<PAGE>   1
                     U.S. SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   FORM 10-KSB
 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)

<TABLE>
<S>                         <C>                         <C>
       Delaware                     0-15476                        68-0080601
(State of Incorporation)    (Commission File Number)    (IRS Employer Identification No.)
</TABLE>

                    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: $274,539.

The aggregate market value of the voting stock held by non-affiliates was
$3,649,170 based on the average of the bid and asked prices on April 13, 1998
($.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 intends to file no later than April 30, 1998, are
incorporated by reference into Part III.

PAGE 1 OF __ PAGES. EXHIBIT INDEX IS LOCATED ON PAGE _.


<PAGE>   2


                                     PART I


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 is 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. Renewals and new notes issued under a 9 1/2% 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 widely used 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.



<PAGE>   3


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 and
polymerized in the end user's laboratory by technicians or supplied in pre-cast
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 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 pre-cast cassettes or may be
prepared by the technician from compounds or premixed preparations. The
pre-cast cassette offers the advantages of convenience, efficiency, and
reliability and are being used by a growing number of users.

Zaxis' core product is a pre-cast 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 

<PAGE>   4

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 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 59% 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



<PAGE>   5

Research and development costs were $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.

EMPLOYEES

Zaxis has 20 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.



<PAGE>   6

<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>

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

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 $1,023,945 or
55%, to $807,866 in 1997 from $1,831,751 in 1996. General and Administrative
expenses were reduced by $405,154, or 44%, to $509,992 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 $1,902,000 in
1996, and $31,834 for equipment and patent expenditures in 1997, compared with
$153,000 in 1996. Proceeds from sales of common stock, including shares sold in
connection with the exercise of warrants, of $561,410 and notes payable (mainly
notes with common stock warrants) of $1,177,590 provided the cash for these
uses. At December 31, 1997, current liabilities exceeded current assets by
$216,297, 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.



<PAGE>   7


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.

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 predominant 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
Balance Sheets
Statements of Operations
Statement of Changes in Stockholders' Equity
Statements of Cash Flows
Notes to Financial Statements

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



<PAGE>   8

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 will be incorporated by reference from the
Registrant's definitive proxy statement or will be filed as an amendment to this
Form 10-KSB under cover of Form 8 not later than April 30, 1998.

ITEM 10.   EXECUTIVE COMPENSATION

The information required by this item will be incorporated by reference from the
Registrant's definitive proxy statement or will be filed as an amendment to this
Form 10-KSB under cover of Form 8 not later than April 30, 1998.

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information required by this item will be incorporated by reference from the
Registrant's definitive proxy statement or will be filed as an amendment to this
Form 10-KSB under cover of Form 8 not later than April 30, 1998.

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required by this item will be incorporated by reference from the
Registrant's definitive proxy statement or will be filed as an amendment to this
Form 10-KSB under cover of Form 8 not later than April 30, 1998.

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).

       10               Material Contracts.

       (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).



<PAGE>   9

       (b)              Financing and Shareholder Agreement (Exhibit 10 to the
                        Company's Current Report on Form 8-K dated February 5,
                        1997, File Number 0-15476, incorporated herein by
                        reference).

       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

<PAGE>   10



                                   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: April 15, 1998                          Zaxis International Inc.

                                                   /s/ Conaly Wm. Bedell
                                              By:
                                                 ------------------------------
                                              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                    Director, Chairman of the Board            April 15, 1998
-------------------------
Conaly Bedell

/s/ Leonard Duval                    Director                                   April 15, 1998
-------------------------
Leonard Duval


                                     Director                                   April 15, 1998
-------------------------
Craig Jones

/s/ Alan Scott                       Director                                   April 15, 1998
-------------------------
Alan Scott


                                     Director                                   April 15, 1998
-------------------------
Calvin D. Wible


/s/ Sharon Killinger
-------------------------
Sharon Killinger                     Accounting Department Manager              April 15, 1998
                                     (Principal Accounting Officer)
</TABLE>



<PAGE>   11
                     ZAXIS INTERNATIONAL INC. AND SUBSIDIARY
                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY


<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, 1995                                  3,402,648      1,945,162              -            -      (1,773,146)

Shares issued for cash prior to merger                         25,913         77,739

