          711,753           701,278        1,119,793
Interest and other income                                    (16,608)          (66,468)        (181,897)
                                                     -----------------------------------------------------
Total expenses                                             1,355,649         1,504,480        2,301,691
                                                     -----------------------------------------------------

Net loss                                                 $(1,345,910)      $(1,504,480)     $(2,443,006)
                                                     =====================================================

Net loss per share                                          $(.47)            $(.55)           $(.93)
Weighted average common shares                             2,857,738         2,753,128        2,622,125

</TABLE>

See accompanying notes.



<TABLE>
<CAPTION>
                                                                              SpectraScience, Inc.                          

                                                             Statement of Changes in Stockholders' Equity (Deficit)


                                                                          SERIES A CONVERTIBLE      SERIES B CONVERTIBLE    
                                                   COMMON STOCK              PREFERRED STOCK           PREFERRED STOCK      
                                            --------------------------------------------------------------------------------
                                               SHARES        AMOUNT        SHARES       AMOUNT       SHARES       AMOUNT    
                                            --------------------------------------------------------------------------------

<S>                                           <C>            <C>                 <C> <C>                   <C> <C>          
Balance December 31, 1992                     1,880,882      $470,221             -  $         -            -  $       -    
   Exercise of warrants                         867,466       216,866             -            -            -          -    
   Exercise of stock options                      2,000           500             -            -            -          -    
   Net loss                                           -             -             -            -            -          -    
                                            --------------------------------------------------------------------------------
Balance December 31, 1993                     2,750,348       687,587             -            -            -          -    
   Exercise of stock options                     30,000         7,500             -            -            -          -    
   Issuance of non-interest bearing notes             -             -             -            -            -          -    
   Issuance of common stock for services          5,000         1,250             -            -            -          -    
   Stock options granted at below market
     value                                            -             -             -            -            -          -    
   Net loss                                           -             -             -            -            -          -    
                                            --------------------------------------------------------------------------------
Balance December 31, 1994                     2,785,348       696,337             -            -            -          -    
   Exercise of stock options                    148,000        37,000             -            -            -          -    
   Issuance of non-interest bearing notes             -             -             -            -            -          -    
   Issuance of Series A convertible
     preferred stock upon debt conversion             -             -       174,998      174,998            -          -    
   Proceeds from issuance of Series A
     convertible preferred stock, net of
     expenses of $60,000                              -             -       500,000      500,000            -          -    
   Proceeds from issuance of Series B
     convertible preferred stock, net of
     expenses of $435,875                             -             -             -            -      792,500    792,500    
   Net loss                                           -             -             -            -            -          -    
                                            --------------------------------------------------------------------------------
Balance December 31, 1995                     2,933,348      $733,337       674,998     $674,998      792,500   $792,500    
                                            ================================================================================
</TABLE>


(TABLE CONTINUED FROM ABOVE)
                                                                             
                                                                               
                                                                        
                                                                       
                                                                          
<TABLE>
<CAPTION>
                                             ADDITIONAL                                      
                                              PAID-IN        ACCUMULATED                     
                                              CAPITAL          DEFICIT          TOTAL        
                                           ------------------------------------------------  
                                                                                             
<S>                                          <C>            <C>             <C>              
Balance December 31, 1992                    $35,657,449    $(35,654,122)   $    473,548     
   Exercise of warrants                        3,008,948               -       3,225,814     
   Exercise of stock options                       4,500               -           5,000     
   Net loss                                            -      (2,443,006)     (2,443,006)    
                                           ------------------------------------------------  
Balance December 31, 1993                     38,670,897     (38,097,128)      1,261,356     
   Exercise of stock options                      67,500               -          75,000     
   Issuance of non-interest bearing notes         15,000               -          15,000     
   Issuance of common stock for services               -               -           1,250     
   Stock options granted at below market                                                     
     value                                        12,500               -          12,500     
   Net loss                                            -      (1,504,480)     (1,504,480)    
                                           ------------------------------------------------  
Balance December 31, 1994                     38,765,897     (39,601,608)       (139,374)    
   Exercise of stock options                     343,000               -         380,000     
   Issuance of non-interest bearing notes          3,260               -           3,260     
   Issuance of Series A convertible                                                          
     preferred stock upon debt conversion        350,002               -         525,000     
   Proceeds from issuance of Series A                                                        
     convertible preferred stock, net of                                                     
     expenses of $60,000                         940,000               -       1,440,000     
   Proceeds from issuance of Series B                                                        
     convertible preferred stock, net of                                                     
     expenses of $435,875                      2,734,125               -       3,526,625     
   Net loss                                            -      (1,345,910)     (1,345,910)    
                                           ------------------------------------------------  
Balance December 31, 1995                    $43,136,284    $(40,947,518)     $4,389,601     
                                           ================================================  
                                                                                             
                                           
</TABLE>


See accompanying notes.


