UNITED STATES

                       SECURITIES AND EXCHANGE COMMISSION
                              WASHINGTON, DC 20549

                                  FORM 10-KSB/A

(Mark One)
[X]     ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
        EXCHANGE ACT OF 1934

        For the Fiscal Year ended  December 31, 1996

[_]     TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
        EXCHANGE ACT OF 1934

                         Commission File Number 0-28566

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

               TEXAS                                           76-0335587
        (State or other jurisdiction of                      (IRS Employer
         incorporation or organization)                   Identification No.)

        120 Industrial Boulevard, Sugar Land, Texas              77478
        (Address of principal executive offices)               (Zip code)

        Issuer's telephone number:   281-276-7000

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

                               Common Stock, $.01 par value
                                     (Title of Class)

        Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15 (d) of the 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 there is no disclosure of delinquent filers pursuant to Item
405 of Regulation S-B 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. [ ]

        The issuer's revenues for its most recent fiscal year are $12,485,961.

        The aggregate market value of voting stock held by non-affiliates of the
registrant on March 25, 1997, based upon the average bid and ask price as
reported on the National Association of Securities Dealers, Inc.'s OTC
Electronics Bulletin Board, was $12,920,196. The number of shares of the
issuer's common stock, $.01 par value, outstanding as of March 25, 1997 was
2,793,556.

        Documents incorporated by reference:  None.

        Transitional Small Business Disclosure Format (check one): 
        Yes [ ] No [x]
<PAGE>
        This amendment on Form 10-KSB/A is being filed in order to update
certain information required in Part III, Items 9, 10, and 11 with respect to
directors and executive officers, executive compensation and security ownership
of certain beneficial owners.


        INCLUDED IN THIS REPORT ARE "FORWARD-LOOKING STATEMENTS" WITHIN THE
MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED, AND SECTION
21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. ALTHOUGH THE COMPANY
BELIEVES THAT THE EXPECTATIONS REFLECTED IN SUCH FORWARD-LOOKING STATEMENTS ARE
REASONABLE, IT CAN GIVE NO ASSURANCE THAT SUCH EXPECTATIONS REFLECTED IN SUCH
FORWARD-LOOKING STATEMENTS WILL PROVE TO HAVE BEEN CORRECT.

                                    PART I


ITEM 1. BUSINESS

        Lasermedics, Inc. (the "Company"), incorporated in November 1990 as a
Texas corporation, is a manufacturer and marketer of diversified products in the
physical therapy and rehabilitation industry. The Company provides high quality
products and services to healthcare professionals and has as its primary goal to
consolidate the largely-fragmented physical medicine and rehabilitation industry
and become a leader in that industry. The Company recently re-organized into
three divisions: Henley Healthcare, Microlight and Health Career Learning
Systems. The Company's Henley Healthcare Division ("Henley") is engaged in the
manufacture and marketing of diversified products in the physical therapy and
rehabilitation industry. The Microlight Division is engaged in the development
and application of portable, hand-held, battery-operated, low-energy laser
devices to treat soft tissue. The Health Career Learning Systems
Division("HCLS") provides training, safety products and technical support
necessary to meet federal Occupational Safety and Health Act ("OSHA") compliance
standards as well as coordination of the training of medical professionals in
the use of various other products offered by the Company.

ACQUISITIONS

        On April 30, 1996, the Company acquired substantially all assets of (and
assumed certain liabilities associated with) Henley, formerly a division of
Maxxim Medical, Inc., a Delaware corporation, as more fully described in the
Notes to the Financial Statements. This acquisition provided the Company with an
expanded and stable base of products and customers as well as manufacturing and
marketing infrastructure. On November 12, 1996, the Company acquired
substantially all of the assets of MJH Medical Equipment, Inc., a privately-held
medical supplies and equipment distributor, which added distribution channels to
the Company's existing marketing outlets, and on November 27, 1996, the Company
acquired all of the issued and outstanding common stock of Health Career
Learning Systems, Inc., ("HCLSI"), which provides training, safety products and
technical support necessary to meet OSHA compliance standards. The Company's
HCLS division includes the operations of HCLSI, and the Company intends that the
division will expand its products and service offerings to fully integrate all
of the Company's training activities.

        On January 24, 1997, the Company completed the following acquisitions:
(i) all of the issued and outstanding common stock of Texas T.E.N.S., Inc.
("Tens"), and (ii) the inventory, distribution systems and customers associated
with the Homecare (third-party billing) division of Gatti Medical Supply, Inc.
("Gatti"). Both Tens and Gatti are engaged in the marketing and distribution of
medical supplies and devices.

STRATEGIC OBJECTIVES

        The Company's long-term strategic objectives are to (i) expand
distribution channels and explore new markets, (ii) consolidate the
highly-fragmented physical therapy and rehabilitation industry by pursuing

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strategic acquisitions that complement existing product lines and increase
market share, (iii) maximize the utilization of existing facilities for
increased productivity, and (iv) obtain approval from the FDA for the Microlight
830(TM).

        The Company believes that it should devote its efforts to exploring new
markets in the physical therapy and rehabilitation industry. An entire range of
the Company's products is proprietary and thus provides a certain advantage in
the Company's efforts to expand into new markets. Additionally, the Company
licenses products from other companies which are implemented into its existing
and expanded distribution system.

        As it seeks to consolidate the physical therapy and rehabilitation
industry through acquisitions, the Company's goal is to locate and combine
efficiencies that will deliver enhanced profits to the Company and increased
shareholder value. The Company believes that the current fragmentation of the
industry presents an opportunity for cost efficiencies and increased market
potential. When achieved, the consolidation will position the Company as a
leader in the industry and will provide an enhanced opportunity to better serve
the emerging integrated healthcare networks which are forming alliances and
buying their medical products on a national accounts basis.

        The acquisition of Henley provided the Company with increased
manufacturing capacity. New products can be added and the manufacture of
existing products can be increased without incurring significant capital
expenditures; such increase in production may simply necessitate the addition of
operating shifts. The Company believes that as it enters new markets and expands
its distribution, the expected increase in production using existing facilities
should provide significant improvement in the Company's margins and
profitability.

OPERATING DIVISIONS

    HENLEY HEALTHCARE DIVISION

        The Company's Henley Healthcare division markets a complete line of
technologically advanced physical therapy products. The division also develops,
manufactures, distributes and markets various products and related accessories
used for control of acute or chronic pain by non-invasive methods or to
facilitate healing of wounds. Physical therapy involves the treatment of
disabilities or injuries with therapeutic exercise and the application of
various heat, hydrotherapy, traction, ultrasound or other modalities. The
division's products are marketed principally through two separate national sales
forces consisting of dedicated sales persons, dealers and sales representatives.

    MICROLIGHT DIVISION

        The Company's Microlight division is engaged in the development and
application of the Microlight 830(TM) to treat soft tissue. The Company
currently seeks approval from the FDA to sell the Microlight 830(TM) in
commercial quantities for human application. Based upon the results of recent
studies including those by General Motors Corporation ("GM") and the Mayo
Clinic, the Company believes, although no assurances can be given, that the
Microlight 830(TM) is an effective treatment for carpal tunnel syndrome ("CTS").

        The Microlight 830(TM) is manufactured by CB Svendsen a/s ("CBS"), a
Danish company, which has sold its low level laser devices in more than 20
foreign countries to physicians, physical therapists, dermatologists and
veterinarians, for use in connection with wound healing, pain reduction and
anti-inflammatory indications. The Company has worked on the development and
marketing of the Microlight 830(TM) with CBS since June 1991. In March 1997, the
Company and CBS entered into new agreements pursuant to which the Company paid
one hundred thousand dollars ($100,000) to CBS and obtained unto perpetuity the
sole and exclusive world-wide distribution rights to all low level laser devices
manufactured by or for CBS. Also pursuant to the agreements, the Company
obtained unto perpetuity the exclusive world-wide manufacturing rights to all
low level laser devices manufactured by or for CBS subject to the payment to CBS
of the sum of one hundred seventy five thousand dollars ($175,000) by June 15,
1998.

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    HEALTH CAREER LEARNING SYSTEMS DIVISION

        The Company's HCLS division provides training, safety products and
technical support necessary to meet OSHA compliance standards. The HCLS system
is designed to ease the task of implementing OSHA requirements in the workplace
by providing a simple, thoroughly planned training program. The system consists
of all needed information relevant to Bloodborne Pathogens Standard, Hazard
Communication Standards, Safety Regulations and State-Specific Regulations. It
is the Company's intention that the division will expand its training activities
(i) to include various other products offered by the Company and (ii) as results
of research and clinical studies using the Microlight 830(TM) emerge to provide
new and additional uses of laser technology including cold laser techniques and
new medical applications.

PRINCIPAL PRODUCTS

        The Company manufactures and markets a variety of physical therapy
products used in the treatment of disabilities or injuries with therapeutic
exercise and the application of various heat, hydrotherapy, traction, ultrasound
or other modalities. The Company also develops, manufactures and distributes
various products and related accessories used for the control of acute or
chronic pain by non-invasive methods and to facilitate healing of wounds.

        FLUIDOTHERAPY UNITS. Fluidotherapy is a patented dry heat treatment that
uses finely divided cellulose particles suspended and circulated in a heated air
stream to apply heat, stimulation and pressure to a specific area of the body.
Patients receive such therapy by placing the area to be treated (e.g., hand,
ankle or knee) into the unit in which the cellulose particles circulate at the
appropriate temperature, speed and density. Fluidotherapy enables physical
therapists to provide their patients with a combination of heat, stimulation,
pressure and other therapies designed to treat the symptoms of various ailments
and conditions including arthritis, circulatory disorders and certain
sports-related injuries. The Company currently manufactures, markets and
distributes several models of Fluidotherapy units.

        TRU-TRAC TRACTION MACHINES AND TABLES. The Company develops,
manufactures, markets and distributes its Tru-Trac line of intermittent traction
machines, currently consisting of four models, including a clinical model and
three portable models. The Company also manufactures, markets and distributes a
proprietary line of Tru-Trac traction and therapy tables used in a variety of
physical therapy applications.

        HYDRA-FITNESS EXERCISE AND REHABILITATION EQUIPMENT. Through its
Hydra-Fitness line of products, the Company develops, manufactures and sells
hydraulic exercise and rehabilitation systems. Hydraulic resistance is provided
by manipulating the size of the aperture in a patented, fluid-filled hydraulic
cylinder. Such hydraulic resistance provided by the machine is totally
accommodating throughout the full range of motion for each individual user and
the resistance stops when force is no longer applied. This contrasts with free
weight or weight stack equipment that must return to the starting point before
the resistance is zero. For this reason, Hydra-Fitness products can be utilized
for both medical and exercise purposes, and the majority of the Company's sales
of Hydra-Fitness products is for medical use by handicapped and rehabilitating
patients and in geriatrics. The Company manufactures numerous models of
Hydra-Fitness machines.

        NERVE STIMULATORS. The Company markets and distributes nerve stimulators
that provide transcutaneous electrical nerve stimulation therapy, sometimes
known as "TENS" therapy. This treatment involves the continuous or intermittent
transmission of low voltage electrical impulses in different wave forms, on a
localized basis, as a treatment for chronic or acute pain resulting from a
variety of medical conditions. The therapy is provided through a small,
portable, battery-powered stimulator (resembling a paging device) connected by
wires to two or more small electrode pads placed at or near the site of the
patient's pain. For most patients, use of this therapy creates an analgesic
effect that assists in the reduction or elimination of localized pain. To the
extent this therapy is effective for a patient, it offers greater patient
comfort and mobility than competing remedies and elimination or reduction of
medications, and results in increased patient alertness, fewer side effects and
lower overall costs than prolonged medication. The Company

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currently sells several different models of TENS devices and believes that the
potential market for these devices is huge and growing.

        JELTRODE ELECTRODES. The Company manufactures, markets and distributes
its proprietary Jeltrode electrodes for use with the Company's nerve stimulators
in a variety of nerve and muscle stimulation and electrotherapy applications.
The Company believes that traditional electrodes used in these therapies often
irritate the skin, are messy to apply and painful to remove. A Jeltrode
electrode uses a unique adhesive gel, is hypoallergenic, virtually painless to
apply and remove and can be re-hydrated, cleaned and re-used. Since the adhesive
gel is water-based, electrical resistance between the electrode and skin is
reduced, resulting in enhanced product performance and prolonged battery life.

        IOTRODE IONTOPHORESIS ELECTRODES. Iontophoresis is a process which uses
electric current to assist drug transfer through the skin. The Company
manufactures, markets and distributes its Iotrode iontophoresis electrode for
use with its Dynaphor iontophoresis device. Using the electrodes, clinicians are
able to deliver through the skin small molecule drugs that can be ionized for
the treatment of pain and inflammation. For many applications, the use of
iontophoresis is superior because it is non-invasive, allows medications to be
dispersed over a wider range of tissue and avoids many of the systemic and
localized side effects associated with oral medications and injections.

        MEDIPADS/MEDIGELS. The Company's proprietary Medipads and Medigels are
marketed and distributed as drug-impregnated, water-based gels and gel pads used
for delivery of drugs directly through the skin on a localized basis. The
Medipads and Medigels can be used topically with various non-prescription
dosages of drugs such as hydrocortisone and lidocaine.

        WOUND CARE PRODUCTS. The Company has recently obtained FDA market
clearance for the manufacture and sale of two sterile wound care products -
Dermaheal gel and Dermaheal impregnated gauze. These products are PVP/aloe
vera-based, ultrasound transparent and electrically conductive.

        THE MICROLIGHT 830(TM). The Microlight 830(TM) is a portable, hand-held,
battery-operated low energy laser with an output which does not exceed 100
milliwatts. The Company currently distributes the Microlight 830(TM) to various
clinicians participating in the Company's current research program under its
Investigational Device Exemption ("IDE") as allowed by FDA regulations. Lasers
that do not exceed 100 milliwatts have no thermal effect on living tissue.
However, depending on the wavelength, the low level laser light will penetrate
and act on the tissue underlying the skin. The specific wavelength of the laser
incorporated within the Microlight 830(TM) penetrates the dermis, epidermis and
subcutaneous layers of the skin entering surrounding tissue. Along its path, the
laser deposits photons into the cells, which is believed to stimulate nerve
regeneration, reduce swelling and improve micro-circulation by bringing
increased oxygen and blood flow to the problem area.

        The Company believes, although no assurances can be given, that the
Microlight 830(TM) is an effective treatment for CTS, which is the tendon and
nerve damage that results from the fast, forceful wrist and hand motions that
are repeated in production and manufacturing workplaces many times in each day,
such as operating a computer, cutting meat, cutting or plucking poultry or
assembling automobiles. Conventional surgical and non-surgical treatments for
CTS and other repetitive stress injuries have been for the most part
unsuccessful in allowing CTS sufferers to continue with or return to productive
employment. As a result of the limited success of these treatments, CTS
frequently results in temporary or permanent disability at substantial economic
costs. The Company believes that the potential market for the Microlight 830(TM)
could exceed two billion dollars worldwide and encompasses hospitals, clinics,
medical doctors, chiropractors, physical therapists, dentists, veterinarians
and, ultimately, individuals.

