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


                                  Form 10-QSB


[X]  QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE 
     ACT OF 1934


                For the quarterly period ended December 31, 1996

                         Commission file number 0-16011


                           WATSON GENERAL CORPORATION
             (Exact name of registrant as specified in its charter)


                                   California
                                   ----------
                        (State or other jurisdiction of
                         incorporation or organization)


                                   95-2873757
                                   ----------
                      (I.R.S. Employer Identification No.)


                                  32-B Mauchly
                                  ------------
                               Irvine, California
                               ------------------
                    (Address of principal executive offices)


                                     92718
                                     -----
                                   (Zip Code)


                                 (714) 727-4020
                                 --------------
                        (Registrant's telephone number,
                              including area code)


Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the preceding 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. 
 X   Yes      No
---       ---

The number of shares of Common Stock outstanding on December 31, 1996 was
10,487,401 Shares.


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PART I -- FINANCIAL INFORMATION

The financial information furnished herein has not been audited by independent
accountants; however, in the opinion of management, all adjustments (only
consisting of normal recurring accruals) necessary for a fair presentation of
the results of operations for the three month period ending December 31, 1996
have been included.

ITEM 1.  FINANCIAL STATEMENTS


                           WATSON GENERAL CORPORATION
                                AND SUBSIDIARIES

                           Consolidated Balance Sheet
<TABLE>
<CAPTION>
                                                    December 31,      September 30,      
                                                        1996              1996           
                                                    ------------      -------------      
                                                    (unaudited)        (unaudited)       
<S>                                                 <C>               <C>                
ASSETS                                                                                   
  CURRENT ASSETS                                                                         
        Cash and equivalents                        $   391,000       $   240,000        
        Accounts receivable                             425,000           670,000        
        Prepaid expenses and other                                                       
          current assets                                138,000            93,000                
                                                    -----------       -----------        
                                                        954,000         1,003,000        
  PROPERTY AND EQUIPMENT                                429,000           806,000        
  DEPOSITS AND OTHER ASSETS                              13,000                --        
  INTANGIBLES AND GOODWILL                            2,378,000         2,434,000        
                                                    -----------       -----------        
                                                    $ 3,774,000       $ 4,243,000        
                                                    ===========       ===========        
                                                                                         
LIABILITIES AND SHAREHOLDERS' EQUITY                                                     
 CURRENT LIABILITIES                                                                     
   Accounts payable, accrued expenses                                                    
      and other liabilities                         $ 1,136,000       $ 1,147,000        
   Current portion of long-term debt                    261,000           454,000        
                                                    -----------       -----------        
                                                      1,397,000         1,601,000        
                                                                                         
                                                                                         
  LONG-TERM DEBT AND OTHER LIABILITIES                  454,000           470,000        
  DEFERRED EMPLOYEE BENEFITS                            435,000           435,000        
                                                                                         
                                                                                         
SHAREHOLDERS' EQUITY                                                                     
   Common stock                                       9,100,000         9,100,000        
   Additional paid-in capital                           653,000           653,000        
   (Accumulated deficit)                             (8,265,000)       (8,016,000)       
                                                    -----------       -----------        
                                                      1,488,000         1,737,000        
                                                    -----------       -----------        
                                                    $ 3,774,000       $ 4,243,000        
                                                    ===========       ===========        
</TABLE>

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<PAGE>   3
                           WATSON GENERAL CORPORATION
                                AND SUBSIDIARIES

                     Consolidated Statements of Operations
                 Three Months Ended December 31, 1996 and 1995

<TABLE>
<CAPTION>
                                                            1996             1995          
                                                       ------------     -------------      
                                                        (unaudited)       (unaudited)      
<S>                                                    <C>              <C>                
Sales                                                   $1,300,000         $ 548,000       
                                                                                           
Cost of sales                                              512,000           426,000       
                                                        ----------         ---------       
     Gross profit (loss)                                   788,000           122,000       
                                                                                           
Selling, general and administrative expenses               907,000           464,000       
                                                                                           
Research and development expenses                           85,000                --       
                                                                                           
