SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549


                                    FORM 10-K

                ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
                       THE SECURITIES EXCHANGE ACT OF 1934
                     For the fiscal year ended June 30, 1997

                         Commission File Number: 1-7054

                             SAGE LABORATORIES, INC.
             (Exact name of registrant as specified in its charter)

     Massachusetts                                            04-2179082
 (State or other jurisdiction of                           (I.R.S. Employer   
  incorporation or organization)                          Identification No.) 
                                                          

    11 Huron Drive, East Natick Industrial Park, Natick, Massachusetts 01760
               (Address of principal executive offices) (Zip Code)

 Registrant's telephone number, including area code:           (508) 653-0844


           Securities registered pursuant to Section 12(b) of the Act:

  Title of each class              Name of each exchange on which registered
  -------------------              -----------------------------------------
          None                                       None

           Securities registered pursuant to Section 12(g) of the Act:

                          Common Stock, $.10 par value
                          ----------------------------
                                (Title of Class)

     Indicate  by check mark  whether the  registrant  (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Act of 1934 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.

                          Yes  X               No _________
                                    
     Indicate by check mark if disclosure of delinquent  filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not 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-K or any amendment to this
Form 10-K [X].

     As of  September  23, 1997 the  aggregate  market value of the voting stock
held by non-affiliates (based on the average bid and asked prices as reported by
NASDAQ) was $10,852,499.

     On June 30,  1997 the Company had  outstanding  1,164,765  shares of common
stock, $.10 par value, which is its only class of stock.

DOCUMENTS INCORPORATED BY REFERENCE
See Exhibit Index at page 12.



<PAGE>


Item 1.    Business.

 General Description and History of the Company

     Sage Laboratories, Inc. (the "Company") is engaged primarily in the design,
manufacture and sale of specialized  microwave components and subsystems.  These
products are used in applications such as cellular base stations, point-to-point
radio links, satellite  communications,  aircraft landing and guidance,  medical
diagnostics  and treatment,  radar and weapons  guidance.  The types of products
designed  and  manufactured  by Sage are  required in each of the basic  systems
described herein.

     Microwaves have an extremely high frequency and short wave length.  A sharp
beam  of  microwave  energy  can  readily  be  shaped,  focused,   concentrated,
reflected, and transmitted in a straight line over infinite distances.

     The Company operates  exclusively  within a single industry (S.I.C.  #3829)
for the  purposes of  Statement of  Financial  Accounting  Standards  No. 14 and
Regulation S-K.

     The  Company  has  engaged in no  transactions  or  activities  outside the
ordinary course of business since June 30, 1996.

 The Company's Microwave Products

     The amounts of total  sales and  revenues,  operating  income and the total
value of assets  attributable  to the Company's  microwave  products in the last
three fiscal years are as follows:

    Fiscal year ended June 30:             1995            1996          1997
                                           ----            ----          ----
                                                     (in thousands)


    Amount of total sales and revenues      $9,154          $9,769        $8,934

    Amount of operating income              $2,158          $2,341          $780

    Total assets (year end)                $11,611         $13,028       $12,996


     The Company's RF/microwave  technology is used in components and integrated
assemblies to divide,  couple,  absorb,  attenuate,  filter,  control,  amplify,
detect, process,  convert RF/microwave energy. Its products are suitable for all
types of  commercial  and  defense  applications,  including  radar,  electronic
warfare, surveillance, and communications systems.

     The Company's line of passive microwave devices is extensive,  ranging from
caseless hybrids which are used in high volume production of commercial cellular
and wireless  products to  sophisticated  integrated  assemblies  which  switch,
divide,  filter  and  control  signals  in  high  performance,   space-qualified
satellite  communications  systems.  Caseless wireline hybrids,  switches rotary
joints, phase shifters,  filters,  couplers,  power dividers and subsystems have
been among the Company's most important passive components in recent years.

