<PAGE>   1

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

                                  FORM 10-KSB/A
 ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

                      For the year ended December 31, 1997

                            ZAXIS INTERNATIONAL INC.
                 (Name of Small Business Issuer in Its Charter)

       Delaware                   0-15476                68-0080601
(State of Incorporation)       (Commission     (IRS Employer Identification No.)
                               File Number)

                    1890 Georgetown Road, Hudson, Ohio 44236
                     (Address of principal executive office)


                                 (330) 650-0444
                (Issuer's telephone number, including area code)


Securities registered under Section 12(b) of the Exchange Act: None.

Securities registered under Section 12(g) of the Exchange Act: Common Stock,
$.01 par value.

Check whether the registrant (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months and (2) has
been subject to such filings for the past 90 days.
Yes[X]  No[ ]

Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [X]

Issuer's revenues for its most recent fiscal year: $276,923.


The aggregate market value of the voting stock held by non-affiliates was
$4,151,694 based on the average of the bid and asked prices on April 13, 1998
($.72). Officers and directors are considered affiliates for purposes of this
calculation. The bid and asked prices are based on a small volume of infrequent
trading in the stock.


As of March 31, 1998, there were 5,766,242 shares of common stock outstanding.

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

DOCUMENTS INCORPORATED BY REFERENCE:

Portions of Issuer's definitive proxy statement for its 1998 Annual Meeting of
Stockholders, which the Issuer has filed, are incorporated by reference into
Part III.

Page 1 of  20 pages. Exhibit index is located on page 8.

<PAGE>   2



                                     PART 1

ITEM 1.   DESCRIPTION OF BUSINESS.

BUSINESS DEVELOPMENT

Zaxis International Inc. ("International") is a holding company which operates
its business through its wholly-owned subsidiary, Zaxis Inc. ("Zaxis"). Zaxis
was incorporated in Ohio in 1989. On August 25, 1995, Zaxis merged with a
subsidiary of The InFerGene Company ("InFerGene") and InFerGene changed its name
to Zaxis International Inc. InFerGene and its subsidiary were inactive and had
no assets or liabilities at the time of the merger. InFerGene was incorporated
in Delaware in 1985. For accounting and tax purposes, the merger was treated as
a reverse acquisition in which Zaxis acquired International.

Zaxis was founded by Raymond Gesinski, Ph.D., (deceased), and Gregory Bambeck,
Ph.D., Director of Research, to develop products for use in life sciences
research. Each had backgrounds in genetic research, cardiovascular diagnostic
developments, and polymer technology in gene separation applications. In 1994
and 1995, Zaxis implemented a program to develop, manufacture and market a
complete product line based on the research of Drs. Gesinski and Bambeck and to
continue research and development of related products. During that period, the
Company moved into new manufacturing and office facilities, installed automated
and computer controlled production equipment, added key management personnel,
prepared its lipoprotein testing system for FDA approval, and began establishing
marketing arrangements with domestic and foreign distributors. A private
placement of common stock and warrants to purchase common stock was completed in
the third quarter of 1995, adding capital funds of $1.4 million. In 1996,
holders exercised 465,743 Class A Warrants, providing $1,048,000 in additional
capital funds and International sold approximately $605,000 in notes with
warrants attached in private sales. Of those notes, in 1997, $391,410 were
converted to stock. In 1997, renewals and new notes issued under a 9-1/2% and
10% Convertible Note offering totaled $1,213,879. Equity capital in the amount
of $170,000 was provided through issuance of common stock.

BUSINESS OF ISSUER

Zaxis manufactures and sells products used in an electrochemical process known
as electrophoresis which is used in more than 55,000 laboratories world wide in
applications for the separation and identification of genes (e.g., DNA) and gene
products (e.g., RNA, proteins). A variety of techniques, formats, materials,
compounds, equipment and devices are employed in electrophoresis, and Zaxis'
catalog includes products for virtually all of these needs. Zaxis' research and
marketing direction is focused on the consumables segment of the electrophoresis
market, predominately on pre-cast gels.

Electrophoresis has been in use for over fifty years. Laboratory applications
cover a broad spectrum, including medical diagnostics, immunology, agriculture,
criminology, forensics, pharmaceuticals, quality assurance and DNA and RNA
research. A simplified explanation of the process describes it as the
application of specimens, such as bacteria, blood serum, body tissue or plant
tissue, to a gel substance which is then subjected to electric current while
submerged in a liquid filled chamber. The sample material breaks down and its
molecules are deposited on the gel substance in a unique pattern which can be
compared to other samples to determine similarities or differences. The pattern
of molecules is popularly referred to as a "bar code" of living matter.


The usefulness of the information from electrophoresis depends on the clarity
and consistency of the results (or resolution) which is dependent upon a variety
of factors, including consistency of manufacturing materials and methods for the
devices, chemicals and gels. Gels can be compounded 




                                       2
<PAGE>   3


and polymerized in the end user's laboratory by technicians or supplied in
precast form in plastic or glass cassettes. Generally, gels are made from one of
two materials: a natural plant-based substance called agarose or an
acrylamide-based substance. Agarose gels are generally limited to use with
proteins of larger molecular size and have not been available in pre-cast form
until 1997. Polyacrylamide gels are available in precast cassettes or may be
prepared by the technician from compounds or premixed preparations. The precast
cassette offers the advantages of convenience, efficiency, and reliability and
are being used by a growing number of users.


