TABLE OF CONTENTS




|                                                                                                                        |  |  |  |  |  |  |  | 
|----------------------------------------------------------------------------------------------------------------------- |  |  |  |  |  |  |  | 
|Item 1. Description of Business                                                                                        
|Item 2. Description of Property                                                                                        
|Item 3. Legal Proceedings                                                                                              
|Item 4. Submission of Matters to a Vote of Security Holders                                                            
|Item 5. Market for Common Equity and Related Stockholder Matters                                                       
|Item 6. Managements Discussion and Analysis                                                                           
|Item 7. Financial Statements                                                                                           
|Item 8. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure                           
|Item 9. Directors, Executive Officers, Promoters and Control Persons, Compliance with Section 16(a) of the Exchange Act
|Item 10. Executive Compensation                                                                                        
|Item 11. Security Ownership of Certain Beneficial Owners and Management                                                
|Item 12. Certain Relationships and Related Transactions                                                                
|Item 13. Exhibits and Reports on Form 8-K                                                                              
|SIGNATURES                                                                                                             
|Report of Independent Auditors                                                                                         



---



U.S. SECURITIES AND EXCHANGE COMMISSION



FORM 10-KSB





For the year ended December 31, 1999

Zaxis International Inc.



Delaware











1890 Georgetown Road, Hudson, Ohio 44236



(330) 650-0444



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.
[  ]

Issuers net sales for its most recent fiscal year: $257,941

The aggregate market value of the voting stock held by
non-affiliates was $7,676,377 based on the average of the bid and
 asked prices on December 31, 1999 ($1.125). 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 1, 2000, there were 7,575,509 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 2000
 Annual Meeting of Stockholders, which the Issuer will file, are
incorporated by reference into Part III.

Page 1 of 21 pages. Exhibit index is located on page 9.



---



##### Table of Contents



PART I




Item 1.  Description of Business

Business Development

Zaxis International Inc. (International or the
Company) is a biotechnology holding company that 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. For accounting and tax
purposes, the merger was treated as a reverse acquisition in
which Zaxis acquired International. InFerGene and its subsidiary
were inactive and had no assets or liabilities at the time of the
 merger. InFerGene was incorporated in California in 1984 and
subsequently chartered in Delaware in 1985.

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 of these individuals had
 a background 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,
 Zaxis moved into new manufacturing and office facilities,
installed automated and computer controlled production equipment,
 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.

In 1997 Zaxis installed new management and attracted new
investors. Investors based in Australia took an active role in
bringing additional new funding to the Company with subsequent
investments totaling $1,458,907. On a fully diluted basis, one
Australian investor, Progen Industries Ltd. (Progen)
would hold approximately eleven percent (11%) of
Internationals common stock at December 31, 1999.
During 1997, the Company also entered into a Financing and
Shareholder Agreement with MML Management Limited, an
Australia-based investment firm (MML). MML and
affiliated entities provided $857,590 in funding to the Company,
of which $90,000 was for stock purchases with the remainder in
the form of convertible debt. In 1998, the Company received funds
 of $601,317 from MML and affiliated entities in the form of
convertible debt. On a fully diluted basis, MML and affiliated
entities would hold approximately ten percent (10%) of
Internationals common stock at December 31, 1999.
Concurrent with the infusion of additional funds from these
Australian investors in 1997, the Board of Directors was
restructured with five active members who continued to serve
until December 16, 1999.

Funding of the Company in 1997 and 1998 was accomplished
primarily through convertible note instruments. In 1998, renewals
 of convertible notes and new convertible notes offered at 9.5%
interest totaled $831,317 and in 1997 renewals of convertible
notes and new convertible notes offered at 10% and 9.5% totaled
$1,213,879. In 1997, additional equity capital in the amount of
$170,000 was provided through issuance of common stock and
$391,410 of the convertible notes subscribed in 1996 that were
converted to common stock.

During 1999, the Companys operations continued to be
financed primarily through loans from shareholders and private
investors, members of the Board of Directors, and related persons
 and entities. Progen, based in Australia, provided $197,792 in
funding to the Company in the form of convertible notes bearing
interest at 9.5%. Additionally, Board of Directors members and
other private investors loaned $147,000 to the Company through
convertible notes at interest rates ranging from 9.5% to 10% per
annum.

The Company also received $773,068 in funds from private
investors during 1999 in connection with the Companys
private offering of securities. This offering allowed investors
to purchase units in Zaxis at $1.00 per unit with a unit
consisting of one share of common stock and Class Z,
Series Z-3, Z-4, Z-5, and Z-6 Warrants entitling the holder
in the aggregate to purchase one additional share of common
stock. The Company issued said securities in reliance upon the
exemption afforded by Section 4(2) of the Securities Act of
1933 and other available exemptions.

2



---



##### Table of Contents



In December 1999, the entire Board of Directors resigned as
well as the Companys President and Chief Executive Officer.
 Five new Directors were nominated and John Hrobsky was appointed
 President and Chief Executive Officer. This process was
described in the Companys 10-QSB report filed for the
quarter ending September 30, 1999 and the Companys 8-K
 report that was filed on January 28, 2000. Concurrent with
this change in the Board and management, additional capital of
$320,000 was raised from investors in December 1999. Company
 ownership continues to be international in scope and broadly
based with approximately 2,600 shareholder accounts as of
December 31, 1999.

Business of Issuer

Zaxis manufactures and distributes products used in a molecular
separation process known as electrophoresis, a procedure used in
more than 55,000 research, industrial and clinical laboratories
worldwide. The more common applications of this procedure include
 protein separations such as the HDL and LDL components of total
cholesterol and the identification of various genes and gene
products (e.g. DNA, RNA, etc.). A variety of techniques, formats,
 materials, compounds, equipment and devices are employed in
electrophoresis and Zaxis provides products to meet these needs.
The primary focus of Zaxis research and development efforts
 as well as its sales and marketing efforts is targeted toward
the consumables segment of this market. Zaxis core products
 are the pre-cast gels and reagents used for these
electrophoresis procedures.