     The  Company's  standard  passive  components  can be sold  from the  shelf
without  special  engineering,  and  such  components  are  the  Company's  most
profitable  products.  The Company also negotiates fixed price contracts for the
sale of passive  components  meeting  particular  specifications  and  requiring
varying  degrees of  engineering  design and  development.  The profit margin on
contracts  involving heavy engineering  content is lower than on standard items,
but such work often  results in a product which may be reordered or which can be
adapted to other purposes with little  additional  engineering and can therefore
be sold at a higher  profit  margin in the  future.  Total  sales  and  contract
revenue derived from the sale of traditional  passive components during the last
three fiscal years are as follows:

                                       2

<PAGE>



Fiscal year ended June 30:            1995               1996              1997
                                      ----               ----              ----
                                                 (in thousands)
Catalog items                       $2,101             $2,889            $2,748
Adaptable or reorderable items       5,281              3,932             2,853
Engineered items                     1,542              2,251             2,659
Other                                  113                321                63
                                    -------------------------------------------
             Total                  $9,037             $9,393            $8,323
                                    ===========================================

     In addition to passive components, semi-conductor based "active" components
are also needed in  microwave  systems to  amplify,  detect,  control,  convert,
modulate,  demodulate and otherwise process  RF/microwave  signals.  The Company
developed  the  capacity  to produce  active  microwave  components  through the
formation of a wholly-owned subsidiary, Sage Laboratories Active Microwave, Inc.
("SLAM"), a New Hampshire corporation, during the second half of fiscal 1994.

     Active  components are used in all types of commercial and defense systems,
including radar, electronic warfare, surveillance, and communications. SLAM uses
modern solid-state circuit technology in the design and manufacture of microwave
mixers, detectors,  switches,  limiters,  variable attenuators,  amplifiers, and
complex integrated assemblies consisting of active and passive components.  SLAM
offers a standard catalog line of solid-state microwave products, as well as the
capability  to produce  custom  products  designed to meet  particular  customer
specifications.  SLAM revenues for fiscal years 1995,  1996 and 1997 amounted to
$117,000, $375,000 and $611,000 respectively.

Sources and Availability of Raw Materials

     The Company  obtains raw  materials  from a wide variety of suppliers  with
alternative  sources available for all essential  materials with reasonable lead
time.  There is no  dependence  on  foreign  sources  and no  relationship  with
important suppliers.

Principal Markets and Distribution

     The Company's microwave products are sold principally through a group of 37
independent representatives with 51 offices located throughout the United States
and abroad.  Their efforts are directed by the Company's Vice President of Sales
and  Sales  Managers.   Catalogs  of  standard   items,   advertising  in  trade
publications,  trade shows and periodic  visits to  customers  by the  Company's
officers and engineers supplement the work of the representatives. The microwave
products are principally used in  communications  and radar  applications in the
commercial and defense markets.

Importance, Duration and Effect of Patents, Trademarks, Licenses, Franchises and
Concessions

     The Company holds various patents,  but does not believe such patents to be
material to the Company's business. There are no material trademarks,  licenses,
franchises or concessions.

Competition

     Many  companies  manufacture  microwave  products  similar  to those of the
Company,  some larger and with greater financial resources than the Company. The
Company's experience to date indicates that competition has related primarily to
delivery, price and performance.

Backlog and Customers

     The Company's backlog of orders believed to be firm for microwave  products
was  $5,258,000  as of June 30, 1997,  as compared to  $4,602,000 as of June 30,
1996.  All of the June 30,  1997  backlog is  expected  to be filled  during the
current  fiscal year.  There is no seasonality to the backlog or to the business
in general.

     The  Company  has not  relied  on a  single  customer  or a small  group of
customers for a significant amount of its sales of microwave products, though at
any given  time one or more  large  orders or  contracts  may  


                                       3
<PAGE>

represent a high  percentage  of the backlog.  During the fiscal year ended June
30, 1997, components were sold to approximately 408 customers.

Practices Relating to Working Capital

     There are no special practices  followed by the Company relating to working
capital.

Personnel

     As of June 30,  1997,  the  Company  employed  66 people,  ten of which are
employed by SLAM. The Company also utilized temporary  employees  throughout the
year.  Thirty of the  Company's  employees  are  engineers or other  technically
trained  people and the balance are engaged in  production,  administrative  and
sales activities.

Research and Development

     The Company  conducts  various  research and development  activities  under
which expenditures of approximately $318,000,  $272,000, and $200,000 (including
overhead) were made in each of fiscal 1997, 1996 and 1995, respectively.

Export Sales

     Approximately  16% of the  Company's  revenues  for  fiscal  year 1997 were
attributable  to  export  sales.  While  competition  abroad is  generally  more
intense,  the  profitability  and  attendant  risks of sales are not  materially
different  from those of the balance of the  Company's  business.  Total  export
sales for the fiscal years ended June 30, 1995,  1996 and 1997 were  $2,184,000,
$1,954,000 and $1,396,000, respectively.

