U.S. SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   FORM 10-KSB


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

Fiscal Year Ended December 31, 1996                  Commission File No. 0-20432


                              ONGARD SYSTEMS, INC.
                 (Name of Small Business Issuer in its Charter)


                 Delaware                                     84-1149380
       (State or other jurisdiction of                       (IRS Employer
        incorporation or organization)                     Identification No.)


      40 Commerce Drive, Hauppauge, NY                              11788
   (Address of principal executive offices)                       (Zip Code)


Issuer's Telephone Number, including area code:  (516) 231-8989


Securities Registered under Section 12(b) of the Act:  None

      Title of Each Class                  Name of Exchange on Which Registered
           N/A                                           N/A


Securities Registered under Section 12(g) of the Act:

          Units consisting of one share of Common Stock and one Warrant
                                (Title of Class)

                          Common Stock, $.001 par value
                                (Title of Class)

                         Common Stock Purchase Warrants
                                (Title of Class)

     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. [ ]

     Issuer's revenues for its most recent fiscal year were $3,688,000.

     The  aggregate  market  value of the  voting  stock of the  issuer  held by
non-affiliates,  computed by reference to the price at which stock was sold,  or
the  average  bid and asked  prices of such  stock,  as of April 10,  1997,  was
$14,054,000.

6,613,722 shares of Common Stock were outstanding as of December 31, 1996.

                  Transitional Small Business Disclosure Format
                              
                                 Yes [ ]    No [X]

<PAGE>


Item 1.  Description of Business


Infection Control Market

     OnGard Systems,  Inc., a Delaware  Corporation (the "Company" or "OnGard"),
was founded in 1989 as a successor by merger to a Colorado corporation, On Guard
Systems,   Inc.,   which  was  founded  during   December  1988.  The  Company's
headquarters  were  relocated  to 40  Commerce  Drive,  Hauppauge,  NY  11788 in
January, 1996 from 2323 Delgany Street, Denver,  Colorado,  80216. Its telephone
number is (516)231-8989. In the third quarter of 1992, the Company completed its
initial  public  offering  of  920,000  shares of its Common  Stock and  920,000
Warrants and has since raised other funds for corporate development purposes.

     The Company  currently  manufactures and markets an integrated line of both
sterilization  equipment and disposable sterility assurance products which serve
the infection control market.  These products are offered to a broad spectrum of
healthcare  providers  ranging  from  hospital,  pharmaceutical  and  laboratory
companies  to  individual   practitioners.   The  Company's   infection  control
activities are divided into two components.

     The  first   component  of  the  infection   control  market   consists  of
sterilization  supplies  and  equipment.  Sterilization  involves  the  complete
elimination  or  destruction  of all forms of  microbial  life,  including  high
numbers of bacterial spores.  Sterilization is required for those instruments or
devices  that  penetrate  skin or contact  normally  sterile  areas of the body.
Through its  acquisition  of  Pharmetics,  now OST, in October 1994, (in a stock
transaction  valued at $2.6  million),  the Company  manufactures  and markets a
complete line of institutional and pharmaceutical grade sterilizers, washers and
dryers.   See   "Sterilization   Equipment  and   Acquisition  of   Pharmetics."
Sterilization  equipment may be used by hospitals in the  sterilization  process
for reusable  instrumentation or for the sterilization of materials prior to the
disposal  of  medical  waste,  and by  pharmaceutical  companies.  Sterilization
supplies may include  containers,  wraps and pouches and indicators and monitors
which indicate that the sterilization process has been completed.  Sterilization
supplies are primarily  utilized by hospital and clinical  facilities during the
reprocessing of reusable instrumentation.  The Company's proprietary AutoPak(TM)
product  line  provides  hospitals  with  a  disposable  packaging  product  for
sterilizing  reusable  surgical  instruments.   See  "Commercialization  of  New
Products."

     The second component, and the Company's initial product line, offered small
quantity medical waste generators (primarily  non-hospital  environments) with a
disposal  system for the elimination of medical waste.  The products  included a
proprietary  mailback system which the user sends directly to disposal sites for
the destruction of syringes and other "sharps" which carry infection. See "Small
Quantity Medical Waste Services." The Company is currently  evaluating a plan of
disposition  of selected  assets of this business to focus on its  sterilization
equipment and supplies business.

     The Company previously  manufactured medical packaging,  which was designed
and manufactured for medical device manufacturers.  Sterile medical packaging is
used to contain new, unused medical devices during  transport and  presentation.
These products were  primarily  sold under private  label.  In 1993, the Company
acquired substantially all of the assets of Med-Device Packaging, Inc. ("MDPI"),
a company engaged in the design,  production and distribution of sterile medical
packaging.  A number of customers of MDPI became  customers of the Company.  See
"Business-Sterilization    Medical   Packaging."   Customers   included   Boston
Scientific,  U.S.  Surgical,   Symbiosis  and  Baxter  HealthCare.  The  Company
announced it had sold selected  medical  packaging  assets to Oliver Products of
Grand  Rapids,  Michigan  on  December  7, 1995.  The sale  included  production
equipment and inventory,  with proceeds from the sale aggregating $620,500.  The
gain on the  sale was  approximately  $233,000.  The  Company  retained  related
accounts receivable.


                                       2
<PAGE>


Sterilization Equipment and Acquisition of Pharmetics

     Effective October 1, 1994, the Company acquired  Pharmetics  through OnGard
Pharmetics,  Inc., a wholly  owned  subsidiary  of the Company  ("OGPI or OnGard
Pharmetics"). The merger agreement provided for the issuance of one share of the
Company's  Common Stock for every twelve shares of  Pharmetics  common stock and
200 shares of the Company's Common Stock for each share of Pharmetics  preferred
stock.  Thus,  on October 1, 1994,  3,103,225  outstanding  shares of Pharmetics
common stock were  exchanged  for 258,602  shares of OnGard Common Stock and 400
outstanding  shares of  Pharmetics  preferred  stock were  exchanged  for 85,000
shares of OnGard  Common  Stock  (which  amount  included an  aggregate of 5,000
shares of Common Stock of OnGard paid to preferred stockholders of Pharmetics in
lieu of accrued and unpaid dividends).  In addition,  Royce Investment Group was
granted 16,000 shares of OnGard Common Stock as a merger fee.

     OST customers  include  pharmaceutical  and medical  device  manufacturers,
hospitals,  clinics,  physicians,  diagnostic  and  research  laboratories,  and
universities.  OST  offers  service  for  its  equipment  as  well  as  for  its
competitors'  equipment, in the form of preventive maintenance contracts and per
diem  arrangements.  Pharmaceutical  and medical  device  manufacturers  use OST
sterilization  equipment in their  manufacturing  process to reduce or eliminate
the possibility  that the products they produce will cause disease or complicate
treatment. Hospitals, clinics, physicians, laboratories and universities use OST
sterilizers to render their  instruments and apparatus  biologically  sterile so
that  their use by humans  and  animals  will not  transmit  or induce  illness.
Hospitals  can also use OST'  sterilizers  to  sterilize  medical  waste  before
discarding.

     OST also markets its washers and dryers to the same  industries to which it
sells its sterilizers. The washers cleanse with high temperature water pressure,
agitation  and  detergents  and are used by customers in washing  items prior to
sterilization or with items that require  cleansing without  sterilization.  The
dryers are used in conjunction with the washers.  See  "Management's  Discussion
and Analysis of Financial  Condition and Results of Operations  --Liquidity  and
Capital Resources" for further information concerning OST.

     In January 1996, the Company relocated from Denver,  Colorado, and combined
its two facilities to the space Pharmetics formerly occupied. In connection with
the relocation,  the Company  renovated its  manufacturing  and office space and
expanded its manufacturing equipment infrastructure.

Commercialization of New Products

     The Company has focused  its efforts on the  development  of  sterilization
supply  and  equipment   product  lines.  The  Company's  ability  to  introduce
sterilization  supply product lines will be subject to the receipt of regulatory
clearance from the FDA. See  "--Regulations--The  Food and Drug Administration."
There is no assurance as to when or if the FDA will give the Company  regulatory
clearance for all of its  sterilization  pouch  products.  In December 1994, the
Company  received  clearance  on  AutoPak(TM)  ,  the  central  product  of  its
sterilization  supply  line.  AutoPak(TM)  was  introduced  into  hospitals  for
commercial use through an exclusive  marketing  agreement with Baxter Healthcare
Corporation. Baxter Healthcare Corporation of Deerfield, Illinois is a worldwide
leader in the manufacture and marketing of healthcare products in 100 countries.
Its V. Mueller division,  which sells AutoPak(TM),  markets surgical instruments
and surgical use products to healthcare  companies and hospitals.  The territory
covered by the exclusive  agreement is the United States and Canada. The Company
received  its first  orders from  Baxter in  September  1996.  During the fourth
quarter of 1996, the  AutoPak(TM)  product line was integrated  into  Allegiance
Corporation,  the  $4.5  billion  healthcare  spin-off  from  Baxter  Healthcare
Corporation.  The Company plans to offer a comprehensive product line which will
include its  AutoPak(TM)  product  line,  a variety of self-seal  and  heat-seal
sterilization  packages and an  integrated  sterilization  indicator and monitor
product line. 


                                       3
<PAGE>


The market for sterilization  supplies is primarily hospital based. There can be
no assurance that the Company can compete effectively outside of its traditional
market.

     The Company has also developed small,  competitively priced sterilizers for
use in hospital,  laboratory and other markets.  A tabletop  sterilizer,  called
HiVac(TM), has completed development.  Sales during 1996 exceeded $200,000 for a
specific,  non-hospital user in Europe.  This same purchaser has provided OnGard
with an initial purchase order for 1997 which aggregates  $284,000.  The Company
anticipates additional orders during 1997.

     The  AutoPak(TM)  System is a  proprietary  disposable,  heavy  duty  large
plastic/non-woven   fabric   pouch  and  a   proprietary   loading   system  for
sterilization  of large instrument trays and soft goods. The product is intended
to  compete  in the  markets  served by central  supply  room wrap and  reusable
instrument  tray  containers.  AutoPak(TM)`s  advantages  include visual access,
reduced storage space,  decreased loading time and waste reduction.  The loading
system  consists  of a  tray  holder  which  will  facilitate  enclosure  of the
instrument tray within the AutoPak(TM) Pouch. The Company has filed for and been
granted  patent  protection  on  the  construction  of  the  package  and on the
materials contained therein.

     To facilitate  manufacture of AutoPak(TM),  new and  proprietary  materials
were required and developed  through a relationship  between OnGard and American
National Can Company  ("American  National  Can"). In June 1993, the Company and
American   National  Can  entered  into  two  letter   agreements  (the  "Letter
Agreements")  which  outlined  the  principal  points of  agreement  between the
parties.  The parties have used the points of agreement in the Letter Agreements
as the  basis of their  relationship.  The  Company  has an  exclusive  right to
purchase these  proprietary  materials  from American  National Can and American
National  Can  has  an  exclusive  right  to  supply  these  materials  for  the
AutoPak(TM)  product  line.  In  addition,  American  National Can has agreed to
provide research and development advice for further OnGard product development.

     With  respect  to all of the  products  discussed  above,  there  can be no
assurance that regulatory  clearances will be obtained (other than  AutoPak(TM),
for  which  clearance  has been  received),  that any of such  products  will be
commercially successful.


Small Quantity Medical Waste Services

     Small Quantity Generators

     The Company's Mailback waste disposal system is especially suited for small
quantity non-hospital medical waste generators, many of whom are subject to some
form of  regulation  with  respect  to their  waste  disposal  practices.  Small
quantity medical waste  generators are generally  considered to be those medical
facilities  that  produce  less than 50 pounds  per month of  regulated  medical
waste.

     Currently,  nearly all states regulate the disposal of medical waste.  Some
states regulate the disposal of medical waste generated in the home environment,
and some local  governments are responding to pressure to remove this waste from
municipal  disposal  systems.  The Company's  integrated  medical waste handling
systems are designed to fit the specific needs of small quantity generators.

     The  handling  of  medical  waste in  healthcare  facilities  is  primarily
regulated  by  the  Occupational  Health  and  Safety  Administration  ("OSHA"),
although other federal,  state and local  regulations  may apply.  The Company's
primary  market for medical  waste  disposal  services  consists of  physicians,
dentists and other non-hospital  health care facilities that generate relatively
small quantities of regulated medical waste.


                                       4
<PAGE>


     The Company utilizes the U.S. Postal Service to allow its customers to ship
contained   medical  waste  from  any  location  to  the  Company's   contracted
incineration  facilities (however the Company itself does not dispose of medical
waste).  The Company believes that the U.S. Postal Service is an effective means
of providing nationwide  transportation for the Company's medical waste systems.
The Company's medical waste disposal solutions incorporate proprietary packaging
designs that meet or exceed stringent Postal Service  regulations  regarding the
transport  of  medical  waste.  The  Company's  medical  Mailback  products  are
authorized for transport by the Postal Service under U.S.  Postal Code number 39
CFR, Part III, and all OnGard  Mailback  medical  waste kits  indicate  OnGard's
Postal  Approval Code  numbers,  U.S.P.S.-002  A-F. See  "Mailback  System." The
Company has provided  training and support to  employees at the  Nashville  Post
Office,  which is the primary  destination for the Company's Mailback system. In
addition,  the Company has worked with  airline  personnel  who handle  OnGard's
products at selected baggage facilities.

     On February 23, 1993,  the Company and  Sherwood,  a subsidiary of American
Home  Products  Corporation,   entered  into  an  exclusive  five  year  supply,
distribution and licensing agreement (the "Sherwood Agreement").  This agreement
made possible the marketing by Sherwood of its Monoject  product line along with
the Company's medical waste disposal system. Pursuant to the Sherwood Agreement,
Sherwood,  one of the country's  largest  manufacturers  of  disposable  medical
devices,  including  syringes,  needles  and other items  collectively  known as
"sharps,"  distributed  the Company's  complete  line of medical waste  Mailback
disposal  kits.  See  "Mailback  System." The Company  also sold these  products
directly to some  customers  through its  internal  sales  group.  However,  the
Company and  Sherwood  were  continuously  revising  the  existing  agreement in
instances where the parties agreed that a direct selling approach by the Company
was appropriate.  Ultimately,  the exclusive relationshhip was terminated during
the  third  quarter  of 1995.  Thereafter,  the  Company  sold  directly  to its
customers.

     Mailback System

     The Company's Mailback products comprise a fully prepaid system that allows
the user to collect and dispose economically of medical waste in compliance with
applicable  regulations.   For  one  price,  the  customer  receives  disposable
containers,  packaging,  tracking services,  transportation and incineration. An
integral, four-part tracking form allows tracking from generator to incinerator.
The entire package is burned without being opened by the incinerator personnel.

     The system uses the Company's  proprietary,  redundant  packaging  concept,
which  incorporates  two  corrugated  fiberboard  packages  with an  intervening
plastic  liner to  enclose  the  waste  container,  containing  liquid-activated
absorbent material. The system is self-sealing;  it does not require any special
equipment,  skill  or  tape.  The  packaging  meets or  exceeds  current  postal
regulation  for  integrity,  strength and  durability.  This packaging must pass
Department  of  Transportation  tests  mandated  by  the  U.S.  Postal  Service,
including a thirty-foot  frozen drop, a five-foot drop of a thirteen pound spike
and a three pounds per square inch pressurized  leak-proof test. OnGard Mailback
kits are available in special chemo-waste  designated  containers as well as for
sharps regulated  medical waste. The Company received three patents with respect
to the Mailback system.


     Markets

     The Company's  initial product was the OnGard  Recapper,  a patented device
offering a  mechanical  alternative  to  unprotected  handling  of  contaminated
needles.  Purchasers of the Recapper and Mailback  products include large dental
product  distributors,  such as Sullivan  Dental  Products, 



                                       5
<PAGE>

Inc. and  Patterson  Dental Co., as well as large catalog  distributors  such as
Henry Schein and Darby Dental Supply.

     In January 1993,  the Company  acquired the customer list of PRO-MED SHARPS
("PRO-MED"),  formerly a seller of medical waste Mailback kits within the dental
and physician office markets.  PRO-MED discontinued sale of its Mailback medical
waste  products.  For a one time  payment of $20,000,  the Company  acquired the
exclusive use of the PRO-MED  mailing list and the support of PRO-MED  personnel
in converting  PRO-MED's  customers to the Company's product lines. Many PRO-MED
customers are now being served on a direct basis and through  automatic  reorder
systems by the Company.  For the year ended December 31, 1996,  sales to PRO-MED
customers were approximately  $159,000.  The Company also continues to serve the
home health care  market.  The Company  has a private  label  relationship  with
Quantum Health  Resources,  a national home infusion company that specializes in
hemophilia  care.  The  Company  also has an  agreement  to  provide  disposable
containers and Mailback  services to Caremark  Inc., a leading  provider of home
care services  throughout  the United  States.  In January,  1995,  Coram,  Inc.
purchased a division of  Caremark,  Inc.,  resulting  in sales to Coram Inc. and
Caremark Therapeutic,  Inc. During the year ended December 31, 1996, approximate
sales  attributable to Caremark,  Coram and Quantam totaled $312,000,  $150,000,
and $45,000  respectively.  As a result of the  purchase  by Coram,  Inc. of the
Caremark  division,  Caremark  Therapeutic,  Inc.,  neither  Coram nor  Caremark
individually reached sales levels which would constitue a major customer,  i.e.,
exceeding 10% of the Company's 1995 or 1996 sales. The Company believes that the
increasing  concentration of homecare service providers offers opportunities for
continued growth of these products.  In addition,  waste haulers serving markets
including small quantity generators also provide opportunities.

     Incineration Contract

     The  Company  has a  long-term  contract  for  incineration  services  with
National  Medical  Waste,  Inc. The facility  involved is operated by BioMedical
Waste, a national  operator of medical waste  incinerators  and medical  hauling
systems. BioMedical Waste is headquartered in Boston, Massachusetts and operates
a medical  waste  incinerator  in  Nashville,  Tennessee  that is  utilized  for
destruction of medical waste generated by OnGard customers. In 1992, the Company
entered  into  a  five-year  contract  with  National  Medical  Waste,  Inc.,  a
subsidiary of BioMedical  Waste,  for  incineration  services which required the
Company to pay a one time fee of $50,000 for prepaid incineration.

     National  Medical  Waste  had  incurred  recurring   operating  losses  and
experienced a working capital deficiency that raise substantial doubts about its
ability to continue  as a going  concern.  National  Medical  Waste  merged into
BioMedical Waste, which subsequently filed for protection pursuant to Chapter 11
of the U.S.  Bankruptcy  Code.  The Company has  negotiated a new waste disposal
contract with a division of Waste Management,  Inc. in Chandler,  Arizona, which
provides all of these  services.  New orders for Mailback  products will dispose
their waste at this facility.  The costs under this agreement are  substantially
lower than the National  Medical  Waste  contract.  However,  as the Company has
Mailback  products,  previously  sold, with mailing labels addressed to National
Medical  Waste,  it will  continue to utilize that  facility  until  outstanding
products have been  delivered for disposal.  That entity has operated  since its
filing for  bankruptcy  and  continues to provide  incineration  services to its
customers.  The Company's new orders will be addressed to the Chandler  facility
for disposal.