DISTRIBUTION AND MARKETING

        The Company's products are marketed through a national network of
independent dealers and distributors, direct salespersons and commissioned sales
representatives to physicians, physical therapists,

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chiropractors and their patients as well as to clinics and healthcare networks.
In conjunction with this, the Company also has a network for direct billing to
insurance claims offices, Medicare carriers and managed healthcare programs. The
Company believes that its approach to marketing is supported by the desire of
its customers to identify with individual account managers and product
specialists. This enables the Company to provide better customer service and to
maintain specialized expertise in each product line. As medical products are
increasingly being purchased on a national account or centralized basis by
healthcare networks, Company salespersons must also maintain relationships with
purchasing managers within these networks.

        The Company has product distribution centers in Ohio and Texas and
approximately 140 dealers and distributors, 30 sales representatives and 25
direct salespersons representing its product within the United States. The
Company also has both telemarketing and direct-mail programs for its
HCLS-related products and services and for the marketing and distribution of
medical supplies related to its TENS, wound-healing and other products.

        Additionally, the Company sells many of its products to over 120
distributors and representatives in 57 countries around the world. The products
manufactured or sold by the Company in Europe are subject to the European
Community regulations for medical devices, including product certification ("CE
Marking"). The European Community has imposed a deadline of June 1998, after
which products without a CE Marking may not be sold in Europe. The Company is
seeking and anticipates obtaining the CE Marking certification for its products
sold in Europe prior to the deadline. The Company believes that its network of
international distributors will enhance its marketing and distribution efforts
as it seeks to extend its share in the international marketplace.

        The Company began marketing the LASERMEDICS VMD 830(TM) for veterinary
application in November 1993. Sales are made to veterinarians for use in wound
healing and the treatment of muscle afflictions on horses and other animals
through a network of distributors and sales representatives. Research studies
have demonstrated the positive photobiostimulation effects of the LASERMEDICS
VMD 830(TM) cold laser technology on veterinary muscle ailments such as bowed
tendon, check ligament and plantar desmitis. Clinical results also show that
soft tissue healing on horses is accelerated with repeated applications of the
LASERMEDICS VMD 830(TM).

COMPETITION

        Competition in the medical device and physical medicine markets is
intense. The Company's products compete with the products of many other
companies in the business of developing, manufacturing, distributing and
marketing physical therapy and rehabilitation products. Many of these companies
may have substantially greater financial and other resources than the Company,
and may have established reputations for success in the development, sale and
service of their products. The Company believes that the principal competitive
factors in each of its markets are product features and benefits, customer
service and pricing. Although the Company's products are not the lowest-priced
in its markets, the Company believes that it maintains a certain competitive
edge by emphasizing overall value through a combination of competitive pricing,
product quality and customer service.

        There are several foreign as well as U.S. manufacturers of low energy
lasers using similar technology to the Microlight 830(TM). However, these
competitive lasers may emit light of a different wavelength, are not generally
portable and may be more expensive than the Company's product. Consequently, the
Company anticipates future competition relating to the Microlight 830(TM).
Furthermore, there may be no effective barrier to competitors using other
wavelengths of low-level laser light inasmuch as the manufacture of the
Microlight 830(TM) does not incorporate any patented inventions, and qualified
companies could reverse engineer such product and market it, subject to
obtaining the requisite FDA pre-marketing approval ("PMA"), for human use.
Although there may be no absolute barriers to entry for competitive lasers, the
Company believes that, pursuant to specific FDA regulations, the safety and
efficiency data submitted to the FDA by one entity supporting such entity's PMA
application cannot be used by another entity in its PMA application. Generally,
this means that another entity desiring to submit a PMA application for a laser
similar to the Microlight 830(TM)

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cannot rely on the Company's clinical trial results to support such entity's PMA
application, but must conduct its own trials and gather its own data. Although
no assurances can be given, this provision could increase the length of time for
a competitor of the Company to obtain FDA approval to commercially sell a
similar product in the United States for human application.

PATENTS AND PROPRIETARY RIGHTS

        The Company actively pursues a policy of seeking patent protection both
in the U.S and abroad for its proprietary technology. The Company owns several
U.S. issued patents and various foreign counterparts. The Company also has one
patent application pending in the U.S. The Company also relies on trade secrets
and unpatented know-how in connection with the use of the Microlight 830(TM),
but the Company may be vulnerable to competitors who attempt to copy the laser
technology used in such product or to gain access to the Company's trade secrets
and know-how.

        Although the Company has conducted a search to discover any patents
which the Microlight 830(TM) or its use may infringe, the Company is not aware
of any patents which may be infringed by this product. The product has been
marketed by CBS outside the United States for several years without any third
party claims alleging that its manufacturer is violating any one's rights being
made known to the Company.

        Litigation, which could result in substantial cost to and diversion of
effort by the Company, may be necessary to enforce any patent issued to the
Company, to protect trade secrets or know-how owned by the Company or to
determine the scope and validity of the proprietary rights of others. Adverse
findings in any proceeding could subject the Company to significant liabilities
to third parties, require the Company to seek licenses from third parties and
adversely affect the Company's ability to sell its product.

GOVERNMENT REGULATION

        All medical devices are subject to FDA regulation under the Medical
Device Amendments of the Food, Drug and Cosmetic Act, as amended ("FDCA".)
Pursuant to the FDCA, a medical device is ultimately classified as either a
Class I, Class II or Class III device. Class I devices are subject only to
general controls which are applicable to all devices. Such controls include
regulations regarding FDA inspections of facilities, "Good Manufacturing
Practices," labeling, maintenance of records and filings with the FDA. Class II
devices must meet general performance standards established by the FDA. Class
III devices are subjected to a more stringent PMA process by the FDA before they
can be commercially marketed and must adhere to such standards once on the
market. Such PMA can involve extensive testing to prove safety and efficacy of
the devices. Most of the Company's products are Class II devices. FDA marketing
approval of these devices is obtained under Section 510 (k) of the FDCA, which
provides for FDA approval for products that can be shown to be substantially
equivalent to devices in commerce prior to May 1976 (the month and year of
enactment of the FDCA.) Most of the Company's remaining products are Class I
devices (i.e., treatment tables and fitness and exercise equipment.)

        Currently, all of the Company's products and manufacturing facilities
are subject to pervasive and continuing regulation by the FDA. All phases of the
manufacturing and distribution process are governed by FDA regulation. Products
must be produced in registered establishments and be manufactured in accordance
with "Good Manufacturing Practices," as such term is defined under the Code of
Federal Regulations. In addition, all such devices must be periodically listed
with the FDA. Labeling and promotional activities are subject to scrutiny by the
FDA and, in certain instances, by the Federal Trade Commission. The export of
devices is also subject to regulation in certain instances. The FDA conducts
inspections periodically to ensure compliance with these regulations.

        The FDA's mandatory Medical Device Reporting ("MDR") regulation
obligates the Company to provide information to the FDA on injuries alleged to
have been associated with the use of a product or in connection with certain
product failures which could cause serious injury or death. If as a result of
FDA inspections, MDR reports or other information, the FDA believes that the
Company is not in compliance with

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regulations, the FDA can institute proceedings to detain or seize products,
enjoin future violations, or assess civil or criminal penalties against the
Company, its officers or employees. Although the Company and its products have
not been the subject of such FDA enforcement action, any such action by the FDA
could result in a disruption of the Company's operations for an undetermined
time.

        In addition to the foregoing, foreign countries in which the Company's
products may be sold, as well as state governments and other federal and local
agencies within the U.S., may impose additional regulatory requirements on the
Company, and such actions could have a material adverse effect on the Company's
ability to do business.

        In March 1995, the Company submitted to the FDA a PMA application to
obtain clearance for commercial distribution of the MicroLight 830(TM) for use
on humans. Approval of the PMA application would permit the Company to sell the
Microlight 830(TM) in commercial quantities for the treatment of carpal tunnel
syndrome. There is no guarantee that the Company will ever receive FDA market
clearance to sell the Microlight 830(TM) for human application. In July 1995, in
response to the Company's submission, the FDA requested the Company to provide
additional information and some clarification of certain data submitted in the
PMA application, and notified the Company that the PMA was not considered to be
formally filed. In February 1997 the Company formally withdrew its PMA
application from the FDA to allow itself adequate time to respond to the
agency's requests and assemble the requested information.

        There can be no assurance that the FDA will not require further
information in the future or that the agency will grant PMA approval for the
MicroLight 830(TM) for the treatment of carpal tunnel syndrome on a timely
basis, if at all. The Company is unable to sell the product in commercial
quantities for human application in the U.S. market until it obtains FDA market
clearance.

        The Company is not required to notify or obtain approval from the FDA
regarding any of its devices sold for veterinarian applications. However, the
Company is required to obtain, prior to commencing any sales activities, a
radiological health registration number and to file an Initial Report for all
models of its devices. With no objection from the FDA to the introduction of the
LASERMEDICS VMD 830(TM) into commerce, the Company continues to market this
product in the veterinary market, although much of the Company's efforts is
focused on the marketing and distribution of its many other products.

THIRD-PARTY REIMBURSEMENT AND HEALTHCARE REFORM

        Healthcare providers, such as hospitals and physicians, that purchase
medical products for use on patients generally rely on third party payors,
principally Medicare, Medicaid and private health insurance plans, to reimburse
all or part of the costs and fees associated with the products used, procedures
performed or services provided. The Company's products are purchased by
hospitals, corporations, clinics and private physicians, which then would bill
various third-party payors for the healthcare services provided to their
patients. These payors include Medicare, Medicaid and private insurance payors.
Generally, government agencies reimburse hospitals and other healthcare
providers for patient medical care at a fixed rate according to
diagnosis-related groups (DRGs) as mandated by Congress. Reimbursements are
dependent on many factors which may include the payor's determination that a
service or procedure was not experimental and was used for an approved
indication.

        Although the Company believes that the nature of the non-intrusive
utilization of its products in patient care and the advantages concerning their
relative cost and ease of use may be positive factors in reducing health care
costs, the Company cannot predict the ultimate effect on the sale of its
products, of the current governmental focus on healthcare reform and the
proposed healthcare initiatives by the Clinton Administration and others.
Although the market for some of the Company's products could be adversely
affected by changes in governmental and private third-party payors' policies,
the Company believes that healthcare legislation may have some beneficial effect
on its business by increasing the availability of healthcare, emphasizing less
invasive surgery and increasing the need for efficiency by healthcare personnel.

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RESEARCH AND DEVELOPMENT

        The Company is continually conducting research and developing new
products by utilizing a team approach involving the engineering, manufacturing
and marketing resources. These research and development efforts are designed
primarily to apply state-of-the-art technology and the Company's expertise to
the treatment of wide-ranging medical conditions. Although the Company has
developed a number of its own products, such as the original Fluidotherapy
device, Medipads and others, most of its research and development efforts are
directed towards product improvement and enhancement of previously developed or
acquired products. Such enhancement may involve updating and redesigning
existing products to improve features, performance and reliability.

        The Company is also involved in the development and application of
various new products many of which are in early stages of development and will
require additional development work, FDA approval, clinical or other testing or
market research and development efforts prior to commercial introduction. In
this regard, the Company is continuing its clinical research and investigation
using the Microlight 830(TM) under its IDE. Expenses incurred in connection with
research and development in 1996 and 1995 amounted to approximately $314,000 and
$174,000, respectively.

        The Company also estimates that it will incur expenditures approximating
$500,000 for research and development, in the event it obtains FDA approval for
human application of the Microlight 830(TM), for which no assurance can be
given. Such research and development effort will primarily emphasize additional
photobiostimulation applications for the Microlight 830(TM), such as pain
suppression, wound healing and sports injuries, in various medical disciplines
including general medicine, dentistry, veterinary medicine, physical therapy,
orthopedic surgery, dermatology and re-constructive and cosmetic surgery.

        CLINICAL TRIALS. The Microlight 830(TM) has been classified by the FDA
as a "non-significant risk" Class III medical device and, as such, the Company
is allowed to conduct clinical trials under an approved IDE. The Company's
clinical trials are subject to IDE regulations, including record keeping,
adverse event reporting and other clinical study requirements. Pursuant to IDE
regulations the Company's clinical researchers are required to be reviewed and
approved by an Institutional Review Board (IRB) to treat human patients for
research purposes. The objective of these clinical trials is to evaluate the
therapeutic effects of low-level laser energy in pain management, soft tissue
trauma (including RSI) and dental applications. The Company is sponsoring
independent research studies on the effects of the Microlight 830(TM) at various
clinical sites in the U.S.

        No assurance can be given (i) that the results of the various research
studies that are being or have been conducted using the Microlight 830(TM), will
demonstrate to the FDA's satisfaction the safety and effectiveness of the
Microlight 830(TM) in treating CTS, (ii) that the FDA will agree that the design
of the studies is satisfactory, (iii) that the FDA will not require additional
clinical studies, or (iv) that the Company can obtain the necessary FDA
marketing clearance for the Microlight 830(TM) on a timely basis, if at all. The
FDA's rejection of the clinical design or the data generated could lead to
rejection of the application for commercial marketing of the Microlight 830(TM)
and/or the need to conduct additional clinical trials.

PRODUCT LIABILITY AND INSURANCE

        The Company's business includes the risk of product liability claims.
Although the Company has not experienced any product liability claims to date,
any such claims could have an adverse impact on the Company. The Company
currently maintains product liability insurance covering up to $3,000,000 in
liability claims, but does not intend to seek additional coverage until after
such time, if ever, as it obtains marketing approval from the FDA for human
application of the Microlight 830(TM).

                                       9
<PAGE>
EMPLOYEES

        As of March 20, 1997, the Company had approximately 169 full-time and 4
part-time employees. None of the Company's employees is represented by a union,
and management believes that its relations with its employees are good. The
Company believes that the success of its business will depend, in part, on its
ability to attract and retain qualified personnel.

ITEM 2  PROPERTIES

        The Company owns two buildings one of which is located in Sugar Land,
Texas, and the other in Belton, Texas. The addresses of these owned facilities
are 120 Industrial Boulevard, Sugar Land, Texas 77478 and 2121 Industrial Park
Road, Belton, Texas 76513. The Company's principal executive and administrative
offices are located in its Sugar Land facility consisting of approximately
25,000 square feet. The manufacturing and warehouse facilities for much of the
Company's physical therapy and fitness products are located at the Belton
facility consisting of approximately 59,000 square feet. The Sugar Land facility
is also the location of the manufacturing and warehouse operations for the
Company's pain management products.

        In addition. the Company also leases two regional warehouse and
distribution facilities in Akron, Ohio and Cuyahoga Falls, Ohio, of
approximately 15,000 and 6,000 square feet, respectively. The Company also
leases approximately 4,900 and 5,000 square feet of office space in Plymouth,
Michigan, and Houston, Texas, respectively, as principal operations center for
its HCLS division and Tens operations, respectively.

