<PAGE>
 
                    U.S. SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                                  FORM 10-QSB

(Mark One)
[X]    QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
       OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1996

[ ]    TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
       ACT OF 1934 FOR THE TRANSITION PERIOD FROM ___________TO____________ .


COMMISSION FILE NUMBER 0-24988

                    LABORATORY SPECIALISTS OF AMERICA, INC.
       (EXACT NAME OF SMALL BUSINESS ISSUER AS SPECIFIED IN ITS CHARTER)


          OKLAHOMA                                   73-145065
(STATE OR OTHER JURISDICTION OF                  (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION)                    IDENTIFICATION NO.)
 
101 PARK AVENUE, SUITE 810
OKLAHOMA CITY, OKLAHOMA                                73102-7202
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)               (ZIP CODE)
 
                                (405) 232-9800
                          (ISSUER'S TELEPHONE NUMBER)
 

Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.  Yes         No  X  .
                                                               ------    ----- 

APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE
PRECEDING FIVE YEARS

Check whether the registrant filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court. Yes____  No___


APPLICABLE ONLY TO CORPORATE ISSUERS

As of November 8, 1996, 3,313,405 shares of issuer's Common Stock, $.001 par
value per share, were outstanding.

Transitional Small Business Disclosure Format (check one);  Yes       No X
                                                                ----    ---



                                       Total Sequentially Numbered Pages is   17
                                                                              --
                    Index to Exhibits Appears on Sequentially Numbered Page   15
                                                                              --
<PAGE>
 
                    LABORATORY SPECIALISTS OF AMERICA, INC.

                   INDEX TO QUARTERLY REPORT ON FORM 10-QSB
<TABLE> 
<CAPTION> 

                                                                                                       Page
                                                                                                       ----
PART I-FINANCIAL INFORMATION
<C>             <S>                                                                                     <C> 
 ITEM 1.        FINANCIAL STATEMENTS
 
                Consolidated Balance Sheets (Unaudited)
                        September 30, 1996, and December 31, 1995........................................3
 
                Consolidated Statements of Income (Unaudited)
                        Three and Nine Months Ended September 30, 1995 and 1996..........................5
 
                Consolidated Statements of Cash Flows (Unaudited)
                        Nine Months Ended September 30, 1995 and 1996....................................6
 
                Notes to Consolidated Financial Statements (Unaudited)...................................7
 
  ITEM 2.      MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                        CONDITION AND RESULTS OF OPERATIONS..............................................9
 
PART II-OTHER INFORMATION
 
  ITEM 1.      LEGAL PROCEEDINGS.......................................................................13
 
  ITEM 2.      CHANGES IN SECURITIES...................................................................13
 
  ITEM 3.      DEFAULTS UPON SENIOR SECURITIES.........................................................13
 
  ITEM 4.      SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.....................................13
 
  ITEM 5.      OTHER INFORMATION.......................................................................13
 
  ITEM 6.      EXHIBITS AND REPORTS ON FORM 8-K........................................................13
 
SIGNATURES.............................................................................................14
 
</TABLE>
<PAGE>
 
PART I-FINANCIAL STATEMENTS
  ITEM 1.      FINANCIAL STATEMENTS

           LABORATORY SPECIALISTS OF AMERICA, INC. AND  SUBSIDIARIES
           ---------------------------------------------------------

                          CONSOLIDATED BALANCE SHEETS
                          ---------------------------
<TABLE>
<CAPTION>
 
                                                                                
                                                               DECEMBER 31,            SEPTEMBER 30,
                                                                   1995                     1996
                                                              --------------           -------------
                                                                                        (UNAUDITED)
<S>                                                             <C>                     <C>  
                                ASSETS
                                ------
 
CURRENT ASSETS:
  Cash and cash equivalents..................................    $2,411,051             $   911,857
  Accounts receivable, net of allowances of $91,546
    in 1995 and $336,368 in 1996.............................     1,096,477               2,276,984
  Income tax refund receivable...............................       131,626                  19,263
  Inventories................................................        87,542                 116,445
  Prepaid expenses and other.................................       115,491                 135,643
                                                                 ----------             -----------
 
    Total current assets.....................................     3,842,187               3,460,192
                                                                 ----------             -----------
 
PROPERTY, PLANT AND EQUIPMENT, net of accumulated
  depreciation of $899,559 in 1995 and $922,877 in 1996......       830,660               1,424,137
                                                                 ----------             -----------
 
OTHER ASSETS:
  Goodwill, net of accumulated amortization of $69,104 in                                           
    1995 and $132,861 in 1996................................     1,539,045               2,897,667 
  Customer list, net of accumulated amortization of $77,783
    in 1995, and $181,767 in 1996............................     1,001,707               2,897,723
  Deferred costs.............................................       105,437                 280,351
                                                                 ----------             -----------
 
    Total other assets.......................................     2,646,189               6,075,741
                                                                 ----------             -----------
 
    Total assets.............................................    $7,319,036             $10,960,070
                                                                 ==========             ===========
 
 </TABLE>
 


     THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE BALANCE SHEETS.