     Both waste disposal  companies  provide  pick-up service at the U.S. Postal
Service  destination  points audit the waste and inputs and maintain the records
required by the Company. This arrangement is designed to assure the Company that
transported   medical   waste  is  destroyed  in  compliance   with   applicable
environmental and other regulations.


                                       6
<PAGE>


Sterilization Medical Packaging

     The  following  information  is  provided  as a  historic  perspective.  On
December 7, 1995, the Company completed the sale of its medical device packaging
line to Oliver Products of Grand Rapids, Michigan. The Company operating results
include the packaging line through that date.

     In January 1993,  the Company,  through a wholly owned  subsidiary,  OnGard
Systems  Packaging,  Inc. ("OSP"),  acquired  substantially all of the assets of
MDPI,  a  Pennsylvania  corporation  engaged  in  the  design,   production  and
distribution of sterile medical packaging.  The acquisition was made pursuant to
an asset purchase  agreement among OSP, MDPI and Donald  Marotta,  President and
sole  shareholder of MDPI. The closing date of the acquisition was March 1, 1993
and the  effective  date was  January  1,  1993.  The  total  purchase  price of
approximately  $675,000  included the issuance of 50,000  shares of Common Stock
valued for purposes of the Agreement at $4.75 per share. The remaining  $437,500
of the purchase  price  included the  assumption of $205,000 of  liabilities  of
MDPI.  Effective  December 7, 1995, the Company sold selected  assets of MDPI to
focus on its sterilization equipment and supplies business.

Manufacturing and Engineering

     OnGard  currently   operates  a  manufacturing  and  assembly  facility  in
Hauppauge,  New York. The New York facility also houses  machinery  required for
production  of  AutoPak(TM)  and other  pouches.  OnGard also has a machine shop
which is utilized to maintain equipment as required.  Materials and supplies for
these products are available from several sources.

     OnGard  designed,  developed  and owns the molds and tooling  used for blow
molding and injection molding the sharps containers sold as part of its Mailback
line, and the tools used to manufacture the corrugated  cardboard  components of
the  waste  disposal  system.  OnGard  contracts  with  third  parties  for  the
manufacture of the molded plastic containers,  corrugated fiberboard cartons and
other  components  and thus is  dependent on them for the  manufacture  of these
products and  components,  and for the assembly of its  Mailback  products,  and
ships finished, complete kits to customers.

        OnGard  purchases raw materials for its AutoPak(TM)  product line from a
variety of sources.  Principal  suppliers  include American  National Can. A two
month  inventory  of raw  materials  is  generally  kept  on  hand.  As  certain
proprietary  films are  available  only from ANC,  the loss of supply  from such
sources could disrupt manufacturing operations.

     OnGard's  proprietary  products  and  product  line  expansions  are  being
developed  and designed  primarily by Mark Weiss,  President,  and Clay Cannady,
Director, Sterility Assurance Products.

     OST fabricates  pressure  vessels and washer and dryer  housings  in-house.
Other components and supplies are generally available from a variety of sources.
Components are manufactured and assembled at 40 Commerce Drive,  Hauppauge,  New
York 11788.

     OST requires progress payments on all non-standard  equipment. In the event
of an order  cancellation,  progress  payments  are applied  against the work in
process. OST offers a one year warranty on all equipment.  In the event that OST
cannot repair a defective  unit, it will replace it during the warranty  period.
Order cancellations and product returns have been immaterial.


                                       7


<PAGE>


Regulation

     OSHA

     OSHA regulates work places in general,  including  medical care facilities.
The OSHA blood-borne pathogen  regulations  encourage the development of certain
safe workplace  practices for the handling of used sharps.  The rules  encourage
both  engineering  and  procedural  solutions  consistent  with  the  use of the
Company's  products.  No  assurance  can be given that OSHA will not develop new
regulations  and new  interpretations  of existing  regulations to the Company's
detriment.  The Company's  manufacturing and assembly  operations are subject to
OSHA inspection

     Post Office

     The U.S. Postal Service has been transporting  medical waste on a regulated
basis  since  1989.  In 1992 the Post  Office  adopted  rules for the mailing of
regulated  materials that mandate rigorous  testing,  certification  and bonding
requirements  for  packaging  used to transport  medical  waste.  The  Company's
products are designed for shipment via first  class/priority mail as required by
Post  Office   regulations.   The  Company's  packaging  meets  or  exceeds  all
requirements  published in the Domestic Mail Manual. In five states,  there is a
further  requirement for the use of registered mail,  return receipt  requested,
service.  The  Company's  kits  sold in  those  states  include  the  additional
documentation and postage necessary to comply.

     State and Local Regulation

     Most states have regulations that determine  appropriate  methodologies for
the handling and disposal of medical waste. Several states,  including New York,
California and New Jersey,  require specific  approval of medical waste disposal
programs  including  mailback  medical waste products.  The Company has obtained
approvals from these states. In Minnesota, a change in the overall environmental
regulatory  framework  resulted in Mailback  medical waste being excluded in new
regulations  put into  effect  during  the  summer of 1993.  Minnesota  took the
position that use of the Company's system by practitioners was inconsistent with
applicable state  regulations.  The Company made its distributors  aware of this
development.  The Director of Pollution  Control in Minnesota  recently informed
the Company  that he intended to address the  situation  through the proposal of
new  regulations  that,  if adopted,  would provide  exemptions  relating to the
disposal of medical waste through the U.S.  Postal  Service.  The Company cannot
predict when or if these new regulations will be adopted.  However, the Director
of Pollution Control has orally informed the Company that no enforcement  action
will be taken in this regard  pending the adoption of the new rules.  Regardless
of these oral representations, there is no assurance that the State of Minnesota
will not take such enforcement  action.  Environmental  regulations in Maine are
also inconsistent with Mailback medical waste programs. The Company has informed
its distributors  about Maine's  position.  The Company does not actively pursue
Mailback  medical waste programs in states that do not encourage or prohibit its
use. Maine and Minnesota  represent a small percentage of the Company's  current
market and a  correspondingly  small  percentage of the potential market for the
Company's medical waste kits.

     Although the Company  attempts to monitor  regulatory  developments  in all
states in order to maintain regulatory  compliance,  because of the large number
of  regulators  it is possible  the Company  might not be  immediately  aware of
changes in relevant  regulations.  Regulations  may change  frequently,  and the
Company's  activities  may be  curtailed  or limited to the extent that  certain
states restrict the use of medical Mailback systems.


                                       8
<PAGE>


     The Food and Drug Administration

     The  Company's  existing  and  planned  products  are or may be  subject to
regulation by the FDA pursuant to the provisions of the Federal Food,  Drug, and
Cosmetic  Act  ("FDC  Act").  Under  the FDC Act,  several,  if not all,  of the
Company's  infection  control  products,  sterilization  medical  packaging  and
sterilization supplies are subject to regulation as medical devices.

     Medical  devices are classified into either Class I, II or III. Class I and
II devices are not expressly  approved by the FDA. However,  pursuant to section
510(k) of the FDC Act, the manufacturer or distributor of a Class I or II device
that is initially  introduced  commercially on or after May 28, 1976 must notify
the  FDA  of its  intent  commercially  to  introduce  the  device  through  the
submission of a premarket  notification (a "510(k)  notice").  Before commercial
distribution  can commence,  the FDA must review the 510(k) notice and clear the
device for commercial  distribution.  The FDA normally has 90 days to review the
510(k)  notice  and grant or deny  clearance  to market on the basis  that it is
substantially   equivalent   to  a  device   marketed   before  May  28,   1976.
Alternatively,  the FDA may postpone a final decision and require the submission
of  additional  information,  which may include  clinical  data.  If  additional
information  is  required,  review  and  clearance  of a  510(k)  notice  may be
significantly  delayed.  In order to clear a Class I or II device for marketing,
the FDA must  determine,  from the  information  contained in the 510(k) notice,
that the  device  is  "substantially  equivalent"  to one or more  Class I or II
devices that are legally marketed in the United States.

     If a device is not considered  "substantially  equivalent," it is regulated
as a Class III medical  device.  In general,  a Class III medical device must be
expressly  approved  by the  FDA for  commercial  distribution  pursuant  to the
submission  of a Premarket  Approval  Application  ("PMA").  A PMA must contain,
among other  information,  substantial  information about the manufacture of the
device  and  data  from  adequate  and  well  controlled  clinical  trials  that
demonstrate that the device is both safe and effective. The PMA approval process
is substantially more complex and lengthy than the 510(k) premarket notification
process.  Once a PMA is submitted,  it may take 16-24 months, or longer, for the
FDA review and approval, if such approval is granted at all.

     A medical device, whether cleared for marketing under the 510(k) pathway or
pursuant to a PMA approval,  is subject to ongoing  regulatory  oversight by the
FDA to  ensure  compliance  with  regulatory  requirements,  including,  but not
limited to, product  labeling  requirements  and  limitations,  including  those
related to promotion and marketing efforts,  Current Good Manufacturing Practice
requirements, record keeping and medical device (adverse reaction) reporting.

     FDA  regulatory  oversight  also applies to the Company's  sterile  medical
packaging  products,  which are used by other  companies in packaging  their own
medical devices.  Generally, FDA acceptance of the suitability of such packaging
products is made in the context of  regulatory  submissions  of other  companies
concerning the device to be packaged. Thus, the Company requires no separate FDA
clearance or approval of these packaging  products.  Within this framework,  the
principal  regulatory  responsibilities  of the Company for its sterile  medical
packaging products are to ensure that the packaging products are manufactured in
conformity with Current Good Manufacturing Practice  requirements.  Although the
Company believes that all of its manufacturing activities are in conformity with
Current Good Manufacturing Practice  requirements,  there can be no guarantee of
compliance.

     Historically,  the FDA has not exercised device  regulatory  authority over
some types of infection  control  products,  such as sharps containers or mailer
packages, including those used in the Company's Mailback system, and has allowed
companies to begin  commercial  introduction (on or after May 28, 1976) of these
types of products  without a 510(k)  clearance.  On  February  3, 1994,  the FDA
issued  a  written  policy  statement  which  allowed  manufacturers  of  sharps
containers  a  "discretionary  period"  of 180 days  (until  August 2,  1994) to
continue  marketing  their products  already in  distribution  (introduced on or
after May 28,  1976)  without  the  benefit of 510(k)  clearance


                                       9


<PAGE>


provided  that  required  501(k)  notices  are  submitted  to FDA  prior  to the
conclusion of the discretionary period.  Manufacturers of sharps containers also
must comply with FDA device listing and establishment registration requirements.
The FDA has indicated that there is no change in its  regulatory  posture toward
the mailer  packages used in the Mailback  system and that it does not intend to
regulate this product as a medical device.  There can, however,  be no assurance
that the FDA will  maintain its current  regulatory  posture  toward the mailing
package.

     OGSI  submitted all but one of the 510(k) notices and expects to submit the
remaining  one  in  the  near  future.   In  June  1994,  the  Company  received
notification  that all of its 510(k)  submittals for sharps  containers had been
approved and cleared for marketing.  The Company has an additional submittal for
one of its sharps  containers which the FDA had advised it to withhold until the
others had cleared,  which it is now preparing for  submission.  The Company has
also received clearances relating to its AutoPak(TM) products.

     Environmental Regulation

     The  Environmental  Protection  Agency  (the  "EPA") has the  authority  to
regulate medical waste under the Resource  Conservation  Recovery Act.  Although
the EPA has not to date issued any formal rules covering medical wastes,  it has
issued a guide for infectious waste management.

     The Hazardous  Materials  Transportation Act ("HMTA") governs the packaging
and  transportation  of hazardous  materials in  commerce.  The HMTA  prescribes
certain  packaging  requirements  for  enumerated  regulated  medical  waste and
infectious   substances.   Regulations   promulgated   by  the   Department   of
Transportation  pursuant to the HMTA describe the requirements to be observed in
preparing  the  materials  for  shipment,  including  shipment by  highway.  The
regulations also cover inspection,  testing and retesting of the  transportation
of hazardous materials.

     The  Congress  and  the  EPA may  adopt  new,  or  modify  existing,  laws,
regulations and policies  regarding the regulation of medical waste. The Company
cannot  predict  what  effect,  if  any,  future  regulation  may  have  on  its
operations.

Patents And Trademarks

     The OnGard product line includes patented and other  proprietary  products.
The OnGard Recapper was awarded U.S. Patent No. 4,986,816.  The Company was also
awarded patents on the OnGard Medical Waste System (U.S.  Patent No.  5,097,950,
350,604 and 5,427,238).  The Company was also awarded two patents on AutoPak(TM)
(U.S.  Patent No.  5,459,978 and 5,590,777).  Although the Company  believes its
patents are valuable and provide a competitive advantage,  there is no assurance
that any patents held or secured by the Company will provide any  protection  or
commercial or competitive benefit to the Company.  In addition,  the Company may
incur  substantial  legal expenses  attempting to enforce its patents.  There is
also no assurance  that the  Company's  products  will not infringe upon patents
held by others.

     The Company owns the registered trademark "OnGard" in its stylized form. In
addition,   the  Patent  and   Trademark   Office  has  approved  the  Company's
applications (which are in the final stages of pendency) with respect to "OnGard
Systems" in stylized and plain letter form and with respect to AutoPak(TM).  The
Company  believes that it has established  valuable  trademark rights in OnGard,
OnGard Systems and AutoPak(TM). The Company retains all rights to its trademarks
under the terms of the Sherwood  Agreement.  The Company's  unified  approach to
product  name,  logo and identity is reflected  in its  promotional  literature,
packaging  and  labeling  and the Company  intends to  continue to promote  this
identity in all its product offerings and strategic alliances.


                                       10


<PAGE>



Employees

     As of December 31, 1996, the Company had  approximately 75 employees.  None
of the Company's employees are subject to a collective bargaining agreement. The
Company believes that its relations with its employees are good.

Competition

     The Company  operates and markets its Mailback  systems in an  increasingly
competitive environment. Competitors include local and national hauling services
and some local or regional Mailback  services.  At the current time, the Company
is aware of five companies  which have approval from the U.S.  Postal Service to
offer Mailback  services.  None of these  companies offer the selection of sizes
and capacities currently provided by OnGard.

     The Company's  primary  competitor in the Mailback  medical waste  handling
business  is a  joint  venture  between  Becton  Dickinson,  a  manufacturer  of
hypodermic  needles,  and Browning-Ferris  Industries,  a national waste hauling
company.  Sherwood and Becton  Dickinson are  competitors  within the needle and
syringe sales market and each has the  capability to sell needles,  syringes and
Mailback systems. In addition, both Sherwood and Becton Dickinson have extensive
distribution capacities within the target markets. The Company believes that its
pricing for Mailback systems is competitive.

     The  sterile  packaging  industry  is  extremely  competitive.  The Company
competes with a variety of large  manufacturers,  including  Kimberly Clark, who
have similar capabilities. The sterilization supplies market is also competitive
and is dominated by several large companies with complete product lines.

     The market  for  sterilization  equipment  is highly  competitive  and many
competitors of OST have greater  financial  resources.  These companies  include
Steris/American   Sterilizer  (AMSCO)  and  Gettinger,  which  may  sell  either
pharmeceutical sterilizers or hospital autoclaves.

Backlog

     As of December 31, 1996, the Company had open orders which  aggregated $2.6
million. Of these, approximately $530,000 were backlog orders, which were due by
December 31 but had not yet been delivered.

Insurance

     The Company maintains liability and umbrella insurance with coverage limits
of $7 million  in the  aggregate.  The  Company  also  carries  other  customary
business  insurance.  The Company has posted a $50,000 bond with the U.S. Postal
Service  under its new  regulations.  The Company does not maintain key man life
insurance on any of its employees.


                                       11
<PAGE>


Item 2.  Description of Property

Facilities

     In early  1996,  the Company  consolidated  operations  at its  facility in
Happauge,  New York.  The Company  closed its Denver  facility by assigning  its
lease  obligations for the duration of the term. The Company  receives a premium
payment monthly from the assignee through the duration, May 31, 1998.

     The Company's  corporate and administrative  offices, as well as production
for  AutoPak(TM),  are now located at 40 Commerce Drive in Hauppauge,  New York.
Approximately  35,000 square feet is used for  manufacturing  and the balance of
7,000 square feet is used for offices.  A new lease commenced  February 1, 1995.
For the three successive annual periods,  the annual rent is $116,025 per annum;
in the  fourth  and fifth  year,  the  annual  rent is  $162,078  and  $172,788,
respectively.  In addition,  the  landlord has advanced  $350,000 to remodel the
facility.  This amount is being repaid by the  Company,  in the amount of $9,600
per month for 36 months and $4,359 for 12 months,  which both began in  February
1996.  Prior amounts due the landlord,  which were unpaid under Pharmetics lease
arrangements,  totaling  $170,248,  were  repaid in 1995 with  22,700  shares of
unregistered OnGard Common Stock, which the Company subsequently registered.

Item 3.  Legal Proceedings.

Legal Proceedings

     The Company does not have any pending legal proceedings other than ordinary
routine litigation  incidental to its business. As a seller of medical infection
control and waste  handling  systems,  the Company could face product  liability
claims or other claims potentially based on accidental infections, loss of waste
disposal  packages in the mail, or other unforeseen  circumstances.  The Company
maintains product liability  insurance in an aggregate amount of $1 million plus
umbrella  coverage for an additional $5 million.  There can be no assurance that
such coverage will be adequate to cover future product  liability claims or that
it will continue to be available at reasonable prices.

     OST, by its merger with Pharmetics, was party to a number of lawsuits filed
primarily by trade creditors,  and it owed withholding and other payroll related
taxes amounting to approximately $230,000, including interest and penalties. The
Company has been  successful in negotiating  settlements to these claims and has
completed  the  payment  terms of  substantially  all of these  and the  Company
believes that the few remaining claims will not have a materially adverse effect
on OST's  financial  condition or results of operations.  In addition,  although
there have been no legal  proceedings  in this regard,  in the second quarter of
1994 the Company initiated, and has completed,  discussions with federal and New
York  state tax  authorities  to pay  Pharmetics  prior  federal  (approximately
$110,000),   unemployment   (approximately   $21,000)   and   New   York   state
(approximately  $102,000)  taxes,  payment for which are due over specified time
periods,  and  which the  Company  is paying  for on a  monthly  basis.  Through
December  31,  1996,   the  Company  had  completed   payments  to  federal  and
unemployment tax authorities.


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

     No matters  were  submitted  to a vote of  security  holders,  through  the
solicitation  of proxies or otherwise,  during the fourth  quarter of the fiscal
year covered by this report.


                                       12
<PAGE>


                                     PART II

Item 5.  Market for Common Equity and Related Stockholder Matters.