Electrophoresis was discovered in the 1930s and has been in
growing usage for more than fifty years. It has been reported
that eighty percent of all life-science researchers in the United
 States use electrophoresis as a lab tool. 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 molecularly disassembled specimens, such as
bacteria, blood serum, body tissue or plant tissue, to a gel
substance that is then subjected to electric current while
submerged in a liquid filled chamber. The sample material
molecules are deposited on the gel substance in a unique pattern
that 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 accuracy, quality and usefulness of the information obtained
from electrophoresis are dependent upon a number of factors
including the consistency, reliability and quality of the medium
in which these molecular separations occur. Zaxis pre-cast
gels and reagents meet these requirements while providing the
researcher and/or clinician with the convenience of not having to
 formulate and quality control gels and reagents made in their
own laboratory. Generally, gels are made from one of two
materials, a natural plant-based substance called agarose or an
acrylamide-based substance. Agarose gels are usually limited to
use with proteins of large molecular sizes. Polyacrylamide gels
are available in mass produced pre-cast cassettes or may be
manually prepared one at a time.

Zaxis pre-cast gels offer the advantages of convenience,
reliability, consistency and high quality to the researcher
and/or clinician. With todays market emphasis on
productivity and quality, Zaxis pre-cast gel products are
well positioned to respond to these market requirements. The
usefulness of the information from electrophoresis depends on the
 clarity and consistency of the results (or resolution) that is
dependent upon a variety of factors, including consistency of
manufacturing materials and methods for the devices, reagents and
 gels.

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,
Zaxis was not able to gain any significant market share due to
production quality variances and a novel application method
proprietary to Zaxis products that was thought to be a
selling advantage, but ultimately proved to not be an advantage.
In 1997, under the direction of

3



---



##### Table of Contents





All of Zaxis existing distribution sources for the product
have accepted the redesigned product into their inventory to
replace the prior version. Based on the redesigned product line,
discussions are being conducted with additional potential
distributors for the line. Product supply contracts were
negotiated and signed in 1998 and 1999 with distributors and
instrument manufacturers in the biotechnology market. Zaxis
 products passed the high product test and quality control
standards set by the customer and are marketed under the
established name of these customers, who are significant players
in this growing market segment.

During 1999, Zaxis continued its efforts to strengthen its
customer base and finalized two new private-label contracts for
the supply of its products. One of these contracts was formally
signed in March 1999 and the other in November 1999 with
product shipments under these contracts beginning in the second
quarter of 1999 and the first quarter of 2000, respectively.
Zaxis is continuing to pursue additional distributors for its
protein electrophoresis products.

During 1999 Zaxis also completed a key marketing agreement with
one of the pioneers and worldwide leaders in products for the
life science industry and is holding discussions with technology
companies for collaborative development of additional innovative
platform product adaptations to expanding applications driven by
strong growth in life sciences.

Although Zaxis gel products are well positioned to take
advantage of this rapidly growing market, Zaxis does not expect
to generate sufficient sales volume with its existing customer
base to support the cost of operations during the 2000-year.
Accordingly, the Company will need to raise additional capital
through borrowings or equity financing throughout this time
period.

Zaxis developed and sells a lipoprotein assay system, consisting
of a poly-gradient electrophoresis gel, electrophoresis
processing equipment, reagents, gel scanner, and computer
software. 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 and 2 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, Zaxis was
 granted a patent for the poly-gradient gel component of the
system.

Zaxis has been marketing the lipoprotein assay system to
researchers since March 1996. In late 1996, Zaxis began
selling lipoprotein gels and reagent kits separately to
researchers who had not purchased the systems. Zaxis 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 from other researchers. In 1998, three Lipoprotein
Fractionation Systems (LFS) were sold worldwide, one
each in Germany, Malaysia, and the United States; each are now in
 operation, and usage is driving continuing purchases of the
consumable LFS gel from Zaxis. One medical center acquired the
system to use the Zaxis test as a central source of data for an
arterial cardiovascular battery of tests. The test series was
developed to provide physicians and patients with the
information necessary to maximally reduce the progression of
atherosclerotic disease, as was stated in the announcement
of the program in April 1999. Zaxis is following the results
 of the introduction closely.

4



---



##### Table of Contents



Zaxis is also working with other key instrument manufacturers to
develop and produce gels for DNA analysis in the field of
proteomics. Zaxis has successfully designed and produced a
long-life, full-sized pre-cast gel for use in DNA sequencing and
during 1997 and 1998 received satisfactory reports on prototype
gels placed for Beta-testing with several companies that
manufacture or market DNA sequencing instruments and supplies.
During 1998 Zaxis engineered several adapter apparatus that
enable the Zaxis DNA gel to be run on the major models of manual
DNA sequencers now in operation. Based on the performance of the
new product line, discussions are being conducted with potential
distributors for the line. Zaxis believes that, at this time, its
 pre-cast DNA sequencing gel will be the only marketed full-sized
 gel to meet all the parameters required by researchers and to
fulfill specifications needed in the DNA sequencing market.

Zaxis is pursuing jointly two channels in its distribution
network for its protein and DNA gels. In addition to directly
marketing and distributing its products, Zaxis has and will
continue to form market alliances and distribution arrangements
with successful major marketers and innovation leaders in the
industry. Management believes that Zaxis quality protein
gel and its proprietary DNA gels provide consumable product lines
 for distributors to compete in markets not previously addressed
by those distributors.

The strategy to develop new business and increase sales for Zaxis
 is predicated on a multi-faceted approach to further penetrate
existing markets and create new market opportunities. Internally,
 Zaxis has refined its production processes and believes that it
provides product of the highest and most uniform quality in the
industry. Continuing R&D efforts are focused on developing
additional cutting edge, superior, high-resolution
electrophoresis products, as well as techniques and products
applicable to issues not sufficiently addressed by other
technologies.

Suppliers

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

Customers and Distribution Methods

Six customers accounted for 69% and 55% of sales in 1999 and
1998, respectively. Zaxis top ten customers accounted for
82% and 73% of sales in 1999 and 1998, respectively. Of
Zaxis top ten customers in 1999, four sell or acquire for
their own use Zaxis products under the Zaxis brand label. Zaxis
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 various U.S.
patents relating to its gel products and various U.S. trademarks.
 In addition, Zaxis relies on trade secrets and proprietary
knowledge related to manufacturing techniques and product
formulations.

The Company has U.S. trademarks covering Zaxis 
A New Dimension In Technology, Z-Quence and the
 term Z-Gel. Zaxis has a trademark application
pending for the marketing phrase, Bio Tools for
Technology. In addition, Zaxis relies on trade secrets and
proprietary knowledge. There can be no assurance that patents or
trademarks will not be challenged or breached or that
confidentiality agreements will not be breached.