                                      -3-
<PAGE>
 
           LABORATORY SPECIALISTS OF AMERICA, INC. AND  SUBSIDIARIES
           ---------------------------------------------------------

                          CONSOLIDATED BALANCE SHEETS
                          ---------------------------
<TABLE>
<CAPTION>
 
                                                                                          
                                                                        DECEMBER 31,             SEPTEMBER 30,
                                                                            1995                     1996
                                                                        ------------             ------------
                                                                                                  (UNAUDITED)
<S>                                                                      <C>                     <C>          
 
                      LIABILITIES AND STOCKHOLDERS' EQUITY
                      ------------------------------------
CURRENT LIABILITIES:
  Accounts payable....................................................    $  446,223              $ 1,103,362
  Accrued payroll.....................................................       215,308                  343,204
  Accrued expenses....................................................        51,838                  193,272
  Current portion of long-term debt...................................            --                  185,755
                                                                          ----------              -----------
 
    Total current liabilities.........................................       713,369                1,825,593
                                                                          ----------              -----------
 
LONG-TERM DEBT, net of current portion................................       353,123                1,148,482
                                                                          ----------              -----------
 
DEFERRED INCOME TAXES.................................................        40,958                1,055,255
                                                                          ----------              -----------
 
COMMITMENTS AND CONTINGENCIES
 
STOCKHOLDERS' EQUITY:
 
 Common stock, $0.001 par value, 20,000,000 shares authorized,
    3,298,405 shares issued and outstanding at 12/31/95 and                                                   
     3,313,405 shares issued and outstanding at 9/30/96...............         3,298                    3,313 
  Paid in capital in excess of par, common stock......................     5,341,667                5,366,027
  Retained earnings...................................................       866,621                1,561,400
                                                                          ----------              -----------
 
    Total stockholders' equity........................................     6,211,586                6,930,740
                                                                          ----------              -----------
 
    Total liabilities and stockholders' equity........................    $7,319,036              $10,960,070
                                                                          ==========              ===========
 
</TABLE>



      THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE BALANCE SHEETS.

                                      -4-
<PAGE>
 
   LABORATORY SPECIALISTS OF AMERICA, INC. AND SUBSIDIARY
   ------------------------------------------------------

                       CONSOLIDATED STATEMENTS OF INCOME
                       ---------------------------------

                                   UNAUDITED
                                   ---------
<TABLE>
<CAPTION>
 
 
 
 
                                                FOR THE THREE    FOR THE THREE    FOR THE NINE     FOR THE NINE
                                                MONTHS ENDED     MONTHS ENDED     MONTHS ENDED     MONTHS ENDED
                                               SEPT. 30, 1995   SEPT. 30, 1996   SEPT. 30, 1995   SEPT. 30, 1996
                                               ---------------  ---------------  ---------------  ---------------
 <S>                                            <C>              <C>              <C>              <C>
REVENUES.....................................      $1,843,356       $2,292,705       $5,300,674       $6,532,412
                                                   ----------       ----------       ----------       ----------
 
COST OF LABORATORY SERVICES..................         758,691          959,810        2,288,513        2,816,344
                                                   ----------       ----------       ----------       ----------
 
  Gross profit...............................       1,084,665        1,332,895        3,012,161        3,716,068
                                                   ----------       ----------       ----------       ----------
 
OPERATING EXPENSES:
  Selling....................................         150,775          148,333          434,302          462,829
  General and administrative.................         557,859          616,774        1,661,903        1,748,379
  Depreciation and amortization..............          55,391          136,902          165,027          358,346
                                                   ----------       ----------       ----------       ----------
 
    Total operating expenses.................         764,025          902,009        2,261,232        2,569,554
                                                   ----------       ----------       ----------       ----------
 
    Income from operations...................         320,640          430,886          750,929        1,146,514
                                                   ----------       ----------       ----------       ----------
 
OTHER INCOME (EXPENSE):
  Interest expense...........................          (6,465)         (20,059)         (23,348)         (49,384)
  Interest income............................          29,075           10,882           95,006           30,554
  Other income...............................         112,500           50,340          320,009           50,847
                                                   ----------       ----------       ----------       ----------
 
    Total other income (expense).............         135,110           41,163          391,667           32,017
                                                   ----------       ----------       ----------       ----------
 