     The Company's Common Stock is quoted in the NASDAQ  (Small-Cap(SM))  system
and it trading symbol is OGSI. As of December 31,1996,  there were approximately
138 record holders and  approximately  1357 beneficial  holders of Common Stock.
There were 6,613,722  shares  outstanding as of December 31, 1996.  Prior to the
initial  public  offering in August 1992,  there was no market for the Company's
Common Stock.

        The tables  below set forth the high and low  closing  bid prices of the
Company's Common Stock, Warrants and Units (each unit consisting of one share of
Common  Stock and one  Warrant)  as  reported  by the  National  Association  of
Securities  Dealers,  In. ("NASAD") for each of the quarters indicated since the
Company's  initial public  offering (such  quotations  represent  prices between
dealers, not actual transactions, and do not include retail mark-ups, mark-downs
or  commissions).  The  Company  withdrew  the Units  from  quotation  in NASDAQ
(Small-CapSM)  system effective October 26, 1993, and its warrants expired April
30, 1996.

<TABLE>
<CAPTION>
Year:  Quarter            Common Stock            Year:  Quarter        Common Stock
--------------            ------------            --------------        ------------
                      High Bid      Low Bid                           High Bid  Low Bid
                      --------      -------                           --------  -------
    1992:                                              1995:
<S>                   <C>           <C>            <C>                 <C>      <C>
Third Quarter         4-1/2         4-1/2          First Quarter       8-1/4    6-1/2
Fourth Quarter        4-1/2         4-1/2          Second Quarter      7        4-1/2
    1993:                                          Third Quarter       9-1/2    4
First Quarter         4-7/8         4-1/2          Fourth Quarter      8-3/4    6-5/8
Second Quarter        5-1/3         4-7/8              1996:
Third Quarter         6-3/4         5-1/8          First Quarter       9-1/4    6-5/8
Fourth Quarter        8-3/8         6-5/8          Second Quarter      7-1/4    4-1/2
     1994:                                         Third Quarter       5-1/4    2-5/8
First Quarter         7-3/4         6-3/4          Fourth Quarter      3-3/8    1-7/8
Second Quarter        8-1/4         4-1/8
Third Quarter         9             6
Fourth Quarter        9             6-1/2

<CAPTION>
                            Warrants                                        Units
                            --------                                        -----
Year:  Quarter        High Bid      Low Bid                           High Bid  Low Bid
--------------        --------      -------                           -----------------
    1992:
Third Quarter         7/8           1/2                               5-3/8     5
Fourth Quarter        13/16         3/4                               5-1/4     5-1/8
    1993:
First Quarter         1             3/4                               5-3/4     5-1/4
Second Quarter        1-1/8         7/8                               6         5-3/4
Third Quarter         1-7/8         1                                 8-3/8     6-1/8
Fourth Quarter        4-1/4         1-3/4                             12-1/4*   8-1/4*
    1994:
First Quarter         4             3-1/4
Second Quarter        2-13/16       1/2
Third Quarter         4             2-1/2
Fourth Quarter        3-3/8         3
    1995:
First Quarter         3-3/4         2
Second Quarter        2-1/2         1
Third Quarter         5-1/4         1
Fourth Quarter        3-5/8         1-7/8
</TABLE>


                                       13
<PAGE>


    1996:
First Quarter         4-7/8         1-7/8
Second Quarter        1-1/4         1

*    Through October 25, 1993.

**   Through April 30, 1996.


     The closing bid price of OnGard Common Stock in the NASDAQ  (Small-Cap(SM))
system on April 10, 1997 was $2.125.

     The Company has never paid any cash  dividends on its Common Stock and does
not expect to pay any cash  dividends  in the  foreseeable  future.  The Company
intends to reinvest its earnings in the continued  development  and expansion of
its business.


                                       14
<PAGE>


                MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                       CONDITION AND RESULTS OF OPERATIONS

General

     Sales, Market Development and Major Customers

     Since the  formation of the Company's  predecessor  in December  1988,  the
Company has been engaged in  developing  products and market  positions  for the
control of infectious  diseases.  Its inital  product line was a waste  disposal
system for small quantity waste generators.  It subsequently expanded to sterile
packaging  and  sterilization  equipment.   During  1992,  concurrent  with  the
publication  of OSHA's  Bloodborne  Pathogen Rule which  increased  awareness of
regulatory control of contaminated medical instruments, the Company successfully
negotiated  medical waste mail-back product sales to Caremark and Quantum Health
Resources,  which are  primarily  engaged in the service of home care  patients.
Caremark was characterized as a major customer constituting 13% of the Company's
total  sales in 1994.  In January  1995  Coram,  Inc.  purchased  a division  of
Caremark  Inc.  resulting  in sales to Coram Inc as well as  Caremark.  Revenues
attributable to Caremark, Coram and Quantum for the year ended December 31, 1996
were $312,000, $150,000 and $45,000 respectively. However, due to the divestment
of a  division  of  Caremark  in  1995,  neither  Caremark,  nor  Coram  met the
qualifications of a significant  customer in 1995 or 1996. A customer group list
was  purchased by OnGard from ProMed  Sharps in December  1992.  During the year
ended  December  31,  1996,  sales to ProMed and  customers  were  approximately
$159,000.  In February 1993,  the Company and Sherwood  entered into a five-year
Supply,  Distribution and Licensing Agreement ("Sherwood  Agreement") which gave
OnGard's  medical  waste  mail-back  products  access  to  Sherwood's  extensive
distribution system. The exclusive arrangement has since terminated in the third
quarter of 1995. For the year ended  December 31, 1995,  the Company's  revenues
attributable to the Sherwood  Agreement were approximately  $99,000,  but had no
sales to Sherwood thereafter.

     With  the   acquisition   of  MDPI  in  1993  and  OST  in  late  1994  and
commercialization of AutoPak(TM),  the Company has emphasized more direct sales.
It had  expanded  its sales  staff  with  personnel  in both the  packaging  and
equipment  lines to expand its market  position.  Boston  Scientific,  a sterile
packaging customer,  had been a major customer representing 10% of the Company's
total sales in 1995.  However,  on November 3, 1995 the Company announced it had
signed a letter of intent with Oliver Products of Grand Rapids, Michigan for the
sale of selected assets of its medical device  packaging line. This  transaction
closed on December 7, 1995. The sale included production equipment and inventory
with  proceeds  from the  sale  aggregating  $620,500.  The gain on the sale was
approximately  $233,000.  The Company retained all related accounts  receivable.
Accordingly,  Boston  Scientific was no longer a major  customer.  Revenues from
Boston Scientific approximated $512,000 in 1995. However, net profitability from
this and other  packaging line accounts was nominal after  accounting for direct
selling  expenses  and  allocation  of  general  and   administrative   expense.
Accordingly, the Company believes the loss of this customer had no net impact on
the results of  operations  and capital  resources.  OST had no customer,  which
accounted for 10% more of the Company's revenues in 1995 or 1996.

Product Line Expansion

     During 1990, substantially all of the Company's revenues came from the sale
of the  Recapper  and related  products.  The  Recapper is a device which allows
clinicians to separate used needles from  re-usable  syringes  without  directly
touching the needle. During 1991 and 1992, the Company expanded its product line
into the medical waste mail-back business.  During 1993, the Company experienced
significant  revenue growth due to the addition of its medical sterile packaging
products.  Growth  in this  market  is  attributable  largely  to the  Company's
acquisition of the assets of MDPI described  elsewhere  herein.  Medical sterile
packaging  products were manufactured to customer  specifications  and sold to a
variety of medical device  manufacturers.  In June 1993,  the Company


                                       15
<PAGE>


relocated MDPI  operations to a larger facility that included a "white room" for
the manufacturing of sterile medical packaging. Revenues attributable to sterile
medical  packaging  product  line for the year  ended  December  31,  1995  were
$1,905,000. This business provided the technical skills and equipment to develop
the  Company's  proprietary  sterility  assurance  product,   AutoPak(TM).  Once
developed,  the Company elected to pursue this market and divest selected assets
of MDPI, described above.

     During 1996, the Company completed an exclusive marketing agreement with
Baxter  Healthcare  Corporation in an arrangement  where Baxter buys AutoPak(TM)
from OnGard for resale and distribution of AutoPak(TM) into the hospital market.
Initial  orders were  received  from  Baxter in  September  1996.  In the fourth
quarter of 1996, the AutoPak(TM)  agreement was integrated into Allegiance,  the
$4.5 billion  healthcare  spin-off from Baxter.  AutoPak(TM)  sales for the year
ended December 31, 1996 to Baxter and other customers were $257,000 and occurred
primarily in the last half of 1996.

     In October 1994, the Company acquired  Pharmetics,  now OST, which expanded
its  activities  into  sterilization  equipment.  OST  generated  $2,522,000  in
revenues for the year ending December 31, 1996.

Results of Operations

     The following table sets forth,  for the periods  indicated,  certain items
from OnGard's Statements of Operations expressed as percentages of revenues:

<TABLE>
<CAPTION>
                                    Year Ended             Year Ended           Year Ended
                                    December 31,          December 31,          December 31,
                                    ------------          ------------          ------------
                                         1994                  1995                    1996
                                         ----                  ----                    ----

<S>                                     <C>                   <C>                    <C>   
Revenues                               100.0%                 100.0%                 100.0%
Costs of Sales                          88.4                  106.3                  131.9
                                       ------                 ------                 ------  
Operating Margin                        11.6                   (6.3)                 (31.9)
                                       ------                 ------                 ------  
Operating Expenses:
General and Administrative              62.1                   52.6                   56.2
Write down of note receivable           71.0                   --                     --
Marketing                               14.5                   29.5                   46.7
Depreciation and Amortization            3.8                    6.2                   10.6
Deferred Compensation                   21.1                   34.7                   18.7
Research and Development                 5.7                    7.4                    4.8
                                       ------                 ------                 ------  
Total                                  (157.1)                130.4%                 137.0
                                       ------                 ------                 ------  

Loss from Operations                  (145.5)                (136.7)                (168.9)
Interest Expense                        (5.6)                 (11.1)                  (8.6)
Interest and Other Income                1.7                    5.6                    8.4
Forgiveness of Debt                     --                      2.1                   --
Other Expenses                          (0.5)                  (0.4)                  (1.4)
                                       ------                 ------                 ------  

Net Loss                               (149.9)%               (138.3)%               (170.5)%
                                       ======                 ======                 ======  
</TABLE>

Year ended December 31, 1996 compared to year ended December 31, 1995.

        Revenues  for the twelve  months ended  December  31, 1996  decreased by
$1,287,000  or 26% from  the  comparable  period  in 1995,  from  $4,975,000  to
$3,688,000.  However, after excluding sales 


                                       16
<PAGE>


related to MDPI of  $1,905,000,  which was divested in December  1995,  revenues
increased  by  approximately  $618,000 or 20%.  This  increase  is  attributable
primarily  to  sales of  AutoPak(TM)  of  $257,000  and  increased  sales of the
equipment  lines of $461,000  offset  partially  by  reductions  in sales of the
Company's Mailback business.

     Operating margin  decreased  $864,000 to a deficit of $1,175,000 (a deficit
of 31.9% of  revenues)  versus a  deficit  of  $311,000  (a  deficit  of 6.3% of
revenues).  The  decrease  is  comprised  of  (1) a net  decrease  in  sales  of
$1,287,000  resulting  from  the  sale of MDPI and its  related  product  margin
contribution of approximately  $441,000,  (2) start-up production costs incurred
in connection  with  relocating  AutoPak(TM)  operations to New York,  including
production equipment,  material  modifications,  internal personnel and facility
restructuring  costs of $147,000  and (3) the  remainder  in  increased  factory
overheads  intended  to improve  the  performance  and  quality  of  production,
including  engineering,  purchasing  and  quality  control.  In  the  aggregate,
revenues were insufficient to offset factory overheads resulting in an operating
margin deficiency.

     General and administrative  expenses decreased by $541,000 to $2,071,000 in
1996 versus  $2,612,000  in 1995,  a decrease of 21%.  The  decrease  relates to
tighter expense  controls  including  reductions in legal fees of  approximately
$170,000, and numerous administrative expenses associated with the consolidation
of the  Denver  and New York  locations  into the New York  facility,  primarily
including  rent  offset by rental  premiums  received  from the  occupant of the
Denver facility, salaries, travel, telephone and other expenses.

     Sales and marketing expenses increased 17%, or $255,000, from $1,468,000 in
1995 to $1,723,000 in 1996.  The increase  relates  primarily to direct  selling
costs in connection with the  commercialization  of AutoPak(TM),  its technicial
support personnel,  related travel and collateral  materials of $684,000 offset,
in part, by the elimination of sales expenses  associated with the divested MDPI
business, of $391,000.

     Research and  development  decreased  from  $370,000 for the twelve  months
ended  December 31, 1995 to $176,000  for the  comparable  period in 1996.  This
decrease of 52%, or  $194,000,  reflects the  completion  of  development  costs
associated   with   both   AutoPak(TM)   and   the   tabletop   sterilizer   and
commercialization of both.

     Depreciation  and amortization  increased  $84,000 or 28%, from $308,000 to
$392,000 for the years December 3, 1995 and 1996  respectively.  The increase is
predominately attributable to expanding the Company's manufacturing capabilities
in the equipment business.

     Deferred  compensation  decreased  from  $1,728,000  in 1995 to $691,000 in
1996.  The  decrease  relates to  recording  non-cash  charges for fully  vested
options  granted in 1996 to certain  directors,  officers or  consultants of the
Company, at prices below market price.

     Interest  expense  decreased by  $230,000,  or 42%,  from  $549,000 in 1995
versus $319,000 in 1996. The decrease  relates  primarily to reduced interest on
the Company's  bank line,  of $345,000,  which was paid at maturity on April 15,
1996, but was outstanding,  in part or whole, throughout 1995. This decrease was
offset by  increased  interest  on  capital  lease  financing  of  manufacturing
equipment and leasehold improvements.

Year ended December 31, 1995 compared to year ended December 31, 1994.

     Revenues for the twelve  months ended  December 31, 1995  increased  27% to
$4,975,000  from  $3,928,000  in the same  period in 1994,  or  $1,047,000.  The
increase was attributable to sales from the Company's equipment line, OST, which
was consolidated in the Company's operating results for the entire year in 1995,
but only for the last quarter of 1994.

                                       17
<PAGE>


     Operating  margin  decreased to a deficit of $311,289 (a deficit of 6.3% of
revenues) for the year ended  December 31, 1995  compared to $457,636  (11.6% of
revenues)  for the same  period in 1994.  The  gross  margin  deficiency  at the
Company's  acquired  equipment  business line,  OST,  comprised  $332,518 of the
deficit.  This was the result of (1) a lack of financial  resources for nearly 9
months during 1995 in which fixed  factory  overhead was incurred and charged to
operations without  substantive revenue generation and, (2) upon availability of
funds,  a  significant  allocation  of  production  man hours was applied to the
development of two new proprietary products, a tabletop sterilizer called HIVAC,
and a hospital autoclave,  called WasteClave.  As a result, shipments of revenue
generating  products  were  reduced and  insufficient  to offset  fixed  factory
overhead.  At the Company's  disposable  product line the operating margin was a
positive  $21,231.  This amount decreased due to unfavorable  material and labor
usage  inefficiencies  related to the sterile  medical  packaging  line selected
assets of which were sold in December  1995.  The Company  believes that revenue
levels  should be  sufficient in the later half of calendar year 1996 to provide
positive operating margins.  Through that date it will fund margin  deficiencies
and losses with existing  funds from its September 1995 Private  Placement,  and
with funds from warrant exercises.

     General and  administrative  expenses  increased 7% to  $2,611,697  (53% of
revenues) for the year ended December 31, 1995 from $2,440,935 (62% of revenues)
for the 1994 period. The  administrative  expenses at OST increased $513,000 due
to a full year of inclusion in 1995 versus one quarter in 1994 after the date of
the acquisition; other expenses decreased $426,000.

     Sales  and  marketing  expenses  increased  159% from  $568,488  in 1994 to
$1,468,319 for the year ended  December 31, 1995. Of this increase  $663,000 was
incurred at OST.  This,  and the remaining  increase of $237,000  relates to the
Company's  efforts to sell  directly to its  existing  customers  as well as the
development  of new  customers  in  conjunction  with  commercializing  its  new
products, AutoPak, HiVac and WasteClave (see "Business-Product Under Development
and Commercialization Activities"). The Company believes its sales and marketing
expenses will continue to increase  during 1996 while it  establishes  its sales
personnel complement and marketing for this effort.

     Depreciation and  amortization  increased from $150,930 to $307,813 for the
year  ended  December  31,  1994 and 1995  respectively  or 104%.  Approximately
$96,000 is attributable  to a full year of  amortization of goodwill  associated
with the  acquisition  of OST versus one quarter in 1994, and the purchase of an
updated computer equipment network and software, $60,000.

     Deferred  compensation  increased to  $1,728,000  in 1995 from  $309,375 in
1994.  The increase in non-cash  charges is  attributable  to fully vested stock
option grants to certain directors, officers and consultants at prices less than
market value.

     Research and  development  increased from $223,652 to $369,858 for the year
ended December 31, 1994 and 1995  respectively,  or 65%. New equipment  products
being or already  developed at OST,  accounted for an increase of  approximately
$221,000.  These products  include HiVac and  WasteClave  described  above.  R&D
expenses  for  disposable  products,   specifically  AutoPak,  declined  $75,000
resulting from the completion of development of initial product sizes.

     Interest  expense  increased as a result of interest and debt issuance cost
amortization  related to the Company's term loans.  The Company  obtained a $1.5
million term loan facilitated by a third party guarantor  ($764,000  outstanding
at  December  31,  1995).  The total was  received in two equal parts in May and
November 1994. The loan bears interest at the prime rate plus 2%. The loan calls
for monthly  payments based on a 36 month  amortization  schedule with a balloon
payment due in April 1996.  In April and May 1995,  the loan was  increased by a
total of $1.0 million under  similar  terms,  with the principal  portion of the
loan is due concurrently  with the balloon payment of the original loan in April
1996. The Company  granted an additional  200,000  warrants to guarantors of the
Company's loan which resulted in debt issuance costs.



                                       18
<PAGE>


     On December 24, 1995 the Board of Directors  granted  700,000 stock options
(600,000  at $3.50 and  100,000 at $1.00) to  certain  officers,  directors  and
consultants  of the  Company.  In the fourth  quarter of 1995 the  Company  will
record compensation expense of $1,700,000 related to fully vested options for an
amount  representing  the difference  between the exercise price and fair market
value of OnGard  common  stock on the date of the grant.  The Company  will also
record  deferred  compensation  expense of  $1,087,500  for  options  which vest
ratably over two years,  which will be charged to operations over that time. The
price of OnGard's common stock at the date of the grant was $7 1/8.

Liquidity and Capital Resources

     Certain information set forth herein contains  forward-looking  statements,
as such term is defined in Section 27A of the Securities Act of 1933 and Section
21E of the  Securities  Exchange  Act of 1934.  Such  statements  are subject to
certain  risks and  uncertainties  discussed  herein,  which could cause  actual
results to differ materially from those in the forward-looking statements.