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

Governmental Regulations

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.

5



---



##### Table of Contents



Research and Development

Research and development costs were approximately $142,879 and
$241,777 for 1999 and 1998, respectively. The amount expended by
Zaxis on research and development during 1999 decreased from 1998
 levels due to the Companys lack of sufficient funding.

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 12 full time employees. In addition, the Company
utilizes outside consultants and several full or part-time
workers 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, that is rented
under a lease that expires October 31, 2003. The building is
 approximately nine years old, is in good condition and is
sufficient for currently anticipated needs of the Company for at
least three years.




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
1999.

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.
 The Companys over-the-counter trading volume is reported
through the NASDs Bulletin Board system.
Trading was moderate during 1999. There were about 2,600 holders
of record of International common stock at December 31,
1999, 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.

|                   |  |      |       |     |  |   |        | 
|------------------ |  | ---- | ----- | --- |  | - | ------ | 
|Quarter Ended      |  | High |       | Low
|                   |  |      |       |    
|March 31, 1998     |  | $    | 0.625 |     |  | $ | 0.5625 | 
|                  
|                  
|                  
|                  
|June 30, 1998      |  |      | 0.78  |     |  |   | 0.75   | 
|                  
|                  
|                  
|                  
|September 30, 1998 |  |      | 0.625 |     |  |   | 0.50   | 
|                  
|                  
|                  
|                  
|December 31, 1998  |  |      | 0.343 |     |  |   | 0.29   | 
|                  
|                  
|                  
|                  
|March 31, 1999     |  |      | 0.438 |     |  |   | 0.4375 | 
|                  
|                  
|                  
|                  
|June 30, 1999      |  |      | 1.250 |     |  |   | 0.391  | 
|                  
|                  
|                  
|                  
|September 30, 1999 |  |      | 1.625 |     |  |   | 0.531  | 
|                  
|                  
|                  
|                  
|December 31, 1999  |  |      | 1.468 |     |  |   | 0.531  | 

6



---



##### Table of Contents






Item 6.  Managements Discussion and
Analysis

Results of Operations

Net sales in 1999 of $257,941 reflected a 37% increase over net
sales in 1998 of $188,732. Revenues from the product supply
agreement signed March 5, 1999 referred to in the section
Business of Issuer are reflected in the 1999 sales
revenue. The first sales revenues from the DNA sequencing
pre-cast gel product were realized in January 1999. A supply
 agreement was signed in November 1999 with a key
manufacturer of DNA sequencing equipment with the first
significant revenues expected in 2000. The growth of this related
 revenue is dependent on the successful market acceptance of the
DNA sequencing equipment. Zaxis is seeking supply agreements with
 other manufacturers of DNA sequencing equipment. Supplies of
protein gels to various distributors are being explored but any
significant revenue resulting would not be expected to occur
until late in 2000.

Cost of goods sold exceeded sales revenue in both 1999 and 1998
due to the fact that the quantity of product manufactured was not
 sufficient to realize necessary economies of scale in the
production process and the amount of product spoilage that
resulted from Zaxis low sales volume.

Total operating costs after cost of goods sold decreased by
$50,768 or 5.5% to $872,947 in 1999 from $923,715 in 1998. This
decrease in operating expenses was due in part to the reduction
in research and development costs discussed previously. General
and Administrative expenses were $567,208 in 1999 and $510,786 in
 1998. This increase was due to the following factors1)
Zaxis efforts to upgrade the skill level of employees in
the finance area, 2) increased travel expense, and 3) additional
costs incurred by Zaxis in its fundraising efforts. Zaxis
selling expenses decreased slightly to $162,860 in 1999 from
$171,152 in 1998. This decrease in selling expenses was due
primarily to Zaxis efforts to conserve its financial
resources due to a lack of sufficient funding during 1999.

Financial Condition and Liquidity

The Company used $999,442 in operations in 1999 compared with
$828,153 in 1998 and $3,340 for equipment and patent expenditures
 in 1999 compared with $9,812 in 1998. Proceeds from the
Companys Private Placement Offering, notes payable (mainly
notes with common stock warrants), and proceeds received upon the
 exercise of warrants provided cash of $1,092,606 for operations
in 1999. At December 31, 1999 current liabilities exceeded
current assets by $2,789,901 and total liabilities exceeded total
 assets by $2,830,589. At December 31, 1999 the Company had
a cash balance of $139,151. To support its anticipated cash
needs, the Company will be required to raise additional capital
through borrowings or equity financings. There can be no
assurance that this will be achieved. The Company is working in
2000 to maintain steady relations with creditors while it strives
 to improve sales volume and demonstrate that the Company can be
successful.

To attract new customers and distributors and increase revenues,
Zaxis plans a major marketing campaign in the first half of 2000.
 Management believes that the core electrophoresis protein gel
products combined with Zaxis unique long shelf life
pre-cast DNA sequencing products may provide sufficient sales
revenue to bring Zaxis to a break-even point on an annualized
basis by the end of 2000. However, there can be no assurance that
 this will be achieved. If Zaxis is successful in generating new
supply agreements, attracting new distributors and gaining new
customers, additional capital investment will be required to
automate the manufacturing process and add production staff.
There can be no assurance, however, that Zaxis will be successful
 in obtaining additional supply contracts, distributors and the
customers necessary to achieve profitability.

Management also believes that the lipoprotein assay system
represents a significant technological improvement over existing
cardiac disease diagnostic test procedures and can contribute
significant revenue and profits to the Company. Zaxis DNA
sequencing gel product line has unique features that provide it
with an opportunity for increased sales and profits. The rapidly
growing markets in proteomics and gene testing provide the basis
for this opportunity.

During 1999, the Company relied upon equity and debt financings
to sustain on-going operations and research and development. The
Company will continue to rely upon these sources of funding.

7



---



##### Table of Contents



Impact of Year 2000

In prior years, the Company discussed the nature and progress of
its plans to become Year 2000 ready. In late 1999, Zaxis
completed its remediation and testing of systems. As a result of
those planning and implementation efforts, the Company
experienced no significant disruptions in mission critical
information technology and non-information technology systems and
 believes those systems successfully responded to the Year 2000
date change. The Company is not aware of any material problems
resulting from Year 2000 issues, either with its products, its
internal systems, or the products and services of third parties.
The Company will continue to monitor its mission critical
computer applications and those of its suppliers and vendors
throughout the year 2000 to ensure that any latent Year 2000
matters that may arise are addressed promptly.