Executive Officers of the Registrant

     The  following  table  sets  forth  information  concerning  the  Company's
executive  officers  as of the date  hereof.  Each  officer  is  elected  by the
Company's  Board of Directors  and holds office until the date of the  Company's
annual meeting of stockholders and until his successor is elected and qualified.

                                       Offices Held and Business Experience
       Name                   Age              During Past Five Years
       ----                   ---              ----------------------

Carl A. Marguerite            57        Chairman, Chief Executive Officer
                                        (President until 1996)
                                        and Director of the Company

Louis J. Lanzillo, Jr.        39        President, Chief Operating  Officer
                                        and Director of the Company
                                        (President of New England Division
                                        Unicco Service Co. until 1996)

Anthony J. Cieri              66        Vice President of Customer Service
                                        and Special Projects of the Company
                                        (Vice President of Sales until 1997)

Janusz J. Majewski            50        Vice President of Research & Development
                                        of the Company
                                        (Vice President of Engineering until
                                        1996
                                        (Director of Engineering until 1995)

John J. Leary                 51        Vice President of Passive Products and
                                        Manufacturing of the Company
                                        (Vice President and General Manager
                                        of U.S. Operations, Filtronic Comtek
                                        until 1997)


                                       4
<PAGE>

Item 2. Properties

     In 1985 and 1986, the Company  constructed a 30,000 square foot facility to
house its offices and principal  plant.  The facility shares a four acre site in
East Natick,  Massachusetts  with the 25,000 square foot building which formerly
served as the  Company's  plant and offices.  The Company moved into its current
facility in late August 1986. The Company occupies  approximately  25,000 square
feet of its  current  facility  and leases the  balance of 5,000  square feet to
others. All of the Company's rental property is fully occupied.

     SLAM leases approximately 6,000 square feet in Hollis, New Hampshire.

     The cost of the Company's machinery and equipment owned on June 30, 1997 is
approximately $2,180,000.  Such machinery and equipment is in good condition and
is being used to capacity.

Item 3. Legal Proceedings

     There are no material  pending legal  proceedings  affecting the Company or
its properties.

Item 4. Submission of Matters to a Vote of Security Holders

     There was nothing  submitted  during the fourth quarter of fiscal 1997 to a
vote of the Company's security holders.

Item 5. Market for the Registrant's Common Equity and Related Stockholder 
        Matters

     The  Company's  common stock,  $.10 par value (which is the Company's  only
class of equity securities), is listed with the NASDAQ system for trading in the
over-the-counter market. The quarterly high and low bid prices for the Company's
common  stock  for the last two  fiscal  years as  reported  on  NASDAQ  were as
follows:

                             1997                               1996
                             ----                               ----
                      High        Low                    High         Low
                      ----        ---                    ----         ---
First Quarter         17          14                     23           11 4/5
Second Quarter        16 5/8      12 1/4                 22           18 1/10
Third Quarter         15 1/4      13                     20 1/4       14 3/4
Fourth Quarter        14 3/4      12 3/4                 18 3/4       15 1/8


     These  over-the-counter  market  quotations  reflect  inter-dealer  prices,
without  retail  mark-up,  mark-down  or  commission  and  may  not  necessarily
represent actual transactions. There were approximately 236 holders of record of
the Company's outstanding common stock on June 30, 1997.

     The Company  paid cash  dividends in October of 1995 and 1996 in the amount
of 10 cents per share.  On September 4, 1997,  the Company's  Board of Directors
declared a cash dividend in the amount of ten cents per share payable on October
10, 1997 to holders of record as of September 26, 1997.

Item 6. Selected Financial Data.

     The  selected  financial  data called for under this caption is attached to
this report as Appendix A.


                                       5
<PAGE>


Item 7.      Management's Discussion and Analysis of Financial Condition and
             Results of Operations

1997 Compared to 1996

Net Sales:

Net sales on a consolidated basis for fiscal 1997 decreased by $835,000,  or 9%,
from fiscal  1996.  This  decrease is due  primarily to lower sales from certain
catalog products and delays experienced in certain space related programs.  This
overall  decrease in sales was  primarily the result of a decrease in the number
and size of orders shipped,  as there have been no material changes in the price
of the Company's  products during fiscal 1997. The Company's core sales decrease
of $1,071,000 was partially  offset by an increase in the Company's  subsidiary,
Sage Laboratories Active Microwave, Inc. (SLAM) sales of $236,000.