<TABLE>
<CAPTION>
                                                                     SpectraScience, Inc.

                                                                   Statements of Cash Flows


                                                                                 YEAR ENDED DECEMBER 31
                                                                        1995              1994             1993
                                                                  -----------------------------------------------------
<S>                                                                   <C>               <C>              <C>         
OPERATING ACTIVITIES
Net loss                                                              $(1,345,910)      $(1,504,480)     $(2,443,006)
Adjustments to reconcile net loss to net cash used
   in operating activities:
     Depreciation                                                          52,302            53,192           97,944
     Compensation expense recognized in connection with
       granting of stock options                                                -            12,500                -
     Non-cash interest expense                                              3,260            15,000                -
     Stock issued for services                                                  -             1,250                -
     Gain on sale of fixed assets                                               -           (28,335)         (24,725)
     Changes in operating assets and liabilities:
       (Increase) decrease in accounts receivable                         (99,860)           35,986          (12,169)
       (Increase) decrease in inventories                                  18,597          (200,468)           8,718
       Decrease (increase) in other assets                                 35,492            15,015          (31,385)
       Increase (decrease) in current liabilities                         (63,399)            7,210         (421,450)
                                                                  -----------------------------------------------------
Net cash used in operating activities                                  (1,399,518)       (1,593,130)      (2,826,073)

INVESTING ACTIVITIES
Purchases of fixed assets                                                (107,379)          (30,798)         (17,995)
Proceeds from sale of fixed assets                                            300            56,540           78,609
                                                                  -----------------------------------------------------
Net cash (used in) provided by investing activities                      (107,079)           25,742           60,614

FINANCING ACTIVITIES
Proceeds from issuance of notes payable                                   225,000           300,000                -
Proceeds from issuance of common stock                                    380,000            75,000        3,230,814
Proceeds from issuance of preferred stock                               4,966,625                 -                -
                                                                  -----------------------------------------------------
Net cash provided by financing activities                               5,571,625           375,000        3,230,814
                                                                  -----------------------------------------------------

Net increase (decrease) in cash and cash equivalents                    4,065,028        (1,192,388)         465,355
Cash and cash equivalents at beginning of year                             58,298         1,250,686          785,331
                                                                  -----------------------------------------------------
Cash and cash equivalents at end of year                               $4,123,326     $      58,298      $ 1,250,686
                                                                  =====================================================

SUPPLEMENTAL SCHEDULE OF NONCASH TRANSACTIONS
Notes payable converted into preferred stock                           $  525,000     $           -      $         -

</TABLE>

See accompanying notes.


                              SpectraScience, Inc.

                          Notes to Financial Statements

                                December 31, 1995


1. BUSINESS

The Company was incorporated on May 4, 1983 as GV Medical, Inc. and was engaged
in the development of laser angioplasty catheter systems. Subsequently the
Company changed its name to SpectraScience, Inc. on October 16, 1992, which was
approved by the shareholders on May 13, 1993. The Company is now focused
primarily on the design, development, manufacturing and marketing of medical
products for the diagnosis and facilitation of treatment of a broad range of
human diseases.

During 1995, the Company received net proceeds of approximately $5.0 million in
conjunction with the issuance of convertible preferred stock (see Notes 3 and
4). Management believes that this capital infusion will be sufficient to fund
continued operations through December 1997.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

CASH EQUIVALENTS

The Company considers highly liquid investments with a maturity of three months
or less when purchased to be cash equivalents.

FIXED ASSETS

Fixed assets are stated at cost. The Company depreciates the cost of the
property over its estimated useful life using the straight line method.

INVENTORY VALUATION

Inventories are stated at the lower of cost or market. Cost is determined on a
first-in, first-out basis.