Item 7.  Financial Statements

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

|                                                  |  |       |         | 
|------------------------------------------------- |  | ----- | ------- | 
|                                                  |  | Pages
|                                                  |  |      
|Report of Independent Auditors                    |  |       | 11      | 
|Balance Sheets                                    |  |       | 12      | 
|Statements of Operations                          |  |       | 13      | 
|Statements of Changes in Stockholders Deficiency |  |       | 14      | 
|Statements of Cash Flows                          |  |       | 15      | 
|Notes to Financial Statements                     |  |       | 16 - 21 | 




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

None. Ernst & Young LLP has audited the Companys
financial statements for the year ended December 31, 1999.

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
to be filed on or before April 29, 2000.




Item 10.  Executive Compensation

The information required by this item is incorporated by
reference from the Registrants definitive proxy statement
to be filed on or before April 29, 2000.




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
to be filed on or before April 29, 2000.




Item 12.  Certain Relationships and Related
Transactions

The information required by this item is incorporated by
reference from the Registrants definitive proxy statement
to be filed on or before April 29, 2000.

8



---



##### Table of Contents






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 (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 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
	(Exhibit to the Companys Annual Report on Form 10-KSB
	for the year ended December 31, 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.)                                                                                       
|                        |  |         | 22 |             |  | Termination of Consulting Agreement and Full and Final Release
	(Exhibit to the Companys 10-QSB for the quarter ended
	September 30, 1999, File Number 0-15476, incorporated herein
	 by reference.)                                                              
|                        |  |         | 24 |             |  | Power of Attorney for signatures on the Companys Form 
	 10-KSB for the year ended December 31, 1999                                                                                                                                                              
|                        |  |         | 27 |             |  | Financial Data Schedule                                                                                                                                                                                                                                            
|(b) Reports on Form 8-K

|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|1/28/00 |  | Reported that Companys previous Board of Directors and
	President and Chief Executive Officer had resigned pursuant to
	the Termination of Consulting Agreement, and Full and Final
	Release described in and filed as an Exhibit to the
	Companys 10-QSB for the quarter ended September 30,
	1999 and that a newly elected Board of Directors elected Ronald
	Hanson as Chairman of the Board and John Hrobsky as President and
	 Chief Executive Officer.

9



---



##### Table of Contents






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: March 29, 2000

| |                         
| | ------------------------
| | Zaxis International Inc.



| |     |                 
| | --- | ----------------
| | By: | /s/ JOHN HROBSKY

| |                                                                                                                                                                                
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                
| | John Hrobsky, 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.

|                           |  |                                       |  |               
|-------------------------- |  | ------------------------------------- |  | --------------
|Signature                  |  | Title                                 |  | Date          
|                           |  |                                       |  |               
|/s/   Ronald Hanson*       |  | Director, Chairman of the Board       |  | March 29, 2000
|/s/   Stephen Anderson*    |  | Director                              |  | March 29, 2000
|/s/   Dr. Mal Eutick, OAM* |  | Director                              |  | March 29, 2000
|/s/   Steven Ficyk*        |  | Director                              |  | March 29, 2000
|/s/   Melvin Weisblatt*    |  | Director, V.P. of Sales and Marketing |  | March 29, 2000
|/s/   Charles Maimbourg    |  | Acting Chief Financial Officer        |  | March 29, 2000



|  |                               
|- | ------------------------------
|* | Pursuant to Power of Attorney.

10



---



##### Table of Contents






Report of Independent Auditors

The Board of Directors and Stockholders



We have audited the accompanying consolidated balance sheets of
Zaxis International Inc. and Subsidiary as of December 31,
1999 and 1998, 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 auditing standards
generally accepted in the United States. 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, 1999 and 1998, and the consolidated results of
their operations and their cash flows for the years then ended in
 conformity with accounting principles generally accepted in the
United States.

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.