    Income before income taxes...............         455,750          472,049        1,142,596        1,178,531
 
INCOME TAX EXPENSE...........................         195,567          188,354          492,348          483,752
                                                   ----------       ----------       ----------       ----------
 
    Net income...............................      $  260,183       $  283,695       $  650,248       $  694,779
                                                   ==========       ==========       ==========       ==========
 
DIVIDEND ON PREFERRED STOCK..................             768               --           13,344               --
                                                   ----------       ----------       ----------       ----------
 
Net income available to common stockholders..      $  259,415       $  283,695       $  636,904       $  694,779
                                                   ==========       ==========       ==========       ==========
 
WEIGHTED AVERAGE NUMBER OF
COMMON STOCK AND COMMON STOCK
EQUIVALENTS OUTSTANDING......................       3,304,339        3,313,405        3,299,889        3,313,887
                                                   ==========       ==========       ==========       ==========
 
NET INCOME PER COMMON STOCK
AND COMMON STOCK EQUIVALENT..................            $.08             $.09             $.19             $.21
                                                   ==========       ==========       ==========       ==========
 
</TABLE>

        THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.

                                      -5-
<PAGE>
 
           LABORATORY SPECIALISTS  OF AMERICA,  INC. AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
 
 
 
                                                                        FOR THE NINE      FOR THE NINE
                                                                        MONTHS ENDED      MONTHS ENDED
                                                                       SEPT. 30, 1995    SEPT. 30, 1996
                                                                       ----------------  ---------------
                                                                                   (UNAUDITED)     
<S>                                                                    <C>               <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net income.........................................................       $  650,248      $   694,779
  Adjustments to reconcile net income to net cash
    provided by operating activities -
      Depreciation and amortization..................................          165,027          358,346
      Provision for bad debts and other..............................           27,000           80,000
      Impact of changes in assets and liabilities, net of effect of
         the NPLI acquisition:
          Accounts receivable........................................         (472,490)        (625,232)
          Inventories................................................           (8,355)          26,890
          Income tax receivable......................................               --          158,030
          Prepaid expenses and other.................................           12,887         (147,383)
          Accounts payable and accrued expenses......................          (67,033)         (25,824)
          Income taxes payable.......................................          108,080               --
                                                                            ----------      -----------
      Net cash provided by operating activities......................          415,364          519,606
                                                                            ----------      -----------
 
CASH FLOWS FROM INVESTING ACTIVITIES:
  Capital expenditures...............................................         (208,203)        (100,718)
  Purchase of NPLI Stock, net of cash acquired.......................               --       (1,022,597)
  Acquisition costs..................................................          (56,796)        (252,422)
                                                                            ----------      -----------
      Net cash  used in investing
        activities...................................................         (264,999)      (1,375,737)
                                                                            ----------      -----------
 
CASH FLOWS FROM FINANCING ACTIVITIES:
  Payments on short-term borrowing...................................               --         (551,425)
  Dividends paid.....................................................          (13,344)              --
  Redemption of preferred stock......................................         (300,000)              --
  Deferred warrant offering costs....................................          (28,270)              --
  Payments on long-term debt.........................................          (90,585)         (91,638)
                                                                            ----------      -----------
      Net cash used in financing
        activities...................................................         (432,199)        (643,063)
                                                                            ----------      -----------
 
INCREASE  (DECREASE) IN CASH AND CASH
  EQUIVALENTS........................................................         (281,834)      (1,499,194)
                                                                            ----------      -----------
 
CASH AND CASH EQUIVALENTS, beginning
  of period..........................................................        2,444,442        2,411,051
                                                                            ----------      -----------
CASH AND CASH EQUIVALENTS, end of period.............................       $2,162,608      $   911,857
                                                                            ==========      ===========
SUPPLEMENTAL DISCLOSURES OF CASH
  FLOW INFORMATION:
  Cash paid during the period for interest...........................       $      285      $    46,290
                                                                            ==========      ===========
  Cash paid during the period for taxes..............................       $  234,541      $   377,564
                                                                            ==========      ===========

</TABLE>

        THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.

                                      -6-
<PAGE>
 
           LABORATORY SPECIALISTS OF AMERICA,  INC. AND SUBSIDIARIES
           ---------------------------------------------------------


                         NOTES TO FINANCIAL STATEMENTS
                         -----------------------------
   (INFORMATION FOR THE  THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1995, AND
                      SEPTEMBER 30, 1996, ARE UNAUDITED.)