Interest and expense, net of interest income                40,000            13,000       
                                                        ----------         ---------       
                                                                                           
Loss from operations before benefit for income taxes      (244,000)         (355,000)      
                                                                                           
Benefit for income taxes                                    (5,000)           (5,000)      
                                                        ----------         ---------       
                                                                                           
Net (loss)                                              $ (249,000)        $(360,000)      
                                                        ==========         =========       
                                                                                           
Net (loss), per share                                   $    (0.02)        $   (0.04)      
                                                        ==========         =========       
</TABLE>



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<PAGE>   4
                           WATSON GENERAL CORPORATION
                                AND SUBSIDIARIES

                     Consolidated Statements of Cash Flows
                 Three Months Ended December 31, 1995 and 1994

<TABLE>
<CAPTION>
                                                               1996                   1995
                                                            (unaudited)            (unaudited)
                                                            -----------            ------------
<S>                                                         <C>                    <C>
Cash flows (used in) operating activities:

     Net (loss)                                              $(249,000)            $ (360,000)
     Adjustments to reconcile net (loss) to net cash
        used for operating activities:

           Depreciation and amortization                        75,000                 35,000
           (Increase) decrease in:
                 Accounts receivable                           245,000                 99,000
                 Other current assets                          (45,000)                52,000

           Increase (decrease) in:
                 Accounts payable and accrued expenses         (11,000)                12,000
                                                             ---------             ----------
                                                                15,000               (162,000)
                                                             ---------             ----------
Cash flows (used in) investing activities:

     Increase in deposits                                      (13,000)               (43,000)
     Purchase (sale) of property and equipment                 358,000                (19,000)
                                                             ---------             ----------
                                                               345,000                (62,000)
                                                             ---------             ----------
Cash flows (used in) provided by financing activities

        Proceeds from issuance of common stock                      --              1,273,000
        Borrowings, net of repayments                         (209,000)                (5,000)
                                                             ---------             ----------
                                                              (209,000)             1,268,000
                                                             ---------             ----------

Increase (Decrease) in cash                                    151,000              1,044,000
Cash, beginning                                                240,000                466,000
                                                             ---------             ----------
Cash, ending                                                 $ 391,000             $1,510,000
                                                             =========             ==========
</TABLE>



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


Results of Operations:

In the first quarter of fiscal 1996 the Company reported a net loss of
$249,000 or $0.02 per share as compared to a net loss of $360,000 or $0.04
per share in the prior year and a net loss of $758,000 for the prior
quarter.  Contributing factors to reduced losses were gains in sales and the
sale of the Company's property in San Diego.  Gross margins continue at
anticipated levels.

Net sales for the quarter increased $752,000 over the prior year due in part
to the Company's acquisition of it's Kansas City subsidiary, a national
provider of statistical inventory reconciliation services.  The Company's
sales depend in part upon its customer's decision as to when to implement
measures to meet 1998 compliance requirements.  The Company believes that
the market for its services may accelerate as compliance deadlines approach.

Financial Condition and Liquidity:

The Company has historically relied upon shareholder capital to fund
operational deficits and expects to continue funding any operating deficits
through equity infusions in fiscal 1997.  The Company is in the process of
negotiating an equity financing arrangement expected to net funds in excess
of amounts required to adequately finance operations and expansion plans.

If the Company does not obtain adequate equity financing, management plans
to recommend to the Company's Board of Directors that the Company divest
certain subsidiaries or assets, and severely curtail operating expenses in
order to finance its ongoing environmental monitoring software business.



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                          PART II -- OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS

Not Applicable

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

Exhibit 27 - Financial Data Schedule.


                                   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.

                                          WATSON GENERAL CORPORATION
                                             (Registrant)




Date:  February 5, 1996                   By:     /s/ Ronald G. Crane
                                              ---------------------------------
                                              Ronald G. Crane
                                              President and CEO



Date:  February 5, 1996                   By:    /s/ Joseph L. Christoffel 
                                              ---------------------------------
                                              Joseph L. Christoffel 
                                              Chief Financial Officer


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