     The Company's working capital at December 31, 1996,  decreased  modestly to
$1,956,000 from $2,085,000 at December 31, 1995. Cash and cash  equivalents were
$885,500 at December 31, 1996 versus  $3,693,000 at December 31, 1995.  Accounts
receivable  increased $10,000 to $785,000 at December 30, 1996, from $775,000 at
December 31, 1995.  Inventory  increased to $2,102,380 at December 30, 1996 from
$1,482,000 at December 31, 1995.

     The Company had an accumulated  deficit of $24,278,000 at December 31, 1996
and expects losses to continue at least through 1997. Cash  requirements to fund
operating  losses  have been  accomplished  primarily  through  equity  and debt
placements.  Operating losses have accelerated since 1994 as a result of funding
the Company's acquired subsidiary, OST, both prior to and after the acquisition.
The Company  invested  $1,883,824  in OST prior to its  acquisition,  and issued
359,602  shares  to  acquire  100%  of the  outstanding  shares  of  Pharmetics.
Subsequent to the date of its acquisition of OST and through  December 31, 1996,
a twenty-six  month  period,  the Company has applied an  additional  $7,126,000
which has been used  substantially  to fund OST's  operating  requirements.  The
operating  requirements  included  the  repayment  of  past  due  trade  credit,
operating losses,  improvements to the existing product line and the development
of two new  sterilization  products:  HiVac,  a  compact  steam  sterilizer  and
WasteClave,  a highly efficient hospital autoclave.  The Company's new products,
which are  proprietary,  and product  enhancements  should generate better gross
margins and should improve  operating  results.  The Company  commenced  selling
these products in late 1995 but as it established  its sales force and marketing
programs during 1996 such expenditures caused continued losses. These losses and
their  financing  have been the most  significant  aspect of the Company's  cash
flow.

     The  Company has begun  calendar  year 1997 with open orders at OST of $2.6
million,  and expects significant  additional orders during 1997 which will also
be filled  during 1997.  Based upon this,  the Company  believes its losses will
decline substantially during 1997.

     Successful  completion of the  Company's  initial  public  offering in 1992
provided  approximately  $4.0  million  to  expand  marketing  efforts  for  the
Company's initial product lines and continue product  enhancement and expansion.
During July 1994,  the Company  completed  a Private  Placement  and an offshore
offering  of 300,000  units  consisting  of two  shares of common  stock and one
warrant  at $7 per unit.  In  addition,  the  Company  obtained  debt  financing
facilitated by a third-party Guarantor. A total of $1.5 million was completed in
two equal parts; the later half was contingent upon the Pharmetics  merger which
was consummated effective October 1, 1994. The Note was secured by the Company's
inventory,   equipment,   accounts   receivable   and  intangible   assets.   In
consideration  for  the  $1.5  million  guarantee,  the  Company  issued  to the
Guarantor or its assigns a


                                       19
<PAGE>


five-year warrant ("Guarantor's  Warrant") to purchase 400,000 shares of Company
Common Stock at an exercise price of $4.00 per share.

     The Note payable to the bank ($764,000 outstanding at December 30, 1995 and
none outstanding at December 31,1996) called for monthly payments at an interest
rate of prime  plus 2% based  upon a  36-month  payment  schedule  and a balloon
payment at the end of one and one-half  years (April 1996).  The Company  repaid
the note at maturity.

     During 1994, the Company also  initiated a private  offering of Convertible
Debentures  ("Debentures")  each  unit  of  which  consists  of  $100,000  in 6%
Convertible  Debentures and 25,000  redeemable  class B common stock warrants to
acquire an equivalent number of common shares at $6.00 per share. The Debentures
were  convertible into shares of the Company's common stock at the option of the
holder or into shares of the  Company's  Series A  Convertible  Preferred  Stock
("Series A Preferred  Stock") at the option of the  Company,  when such Series A
Preferred  Stock  were  approved  by  the  Company's   Shareholders.   Debenture
conversion  was to be based on a  conversion  ratio of  25,000  shares  for each
$100,000 Debenture converted, or $4.00 per share. In January 1995, the Company's
shareholders approved, by a majority vote, the authorization of preferred stock.
As a result,  the total $1.5 million raised from the offering  through  February
1995 became equity and the Company issued 375,000 Series A preferred  shares and
375,000 Class B common stock warrants.

     In addition,  during  February  1995 the Company  sold shares,  through the
exercise of Class A warrants from existing warrant holders, totaling $320,000 in
gross proceeds.  The Company provided an incentive to Class A warrant holders by
reducing the exercise  price to $4.50 for a period of 30 days. In April and May,
1995,  the guarantor of the Company's  bank line  (described  above) and another
investor in OnGard facilitated $1,000,000 of additional bank borrowings. The two
new  $500,000  notes bear  interest at the rate of 11% per annum and matured and
were paid in full on April 15, 1996.

     In  September,  1995,  the  Company  completed  a  private  placement  (the
"September  1995  Private  Placement")  of the sale of  2,204,021  shares of the
Company's common stock at a price of $3.50 per share  aggregating gross proceeds
of  $7,714,028  and net  proceeds of  $7,634,028.  The  September  1995  Private
Placement  required that the Company  register such Common Shares issued in this
placement,  which it did during  1996.  Pursuant to the  September  1995 Private
Placement, the Company also sold 100 shares of its Series B Redeemable Preferred
Limited Voting Stock (the "Series B preferred stock"). Provided that the holders
of the  Series  B  preferred  stock  own in the  aggregate  at  least  5% of the
Company's Common Stock, the holders of the Series B preferred stock can nominate
and elect one member to the Company's Board of Directors.

     The Company also  obtained  funds from the exercise of  outstanding  Common
Stock purchase  warrants.  These warrants were to expire on August 11, 1995, but
were  extended  until April 30, 1996.  The net  proceeds to the Company  through
warrant exercise were $5.7 million by the expiration date. The Company will need
additional  funds for working  capital as its orders for its new  product  lines
increase and to fund operating  losses.  In April 1997,  the Company  obtained a
commitment for a credit line with a bank,  secured by the Company's tangible and
intangible assets and facilitated guarantors ( the "Guarantors"), who are either
investors  or option  holders of the  Company.  The credit line of $1.0  million
matures 12 months from inception, in April 1998, and bears interest at the LIBOR
rate plus 2%. In  exchange  for their  guarantee,  the Company  granted  375,000
warrants to purchase the  Company's  common stock price per share at the closing
date or $2.00 per share,  whichever is lower. At maturity, the Company will seek
alternatives  to repay the debt with new  equity,  determine  if the line can be
extended or refinanced with new debt. In addition, the Company has received $1.5
million  from  the  sale  of  convertible  Debentures  (the  "Debentures").  The
Debentures  are  convertible  into  common  stock  of  the  Company  in  $50,000
denominations at any time after a 45-day  restriction period at a price equal to
the then fair market value of the common stock less 22 1/2% or, the price at the
funding date, whichever is lower. The


                                       20
<PAGE>


Debentures  bear  interest  at the rate of 6% per annum until  conversion;  such
interest is payable  quarterly in cash or common  stock of the  Company,  at the
Company's  option.  The Debentures mature five years from issuance at which time
any remaining  amounts convert to common stock.  The Company will grant warrants
to the  placement  agent equal to 10% of the funds raised at the exercise  price
described above and pay placement fees of approximately 10% of the funds raised.
The Company  projects  that these funds plus its existing  cash position will be
sufficient to fund operations through December 31, 1997. The placement agent has
committed to financing an additional $3.5 million until February 28, 1998, under
the same  terms  discussed  above;  the  additional  financing  is solely at the
Company's  option.  However,  in the event such commitment is unfulfilled by the
Company,  an  additional  2% of  such  unfulfilled  commitment  will  be paid in
warrants to the placement agent on the terms described  above.  The Company will
record the value of warrants to the  quarantors,  and the  discount  from market
price  provided  to the  Debenture  holders,  as a non-cash  charge  included as
interest expense.

     Although the Company has been  successful  to date in obtaining  sources of
financing  sufficient to meet current and past due trade  obligations  and other
expenses and to enable it to pursue its business  plans  generally,  there is no
assurance it will be successful in this regard in the future. Furthermore, there
can be no  assurance  that such funds  will be  adequate  to fund the  Company's
operations  until it is able to  generate  cash from  operations  sufficient  to
sustain its ongoing operations without additional external sources of capital.

Item 7.  Financial Statements

        INDEX                                                    Page
        -----                                                    ----

        Report of Independent Public Accountants                 F-1

        Consolidated Balance Sheet                               F-2

        Consolidated Statements of Operations                    F-3

        Consolidated Statements of Stockholders' Equity          F-4

        Consolidated Statements of Cash Flow                     F-5

        Notes to Consolidated Financial Statements               F-6


                                       21


<PAGE>




                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS



To OnGard Systems, Inc.:

We have audited the accompanying consolidated balance sheets of OnGard Systems,
Inc. (a Delaware corporation) and subsidiary as of December 31, 1996 and 1995,
and the related consolidated statements of operations, stockholders' equity and
cash flows for the years then ended. 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 OnGard Systems, Inc. and
subsidiary as of December 31, 1996 and 1995, and the results of their operations
and their cash flows for the years then ended in conformity with generally
accepted accounting principles.

                                                         /s/ARTHUR ANDERSEN LLP
                                                         -----------------------
                                                         ARTHUR ANDERSEN LLP


Melville, New York
April 11, 1997



<PAGE>


<TABLE>
<CAPTION>
                                                 ONGARD SYSTEMS, INC. AND SUBSIDIARY
                                                     CONSOLIDATED BALANCE SHEETS
                                                  AS OF DECEMBER 31, 1996 AND 1995

                                  ASSETS                                                               1996                1995
                                                                                                   ------------        ------------

<S>                                                                                                <C>                 <C>
CURRENT ASSETS:
  Cash and cash equivalents                                                                        $    885,552        $  3,693,303
  Restricted cash                                                                                        50,000              97,363
  Trade accounts receivable, net of allowance of $40,000 and $119,186,
    respectively                                                                                        744,856             656,274
  Inventory, net                                                                                      2,102,380           1,481,847
  Prepaid expenses and other current assets                                                             203,712              77,881
                                                                                                   ------------        ------------
                  Total current assets                                                                3,986,500           6,006,668
                                                                                                   ------------        ------------

PROPERTY AND EQUIPMENT, net                                                                           1,836,056           1,152,573
                                                                                                   ------------        ------------
EQUIPMENT UNDER OPERATING LEASE, net                                                                    237,594             134,440
                                                                                                   ------------        ------------

OTHER ASSETS:
  Excess cost over net tangible assets acquired, net                                                  2,268,788           2,396,608
  Intangible and other assets, net                                                                      303,359             238,258
  Deposits                                                                                               95,241              51,151
  Debt guarantee fee, net                                                                                  --               140,740
                                                                                                   ------------        ------------
                  Total other assets                                                                  2,667,388           2,826,757
                                                                                                   ------------        ------------
                                                                                                   $  8,727,538        $ 10,120,438
                                                                                                   ============        ============
                           LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
  Notes payable to bank                                                                            $       --          $  1,764,270
  Trade accounts payable                                                                                541,604             839,187
  Accrued liabilities                                                                                 1,242,257           1,251,050
  Capital lease obligations                                                                             186,741              88,362
  Customer deposits                                                                                     221,359              89,994
  Current portion of notes payable                                                                       98,847                --
                                                                                                   ------------        ------------
                  Total current liabilities                                                           2,290,808           4,032,863

CAPITAL LEASE OBLIGATIONS                                                                               198,051                --
NOTES PAYABLE                                                                                           109,520              50,735
                                                                                                   ------------        ------------
                  Total liabilities                                                                   2,598,379           4,083,598
                                                                                                   ------------        ------------

COMMITMENTS AND CONTINGENCIES (Notes 6 and 11)

STOCKHOLDERS' EQUITY:
  Convertible Series A Preferred stock, $.001 par value, 3,000,000 shares
    authorized; 253,292 and 378,292 issued and outstanding as of December 31,
    1996 and 1995, respectively; aggregated liquidation preference of $1,013,168
    and $1,513,168, respectively                                                                        778,167           1,228,167
  Series B Redeemable Preferred stock, no par value; 100 shares issued and
    outstanding as of December 31, 1996 and 1995                                                             10                  10
  Common stock, $.001 par value, 25,000,000 and 10,000,000 shares authorized
    as of December 31, 1996 and 1995, respectively; 6,613,722 and 5,355,281
    shares issued and outstanding, respectively                                                           6,614               5,355
  Additional paid-in capital                                                                         30,212,161          23,983,803
  Deferred compensation                                                                                (589,500)         (1,189,500)
  Accumulated deficit                                                                               (24,278,293)        (17,990,995)
                                                                                                   ------------        ------------
                  Total stockholders' equity                                                          6,129,159           6,036,840
                                                                                                   ------------        ------------
                                                                                                   $  8,727,538        $ 10,120,438
                                                                                                   ============        ============
</TABLE>

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


                                      F-2
<PAGE>



<TABLE>
<CAPTION>
                                                 ONGARD SYSTEMS, INC. AND SUBSIDIARY

                                                CONSOLIDATED STATEMENTS OF OPERATIONS

                                           FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995

                                                                                                  1996                      1995
                                                                                             -----------                -----------

<S>                                                                                          <C>                        <C>
REVENUES                                                                                     $ 3,688,186                $ 4,975,069

COST OF SALES                                                                                  4,716,411                  5,286,358
START UP PRODUCTION COSTS                                                                        147,052                       --
                                                                                             -----------                -----------

                  Operating margin (deficit)                                                  (1,175,277)                  (311,289)
                                                                                             -----------                -----------

COSTS AND EXPENSES:
  General and administrative                                                                   2,071,203                  2,611,697
  Sales and marketing                                                                          1,722,800                  1,468,319
  Depreciation and amortization                                                                  392,254                    307,813
  Deferred compensation                                                                          691,500                  1,728,125
  Research and development                                                                       175,780                    369,859
                                                                                             -----------                -----------

                  Total costs and expenses                                                     5,053,537                  6,485,813
                                                                                             -----------                -----------

LOSS FROM OPERATIONS                                                                          (6,228,814)                (6,797,102)

INTEREST EXPENSE                                                                                (319,027)                  (549,332)

OTHER EXPENSE                                                                                    (49,893)                   (23,365)

INTEREST AND OTHER INCOME, net                                                                   310,436                    381,799
                                                                                             -----------                -----------

LOSS BEFORE PROVISION FOR INCOME TAXES                                                        (6,287,298)                (6,988,000)

PROVISION FOR INCOME TAXES                                                                          --                         --
                                                                                             -----------                -----------

NET LOSS                                                                                     $(6,287,298)               $(6,988,000)
                                                                                             ===========                ===========

NET LOSS PER SHARE                                                                                  (.99)                     (1.76)
                                                                                             ===========                ===========

WEIGHTED AVERAGE NUMBER OF COMMON SHARES
  OUTSTANDING                                                                                  6,365,250                  3,961,700
                                                                                             ===========                ===========
</TABLE>



        The accompanying notes are an integral part of these statements.


                                      F-3
<PAGE>


<TABLE>
<CAPTION>
                                                 ONGARD SYSTEMS, INC. AND SUBSIDIARY

                                           CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

                                           FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995


                                                              Convertible Series A          Series B Redeemable       
                                                                Preferred Stock               Preferred Stock         
                                                            ----------------------         ---------------------      
                                                            Shares          Amount         Shares          Amount     
                                                        ------------    ------------    ------------    ------------  
<S>                                                          <C>        <C>                     <C>     <C>           
BALANCE, December 31, 1994                                      --      $       --              --      $       --    

  Conversion of convertible debentures to Class A
   preferred stock, net of debt discount                     250,000         765,000            --              --    

  Issuance of 3,292 Series A preferred shares for
   accrued interest on convertible debentures                  3,292          13,167            --              --    

  Sale of 125,000 Series A preferred shares, net of
   underwriters' commissions of $50,000                      125,000         450,000            --              --    

  Issuance of 100 shares of Series B redeemable
   preferred limited voting stock                               --              --               100              10  

  Conversion of 71,429 Series A warrants to common
   stock, net of underwriters commissions of $25,000            --              --              --              --    

  Conversion of related party notes payable and
   interest to common stock                                     --              --              --              --    

  Issuance of 200,000 warrants in connection with
   guarantee of the Company's notes payable to bank             --              --              --              --    

  Issuance of 2,204,021 common shares in connection
   with equity private placement, net of issuance               --              --              --              --    
   costs of $80,000

  Deferred compensation related to stock options                --              --              --              --    
   granted

  Compensation related to stock options granted                 --              --              --              --    

  Amortization of deferred compensation                         --              --              --              --    

  Conversion of vendor payables to common stock                 --              --              --              --    

  Exercise of common stock warrants                             --              --              --              --    

  Net loss                                                      --              --              --              --    
                                                        ------------    ------------    ------------    ------------  
BALANCE, December 31, 1995                                   378,292       1,228,167             100              10  


  Issuance of 1,129,941 common shares in connection
   with conversion of common stock purchase warrants,
   net of commissions and other expenses of $371,000            --              --              --              --    

  Exercise of employee stock options                            --              --              --              --    

  Conversion of Series A preferred stock to common          (125,000)       (450,000)           --              --    
   stock

  Amortization of deferred compensation                         --              --              --              --    

  Deferred compensation related to issuance of stock
   options to non-employee                                      --              --              --              --    

  Net loss                                                      --              --              --              --    
                                                        ------------    ------------    ------------    ------------  

BALANCE, December 31, 1996                                   253,292    $    778,167             100    $         10  
                                                        ============    ============    ============    ============  

<CAPTION>
                                                                   Common Stock             Additional                   
                                                              -----------------------        Paid-In       Deferred      
                                                              Shares          Amount         Capital     Compensation    
                                                           ------------   ------------    ------------   ------------    
                                                                                                                         
                                                                                                                         
                                                              <C>         <C>             <C>            <C>             
BALANCE, December 31, 1994                                    3,029,602   $      3,030    $ 12,765,948   $   (150,000)   
                                                                                                                         
  Conversion of convertible debentures to Class A                                                                        
   preferred stock, net of debt discount                           --             --              --             --      
                                                                                                                         
  Issuance of 3,292 Series A preferred shares for                                                                        
   accrued interest on convertible debentures                      --             --              --             --      
                                                                                                                         
  Sale of 125,000 Series A preferred shares, net of                                                                      
   underwriters' commissions of $50,000                            --             --              --             --      
                                                                                                                         
  Issuance of 100 shares of Series B redeemable                                                                          
   preferred limited voting stock                                  --             --              --             --      
                                                                                                                         
  Conversion of 71,429 Series A warrants to common                                                                       
   stock, net of underwriters commissions of $25,000             71,429             71         296,359           --      
                                                                                                                         
  Conversion of related party notes payable and                                                                          
   interest to common stock                                      12,373             12          59,910           --      
                                                                                                                         