1.  GENERAL
    -------

The consolidated financial statements included in this report have been prepared
by the Company pursuant to the rules and regulations of the Securities and
Exchange Commission for interim reporting and include all adjustments which are,
in the opinion of management, necessary for a fair presentation.  These
financial statements have not been audited by an independent accountant.  The
consolidated balance sheet at December 31, 1995, has been derived from the
audited balance sheet of the Company.

Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to such rules and regulations for
interim reporting.  The Company believes that the disclosures are adequate to
make the information presented not misleading.  However, these financial
statements should be read in conjunction with the audited financial statements
and notes thereto included in the annual report on Form 10-KSB filed by the
Company with the Securities and Exchange Commission on April 11, 1996. The
financial data for the interim periods presented may not necessarily reflect the
results to be expected for the full year.

2.  NPLI ACQUISITION
    ----------------

On January 2, 1996, the Company acquired all of the issued and outstanding
capital stock (the "NPLI Stock") of National Psychopharmacology Laboratory,
Inc., a Tennessee corporation ("NPLI"), and purchased goodwill (the "NPLI
Goodwill"), pursuant to a Stock Purchase Agreement dated January 1, 1996 (the
"Purchase Agreement"), and NPLI became a wholly-owned subsidiary of the Company
(the "NPLI Acquisition").  NPLI is engaged in forensic drug testing (urine drug
screening with chain of custody) and clinical testing and analysis.

Pursuant to the Purchase Agreement and in connection with the NPLI Acquisition,
(i) the Company agreed to pay $1,375,000 for the NPLI Stock ( the "NPLI Purchase
Cost") of which $1,075,000 was paid at closing to the shareholders of NPLI (the
"NPLI Shareholders"), and two unsecured promissory notes (the "NPLI Promissory
Notes"), valued at approximately $300,000, were issued and delivered to the NPLI
Shareholders, (ii) the Company agreed to pay $140,000 for the NPLI Goodwill
payable in 24 monthly installments commencing on February 1, 1996, (iii) assumed
net liabilities of NPLI of approximately $1,085,000, and (iv) incurred deferred
income taxes of approximately $1,000,000 as a result of NPLI's tax basis of its
assets being significantly less than the purchase price of the NPLI capital
stock.  All of the above resulted in a total purchase price of approximately
$3,600,000, substantially all of which was recorded as intangible assets.

The aggregate principal amount of the NPLI Promissory Notes is subject to
adjustment (increase or decrease) in the event revenues from forensic testing
(employee urine drug screens that have a chain of custody) are greater or less
than a certain level during the 12 months ended on January 2, 1997, determined
in accordance with generally accepted accounting principles.

The forensic portion of NPLI's business was consolidated into LSI's operation
effective February 1996.  NPLI's remaining revenues and expenses associated with
the clinical business were deferred for reporting purposes, pending the sale of
NPLI's clinical business.  The Company intends to sell NPLI's clinical business
before the end of 1996.  A letter of intent was signed in April, however a
definitive agreement was not reached.  The Company is currently seeking
additional offers for the sale of the clinical business.  Giving effect to the
inclusion of NPLI's revenues and income, consolidated net income, after tax
would have been $549,861 on revenues of $9,326,006, for the period

                                      -7-
<PAGE>
 
ended September 30, 1996, resulting in earnings per common share of $.17 for the
nine months ended September 30, 1996.  The Company will adjust the NPLI Purchase
Cost allocation based upon amounts received from the expected disposition of the
clinical business.

3.  EARNINGS PER COMMON SHARE
    -------------------------

Earnings per common share were computed using the weighted average number of
common shares outstanding after adding the dilutive effect of the conversion of
stock options.  Outstanding warrants are not included in the weighted average
shares outstanding for any period because their effect on the earnings per share
calculation is antidilutive.

4.  GOODWILL AND CUSTOMER LIST
    --------------------------

Goodwill and customer lists are being amortized on a straight-line basis over
twenty to forty years and fifteen years, respectively.  The Company continually
evaluates whether events and circumstances have occurred that indicate the
remaining estimated useful life of goodwill and customer lists may warrant
revision or that the remaining unamortized balance of goodwill or customer lists
may not be recoverable.  When factors, such as operating losses, loss of
customers, loss or suspension for an extended period of laboratory
certification, or changes in the drug testing industry, if present, indicate
that goodwill or customer lists should be evaluated for possible impairment, the
Company uses an estimate of the related undiscounted cash flows over the
remaining life of the goodwill or customer lists in measuring whether the
goodwill and the customer lists are recoverable.  Although management believes
that goodwill and the customer lists are currently recoverable over the
respective remaining amortization periods, it is possible, due to a change in
circumstances, that the carrying value of goodwill and the customer lists could
become impaired in the future.  Such impairment could have a material effect on
the results of operations in a particular reporting period.