        The Company believes that its facilities, whether leased or owned, are
adequate to meet its current needs and should continue to be adequate for the
foreseeable future.

ITEM 3. LEGAL PROCEEDINGS

        None.

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

        None.

                                     PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

        On September 14, 1992, the Company commenced the initial public offering
of its securities. Prior to that time there had been no public trading market
for its securities. On January 19, 1993 the Company completed the initial public
offering of its securities. There can be no assurance that any public trading
market that has developed will be sustained.

        The Company's Common Stock currently trades in over the counter ("OTC")
market and is quoted on the National Association of Securities Dealers Automated
Quotation ("NASDAQ") Electronic Bulletin Board under the symbol "LMDX."

                                       10
<PAGE>
        The following table sets forth the range of high and low bid prices on
the Company's Common Stock for calendar years 1996 and 1995 on the NASDAQ
Bulletin Board:

        CALENDAR PERIOD                                   HIGH              LOW
                                                         -----             -----
        1996:
        First Quarter ......................             8.750             4.250
        Second Quarter .....................             8.875             6.000
        Third Quarter ......................             8.125             4.750
        Fourth Quarter .....................             6.875             5.750

        CALENDAR PERIOD                                   HIGH              LOW
                                                         -----             -----
        1995:
        First Quarter ......................             5.750             4.000
        Second Quarter .....................             7.000             5.250
        Third Quarter ......................             8.750             6.000
        Fourth Quarter .....................             8.125             4.000

        These quotations reflect inter-dealer prices, without retail mark-up,
mark-down or commission and may not represent actual transactions.

        The Company has authorized 20,000,000 shares of common stock, par value
$.01 per share. As of March 25, 1997, there were issued and outstanding
2,793,556 shares and 269 shareholders of record, although the Company believes
that there are other persons who are beneficial owners of the Company's
securities held in "street" names. All shares of Common Stock currently
outstanding are validly issued, fully paid and non-assessable.

        The Company has neither declared nor paid any dividends on common stock
since its inception and presently anticipates that no dividends will be declared
in the foreseeable future. Any future dividends will be subject to the
discretion of the Company's Board of Directors and will depend upon, among other
things, future earnings, the operating and financial condition of the Company,
its capital requirements, debt obligation agreements, general business
conditions and other pertinent facts. Therefore, there can be no assurance that
any dividends on the Common Stock will be paid in the future.

RECENT SALES OF UNREGISTERED SECURITIES

        The following sales of unregistered securities occurred during the year
ended December 31, 1996, in private transactions in which the Company relied on
the exemption from registration available under Section 4(2) of the Securities
Act of 1993, as amended:

        In April 1996, the Company entered into an agreement with Maxxim,
whereby the Company purchased certain assets (and assumed certain liabilities)
associated with Henley for an estimated purchase price of approximately $13.5
million. The purchase price was paid by the issuance of the Company's
convertible subordinated promissory note in the principal amount of $7 million
(the "Note"), with the balance of the purchase price paid in cash provided
through a financing with a bank. The Note is convertible into common stock at an
initial conversion price of $3 per share, provided that upon the occurrence of
any default under the Note, the conversion price will be automatically adjusted
to an amount equal to the lesser of the conversion price then in effect or 80%
of the average market price for the Company's common stock for the 30 trading
days immediately preceding the event of default. The conversion price is also
subject to adjustment upon the occurrence of certain events (including certain
issuances of common stock for less than the conversion price) to provide
anti-dilution protection.

                                       11
<PAGE>
        During the year ended December 31, 1996, the Company issued 33,333
shares of common stock and 33,333 warrants to purchase shares of the Company's
common stock at a price of $6.00 per share to Dr. Pedro A. Rubio for his
services in connection with the Company's PMA application submission to the FDA
for the Microlight 830(TM).

        In connection with a "best efforts" private offering securities
consummated in June 1996, the Company received an aggregate of approximately
$1,934,000 from investors and issued to such investors in exchange therefor,
644,670 units of its securities ("Units"), each Unit consisting of one share of
common stock and one four-year warrant to purchase one share of common stock at
an exercise price of $6.00 per share. The Company filed a Form D with the
Securities and Exchange Commission in connection with this transaction.

        Also, in June 1996, the holders of certain convertible, unsecured,
non-negotiable promissory notes converted the amounts due thereunder into an
aggregate of 176,773 shares of common stock and four-year warrants to purchase
an aggregate of 176,773 shares of common stock at an exercise price of $6.00 per
share.
The Company also filed a Form D in connection with this transaction.

        On November 12, 1996, the Company acquired substantially all of the
assets of MJH Medical Equipment, Inc., a privately-held medical supplies and
equipment distributor. In connection with the acquisition, the Company issued
39,063 shares of its common stock to Mr. Michael J. Houska, the former sole
stockholder and owner of the company.

        On November 27, 1996, the Company acquired all of the issued and
outstanding common stock of Health Career Learning Systems, Inc., a
privately-held company which provides training, safety products and technical
support necessary to meet OSHA compliance standards. In connection with the
acquisition, the Company issued an aggregate of 287,375 shares of its common
stock to the former owners of that company.

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

        During the fiscal year ended December 31, 1996, the Company experienced
dramatic growth through acquisitions of established business operations and
product lines. Due to the relative magnitude of the acquisitions, particularly
the acquisition of Henley in April 1996, the Company's operating results for
fiscal 1996, as reflected in the financial statements, are not directly
comparable on a year-to-year or other period-to-period basis with those of other
periods presented. Therefore, the results of operations for fiscal 1996 reflect
the partial results of operations from acquisitions, while the results of
operations for fiscal 1995 and 1994 reflect such results for the full twelve
months without the effects of any acquisitions.

        As previously stated, in April 1996, the Company acquired substantially
all assets of (and assumed certain liabilities associated with) Henley, formerly
a division of Maxxim for an estimated purchase price of approximately $13.5
million. See RECENT SALES OF UNREGISTERED SECURITIES above.

        The Company obtained the cash portion of the purchase price pursuant to
financing arrangements entered into with Comerica Bank - Texas, ("Comerica"),
which financing is secured by substantially all of the assets of the Company
including the Henley assets acquired from Maxxim. The financing arrangements
with Comerica provide for (i) a revolving loan ("Line of Credit"), which permits
borrowings up to $4,000,000 pursuant to a borrowing base calculation derived
from the Company's accounts receivable and inventory and (ii) two term loans in
the amount of $893,000 and $1,616,000, respectively, as more fully described in
the Notes to Consolidated Financial Statements. The Line of Credit also includes
a $250,000 letter of credit facility. All of the borrowings from Comerica are
secured by substantially all of the assets of the Company including the Henley
assets acquired from Maxxim.

                                       12
<PAGE>
        The following discussion should be read in conjunction with the
consolidated financial statements and the related notes thereto and other
detailed information appearing elsewhere herein.

RESULTS OF OPERATIONS

FISCAL 1996 COMPARED TO 1995

        Total revenue for fiscal year 1996 amounted to approximately $12,486,000
reflecting an increase of approximately $11,959,000 over the amount reported for
fiscal year 1995. The increase is primarily due to increased sales from the
acquired Henley operations. Net loss decreased about 38% from approximately
$1,420,000 in fiscal 1995 to approximately $879,000 in fiscal 1996. The decrease
in net loss is due to achievement of more profitable operations during the
second six-month period of fiscal 1996.

        The Company's gross profit for fiscal 1996 was approximately $6,770,000
compared to approximately $183,000 for fiscal 1995. Product gross margin as a
percentage of sales in 1996 increased to 54% from 35% in 1995. The increase in
the 1996 gross margin percentage compared with 1995 resulted primarily from
sales of many high margin products acquired from Henley.

        Operating expenses in 1996 increased approximately $5,196,000 over the
amount of approximately $1,530,000 reported for 1995. However, as a percent of
sales, operating expenses in 1996 decreased to 54% compared to 290% a year
earlier. The increase in operating expenses is due to increased relative costs
of operating the acquired businesses. However, the decreased operating expenses
as a percent of sales reflects the effects of larger overall sales from the
Henley products and certain cost containment measures undertaken following the
Henley acquisition. The Company will continue to face the challenge of managing
expense growth as it seeks to expand distribution channels and explore new
markets while moving towards the consolidation of the highly-fragmented physical
therapy and rehabilitation industry.

        Interest expense for fiscal 1996 amounted to $814,636 compared to
$83,779 in fiscal 1995. The increase in interest expense was primarily due to
the interest-bearing notes issued to finance the Company's acquisition of Henley
as well as the effects of the conversion of certain interest-bearing notes into
shares of the Company's common stock.

        For the year ended December 31, 1996, the amount of other income and
expense, net included certain non-recurring employee relocation and severance
costs which were not incurred in 1995.

FISCAL 1995 COMPARED TO 1994

        During fiscal 1995 and 1994, the Company had limited operating revenues
as it was still in the development stage. Net loss for fiscal 1995 amounted to
approximately $1,420,000 compared to net loss of approximately $3,365,000
reported for fiscal 1994.

        Total revenue of $527,176 for fiscal 1995 showed a decrease of $349,048
or 40% from the amount reported for fiscal 1994. The decrease was primarily due
to the temporary discontinuation of operations of the Company's former training
division. Also contributing to the decrease in revenues was the Company's
realignment of its focus from intensive marketing in the veterinarian market to
more limited selling for human research and investigation of medical
feasibility. This shift in focus was for the specific purpose of expediting the
collection of research data to support the Company's PMA application with the
FDA.

        Product gross margin as a percentage of sales in 1995 decreased to 35%
from 48% in 1994. This decline in the 1995 gross margin percentage compared with
1994 was primarily the result of certain pricing actions taken as the Company
expanded its sales for human research and investigation pursuant to the
Company's expansion of its clinical research program during 1995.

                                       13
<PAGE>
        Gross margin as a percentage of sales of the Company's former training
division in 1995 was 39% compared to 33% recorded for 1994. This increase in the
gross margin percentage was due to a non-recurring profit arrangement under
which special seminars were conducted in the first quarter of 1995. The Company
temporarily ceased operations of its training division during the second quarter
of 1995. The Company's decision came as a result of many factors including the
shortage of new techniques and applications in laser technology, intense
competition in the medical seminars market and what the Company perceived as a
critical need during the period to direct its efforts to supporting its PMA
application process.

        Operating expenses in 1995 decreased approximately $2,219,000 or 59%
from the amount reported for 1994. The decrease reflected approximately
$1,916,000 of less expenses recognized during 1995 in connection with stock,
stock options or stock warrants issued for compensation or under certain
agreements which the Company entered into as well as a decrease in expenses
incurred in connection with the Company's continuing efforts to meet all
governmental regulatory requirements in preparation for the commercial marketing
of its product for human application in the United States, in the event it
obtains the necessary FDA approval.

        For the period from January 1, 1991, through December 31, 1995, the
Company's other income (expense), net, of $30,827 consisted of interest income
from certificates of deposit.

LIQUIDITY AND CAPITAL RESOURCES

        At December 31, 1996, the Company had cash and cash equivalents in the
amount of $507,892 as compared to $203,364 at December 31, 1995. This resulted
from proceeds of a private offering consummated during the quarter ended June
30, 1996.

        The Company's current sources of liquidity consist primarily of (i)
proceeds received from the private offering consummated during fiscal 1996,
discussed above under RECENT SALES OF UNREGISTERED SECURITIES, and (ii) the
amounts, if any, available under the Line of Credit with Comerica, also
discussed above. The Company used portions of the proceeds of the private
offering in operations and to reduce amounts outstanding under the Line of
Credit. As of December 31, 1996 the Company had approximately $800,000 available
for borrowing pursuant to the Line of Credit. The total amount available for
borrowing under the Line of Credit is the lesser of (i) $4,000,000 and (ii) a
variable borrowing base calculated based on the amount and type of outstanding
accounts receivable and the value of certain items of inventory.

        At December 31, 1996, the Company had working capital of approximately
$5,592,000 and its current ratio was 2.21 to 1 as compared to ($174,000) and .72
to 1 at December 31, 1995.

        Although no assurances can be given, the Company anticipates that its
operating cash flows will be sufficient to meet its current needs. If the
Company's operating cash flows is not adequate, the Company may require new
sources of liquidity to (i) fund future activities that may be required to
obtain FDA marketing clearance for the Microlight 830(TM), (ii) make the
required payments under the Note (with Maxxim) and financial commitments to
Comerica, (iii) make the payments required to obtain the exclusive manufacturing
rights to the Microlight 830(TM), (iv) expand the Henley Division's operations,
(v) begin full-scale manufacturing of the Microlight 830(TM) and (vi) pursue
additional acquisitions. The Company believes that its success in obtaining the
necessary financing will depend on, among other factors, successfully operating
the recently-acquired businesses and successfully marketing the Microlight
830(TM) if it is cleared for commercial distribution by the FDA. The failure to
accomplish any of the foregoing could have a significant adverse impact on the
Company's business and financial condition. Sources of additional financing may
include additional bank debt or public or private sale of equity or debt
securities. There can be no assurance that the Company will be successful in
arranging such financing on terms commercially acceptable to the Company.

                                       14
<PAGE>
        Management believes that the funds generated from operations, along with
the Company's current working capital position and bank credit, will be
sufficient to satisfy the Company's capital requirements for the existing
operations for the foreseeable future.


ITEM 7.               FINANCIAL STATEMENTS

        The information required hereunder is included in this report as set
forth in the "Index to Financial Statements."

                              INDEX TO FINANCIAL STATEMENTS

                                                                            PAGE

Independent Auditors' Report .............................................    16

Consolidated Balance Sheet ...............................................    17

Consolidated Statement of Operations .....................................    18

Consolidated Statement of Changes in Stockholders' Equity (Deficiency) ... 19-20

Consolidated Statement of Cash Flows .....................................    21

Notes to Consolidated Financial Statements ............................... 22-34

                                       15
<PAGE>
        INDEPENDENT AUDITOR'S REPORT


        To the Board of Directors
        Lasermedics, Inc.


        We have audited the accompanying consolidated balance sheet of
        Lasermedics, Inc. and Subsidiary as of December 31, 1996, and the
        related consolidated statements of operations, changes in stockholders'
        equity, and cash flows for the years ended December 31, 1996 and 1995.
        These financial statements are the responsibility of the Company's
        management. Our responsibility is to express an opinion on these
        financial statements based on our audits.

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

        In our opinion, the financial statements referred to above present
        fairly, in all material respects, the financial position of Lasermedics,
        Inc. and Subsidiary as of December, 31, 1996 and the results of their
        operations and their cash flows for the years ended December 31, 1996
        and 1995 in conformity with generally accepted accounting principles.