Orders received in fiscal 1997 totaled $9,851,000, as compared to $9,708,000 for
1996.  Total orders  included  $941,000 from SLAM,  compared to $586,000 for the
same period a year ago. SLAM's increase in orders is due to growing  recognition
in the industry.  The decrease in Sage core orders of approximately  $212,000 is
primarily due to customers'  delays in placing orders, as well as certain orders
which were  received  in fiscal 1996 that were not renewed in fiscal 1997 due to
programs coming to closure.  There is no seasonality to the Company's  business.
Sales volume is strictly predicated on customers' requirements for delivery.

Gross Profit:

     Gross profit as a percentage  of sales  decreased to  approximately  38% in
fiscal 1997,  as compared to 48% for the same period a year ago. The decrease in
gross  profit  percentage  was due in part to a shift  in mix of  sales to lower
margin products,  increased research and development expenses, increases in cost
overruns  on  Sage  core  engineering  programs,  and a  negative  gross  profit
attributed to SLAM and the commercial switch division.

Selling, General and Administrative Expenses:

     Selling,  General  and  Administrative  Expenses  (S  G & A)  increased  by
approximately  $256,000,  or 11%,  over the  same  period  a year  ago.  Selling
expenses increased by approximately  $140,000.  The increase in selling expenses
was primarily due to increased salary and related items of approximately $21,000
and the addition of sales and marketing  personnel,  increased  advertising  and
other sales expenses of $119,000.  Commission expense increased by approximately
$34,000  as a  result  of the  change  in  the  mix  from  non  commissioned  to
commissioned  sales,  as well as a larger  number of smaller  orders  which bear
higher  commission  rates.  General and  Administrative  expenses  increased  by
approximately  $82,000,  due in part to increased salary expenses for additional
administrative  personnel  partially  offset by a decrease in bonuses  resulting
from lower corporate  profitability and decreased consulting expenses attributed
to the Company's former Chairman of the Board.

Interest Income:

     Interest income for fiscal year 1997 decreased by approximately  $24,000 as
compared  to fiscal  year  1996.  This  decrease  is due to lower  average  cash
balances, as well as lower interest rates being realized.

Interest Expense:

     Interest expense decreased in fiscal year 1997 by $13,000 over the previous
year. This decrease is due to decreases in the outstanding principal balances.

Rental Property:

     The Company  generated a profit of  approximately  $69,000  from its rental
property in fiscal 1997  compared to a profit of $55,000 in fiscal 1996.  All of
the Company's rental property was fully occupied during fiscal 1997.

     The Company's net book value of property held for rent at June 30, 1997 and
1996 is as follows:


                                       6
<PAGE>

                                                           1997           1996
                                                         --------       --------
       3 Huron Drive (old facility)                      $423,116       $501,114
       11 Huron Drive (rental portion
       of current facility)                               250,171        283,855
                                                         --------       --------
       Total                                             $673,286       $784,969
                                                         ========       ========

Provisions for Federal and State Income Taxes:

     Federal and State income tax provisions for fiscal years 1997 and 1996 have
been  reconciled  to the  U.S.  statutory  rate.  (See  Note  5 to  Consolidated
Financial Statements).

1996 Compared to 1995

Net Sales:

     Net sales for fiscal 1996  increased by $615,000,  or 7%, from fiscal 1995.
This  increase  is due in part to an  increase  in the  Company's  core sales of
$357,000 and an increase in the Company's  subsidiary,  Sage Laboratories Active
Microwave,  Inc.  (SLAM) sales of $258,000.  This overall  increase in sales was
primarily the result of an increase in the number and size of orders shipped, as
there have been no material  increases  in the price of the  Company's  products
during  fiscal  1996.  Orders  received in fiscal 1996  totaled  $9,708,000,  as
compared to  $10,530,000  for 1995.  Total orders  included  $586,000 from SLAM,
compared to $128,000 for the same period a year ago.  SLAM's  increase in orders
is due to growing  recognition in the industry.  The decline in Sage core orders
of  approximately  $1,280,000 is primarily  due to customers'  delays in placing
orders,  as well as certain  orders which were received in fiscal 1995 that were
not  renewed in fiscal  1996 due to programs  coming to  closure.  Although  the
Company's  fourth quarter has  historically  realized a larger sales volume over
other quarters,  there is no seasonality to the Company's business. Sales volume
is strictly predicated on customers' requirements for delivery.