  Issuance of 200,000 warrants in connection with                                                                        
   guarantee of the Company's notes payable to bank                --             --           200,000           --      
                                                                                                                         
  Issuance of 2,204,021 common shares in connection                                                                      
   with equity private placement, net of issuance             2,204,021          2,204       7,631,844           --      
   costs of $80,000                                                                                                      
                                                                                                                         
  Deferred compensation related to stock options                   --             --         1,087,500     (1,087,500)   
   granted                                                                                                               
                                                                                                                         
  Compensation related to stock options granted                    --             --         1,700,000           --      
                                                                                                                         
  Amortization of deferred compensation                            --             --              --           48,000    
                                                                                                                         
  Conversion of vendor payables to common stock                  35,200             35         228,062           --      
                                                                                                                         
  Exercise of common stock warrants                               2,656              3          14,180           --      
                                                                                                                         
  Net loss                                                         --             --              --             --      
                                                           ------------   ------------    ------------   ------------    
BALANCE, December 31, 1995                                    5,355,281          5,355      23,983,803     (1,189,500)   
                                                                                                                         
                                                                                                                         
  Issuance of 1,129,941 common shares in connection                                                                      
   with conversion of common stock purchase warrants,                                                                    
   net of commissions and other expenses of $371,000          1,129,941          1,130       5,664,237           --      
                                                                                                                         
  Exercise of employee stock options                              3,500              4          22,746           --      
                                                                                                                         
  Conversion of Series A preferred stock to common              125,000            125         449,875           --      
   stock                                                                                                                 
                                                                                                                         
  Amortization of deferred compensation                            --             --              --          691,500    
                                                                                                                         
  Deferred compensation related to issuance of stock                                                                     
   options to non-employee                                         --             --            91,500        (91,500)   
                                                                                                                         
  Net loss                                                         --             --              --             --      
                                                           ------------   ------------    ------------   ------------    
                                                                                                                         
BALANCE, December 31, 1996                                    6,613,722   $      6,614    $ 30,212,161   $   (589,500)   
                                                           ============   ============    ============   ============    
                                                                                                                         

<CAPTION>
                                                                            Total          
                                                         Accumulated     Stockholders'     
                                                           Deficit          Equity         
                                                        ------------     -------------     
                                                                                           
                                                                                           
<S>                                                     <C>             <C>                
BALANCE, December 31, 1994                              $(11,002,995)   $  1,615,983       
                                                                                           
  Conversion of convertible debentures to Class A                                          
   preferred stock, net of debt discount                        --           765,000       
                                                                                           
  Issuance of 3,292 Series A preferred shares for                                          
   accrued interest on convertible debentures                   --            13,167       
                                                                                           
  Sale of 125,000 Series A preferred shares, net of                                        
   underwriters' commissions of $50,000                         --           450,000       
                                                                                           
  Issuance of 100 shares of Series B redeemable                                            
   preferred limited voting stock                               --                10       
                                                                                           
  Conversion of 71,429 Series A warrants to common                                         
   stock, net of underwriters commissions of $25,000            --           296,430       
                                                                                           
  Conversion of related party notes payable and                                            
   interest to common stock                                     --            59,922       
                                                                                           
  Issuance of 200,000 warrants in connection with                                          
   guarantee of the Company's notes payable to bank             --           200,000       
                                                                                           
  Issuance of 2,204,021 common shares in connection                                        
   with equity private placement, net of issuance               --         7,634,048       
   costs of $80,000                                                                        
                                                                                           
  Deferred compensation related to stock options                --              --         
   granted                                                                                 
                                                                                           
  Compensation related to stock options granted                 --         1,700,000       
                                                                                           
  Amortization of deferred compensation                         --            48,000       
                                                                                           
  Conversion of vendor payables to common stock                 --           228,097       
                                                                                           
  Exercise of common stock warrants                             --            14,183       
                                                                                           
  Net loss                                                (6,988,000)     (6,988,000)      
                                                        ------------    ------------       
BALANCE, December 31, 1995                               (17,990,995)      6,036,840       
                                                                                           
                                                                                           
  Issuance of 1,129,941 common shares in connection                                        
   with conversion of common stock purchase warrants,                                      
   net of commissions and other expenses of $371,000            --         5,665,367       
                                                                                           
  Exercise of employee stock options                            --            22,750       
                                                                                           
  Conversion of Series A preferred stock to common              --              --         
   stock                                                                                   
                                                                                           
  Amortization of deferred compensation                         --           691,500       
                                                                                           
  Deferred compensation related to issuance of stock                                       
   options to non-employee                                      --              --         
                                                                                           
  Net loss                                                (6,287,298)     (6,287,298)      
                                                        ------------    ------------       
                                                                                           
BALANCE, December 31, 1996                              $(24,278,293)   $  6,129,159       
                                                        ============    ============       
</TABLE>


        The accompanying notes are an integral part of these statements.

                                       F-4
<PAGE>


<TABLE>
<CAPTION>
                                                 ONGARD SYSTEMS, INC. AND SUBSIDIARY
                                                CONSOLIDATED STATEMENTS OF CASH FLOWS
                                           FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
                                                                                                            1996               1995
                                                                                                     -----------        -----------
<S>                                                                                                  <C>                <C>         
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net loss                                                                                           $(6,287,298)       $(6,988,000)
  Adjustments to reconcile net loss to net cash used in operating activities-
    Depreciation and amortization and non-cash interest                                                  814,911            835,715
    Compensation expense related to stock options granted                                                691,500          1,748,000
    Gain on sale of packaging assets                                                                        --             (233,500)
    Provision for doubtful accounts                                                                      (79,186)            52,000
    Write-off of selected intangible packaging line assets                                                  --              110,000
  Changes in assets and liabilities:
    Decrease (increase) in restricted cash                                                                47,363            (47,363)
    Decrease (increase) in trade accounts receivable                                                      (9,396)           625,846
    Increase in inventory                                                                               (737,113)          (404,363)
    Increase in prepaid expenses and other current assets                                               (125,831)           (71,556)
    Decrease in trade accounts payable and accrued liabilities                                          (298,859)        (1,045,803)
    Increase in customer deposits                                                                        131,365             59,535
                                                                                                     -----------        -----------

                Net cash used in operating activities                                                 (5,852,544)        (5,359,489)
                                                                                                     -----------        -----------

CASH FLOWS FROM INVESTING ACTIVITIES:
  Purchases of property and equipment                                                                   (312,965)          (298,076)
  Proceeds from sale of packaging assets                                                                    --              620,500
  Decrease (increase) in other assets                                                                   (137,111)            68,134
                                                                                                     -----------        -----------

                Net cash provided by (used in) investing activities                                     (450,076)           390,558
                                                                                                     -----------        -----------

CASH FLOWS FROM FINANCING ACTIVITIES:
  Proceeds from issuance of preferred stock                                                                 --              450,010
  Proceeds from issuance of common stock                                                                  22,750          7,944,641
  Proceeds from conversion of warrants to common stock, net                                            5,665,367               --
  Payment of notes payable to related parties                                                             (7,500)           (55,500)
  Proceeds from notes payable to bank                                                                       --            1,000,000
  Payment of note payable to bank                                                                     (1,764,270)          (666,109)
  Payment of capital leases payable                                                                     (229,108)           (79,523)
  Payment of leasehold improvements financed by owner and other                                         (192,370)              --
                                                                                                     -----------        -----------

                Net cash provided by financing activities                                              3,494,869          8,593,519
                                                                                                     -----------        -----------

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                                                  (2,807,751)         3,624,588

CASH AND CASH EQUIVALENTS, beginning of year                                                           3,693,303             68,715
                                                                                                     -----------        -----------

CASH AND CASH EQUIVALENTS, end of year                                                               $   885,552        $ 3,693,303
                                                                                                     ===========        ===========

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
  Cash paid for interest                                                                             $   170,019        $   131,274
                                                                                                     ===========        ===========

SUPPLEMENTAL SCHEDULE OF NON-CASH FINANCING ACTIVITIES:
  Conversion of convertible debentures to preferred stock                                                   --              765,000
  Conversion of related party notes payable and accrued interest to common stock                            --               59,922
  Conversion of vendor payables to common stock                                                             --              228,097
  Conversion of preferred stock to common stock                                                          450,000               --
  Leasehold improvements financed by owner                                                               350,000               --
  Acquisition of equipment through capital leases                                                        525,128            145,517
  Fair value of warrants issued to guarantor for bank debt (Notes 8 and 9)                                  --              200,000
  Reclassification of inventory to equipment under operating lease                                       116,580            134,440
</TABLE>

        The accompanying notes are an integral part of these statements.


                                      F-5
<PAGE>


                       ONGARD SYSTEMS, INC. AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                           DECEMBER 31, 1996 AND 1995

1.   ORGANIZATION AND BUSINESS:

OnGard Systems, Inc. ("OnGard" or the "Company") manufactures and markets both
equipment and disposable sterility assurance products for the control of
infectious diseases. These products serve a broad spectrum of healthcare
providers in a variety of markets. Through its 1994 acquisition of Pharmetics,
Inc. ("Pharmetics"), now known as OnGard Sterilization Technologies, Inc.
("OST"), a wholly-owned subsidiary of the Company, the Company manufactures
sterilizers, washers and dryers used for the control of infection in hospital,
pharmaceutical, laboratory and research facilities. The Company also sells
products for the safe, efficient and economic handling, storage, transportation
and disposal of infectious medical waste, and is also engaged in the production
and distribution of sterile packaging.

During 1993, the Company and Med-Device Packaging, Inc. ("MDPI") entered into an
Asset Purchase Agreement (the "Purchase Agreement"), effective January 1, 1993,
whereby the Company purchased substantially all of MDPI's assets and assumed
certain MDPI liabilities. Effective December 7, 1995, the Company sold selected
MDPI assets to another company in order to focus on its proprietary
sterilization packaging line, Autopak(TM), and sterilization equipment business.
Sales proceeds for the packaging equipment and inventory aggregated $620,500.
The gain on the sale of these assets was $233,500. In connection with the
disposal, the Company wrote-off related goodwill and a non-compete agreement
aggregating $68,000 during 1995. The Company also retained related accounts
receivable.

2.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of the
Company and its wholly owned subsidiary. All significant intercompany accounts
and transactions have been eliminated in consolidation.

Use of Estimates

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

Cash Equivalents

The Company considers all highly liquid cash investments with an original
maturity of three months or less to be cash equivalents.


                                      F-6
<PAGE>


Restricted Cash

The Company has a standby letter of credit for $50,000 for the transportation of
medical waste by the U.S. Postal Service. The letter of credit had no balance
outstanding at December 31, 1996 and 1995, and is backed by the restriction of a
$50,000 certificate of deposit, which is classified as restricted cash in the
accompanying consolidated balance sheets as of December 31, 1996 and 1995. As of
December 31, 1995, an additional $47,000 was held in escrow related to the sale
of MDPI assets (Note 1).

Inventory

Inventory is stated at the lower of cost (first-in, first-out method) or market.
Work-in-process and finished goods inventory include direct manufacturing costs
and an allocation of overhead.

Inventory, net consists of the following:

                                                            December 31,
                                                      1996                 1995
                                                 ----------           ----------
Raw materials                                    $1,356,476           $  905,886
Work-in-process                                     629,280              477,901
Finished goods                                      116,624               98,060
                                                 ----------           ----------
                                                 $2,102,380           $1,481,847
                                                 ==========           ==========

Property and Equipment

Property and equipment are recorded at cost, less accumulated depreciation and
amortization. Depreciation and amortization are provided on a straight-line
basis over the following estimated useful lives:

  Machinery and equipment                3 - 7 years
  Furniture and fixtures                 5 - 7 years
  Leasehold improvements                 remaining term of lease or estimated 
                                           useful life, whichever is less

Expenditures for maintenance and repairs which do not materially prolong the
normal useful life of an asset are charged to operations as incurred. Additions
and improvements which substantially extend the useful lives of the properties
are capitalized. The cost and related accumulated depreciation and amortization
of property and equipment are removed from the accounts upon retirement or other
disposition, and any resulting gain or loss is reflected in earnings.

Excess Cost Over Net Tangible Assets Acquired

Excess cost over net tangible assets acquired is being amortized over 20 years.
The balances at December 31, 1996 and 1995 of $2,268,788 and $2,396,608 are net
of $287,594 and $159,774 of accumulated amortization, respectively.

Intangible and Other Assets

The costs of the Company's patents and trademark are being amortized on a
straight-line basis over 17 years from the date the patents and trademark were
obtained.


                                      F-7
<PAGE>


Debt Guarantee Fee

Debt guarantee fee reflected the fair value of warrants issued to the guarantors
of the Company's $2.5 million bank loans in exchange for the guarantee (Note 8).
The costs were amortized over the life of the loan as interest expense. The
Company obtained an investment banking opinion on the fair value assigned to
these warrants, which was fully amortized at December 31, 1996.

Fair Value of Financial Instruments

The Company calculates the fair value of financial instruments and includes this
additional information in the notes to financial statements when the fair value
is different than the book value of those financial instruments. When the fair
value approximates book value, no additional disclosure is made. The Company
uses quoted market prices whenever available to calculate these fair values.
When quoted market prices are not available, the Company uses standard pricing
models for various types of financial instruments which take into account the
present value of estimated future cash flows. At December 31, 1996 and 1995, the
carrying value of all financial instruments approximated fair value.

Impairment of Long-Lived Assets

During March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed Of". This
statement establishes financial accounting and reporting standards for the
impairment of long-lived assets, certain identifiable intangibles, and goodwill
related to those assets to be held and used, and for long-lived assets and
certain identifiable intangibles to be disposed of. This statement was adopted
by the Company effective January 1, 1996. No impairment loss was recognized as a
result of the adoption of this statement.

Warranty Reserve

The Company provides a warranty on its equipment sales. Estimated warranty costs
are accrued at the time the equipment is sold. The Company has a warranty
reserve of approximately $100,000 and $91,000 as of December 31, 1996 and 1995,
respectively, which is included in accrued liabilities in the accompanying
consolidated balance sheets.

Accrued Liabilities

Accrued incineration and postage expenses represent the expected costs
associated with the ultimate disposal of the Company's mail-back products.
Mail-back products are disposable containers used to collect medical waste by
customers who then mail the filled containers through the U.S. Postal Service
(Note 11) to an incinerator. An accrual is made for each mail-back product sold
and, as the containers are received by the incinerator, charges for incineration
and postage are billed to and paid by the Company.

Accrued liabilities consist of the following:

                                                              December 31,
                                                           1996           1995
                                                       ----------     ----------
Legal                                                  $   85,966     $  125,343
Incineration and postage                                  420,000        370,089
Commissions                                               123,662        154,144
Accrued vacation, payroll and related taxes               155,165        123,253
Other                                                     457,464        478,221
                                                       ----------     ----------
                                                       $1,242,257     $1,251,050
                                                       ==========     ==========


                                      F-8
<PAGE>


Revenue Recognition

The Company generally recognizes revenue from product sales upon shipment to the
customer. If a product shipment is delayed at the customer's request, the
Company recognizes revenue upon completion and acceptance by the customer.

Major Customers

The Company had no single customer which would be characterized as a major
customer during 1996. The Company had one customer which accounted for 10% of
total revenue during 1995. As a result of the sale of medical device packaging
assets the Company no longer sells to this customer. During 1995, one of the
Company's 1994 major customers divested a division to another entity resulting
in the Company selling to both entities. Due to the divestiture neither of these
was a major customer, although the Company retained the sales to both.

Research and Development

Research and development costs incurred by the Company associated with the
development of preproduction prototypes are expensed as incurred.

Income Taxes

The Company accounts for income taxes under the provisions of Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS
109"). SFAS 109 requires recognition of deferred income tax assets and
liabilities for the expected future income tax consequences, based on enacted
laws, of temporary differences between the financial reporting and tax bases of
assets and liabilities. In addition, SFAS 109 requires recognition of deferred
tax assets for the expected future tax effects of tax loss carryforwards and tax
credit carryforwards. Net deferred tax assets are then reduced, if deemed
necessary, by a valuation allowance for the amount of any tax benefits which,
more likely than not based on current circumstances, are not expected to be
realized (Note 7).

Stock-Based Compensation

In October 1995, the Financial Accounting Standards Board issued SFAS No. 123,
"Accounting for Stock-Based Compensation". This statement establishes a fair
value based method of accounting for an employee stock option or similar equity
instrument but allows companies to continue to measure compensation cost for
those plans using the intrinsic value based method of accounting prescribed by
APB Opinion No. 25, "Accounting for Stock Issued to Employees". Companies
electing to continue using the accounting under APB Opinion No. 25 must,
however, make pro forma disclosures of net income and earnings per share as if
the fair value based method of accounting defined in SFAS No. 123 had been
applied (Note 9). These disclosure requirements are effective for years
beginning after December 15, 1995. The Company has elected to continue
accounting for its stock-based compensation awards to employees and directors
under the accounting prescribed by APB Opinion No. 25 and to provide the
disclosures required by SFAS No. 123. As required, the Company has adopted SFAS
No. 123 to account for stock-based compensations awards to outside consultants.

Net Loss Per Share

Net loss per share is based on the weighted average number of common shares
outstanding during each year. Due to the Company's net losses in 1996 and 1995,
common stock equivalents of the Company are not included in the net loss per
share calculation, as the inclusion of such common stock equivalents would be
antidilutive.


                                      F-9
<PAGE>


Recently Issued Accounting Standards

In March 1997, the Financial Accounting Standards Board issued SFAS No. 128,
"Earnings Per Share". This statement establishes standards for computing and
presenting earnings per share ("EPS"), replacing the presentation of currently
required primary EPS with a presentation of Basic EPS. SFAS 128 is effective for
financial statements issued for periods ending after December 15, 1997,
including interim periods, and earlier application is not permitted. When
adopted, the Company will be required to restate its EPS data for all prior
periods presented. The Company does not expect the impact of the adoption of
this statement to be material to previously reported EPS amounts.

Reclassifications

Certain prior year amounts have been reclassified to conform with the current
year presentation.

3.   PROPERTY AND EQUIPMENT:

Property and equipment consists of the following:

                                                             December 31,
                                                         1996           1995
                                                     -----------    -----------
Furniture and fixtures                               $    86,080    $    62,256
Leasehold improvements                                   784,140        415,142
Machinery and equipment                                2,079,400      1,418,999
                                                     -----------    -----------
                                                       2,949,620      1,896,397

Less-Accumulated depreciation and amortization        (1,113,564)      (743,824)
                                                     -----------    -----------
                                                     $ 1,836,056    $ 1,152,573
                                                     ===========    ===========

Equipment under capital leases, included in property and equipment was
approximately $520,000 and $87,000 as of December 31, 1996 and 1995,
respectively.