        GOLDSTEIN GOLUB KESSLER & COMPANY, P.C.
        New York, New York
        February 23, 1997

                                       16
<PAGE>
                        LASERMEDICS, INC. AND SUBSIDIARY

                           CONSOLIDATED BALANCE SHEET

December 31,                                                          1996
                                                                  ------------
ASSETS (Notes 2, 3 and 5)                             

Current Assets:
  Cash and cash equivalents (Note 1) ...........................  $    507,892
  Accounts receivable, net of allowance for doubtful
     accounts of $140,260 ......................................     4,959,194
  Inventory (Notes 1, 2 and 5) .................................     4,427,991
  Prepaid expenses .............................................       176,290
  Other current assets .........................................       158,028
                                                                  ------------
         Total current assets ..................................    10,229,395

Property, plant and equipment, net (Notes 1, 3 and 5) ..........     3,488,586
Goodwill and other intangibles, net of accumulated
  amortization of $74,744  (Notes 1 and 4) .....................     2,387,664
Other assets ...................................................       119,327
                                                                  ------------
         Total Assets ..........................................  $ 16,224,972
                                                                  ============
LIABILITIES AND STOCKHOLDERS' EQUITY

Current Liabilities:
  Line of credit - bank  (Note 5) ..............................  $  2,187,071
  Accounts payable .............................................       962,647
  Accrued expenses and other current liabilities (Note 8) ......       869,313
  Note payable - bank (Note 6) .................................       292,000
  Current maturities of long-term debt (Notes 4 and 5) .........       326,367
                                                                  ------------
         Total current liabilities .............................     4,637,398

Interest payable ...............................................       252,000
Long-term debt, net of current maturities (Notes 4 and 5) ......     9,129,034
                                                                  ------------
         Total  liabilities ....................................    14,018,432

Commitments and contingencies (Notes 5 and 12)

Stockholders' Equity (Note 10):
  Preferred stock - $.10 par value; authorized
    2,500,000 shares; none issued and outstanding
  Common stock - $.01 par value; authorized
    20,000,000 shares; issued 3,021,439 ........................        30,214
  Additional paid-in-capital ...................................    10,660,312
  Accumulated deficit ..........................................    (8,257,807)
                                                                  ------------
                                                                     2,432,719
  Treasury stock, at cost, 279,000 common shares ...............      (226,179)
                                                                  ------------
        Stockholders' equity ...................................     2,206,540

      Total Liabilities and Stockholders' Equity ...............  $ 16,224,972
                                                                  ============
                 See notes to consolidated financial statements

                                       17
<PAGE>
                        LASERMEDICS, INC. AND SUBSIDIARY
                                        
                      CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Year ended December 31,                                                1996         1995
                                                                  ------------   -----------
<S>                                                               <C>            <C>        
Net sales (Note 1) .............................................  $ 12,485,961   $   527,176
Cost of sales ..................................................     5,716,156       344,076
                                                                  ------------   -----------
Gross profit ...................................................     6,769,805       183,100

Operating expenses .............................................     6,726,692     1,530,349
                                                                  ------------   -----------
Income (loss) from operations ..................................        43,113    (1,347,249)

Interest expense ...............................................      (814,636)      (83,779)
Other income (expense), net ....................................      (107,814)       11,427
                                                                  ------------   -----------
Net loss .......................................................  $   (879,337)  $(1,419,601)
                                                                  ============   ===========
Net loss per common share ......................................  $      (0.44)  $     (0.98)
                                                                  ============   ===========
Weighted average common shares outstanding .....................     1,995,388     1,443,578
                                                                  ============   ===========
</TABLE>
                 See notes to consolidated financial statements 

                                       18
<PAGE>
                        LASERMEDICS, INC. AND SUBSIDIARY
           Consolidated Statements of Changes in Stockholders' Equity
                 For the years ended December 31, 1996 and 1995.
<TABLE>
<CAPTION>
                                                                   Preferred Stock                              
                                                                       Series B                  Common Stock 
                                                                 ----------------------     -------------------------     Additional
                                                                 Number of                   Number of                      Paid-In 
                                                                   Shares     Par Value        Shares       Par Value       Capital 
                                                                  -------      -------      ----------      --------      ----------
<S>                                                                <C>         <C>           <C>            <C>           <C>       
Balance at December 31, 1994 ................................      10,000      $ 1,000       1,683,887      $ 16,838      $6,882,569
Compensation related to change in January 1995
of price of stock options ...................................        --           --              --            --             3,900
Issuance of common shares for research services
  in January 1995 ...........................................        --           --            20,000           200          89,800
Common shares issued on conversion of Preferred
  Stock in March 1995  exchange:
         Series B ...........................................     (10,000)      (1,000)          3,333            33             967
Issuance of common shares for furniture in
  April 1995 and other ......................................        --           --             1,505            16          10,980
Shares rescinded in March and  April 1995
  relating to July 1994 private offering ....................        --           --           (11,500)         (115)            115
Issuance of common shares related to Bridge
   Financing in June 1995 ...................................        --           --            39,000           390         194,610
Issuance of common shares for research services
  in July 1995 ..............................................        --           --             5,000            50          19,950
Exercise of options for cash in November 1995 ...............        --           --            20,000           200          29,800
Compensation related to stock options issued
  in January, June and December 1993 ........................        --           --              --            --              --  
Net loss ....................................................        --           --              --            --              --  
                                                                  -------      -------      ----------      --------      ----------
Balance at December 31, 1995 ................................        --           --         1,761,225        17,612       7,232,691
</TABLE>
<TABLE>
<CAPTION>
                                                                                    Treasury Stock
                                                                              -------------------------    Deferred    Stockholders'
                                                               Accumulated    Number of    Acquisition   Compensation      Equity   
                                                                 Deficit        Shares        Cost          Expense     (Deficiency)
                                                               -----------     --------     ---------     ---------     -----------
<S>                                                            <C>             <C>          <C>           <C>           <C>        
Balance at December 31, 1994 ..............................    $(5,958,869)    (281,000)    $(227,800)    $(133,430)    $   580,308
Compensation related to change in January 1995
of price of stock options .................................           --           --            --            --             3,900
Issuance of common shares for research services
  in January 1995 .........................................           --           --            --            --            90,000
Common shares issued on conversion of Preferred
  Stock in March 1995  exchange:
         Series B .........................................           --           --            --            --              --   
Issuance of common shares for furniture in
  April 1995 and other ....................................           --           --            --            --            10,996
Shares rescinded in March and  April 1995
  relating to July 1994 private offering ..................           --           --            --            --              --   
Issuance of common shares related to Bridge
   Financing in June 1995 .................................           --           --            --            --           195,000
Issuance of common shares for research services
  in July 1995 ............................................           --           --            --            --            20,000
Exercise of options for cash in November 1995 .............           --           --            --            --            30,000
Compensation related to stock options issued
  in January, June and December 1993 ......................           --           --            --         133,430         133,430
Net loss ..................................................     (1,419,601)        --            --            --        (1,419,601)
                                                               -----------     --------     ---------     ---------     -----------
Balance at December 31, 1995 ..............................     (7,378,470)    (281,000)     (227,800)         --          (355,967)
</TABLE>
                 See notes to consolidated financial statements

                                       19
<PAGE>
                        LASERMEDICS, INC. AND SUBSIDIARY
           Consolidated Statements of Changes in Stockholders' Equity
                 For the years ended December 31, 1996 and 1995.
                                                                 
<TABLE>
<CAPTION>
                                                                   Preferred Stock                                                  
                                                                       Series B                Common Stock 
                                                                 ----------------------   ------------------------       Additional 
                                                                 Number of                 Number of                       Paid-In  
                                                                   Shares     Par Value     Shares       Par Value        Capital   
                                                                  -------      -------    ----------      --------       -----------
<S>                                                               <C>          <C>         <C>            <C>            <C>   
Issuance of common shares for services
  in February 1996 ............................................        -        -             --             --          $     6,379
Subscriptions for common stock at $3.00
  per share in January through June 1996 ......................        -        -          644,670        $ 6,447          1,927,577
Issuance of common shares for services
  (Note 7) ....................................................        -        -           33,333            333             99,667
Issuance of common shares on conversion
  of Bridge Notes .............................................        -        -          176,773          1,768            528,552
Issuance of common shares on the
  exercise of warrants ........................................        -        -           75,000            750              6,750
Issuance of common shares for
  equipment ...................................................        -        -            4,000             40             11,960
Issuance of common shares for
  acquisitions ................................................        -        -          121,170          1,211            748,789
Issuance of common shares related to
  employment agreement (Note 12) ..............................        -        -          205,268          2,053             97,947
Net loss ......................................................        -        -             --             --                 --  
                                                                  -------      -------   ---------       --------        -----------
Balance at December 31, 1996 ..................................        -        -        3,021,439        $30,214        $10,660,312
                                                                  =======      =======   =========        =======        ===========
</TABLE>
<TABLE>
<CAPTION>
                                                                                    Treasury Stock
                                                                              -------------------------    Deferred    Stockholders'
                                                               Accumulated    Number of    Acquisition   Compensation      Equity   
                                                                 Deficit        Shares        Cost          Expense     (Deficiency)
                                                               -----------     --------     ---------     ---------     -----------
<S>                                                            <C>             <C>          <C>           <C>           <C>
Issuance of common shares for services
  in February 1996 ..................................              --             2,000     $   1,621        -          $     8,000
Subscriptions for common stock at $3.00                                                                               
  per share in January through June 1996 ............              --              --            --          -            1,934,024
Issuance of common shares for services                                                                                
  (Note 7) ..........................................              --              --            --          -              100,000
Issuance of common shares on conversion                                                                               
  of Bridge Notes ...................................              --              --            --          -              530,320
Issuance of common shares on the                                                                                      
  exercise of warrants ..............................              --              --            --          -                7,500
Issuance of common shares for                                                                                         
  equipment .........................................              --              --            --          -               12,000
Issuance of common shares for                                                                                         
  acquisitions ......................................              --              --            --          -              750,000
Issuance of common shares related to                                                                                  
  employment agreement (Note 12) ....................              --              --            --          -              100,000
Net loss ............................................          (879,337)           --            --          -             (879,337)
                                                            -----------        --------     ---------     ----------    -----------
Balance at December 31, 1996 ........................       $(8,257,807)       (279,000)    $(226,179)       -          $ 2,206,540
                                                            ===========        ========     =========     ==========    ===========
</TABLE>
                 See notes to consolidated financial statements

                                       20
<PAGE>

                        LASERMEDICS, INC. AND SUBSIDIARY
                                        
                      CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended December 31,                                                                      1996          1995
                                                                                         -----------   -----------
<S>                                                                                      <C>           <C>         
Cash flows from operating activities:
  Net loss ............................................................................  $  (879,337)  $(1,419,601)
                                                                                         -----------   -----------
  Adjustments to reconcile net loss
    to net cash provided by (used in) operating activities:
     Depreciation and amortization expense ............................................      283,746         8,642
     Amortization of discount on notes payable ........................................      151,667        43,333
     Interest expense .................................................................      294,820          --   
     Bad debt expense .................................................................    1,420,518        12,377
     Compensation related to stock options and
      warrants issued .................................................................         --         137,330
     Shares issued for public relations agreement .....................................        8,000          --   
     Shares issued for equipment ......................................................       12,000          --   
     Shares issued for services/with employment agreement .............................      200,000          --   
     Shares issued for clinical research studies ......................................         --         110,000
     Changes in operating assets and liabilities:
       (Increase) decrease in accounts receivable .....................................   (2,623,498)      120,297
       (Increase) decrease in inventory ...............................................    1,381,689       (35,378)
       (Increase) in prepaid expenses and other current assets ........................     (149,693)      (24,960)
       (Increase) in other assets .....................................................      (16,447)         --   
       Decrease in accounts payable and accrued liabilities ...........................      500,785       465,941
                                                                                         -----------   -----------
              Total adjustments .......................................................    1,463,587       837,582
                                                                                         -----------   -----------
              Net cash provided by (used in) operating activities .....................      584,250      (582,019)
                                                                                         -----------   -----------
Cash flows from investing activities:
  Acquisitions, net of cash acquired of $46,270 .......................................   (6,603,046)         --   
  Intangible assets expenditures ......................................................       (1,036)         --   
  Capital expenditures ................................................................     (139,534)       (1,859)
                                                                                         -----------   -----------
             Net cash used in investing activities ....................................   (6,743,616)       (1,859)
                                                                                         -----------   -----------
Cash flows from financing activities:
  Net proceeds from issuance of common stock ..........................................    1,941,524        35,000
  Subscriptions refunded on common stock ..............................................         --         (46,000)
  Net proceeds from line of credit ....................................................    2,187,071          --   
  Proceeds from long-term debt ........................................................    2,509,000       487,500
  Principal payments of long-term debt ................................................     (173,701)         --   
                                                                                         -----------   -----------
            Net cash provided by financing activities .................................    6,463,894       476,500
                                                                                         -----------   -----------
Net increase (decrease) in cash and cash equivalents ..................................      304,528      (107,378)

Cash and cash equivalents at beginning of period ......................................      203,364       310,742
                                                                                         -----------   -----------
Cash and cash equivalents at end of period ............................................  $   507,892   $   203,364
                                                                                         ===========   ===========

                 See notes to consolidated financial statements
                                        
Supplemental disclosures of cash flow information:                                      
Cash paid during the year for:                                  
                                        
    Interest ........................................................................... $   325,136   $      --
                                                                                         ===========   ===========
</TABLE>
                                       21
<PAGE>
                             LASERMEDICS, INC. AND SUBSIDIARY
                        NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.      PRINCIPAL BUSINESS ACTIVITY AND SUMMARY OF SIGNIFICANT ACCOUNTING
        POLICIES:

        Lasermedics, Inc. and subsidiary (collectively, the "Company") is a
        manufacturer and marketer of diversified products in the physical
        therapy and rehabilitation industry. Substantially all of the Company's
        customers are located throughout the United States.

        Lasermedics, Inc., organized in November 1990, was in the development
        stage through April 30, 1996, and for the year ended December 31, 1996,
        is considered an operating company.

        Following is a summary of the Company's significant accounting policies:

        The consolidated financial statements include the accounts of
        Lasermedics, Inc. and its wholly-owned subsidiary. Inter-company
        transactions and balances have been eliminated in consolidation.

        Revenue is recognized when title passes to the buyer, typically when the
        product is shipped.

        The Company considers all highly liquid investments purchased with an
        original maturity of three months or less to be cash equivalents. The
        Company maintains cash in bank deposit accounts which, at times, exceed
        federally insured limits. The Company has not experienced any losses on
        these accounts.

        Inventory is stated at the lower of cost, determined by the first-in,
        first-out (FIFO) valuation method, or market.

        Depreciation and amortization of property, plant and equipment is
        provided using the straight-line method over the estimated useful lives
        of the assets.

        The Company employs the liability method of accounting for income taxes
        pursuant to Statement of Financial Accounting Standards No. 109, under
        which method recorded deferred income taxes reflect the tax consequences
        on future years of temporary differences (differences between the tax
        basis of assets and liabilities and their financial amounts at
        year-end). The Company provides a valuation allowance that reduces
        deferred tax assets to their net realizable value.