Zaxis' core product is a precast polyacrylamide gel cassette based upon its
in-house research utilizing proprietary polymer chain length control ("PCL")
technology. The gel cassettes can be used with Zaxis' proprietary
electrophoresis devices or with devices of other manufacturers. Zaxis' product
line includes electrophoresis systems and components, chemicals, compounds,
stains, reagents, chambers, power supplies, computers, scanners, and accessories
in addition to gel cassettes. The gel cassettes, chemical compounds and many of
the acrylic components are manufactured or assembled by Zaxis in its facility,
while the microprocessor components, scanners, power supplies and other system
components are manufactured to Zaxis' specifications by other companies.

In its initial pre-cast gel product line introduction in 1995, the Company was
not able to gain any significant market share due to production quality
variances and a novel application method proprietary to Zaxis' products, which
was thought to be a selling advantage, but proved not to be. In March 1997,
under the direction of a new management team, the poly-acrylamide product line
was removed from market except for continued shipments to existing customers,
and an extensive re-design of the product was undertaken. An advanced
formulation of the basic product line was introduced to Beta-site testing in
December 1997, and test-user responses have been encouraging. In several
instances, testers have started placing orders on a repeat basis, and all of the
Company's existing distribution sources for the product have accepted the
re-designed product into their inventory to replace the prior version. Based on
the re-designed product line, discussions are being conducted with additional
potential distributors for the line.

Zaxis developed and sells a lipoprotein assay system, consisting of a
poly-gradient electrophoresis gel, electrophoresis processing equipment,
reagents, gel scanner, computer software and hardware. The system measures the
relative percentages of High Density and Low Density Lipoproteins (HDL and LDL)
in human blood serum in a single test from single samples. Within the general
categories of HDL and LDL are subfractions variously designated as Very Low
Density Lipoprotein, LDL 1, 2 and 3 and HDL 1,2 and 3. The Zaxis system obtains
its measurement by separating the subfractions and then programatically
computing the totals of the components, rather than simply measuring the two
masses of LDL and HDL, as competing systems do. The system was granted FDA
marketing approval in September 1996 on the basis that it provided measurements
in terms of total LDL and HDL equivalent to other systems already approved. The
lipoprotein subfractions measurements unique to the Zaxis system were not part
of the FDA clearance for clinical marketing purposes, but are the subject of
ongoing research by the Zaxis research and development staff and by outside
researchers who have purchased the Zaxis system. In December 1996, the Company
was granted a patent for the poly-gradient gel component of the system

The Company has been marketing the lipoprotein assay system to researchers since
March 1996. In late 1996, the Company began selling lipoprotein gels and reagent
kits separately, to researchers who had not purchased the systems. The Company
has not actively pursued the clinical market yet because it does not currently
possess the staff and marketing resources to do so. Sales of the system and
supplies of lipoprotein gels for use in the system continue to be made to
researchers who learn of the product through researcher channels of information.

The Company has successfully designed and produced a long-life, full-sized
pre-cast gel for use in DNA sequencing and has received satisfactory reports on
prototype gels placed for Beta-testing with 



                                       3
<PAGE>   4


several companies that manufacture or market DNA sequencing instruments and
supplies. Based on the performance of the new product line, discussions are
being conducted with potential distributors for the line. The Company believes
that at this time its pre-cast DNA sequencing gel will be the only marketed gel
to meet all the parameters as required by researchers and fulfilling
specifications needed in the DNA sequencing market.

SUPPLIERS

The raw materials and system components that Zaxis uses in its products are
readily available from several reliable sources.

CUSTOMERS AND DISTRIBUTION METHODS

Three customers accounted for 69% of sales and seven customers accounted for 84%
of sales in 1997. Two customers accounted for 46% of sales in 1996. The three
largest customers in 1997 were OEM accounts. Three of the seven largest
customers sell Zaxis products under the Zaxis brand label. The Company sells
directly to research, educational and medical institutions under the Zaxis
brand.

PATENTS, TRADEMARKS, AGREEMENTS

In addition to the December 1996 patent on the poly-gradient gel, the Company
has patents on its electrophoresis device, a cassette and a cassette component.
The Company has three patent- applications pending, including one on the DNA
product that is slated for market introduction in 1998. The Company has U.S.
trademarks covering "Zaxis - A New Dimension In Technology" and the term
"Z-Gel." In addition, Zaxis relies on trade secrets and proprietary knowledge.
There can be no assurance that patents will not be challenged or breached or
that confidentiality agreements will not be breached.


Zaxis owns the software for its Lipoprotein Fractionation System, LFS, and
grants limited, non-exclusive rights to the use of the software by its customers
who purchase the Lipoprotein Fractionation System.


GOVERNMENTAL REGULATIONS


The Zaxis manufacturing plant is a registered FDA facility and is subject to FDA
regulation, including audit and review for compliance with agency rules. The
Company believes it is in compliance with the FDA regulations. The facility has
not been audited and the Company has not received notice of any planned or
pending audits. As a result of the award of a Governmental Services Agency
contract, which became effective April 1, 1998, the Company is subject to
routine audits of GSA vendors.


RESEARCH AND DEVELOPMENT

Research and development costs were approximately $126,940 in 1997 and $167,328
in 1996. None of the expenses were borne by customers.

ENVIRONMENTAL LAWS

Zaxis has not incurred any costs specifically for compliance with environmental
laws and does not anticipate any material costs solely for this purpose. The
Company is subject to routine hazardous materials handling rules of the
Environmental Protection Agency, if and when such materials are employed in a
manufacturing process.