/s/  ERNST & YOUNG LLP

Cleveland, Ohio

March 17, 2000

11



---



##### Table of Contents



ZAXIS INTERNATIONAL INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS


ASSETS




|                                         |                                                                                                                   |                                                |         |              |            |   |         |            |            |  
|---------------------------------------- | ----------------------------------------------------------------------------------------------------------------- | ---------------------------------------------- | ------- | ------------ | ---------- | - | ------- | ---------- | ---------- | -
|                                         |                                                                                                                   | December 31,                                   |         | December 31,
|                                         |                                                                                                                   | 1999                                           |         | 1998        
|                                         |                                                                                                                   |                                                |         |             
|Current assets:                          |                                                                                                                   |                                                |         |              |            |   |         |           
|                                         | Cash                                                                                                              |                                                | $       | 139,151      |            |   | $       | 49,327     |           
|                                         | Accounts receivable, net                                                                                          |                                                |         | 45,286       |            |   |         | 13,904     |           
|                                         | Inventory                                                                                                         |                                                |         | 64,036       |            |   |         | 64,738     |           
|                                         | Prepaid expenses and other                                                                                        |                                                |         | 11,188       |            |   |         | 29,670     |           
|                                         |                                                                                                                   |                                                |         |              |            |   |         |           
|                                         |                                                                                                                   | Total current assets                           |         |              | 259,661    |   |         |            | 157,639    |  
|                                        
|                                        
|                                        
|                                        
|Property and equipment:                  |                                                                                                                   |                                                |         |              |            |   |         |           
|                                         | Machinery and equipment                                                                                           |                                                |         | 361,582      |            |   |         | 360,082    |           
|                                         | Office equipment                                                                                                  |                                                |         | 190,064      |            |   |         | 190,064    |           
|                                         | Leasehold improvements                                                                                            |                                                |         | 86,992       |            |   |         | 86,992     |           
|                                         |                                                                                                                   |                                                |         |              |            |   |         |           
|                                         |                                                                                                                   |                                                | 638,638 |              |            |   | 637,138 |           
|                                         | Less accumulated depreciation                                                                                     |                                                |         | 498,954      |            |   |         | 400,731    |           
|                                         |                                                                                                                   |                                                |         |              |            |   |         |           
|                                         |                                                                                                                   |                                                | 139,684 |              |            |   | 236,407 |           
|                                        
|                                        
|                                        
|                                        
|Other assets:                            |                                                                                                                   |                                                |         |              |            |   |         |           
|                                         | Patent costs                                                                                                      |                                                |         | 33,460       |            |   |         | 37,910     |           
|                                         | Organization costs                                                                                                |                                                |         |             |            |   |         | 395        |           
|                                         |                                                                                                                   |                                                |         |              |            |   |         |           
|                                         |                                                                                                                   |                                                | 33,460  |              |            |   | 38,305  |           
|                                         |                                                                                                                   |                                                |         |              |            |   |         |           
|                                         |                                                                                                                   | Total assets                                   |         | $            | 432,805    |   |         | $          | 432,351    |  
|                                         |                                                                                                                   |                                                |         |              |            |   |         |           
|                                        
|                                        
|                                        
|                                        
|LIABILITIES AND STOCKHOLDERS DEFICIENCY
|                                        
|                                        
|                                        
|                                        
|Current liabilities:                     |                                                                                                                   |                                                |         |              |            |   |         |           
|                                         | Current portion of lease obligations                                                                              |                                                | $       | 12,653       |            |   | $       | 10,906     |           
|                                         | Notes payable to directors                                                                                        |                                                |         | 1,488,907    |            |   |         | 784,895    |           
|                                         | Notes payable                                                                                                     |                                                |         | 417,928      |            |   |         | 475,264    |           
|                                         | Accounts payable                                                                                                  |                                                |         | 581,070      |            |   |         | 476,962    |           
|                                         | Accrued expenses                                                                                                  |                                                |         | 549,004      |            |   |         | 449,341    |           
|                                         |                                                                                                                   |                                                |         |              |            |   |         |           
|                                         |                                                                                                                   | Total current liabilities                      |         |              | 3,049,562  |   |         |            | 2,197,368  |  
|                                        
|                                        
|                                        
|                                        
|Long term liabilities:                   |                                                                                                                   |                                                |         |              |            |   |         |           
|                                         | Capitalized lease obligations                                                                                     |                                                |         | 16,040       |            |   |         | 28,705     |           
|                                         | Notes payable                                                                                                     |                                                |         |             |            |   |         | 130,000    |           
|                                         | Notes payable to directors                                                                                        |                                                |         | 197,792      |            |   |         | 684,012    |           
|                                         |                                                                                                                   |                                                |         |              |            |   |         |           
|                                         |                                                                                                                   | Total long term liabilities                    |         |              | 213,832    |   |         |            | 842,717    |  
|                                        
|                                        
|                                        
|                                        
|Stockholders deficiency:                |                                                                                                                   |                                                |         |              |            |   |         |           
|                                         | Common stock                                                                                                      |                                                |         | 69,275       |            |   |         | 58,112     |           
|                                         | $.01 par value, 12,000,000 shares authorized, 6,927,497 and
	5,811,216 shares issued and outstanding and issuable |                                                |         |              |            |   |         |            |           
|                                         | Additional paid-in capital                                                                                        |                                                |         | 7,046,790    |            |   |         | 5,984,885  |           
|                                         | Accumulated deficit                                                                                               |                                                |         | (9,946,654   | )          |   |         | (8,650,731 | )         
|                                         |                                                                                                                   |                                                |         |              |            |   |         |           
|                                         |                                                                                                                   | Total stockholders deficiency                 |         |              | (2,830,589 | ) |         |            | (2,607,734 | )
|                                         |                                                                                                                   |                                                |         |              |            |   |         |           
|                                         |                                                                                                                   | Total liabilities and stockholders deficiency |         | $            | 432,805    |   |         | $          | 432,351    |  
|                                         |                                                                                                                   |                                                |         |              |            |   |         |           

See notes to consolidated financial statements.

12



---



##### Table of Contents



ZAXIS INTERNATIONAL INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF OPERATIONS


|                                                                   |                  |                              |           |          |            |   |           |          |            |  
|------------------------------------------------------------------ | ---------------- | ---------------------------- | --------- | -------- | ---------- | - | --------- | -------- | ---------- | -
|                                                                   |                  |                             
|                                                                   |                  | Years Ended                 
|                                                                   |                  | December 31                 
|                                                                   |                  |                             
|                                                                   |                  | 1999                         |           | 1998    
|                                                                   |                  |                              |           |         
|Net sales                                                          |                  | $                            | 257,941   |          |            | $ | 188,732   |         
|Cost of goods sold                                                 |                  |                              | 498,230   |          |            |   | 392,033   |         
|Selling, general and administrative expenses                       |                  |                              | 872,947   |          |            |   | 923,715   |         
|                                                                   |                  |                              |           |          |            |   |           |         
|                                                                   |                  | Loss from operations         |           |          | (1,113,236 | ) |           |          | (1,127,016 | )
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|Other income (expense):                                            |                  |                              |           |          |            |   |           |         
|                                                                   | Interest expense |                              |           | (183,072 | )          |   |           | (164,859 | )         
|                                                                   | Other, net       |                              |           | 385      |            |   |           | 6,822    |           
|                                                                   |                  |                              |           |          |            |   |           |         
|                                                                   |                  | Total other income (expense) |           |          | (182,687   | ) |           |          | (158,037   | )
|                                                                   |                  |                              |           |          |            |   |           |         
|                                                                   |                  | Net loss                     |           | $        | (1,295,923 | ) |           | $        | (1,285,053 | )
|                                                                   |                  |                              |           |          |            |   |           |         
|Net loss per common share  basic and diluted                      |                  | $                            | (0.21     | )        |            | $ | (0.22     | )       
|                                                                   |                  |                              |           |          |            |   |           |         
|Weighted average number of shares outstanding  basic
	and diluted |                  |                              | 6,101,547 |          |            |   | 5,764,366 |         
|                                                                   |                  |                              |           |          |            |   |           |         

See notes to consolidated financial statements.