        The calculation of net loss per common share is based on the weighted
        average number of shares outstanding during the period, after
        consideration of the dilutive effect of stock options and warrants
        reflected under the treasury stock method.

        The preparation of financial statements in conformity with generally
        accepted accounting principles requires the use of estimates and
        assumptions by management affecting the reported amounts of assets and
        liabilities and revenue and expenses and the disclosure of contingent
        assets and liabilities. Actual results could differ from those
        estimates.

        The Company measures compensation cost using APB Opinion No. 25 as is
        permitted by the Statement of Financial Accounting Standards No. 123,
        "Accounting for Stock-Based Compensation."

        Expenditures relating to research and development are expensed as
        incurred. The amount charged to operations was approximately $314,000
        and $174,000 for the years ended December 31, 1996 and 1995,
        respectively.

                                       22
<PAGE>
                        LASERMEDICS, INC. AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


        Goodwill represents the excess of the aggregate purchase price paid by
        the Company over the fair market value of the tangible and identifiable
        intangible net assets acquired arising from business acquisitions
        accounted for under the purchase method. Goodwill and intangibles are
        being amortized on a straight-line basis over 15 years and for periods
        ranging from 3 to 7 years, respectively.

2.      INVENTORY:

        Inventory at December 31, 1996, included the following:

              Raw material ..............................  $1,504,876
              Work-in-process ...........................      33,578
              Finished goods ............................   2,889,537
                                                           ----------
                                                           $4,427,991
                                                           ==========

        Substantially all of the Company's inventory is pledged as collateral
        for the Company's long-term debt (see Note 5).

3.      PROPERTY, PLANT  AND EQUIPMENT:

        At December 31, 1996, property and equipment, at cost, included:

                                                                     ESTIMATED
                                                                    USEFUL LIFE
                                                                    -----------
                Land                                $  190,000
                Buildings                            1,896,234      25 years
                Machinery and equipment              1,412,908      3 to 7 years
                Office furniture and fixtures          207,998      5 years
                Automobile                               7,000      5 years
                                                    ----------
                                                     3,714,140
                Less accumulated depreciation
                  and amortization                    (225,554)
                                                    ----------
                Property, plant  and equipment, net $3,488,586
                                                    ==========

        Substantially all of the Company's property, plant and equipment is
        pledged as collateral for the Company's long-term debt (see Note 5).

4.      ACQUISITIONS:

        On April 30, 1996 the Company entered into an agreement with Maxxim
        Medical, Inc., a Delaware corporation ("Maxxim"), whereby the Company
        purchased certain assets of (and assumed certain liabilities associated
        with) the Henley Healthcare Division ("Henley") of Maxxim for an
        estimated purchase price of approximately $13.5 million including
        related acquisition costs of approximately $650,000. The assets acquired
        consist of real property; tangible personal property including
        machinery, equipment, furniture and fixtures; general intangibles;
        contracts; business licenses;

                                       23
<PAGE>
                        LASERMEDICS, INC. AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

        accounts receivable; inventory; and prepaid expenses. The purchase price
        was paid by the issuance of the Company's convertible subordinated
        promissory note in the principal amount of $7,000,000 (the "Note") with
        the balance of the purchase price being paid in cash

        The Company obtained the cash portion of the purchase price pursuant to
        financing arrangements entered into with Comerica Bank - Texas, a Texas
        banking corporation ("Comerica"), which financing is secured by
        substantially all of the assets of the Company including the Henley
        assets acquired from Maxxim (see Note 5).

        On November 12, 1996, the Company purchased substantially all of the
        assets of (and assumed certain liabilities associated with) MJH Medical
        Equipment, Inc. ("MJH") for an estimated purchase price of approximately
        $435,000 including related acquisition costs of approximately $45,000.
        The assets acquired consist of tangible personal property including
        equipment, furniture and fixtures; contracts; business licenses;
        accounts receivable; inventory; and prepaid expenses. The purchase price
        was paid by the issuance of the Company's promissory note in the
        principal amount of approximately $120,000 and 39,063 shares of common
        stock, with a market value of approximately $6.40 per share, with the
        balance of the purchase price being paid in cash.

        On November 27, 1996, the Company, through a wholly-owned subsidiary,
        acquired all of the outstanding shares of common stock of Health Career
        Learning Systems, Inc., ("HCLSI"), a Michigan corporation, for an
        estimated purchase price of approximately $680,000 including related
        acquisition costs of approximately $80,000. The purchase price was paid
        by the issuance of 82,107 shares of common stock, with a market value of
        approximately of $6.09 per share, with the balance of the purchase price
        being paid in cash (see Note 5).

        These acquisitions have been accounted for as purchases for accounting
        purposes, and the results of operations of the acquisitions have been
        included in the consolidated statement of operations from the dates of
        acquisition. The estimated purchase price in excess of the estimated
        fair value of the net assets acquired, aggregating approximately
        $2,106,000 for all of the acquisitions, has been calculated as follows:

                                 Henley       MJH         HCLSI          Total
                               -----------  --------  ------------   -----------
Purchase price ..............  $12,847,000  $390,000  $    600,000   $13,837,000
Acquisition costs ...........      650,000    45,000        80,000       775,000
                               -----------  --------  ------------   -----------
                                13,497,000   435,000       680,000    14,612,000
                               -----------  --------  ------------   -----------

Assets acquired .............   12,683,000   215,000       355,000    13,253,000
Liabilities assumed .........      397,000   115,000       390,000       902,000
                               -----------  --------  ------------   -----------
Net assets (liabilities)
acquired ....................   12,286,000   100,000       (35,000)   12,351,000
                               -----------  --------  ------------   -----------

Excess of cost over
fair value of net assets
acquired (goodwill) .........  $ 1,211,000  $335,000  $    715,000   $ 2,261,000
                               ===========  ========  ============   ===========

                                       24
<PAGE>
                         LASERMEDICS, INC. AND SUBSIDIARY
                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


        The following summarized pro forma (unaudited) information assumes the
        acquisitions had occurred on January 1, 1996 and 1995, respectively:

For year ended December 31,                        1996                 1995
                                               ------------        ------------
Net sales ..............................       $ 20,120,000        $ 21,125,000
Net loss ...............................         (1,462,000)         (2,288,000)
                                               ------------        ------------
Net loss per common share ..............       $       (.73)       $      (1.58)
                                               ============        ============

        The above amounts reflect adjustments for interest on the Note and the
        financing arrangement with Comerica, amortization of goodwill,
        compensation related to an employment agreement and depreciation on
        re-valued property, plant and equipment.

5.      LONG-TERM DEBT:

        The following table summarizes the Company's long-term debt at December
        31, 1996, which is described below:

Note payable - Maxxim (a) ................................            $7,000,000
Term Note A - Comerica (b) ...............................               788,817
Term Note B - Comerica (b) ...............................             1,553,156
Note payable - MJH (c) ...................................               113,428
                                                                      ----------
                                                                       9,455,401
Less:  Current maturities ................................               326,367
                                                                      ----------
                                                                      $9,129,034
                                                                      ==========

        (a) In connection with the acquisition of Henley, the Note payable to
        Maxxim is due and payable on March 1, 2003 with interest payable
        semi-annually on November 1 and May 1 of each calendar year and
        calculated at a rate equal to 2% per annum and increasing annually 2%
        per annum. The Company may redeem all or any portion of the outstanding
        principal amount of the Note at redemption prices ranging from 104% to
        110% of the principal amount being redeemed, depending on when the
        redemption occurs as set forth in the Note. In addition, the Note is
        subject to mandatory redemption in annual installments of $1.4 million
        commencing on March 1, 1999 at premiums starting at 7% and decreasing 1%
        each year. The Company is also required to redeem 40% of the Note upon
        the completion of a public offering. The Note is convertible into common
        stock at an initial conversion price of $3 per share, provided that upon
        the occurrence of any default under the Note, the conversion price will
        be automatically adjusted to an amount equal to the lesser of the
        conversion price then in effect or 80% of the average market price for
        the Company's common stock for the 30 trading days immediately preceding
        the event of default. The conversion price is also subject to adjustment
        upon the occurrence of certain events (including certain issuances of
        common stock for less than the conversion price) to provide
        anti-dilution protection. Such conversion could, depending on the fair
        market value of the Company's common stock at the time of conversion,
        result in substantial dilution to holders of the Company's common stock.
        The Company's common stock issuable upon conversion of the Note is
        subject to the terms of a registration rights agreement entered into by
        the Company and Maxxim whereby Maxxim (and certain subsequent holders)
        shall retain certain demand and piggyback registration rights with
        respect to those shares of common stock.

                                       25
<PAGE>
                         LASERMEDICS, INC. AND SUBSIDIARY
                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


        (b) The financing arrangements with Comerica (the "Financing") provides
        for (i) a two-year revolving loan ("Line of Credit"), which permits
        borrowings up to $4,000,000 through April 1998, pursuant to a monthly
        borrowing base calculation derived from the Company's accounts
        receivable and inventory and (ii) two term loans in the amount of
        $893,000 ("Term Note A") and $1,616,000 ("Term Note B"), respectively.
        Term Note A and Term Note B are payable in monthly installments of
        $14,883 and $8,978, respectively, plus interest through May 2001 and
        2011, respectively. The Line of Credit also includes a $250,000 letter
        of credit facility. Interest on the Line of Credit and the two term
        loans is payable monthly and is calculated at a rate equal to the Prime
        Rate (8.25% at December 31, 1996) plus one-half of one percent per
        annum. Term Note B is callable by Comerica beginning on the fifth
        anniversary of the Financing. All of the borrowings from Comerica are
        secured by substantially all of the assets of the Company including the
        Henley assets acquired from Maxxim. The Financing also contains a number
        of affirmative covenants, negative covenants and financial covenants
        with which the Company must comply including a minimum tangible net
        worth, leverage ratio, working capital ratio, fixed charge ratio and
        interest coverage ratio. The Company, among other matters, is also
        limited in the amount of its capital expenditures, research and
        development expenditures and dividends and all future acquisitions and
        major corporate transactions require approval of Comerica, as do
        offerings of securities by the Company.

        (c) In connection with the MJH acquisition, the Company issued a note
        payable to the seller, an officer of the Company, in the amount of
        approximately $120,000. The note is payable in monthly principal
        installments of $3,336 plus interest at a bank's prime lending rate plus
        2% per annum through November 1999.

        The estimated fair value of the Note payable to Maxxim amounted to
        $7,000,000 pursuant to a valuation by an investment banking firm. Based
        on borrowing rates currently available to the Company for loans with
        similar terms and average maturities the fair value of the Company's
        other long-term debt approximates the carrying amount.

        Aggregate maturities of long-term debt are as follows:


        For the year ending December 31,  1997             $  326,367
                                          1998                326,367
                                          1999              1,719,694
                                          2000              1,686,332
                                          2001              1,582,169
                              2002 and thereafter           3,814,472
                                                            ---------
                                                            9,455,401
        Less current maturities                               326,367
                                                           ----------
                                                           $9,129,034
                                                           ==========

6.      NOTE PAYABLE:

        The Company has a demand note payable to a bank in the amount of
        $292,000. Interest is payable monthly at the rate of 10.25% per annum.
        The note is collaterized by substantially all of the assets of HCLSI.

                                       26
<PAGE>
                         LASERMEDICS, INC. AND SUBSIDIARY
                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

7.      RELATED PARTY TRANSACTIONS:

        In August 1995, the Company entered into an agreement with Mezzanine
        Financial Relations, Inc., (Mezzanine) a financial relations company, to
        assist the Company in the evaluation of, and formulation of terms for
        certain companies identified in the Company's strategic acquisition
        plan. The executive vice president, chief financial officer and a
        director of the Company was Chairman of the Board and a shareholder of
        Mezzanine. The agreement provided, among other things, for the Company
        to pay Mezzanine a cash fee of $115,000 concurrent with the closing of
        the Henley acquisition transaction. Pursuant to the agreement the
        Company issued to Mezzanine a four-year warrant to purchase 25,000
        shares of the Company's common stock at a price of $6.75 per share,
        which was the market price of the Company's common stock on the date of
        the grant. The warrant is exercisable from February 16, 1996 through
        August 16, 1999.

        In May 1996, the Company entered into an additional agreement with
        Mezzanine, which agreement the parties amended in November 1996, whereby
        Mezzanine agreed to provide financial consulting services with regard to
        potential mergers and acquisitions in consideration for a monthly fee of
        $10,000. The agreement terminated on January 31, 1997.

        During the year ended December 31, 1996, the Company paid fees
        aggregating $25,000 and issued 33,333 shares of common stock to a
        director of the Company for his services in connection with the
        Company's pre-market approval application submission to the FDA.

8.      ACCRUED EXPENSES AND OTHER CURRENT  LIABILITIES:

        The following are included in accrued expenses and other current
liabilities at December 31, 1996:

Property taxes ............................................             $196,993
Payroll and commissions ...................................              199,403
Interest payable ..........................................               81,888
Accrued acquisition costs .................................               92,583
Accrued professional fees .................................               93,966
Other .....................................................              204,480
                                                                        --------
                                                                        $869,313
                                                                        ========

9.      INCOME TAXES:

        The components of deferred tax assets as of December 31, 1996 were as
follows:

                                                                           1996
                                                                    -----------
        Total deferred tax assets .......................           $ 1,181,000
        Valuation allowance .............................            (1,181,000)
             Net deferred tax assets ....................                   -0-
                                                                    ===========

                                       27
<PAGE>
                         LASERMEDICS, INC. AND SUBSIDIARY
                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


        The tax effects of temporary differences, loss carryforwards and the
        valuation allowance that give rise to deferred tax assets (liabilities)
        at December 31, 1996, were as follows:

                                                                           1996
                                                                    -----------
             Temporary differences:
             Compensation expense not
                deductible until options exercised ...........      $   239,000
             Depreciation ....................................          (35,000)
             Customer deposits received ......................            3,000
             Net operating losses ............................          974,000
             Less  valuation allowance .......................       (1,181,000)
                                                                    -----------
                                                                           -0-
                                                                    ===========

        Following is a reconciliation of the amount of the income tax benefit to
        result from applying the statutory federal income tax rates to pretax
        loss and the reported amount of income tax benefit for the year ended
        December 31, 1996 and 1995:

                                                             1996        1995
                                                          ---------   ---------
Tax benefit of statutory rate of 15% ...................  $ 132,000   $ 212,940
Increases in valuation allowance .......................    (76,000)   (211,641)
Other ..................................................    (56,000)     (1,299)
                                                          ---------   ---------
                                                              -0-         -0-
                                                          =========   =========

        As of December 31, 1996, the Company had net operating loss
        carryforwards available to offset future taxable income of approximately
        $6,493,000 expiring through 2010. Between January 1993 and December
        1996, the Company completed an initial public offering, had warrants
        exercised, completed private offerings of securities and made
        acquisitions of established businesses or product lines. Under the
        Internal Revenue Code Section 382 these activities effected an ownership
        change and thus severely limit on an annual basis, the Company's ability
        to utilize its net operating loss carryforwards. The Company uses the
        lowest marginal U.S. corporate tax rate of 15% to determine deferred tax
        amounts and the related valuation allowance because the Company has had
        no taxable earnings through December 31, 1996.