                                       4
<PAGE>   5



EMPLOYEES

Zaxis has 18 full time employees. In addition, the Company utilizes outside
consultants and, on occasion, temporary help on a contract basis.

The Company believes it has good relations with its employees and has
experienced no strikes or work stoppages.

ITEM 2.   DESCRIPTION OF PROPERTY.

Zaxis' operations are conducted in a facility consisting of a 19,800-square-foot
building in Hudson, Ohio, which is rented under a lease expiring October 31,
1998. The building is approximately seven years old, is in good condition and is
sufficient for currently anticipated needs of the Company for at least three
years. The building has been offered to the Company by an agent for the owner
for purchase by the Company but no decision has been made concerning whether to
pursue this offer.

ITEM 3.   LEGAL PROCEEDINGS.

None other than routine litigation incidental to the business.

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

No matters were submitted to a vote of security holders during the fourth
quarter of 1997.


                                     PART II

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

There is no established public trading market at present in the United States or
elsewhere for International's common stock. Over-the-counter trading volume is
reported by NASD through its "Bulletin Board" system. Trading was light during
1997 but increased gradually as the year progressed. There were some more than
2,500 holders of record of International common stock at the end of the first
quarter 1998, including holders of InFerGene and Zaxis shares who have yet to
exchange their shares for International shares. No cash dividends have been
declared on the common stock and none are currently anticipated. The high and
low bid prices quoted for each quarter during the last two fiscal years are
presented below. The quotations reflect inter-dealer prices, without retail
mark-up, mark-down or commission and may not represent actual transactions.

<TABLE>
<CAPTION>
           Quarter Ended                    High      Low
           -------------                    ----      ---

<S>                                        <C>       <C>   
           March 31, 1996                  $ 6.00    $ 3.00
           June 30, 1996                     6.00      4.75
           September 30, 1996                3.75      1.75
           December 31, 1996                 5.50      1.75
           March 31, 1997                    3.25      1.50
           June 30, 1997                     1.75      1.375
           September 30, 1997                2.00      1.50
           December 31, 1997                 1.875      .56
</TABLE>


                                       5
<PAGE>   6



ITEM 6.   MANAGEMENT'S DISCUSSION AND ANALYSIS.

RESULTS OF OPERATIONS

Net sales were $274,539 in 1997, down $176,026 from $451,000, or 39 percent from
1996. New distributors added in late 1995 and early 1996, with initial stocking
orders, accounted for an $180,000 sales increase in 1996. Due to the withdrawal
of the pre-cast protein gel line from the new sales market in March of 1997, as
discussed in Item 1, Business of the Issuer, no new distribution sources were
developed in 1997, and sales through existing distribution sources were flat or
declining. The first sale of the DNA Sequencing pre-cast gel occurred in January
1997 at a testing-quantity level.

Cost of goods sold exceeded sales in both 1997 and 1996. Production capacity,
built in 1996 in anticipation of rapid sales growth, is greater than sales
volumes achieved, causing inefficient application of labor and overhead. In
March of 1997, the Company took delivery on a custom-designed automated product
packaging system for protein gels. In addition, the Company incurred significant
additional costs through a regimented in-house product-testing protocol designed
to perfect the re-designed protein gel before it was offered for sale or even
offered to Beta-site testers.

Total operating expenses after cost of goods sold were reduced by $846,072 or
51%, to $815,866 in 1997 from $1,661,938 in 1996. General and Administrative
expenses were reduced by $397,154, or 43%, to $517,992 in 1997 from $915,146 in
1996. Reductions in general and administrative staff accounted for $275,975, or
68%, of the decrease. Selling expenses, including sales salaries, advertising,
promotion and travel expenses were reduced by $408,530, or 70%, to $170,934 in
1997 compared to $579,465 in 1996. Research and Development expenses decreased
by $40,388, or 24%, to $126,940 in 1997 compared to $167,328 in 1996.

FINANCIAL CONDITION AND LIQUIDITY

The Company used $992,009 in operations in 1997 compared with $1,902,247 in
1996, and $31,834 for equipment and patent expenditures in 1997 compared with
$153,266 in 1996. Proceeds from sales of common stock of $561,410 and notes
payable (mainly notes with common stock warrants) of $553,559 provided the cash
for these uses. At December 31, 1997, current liabilities exceeded current
assets by $1,199,389, and total liabilities exceeded total assets by $1,362,454.
The Company is reliant upon investors to provide funds for operations and is
working to maintain in 1998 steady relations with creditors while it strives to
improve sales volume and demonstrate that the Company can be successful.

To achieve this, the Company in 1997 re-designed its core market-entry product,
the pre-cast poly-acrylamide protein gel, as discussed above, and completed
research and development on its long-lived, pre-cast DNA sequencing gel. The
Company also continues to acquire additional research customers for its
lipoprotein assay system or components at a slow, word-of-mouth rate.

Management believes that the core product and the DNA sequencing product can
provide sufficient sales revenue to bring the Company to profitability if firm
contracts can be negotiated during 1998. Management also believes that the
lipoprotein assay system represents a significant technological improvement over
existing cardiac disease diagnostic systems and can be a profitable future
source of revenues. There can be no assurance, however, that the Company will be
successful in obtaining the necessary contracts and commitments from
distributors and potential partners to achieve profitable operations. If the
Company is successful in obtaining the necessary contracts, then the Company
will require additional capital investment for production capacity and
additional production staff.