Additional shares issued to certain investors                 229,184        338,734                                    (338,734)
                                                            ---------     ----------    -----------    ---------    -------------

                                                            3,657,745      2,361,635              -            -      (2,111,880)

Transactions in conjunction with merger:
  Conversion of Zaxis Inc. to
      Zaxis International Inc.                               (527,850)    (2,330,336)     2,330,268
  Zaxis International Inc. shares outstanding                 578,808          5,788         (5,788)
                                                            ---------     ----------    -----------    ---------    -------------


                                                            3,708,703         37,087      2,324,480            -      (2,111,880)
Shares issued in private placement,
      net of expenses                                       1,176,148         11,761      1,412,214

Shares issued upon exercise of
      Class A warrants                                         17,895            179         40,084

Stock option grants                                                                         375,853      (59,375)

Net loss - 1995                                                                                                       (1,728,918)
                                                            ---------     ----------    -----------    ---------    -------------

Balance at December 31, 1995                                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

Stock option grants, net of recissions                                                      (17,275)      28,507

 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 - unaudited                                   280,081          2,801        558,609

1996 Sales of shares not in Y/E numbers - unaudited             6,418             64            (64)

Stock option grants, net of recissions - unaudited                                          (25,252)      30,868

 Net loss - 1997 - unaudited                                                                                          (1,312,119)
                                                            ---------     ----------    -----------    ---------    -------------

 Balance at December 31, 1997 - unaudited                   5,724,518       $ 57,245    $ 5,937,833    $       -    $ (7,357,532)
                                                            =========     ==========    ===========    =========    =============
</TABLE>


<PAGE>   12

                     ZAXIS INTERNATIONAL INC. AND SUBSIDIARY
                      CONSOLIDATED STATEMENTS OF OPERATIONS



<TABLE>
<CAPTION>
                                                             TWELVE MONTHS ENDED
                                                                  DECEMBER 31
                                                      -----------------------------------
                                                           1997                 1996
                                                      ---------------     ---------------
                                                       (UNAUDITED)

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

Cost of goods sold                                          686,892             805,918

Selling, general and administrative expenses                807,866           1,831,751
                                                        -----------         -----------

             Loss from operations                        (1,220,219)         (2,187,103)

Other income (expense):
  Interest income                                             1,984               7,572
  Miscellaneous income                                          400               1,317
  Interest expense                                          (94,283)            (26,401)
                                                        -----------         -----------

             Total other income (expense)                   (91,899)            (17,512)
                                                        -----------         -----------

             Net loss                                   $(1,312,119)        $(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                                        5,608,998           5,368,898
                                                        ===========         ===========
             Diluted                                      5,608,998           5,368,898
                                                        ===========         ===========
</TABLE>


See notes to consolidated financial statements 

<PAGE>   13

                     ZAXIS INTERNATIONAL INC. AND SUBSIDIARY
                           CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                     ASSETS
                                     ------                               DECEMBER 31        DECEMBER 31,
                                                                             1997                1996
                                                                         -------------       ------------
                                                                          (Unaudited)
<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' EQUITY
                     ------------------------------------

CURRENT LIABILITIES:
      Current portion of lease obligations                                $    10,238         $     1,516
       Bank loan payable                                                  $         -         $   100,000
       Notes Payable to directors                                         $   612,020         $   141,340
      Notes payable                                                           138,000             464,000
      Accounts payable                                                        430,513             551,623
      Accrued expenses                                                        222,327              92,593
                                                                          -----------         -----------
                   Total current liabilities                                1,413,098           1,351,072

  LONG TERM LIABILITIES:
        Capitalized lease obligations                                          38,763
        Notes Payable                                                         251,289
         Notes Payable to directors                                           257,590
                                                                          -----------
                   Total long term liabilities                                547,642

STOCKHOLDERS' EQUITY:
      Common stock                                                             57,245              54,380
        $.01 par value, 12,000,000 shares authorized,
             5,438,019 and 5,724,518 shares issued and outstanding
      Additional paid-in capital                                            5,937,833           5,404,540
      Deferred compensation                                                         -             (30,868)
      Accumulated deficit                                                  (7,357,532)         (6,045,413)
                                                                          -----------         -----------
                   Total stockholders' equity                              (1,362,454)           (617,361)
                                                                          -----------         -----------
                   TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY             $   598,285         $   733,711
                                                                          ===========         ===========
</TABLE>

See notes to consolidated financial statements.