USE OF ESTIMATES

The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from the estimates.

INCOME TAXES

The Company accounts for income taxes under the liability method. Deferred tax
assets and liabilities are recognized for the future tax consequences
attributable to temporary differences between the financial statement carrying
amount of assets and liabilities and their respective tax bases.

NET LOSS PER SHARE

Net loss per share is computed by dividing the net loss for the period by the
weighted average number of common shares outstanding during the period. Common
equivalent shares from stock options, warrants and convertible preferred stock
are excluded from the computation as their effect is antidilutive.

3. NOTES PAYABLE

During 1994, the Company received $300,000 of convertible bridge financing from
an investor group. The promissory notes were non-interest bearing and were due
on March 31, 1995. In connection with the notes payable, the Company granted
warrants to the participants in the bridge financing to purchase 100,000 shares
of the Company's common stock at $3.00 per share. The warrants are exercisable
for five years from the date of grant.

During 1995, the Company received $225,000 of convertible bridge financing from
an investor group. The promissory notes were non-interest bearing and were due
on March 31, 1995. In connection with the notes payable, the Company granted
warrants to the participants in the bridge financing to purchase 74,998 shares
of the Company's common stock at $3.00 per share. The warrants are exercisable
for five years from the date of grant.

Upon completion of the sale of convertible preferred stock, Series A in 1995
(see Note 4), bridge loans of $525,000 were converted into 174,998 shares of
convertible preferred stock at a price of $3.00 per share. In addition, the
Company issued warrants to the investors to purchase 58,335 shares of the
Company's common stock at $5.00 per share. The warrants are exercisable for
three years from the date of grant.

4. CAPITAL STOCK

During 1993, the Company received net proceeds of $3,225,814 from the exercise
of 867,466 warrants that had been issued in 1992. The remaining 465,867 warrants
expired. In addition, the Company issued 50,000 warrants to a company helping
the Company with its public relations in the investment community. These
warrants were exercisable at $2.50 per share. The warrants were canceled in 1995
and 50,000 options were reissued to the company and exercised in 1995 at $2.50
per share.

On June 30, 1994, the Company's Board of Directors approved a 1-for-5 reverse
stock split. Accordingly, all share, per share, weighted average share, and
stock option information has been restated to reflect the split.

From March 1995 to June 1995, the Company sold 500,000 shares of convertible
preferred stock, Series A at $3.00 per share in a private placement for
$1,500,000 less related costs of $60,000. The nondividend yielding shares of
convertible preferred stock are first convertible into an equivalent number of
shares of common stock on March 31, 1996. Holders of shares of the convertible
preferred stock also received warrants to purchase 166,665 shares of the
Company's common stock at $5.00 per share. The warrants are exercisable for
three years from the date of grant. In addition, the Company issued warrants to
the underwriter to purchase 20,000 shares of the Company's common stock at $3.00
per share. The warrants are exercisable for five years from the date of grant.
The Company issued additional warrants to the underwriter to purchase 6,667
shares of the Company's common stock at $5.00 per share. The warrants are
exercisable for three years from the date of grant.

In December 1995, the Company sold 792,500 shares of convertible preferred
stock, Series B at $5.00 per share in a private placement for $3,962,500 less
related costs of $435,875. Holders of shares of the convertible preferred stock
also received warrants to purchase 264,175 shares of the company's common stock
at $9.50 per share. The warrants are exercisable for three years from the date
of grant. In addition, the Company issued warrants to the underwriter to
purchase 79,250 shares of the Company's common stock at $5.00 per share. The
warrants are exercisable for five years from the date of grant. The Company
issued additional warrants to the underwriter to purchase 26,418 shares of the
Company's common stock at $9.50 per share, conditional upon exercise of the
previous warrant issued to the underwriter. The warrants are exercisable for
five years from the date of grant.