                                       6
<PAGE>   7


During 1997, the Company relied upon investor financing to sustain on-going
operations, research and development. Sources of these investments were largely
directors of the corporation, and their affiliated business interests, and prior
investors who made additional commitments of funds through two-year convertible
notes. The Company continues to rely upon these sources of funding. Discussions
have been conducted with potential new investors for long-term debt or equity
funding, but to date no transaction has been completed. The Company will
necessarily be reliant upon such sources of funding until the marketing of the
principal products can be brought to a level sufficient to support the operating
requirements of the Company.

YEAR 2000 TECHNOLOGY

The company currently is analyzing its proprietary computer programming to
determine whether it will experience a Year 2000 technology problem. The
Company's general operating programs that are known to be date-sensitive are
off-the-shelf software for which the originators, all of whom are major
suppliers, can reasonably be expected to provide updated programming and for
which the Company is committed to upgrade. Most of the general programs now in
use by the Company already run in a Year 2000 acceptable mode.

ITEM 7.   FINANCIAL STATEMENTS.


Financial statements of the Registrant and the reports of independent auditors
thereon are included on the following pages.

                                                            Pages
                                                            -----

Reports of Independent Auditors                               10
Balance Sheets                                                11
Statements of Operations                                      12
Statement of Changes in Stockholders' Equity                  13
Statements of Cash Flows                                      14
Notes to Financial Statements                                 15 - 20


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

None. At the 1997 Shareholder meeting, shareholders affirmed the re-appointment
of Ernst & Young L.P. as auditors for the year ended December 31, 1997.

                                    PART III

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

The information required by this item is incorporated by reference from the
Registrant's definitive proxy statement that has been filed as an amendment to
this Form 10-KSB under cover of Form 8.

ITEM 10.   EXECUTIVE COMPENSATION

The information required by this item is incorporated by reference from the
Registrant's definitive proxy statement that has been filed as an amendment to
this Form 10-KSB under cover of Form 8.



                                       7
<PAGE>   8


ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information required by this item is incorporated by reference from the
Registrant's definitive proxy statement that has been filed as an amendment to
this Form 10-KSB under cover of Form 8.


ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required by this item is incorporated by reference from the
Registrant's definitive proxy statement that has been filed as an amendment to
this Form 10-KSB under cover of Form 8.

ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits


Exhibit
Number                            Description
------                            -----------

  3(i)                     Certificate of Incorporation (Exhibit 3(i) to the
                           Company's Annual Report on Form 10-KSB for the year
                           ended December 31, 1995, File Number 0-15476,
                           incorporated herein by reference).

  3(ii)                    By-laws Certificate of Incorporation (Exhibit 3(ii)
                           to the Company's Annual Report on Form 10-KSB for the
                           year ended December 31, 1995, File Number 0-15476,
                           incorporated herein by reference).

   4                       Instruments defining the rights of security holders, 
                           including debentures.

     (a)                   Promissory Notes to Directors and Other Investors
                           (Exhibit 10 to the Company's Quarterly Report on Form
                           10-QSB for the period ended September 30, 1996, File
                           Number 0-15476, incorporated herein by
                           Reference).

     (b)                   Financing and Shareholder Agreement (Exhibit 10 to
                           the Company's Current Report on Form 8-K dated
                           February 5, 1997, file number 0-15746, Incorporated
                           herein by reference).

     (c)                   9 1/2% Convertible Note issued to directors and other
                           investors and related Class Z1 and Class Z2 Warrants

21                         List of Subsidiaries (Exhibit 21 to the Company's 
                           Annual Report on Form 10 KSB for the year ended
                           December 31, 1996, File No. 0-15476, incorporated
                           herein by reference.)

27                         Financial Data Schedule


(b) Reports on Form 8-K
         None


                                       8
<PAGE>   9


                                   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.

Date: June 5, 1998                               Zaxis International Inc.

                                                 By:/S/ CONALY BEDELL
                                                    ---------------------------
                                                 Conaly Wm. Bedell, President
                                                 and Chief  Executive Officer


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

<TABLE>
<CAPTION>
Signatures                           Title                                      Date
----------                           -----                                      ----

<S>                                  <C>                                        <C>
/S/CONALY BEDELL
--------------------------
Conaly Bedell                        Director, Chairman of the Board            June 5, 1998

/S/LEONARD DUVAL
--------------------------
Leonard Duval                        Director                                   June 5, 1998

/S/CRAIG JONES
--------------------------
Craig Jones                          Director                                   June 5, 1998

/S/ALAN SCOTT
--------------------------
Alan Scott                           Director                                   June 5, 1998

/S/CALVIN D. WIBLE
--------------------------
Calvin D. Wible                      Director                                   June 5, 1998

/S/SHARON KILLINGER
--------------------------           Accounting Department Manager              June 5, 1998
Sharon Killinger                     (Principal Accounting Officer)
</TABLE>



                                       9
<PAGE>   10



                         Report of Independent Auditors



The Board of Directors and Stockholders
Zaxis International Inc.



We have audited the accompanying consolidated balance sheets of Zaxis
International Inc. and Subsidiary as of December 31, 1997 and 1996, and the
related consolidated statements of operations, stockholders' deficiency and cash
flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Zaxis
International Inc. and Subsidiary at December 31, 1997 and 1996, and the
consolidated results of their operations and their cash flows for the years then
ended in conformity with generally accepted accounting principles.