4.   INTANGIBLE AND OTHER ASSETS:

Intangible and other assets consist of the following:

                                                            December 31,
                                                       1996               1995
                                                    ---------         ---------
Patents and trademark                               $ 338,150         $ 245,132
Non-compete agreement                                    --              36,662
Other                                                  20,000            20,000
                                                    ---------         ---------
                                                      358,150           301,794

Less-Accumulated amortization                         (54,791)          (63,536)
                                                    ---------         ---------
                                                    $ 303,359         $ 238,258
                                                    =========         =========


                                      F-10
<PAGE>


5.   NOTES PAYABLE TO RELATED PARTIES:

The Company had a note payable outstanding to an employee of the Company for
$48,000, which was paid in 1995. In 1989, the Company issued a $30,000 unsecured
note to one of the founding stockholders of the Company as consideration for
funding start-up losses. The note provided for interest payable at prime plus
1%, and matured June 28, 1993. This note, including accrued interest, was
settled in 1995 with the issuance of 10,268 shares of the Company's common
stock. Through its acquisition of Pharmetics, the Company also had a $30,000
unsecured note payable to one of its employees which had been classified as a
current liability at December 31, 1994. The note was repaid during 1995 and 1996
in part with 2,105 shares of the Company's common stock and the remainder with
$15,000 in cash.

6.   LEASES:

The Company leases its New York office and warehouse facilities and a sales
office in Denver, and has other minor noncancelable operating leases including
office and factory equipment which range from three to five years. In connection
with the consolidation of its Denver and New York facilities, in January 1996,
the Company assigned the lease for its former Denver facility effective April 1,
1996. Through this assignment, the Company was granted complete release from its
obligations under the lease and also receives additional payments from the
assignee in excess of its monthly rental payments through May 1998. The New York
facility lease expires in January 2000. Total rental expense for 1996 and 1995
was $252,121 and $258,651, respectively. Future minimum operating lease payments
are as follows, which excludes payments relating to the assigned lease in
Denver:

                         1997                       $223,000
                         1998                        251,000
                         1999                        261,000
                         2000                         23,000
                   Thereafter                           --

The Company also leases certain fixed assets that are capitalized as of December
31, 1996. Future obligations on these leases are approximately $385,000, plus
accrued interest of $85,000.

7.   INCOME TAXES:

Net deferred tax assets and liabilities consist of the following:

                                                       December 31,
                                                   1996           1995
                                            -----------    -----------
         Current:
         Accounts receivable                $    15,200    $    45,291
         Inventory                               45,875        102,661
         Other                                     --           37,048
                                            -----------    -----------
                                                 61,075        185,000
                                            -----------    -----------
         Noncurrent:
         Fixed assets                           (50,000)       (48,715)
         Stock compensation                     891,385        646,000
         Net operating loss carryforwards     8,166,693      6,167,156
                                            -----------    -----------
                                              9,008,078      6,764,441
                                            -----------    -----------
         Total net deferred tax asset         9,069,153      6,949,441

         Valuation allowance                 (9,069,153)    (6,949,441)
                                            -----------    -----------
         Net deferred tax asset             $      --      $      --
                                            ===========    ===========


                                      F-11
<PAGE>


The Company's effective income tax rate was different than the statutory federal
income tax rate as follows:

                                                           1996         1995
                                                       -----------  -----------
Federal income tax (benefit) at statutory rates        $(1,999,537) $(2,338,000)
State income tax (benefit), net of Federal effect         (194,138)    (227,000)
Valuation allowance on net operating loss carryforwards  2,193,675    2,565,000
                                                       -----------  -----------
                                                       $     --     $     --   
                                                       ===========  ===========

The Company has no state or federal income taxes currently payable at December
31, 1996 or 1995.

The differences between the fiscal 1996 and 1995 losses reported for financial
reporting and income tax purposes relate primarily to differences in the timing
of certain reported items including depreciation and amortization expense and
provision for losses.

At December 31, 1996 and 1995, respectively, the Company has net operating loss
("NOL") carryforwards of approximately $21,491,000 and $16,229,000 currently
available for federal income tax purposes which expire through 2011. The
Company's initial public offering ("IPO") and certain other ownership changes
have limited the Company's ability to utilize its NOL carryforwards existing at
the dates of the respective ownership changes. The Pharmetics preacquisition NOL
of approximately $3,990,000, which is included in the above amount, will be
significantly limited due to the change in control resulting from the
acquisition by OnGard.

The Company has determined that its net deferred tax assets as of December 31,
1996 and 1995 do not satisfy the realization criteria set forth in SFAS 109.
Recognition of these benefits requires future taxable income, the attainment of
which is uncertain. Accordingly, a valuation allowance has been recorded to
offset the entire net deferred tax asset.

8.   NOTES PAYABLE:

In 1994, the Company obtained a $1.5 million bank loan facilitated by a
third-party guarantor. The total $1.5 million was received in two equal parts;
the first half was a revolving credit facility and the second was contingent
upon completion of the Pharmetics merger, which was consummated effective
October 1, 1994 (Note 1). Upon issuance of the second $750,000, the total
revolving credit facility converted to a $1.5 million term loan, dated November
1994, which bears interest at the prime rate plus 2%. As of December 31, 1995,
there was $764,270 outstanding under this term loan. During 1995, the guarantor
of the original loan and another investor in the Company facilitated an
additional $1,000,000 in bank borrowings due concurrently with the original
loan. These loans matured on April 15, 1996 and were paid off in their entirety.

During 1996, the Company entered into two new borrowing agreements with the
landlord of the Company's New York facility in order to finance certain
leasehold improvements. Under the terms of those agreements, the Company
borrowed $50,000 and $300,000 at an annual interest rate of 10%. The loans are
being repaid in monthly installments through January 1997 and January 1999,
respectively. As of December 31, 1996, $208,000 was outstanding under these
agreements.


                                      F-12
<PAGE>

9.   STOCKHOLDERS' EQUITY:

Private Equity Transactions

During August and September 1995, the Company received net proceeds of
approximately $7.6 million from the private placement of 2,204,021 shares of its
common stock at a price of $3.50 per share. The Company also issued 100 shares
of its Series B redeemable preferred stock to the largest investor in the
private placement at an aggregate cost of $10 per share. The Series B preferred
shares carry no dividend or voting rights but convey the right to elect one
member of the Company's Board of Directors so long as at least 5% of the
Company's common stock is owned by the investor. The Series B holder exercised
this right effective December 1995. The stock purchase agreement also provides
this investor a preemptive right to purchase its pro rata share of ownership in
the Company subsequent to this private placement, allowing for up to $7.0
million in gross proceeds from this placement.

In January 1995, the Company's shareholders approved, by a majority vote, the
authorization of up to 3,000,000 Series A preferred shares. Series A preferred
shares have a par value of $.001 per share, carry no dividend rights unless
declared by the Company's Board of Directors in their sole discretion, and have
a preference in liquidation of $4.00 per share plus any accrued dividends, if
such dividends have been declared. Each preferred share is convertible into one
share of the Company's common stock at the option of the holder. The Series A
preferred shareholders are entitled to vote with the common shareholders as a
single class. Each preferred share conveys votes equal to the number of common
shares into which it is convertible. Upon authorization of the preferred stock
issuance by the Company's shareholders, the Company converted, at its option,
$1,000,000 of convertible debentures, which were outstanding at December 31,
1994, into 250,000 shares of convertible Series A preferred stock. Class B
Preferred Stock Warrants to acquire 250,000 shares of the Company's common stock
at $6.00 per share, which were issued in connection with the convertible
debentures, remain outstanding after the conversion.

During February 1995, the Company sold an additional $500,000 of preferred stock
units. Each unit consists of one share of Series A preferred stock at a price of
$4.00 per share and one warrant to acquire the Company's common stock at an
exercise price of $6.00 per share. A total of 125,000 Series A preferred shares
were sold, accompanied by 125,000 Class B Preferred Stock Warrants.

Public Offering and Common Stock Purchase Warrants

In August 1992, the Company completed an IPO of its common stock whereby 920,000
units, consisting of one share of common stock and one purchase warrant (the
"Common Stock Purchase Warrant"), were sold at $5.00 per unit, resulting in net
proceeds to the Company of approximately $3,718,000. During 1995, 2,100 of these
Common Stock Purchase Warrants were exercised (2,656 shares were issued pursuant
to antidilution provisions of these warrants). Each Common Stock Purchase
Warrant entitled the holder to purchase one share of common stock at an exercise
price of $6.75 per share. The Common Stock Purchase Warrants were subject to
redemption by the Company in the event its closing stock price equaled or
exceeded $10.00 per share on the NASDAQ exchange for 20 consecutive days and
upon 30 days written notice. The redemption provision expired in August 1995.
The Common Stock Purchase Warrants contained an antidilution provision which
affects both the exercise price of the warrant and the number of shares
underlying the warrants, and which has been triggered by various equity and debt
financing transactions which have occurred since that date. During 1995, the
Company extended the expiration date, but no other provisions, to December 31,
1995, March 29, 1996 and then to April 30, 1996. Approximately 1,130,000 options
were exercised prior to the final revised expiration date at an adjusted price
of $5.34 providing gross proceeds of $6,000,000 and net proceeds of $5,665,000.


                                      F-13
<PAGE>


Equity Private Placement and Series A Warrants

In July 1994, the Company completed a private placement of 300,000 equity units,
each unit consisting of two shares of the Company's common stock and one warrant
which was sold at $7.00 per unit. Each warrant (the "Series A Warrants")
entitles a holder to purchase one share of the Company's common stock for $6.00.
The Series A Warrants also contain an antidilution provision which affects the
number of shares and the price of each warrant. The warrant agreement
specifically provides that the antidilution provisions were not triggered by
either the Pharmetics merger (Note 1) or the Guarantor's Warrants (Note 8 and
below). The Series A Warrants are subject to redemption on the same terms as the
Common Stock Purchase Warrants described above. In February 1995, 71,429
warrants were converted to common stock; the Company had provided one-time
pricing of $4.50 per share to incent this exercise, which resulted in
approximately $296,430 in net proceeds.

Guarantor's Warrants

In connection with the guarantee of the Company's $1.5 million bank loan (Note
8), the Company granted a total of 400,000 warrants (the "Guarantor's Warrants")
to purchase its common stock at a price of $4.00 per share to a guarantor . The
Guarantor's Warrants were granted in phases: 250,000 warrants were granted upon
the guarantee of the first $750,000 loan amount and, thereafter, an additional
150,000 warrants were granted upon issuance of the aggregate $1.5 million note.
The warrant agreement with the guarantor contains antidilution provisions which
specifically exclude the Pharmetics merger (Note 1) and the equity private
placement described above. During 1995, in connection with the guarantee of an
additional $1.0 million in bank loans, the Company granted a total of 200,000
additional warrants to the original guarantor and another investor in the
Company under similar terms as the original warrants.

Underwriter's Warrants

Underwriter's warrants to purchase a total of 80,000 units at an exercise price
of $7.00 per unit, each unit consisting of one share of common stock and one
purchase warrant with an exercise price of $9.45, were issued to the underwriter
("Underwriter") as part of the Company's IPO. The Underwriter's warrants contain
an antidilution provision that has been triggered by various equity and debt
financing transactions which have occurred since that date. The warrants
underlying the Underwriter's warrants have also been adjusted based on similar
antidilution provisions.

The Underwriter has also been granted warrants to purchase a total of 30,000
units (each unit consisting of two shares of common stock and one purchase
warrant) at $7.00 per unit in connection with the Company's equity private
placement. The 30,000 warrants underlying the Underwriter's equity private
placement warrants are identical in terms to the Class A Warrants discussed
above except that they are not subject to redemption.

Series B Preferred Stock Warrants (see "Private Equity Transactions" above)

In November 1994, the Company issued 250,000 Series B Preferred Stock Warrants
in connection with the sale of $1.0 million in convertible debentures. The
Series B Preferred Stock Warrants are identical in terms to the Series A
Warrants described above, and are subject to redemption by the Company under the
same terms and conditions as the Common Stock Purchase Warrants described above.
As part of a single transaction in February 1995, the Company converted the
debentures to preferred stock and sold an additional $500,000 of preferred stock
with identical warrants; 125,000 Series B Preferred Stock Warrants were also
issued.


                                      F-14
<PAGE>

A summary of the warrant terms, the Company's calculation of dilution adjusted
prices and shares at December 31, 1996, and potential maximum gross proceeds to
the Company are as follows:

<TABLE>
<CAPTION>
                                                                                                      Series B
                                                                                                      Preferred
                                                 Series A      Guarantor's       Underwriter's          Stock
                                                 Warrants        Warrants           Warrants          Warrants         Total
                                                 --------        --------           --------          --------         -----

<S>                                              <C>          <C>                <C>                <C>              <C>      
Original number of shares (a)                    228,571         600,000            250,000            375,000       1,453,571
Original price                                    $6.00           $4.00          $3.50 - $9.45          $6.00
Dilution adjusted shares                         268,341         692,780            345,260            428,501       1,734,882
Dilution adjusted price                           $5.20       $3.41 - $3.57      $3.01 - $6.25      $5.28 - $5.31
Maximum potential gross proceeds
  ($ millions) (b)                                 $1.4            $2.4               $1.6              $2.3            $7.7
Expiration date                                  4-30-97,        10-24-99           8-11-97,           2-28-98
                                                 7-18-97                            7-20-97
Redemption provision                               Yes              No                 No                Yes
</TABLE>

     (a)  71,429 Series A Warrants exercised during 1995.

     (b)  There is no assurance that the full amount of these proceeds will be
          received by the Company in the future.

Stock Option Plan

In January 1995, the Company's shareholders approved a stock plan (the "1994
Plan"), which superseded the pre-existing stock option plan (the "1992 Plan").
The 1994 Plan provides for the issuance of up to 1,500,000 shares of common
stock of either or both nonqualified or incentive stock options. The option
grants vest ratably over four years and may be exercised for a term of 10 years
but not before six months following the date of grant. The option price for
incentive stock options granted shall be at least 100% of the fair market value
of the common stock at the date of grant. Nonqualified options may be issued at
less than the fair market value at the discretion of the Committee. At December
31, 1996, 1,107,688 stock options granted to employees and directors were
exercisable. The Company accounts for awards granted to employees and directors
under APB Opinion No. 25, under which compensation cost has been recognized for
stock options granted at an exercise price less than the market value of the
options on the grant date. Had compensation cost for all stock option grants in
1996 and 1995 been determined consistent with SFAS No. 123, the Company's net
loss and loss per share would have been increased to the following pro forma
amounts:

                                                    1996              1995
                                                    ----              ----

       Net loss:          As Reported             (6,287,298)     (6,988,000)
                          Pro Forma               (6,800,163)     (7,746,636)

       Primary EPS:       As Reported                  (.99)           (1.76)
                          Pro Forma                   (1.07)           (1.96)

The effects of applying SFAS No. 123 in this pro forma disclosure are not
indicative of future amounts. SFAS No. 123 does not apply to awards prior to
1995, and additional awards in future years are anticipated.


                                      F-15
<PAGE>


The following table reflects activity under the plan for the two-year period
ended December 31, 1996:

<TABLE>
<CAPTION>
                                                1996                  1995
                                               ------                 -----
                                                      Weighted               Weighted
                                                      Average                Average
                                                      Exercise               Exercise
                                        Shares         Price    Shares        Price
                                        ------         -----    ------        -----

<S>                                     <C>          <C>        <C>        <C>     
Outstanding at beginning of year        1,346,250    $   4.49   527,500    $   5.45
   Granted                                441,000        4.47   908,750        4.15
   Exercised                               (3,500)       7.50      --           --
   Forfeited                             (237,750)       6.64   (75,000)       6.76
   Canceled                               (30,250)       5.43   (15,000)       6.27
                                        ---------             ---------


Outstanding at end of year              1,515,750        4.12 1,346,250        4.49
                                        =========             =========
Exercisable at end of year              1,107,688        4.01   747,500        4.01
                                        =========             =========
</TABLE>

The fair value of the stock options granted is estimated on the date of grant
using the Black-Scholes option pricing model with an assumed expected life of 7
years, risk free interest rates of 6.36% in 1996 and 6.01% in 1995, volatility
of 56% in 1996 and 49% in 1995 and dividend yield of 0% in both years. The
weighted average fair values of options granted in 1995 at prices below market
value and at market value are $5.46 and $4.60, respectively. The weighted
average fair values of options granted in 1996 at prices at market value and
above market value were $4.19 and $1.83, respectively.

In December 1995, the Board of Directors granted 700,000 stock options (600,000
at $3.50 and 100,000 at $1.00) to certain officers and directors of the Company.
In the fourth quarter of 1995, the Company recorded compensation expense of
$1,700,000 related to fully vested options for an amount representing the
difference between the exercise price and fair market value of OnGard common
stock on the date of the grant. The Company also recorded deferred compensation
expense of $1,087,500 for options which vest ratably over two years, and related
compensation will be charged to operations over that time.

During 1996 under the 1994 Plan, the Company granted 50,000 options to an
outside consultant. All transactions with individuals other than those
considered employees, as set forth within the scope of APB Opinion No. 25, must
be accounted for under the provisions of SFAS No. 123. Under SFAS No. 123, the
fair value of the options granted to the consultant at the date of grant was
$91,500. These options were granted for a term of up to seven years at an
exercise price equal to the market value at the date of grant. At December 31,
1996, 25,000 of the options outstanding with respect to the consultant were
exercisable. Compensation expense recognized during fiscal 1996 related to these
options was $45,750.

The following table summarizes information about stock options outstanding at
December 31, 1996:

<TABLE>
<CAPTION>
                                                      Options Outstanding                          Options Exercisable
                                      ----------------------------------------------------     -----------------------------
                                          Number             Weighted            Weighted         Number          Weighted   
                                       Outstanding            Average             Average        Exercisable       Average   
                                            at              Remaining            Exercise           at           Exercise    
     Range of Exercise Prices            12/31/96        Contractual Life         Price          12/31/96          Price     
     ------------------------            --------        ----------------         -----          --------          -----     

<S>                                      <C>                    <C>               <C>            <C>                 <C>  
     $ 1.00     to  $  1.50                100,000              5.98              $1.00             100,000          $1.00
       3.42     to     5.13              1,188,000              6.43               3.86             887,500           3.99
       5.14     to     7.72                227,750              6.21               6.81             120,188           6.70
                                        ----------                                                ---------
       1.00     to     7.72              1,515,750              6.37               4.12           1,107,688           4.01
                                         =========                                                =========
</TABLE>


                                      F-16
<PAGE>


10.  TRANSACTIONS WITH MANAGEMENT:

In May 1992, the Company entered into an employment agreement with its
President, which expired on December 31, 1995. In December 1995, the Board of
Directors voted to extend this agreement for three years. The President's
employment agreement provides that if he is terminated without cause, he will
receive a one-time payment equal to five times the amount of his base salary in
effect at that time. The Company also has employment agreements with its Vice
Presidents of Sales and Technology. All of these agreements specify minimum base
salary amount, certain fringe benefits and incentive compensation, including
annual bonuses contingent on achievement of specific objectives established by
the Board of Directors.