13



---



##### Table of Contents



ZAXIS INTERNATIONAL INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF STOCKHOLDERS DEFICIENCY


|                                     |  |              |           |            |  |         |        |             |  |   |           |  |  |   |            |  
|------------------------------------ |  | ------------ | --------- | ---------- |  | ------- | ------ | ----------- |  | - | --------- |  |  | - | ---------- | -
|                                     |  |              |           |            |  |        
|                                     |  | Common Stock |           |            |  |        
|                                     |  |              |           | Additional |  |        
|                                     |  | Number of    |           | Stated or  |  | Paid-in |        | Accumulated
|                                     |  | Shares       |           | Par Value  |  | Capital |        | Deficit    
|                                     |  |              |           |            |  |         |        |            
|Balance at December 31, 1997         |  |              | 5,744,991 |            |  | $       | 57,450 |             |  | $ | 5,945,774 |  |  | $ | (7,365,678 | )
|Shares issued for compensation       |  |              | 66,225    |            |  |         | 662    |             |  |   | 39,111    |  |  |   |            |  
|Net loss  1998                      |  |              |           |            |  |         |        |             |  |   |           |  |  |   | (1,285,053 | )
|                                     |  |              |           |            |  |         |        |             |  |   |           |  |  |   |            |  
|Balance at December 31, 1998         |  |              | 5,811,216 |            |  |         | 58,112 |             |  |   | 5,984,885 |  |  |   | (8,650,731 | )
|Sale of shares                       |  |              | 816,281   |            |  |         | 8,163  |             |  |   | 764,905   |  |  |   |            |  
|Shares issued on conversion of notes |  |              | 300,000   |            |  |         | 3,000  |             |  |   | 297,000   |  |  |   |            |  
|Net loss  1999                      |  |              |           |            |  |         |        |             |  |   |           |  |  |   | (1,295,923 | )
|                                     |  |              |           |            |  |         |        |             |  |   |           |  |  |   |            |  
|Balance at December 31, 1999         |  |              | 6,927,497 |            |  | $       | 69,275 |             |  | $ | 7,046,790 |  |  | $ | (9,946,654 | )
|                                     |  |              |           |            |  |         |        |             |  |   |           |  |  |   |            |  

See notes to consolidated financial statements.

14



---



##### Table of Contents



ZAXIS INTERNATIONAL INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS


|                                                                         |                                                    |                                       |                                       |         |         |           |            |         |         |          |  
|------------------------------------------------------------------------ | -------------------------------------------------- | ------------------------------------- | ------------------------------------- | ------- | ------- | --------- | ---------- | ------- | ------- | -------- | -
|                                                                         |                                                    |                                      
|                                                                         |                                                    | Twelve Months Ended                  
|                                                                         |                                                    | December 31,                         
|                                                                         |                                                    |                                      
|                                                                         |                                                    | 1999                                  |                                       | 1998   
|                                                                         |                                                    |                                       |                                       |        
|Operating activities:                                                    |                                                    |                                       |                                       |         |         |           |            |        
|Net loss                                                                 |                                                    | $                                     | (1,295,923                            | )       |         | $         | (1,285,053 | )      
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|Adjustments to reconcile net loss to cash used in operating
	activities: |                                                    |                                       |                                       |         |         |           |            |        
|                                                                         | Depreciation and amortization                      |                                       |                                       | 104,908 |         |           |            | 119,678 |        
|                                                                         | Compensation due to stock option grants            |                                       |                                       |        |         |           |            | 39,773  |        
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                         | Changes in operating assets and liabilities:       |                                       |                                       |         |         |           |            |         |        
|                                                                         |                                                    | Accounts receivable                   |                                       |         | (31,382 | )         |            |         | 25,167  |         
|                                                                         |                                                    | Inventory and prepaid expenses        |                                       |         | 19,184  |           |            |         | (1,181  | )       
|                                                                         |                                                    | Accounts payable and accrued expenses |                                       |         | 203,771 |           |            |         | 273,463 |         
|                                                                         |                                                    |                                       |                                       |         |         |           |            |        
|                                                                         |                                                    |                                       | Cash used in operating activities     |         |         | (999,442  | )          |         |         | (828,153 | )
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|Investing activities:                                                    |                                                    |                                       |                                       |         |         |           |            |        
|Purchases of property and equipment                                      |                                                    |                                       | (1,500                                | )       |         |           | (7,569     | )      
|Patent cost expenditures                                                 |                                                    |                                       | (1,840                                | )       |         |           | (2,243     | )      
|                                                                         |                                                    |                                       |                                       |         |         |           |            |        
|                                                                         |                                                    |                                       | Cash used in investing activities     |         |         | (3,340    | )          |         |         | (9,812   | )
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|Financing activities:                                                    |                                                    |                                       |                                       |         |         |           |            |        
|                                                                         | Proceeds from sales of common stock                |                                       |                                       | 773,068 |         |           |            |        |        
|                                                                         | Payments on notes payable                          |                                       |                                       | (14,336 | )       |           |            | (16,045 | )      
|                                                                         | Proceeds from notes payable and bank loans payable |                                       |                                       | 344,792 |         |           |            | 831,317 |        
|                                                                         | Payments on capital lease obligations              |                                       |                                       | (10,918 | )       |           |            | (9,390  | )      
|                                                                         |                                                    |                                       |                                       |         |         |           |            |        
|                                                                         |                                                    |                                       | Cash provided by financing activities |         |         | 1,092,606 |            |         |         | 805,882  |  
|                                                                         |                                                    |                                       |                                       |         |         |           |            |        
|Increase (Decrease) in cash                                              |                                                    |                                       | 89,824                                |         |         |           | (32,083    | )      
|Cash at beginning of period                                              |                                                    |                                       | 49,327                                |         |         |           | 81,410     |        
|                                                                         |                                                    |                                       |                                       |         |         |           |            |        
|Cash at end of period                                                    |                                                    | $                                     | 139,151                               |         |         | $         | 49,327     |        
|                                                                         |                                                    |                                       |                                       |         |         |           |            |        
|Non cash transactions:                                                   |                                                    |                                       |                                       |         |         |           |            |        
|                                                                         |                                                    |                                       | Capital lease                         |         | $       |          |            |         | $       | 39,611   |  
|                                                                         |                                                    |                                       | Notes converted to stock              |         |         | 300,000   |            |         |         |         |  
|Supplemental Information Interest paid on notes                          |                                                    | $                                     |                                      |         |         | $         | 21,483     |        

See notes to consolidated financial statements.

15



---



##### Table of Contents



ZAXIS INTERNATIONAL INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.  Nature of Operations and Liquidity

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

Zaxis was primarily engaged in research and development
activities from 1989 until 1994. In 1994, Zaxis moved into its
present office and manufacturing facilities and began selling
certain products, finalizing product planning and design,
development of its computerized manufacturing process, and
creating its marketing and distribution strategies. 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 that was
primarily used to fund operations as the Company sought to
establish marketing arrangements for its products.