The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has suffered recurring losses from operations,
has liabilities in excess of total assets and has a working capital deficiency.
These conditions raise substantial doubt about the Company's ability to continue
as a going concern. Management's plans in regard to these matters are also
described in Note 1. The financial statements do not include any adjustments
that might result from the outcome of this uncertainty.





Cleveland, Ohio

May 11, 1998



                                       10
<PAGE>   11


                     ZAXIS INTERNATIONAL INC. AND SUBSIDIARY
                           CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                     ASSETS
                                     ------

                                                                         DECEMBER 31        DECEMBER 31,
                                                                            1997               1996
                                                                        -------------      -------------

<S>                                                                      <C>                <C>        
CURRENT ASSETS:
      Cash                                                               $    81,410        $     1,090
      Restricted cash                                                              -            100,000
      Accounts receivable, net                                                39,071             42,468
      Inventory                                                               76,320            139,209
      Prepaid expenses and other                                              16,908             43,928
                                                                         -----------        -----------
                   Total current assets                                      213,709            326,695
PROPERTY AND EQUIPMENT:
      Machinery and equipment                                                353,461            276,250
      Office equipment                                                       189,117            190,369
      Leasehold improvements                                                  86,992             86,992
                                                                         -----------        -----------
                                                                             629,570            553,611
      Less accumulated depreciation                                          289,610            184,852
                                                                         -----------        -----------
                                                                             339,960            368,759
OTHER ASSETS:
      Patent costs                                                            41,853             33,125
      Organization costs                                                       2,764              5,132
                                                                         -----------        -----------
                                                                              44,617             38,257
                                                                         -----------        -----------

                   TOTAL ASSETS                                          $   598,285        $   733,711
                                                                         ===========        ===========

                   LIABILITIES AND STOCKHOLDERS' DEFICIENCY
                   ----------------------------------------

CURRENT LIABILITIES:
      Current portion of lease obligations                               $    10,238        $     1,516
      Bank loan payable                                                            -            100,000
      Notes Payable to directors                                              92,020            141,340
      Notes payable                                                          118,000            464,000
      Accounts payable                                                       430,513            551,623
      Accrued expenses                                                       222,327             92,593
                                                                         -----------        -----------
                   Total current liabilities                                 873,098          1,351,072

  LONG TERM LIABILITIES:
        Capitalized lease obligations                                         38,763
        Notes Payable                                                        271,289
         Notes Payable to directors                                          777,590
                                                                         -----------
                   Total long term liabilities                             1,087,642

STOCKHOLDERS' DEFICIENCY:
      Common stock                                                            57,450             54,380
        $.01 par value, 12,000,000 shares authorized,
             5,744,991 and 5,438,019 shares issued and outstanding
      Additional paid-in capital                                           5,945,774          5,404,540
      Deferred compensation                                                        -            (30,868)
      Accumulated deficit                                                 (7,365,678)        (6,045,413)
                                                                         -----------        -----------
                   Total stockholders' deficiency                         (1,362,455)          (617,361)
                                                                         -----------        -----------
                   TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIENCY        $   598,285        $   733,711
                                                                         ===========        ===========
</TABLE>

See notes to consolidated financial statements.

Page 11


<PAGE>   12


                     ZAXIS INTERNATIONAL INC. AND SUBSIDIARY
                      CONSOLIDATED STATEMENTS OF OPERATIONS


<TABLE>
<CAPTION>
                                                            YEARS ENDED
                                                            DECEMBER 31
                                                    ------------------------------
                                                       1997                1996
                                                    -----------        -----------

<S>                                                 <C>                <C>        
Net sales                                           $   274,539        $   450,566

Cost of goods sold                                      686,892            805,918

Selling, general and administrative expenses            815,866          1,831,751
                                                    -----------        -----------

             Loss from operations                    (1,228,219)        (2,187,103)

Other income (expense):
  Interest income                                         1,984              7,572
  Miscellaneous income                                      400              1,317
  Interest expense                                      (94,429)           (26,401)
                                                    -----------        -----------

             Total other income (expense)               (92,045)           (17,512)
                                                    -----------        -----------

             Net loss                               $(1,320,265)       $(2,204,615)
                                                    ===========        ===========

Net loss per common share
              Basic                                 $     (0.23)       $     (0.41)
                                                    ===========        ===========
              Diluted                               $     (0.23)       $     (0.41)
                                                    ===========        ===========

Weighted average number of shares outstanding
             Basic                                    5,619,814          5,368,898
                                                    ===========        ===========
             Diluted                                  5,619,814          5,368,898
                                                    ===========        ===========
</TABLE>



 See notes to consolidated financial statements.