11.  CONTINGENCIES:

Mail-back Medical Waste Service

The Company provides a mail-back medical waste service to small quantity
generators of medical waste. The Company uses the U.S. Postal Service for its
mailings of medical waste. As such, the Company is subject to the U.S. Postal
Service's existing and evolving regulations pertaining to the transportation of
medical waste. Transportation, handling and storage of medical waste may also be
subject to rules and regulations promulgated by various agencies such as the
Occupational Safety and Health Administration, the Department of Transportation
and various state and local municipalities. Changes in regulations could have a
significant impact on the Company's ability to market and transport its medical
waste products and waste disposal services.

Legal Proceedings

The Company does not have any pending legal proceedings other than ordinary,
routine litigation incidental to its business. However, as a seller of medical
infection control and waste handling systems, the Company could face product
liability claims or other claims potentially based on accidental infections,
loss of waste disposal and umbrella coverage packages in the mail or other
unforeseen circumstances. The Company maintains product liability and umbrella
insurance in an aggregate amount of $7,000,000, an amount it believes to be
adequate. However, there can be no assurance that such coverage will be adequate
to cover future product liability claims, if any, or that such product liability
insurance coverage will continue to be available at reasonable prices.

12.  LIQUIDITY AND CAPITAL RESOURCES - SUBSEQUENT EVENTS:

The Company has an accumulated deficit of $24 million at December 31, 1996 and
expects losses to continue for the foreseeable future. Additional expenditures
for equipment and marketing will also be required in order to expand the market
position of OnGard's sterilization supply and equipment product lines. The
Company needs additional capital in order to support its operations until it
generates sufficient cash flow from operations.

In April 1997, the Company obtained a $1.0 million bank loan facilitated by
third-party guarantors, who are either investors in or option holders of the
Company (the "Guarantors"). The loan matures twelve months from inception for
the then outstanding principal balance. Outstanding principal bears interest at
LIBOR plus 2%. The Company has provided its assets as collateral for the
funding, but is permitted to sell certain assets without a commensurate
reduction of the aggregate $1.0 million line. In connection with the guarantee,
the Company has granted the Guarantors a total of 375,000 warrants to purchase
its common stock at a price of $2.00 or the common stock price at the funding
date, whichever is lower. The Company will amortize debt guarantee fees over the
life of the loan, as interest expense, for the fair value of the warrants
issued.


                                      F-17
<PAGE>


Also in April 1997, the Company received $1.5 million from the sale of
convertible debentures (the "Debentures"). The Debentures are convertible into
common stock of the Company in $50,000 denominations at any time after a 45-day
restriction period at a price equal to the then fair market value of the common
stock less 22-1/2%, or the common stock price at the funding date, whichever is
lower. The Debentures bear interest at the rate of 6% per annum until
conversion; such interest is payable quarterly in cash or common stock of the
Company at the Company's option.

The Debentures mature five years from issuance, at which time any remaining
amounts convert to common stock. The Company will grant warrants to the
placement agent equal to 10% of the funds raised at the exercise price described
above and pay placement fees of approximately 10% of the funds raised. The
placement agent has committed to financing an additional $3.5 million until
February 28, 1998, under the same terms discussed above but the additional
financing is solely at the Company's option. However, in the event such
commitment is unfulfilled by the Company, an additional 2% of such unfulfilled
commitment will be paid in warrants on the terms described above. The Company
will record the value of warrants to the guarantors, and the guaranteed discount
from market price provided to the Debenture holders, as non-cash interest
expense.

Although the Company has been successful to date in obtaining sources of
financing sufficient to meet current trade obligations and other expenses and to
enable it to pursue its business plans generally, and although the Company's
management believes that the Company has, through its available cash and lines
of credit, sufficient resources through at least December 31, 1997, there is no
assurance it will be successful in this regard in the future. Furthermore, there
can be no assurance that the Company will be successful in receiving additional
proceeds from the exercise of the warrants outstanding, or that if successful,
such funds will be adequate to fund the Company's operations until it is able to
generate cash from operations sufficient to fund its operations without
additional external sources of capital.



                                      F-18
<PAGE>


                                    PART III

Item 9. Executive Officers, Directors and Significant Employees

     OnGard's executive officers, directors and significant employees are as
follows:

Name                         Age                 Title
----                         ---                 -----

Mark E. Weiss                44                  President, Treasurer, Director
                                                 and Chief Executive Officer

Philip B. Kart               46                  Vice President and Chief
                                                 Financial Officer

Eric L. Steiner, M.D.        43                  Director

Thomas F. Kearns Jr.         58                  Director

Domenick P. Treschitta       55                  Director

Paul Rizzo                   69                  Director

Clay C. Cannady              35                  Director of Sterility
                                                 Assurance Products

Lawrence H. Cabeceiras       40                  Vice President, Marketing

James Terracciano            40                  Vice President, Technology

     Mark E.  Weiss is a  co-founder  of OnGard  and has  served as a  director,
President and Treasurer since OnGard's  inception.  Prior to OnGard's inception,
from September  1987 to June 1989,  Mr. Weiss was President and Chief  Executive
Officer  of  HealthCare  United  Management  Corporation,   a  health  insurance
management    organization,    and   President   of   HealthCare    United,    a
federally-qualified  health  maintenance  organization.  HealthCare  United  was
operating under the  supervision of the Colorado  Division of Insurance when Mr.
Weiss  joined the  organization  as part of a work-out  team.  As  President  of
HealthCare  United,  Mr. Weiss worked with the Colorado Division of Insurance to
place HealthCare  United in an orderly  receivership,  ensuring that beneficiary
coverage was maintained. Prior to that, Mr. Weiss was an independent consultant.
Mr. Weiss has a bachelor's  degree in  mathematics,  with a minor in  chemistry,
from the University of Colorado.

     Philip B. Kart joined the Company in March 1994 as Vice President and Chief
Financial Officer. Prior to joining the Company, from 1989 to 1994, Mr. Kart was
a principal in Big Stone  Partners,  a financial  advisory  firm which  assisted
growing and  troubled  businesses  in  operations  restructuring  and  financial
management.  Prior to that,  Mr.  Kart  held  financial  officer  or  management
positions  with  Lasertrak  Corporation,   a  venture  capital  backed  aviation
equipment   company,   Agrigenetics   Corporation,   a  $100   million   (sales)
biotechnology company and Union Carbide Corporation. He was also with the public
accounting  firm of Price  Waterhouse.  Mr.  Kart has a  bachelor's  degree from
Wagner College, an M.B.A. from City University of New York and is a C.P.A.

     Eric L.  Steiner,  M.D.,  is a  co-founder  of OnGard  and has  served as a
director since OnGard's inception.  He is not an employee of OnGard. Since 1981,
Dr.  Steiner  has  been  a  board-certified  anesthesiologist,  specializing  in
cardiovascular   anesthesia,   and  is  past  Chairman  of  the   Department 



                                       22
<PAGE>


of  Anesthesiology  at Mercy  Medical  Center in Denver.  Dr.  Steiner is a 1978
graduate of Hahnemann  Medical  College and a 1974 graduate of the University of
Pittsburgh.

     Anthony  Esposito was appointed to the Board,  effective March 1997, by the
existing Directors pursuant to the Company's by-laws, to serve until the vote at
the next annual  shareholders  meeting.  Mr. Esposito has broad  experience with
manufacturing  operations;  he has  been  president  of ECC  Corporation,  which
manufactures  industrial  equipment,  since 1976 as well as manages  real estate
interests.

     Thomas F. Kearns,  Jr. has been appointed to the Board,  effective December
24, 1995, to fill the vacancy created by the resignation of Derace L. Schaeffer,
M.D.,  which  resignation  was  effective  as of the same date.  Mr.  Kearns was
appointed in accordance with the right of the Series B Preferred stockholders to
nominate  and  elect a  director.  Mr.  Kearns  was  approved  by the  Company's
shareholders at the Company's last annual sharholders'  meeting during 1996. Mr.
Kearns is a retired  partner of the investment  banking firm of Bear,  Stearns &
Co.,  Inc. He also  serves as a director  of Biomet,  Inc.,  a  manufacturer  of
orthopedic devices, and Pharma Kinetics Laboratories,  Inc., a contract research
organization,  and as a trustee of the University of North Carolina.  Mr. Kearns
resigned his directorship on March 6,1997.

     Domenick P.  Treschitta was nominated to fill the second vacancy created by
the increase in the number of  directors.  He became a consultant to the Company
in  March,  1995  advising  the  Company  in the area of  commercialization  for
AutoPak(TM) and corporate finance and subsequently a director. Prior to becoming
a consultant to the Company,  he was Executive Vice President of Ballard Medical
Products,  Inc. Mr.  Treschitta has a B.A. degree in Science from the University
of Connecticut. Mr. Treschitta resigned his directorship on March 2, 1997.

     Paul J. Rizzo has been a partner in Franklin Street  Partners,  a member of
the  National  Association  of  Securities  Dealers,  since 1994 and serves as a
director of Johnson & Johnson,  McGraw Hill,  Ryder  Systems and Morgan  Stanley
Group. Prior to becoming a director of the Company,  he was Vice Chairman of IBM
Corporation  from  1993 to  1994.  From  1987 to 1992 he  served  as Dean of the
University of North Carolina  Graduate School of Business.  From 1958 to 1987 he
was Vice Chairman of IBM Corporation. Mr. Rizzo has a Bachelor of Science degree
in Business from the University of North  Carolina.  Mr. Rizzo resigned from the
Board on March 6, 1997.

     Clay C.  Cannady,  Director  of Sterile  Assurance  Products  has been with
OnGard  Systems  since May 1993.  From May 1988 to April 1993,  he held  various
positions in the Sales and Marketing Group of American National Can. Mr. Cannady
has a bachelor  of arts degree from the  University  of Missouri  and a graduate
degree from the University of North Carolina School of Business.

     Lawrence  H.  Cabeceiras  joined  the  Company  in  January  1995  as  Vice
President,  Sales and Marketing.  Prior to joining the Company, he had been with
AMSCO  (American  Sterilizer  Company) from 1980 through 1994,  most recently as
Corporate Director of Marketing and Product Commercialization. He had previously
been with Union  Carbide,  Linde  Medical Gas  Division  from 1978 to 1980.  Mr.
Cabeceiras has a B.A. and an M.B.A. from Tulane University

     James  Terracciano  joined  the  Company in May 1996 as Vice  President  of
Technology and General Manager.  Prior to joining the Company,  he had been with
Lumex, Inc., a leading healthcare manufacturer from 1985 to 1996, as Director of
Technical  Affairs.  He had previously been with Grumman Aerospace and Fairchild
Republic from 1976 to 1985. Mr. Terracciano has a B.T. in Mechanical Engineering
from SUNY Farmingdale.

        In  connection  with an initial  public  offering  OnGard  completed  in
September  1992,  Royce has the right pursuant to an  underwriting  agreement to
designate a member or a non-voting  advisor to OnGard's Board of Directors until
August 1997. Royce has not yet exercised its right nor expressed its intent with
respect to designating such a person.

     In connection with its investment in the September 1995 Private  Placement,
Montgomery  Asset  Management  has the right to nominate and elect one member of
the Company's Board of Directors.  See "Description of Capital Stock - Preferred
Stock".  Effective  December 24, 1995, Dr.


                                       23
<PAGE>

Derace L. Schaeffer resigned from the Board.  Montgomery's  designee,  Thomas F.
Kearns, Jr., was appointed to fill the vacancy on the Board. Mr. Kearns resigned
effective March 6, 1997.

     The  following  persons,  each of whom was an  officer or  director  of the
Company,  or beneficial owner of more than 10% of the Company's Common Stock, at
any time  during  1995,  failed to file on a timely  basis  reports  required by
Section 16(a) of the Exchange Act during 1995 or prior fiscal years: Lawrence H.
Cabercieras, Kent W. Cherrey and Eric L. Steiner.

Item 10. Executive Compensation

     The following table sets forth all annual and long-term  compensation  paid
by the Company to those  officers  whose total annual salary and bonus  exceeded
$100,000, for services rendered during the calendar years indicated below.

<TABLE>
<CAPTION>
                                  SUMMARY COMPENSATION TABLE
----------------------------------------------------------------------------------------
                                           Annual Compensation              Long-Term
                                                                           Compensation
                                --------------------------------------------------------
  Name and Principal     Year      Salary         Bonus         Other         Stock
       Position                                                 Annual       Options
                                                             Compensation
----------------------------------------------------------------------------------------
<S>                      <C>      <C>            <C>             <C>        <C>       
Weiss, Mark              1996     $200,000       $75,000         (3)        175,000(1)
President                                                                 
----------------------------------------------------------------------------------------
Weiss, Mark              1995     $150,941       $50,000         (3)        350,000(1)
President
----------------------------------------------------------------------------------------
Weiss, Mark              1994     $130,000       $25,000         (3)        135,000(4)
President
----------------------------------------------------------------------------------------
Weiss, Mark              1993     $126,000       $35,000         (3)         62,500(4)
President
----------------------------------------------------------------------------------------
Cabeceiras, Larry        1996     $120,000         -0-           (3)           -0-
Vice President
Marketing
----------------------------------------------------------------------------------------
Cabeceiras, Larry        1995     $110,909         -0-           -0-        60,000(2)
Vice President
Marketing
----------------------------------------------------------------------------------------
Kart, Phil               1996     $119,000         -0-           -0-        12,500(1)
Vice President
----------------------------------------------------------------------------------------
Kart, Phil               1995     $94,000        $26,000         -0-        25,000(1)
Vice President
----------------------------------------------------------------------------------------
</TABLE>
     (1)  Exercisable at $3.50 per share and expire December 24, 2002.
     (2)  15,000 options  vested and  exercisable on January 30, 1995 and 45,000
          vested  equally in four annual  installments  exercisable at $6.50 per
          share. All expire January 30, 2002.
     (3)  Less than $50,000 or 10% of the total of annual salary and bonus.
     (4)  Exercisable at $5.00 per share and expire in December 2000-2001.

<TABLE>
<CAPTION>
                                      INDIVIDUAL GRANTS
----------------------------------------------------------------------------------------
                                      Percent of All
                                     Options Granted
                       Number of     to Employees in
                        Shares         Fiscal Year      Exercise       Expiration Date
                      Underlying                          Price
                        Options
----------------------------------------------------------------------------------------
<S>                     <C>               <C>             <C>                    <C> 
   Weiss, Mark          175,000           41.1%           $3.50        September 2003
----------------------------------------------------------------------------------------
   Kart, Phil            12,500             3.0%          $3.50        September 2003
----------------------------------------------------------------------------------------
</TABLE>




                                       24
<PAGE>


     The following table sets forth the number of shares of the Company's Common
Stock covered by outstanding  stock options held by each of the named executives
at December 31, 1996,  and the value at December 31, 1996,  as determined by the
spread  between the option price and the price of the Company  stock as reported
by  NASDAQ  National  Market  (Small-Cap(SM)).  Options  granted  to  the  named
executives  during the fiscal year are shown in the table  immediately above and
are reflected in the following table.


<TABLE>
<CAPTION>
                                FISCAL YEAR-END OPTION VALUES
----------------------------------------------------------------------------------------
                Number of Unexercisable Options     Value of Unexercised In-the-Money
                      at Fiscal Year-End               Options at Fiscal Year-End
               -------------------------------------------------------------------------
    Name         Exercisable      Unexercisable      Exercisable       Unexcercisable
----------------------------------------------------------------------------------------
<S>                <C>               <C>                 <C>                <C>
Weiss, Mark        547,500           175,000             -0-                -0-
----------------------------------------------------------------------------------------
Cabeceiras,          30,000           30,000             -0-                -0-
Larry
----------------------------------------------------------------------------------------
Kart, Phil           66,250           31,250             -0-                -0-
----------------------------------------------------------------------------------------
</TABLE>


Compensation of Directors

     In September  1996,  the Board of Directors  granted  12,500  non-qualified
stock options to Dr. Eric Steiner,  and 25,000 each to Mr. Thomas Kearns and Mr.
Paul Rizzo,  pursuant to the Company's  1995 Stock Option Plan.  The options are
exercisable  at $3.50 per share and expire in  September  2003.  The options are
fully vested.

     In  December  1995,  the  Board of  Directors  granted  50,000  and  25,000
non-qualified  stock options,  respectively  to Mr..  Thomas Kearns and Dr. Eric
Steiner,  respectively,  pursuant to the Company's  1995 Stock Option Plan.  The
stock  options are  exercisable  at $3.50 per share and expire on  December  24,
2002.  These  options  are vested 50%  immediately,  with the  remainder  vested
ratably over two years.

     In  December  1994,  the Board of  Directors  granted  100,000  and  50,000
non-qualified  stock  options,  respectively,  to Drs.  Schaffer and Steiner for
their services as directors of the Company  pursuant to the Company's 1992 Stock
Option Plan. The stock options are  exercisable at $5.00 per share and expire on
December 22, 2001. The stock options granted to Dr. Schaffer vest ratably over a
four year period; the stock options granted to Dr. Steiner vested immediately.

Employment Agreements

     Mr.  Weiss  has an  employment  agreement  with  OnGard  effective  through
December 31, 1995.  The Board of Directors  has agreed to extend the  employment
agreement  through three additional years. The agreement is terminable by OnGard
for cause, as defined therein, without further obligation.  If OnGard terminates
Mr. Weiss without cause, he will be entitled to a one-time payment equal to five
times  his  annual  base  salary  at the  amount  in  effect  at the date of the
termination.  Upon any termination,  Mr. Weiss is subject to two-year  covenants
not to  compete.  Effective  January 1, 1996 Mr.  Weiss'  annual base salary was
increased to $200,000.

     Effective September 29, 1994, OST entered into an employment agreement with
Theodore  Shlisky in  connection  with the  Pharmetics  Merger.  The  employment
agreement  provided that Mr.  Shlisky shall serve as executive vice president of
OST for the three year term of the  agreement  and in such capacity he was to be
responsible for all phases of OST's manufacturing and distribution in connection
with its sterilization equipment business. Mr. Shlisky resigned from the Company
effective December 18, 1995. Mr. Shlisky claims that the Company did not fulfill
certain of its obligations  under his employment  agreement.  The Company denies
this  allegation.  


                                       25
<PAGE>


The Company  intends to  vigorously  defend all its available
remedies relating to this matter. Mr. Shlisky has not pursued this matter.

     There are no arrangements pursuant to which any director of OnGard receives
cash  compensation;  however  directors are provided  stock options as described
above.