In 1997 Zaxis installed new management and attracted new
investors. Progen Industries Ltd. (Progen), a
pharmaceutical company based in Australia, and MML Management
Limited, an Australia-based investment firm (MML),
took an active role in bringing additional new funding to the
Company with subsequent investments totaling $1,458,907. During
1997, the Company entered into a Financing and Shareholder
Agreement with MML and affiliated entities that provided $857,590
 in funding to the Company, of which $90,000 was for stock
purchases with the remainder in the form of convertible debt.

In 1998, the Company received funds of $601,317 from MML and
affiliated entities in the form of convertible debt. In addition,
 the Company received funds of $230,000 in 9.5% convertible notes
 from private investors.

During 1999, the Companys operations continued to be
financed primarily through loans from shareholders and private
investors, members of the Board of Directors, and related persons
 and entities. Progen provided $197,792 in funding to the Company
 in the form of convertible notes bearing interest at 9.5%.
Additionally, Board of Directors members and other private
investors loaned $147,000 to the Company through convertible
notes at interest rates ranging from 9.5% to 10% per annum. The
Company also received $773,068 in funds from private investors in
 connection with the Companys private offering of
securities. This offering allowed investors to purchase units in
Zaxis with a unit consisting of one share of common stock and
Class Z, Series Z-3, Z-4, Z-5, and Z-6 Warrants
entitling the holder in the aggregate to purchase one additional
share of common stock.

Significant new funds were obtained through the Companys
Private Placement Offering in the first two months of 2000.
Discussions have been initiated with potential new investors for
equity funding but no transaction has been completed. The Company
 will continue to be reliant upon such funding sources until the
sales and marketing programs result in sufficient revenue to
support the Companys operations. There can be no assurance
that the Company will continue to receive investor funding or
that the Company will be able to strengthen its customer base
sufficiently to generate the sales volume required to meet or
exceed the cost of operations.

Zaxis incurred losses of $1,295,923 in 1999 and $1,285,053 in
1998. Zaxis does not expect to generate sufficient sales volume
with its existing customer base to support the cost of operations
 during the 2000-year. Accordingly, the Company will need to
raise additional capital through borrowings or equity financing
throughout this time period. The Company continued its efforts to
 strengthen its customer base and finalized two new private-label
 contracts for the supply of the Companys products during
1999. One of these contracts was formally signed in
March 1999 and the other in November 1999 with product
shipments under these contracts beginning in the

16



---



##### Table of Contents



ZAXIS INTERNATIONAL INC. AND SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  Continued

second quarter of 1999 and the first quarter of 2000,
respectively. Zaxis is continuing to pursue additional
distributors for its protein electrophoresis products.

The Company continues to rely upon these various funding sources
to sustain on-going operations, research, product and sales
development. Zaxis continues with other discussions regarding
long-term debt and/or equity fundings. The Company will continue
to be reliant upon investor fundings until the marketing of the
Companys products can be brought to a level sufficient to
support the operating requirements of the Company. These
conditions cause 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.

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. All intercompany accounts
are eliminated upon consolidation.

Use of Estimates

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

Revenue Recognition

The Company recognizes revenue when product is shipped.

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:

|                       |  |             |        | 
|---------------------- |  | ----------- | ------ | 
|                       |  | Estimated  
|Asset                  |  | Useful Life
|                       |  |            
|Leasehold Improvements |  |             | 5      | 
|Machinery & Equipment  |  |             | 5  10 | 
|Office Equipment       |  |             | 5  7  | 

Depreciation expense including amortization of capitalized leases
 charged to operations was $98,223 and $111,385 for 1999 and
1998, respectively.

Asset Impairment

The Companys policy is to review long-lived 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.

17



---



##### Table of Contents



ZAXIS INTERNATIONAL INC. AND SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  Continued

Intangibles

Patent costs are amortized over the life of the patents.
Amortization expense was $6,290 and $6,186 for 1999 and 1998,
respectively, and accumulated amortization was $23,887 and
$17,597 at December 31, 1999 and 1998, respectively.

Organization costs are amortized over five years. Accumulated
amortization was $11,845 and $11,450 at December 31, 1999
and 1998, respectively. Organization costs were fully amortized
during 1999.

Income Taxes

The Company accounts for income taxes using the liability method
of accounting. Under this 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 values of cash, accounts receivable and accounts
payable are a reasonable estimate of their fair value due to the
short-term nature of these instruments. Notes payable to
directors and others do not have a ready market, and cost is
assumed to approximate fair value. The aggregate carrying value
of these notes is $2,104,627 at December 31, 1999, with
interest rates ranging from 9.25% to 10% and maturity dates
ranging from December 31, 1999 through August 9, 2001.

Research and Development Costs

Research and development costs are expensed as incurred. Research
 and development costs were approximately $142,879 and $241,777
for 1999 and 1998, respectively. The amount expended by Zaxis on
research and development during 1999 decreased from 1998 levels
due to the Companys lack of sufficient funding.

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 generally 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 $5,281 and $3,049 in 1999 and 1998, respectively.

New Accounting Pronouncements

In June 1998, the FASB issued Statement 133,
Accounting for Derivative Instruments and Hedging
Activities that is required to be adopted in the year 2001.
 Because the Company does not currently utilize derivative
financial instruments, the adoption of this new statement is not
expected to effect the Companys financial statements.

3.  Notes Payable

Notes payable to directors of $1,686,699 at December 31,
1999 are due at various dates from December 31, 1999 through
 August 9, 2001 and bear interest at rates from 9.25% to
10%.

18



---



##### Table of Contents



ZAXIS INTERNATIONAL INC. AND SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  Continued

Notes payable to others of $417,928 at December 31, 1999 are
 due $307,928 on demand and $110,000 at various dates from
February 28, 2000 through May 4, 2000 and bear interest
 at rates from 9.25% to 10%.

Holders of notes payable were granted warrants to purchase
1,360,912 shares of common stock at $1.00 to $3.00 per share for
up to three years from the dates of issuance. Certain of the
notes payable include terms that 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 has been assigned to the
warrants.

Notes payable totaling $1,471,443 are convertible into common
stock at prices ranging from $2.00 to $3.24. If converted, the
Company will issue warrants at prices ranging from $2.50 to $4.00
 equal to the number of shares issued through the conversion.

At December 31, 1999, the Company was delinquent on
principal payments of $707,823 and interest payments of $134,836.