Page 12


<PAGE>   13


                     ZAXIS INTERNATIONAL INC. AND SUBSIDIARY
               CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIENCY


<TABLE>
<CAPTION>
                                                   COMMON STOCK         
                                           -----------------------------   ADDITIONAL
                                             NUMBER OF       STATED OR       PAID-IN         DEFERRED       ACCUMULATED
                                               SHARES        PAR VALUE       CAPITAL       COMPENSATION      DEFICIT
                                           --------------  -------------  -------------  ---------------  -------------

<S>                                            <C>             <C>         <C>               <C>          <C>          
Balance at January 1, 1996                     4,902,746       $ 49,027    $ 4,152,631       $ (59,375)   $ (3,840,798)

Shares issued upon exercise of
       Class A warrants                          465,743          4,657      1,043,267

Sales of shares                                   69,530            696        225,917

Amortization of deferred compensation                                                           11,232

Forfeiture of unvested stock grants                                            (17,275)         17,275

 Net loss - 1996                                                                                            (2,204,615)
                                           --------------  -------------  -------------  --------------  --------------

 Balance at December 31, 1996                  5,438,019         54,380      5,404,540         (30,868)     (6,045,413)

Sales of shares                                  108,918          1,089        177,932

Shares issued on conversion of notes             198,054          1,981        388,554

Amortization of deferred compensation                                                            5,616

Forfeiture of unvested stock grants                                            (25,252)         25,252

 Net loss - 1997                                                                                            (1,320,265)
                                           --------------  -------------  -------------  --------------  --------------

 Balance at December 31, 1997                  5,744,991       $ 57,450    $ 5,945,774       $       -    $ (7,357,532)
                                           ==============  =============  =============  ==============  ==============
</TABLE>


Page 13

<PAGE>   14

                     ZAXIS INTERNATIONAL INC. AND SUBSIDIARY
                      CONSOLIDATED STATEMENTS OF CASH FLOWS




<TABLE>
<CAPTION>
                                                                          TWELVE MONTHS ENDED
                                                                              DECEMBER 31,
                                                                     --------------------------------
                                                                         1997               1996
                                                                     ------------       -------------
<S>                                                                  <C>                <C>         
OPERATING ACTIVITIES:
Net loss                                                             $(1,312,119)       $(2,204,615)
Adjustments to reconcile net loss to cash
  used in operating activities:
    Depreciation and amortization                                        112,523             97,289
    Compensation due to stock option grants                                5,616             11,232
    Changes in operating assets and liabilities:
      Restricted cash                                                    100,000            (74,985)
      Accounts receivable                                                  3,397             11,888
      Inventory and prepaid expenses                                      89,950             11,502
      Accounts payable and accrued expenses                                8,624            245,442
                                                                     -----------        -----------

           Cash used in operating activities                            (992,009)        (1,902,247)

 INVESTING ACTIVITIES:
  Purchase of property and equipment                                     (18,092)          (142,770)
  Patent cost expenditures                                               (13,742)           (10,496)
                                                                     -----------        -----------

           Cash used in investing activities                             (31,834)          (153,266)

FINANCING ACTIVITIES:
  Proceeds from sales of common stock                                    170,000          1,274,537
  Proceeds from notes payable and bank loan payable                      944,969            680,325
  Payments on capital lease obligations                                  (10,806)            (8,818)
                                                                     -----------        -----------

           Cash provided by financing activities                       1,104,163          1,946,044
                                                                     -----------        -----------

Increase in cash                                                          80,320           (109,469)
Cash at beginning of period                                                1,090            110,559
                                                                     -----------        -----------

Cash at end of period                                                $    81,410        $     1,090
                                                                     ===========        ===========

Non cash transactions:
           Capital lease                                                  57,867
           Notes converted to stock                                      390,535

Supplemental Information
           Interest paid on notes                                         17,574             12,687
</TABLE>


Page 14

<PAGE>   15


                     ZAXIS INTERNATIONAL INC. AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1. NATURE OF OPERATIONS AND LIQUIDITY

Zaxis manufactures and sells products for use in electrophoresis, an
electrochemical process used to analyze genetic material and its components such
as proteins and DNA. The products include testing media, primarily in the form
of precast poly-achrylamide gel cassettes, electrophoresis chambers, chemical
compounds and reagents. The Company also sells equipment manufactured to its
specifications for use in performing electrophoresis, such as power supplies,
and in the analysis and quantification of electrophoresis results, including
computer systems and automated scanners. The Company sells its products directly
to institutions operating research laboratories and to distributors who market
the Company's products under the Zaxis name or their private labels. The
Company's blood serum lipoprotein assay system is marketed directly to research
laboratories. The system was granted clearance to be marketed for clinical use
by the Food and Drug Administration in September 1996.


The Company was primarily engaged in research and development activities from
1989 until 1994. In 1994, the Company moved into its present office and
manufacturing facilities and began selling certain products, finalizing product
planning and design, developing its computerized manufacturing process, and
setting marketing and distribution plans. In 1995, a private placement of units
consisting of common stock and two series of common stock warrants was
completed, resulting in net proceeds of $1,424,000. The proceeds were used to
complete the projects started in 1994, continue research activities and provide
funds during the startup of product manufacturing and marketing. During 1996,
the Company obtained financing totaling $1,955,000 from sales of common stock
and notes which was primarily used to fund operations as the Company sought to
establish marketing arrangements for its products.


In February 1997, the Company entered into a Financing and Shareholder Agreement
with MML Management Limited, an Australia-based investment firm ("MML"). The
agreement provided initial funds of $65,000 under a one-year note and additional
financing over the next year of up to $1.2 million, contingent upon the
occurrence of certain events. The initial funds were provided under a one year
9.25% note, collaterallized by accounts receivable and a patent owned by the
company. The note was extended when it matured in 1998. The certain events 
which MML agreed would initiate additional financing, other than obtaining
investments under the private placement, have not occurred. These events
included the obtaining of new purchase orders from certain prospective
customers by certain dates. However, MML and affiliated entities did provide a
total of $857,590 in funding to the Company in 1997, of which $90,000 was for
stock purchases and the remainder of which was convertible debt.