10.     STOCKHOLDERS' EQUITY:

        In February 1995, 10,000 shares of Series B preferred stock were
        converted to common stock at the rate of three preferred shares for one
        common share There was no cash involved in the transaction. The effect
        of this transaction had it occurred on January 1, 1995 would have
        resulted in weighted average shares outstanding of 1,444,189 and net
        loss per share of $0.98 for the year ended December 31, 1995. As of
        December 31, 1995 there were no shares of Preferred Stock issued and
        outstanding.

        In March 1995, the Company made a rescission offer to stockholders
        owning in the aggregate 24,150 shares of common stock, who purchased
        such shares at a price of $4.00 per share in the Company's private
        placement which closed on October 31, 1994 and who reside in the states
        of Texas and New York. The offer expired on March 31, 1995 and
        shareholders owning in the aggregate 11,500 shares rescinded, and
        received a refund of, their investment.

                                       28
<PAGE>
                         LASERMEDICS, INC. AND SUBSIDIARY
                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


        During April 1995, the Company issued in a private placement
        transaction, 12% convertible, unsecured, non-negotiable promissory notes
        (the "Bridge Notes") in the principal amount of $487,500 and 39,000
        shares of common stock valued at $195,000. The Bridge Notes were due and
        payable on the earlier of June 12, 1998, or the closing of any public
        offering or private placement of the Company's securities in which the
        Company received gross proceeds of at least $3,000,000.

        In December 1995, the Company commenced a "best-efforts" private
        placement of its securities (the "Offering".) A total of 300,000 units
        were offered at a price of $3.00 per unit and a minimum subscription of
        2,000 units. Each unit consisted of one share of common stock and one
        warrant to purchase one share of common stock at $6.00 for a period of
        four years. The units offered were not registered, and the offering was
        to expire on January 31, 1996. At December 31, 1995, no subscriptions
        had been received in connection with the offering. During March 1996,
        the Company amended the terms of the Offering by extending the
        expiration date from January 31, 1996 to June 21, 1996, increasing the
        size of the Offering up to 1,000,000 units and modifying the provisions
        of certain common stock registration rights granted in the Offering.

        On April 30, 1996 the Company consummated the Offering with respect to
        those subscriptions received to that date. Pursuant to such consummation
        the Company received an aggregate of approximately $1,200,000 from
        investors and issued to such investors in exchange therefor, 400,000
        units of its securities ("Units"), each Unit consisting of one share of
        the Company's common stock and one four-year warrant to purchase one
        share of the Company's common stock at an exercise price of $6.00 per
        share. Subsequent to April 30, 1996 the Company consummated the Offering
        with respect to those subscription agreements received after that date
        and, in connection therewith, received approximately $746,000 and issued
        an additional 248,670 Units.

        Additionally, on April 30, 1996 all of the holders of the Bridge Notes
        converted the amounts due thereunder into an aggregate of 176,773 shares
        of common stock and four-year warrants to purchase an aggregate of
        176,773 shares of common stock at an exercise price of $6.00 per share.
        Such conversion was effected under the same terms as those offered to
        investors in the Offering.

        In connection with an agreement the Company entered into (in December
        1995) with a public relations firm, the Company issued to the firm, in
        February 1996, 2,000 shares of its treasury common stock as compensation
        for services. The Company has recognized $8,000 in related compensation
        expense based on the market price of the common stock of $4.00 per share
        on the date of the agreement.

        At the Company's annual shareholders' meeting held in July 1996, the
        Company's shareholders, among other things, approved (i) a proposal
        amending the Company's Articles of Incorporation which (a) increased the
        authorized number of shares of the Company's Common Stock, par value
        $.01 per share from 10,000,000 shares to 20,000,000 shares and (b)
        increased the authorized number of shares of the Company's Preferred
        Stock, par value $.10 per share from 1,000,000 shares to 2,500,000
        shares and (ii) the 1996 Incentive Stock Option Plan (the "Incentive
        Plan") and the 1996 Amended and Restated Non-Employee Director Stock
        Option Plan (the "Director Plan") as adopted by the Company's Board of
        Directors (the "BOD") in January 1996.

                                       29
<PAGE>
                         LASERMEDICS, INC. AND SUBSIDIARY
                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

11.     STOCK OPTIONS & WARRANTS:

        As discussed in Note 10, the Company has reserved for future issuance
        1,200,000 and 250,000 shares of common stock for the Incentive Plan and
        the Director Plan, respectively. The Incentive Plan provides for the
        granting of options, to purchase common stock, to employees and
        consultants of the Company at a price not less than the fair market
        value of the shares on the date of the option grant, provided that the
        exercise price of any option granted to an employee owning more than 10%
        of the outstanding common stock of the Company may not be less than 110%
        of the fair market value of the shares on the date of the option grant.
        The term of each option and the manner of exercise is determined by the
        BOD, but in no case can the options be exercisable in excess of 10 years
        beyond the date of grant. The Director Plan provides for the granting of
        options, to purchase common stock, to non-employee directors of the
        Company at a price equal to the fair market value of the shares on the
        date of the option grant. The Director Plan also provides for the
        granting of an option for 10,000 shares of common stock to all
        non-employee directors on an annual basis, coinciding with the
        anniversary of the director's date of election to the BOD. Each option
        granted under the Director Plan expires 10 years from the date of grant.

        A summary of the Company's options as of December 31, 1996 and 1995 and
        changes during the years then ended is presented below:
<TABLE>
<CAPTION>
                                                      1996                       1995
                                      -----------------------------   -------------------------
                                                      Weighted Avg.              Weighted Avg.
                                         SHARES      EXERCISE PRICE    SHARES   EXERCISE PRICE
                                      ----------     --------------   --------  --------------
<S>                                      <C>            <C>            <C>          <C>  
Outstanding at
   beginning of
   year ...........................      962,726        $3.81          950,082      $3.67
Canceled/
   expired ........................      (50,000)        0.10          (82,801)      3.94
Granted ...........................      973,776         6.02          125,445       4.56
Exercised .........................      (75,000)        0.10          (30,000)      1.00
                                      ----------        -----         --------      -----
Outstanding at
   end of year ....................    1,811,502        $5.24          962,726      $3.81
                                      ==========        =====         ========      =====
Options
   exercisable at
   year-end .......................    1,811,502         --            962,726       --
                                                                      ========      =====
Weighted- average fair
   value of options granted
   during the year ................         --          $1.26             --        $1.81
                                      ==========        =====         ========      =====
</TABLE>

                                       30
<PAGE>
                         LASERMEDICS, INC. AND SUBSIDIARY
                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


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

                                         OPTIONS OUTSTANDING AND EXERCISABLE
                                   ------------------------------------------ 
                                                        WEIGHTED   
                                       NUMBER           AVERAGE      WEIGHTED
RANGE OF                            OUTSTANDING        REMAINING      AVERAGE
EXERCISE                           AT DECEMBER 31,     CONTRACTUAL    EXERCISE
PRICES                                   1996             LIFE         PRICE
                                      ---------          -----         -----
$1.00-$3.00 .....................       270,000            3.0         $2.74
$4.00-$5.50 .....................       475,000            4.8         $4.46
$6.00-$7.75 .....................     1,066,502            3.4         $6.22
                                      ---------          -----         -----
$1.00-$7.75 .....................     1,811,502            3.7         $5.24
                                      =========          =====         =====
                                                                  
        The Company has elected. in accordance with the provisions of Statement
        of Financial Accounting Standards No. 123 ("SFAS No. 123") to apply the
        current accounting rules under APB Opinion No 25 and related
        interpretations in accounting for stock options, and accordingly, has
        presented the disclosure-only information as required by SFAS No. 123.
        If the Company had elected to recognize compensation cost based on the
        fair value of the options granted at the grant date as prescribed by
        SFAS No. 123, the Company's net loss and net loss per common share for
        the years ended December 31, 1996 and 1995 would approximate the pro
        forma amounts shown in the table below.

        Year ended December 31,                     1996               1995
                                                -------------     -------------

Net loss - as reported .....................    $    (879,337)    $  (1,419,601)
Net loss - pro forma .......................    $  (1,023,837)    $  (1,646,318)
Net loss per common share - as reported ....    $        (.44)    $        (.98)
Net loss per common share - pro forma ......    $        (.51)    $       (1.14)


        The fair value of each option grant on the date of grant was valued by
        an investment banking firm taking into account as of the grant date the
        exercise price and expected life of the option, the current price of the
        underlying stock and its expected volatility, expected dividends on the
        stock and the risk-free interest rate for the expected term of the
        option as prescribed by SFAS No. 123.

        In connection with their election to the BOD in January 1996, two
        non-employee directors were each granted a stock option under the
        Director Plan to purchase 25,000 shares of the Company's common stock at
        a price of $5.50 per share. Also, in connection with his election to the
        BOD concurrent with the closing of the Henley transaction in April 1996,
        one non-employee director was granted an option under the Director Plan
        to purchase 25,000 shares of the Company's common stock at a price of
        $7.75 per share. The grants of these options were subject to stockholder
        approval of the Director Plan which approval was obtained in July 1996.

        In February 1996, the Company extended the expiration date from February
        16, 1997 to February 1, 1999 of an immediately exercisable option to
        purchase 75,000 shares of the Company's common stock at a price of $4.25
        per share granted in connection with an agreement entered into with a
        consultant of the Company in February 1994.

                                       31
<PAGE>
                         LASERMEDICS, INC. AND SUBSIDIARY
                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


        In March 1996, the Company extended the expiration date from July 15,
        1996 to March 12, 1998 of an immediately exercisable option to purchase
        20,000 shares of the Company's common stock at a price of $4.00 per
        share granted in connection with an agreement entered into with a
        financial public relations firm in December 1995.

        Effective June 14, 1996 the Company entered into a settlement agreement
        with J.W. Cabott Holding Corp. ("JWC") and certain of JWC's principals
        with respect to an agreement the Company entered into with JWC in July
        1994 pursuant to which JWC was granted a warrant to purchase 125,000
        shares of the Company's common stock at $.10 per share. The settlement
        agreement provides for, among other things, a reduction in the number of
        shares issuable pursuant to the warrant granted to JWC from 125,000 to
        75,000 and the transfer of such warrant to three principals of JWC. The
        Company subsequently issued 75,000 shares of its common stock to the
        three principals of JWC pursuant to their exercise of the warrant at the
        specified price of $.10 per share.

        In connection with their re-election to the BOD in July 1996, four
        non-employee directors were each granted a stock option under the
        Director Plan to purchase 10,000 shares (for an aggregate of 40,000
        shares) of the Company's common stock at a price of $6.125 per share.

12.     COMMITMENTS AND CONTINGENCIES:

        EMPLOYMENT AND CONSULTING AGREEMENTS

        The Company has entered into various employment and consulting
        agreements with various key personnel, directors and certain
        shareholders aggregating $1,339,000 which expire at various dates
        through November 1999. Certain of these agreements provide for incentive
        bonuses and or commissions, as defined in the agreements. In connection
        with the HCLSI acquisition, the Company entered into an employment
        agreement with one of the sellers which provides for a signing bonus of
        $100,000, paid by the issuance of 16,421 shares of the Company's common
        stock. The agreement also provides for the issuance of 188,847 shares of
        the Company's common stock to be held in escrow. Such shares will be
        released from escrow over a three-year period if the employee meets
        certain performance goals as defined in the agreement. The Company will
        recognize a charge to operations upon the release of such shares from
        escrow based upon the fair market value of the shares as of the release
        date.

        EXCLUSIVE LICENSE AGREEMENT

        In November 1993, the Company entered into an agreement, amended in June
        and December 1994, November 1995 and as of December 1996, with CB
        Svendsen a/s ("CBS"), the Danish manufacturer of the Company's low
        energy laser device, the Microlight 830, under which the Company obtains
        sole and exclusive world-wide manufacturing, marketing, and distribution
        rights in perpetuity to all low-energy laser devices currently made by
        CBS, upon the payment to CBS of the sums of $150,000 by December 31,
        1997 and $125,000 by June 30, 1998, respectively, in each case subject
        to an extension of up to eight weeks obtainable by a payment of $1,000
        per week of extension, plus royalties of 3% on sales for a period of
        seven years following the respective grants of exclusivity (see Note
        16).

                                       32
<PAGE>
                         LASERMEDICS, INC. AND SUBSIDIARY
                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


        LEASES

        The Company is obligated under various non-cancelable operating leases
        (including certain related-party leases aggregating approximately $8,300
        per month) for warehouse and office space expiring through June 2001,
        which are subject to increase for real estate taxes and operating
        expense escalation. Rent expense charged to operations under these
        operating leases amounted to approximately $45,000 and $16,000 for the
        years ended December 31, 1996 and 1995, respectively. Minimum future
        rental payments are as follows:

                    FISCAL YEARS
                    ------------ 
                      1997                         $109,204
                      1998                          101,904
                      1999                          103,704
                      2000                           95,304
                      2001                           26,652
                                                   --------
                                                   $436,768
                                                    =======

13.     MAJOR CUSTOMERS:

        During 1996 and 1995 no customer accounted for 10% or more of total
        sales.

14.     EMPLOYEE BENEFIT PLANS:

        During the year ended December 31, 1996, the Company adopted a 401 (k)
        savings plan (the "Plan") covering all qualified employees. The Plan
        permits participants to contribute up to 15% of their base compensation
        (as defined) each year. The Company will match at least 25% of the
        participant's contribution up to a maximum of 6% of gross pay. The
        Company's matching percentage may be adjusted as Company profitability
        dictates. Two officers of the Company serve as trustees of the Plan.
        Matching contributions to the Plan for the year ended December 31, 1996,
        amounted to approximately $25,000.

15.     SUPPLEMENTAL CASH FLOW INFORMATION:

        Non-cash investing and financing transactions during the years ended
        December 31, 1996 and 1995 were as follows:

                                                                1996        1995
                                                            --------      ------
Common shares issued in connection
       with acquisitions .............................      $750,000        --
Common shares issued in connection
       with conversion of bridge notes ...............       530,320        --
Common shares issued for
       equipment and furniture .......................        12,000      $5,995
Common shares issued for employment
       agreement and services ........................       208,000        --
Accrued amounts relating to acquisitions .............        92,583        --

                                       33
<PAGE>
                         LASERMEDICS, INC. AND SUBSIDIARY
                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


                                                              1996          1995
                                                              ----       -------
Compensation related to common stock
       options issued .................................       --           3,900
Common shares issued in connection with
       research and development agreement .............       --         110,000
Deferred compensation related to common
       stock options ..................................       --         133,430

16.     SUBSEQUENT EVENTS:

        On January 24, 1997, the Company entered into an agreement pursuant to
        which it acquired Texas T.E.N.S., Inc., a Texas corporation, as a
        wholly-owned subsidiary for an estimated purchase price of approximately
        $850,000 including related acquisition costs of approximately $50,000.