     On December 22, 1994, pursuant to the Company's 1992 Stock Option Plan, the
Board of Directors  voted to grant the following  stock options to the following
people:  Mark E. Weiss,  options for 135,000 shares of Common Stock at $5.00 per
share, vesting immediately;  Eric L. Steiner, M.D., options for 50,000 shares of
Common  Stock at an  exercise  price of $5.00 per  share,  vesting  immediately;
Derace L.  Schaffer,  M.D.,  options  for 100,000  shares of Common  Stock at an
exercise  price of $5.00 per  share,  vesting  ratably  over a four year  period
beginning December 22, 1994; Philip B. Kart, options for 10,000 shares of Common
Stock at $6.00 per share,  vesting  effective  March 21,  1994,  and options for
50,000  shares of Common Stock at $6.50 per share,  vesting  ratably over a four
year period beginning March 21, 1994; Clay C. Cannady, options for 15,000 shares
of Common Stock at $5-1/8 per share, vesting effective May 10, 1993, and options
for 45,000  shares of Common  Stock at $6.50 per share,  vesting  ratably over a
four year period  beginning May 10, 1993.  All options  expire seven years after
the vesting date of the first options to vest under the  particular  grant.  See
"Management  Discussion  and  Analysis  of  Financial  Condition  and Results of
Operations--Year  Ended  December 31, 1994  Compared to Year Ended  December 31,
1993."

     On December 24, 1995, under similar grants, the Board of Directors voted to
grant stock  options to the following  people at $3.50 per common share,  vested
50% immediately and the remainder vested ratably over two years:  Mark E. Weiss,
350,000 options;  Eric L. Steiner,  M.D. 25,000 options;  Thomas F. Kearns, Jr.,
50,000 options;  Philip B. Kart was granted 25,000 options;  Joseph Riccardo,  a
consultant to the company,  100,000 options;  Paul J. Rizzo, a consultant to the
company, 50,000 options. In addition,  Domenick Treschitta,  a consultant to the
Company  and  subsequently,  a member of the  Board of  Directors,  was  granted
100,000 options, all vested immediately, but at $1.00 per common share.

     In September  1996, the Board of Directors  voted to approve options to the
following  individuals at the then current market price of $3.50: Mark E. Weiss,
175,000 options;  Eric Steiner,  M.D.,  12,500 options;  Thomas F. Kearns,  Jr.,
25,000 options;  Paul Rizzo,  25,000 options;  Joseph Riccardo,  50,000 options,
Philip B. Kart, 12,500 options.

Item 11. Security Ownership of Certain Beneficial Owners and Management

     The following table sets forth certain information regarding the beneficial
ownership of OnGard Common Stock as of December 31, 1996, by (i) each person who
is known by OnGard to own  beneficially 5% or more of OnGard Common Stock;  (ii)
each director and officer individually;  and (iii) all directors and officers as
a group.  Except  as  otherwise  indicated,  each  person  has sole  voting  and
investment  power over the shares of OnGard Common Stock listed as  beneficially
owned by him.


                                       26
<PAGE>


<TABLE>
<CAPTION>
Name of individual
or number in group                    Shares Beneficially
Outstanding(1)(6)                          owned                          Percentage of Shares Outstanding(1)
-----------------                     --------------------                -----------------------------------

<S>                                    <C>                               <C>        
Mark E. Weiss                            777,667(2)(3)                   11.7%(2)(3)
40 Commerce Drive
Hauppauge, NY  11788

Eric L. Steiner, M.D.                    217,185(3)(5)                    3.3%(3)(5)
40 Commerce Drive
Hauppauge, NY  11788

Montgomery Asset Management, L.P       1,148,000(6)(7)                   17.4%(6)(7)
600 Montgomery Street
San Francisco, CA  94111

Mellon Bank Corporation                  541,100(9)                       8.2%(9)
One Mellon Bank Center
Pittsburgh, PA  15258

Dreyfus Corporation                      541,100(9)                       8.2%(9)
and Dreyfus Growth Capital
New York, NY

Quota Fund                               360,000(6)                       5.4%(6)
600 Montgomery Street
San Francisco, CA  94111

Hausmann Funding                         456,000(6)                       6.9%(6)
600 Montgomery Street
San Francisco, CA  94111

Lawrence H. Cabeceiras                    26,250(4)                        .4%(4)
40 Commerce Drive
Hauppauge, NY  11788

Clay C. Cannady                           53,750(4)                        .8%(4)
40 Commerce Drive
Hauppauge, NY  11788

Phil Kart                                 53,750(4)                        .8%(4)
40 Commerce Drive
Hauppauge, NY  11788

Thomas F. Kearns                          87,500(4)(6)                    1.3%(4)(6)
40 Commerce Drive
Hauppauge, NY  11788

Paul Rizzo                                57,500(6)(10)                    .9%(6)(10)
40 Commerce Drive
Hauppauge, NY  11788
</TABLE>


                                       27
<PAGE>

<TABLE>
<S>                                    <C>                               <C> 
Domenick Treschitta                      139,000(6)(8)(10)                2.1%(6)(8)(10)
40 Commerce Drive
Hauppauge, NY  11788

All directors and officers             1,416,352(4)                      21.4%(4)
as a group (9 persons)
</TABLE>

(1)  Includes  outstanding  OnGard  Common  Stock.  Excludes  preferred  shares,
     options and  warrants,  which can be  converted  or  exercised  into Common
     Stock. See "Certain Transactions."

(2)  Includes  113,667  shares owned of record by Blue River  Irrevocable  Trust
     (see  Footnote  5) and assumes  exercise  of options to buy 460,000  shares
     granted  to Mr.  Weiss  which are  currently  exercisable,  62,500 of which
     expire in May 2003 and the remainder of which expire in December, 2002. See
     "Management--Executive Compensation."

(3)  The  beneficial  ownership of 113,667 shares (held by Blue River Trust) may
     be  attributable  to both Mr. Weiss and Dr. Steiner and is included in each
     of the totals of shares beneficially owned by them. See Footnotes 2 and 5.

(4)  Assumes exercise of currently  exercisable  options to buy shares of OnGard
     Common Stock granted as follows:  (i) Mr. Weiss,  460,000 shares;  (ii) Dr.
     Steiner,  68,750 shares;  (iii) Mr. Cannady,  53,750 shares; (iv) Mr. Kart,
     53,750 shares;  (v) Mr.  Cabeceiras,  26,250 shares and Mr. Kearns,  37,500
     shares.  See  "Management--Executive  Compensation,"  "--  Compensation  of
     Directors," and "--Employment Agreements."

(5)   Includes 113,667 shares owned of record by Blue River  Irrevocable  Trust.
      Mr. Weiss  serves as trustee of this trust for the benefit of Dr.  Steiner
      and his family.  Under the terms of the trust,  Mr. Weiss has the power to
      vote and direct the  disposition of these shares and may be considered the
      beneficial owner thereof. Includes 10,000 shares owned of record by C.A.C.
      401(k) Profit Sharing Plan for the benefit of Dr. Eric L. Steiner,  10,268
      shares acquired in payment of indebtedness owed to Dr. Steiner, and 14,500
      shares  acquired in the  September  1995 Private  Placement.  Also assumes
      exercise of options to buy 50,000 shares  granted to Dr. Steiner which are
      currently exercisable and which expire in December, 2001, and 18,750 which
      are exercisable and which expire December 2002.

(6)  This  beneficial  owner  purchased the  Company's  common shares during the
     September 1995 Private Placement. 

(7)  Includes  shares  held by  Quota  Fund  and  Hausmann  Funding,  for  which
     Montgomery Asset Management maintains voting and dispositive power.

(8)  Includes 10,000 shares purchased by Barbara  Treschitta,  Mr.  Treschitta's
     wife, in the September 1995 Private Placement.

(9)  Mellon Bank has acquired  shares in the public market as  beneficial  owner
     for the Dryfus  Corporation  and the Dryfus Growth Capital for which it has
     voting and depositive power.


                                       28
<PAGE>


Item 12. Certain Relationships and Related Transactions.

                              CERTAIN TRANSACTIONS

     In June 1989,  LEP  Holdings,  Inc.,  a company  that  desired to invest in
OnGard,  loaned Mr. Weiss and Dr.  Steiner a total of $125,000 which was in turn
loaned to OnGard. The notes evidencing those loans provided for interest payable
at 1% above prime with a maturity on June 28, 1993. The notes were unsecured and
subordinate to the other debts and obligations of OnGard. The notes were pledged
by Mr. Weiss and Dr.  Steiner to LEP as security for their notes  payable to LEP
in the amount of  $125,000.  These  notes,  from  OnGard to Dr.  Steiner and Mr.
Weiss,  and from  them to LEP,  were  repaid as part of the  agreement  with LEP
described below.

     During June 1989, LEP acquired  429,000 shares of OnGard's common stock for
$100,000.  In  connection  with  this  transaction,  LEP  agreed to  provide  an
irrevocable  letter of credit of up to $3 million to secure bank  financing  for
OnGard's start-up operations.  OnGard ultimately borrowed a total of $2,972,985,
including accrued interest,  under a bank promissory note agreement due December
15, 1991. The bank notified  OnGard that it was calling the loan due and payable
on  December  17,  1991 and it  proceeded  against  the LEP letter of credit for
repayment of the loan. The payment of the bank  promissory  note through the LEP
letter of credit  constituted an additional  capital  contribution  to OnGard by
LEP.

     On May 12, 1992,  OnGard and LEP entered into an agreement  whereby  OnGard
repurchased  one-half  of the shares of OnGard's  common  stock owned by LEP for
approximately  $140,000 and purchased a $25,000 principal amount promissory note
of a third party for $10,000.  Effective  with the execution of this  agreement,
LEP provided a general  release to OnGard for any and all claims  against OnGard
and its principal stockholders for all transactions which transpired through the
date of the release.  In addition,  Mr. Weiss and Dr.  Steiner repaid loans from
LEP totaling $125,000 plus accrued interest of $25,000.  The Agreement  provided
that LEP would be  represented  on OnGard's  Board of Directors  for a period of
three  years.  LEP did not  nominate  a  representative  to  OnGard's  Board  of
Directors for 1993.  Each of the foregoing  transactions  with LEP were on terms
more  favorable  than with an entity which would not desire to invest in OnGard.
However,  OnGard  does  not  believe  that LEP has  been,  or is  presently,  an
affiliate of OnGard.  In December  1994, LEP sold all of its OnGard Common Stock
to various  individuals  and entities in  accordance  with Rule 144(k) under the
Securities Act of 1933, as amended.  See "Risk  Factors--Potential  Future Sales
Pursuant to Rule 144." The Company was not a party to this transaction.

     In  connection  with  OnGard's  May 1992  restructuring,  discussed  in the
preceding  paragraph,  Mr.  Weiss  purchased  68,295  shares of Common Stock for
$47,806,  Mr. Bauer purchased  42,165 shares of Common Stock for $29,515 and Dr.
Steiner contributed 154,457 of his beneficially-owned  shares of Common Stock to
OnGard.  Mr.  Weiss and Mr.  Bauer  received  bonuses  of $47,806  and  $29,515,
respectively,  on May 7, 1992, and OnGard paid an additional bonus of $52,000 in
December  of 1992 to cover  the  taxes on these  bonuses.  These  purchases  and
contributions  were  accomplished to reflect these  shareholders'  interests and
investments in OnGard as of that date.

     As of May 7, 1992,  OnGard  effected a  1.7875-for-1  Common  Stock  split,
effected as a stock  dividend  of .7875 share of Common  Stock for each share by
holders of record on May 7, 1992.

     In  September  1992,  OnGard  completed an initial  public  offering of its
common stock whereby 920,000 Units,  consisting of one share of Common Stock and
one Warrant,  were sold at $5.00 per Unit resulting in net proceeds to OnGard of
approximately $3,718,000. Each Warrant entitles the holder to purchase one share
of  Common  Stock at an  adjusted  exercise  price of $5.34  per  share  and was
exercisable  through August 11, 1995,  until the Company extended the expiration
date  through  April 30, 1996.  An  anti-dilution  provision  contained in these
warrants  expired on August 11, 1995.  The Warrants are subject to redemption by
OnGard,  subject to certain  conditions,  upon 30 days 


                                       29
<PAGE>


written notice. At the expiration date,  warrants had been issued,  resulting in
net proceeds to the Company of $5,700,000.

     Pursuant to the terms of the underwriting agreement relating to the initial
public offering, OnGard has entered into a five-year agreement providing for the
payment  of a fee to Royce in the  event  Royce is  responsible  for a merger or
acquisition  transaction  to which  OnGard is a party.  OnGard will pay Royce an
amount equal to the following  percentages  of the  consideration  paid by or to
OnGard;  5% of the  first  $1,000,000  or  portion  thereof;  4% of  the  second
$1,000,000 or portion  thereof;  and 3% of the excess.  The fee payable to Royce
will be in the same form of  consideration  as that paid by OnGard or to OnGard,
as the case may be. In connection  with the Merger,  Royce is receiving a fee of
approximately 16,000 shares of OnGard Common Stock.

     Effective  October  1,  1994,  Pharmetics  was  merged  into the  Company's
wholly-owned  subsidiary,  OGPI,  now OST.  See  ""Business  --  Acquisition  of
Pharmetics."

     On June 28, 1995,  the Company  issued 10,268 shares of Common Stock to Dr.
Eric L.  Steiner,  a director of the  Company,  in  repayment of a loan from Dr.
Steiner to the Company. For purposes of the repayment, the shares were valued at
$4.375 per share.

     In September,  1995, the Company completed a private placement of 2,204,021
shares of the Company's  Common Stock at a price of $3.50 per share and received
an  aggregate  of  $7,714,075  in  gross  proceeds.  Pursuant  to  such  private
placement,   a  group  of  investors  under  the  control  of  Montgomery  Asset
Management,  L.P.  acquired  1,148,000  shares  of 21.4  percent  of the  shares
outstanding  of the  Company.  At the same  time,  the same  group of  investors
purchased  100 shares of the  Company's  Series B Redeemable  Preferred  Limited
Voting  Stock for an  aggregate  of $10.  The Series B  Preferred  Stockholders,
provided they own in the aggregate at least five percent of the Company's Common
Stock,  can nominate and elect one member of the  Company's  Board of Directors.
The Series B Preferred Stock is not entitled to any dividends unless so declared
by the Company's Board of Directors.  If at any time the holders of the Series B
Preferred  Stock in the  aggregate  own less than five percent of the  Company's
Common  Stock,  the  Company  may,  upon ten days'  notice,  redeem the Series B
Preferred Stock at a price of $.10 per share. There is no liquidation preference
for the Series B shares  unless the Board elects to redeem these shares prior to
liquidation.

     Also in connection with the private placement  discussed above, Dr. Eric L.
Steiner,  a director of the Company,  purchased  14,500  shares of the Company's
Common Stock, Thomas F. Kearns, Jr., a director of the Company, purchased 50,000
shares of the Company's Common Stock and Domenick  Treschitta,  a nominee to the
Board of Directors and his wife, Barbara  Treschitta,  purchased an aggregate of
39,000 shares of the Company's Common Stock.

Item 13. Exhibits and Reports on Form 8-K

(a)  Exhibits
     The following exhibits are filed as part of this Report:

                                  EXHIBIT INDEX

        Exhibit
        Number             Description

          3.1       Certificate of Incorporation, as amended (i)
          3.2       Bylaws of OnGard, as amended (i)
          4.1       Certificate of Incorporation, as amended (i)


                                       30


<PAGE>


          4.2       ByLaws of OnGard, as amended (i)
          4.3       Form of Warrant Agreement (i)
          4.4       Specimen Warrant Agreement (i)
          4.5       Form of Underwriter's Warrant Agreement (i)
          4.6       Specimen Common Stock Certificate (i)
          10.1      1992 Stock Option Plan (i)
          10.2      Employment Agreement of Mark E. Weiss (i)
          10.3      Employment Agreement of Thomas J. Bauer (i)
          10.4      Agreement between OnGard and National Medical Waste (i)
          10.5      Employment Agreement of Donald M. Marotta (ii)
          10.5.1    Consulting Agreement of Donald M. Marotta (vi)
          10.6      Letter  of  Intent  to   Acquire   all  of  the  Issued  and
                    Outstanding  Common Stock and Preferred Stock of Pharmetics,
                    Incorporated (iii)
          10.7      Agreement  Between OnGard and American Can (iv);  omitted in
                    connection  with  a  request  for   confidential   treatment
                    pursuant to Rule 406 of Regulation C
          10.8      Merger   Agreement  Among  OnGard,   OGPI,   Pharmetics  and
                    Shlisky(v)
          10.8.1    Amendment to Merger Agreement (v)
          10.8.2    Amendment No. 2 to Merger Agreement (vii)
          10.8.3    Amendment No. 3 to Merger Agreement (vii)
          10.9      Employment Agreement of Theodore M. Shlisky (v)
          10.10     Agreement Between OnGard and LEP Holdings, Inc. (vii)
          10.11     Guaranty of Guarantor and OnGard Note to Bank (vii)
          10.12     Joint Marketing and  Distribution  Agreement  between OnGard
                    and Devon Industries, Inc. (viii)
          10.13     Mailback  Agreement  between  OnGard and Option  Care,  Inc.
                    (viii)
          10.14     Agreement between OGPI and ECC Corp. (viii)
          10.14.1   Agreement between OnGard, OGPI and ECC Corp. (vii)
          10.14.2   Agreement between OnGard, OGPI and ECC Corp. (viii)
          10.15     Agreement between OnGard and Baxter  HealthCare  (Omitted in
                    connection  with  a  request  for   confidential   treatment
                    pursuant to rule 406 of Regulation C)
          22        List of Subsidiaries of OnGard (iii)
          25        Powers of Attorney (I)
          99        Deferred  Payment  Arrangements  for Payment of Unemployment
                    Insurance by Pharmetics Incorporated (viii)

----------

(i)    Previously  filed  with   Registration   Statement  No.   33-48372,   and
       incorporated herein by reference

(ii)   Previously filed with OnGard's Form 10-KSB for fiscal year ended December
       31, 1992, and incorporated herein by reference.

(iii)  Previously  filed with  Post-Effective  Amendment  No. 1 to  Registration
       Statement No. 33-48372, and incorporated herein by reference.

(iv)   Filed with Post-Effective  Amendment No. 2 to Registration  Statement No.
       33-48372, and Incorporated herein by reference.

(v)    Previously  filed  with   Registration   Statement  No.   33-75282,   and
       incorporated herein by reference.


                                       31
<PAGE>


(vi)   Previously  filed with  OnGard's  Form  10-KSB for the fiscal  year ended
       December 31, 1993, and incorporated herein by reference.

(vii)  Previously  filed with  Amendment  No. 1 to  Registration  Statement  No.
       33-75282, and incorporated herein by reference.

(viii) Filed with Post-Effective  Amendment No. 4 to Registration  Statement No.
       33-48372, and incorporated herein by reference.

SIGNATURES

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

Dated:  April 14, 1997                      ONGARD SYSTEMS, INC.

                                            BY:/s/Mark E. Weiss
                                               ---------------------------------
                                               Mark E. Weiss, President

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

Name                                Title                                Date


/s/Mark E. Weiss                President and Director           April 14, 1997
----------------------          (Principal Executive Officer)
Mark E. Weiss                         

                             *
/s/Eric L. Steiner              Director                         April 14, 1997
----------------------
Eric L. Steiner

/s/Anthony Esposito             Director                         April 14, 1997
----------------------
Anthony Esposito

/s/Philip B. Kart               Principal Financial Officer      April 14, 1997
----------------------
Philip B. Kart


*  Pursuant to power of attorney


                                       32