5.  CONTINGENT LIABILITIES
    ----------------------

Incidental to its business, the Company from time to time is sued by individuals
who have tested positive for drugs of abuse or who allege that improper analysis
has been performed, generally arising from Laboratory Specialists, Inc.'s, the
company's wholly owned subsidiary ("LSI"), alleged failure to properly
administer drug urinalysis tests or NPLI's alleged improper analysis.  LSI and
NPLI are currently defendants in several such lawsuits.  Based upon prior
successful defense of similar-type lawsuits, the Company believes it has valid
defenses to each of such lawsuits, and intends to vigorously defend in such
actions.  Although each of LSI and NPLI maintain insurance to protect itself
against such liability, and LSI and NPLI's insurance carriers have assumed the
defense of LSI and NPLI in connection with certain actions, the extent of such
insurance coverage is limited, both in terms of types of risks covered by the
policies and the amount of coverage.  In the opinion of the Company's management
and it's legal counsel, these suits and claims should not result in judgments or
settlements which would have a material adverse effect on the Company's results
of operations or financial position.  Although, neither LSI nor NPLI has
experienced any material liability related to such claims, there can be no
assurance that LSI or NPLI, and possibly LSAI, will not at some time in the
future experience significant liability in connection with such claims and such
liability may exceed the extent of such insurance coverage, both in terms of
risks covered by the policies and the amount of coverage, which could have a
material adverse effect upon the results of operations and financial condition
of the Company.

                                      -8-
<PAGE>
 
6.  SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
    --------------------------------------------------------------------

In conjunction with the acquisition of the NPLI Stock, liabilities were assumed
as follows:

  Fair value of assets acquired                       $   3,600,000
  Cash paid at closing                                   (1,075,000)
                                                      --------------
     Liabilities and deferred income taxes assumed    $   2,525,000
                                                      ==============

A capital lease obligation of  approximately $650,000 was incurred when LSI
entered into an agreement with a vendor to buy equipment and certain lab
supplies at a fixed price per drug screen performed.  The minimum monthly amount
under the agreement is approximately $47,000, with approximately $13,000 per
month allocated to the principal and interest of the capital lease obligation,
and the remaining cost being allocated to the cost of laboratory supplies.  The
agreement resulted in LSI recording approximately $650,000 in additional
equipment, with an equal amount of capital lease obligation recorded as long-
term debt obligation payable over five years.

All of the above transactions, except the cash paid at closing in connection
with the purchase of the NPLI Stock and the monthly payment to the vendor, are
non-cash transactions and have been excluded from the accompanying statements of
cash flows.




ITEM 2.
                    MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                 FINANCIAL CONDITION AND RESULTS OF OPERATIONS

GENERAL

  NPLI ACQUISITION.  On January 2, 1996, the Company acquired all of the issued
and outstanding capital stock (the "NPLI Stock") of National Psychopharmacology
Laboratory, Inc., a Tennessee corporation ("NPLI"), and purchased goodwill (the
"NPLI Goodwill"), pursuant to a Stock Purchase Agreement dated January 1, 1996
(the "Purchase Agreement"), and NPLI became a wholly-owned subsidiary of the
Company (the "NPLI Acquisition").  NPLI is engaged in forensic drug testing
(urine drug screening with chain of custody) and clinical testing and analysis.

 Pursuant to the Purchase Agreement and in connection with the NPLI Acquisition,
(i) the Company agreed to pay $1,375,000 for the NPLI Stock ( the "NPLI Stock
Purchase Price") of which $1,075,000 was paid at closing to the shareholders of
NPLI (the "NPLI Shareholders"), and two unsecured promissory notes (the "NPLI
Promissory Notes"), valued at approximately $300,000, were issued and delivered
to the NPLI Shareholders, (ii) the Company agreed to pay $140,000 for the NPLI
Goodwill payable in 24 monthly installments commencing on February 1, 1996,
(iii) assumed  net liabilities of NPLI of approximately $1,085,000, and (iv)
incurred deferred income taxes of approximately $1,000,000 as a result of NPLI's
tax basis being significantly less than the purchase price of the NPLI Stock.
All of the above will result in a total purchase price of approximately
$3,600,000, substantially all of which will be recorded as intangible assets.

 The aggregate principal amount of the NPLI Promissory Notes is subject to
adjustment (increase or decrease) in the event revenues from forensic testing
(employee urine drug screens that have a chain of custody) are greater or less
than a certain level during the 12 months ended on January 2, 1997, determined
in accordance with generally accepted accounting principles.