        On January 24, 1997, the Company purchased substantially all of the
        inventory, distribution systems and customers associated with the
        Homecare (third-party billing) division of Gatti Medical Supply, Inc., a
        Pennsylvania corporation, for an estimated purchase price of
        approximately $600,000 including related acquisition costs of
        approximately $50,000.

        In March 1997, the Company and CBS entered into a new and superseding
        agreement, pursuant to which the Company paid $100,000 to CBS and
        obtained unto perpetuity the sole and exclusive world-wide distribution
        rights to the Microlight 830. Also pursuant to the agreement, the
        Company obtained unto perpetuity the exclusive world-wide manufacturing
        rights to the Microlight 830 subject to the payment to CBS of $175,000
        by June 15, 1998.


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

        None.

                                       34
<PAGE>
                                    PART III

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

EXECUTIVE OFFICERS AND DIRECTORS

        The following table provides information concerning each executive
officer and director of the Company as of the date hereof:
<TABLE>
<CAPTION>
                                    AGE     TITLE
<S>                                <C>      <C>
Michael M. Barbour                  52      President, Chief Executive Officer, Director

Dan D. Sudduth                      55      Executive Vice President, Chief Financial Officer, Director

Chike J. Ogboenyiya                 45      Vice President - Finance, Secretary

Michael J. Houska                   37      Vice President - Sales

Chadwick F. Smith, MD               63      Medical Director,  Director, Chairman of Board

Pedro A. Rubio, MD, Ph.D.           52      Director

Kenneth W. Davidson                 49      Director

Ernest J. Henley, Ph.D.             70      Director
</TABLE>
        Michael M. Barbour has been President, Chief Executive Officer and
Director of the Company since May 1991. He has over 13 years experience in the
field of laser products. Prior to forming Lasermedics, he was President of
Medical Training Centers of America (formerly The Houston Laser Institute) from
January 1987 to April 1991, which he founded in order to train and inform
doctors in the medical and surgical use of lasers. From April 1984 to January
1987, he was President of Surgimedics, a Houston, Texas, manufacturer and
distributor of laser accessory products. Mr. Barbour graduated from the
University of Houston in 1967 with a B.B.A. in marketing.

        Dan D. Sudduth joined the Company as Executive Vice President and Chief
Financial Officer in February 1997. He has been a Director of the Company since
January 1996. Mr. Sudduth was Chief Financial Officer for Mezzanine Telecom,
Inc., a Houston-based telecommunications company, from 1994 to January 1997 and
currently serves as a Director. He is also a Director for CQI Solutions, Inc., a
medical computer software company in New Braunfels, Texas. During 1995 and 1996,
Mr. Sudduth was President and Director of AMC Home Healthcare, Inc., a
respiratory therapy company in Houston, Chairman of Mezzanine Financial
Relations, Inc., a merchant banking firm in Houston, and Chief Financial Officer
and Director of Creative Communications International, Inc., a Houston
telecommunications company. From 1992 to 1994, Mr. Sudduth served as Chairman
and Chief Executive Officer of Heart Labs of America, Inc. From 1988 to 1992, he
was President and Chief Financial Officer of American Biomed, Inc. Mr. Sudduth
received a B.B.A. in 1964 from Lamar University.

        Chike J. Ogboenyiya has been Vice President-Finance of the Company since
January 1994 and Secretary since August 1994. He has over 20 years of extensive
industry experience in accounting, corporate finance and business management.
From 1990 to 1993, he was president and owner of a small accounting firm which
offered business consulting and financial services to various clients. Prior to
that time, he was a Director and Chief Financial Officer for Kaulimax
International Corporation, a privately-held exporter of apparel located in
Houston, Texas, from 1984 to 1990. Mr. Ogboenyiya is a Certified Public
Accountant, graduated with an M.S. from the University of Houston in 1979, and
graduated cum laude from Texas Southern University in 1977 with a B.B.A. in
Accounting.

        Michael J. Houska has been Vice President-Sales of the Company since May
1996. He has over 13 years of experience in the medical devices industry. Mr.
Houska is a Director of Love Inc./Love for Children,

                                       35
<PAGE>
an affiliate of World Vision. From 1987 to 1996, Mr. Houska was divisional Vice
President of Sales and Marketing for Maxxim. Mr. Houska holds a B.A. degree in
business management from Hiram College in Ohio.

        Chadwick F. Smith, MD has been a Director of the Company since May 1991
and Chairman of the Board of Directors since June 1993. He is also a Consultant
to the Company. See "Certain Relationships and Related Transactions." Dr. Smith
is a Clinical Professor of Orthopedic Surgery at the University of Southern
California School of Medicine, a position he has held since 1981. He has also
been a member of the Medical Staff of Orthopedic Hospital, Los Angeles,
California, since 1966. Dr. Smith graduated with a B.A. from Southern Methodist
University in 1954, graduated from the University of Texas medical school in
1958, and has been a diplomate of the American Board of Orthopedic Surgery since
1968.

        Pedro A. Rubio, MD., Ph.D. has been a Director of the Company since
January 1996. He is currently a Clinical Associate Professor of Surgery at the
University of Texas Health Science Center in Houston. He was Director of
Education of the Laser Training Institute of Houston, from November 1993 until
January 1996. He served as World President of the International College of
Surgeons in Chicago in 1995, and was Chairman of the Department of Surgery at
the Columbia/HCA Medical Center Hospital in Houston from 1976 to 1994, when he
became Chairman Emeritus. Dr. Rubio holds the degrees of Bachelor of Science,
Master of Science in Surgical Technology, Doctor of Philosophy in Biomedical
Technology and Doctor of Medicine and Surgery. Dr. Rubio is a Diplomate of the
American Boards of Surgery, Laser Surgery, Abdominal Surgery, Forensic Medicine,
Quality Assurance and Utilization Review, Forensic Examiners and Pain
Management.

        Kenneth W. Davidson has been a Director of the Company since April 1996.
He is President, Chief Executive Officer and Chairman of the Board of Directors
of Maxxim Medical, Inc. ("Maxxim") since November 1986, and a Director since
1982. Prior to that time, Mr. Davidson was the Corporate Director of Business
Development at Intermedics, Inc., which is principally a manufacturer of
implantable devices such as pacemakers. Mr. Davidson is also a Director of
Encore Orthopedics, Inc., a designer and manufacturer of implantable orthopedic
devices.

        Ernest J. Henley, Ph.D., has been a Director of the Company since April
1996, and is also a consultant to the Company. He has been a Director of Maxxim
since 1976. See "Certain Relationships and Related Transactions." Dr. Henley's
principal employment for more than fifteen years has been as a Professor of
Chemical Engineering at the University of Houston.

        All directors hold office until the next annual meeting of stockholders
and until their successors have been duly elected and qualified. All
non-employee directors of the Company are reimbursed for expenses incurred for
attendance at meetings of the Board of Directors and any Board committee and are
eligible to receive stock options pursuant to the 1996 Non-Employee Director
Stock Option Plan. See "Item 10.
Executive Compensation."

        Each officer of the Company serves at the discretion of the Board of
Directors, subject to the terms of his employment agreement, if any, and is
eligible to receive stock options pursuant to the 1996 Incentive Stock Plan. See
"Item 10. Executive Compensation" below, for a discussion of the Company's
employment agreement with Mr. Barbour. Each member of management devotes his
full time to the Company's affairs.

COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT

     Section 16(a) of the Exchange Act requires a company's directors and
executive officers, and persons who own more than 10% of the equity securities
of the Company to file initial reports of ownership and reports of changes in
ownership of the Common Stock with the Securities and Exchange Commission.
Officers, directors and greater than 10% shareholders are required to furnish
the Company with copies of all Section 16(a) reports they file.

                                       36
<PAGE>
     Based solely on a review of the forms the Company has received or prepared,
the Company believes that during the year ended December 31, 1996, all filing
requirements applicable to the Company's directors, officers and greater than
10% shareholders were met except Michael J. Houska failed to file a Form 4 on a
timely basis in connection with the shares of Common Stock issued to him in the
asset purchase transaction between MJH and the Company.

SCIENTIFIC ADVISORY BOARD

        The Company established a Scientific Advisory Board of distinguished
physicians and scientists with a wide range of experience in the medical field.
The Board meets formally or by teleconference at the Company's expense every six
months to discuss research data regarding the Company's products.

        By selection, the medical and scientific advisors are geographically
diverse and have varied experience within the laser field, including hospital
work, teaching at universities, and working within different industries or types
of private practice. All of the advisors are in private practice, employed by
hospitals, universities or other organizations, none of which in the future is
expected by the Company to compete with the Company. These advisors are expected
to devote only a small portion of their time to the Company, and they are not
expected to participate actively in the Company's affairs. Certain of the
institutions with which the Scientific Advisors are affiliated may adopt new
regulations or policies that limit the ability of the advisors to consult with
the Company; however, the loss of the services of any of the Scientific Advisors
is unlikely to adversely affect the Company.

        The Scientific Advisory Board is comprised of the following individuals:

JACK ANSTANDIG, MD. - Neurologist, Acupuncture and Pain Management Specialist;
Member, American Academy of Neurology, American Academy of Medical Acupuncture
and International Association.

CHADWICK F. SMITH, MD. - Clinical Professor of Orthopedic Surgery, University of
Southern California School of Medicine; Medical Director, International
Children's Program, Orthopedic Hospital, Los Angeles. Dr. Smith is also a
director of the Company.

C. THOMAS VANGSNESS, MD. - Assistant Professor, Orthopedic Surgery and Chief of
Sports Medicine, University of Southern California. Dr. Vangsness owns 22,833
shares of the Company's common stock.

PEDRO A. RUBIO, MD., PH.D. - Past World President of the International College
of Surgeons (Chicago); Clinical Associate Professor of Surgery, University of
Texas Health Science Center, Houston; Diplomate, American Boards of Surgery,
Laser Surgery, Forensic Medicine, Quality Assurance and Pain Management. Dr.
Rubio is also a director of the Company.

ITEM 10. EXECUTIVE COMPENSATION

         SUMMARY OF COMPENSATION. The following table provides information
concerning compensation paid or accrued during the fiscal years ended December
31, 1996, 1995 and 1994 to the Company's Chief Executive Officer, Michael M.
Barbour. During 1996, 1995 and 1994, no other executive officers received
compensation which exceeded $100,000:
<TABLE>
<CAPTION>
                                                                                           LONG TERM COMPENSATION
                                                                                   ---------------------------------
                                                                                           AWARDS
                                                                                   -----------------------
                                                      ANNUAL COMPENSATION                       SECURITIES   PAYOUTS
                                              -----------------------------------               UNDERLYING  -------       ALL
                                                                     OTHER ANNUAL   RESTRICTED   OPTIONS/    LTIP        OTHER
NAME AND POSITION    YEAR                      SALARY        BONUS   COMPENSATION  STOCK AWARDS   SARS(#)   PAYOUTS   COMPENSATION
------------------   ----                     --------       -----   ------------  ------------  ---------  -------   ------------
<S>                  <C>                      <C>            <C>     <C>           <C>           <C>        <C>       <C>
Michael M. Barbour   1996.................    $171,657        --          --           --           --        --           --
CEO                  1995.................    $110,000        --        $9,000         --           --        --           --
                     1994 ................    $110,000        --        $9,000         --        225,000      --           --
</TABLE>

                                       37
<PAGE>
     AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR ENDED
OPTION VALUES. The following table provides certain information with respect to
options exercised during the fiscal year ended December 31, 1996 by the
Company's Chief Executive Officer:
<TABLE>
<CAPTION>
                                                            NUMBER OF                   VALUE OF
                                                       SECURITIES UNDERLYING          UNEXERCISED
                                                           UNEXERCISED                IN-THE-MONEY
                                                          OPTIONS/SARS              OPTIONS/SARS AT
                                                       AT FISCAL YEAR END (#)     FISCAL YEAR END ($) (1)   
                            SHARES                      DECEMBER 31, 1994                REALIZED
                          ACQUIRED ON    VALUE     --------------------------   ---------------------------
NAME                        EXERCISE    REALIZED   EXERCISABLE  UNEXERCISABLE   EXERCISABLE   UNEXERCISABLE
-----                     ------------  --------   -----------  -------------   -----------   -------------
<S>                       <C>           <C>        <C>          <C>             <C>           <C>                   
Michael M. Barbour             --         --          225,000         --         $498,750            --
</TABLE>
(1)     Calculated by multiplying the number of shares underlying outstanding
        in-the-money options by the difference between the last sales price of
        the Common Stock on December 31, 1996 ($6.05 per share) and the exercise
        price, which ranges between $3.00 and $4.50 per share. Options are
        in-the-money if the fair market value of the underlying Common Stock
        exceeds the exercise price of the option.


COMPENSATION OF DIRECTORS

        Effective January 15, 1996, the Board of Directors of the Company (the
"BOD") adopted the following plans which were approved by the Company's
shareholders in July 1996: (i) a 1996 Incentive Stock Option Plan under which
the Company can issue up to 1.2 million shares of the Company's common stock to
eligible officers, employees, and consultants of the Company and (ii) a 1996
Non-Employee Directors Stock Option Plan (the "Outside Director Plan") under
which the Company can issue up 250,000 shares of common stock to its outside
directors.

        In connection with their election to the BOD in January 1996, Mr.
Sudduth and Dr. Rubio were each granted a stock option under the Outside
Director Plan to purchase 25,000 shares of the Company's common stock at a price
of $5.50 per share. Also, in connection with his election to the BOD concurrent
with the closing of the Henley transaction in April 1996, Dr. Henley was granted
an option under the Outside Director Plan to purchase 25,000 shares of the
Company's common stock at a price of $7.75 per share. Additionally, in
connection with their re-election to the BOD in July 1996, Drs. Henley and Rubio
and Messrs. Sudduth and Davidson were each granted a stock option under the
Outside Director Plan to purchase 10,000 shares (for an aggregate of 40,000
shares) of the Company's common stock at a price of $6.125 per share.

        The Outside Director Plan also provides that at the discretion of the
BOD, the Company may pay a cash fee to non-employee directors from time to time
for serving on and for attendance at meetings of, the BOD or any committee
thereof (as such fees are set by the BOD from time to time.) During the year
ended December 31, 1996, the Company paid Drs. Henley and Rubio and Messrs.
Sudduth and Davidson $500 per person for attendance at each meeting of the Board
of Directors.

EMPLOYMENT CONTRACTS

         In November 1996, the Company entered into an agreement with Michael M.
Barbour, effective as of May 1, 1996, employing him as its Chief Executive
Officer at a base annual salary of $160,000. The agreement also provides for an
annual bonus amount payable to Mr. Barbour based on specific formula as provided
in the agreement. The agreement terminates on December 31, 1998.