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

|      |  |   |           | 
|----- |  | - | --------- | 
|2000  |  | $ | 1,906,835 | 
|2001  |  |   | 197,792   | 
|      |  |   |           | 
|Total |  | $ | 2,104,627 | 
|      |  |   |           | 

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
 1999 or 1998.

5.  Lease Obligations

The Company has equipment under capital leases as follows:

|                         |  |             |        |      |  |   |        | 
|------------------------ |  | ----------- | ------ | ---- |  | - | ------ | 
|                         |  |            
|                         |  | December 31
|                         |  |            
|                         |  | 1999        |        | 1998
|                         |  |             |        |     
|Cost                     |  | $           | 75,801 |      |  | $ | 75,801 | 
|Accumulated Amortization |  |             | 41,691 |      |  |   | 26,530 | 
|                         |  |             |        |      |  |   |        | 
|                         |  | $           | 34,110 |      |  | $ | 49,271 | 
|                         |  |             |        |      |  |   |        | 

The Company rents a building for its office, research &
development and manufacturing under a five-year prime lease that
expires October 2003. Rent expense was $126,267 in 1999 and
$105,295 in 1998.

|                  |  |  |      |  |  |   |         | 
|----------------- |  |  | ---- |  |  | - | ------- | 
|                 
|                 
|                 
|                 
|Rent obligations: |  |  | 2000 |  |  | $ | 114,792 | 
|                  |  |  | 2001 |  |  |   | 119,542 | 
|                  |  |  | 2002 |  |  |   | 124,292 | 
|                  |  |  | 2003 |  |  |   | 106,875 | 

6.  Capital Stock Transactions

During 1999, the Company received $773,068 in funds from private
investors in connection with the Companys ongoing private
offering of securities. This offering allowed investors to
purchase units in Zaxis with a unit consisting of one share of
common stock and Class Z, Series Z-3, Z-4, Z-5, and Z-6
 Warrants entitling the holder in the aggregate to purchase one
additional share of common stock.

19



---



##### Table of Contents



ZAXIS INTERNATIONAL INC. AND SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  Continued

Holders of notes were offered the opportunity to convert their
notes and the related accrued interest at the date converted into
 common stock of Zaxis under the private offering of securities
noted previously. This offer resulted in $300,000 in notes being
converted into equity during 1999.

Investors and individuals who have invested funds in the Company
have been issued 1,873,164 warrants to purchase the
Companys common stock at prices ranging between $1.00 and
$5.00 that expire between January 31, 2000 and
December 31, 2004.

During 1998, the Company issued 4,034 shares of common stock at a
 price of $.6875 for directors fees. The Company also
issued 12,191 and 50,000 shares of common stock at a price of
$.9843 and $.50, respectively, for compensation.

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:

|                                                      |  |      |          |      |  |   |          |  
|----------------------------------------------------- |  | ---- | -------- | ---- |  | - | -------- | -
|                                                      |  | 1999 |          | 1998
|                                                      |  |      |          |     
|Tax benefit at statutory rate                         |  | $    | (440,000 | )    |  | $ | (437,000 | )
|Increase in valuation allowance on deferred tax asset |  |      | 440,000  |      |  |   | 437,000  |  
|                                                      |  |      |          |      |  |   |          |  
|Provision for income taxes                            |  | $    |         |      |  | $ |         |  

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, 1999 and 1998 are as
follows:

|                     |                                 |      |            |           |   |  |            |           | 
|-------------------- | ------------------------------- | ---- | ---------- | --------- | - |  | ---------- | --------- | 
|                     |                                 | 1999 |            | 1998     
|                     |                                 |      |            |          
|Deferred tax assets: |                                 |      |            |           |   |  |            |          
|                     | Net operating loss carryforward |      | $          | 3,021,640 |   |  | $          | 2,536,640 | 
|                     | Other, net                      |      |            | (6,000    | ) |  |            | 39,000    | 
|                     |                                 |      |            |           |   |  |            |          
|                     |                                 | $    | 3,015,640  |           |   |  | 2,575,640  |          
|Valuation allowance  |                                 |      | (3,015,640 | )         |   |  | (2,575,640 | )        
|                     |                                 |      |            |           |   |  |            |          
|                     | Net deferred tax assets         |      | $          |          |   |  | $          |          | 

For Federal income tax purposes, net operating loss carryovers
total $8,887,000 that, if not utilized, will expire between 2004
and 2014.

8.  Stock Options and Warrants

As of December 31, 1999 the following warrants are
outstanding:

60,000 warrants exercisable at $1.50 related to debt issuances
expiring at various dates from February 5, 2000 through
February 21, 2000.

2,000 Class Y warrants exercisable at $.9687 expiring
August 11, 2000.

285,000 Class C Series 2 warrants exercisable at $1.00
expiring January 31, 2000.

6,667 warrants exercisable at $3.00 related to debt issuances
expiring at October 28, 2000.

20



---



##### Table of Contents



ZAXIS INTERNATIONAL INC. AND SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  Continued

The following Classes of warrants are convertible at a rate of
four (4) warrants to purchase one (1) share of common stock.

543,536 Class Z3 warrants exercisable at $1.00 per share of
common stock expiring on dates ranging from December 31,
1999 to December 31, 2000.

543,536 Class Z4 warrants exercisable at $2.50 per share of
common stock expiring on dates ranging from December 31,
2000 to December 31, 2001.

543,536 Class Z5 warrants exercisable at $3.50 per share of
common stock expiring on dates ranging from December 31,
2001 to December 31, 2002.

543,536 Class Z6 warrants exercisable at $5.00 per share of
common stock expiring on dates ranging from December 31,
2003 to December 31, 2004.

There are 2,221,138 shares of common stock reserved for warrants
and stock options.

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 1999, 55,871 (100,250 in 1998) options were granted with
exercise prices between $.8125 and $1.50 ($.55 and $.9687 in
1998) and expire three, five or ten years from the date of grant.
 These options were exercisable upon grant. At December 31,
1999, 347,974 (302,378 at December 31, 1998) options were
outstanding with a weighted average exercise price of $1.78
($2.07 at December 31, 1998). No options were exercised during
1999 or 1998.

9.  Major Customers

Six customers accounted for 69% and 55% of sales in 1999 and
1998, respectively. Since the Company will not be able to cover
its operating costs unless the customer base is increased, the
loss of any of the major customers could have a material adverse
effect on the Company.

21