<PAGE>   14

                     ZAXIS INTERNATIONAL INC. AND SUBSIDIARY
                      CONSOLIDATED STATEMENTS OF CASH FLOWS




<TABLE>
<CAPTION>
                                                                             TWELVE MONTHS ENDED
                                                                                 DECEMBER 31,
                                                                      ---------------------------------
                                                                           1997                 1996
                                                                      -------------         -----------
                                                                       (Unaudited)
<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 and exercise of warrants             561,410           1,274,537
  Proceeds from notes payable and bank loan payable                        553,559             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                                        369,000
</TABLE>

<PAGE>   15




                     ZAXIS INTERNATIONAL INC. AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                 THE INFORMATION SUBSEQUENT TO 1996 IS UNAUDITED

1. BASIS OF PRESENTATION

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.


On August 25, 1995, Zaxis merged with a subsidiary of The InFerGene Company
(InFerGene). InFerGene was an inactive public company and neither InFerGene nor
its subsidiary had any assets or liabilities. The merger, for accounting
purposes, was a reverse acquisition in which Zaxis acquired InFerGene. The
acquisition was accounted for as a purchase with no value assigned to InFerGene.
InFerGene then changed its name to Zaxis International Inc. The financial
statements include the operations of Zaxis for all periods presented and the
operations of International since the date of acquisition. All intercompany
transactions and balances have been eliminated. As a result of the transaction,
the former InFerGene stockholders initially acquired approximately 12% of the
outstanding stock of International.

2. 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 RNA. 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 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.



<PAGE>   16


                     ZAXIS INTERNATIONAL INC. AND SUBSIDIARY

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued


 .

Zaxis incurred losses of $1,312,000 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
partnering arrangements with clinical device system or components thereof.cal
companies for its lipoprotein assay

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.

3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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 depreciation of capitalized leases charged to
operations was $105,140 and $91,424 for 1997 and 1996, respectively.




<PAGE>   17

                     ZAXIS INTERNATIONAL INC. AND SUBSIDIARY

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED


Asset Impairment

The company adopted Statement of Financial Accounting Standards No. 121,
"Accounting for Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed of." This Statement requires companies 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. The adoption of this standard did
not affect the Company's results of operations, financial position or liquidity.

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 at December 31, 1997.

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


INCOME TAXES

The Company accounts for income taxes in accordance with the provisions of
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes." Under Statement No. 109, the liability method is used in accounting for
income taxes whereby 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

Effective January 1, 1996, the Company adopted Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation," which defines a
fair value based method of accounting for employee stock options which allows
for an element of compensation cost to be charged to earnings on an annual
basis. Statement No. 123 also permits entities to continue to measure
compensation cost using the intrinsic value based method of accounting
prescribed by Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees" which may result in no compensation cost being recognized.
As permitted by the Statement, the Company has elected to continue to account
for its employee stock compensation under the intrinsic value based method of
accounting prescribed by APB Opinion No. 25, while providing pro forma
disclosures of net loss as if the fair value based method had been applied.
Under 



<PAGE>   18



the intrinsic value based method, compensation cost is the excess, if any, of
the fair market value of a share of common stock at the grant date over the
amount an employee must pay to acquire the stock. The effect of adopting this
statement results in pro forma net loss that is not materially different from
amounts reported.


                     ZAXIS INTERNATIONAL INC. AND SUBSIDIARY

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED


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 earnings per share for all prior
periods presented have been restated.

4. BANK LOAN AND NOTES PAYABLE



5. 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.

6. LEASE OBLIGATIONS





                     ZAXIS INTERNATIONAL INC. AND SUBSIDIARY

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED


7. CAPITAL STOCK TRANSACTIONS



8. INCOME TAXES






                     ZAXIS INTERNATIONAL INC. AND SUBSIDIARY

<PAGE>   19


             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED


                                                 1996               1995
                                                 ----               ----
9. STOCK OPTIONS AND WARRANTS:


                     ZAXIS INTERNATIONAL INC. AND SUBSIDIARY

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED



10. MAJOR CUSTOMERS

Two customers accounted for 46% of sales in 1996 and four customer accounted for
62% of sales in 1995. 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
1996 customers would not have a material adverse effect on the Company.