5. STOCK OPTIONS

The Company has a stock option plan under which selected employees and
non-employees may be granted incentive and non-qualified options to purchase
common stock of the Company. The options granted are exercisable over a period
of no longer than ten years and are granted at not less than 85% of the market
price on the date of the grant. The following table summarizes the stock option
activity for the three plans:

<TABLE>
<CAPTION>
                                                      SHARES        STOCK OPTIONS
                                                    AVAILABLE     OUTSTANDING UNDER         PRICE
                                                    FOR GRANT         THE PLANS           PER SHARE
                                                  --------------------------------------------------------
<S>                                                   <C>              <C>            <C>        <C>   
   Balance December 31, 1992                           62,270           430,820        $2.50  -   $11.25
     Options granted                                  (70,200)           70,200         5.00  -     5.80
     Options exercised                                      -            (2,000)        2.50
     Options forfeited                                 97,448           (97,448)        2.50  -     5.80
                                                  -----------------------------------
   Balance December 31, 1993                           89,518           401,572         2.50  -    11.25
     Options granted                                 (459,000)          459,000         2.50  -     3.00
     Options exercised                                      -           (30,000)        2.50
     Options forfeited                                140,700          (140,700)        2.50  -    11.25
     Options canceled                                  89,600           (89,600)        2.65
                                                  -----------------------------------
   Balance December 31, 1994                         (139,182)          600,272         2.50  -    11.25
     Amendment to plan                                540,000                 -               -
     Options granted                                 (320,000)          320,000         2.50  -     4.75
     Options exercised                                      -          (148,000)        2.50  -     3.00
     Options forfeited                                  5,000            (5,000)        3.00
     Options canceled                                   5,000            (5,000)        2.50
     Option plans terminated                          (30,890)                -               -
                                                  -----------------------------------
   Balance December 31, 1995                           59,928           762,272        $2.50  -   $11.25
                                                  ===================================

</TABLE>

At December 31, 1995, options for 527,184 shares were exercisable.

In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation". The Company has not determined the impact of the new statement on
its financial statements.

6. COMMITMENTS

The Company has an operating lease agreement for certain premises within a
building in Minneapolis, Minnesota that has a term extending through August
1996. The lease requires annual base rent of approximately $24,000 plus a
sharing of certain expenses. The Company incurred total lease and rental
expenses of $36,000, $37,000 and $107,000 for the years ended December 31, 1995,
1994 and 1993, respectively.

In 1995, the Company entered into a clinical research agreement for up to two
years with a hospital. Under the terms of the agreement, the Company has agreed
to pay $200,000 for the first year of the study, of which $150,000 was charged
to expense in 1995. The second year of the study will not be initiated until the
partners have agreed to the amount of funding to be provided by the Company.

The Company entered into a license agreement with Massachusetts Institute of
Technology for the use of certain patents. Under the terms of the agreement, the
Company has agreed to pay $50,000 per year through October 2003 and $30,000 per
year thereafter until the expiration of the patent rights. The agreement will
immediately terminate if any scheduled payment is not made within 30 days of its
due date.

7. INCOME TAXES

The tax effect of the Company's deferred tax assets is as follows:


                                                    DECEMBER 31
                                               1995               1994
                                        --------------------------------------

   Net operating loss carryforward            $14,616,000        $14,270,000
   Accounts receivable allowance                   18,000             62,000
   Accrued liabilities                             40,000             52,000
   Tax credits                                    740,000            607,000
                                        --------------------------------------
                                               15,414,000         14,991,000
   Valuation allowance                        (15,414,000)       (14,991,000)
                                        --------------------------------------
                                             $          -       $          -
                                        ======================================

At December 31, 1995, the Company had net operating loss carryforwards of
approximately $40,600,000 that expire at various times through the year 2010. In
addition, the Company has research and development tax credits that expire at
various times through 2010. As a result of previous stock transactions, the
Company is limited as to the amount of net operating loss and tax credit
carryforwards which may be utilized in any one year. The annual limitation is
approximately $1,000,000.

8. BUSINESS SEGMENT AND EXPORT SALES INFORMATION

The Company is focused primarily on the design, development, manufacturing and
marketing of medical products for the diagnosis and facilitation of treatment of
a broad range of human diseases. Its product is marketed primarily through an
independent distributor in foreign countries. The Company's only export sales
were $28,000 in 1993.

9. EMPLOYEE BENEFIT PLAN

The Company has a 401(k) profit sharing and savings plan covering substantially
all employees. The plan allows employees to defer up to 15% of their annual
earnings. The Company will match 25% of the employee contributions to a maximum
of 4% of employee earnings. The contributions by the Company totaled
approximately $4,000, $4,000 and $10,000 for 1995, 1994 and 1993, respectively.