Zaxis incurred losses of $1,320,000 in 1997 and $2,205,000 in 1996. The Company
does not expect to generate sufficient sales volume with its existing customer
base to support the cost of operations in the next year and is attempting to
strengthen its customer base in several ways. Principal efforts include
aggressive pursuit of additional private label distributors for the Company's
protein electrophoresis products, prototype testing of its precast DNA
Sequencing product with several leading instrument manufacturers with the intent
of obtaining exclusive supply contracts or joint ventures, and pursuit of
arrangements with clinical device manufacturers and pharmaceutical companies
for its lipoprotein assay system or components thereof.

MML Management Ltd. continues to be committed to the success of the Company and
currently is negotiating for additional long-term debt or equity infusions
through affiliates and associates of MML. There can be no assurance that MML
will be successful in its efforts nor that the Company will be able to
strengthen its customer base and generate sufficient sales volume to meet or
exceed the costs of operation. These conditions raise substantial doubt about
the Company's ability to continue as a going concern. No adjustments to the
amounts or classification of assets and liabilities which could result from the
outcome of this uncertainty are reflected in the financial statements.



                                       15
<PAGE>   16


                     ZAXIS INTERNATIONAL INC. AND SUBSIDIARY

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

2. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The financial statements present the consolidated financial position and results
of operations of Zaxis International Inc. (International) and Zaxis Inc. (Zaxis
or the Company), its wholly-owned subsidiary.

USE OF ESTIMATES

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

INVENTORY

Inventories are stated at the lower of cost, determined using the first-in,
first-out method, or market value.

PROPERTY AND EQUIPMENT

Property and equipment are stated on the basis of cost. Depreciation is computed
using the straight-line method over the estimated useful lives of the assets.
Classes of property and equipment and related useful lives are as follows


<TABLE>
<CAPTION>
                                                               Estimated
                                Asset                         Useful Life
                      ------------------------                -----------
<S>                                                              <C>
                      Leasehold improvements                       5
                      Machinery and equipment                    5 - 10
                      Office equipment                           5 - 7

</TABLE>

Depreciation expense including amortization of capitalized leases charged to
operations was $105,140 and $91,424 for 1997 and 1996, respectively.

ASSET IMPAIRMENT

The companies policy is to review certain assets for impairment whenever events
or changes in circumstances indicate that the carrying amount of these assets
may not be recoverable, in which case the asset generally would be written down
to fair value.

INTANGIBLES

Patent costs are amortized over the life of the patents. Amortization expense
was $5,013 and $3,495 for 1997 and 1996, respectively, and accumulated
amortization was $11,411 and $6,398 at December 31, 1997 and 1996, respectively.

Organization costs are amortized over five years. Accumulated amortization was
$9,081 and $6,712 at December 31, 1997 and 1996, respectively.


                                       16
<PAGE>   17



                     ZAXIS INTERNATIONAL INC. AND SUBSIDIARY

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED


INCOME TAXES


The Company accounts for income taxes using the liability method of accounting.
Under the liability method, deferred tax assets and liabilities are determined
based upon differences between financial reporting and tax bases of assets and
liabilities and are measured using the currently enacted tax rates.

FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying amounts of the Company's accounts receivable, short-term and
long-term debt approximate their fair value.

RESEARCH AND DEVELOPMENT COSTS

Research and development costs are expensed as incurred. Research and
development costs were approximately $127,000 and $146,000 for 1997 and 1996,
respectively.

STOCK COMPENSATION

As permitted by Statement of Financial Accounting Standards No. 123, "Accounting
for Stock-Based Compensation," the Company has elected to use the method of
accounting prescribed by Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees." This method results in no compensation cost
being recognized. The pro forma effect of using the alternative method under
SFAS 123 results in a pro forma net loss that is not materially different from
amounts reported.

ADVERTISING COSTS

Advertising costs are expensed when incurred. Advertising expense amounted to
$4,601 in 1997 and $131,355 in 1996.

NEW ACCOUNTING PRONOUNCEMENTS

In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement 128, "Earnings per Share," which simplifies the standards for
computing earnings per share and makes them comparable to international
standards. Under the new requirements, basic earnings per share approximates    
previously reported earnings per share, and diluted earnings per share takes
into account the effect on average common shares of stock options if dilutive.
The statement was adopted in December 1997 and had no effect on earnings per
share for all prior periods.

In June 1997, the FASB issued Statement 130, "Reporting Comprehensive Income,"
which establishes standards for the reporting and display of comprehensive
income and its components in a full set of financial statements. The standard is
effective for years beginning after December 15, 1997. The Company will adopt
the new standard in 1998.



                                       17
<PAGE>   18


                     ZAXIS INTERNATIONAL INC. AND SUBSIDIARY

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED


3. BANK LOAN AND NOTES PAYABLE

Notes payable to directors of $869,810 at December 31, 1997 are due $2,020 on
demand and $867,590 at various dates from March 3, 1998 through July 31, 2000 
and bear interest at rates from 9.25% to 10%.

Notes payable to others of $389,289 at December 31, 1997 are due $68,000 on
demand and $321,289 at various dates from January 28, 1998 through December 31,
1999 and bear interest at rates from 9.25% to 10%.

Holders of the notes payable were granted warrants to purchase 465,434 shares of
common stock at $1.50 or $3.00 per share for three years from the date of
issuances. The notes payable include terms which permit the holder to be repaid
in shares of common stock by exercising the warrants. If the holder so elects,
the Company will grant additional common stock warrants for the same exercise
price in an amount equivalent to 50% of the warrants exercised. No value was
assigned to the warrants.