        Effective November 12, 1996, the Company entered into an agreement with
Michael J. Houska employing him as its Vice President - Sales at a base annual
salary of $120,000. The agreement also provides for a monthly sales commission
of $6,700 payable to Mr. Houska based on specific formula as provided in the
agreement. The agreement terminates on November 11, 1998.

                                       38
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

             The following table sets forth certain information regarding the
number and percentage of shares of Common Stock beneficially owned as of March
25, 1997, by any person (including any group of affiliated persons) known by the
Company to own 5% or more of the outstanding shares of the Company's Common
Stock, each named executive officer and director, and all executive officers and
directors of the Company as a group. Unless otherwise indicated, the Company has
been advised that all holders listed have the power to vote and dispose of the
number of shares set forth as beneficially owned by them.


NAME AND ADDRESS                             AMOUNT AND NATURE OF    PERCENT OF 
OF BENEFICIAL OWNER (1)                    BENEFICIAL OWNERSHIP (2)   CLASS
                                                ---------             ----- 
Ernest J. Henley, Ph.D .....................    2,368,333(3)          45.88%
                                                                    
Kenneth W. Davidson ........................    2,343,333(3)          45.62%
     104 Industrial Boulevard                                       
     Sugar Land, Texas 77478                                        
                                                                    
Maxxim Medical, Inc. .......................    2,333,333(4)          45.51%
     104 Industrial Boulevard                                       
     Sugar Land, Texas 77478                                        
                                                                    
Chadwick F. Smith, MD ......................      420,666(5)          13.94%
     1127 Wilshire Blvd ....................                        
     Los Angeles, California 90017                                  
                                                                    
Michael M. Barbour .........................      411,748(5)          13.64%
                                                                    
Pedro A. Rubio, MD, Ph.D ...................      105,003(6)           3.67%
                                                                    
Dan D. Sudduth .............................       60,000(7)           2.10%
                                                                    
All Executive Officers and Directors as a ..    3,459,063(8)          59.62%
Group (8 persons)                                              

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

(1)     Unless otherwise specified, the address of each beneficial owner is c/o
        Lasermedics, Inc. 120 Industrial Boulevard, Sugar Land, Texas 77478.

(2)     Except as otherwise indicated, all shares are beneficially owned, and
        the sole investment and voting power is held, by the person named. This
        table is based on information supplied by the officers, directors and
        principal shareholders and reporting forms, if any, filed with the
        Securities and Exchange Commission on behalf of such persons. A person
        is deemed to beneficially own shares of common stock underlying options,
        warrants or other convertible securities if the stock can be acquired by
        such person within sixty days of the date hereof.

(3)     Includes 2,333,333 shares issuable upon the conversion of the Company's
        convertible subordinated promissory note in the initial principal amount
        of $7 million issued to Maxxim (the "Maxxim Note"), as to which Dr.
        Henley and Mr. Davidson , who are directors of both the Company and
        Maxxim, may be deemed the beneficial owners by virtue of their
        affiliation with Maxxim. See "Certain Relationships and Related
        Transactions." The additional 35,000 and 10,000 shares listed for each
        of Dr. Henley and Mr. Davidson, respectively, consist entirely of
        warrants and/or options exercisable as of the date hereof.

(4)     Maxxim is the holder of the Maxxim Note, which is convertible into
        2,333,333 shares of Common Stock. See "Certain Relationships and Related
        Transactions."

(5)     Includes 225,000 shares issuable upon exercise of currently exercisable
        options.

(6)     Includes 69,508 shares issuable upon exercise of currently exercisable
        options.

(7)     Consists entirely of shares issuable upon exercise of currently
        exercisable options or warrants.

                                       39
<PAGE>
(8)     In addition to the 2,333,333 shares issuable upon conversion of the
        Maxxim Note and the currently exercisable options and warrants listed
        above, this amount includes (i) 500 shares and 50,000 currently
        exercisable options owned by Chike J. Ogboenyiya, the Company's Vice
        President-Finance and Secretary, and (ii) 32,813 shares owned by Michael
        J. Houska, the Company's Vice President-Sales.


ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         During January 1992, the Company entered into a five-year consulting
agreement with Chadwick F. Smith, MD, one of its Directors. The agreement
provided for a monthly fee of $1,500 commencing in July 1992. During 1993, the
agreement was amended to provide a monthly fee of $5,000 commencing in June
1993. The agreement terminated in April 1996, and a new agreement was entered
into with Dr. Smith effective May 1, 1996. Dr. Smith's new consulting agreements
includes annual compensation of $90,000 and terminates on December 31, 1998.

     During 1993, the Company entered into an employment agreement with Stephen
Barbour, who is the brother of the President of the Company, whereby Mr. Stephen
Barbour would receive, as part of his employment contract, a salary of $60,000
per year, 15,000 shares of the Common Stock and commissions of 15% on the
monthly gross profit of the Company's training division. The agreement
terminated in 1996.

     In August 1995, the Company entered into an agreement with Mezzanine
Financial Relations, Inc., a financial relations company ("Mezzanine"), to
assist the Company in the evaluation of, and formulation of terms for certain
companies identified in the Company's strategic acquisition plan. Mr. Sudduth,
Executive Vice President, Chief Financial Officer and a Director of the Company,
was Chairman of the Board and a shareholder of Mezzanine. Pursuant to the
agreement, the Company paid Mezzanine a cash fee of $115,000 concurrent with the
closing of the Henley acquisition, which is discussed below. Additionally,
pursuant to the agreement, the Company issued to Mezzanine a four-year warrant
to purchase 25,000 shares of the Company's common stock at a price of $6.75 per
share, which was the market price of the Company's Common Stock on the date of
the grant. This warrant is exercisable from February 16, 1996 through August 16,
1999. In May 1996, the Company entered into an additional agreement with
Mezzanine pursuant to which Mezzanine agreed to provide financial consulting
services with regard to potential mergers and acquisitions in consideration for
a monthly fee of $10,000. The agreement terminated on January 31, 1997.

     On April 30, 1996, the Company entered into an agreement with Maxxim,
whereby the Company purchased certain assets (and assumed certain liabilities)
associated with for an estimated purchase price of approximately $13.5 million.
The purchase price was paid by the issuance of the Company's convertible
subordinated promissory note in the principal amount of $7 million, with the
balance of the purchase price paid in cash provided through a financing with a
bank. Mr. Davidson and Dr. Henley are currently employed by Maxxim, with Mr.
Davidson serving in the capacities of Chairman of the Board, Chief Executive
Officer and President and Dr. Henley serving as a Director and consultant. Dr.
Henley's consulting agreement, which was entered into between Dr. Henley and
Maxxim in 1987, was acquired in the transaction with Maxxim. The agreement
includes a monthly consulting fee in the amount of $5,833 and terminates on
October 31, 1997.

     In May and July 1996, the Company paid to Dr. Rubio fees aggregating
$25,000 and issued 33,333 shares of Common Stock and 33,333 warrants to purchase
shares of Common Stock at a price of $6.00 per share for his services in
connection with the Company's PMA application submission to the FDA.

     In November 1996, the Company entered into an agreement with MJH Medical
Equipment, Inc. ("MJH"), whereby the Company purchased substantially all of the
assets (and assumed certain liabilities) of MJH for a purchase price of
approximately $400,000. The purchase price was paid by the issuance of the
Company's Common Stock with an estimated market value of $250,000 and promissory
note in the principal amount of approximately $120,000, with the balance of the
purchase price paid in cash. Michael J. Houska, now the Company's Vice-President
Sales, was the owner and sole stockholder of MJH. Mr. Houska entered into a
two-year employment agreement with the Company with a base salary of $120,000
and monthly

                                       40
<PAGE>
bonuses. The Company leases approximately 15,000 square feet of warehouse and
distribution space in Akron, Ohio, for a monthly rental of approximately $3,900.
Mr. Houska is one of the owners of the leased facility.

ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K

        EXHIBITS

        See "Index of Exhibits" below which lists the documents required to be
filed as exhibits by Item 601 of Regulation S-B.

        REPORTS ON FORM 8-K

        None.

                                       41
<PAGE>
                                        SIGNATURES

        IN ACCORDANCE WITH SECTION 13 OR 15(D) OF THE EXCHANGE ACT, THE
REGISTRANT CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED,
THEREUNTO DULY AUTHORIZED, ON THE 24TH DAY OF APRIL, 1997.

                                               LASERMEDICS, INC.
                                                     (Registrant)

                                                By :  MICHAEL M. BARBOUR
                                                      Michael M. Barbour
                                                    (President and Chief 
                                                      Executive Officer)

         IN ACCORDANCE WITH THE EXCHANGE ACT, THIS REPORT HAS BEEN SIGNED BY THE
FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT AND IN THE CAPACITIES AND ON THE
DATES INDICATED.
<TABLE>
<CAPTION>
SIGNATURE                                          TITLE                        DATE
<S>                           <C>                                               <C>
MICHAEL M.  BARBOUR           President and Chief Executive Officer             April 24, 1997
____________________          and Director (Principal Executive Officer)
(Michael M. Barbour)


DAN D. SUDDUTH                Executive Vice President and Director             April 24, 1997
____________________          (Principal Financial Officer)
(Dan D. Sudduth)


CHIKE J. OGBOENYIYA           Vice President, Finance                           April 24, 1997
____________________          (Principal Accounting Officer)
(Chike J. Ogboenyiya)


CHADWICK F. SMITH, MD.        Chairman and Director                             April 24, 1997
_____________________
(Chadwick F. Smith, MD.)


PEDRO A. RUBIO,  MD, Ph.D.    Director                                          April 24, 1997
_____________________
 (Pedro A. Rubio, MD, Ph.D.)


ERNEST J. HENLEY, Ph.D.       Director                                          April 24, 1997
_____________________
 (Ernest J. Henley, Ph.D.)


KENNETH W. DAVIDSON           Director                                          April 24, 1997
_____________________
 (Kenneth W. Davidson)
</TABLE>
                                       42
<PAGE>
                                    LASERMEDICS, INC.
                                EXHIBITS TO FORM 10-KSB/A
                           FOR THE YEAR ENDED DECEMBER 31, 1996

                                    INDEX OF EXHIBITS

         Exhibits incorporated by reference to a prior filing are designated by
an asterisk (*); all exhibits not so designated are documents required to be
filed as exhibits by Item 601 of Regulation S-B:


EXHIBIT
   NO.                                     DESCRIPTION


3.1*    Articles of Incorporation (Exhibit 3A to the Company's Registration
        Statement on Form S-18 (No. 33- 49972) dated July 22, 1992).

3.2*    Amendment to Articles of Incorporation (This exhibit to the Company's
        Registration Statement on Form S-18 (No. 33-49972) dated July 22, 1992).

3.3*    Articles of Amendment to Articles of Incorporation, (Exhibit 3.2 to the
        Company's Periodic Report on Form 10-QSB for the quarter ended June 30,
        1996 (File No. 0-28566)).

3.4*    By-Laws (Exhibit 3B to the Company's Registration Statement on Form S-18
        (No. 33-49972) dated July 22, 1992).

3.5*    Amendment to By-Laws (Exhibit 3.1 to the Company's Periodic Report on
        Form 10-QSB for the quarter ended June 30, 1996 (File No. 0-28566)).

4.1*    Specimen Stock Certificate. (This exhibit to the Company's Registration
        Statement on Form S-18 (No. 33-49972) dated July 22, 1992).

4.2*    Specimen Form of Warrant Certificate. (Exhibit 4.2 to the Company's
        Annual Report on Form 10-KSB for the year ended December 31, 1995 (File
        No. 0-28566)).

4.3*    Form of Underwriter's Warrant. (Exhibit 4C to the Company's Registration
        Statement on Form S-18 (No. 33-49972) dated July 22, 1992).

10.1*   Consultation Agreement with Mezzanine Financial Relations, Inc. dated
        September 5, 1995. (Exhibit 10.11 to the Company's Annual Report on Form
        10-KSB for the year ended December 31, 1995 (File No. 0-28566)).

10.2*   1996 Amended and Restated Non-Employee Director Stock Option Plan.
        (Exhibit C to the Company's Proxy Statement on Schedule 14A dated June
        24, 1996 (File No. 0-28566)).

10.3*   1996 Incentive Stock Plan. (Exhibit B to the Company's Proxy Statement
        on Schedule 14A dated June 24, 1996 (File No. 0-28566)).

10.4*   Employment Agreement with Michael Barbour dated November 22, 1996.
        (Exhibit 10.4 to the Company's Annual Report on Form 10-KSB for the year
        ended December 31, 1996 (File No. 0-28566)).

                                       43
<PAGE>
                               INDEX OF EXHIBITS, CONTINUED

EXHIBIT
   NO.                                      DESCRIPTION


10.5*   Consulting Agreement with Chadwick F. Smith, MD dated November 22, 1996.
        (Exhibit 10.5 to the Company's Annual Report on Form 10-KSB for the year
        ended December 31, 1996 (File No. 0-28566)).

10.6*   Asset Purchase Agreement dated November 12, 1996 with MJH Medical
        Equipment and Michael J. Houska. (Exhibit 10.6 to the Company's Annual
        Report on Form 10-KSB for the year ended December 31, 1996 (File No.
        0-28566)).

10.7*   Employment Agreement with Michael J. Houska dated November 12, 1996.
        (Exhibit 10.7 to the Company's Annual Report on Form 10-KSB for the year
        ended December 31, 1996 (File No. 0-28566)).

10.8*   Plan and Agreement of Merger with Health Career Learning Systems, Inc.
        dated November 27, 1996. (Exhibit 10.8 to the Company's Annual Report on
        Form 10-KSB for the year ended December 31, 1996 (File No. 0-28566)).

10.9*   Stock Purchase Agreement with Paula L. Buhr dated January 24, 1996.
        (Exhibit 10.9 to the Company's Annual Report on Form 10-KSB for the year
        ended December 31, 1996 (File No. 0-28566)).

10.10*  Asset Purchase Agreement with Gatti Medical Supply dated January 24,
        1996. (Exhibit 10.10 to the Company's Annual Report on Form 10-KSB for
        the year ended December 31, 1996 (File No. 0-28566)).

10.11*  Master Agreement and Manufacturing Agreement with CB Svendsen, a/s dated
        March 12, 1997. (Exhibit 10.11 to the Company's Annual Report on Form
        10-KSB for the year ended December 31, 1996 (File No. 0-28566)).

21.1*   Subsidiaries of the Registrant. (Exhibit 21.1 to the Company's Annual
        Report on Form 10-KSB for the year ended December 31, 1996 (File No.
        0-28566)).

23.1    Consent of Independent Accountants.

27*     Financial Data Schedule. (Exhibit 27 to the Company's Annual Report on
        Form 10-KSB for the year ended December 31, 1996 (File No. 0-28566)).

                                       44