                                      -9-
<PAGE>
 
RESULTS OF OPERATIONS

 The following table sets forth selected results of operations for (i) the three
months ended September 30, 1995 and 1996, which are derived from the unaudited
financial statements of the Company and (ii) for the nine months ended September
30, 1995 and 1996, which are derived from the unaudited financial statements of
the Company which include, in the opinion of management of the Company, all
normal recurring adjustments which management of the Company considers necessary
for a fair statement of the results for such periods  The results of operations
for the periods presented are not necessarily indicative of the Company's future
operations.
<TABLE>
<CAPTION>
 
                                        THREE MONTHS ENDED SEPT. 30,                      NINE MONTHS ENDED SEPT. 30,
                                --------------------------------------------     ------------------------------------------------
                                        1995                   1996                   1995                       1996
                                ---------------------  ---------------------  ---------------------  -----------------------------
                                (UNAUDITED)            (UNAUDITED)            (UNAUDITED)              (UNAUDITED)
 
                                  AMOUNT     PERCENT     AMOUNT     PERCENT     AMOUNT     PERCENT        AMOUNT         PERCENT
                                ----------- ---------  -----------  --------  -----------  --------  ----------------  -----------
<S>                             <C>          <C>       <C>          <C>       <C>          <C>       <C>               <C>
Revenues......................  $1,843,356     100.0%  $2,292,705     100.0%  $5,300,674     100.0%       $6,532,412        100.0%
Cost of revenues..............     758,691      41.2%     959,810      41.9%   2,288,513      43.2%        2,816,344         43.1%
                                ----------     -----   ----------     -----   ----------     -----        ----------        -----
Gross profit..................   1,084,665      58.8%   1,332,895      58.1%   3,012,161      56.8%        3,716,068         56.9%
                                ----------     -----   ----------     -----   ----------     -----        ----------        -----
Operating expenses:
  Selling.....................     150,775       8.2%     148,333       6.5%     434,302       8.2%          462,829          7.1%
  General and administrative..     557,859      30.3%     616,774      26.9%   1,661,903      31.4%        1,748,379         26.8%
  Depreciation and
     amortization.............      55,391       3.0%     136,902       5.9%     165,027       3.1%          358,346          5.4%
                                ----------     -----   ----------     -----   ----------     -----        ----------        -----
Total operating expenses......     764,025      41.5%     902,009      39.3%   2,261,232      42.7%        2,569,554         39.3%
                                ----------     -----   ----------     -----   ----------     -----        ----------        -----
Income from operations........  $  320,640      17.3%  $  430,886      18.8%  $  750,929      14.1%       $1,146,514         17.6%
                                ==========     =====   ==========     =====   ==========     =====        ==========        =====
</TABLE>

     During the three and nine months ended September 30, 1996, LSI
experienced a 5.5 percent and 4.2 percent decrease respectively in the price per
specimen, compared to the three and nine months ended September 30, 1995,
principally due to increased price competition among providers of drug testing
services, price per specimen being an important factor in obtaining and
maintaining clients.  Management of LSI closely monitors its price per specimen,
the prices of its competitors and the costs of processing specimens to remain
competitive, as well as profitable. There can be no assurance that price
decline per specimen will not further decline during 1996. In the event price
stabilization does not occur, LSI will, as it has in the past, take appropriate
measures to downsize its drug testing personnel and possibly further automate
the testing process and employ additional technology to continue profitability,
although there can be no assurance that such measures will assure profitability
in the event of substantial price reductions within the short term.

Comparison of Three-Month and Nine-Month Periods Ended September 30, 1995 and
1996

 Revenues increased to $6,532,412 in the nine months ended September 30, 1996
(the "1996 Interim Period"), from $5,300,674 in the nine months ended September
30, 1995 (the "1995 Interim Period"), an increase of 23.2 percent. Revenues
increased to $2,292,705 in the three months ended September 30, 1996 (the "1996
Third Quarter"), from $1,843,356 in the three months ended September 30, 1995
(the "1995 Third Quarter"), an increase of 24.4 percent. The increase in
revenues was due to a 31.4 percent increase and 33.0 percent increase in the
number of specimens analyzed during the 1996 Interim Period as compared to the
1995 Interim Period and 1996 Third Quarter as compared to the 1995 Third
Quarter, respectively, although partially offset by a decrease of 4.2 percent
and 5.5 percent respectively in the average price per specimen.  The increase in
number of specimens analyzed was attributable to the NPLI Acquisition as well as
LSI's normal sales and marketing efforts.  The decrease in the average price per
specimen was principally due to increased price competition among providers of
drug testing services, price per specimen being an important factor in obtaining
and maintaining clients.  There can be no assurance that price decline per
specimen will not further decline in 1996.
 