Future maturities of long term debt assuming the notes are not converted prior
to maturity are as follows:


<TABLE>
<S>                                                <C>            <C>
                                                   1998           $  210,020
                                                   1999              798,879
                                                   2000              250,000

                                                   Total          $1,258,929

</TABLE>

  4. DEFINED CONTRIBUTION PLAN

The Company maintains a 401(k) plan for substantially all employees. Company
contributions are at the discretion of management. There were no Company
contributions under the plan in 1997 or 1996.

  5. LEASE OBLIGATIONS

The Company has equipment under capital leases as follows:

<TABLE>
<CAPTION>
                                                      December 31,
                                                -------------------------
                                                   1997            1996

<S>                                             <C>             <C>      
Cost                                            $  75,801       $  31,650
Less accumulated amortization                      11,370           7,535
                                                ---------       ---------

                                                $  64,431       $  24,115
                                                =========       =========
</TABLE>



The Company rents a building for its office, research and development and
manufacturing under a sub-lease agreement. The lease is for a period of four
years and five months and expires on October 31, 1998. Rent expense was $112,700
in 1997 and $ 67,055 in 1996.

Rent expense under sub-lease to October 1998 will be $87,083.



                                       18
<PAGE>   19


                     ZAXIS INTERNATIONAL INC. AND SUBSIDIARY

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

6. CAPITAL STOCK TRANSACTIONS

During 1997, The Company sold 82,500 shares of common stock at price of $2.00
per share in a private offerings. Notes payable plus interest were converted to 
197,581 shares of stock at prices ranging from $2.00 to $3.24 per share
depending on the terms of the note. These investors were issued 292,419
warrants to purchase stock at $3.00 per share expiring March 30, 1999.

During 1996, the Company sold shares of common stock at prices ranging from
$3.00 to $3.75 per share in private offerings and at $2.25 per share upon the
exercise of Class A warrants. In March 1997, additional shares were issued to
purchasers of shares at $3.75 per share to adjust the basis of those share
holdings to $3.00 per share.


7. INCOME TAXES

A reconciliation of income taxes computed at the U.S. federal statutory rate to
the provision for income taxes is as follows:

<TABLE>
<CAPTION>
                                                                    1997            1996
                                                                  ----------     ---------

<S>                                                               <C>            <C>       
Tax benefit at statutory rate                                     $ (471,640)    $(749,000)
Increase in valuation allowance on deferred tax asset                471,640       749,000
                                                                  ----------     ---------

Provision for income taxes                                        $        -     $       -
                                                                  ==========     =========
</TABLE>

Deferred income taxes are provided to reflect the tax effects of temporary
differences in the recognition of revenue and expense for tax and reporting
purposes. Significant components of deferred tax assets at December 31, 1997 and
1996 are as follows:

<TABLE>
<CAPTION>
                                                           1997          1996
                                                       -----------    ----------
<S>                                                    <C>            <C>       
Deferred tax assets:

  Net operating loss carryforward                      $ 2,106,640    $1,666,000
  Other, net                                                32,000         1,000
                                                       -----------    ----------
                                                         2,138,640     1,667,000


  Valuation allowance                                   (2,138,640)   (1,667,000)
                                                       -----------    ----------

     Net deferred tax assets                           $     -        $    -
                                                       ===========    ==========
</TABLE>


For Federal income tax purposes, net operating loss carryovers total $6,196,000
that, if not utilized, will expire between 2004 and 2012. 

                                       19
<PAGE>   20



                     ZAXIS INTERNATIONAL INC. AND SUBSIDIARY

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

8. STOCK OPTIONS AND WARRANTS:

As of December 31, 1997 the following warrants are outstanding:

110,000 warrants exercisable at $1.50 related to previous debt issuances
expiring at various dates from January 26, 1998 through May 20, 1998.

208,432 warrants exercisable at $3.00 related to debt issuances expiring at
various dates from June 2, 1999 through October 20, 2000.

491,600 Class B warrants exercisable at $3.50 related to previous stock
purchases expiring on September 30, 1998.

367,419 Class C warrants exercisable at $3.00 related to current year stock
issuances and debt issuances expiring on March 30, 1999.

285,000 Class C Series 2 warrants exercisable at $1.00 expiring April 30, 1999.

International has a long term incentive plan under which options to purchase
405,000 shares of common stock may be granted at the fair market value on the
date of grant in the form of incentive or non-qualified stock options. In
addition, the Company has a Non-Employee Director's Stock Option plan under
which options to purchase up to 100,000 shares may be granted at fair market
value at the date of grant.

During 1997, 98,660 (74,200 in 1996) options were granted with exercise prices
between $1.44 and $5.50 ($1.44 and $3.75 in 1996) and expire either three or
five years from the date of grant. These options were exercisable upon grant. At
December 31, 1997, 253,128 (154,468 at December 31, 1996) options were
outstanding with an weighted average exercise price of $2.39 ($2.67 at December
31, 1996). No options were exercised during 1997 or 1996.

9. MAJOR CUSTOMERS

Two customers accounted for 58% of sales in 1997 and two customers accounted for
46% of sales in 1996. Since the Company will not be able to cover its operating
costs unless the customer base is increased, the loss of either of the major
1997 customers could have a material adverse effect on the Company.



                                       20