 Cost of revenues increased from $2,288,513 in the 1995 Interim Period to
$2,816,344 in the 1996 Interim Period and from $758,691 in the 1995 Third
Quarter to $959,810 in the 1996 Third Quarter, increases of 23.1 percent and

                                      -10-
<PAGE>
 
26.5 percent, respectively, while decreasing as a percentage of revenues from
43.2 percent to 43.1 percent for the Interim Period but increasing from 41.2
percent to 41.9 percent for the Third Quarter.

 Operating expenses increased from $2,261,232 in the 1995 Interim Period to
$2,569,554 in the 1996 Interim Period and from $764,025 in the 1995 Third
Quarter to $902,009 in the 1996 Third Quarter, an increase of 13.6 percent and
18.1 percent, respectively, and decreased as a percentage of revenues from 42.7
percent to 39.3 percent and from 41.5 percent to 39.3 percent, respectively.
The increase in operating expenses was attributable to the increase in general
and administrative expenses of $86,476 for the Interim Period and $58,915 for
the Third Quarter while selling expense increased by $28,527 for the Interim
Period but decreased $2,442 for the Third Quarter and depreciation and
amortization increased by $193,319 in the 1996 Interim Period compared to the
1995 Interim Period and by $81,511 in the 1996 Third Quarter as compared to the
1995 Third Quarter.  The increase in general and administrative expenses was
principally as a result of the increase in executive officer compensation along
with accrued bonuses for certain key employees of LSI.  The increase in selling
expenses was due to the addition of one sales representative, added to assist in
maintaining forensic clients acquired in the NPLI Acquisition, although
partially offset by a reduction in commissions expense.  Depreciation increased
due to the addition of new laboratory equipment at LSI in March of 1996, while
amortization increased due to the acquisition of NPLI and the amortization of
the NPLI customer list and goodwill.

 Interest expense increased from $23,348 in the 1995 Interim Period to $49,384
in 1996 Interim Period, and from $6,465 in the 1995 Third Quarter to $20,059 in
the 1996 Third Quarter, an increase of  111.5 percent and 210.3 percent
respectively.  The increase in interest expense was the result of a capital
lease agreement for certain laboratory equipment entered into in the first
quarter of 1996.  Interest income decreased from $95,006 in the 1995 Interim
Period to $30,554 in the 1996 Interim Period, a 67.8 percent decrease, and from
$29,075 in the 1995 Third Quarter to $10,882 in the 1996 Third Quarter, a 62.6
percent decrease.  The decrease is a result of less cash held for investment,
due to the acquisitions.  Other income decreased from $320,009 in the 1995
Interim Period to $50,847 in the 1996 Interim Period and from $112,500 in the
1995 Third Quarter to $50,340 in the 1996 Third Quarter, decreases of 84.1
percent and 55.3 percent respectively.  The decrease in other income, although
partially offset by a gain on the disposition of certain equipment during the
third quarter of 1996, was primarily due to the receipt during 1995 of a non-
recurring settlement of a lawsuit in which LSI was the plaintiff.  Net income,
after provision for income taxes, increased from $650,248 in the 1995 Interim
Period to $694,779 in the 1996 Interim Period, a 6.8 percent increase and from
$260,183 in the 1995 Third Quarter to $283,695 in the 1996 Third Quarter, a 9.0
percent increase.
 
 Quarterly Results of Operations

 LSI and NPLI's operations are affected by seasonal trends to which drug testing
laboratories are generally subject.  In LSI's experience, testing volume tends
to be higher in the second calendar quarter and lower in the winter holiday
season and the beginning of the first calendar quarter primarily due to hiring
patterns which affect pre-employment drug testing.  Because the general and
administrative expenses associated with maintaining and adding to the testing
work force are relatively fixed over the short term,  margins tend to increase
in periods of higher testing volume and decrease in periods of lower testing
volume.  These effects are not always apparent because of the impact and timing
of the startup of new businesses and other factors such as the timing and amount
of price increases or decreases.  Nevertheless, the results of operations for a
particular quarter may not be indicative of the results to be expected during
other quarters.

                                      -11-
<PAGE>
 
 Income Taxes

        Income taxes accrued for the three and nine months ended September 30,
1996, were based on an effective combined federal and state corporate income tax
rate of approximately 40 percent of pretax income.

LIQUIDITY AND CAPITAL RESOURCES

        Net cash provided by operating activities totaled $519,606 in the nine
months ended September 30, 1996, and $415,364 in the nine months ended September
30, 1995.  As of September 30, 1996, LSAI had working capital of $1,634,599,
compared to working capital of $3,128,818, at December 31, 1995.  In the event
the Company's revenues increase as anticipated by management of the Company, the
Company's working capital requirements will also increase and such requirements
may exceed the net cash provided by operating activities and require that cash
be used in operating activities from sources other than operations, including
the available cash and cash equivalents (which were $911,857 at September 30,
1996) and borrowing.  The increase in cash used in operations will principally
be due to the timing differential between Company's payment for materials and
services to its suppliers and employee work force, and the time at which the
Company receives payment from its customers.

        On December 27, 1995, LSI entered into a revolving line of credit loan
agreement with Hibernia National Bank (the "Bank"), which will mature on
December 27, 1996, under which LSI may draw up to $1,000,000 (the "Revolving
Loan").  As of September 30, 1996, there were no borrowings outstanding under
the Revolving Loan.  It is anticipated that any advances on the Revolving Loan
will be based upon LSI's liquid assets including its accounts receivable.
Amounts drawn under the Revolving Loan bear interest at Citibank, N.A. rate.
The Revolving Loan is secured by the accounts receivable, intangible assets, and
by a mortgage on the building owned by LSI, and is guaranteed by LSAI.  The loan
agreement contains various covenants, including certain financial ratios.

FUTURE OPERATIONS AND LIQUIDITY

        As of the date hereof the Company does not currently have any
significant future capital commitments. The Company anticipates that existing
cash balances, and funds to be generated from future operations will be
sufficient to fund operations, and budgeted capital expenditures of the Company
through 1997.

 FUTURE ASSESSMENT OF RECOVERABILITY AND IMPAIRMENT OF GOODWILL.  The carrying
value and recoverability of unamortized goodwill and customer lists  will  be
periodically reviewed by management of the Company.  If the facts and
circumstances suggest that the goodwill or customer lists may be impaired, the
carrying value of goodwill or customer lists will be adjusted which will result
in an immediate charge against income during the period of the adjustment and/or
the length of the remaining amortization period may be shortened which will
result in an increase in the amount of goodwill or customer list amortization
during the period of adjustment and each period thereafter until fully
amortized.  Once adjusted, there can be no assurance that there will not be
further adjustments for impairment and recoverability in future periods.  In the
event management of the Company determines that goodwill or the customer list
has become impaired, the adjustment for impairment and recoverability will most
likely occur during a period of operations in which the Company has sustained
losses or has only marginal profitability from operations, and the impairment
and/or increased amortization amount will either increase such losses from
operations or further reduce profitability.

                                      -12-
<PAGE>
 
PART II-OTHER INFORMATION

 ITEM 1.  LEGAL PROCEEDINGS

 LSAI does not have any pending litigation.  In the ordinary course of its
business, LSI and NPLI from time to time are sued by individuals who have tested
positive for drugs of abuse or who allege that improper clinical analysis has
been performed by NPLI.  To date, LSI and NPLI  have not experienced any
material liability related to these claims, although there can be no assurance
that LSI or NPLI will not at some time in the future experience significant
liability in connection with such claims. Based upon the prior successful
defense of similar-type litigation, LSI and NPLI believe they have valid
defenses to the plaintiffs claims in all pending litigation, and LSI and NPLI
intend to vigorously defend themselves in such litigation.  LSI and NPLI are not
currently a defendant party in any other legal proceedings other than routine
litigation that is incidental to the business of LSI and NPLI, and management of
LSI and NPLI believe the outcome of such legal proceedings will not have a
material adverse effect upon the results of operations or financial condition of
LSI and NPLI.  Furthermore, management of LSI and NPLI believe that the
liability coverage is adequate with respect to the pending litigation and, in
general, for business of LSI and NPLI.

ITEM 2.  CHANGES IN SECURITIES

         Not applicable.

ITEM 3.  DEFAULTS UPON SENIOR SECURITIES

         Not applicable.

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

         Not applicable.

ITEM 5.  OTHER INFORMATION

         Not applicable

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

 (a)     Exhibits:

         Exhibit No.
         -----------
 
         27   Financial Data Schedules

 (b)     Reports on Form 8-K

         Not applicable

                                      -13-
<PAGE>
 
SIGNATURES


 In accordance with the requirements of the Exchange Act, the Registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.



                                 LABORATORY SPECIALISTS OF
                                      AMERICA, INC.
                                        (Registrant)



Date:  November 8, 1996          By: /s/ Arthur R. Peterson, Jr.
                                 -------------------------------
                                    Arthur R. Peterson, Jr.
                                      Treasurer

                                      -14-
<PAGE>
 
                               INDEX TO EXHIBITS
                               -----------------



                                                      SEQUENTIALLY
                                                        NUMBERED
EXHIBIT NO.                     EXHIBIT                   PAGE  
-----------                     -------               -------------

    27                Financial Data Schedules              16
 

                                      -15-