Gross Profit:

     Gross profit as a percentage  of sales  decreased to  approximately  48% in
fiscal 1996,  as compared to 50% for the same period a year ago. The decrease in
gross profit percentage was due to increased  research and development  expense,
as well as increases in cost overruns on Sage core engineering  programs,  lower
profit margins on certain  programs,  and a negative gross profit  attributed to
SLAM.

Selling, General and Administrative Expenses:

     Selling,  General  and  Administrative  Expenses  (S  G & A)  decreased  by
approximately $59,000 over the same period a year ago. Selling expense increased
by  approximately   $32,000.  This  increase  was  primarily  due  to  increased
commission expense of approximately $60,000 attributed to increased sales volume
offset by a decrease  in  marketing  expense  of  approximately  $28,000.  G & A
expenses  decreased  by  approximately  $90,000,  due in part to a  decrease  of
approximately  $63,000 in consulting fees  associated with the Company's  former
Chairman of the Board,  as well as a decrease in salaries  and related  items of
approximately $30,000.

Interest Income:

     Interest  income for fiscal year 1996 increased by  approximately  $108,000
over fiscal year 1995. This increase is due to higher average cash balances,  as
well as higher interest rates being realized.

Interest Expense:

     Interest  expense  decreased  for  fiscal  year  1996 by  $11,000  over the
previous year. This decrease is due to decreases in outstanding principal.


                                       7
<PAGE>


Rental Property:

     The Company  generated a profit of  approximately  $55,000  from its rental
property in fiscal 1996  compared to a modest  profit of $6,500 in fiscal  1995.
All of the  Company's  rental  property was fully  occupied  during fiscal 1996.
During fiscal 1996,  the Company took  occupancy of  approximately  5,000 square
feet of space in its corporate  headquarters  that had  previously  been leased.
This space was  converted to a  state-of-the-art  Clean Room facility and is now
occupied by the Company's Commercial switch and high reliability product lines.

     The Company's net book value of property held for rent at June 30, 1996 and
1995 is as follows:

                                                         1996            1995
                                                      ----------      ----------
           3 Huron Drive (old facility)               $  501,114      $  579,112
           11 Huron Drive (rental portion
           of current facility)                          283,855*        612,966
                                                      ----------      ----------
           Total                                      $  784,969      $1,192,078
                                                      ==========      ==========

          *Change due to Company  occupying  additional space for its commercial
          switch and high reliability product lines.

Provisions for Federal and State Income Taxes:

     Federal and State income tax provisions for fiscal years 1997 and 1996 have
been  reconciled to the U.S.  statutory  rate.  (See Note No. 5 to  Consolidated
Financial Statements).

Liquidity and Capital Resources:

     For the twelve months ended June 30, 1997  operating  activities  generated
$321,000 in cash, a decrease of $1,326,000 from the twelve months ended June 30,
1996.  Cash used in investing  activities  amounted to $645,000 and $808,000 for
the twelve  months ended June 30, 1997 and 1996,  respectively,  while cash used
for financing activities was $274,000 and $222,000,  respectively The details of
these activities are provided in the consolidated  statements of cash flows. The
Company  invests its excess cash only in short-term,  highly liquid  instruments
with minimal risk.

     The Company  anticipates  that total capital  expenditures  for fiscal year
1998 will be approximately  $500,000.  The Company  repurchased 65,000 shares of
stock from the estate of a shareholder at a total cost of approximately $902,000
on July 3, 1997, as described in more detail in Note 7 to Consolidated Financial
Statements. No outside funding will be required.

     Having only the debt relating to the Company's  facility,  and with surplus
cash,  management  believes  that  the  Company  will  be able  to  finance  its
operations and necessary capital expenditures for the foreseeable future.

     Although the Company has a $2,000,000 bank line of credit, the Company does
not presently intend to utilize the line.

     The  foregoing  analysis  contains  forward-looking  statements  within the
meaning of Section  27A of the  Securities  Act of 1933 and  Section  21E of the
Securities  Exchange  Act of 1934,  including  statements  about  the  Company's
commercial switch product line and the improving  performance at SLAM.  Inasmuch
as the  results  of these  activities  depend  on  numerous  factors,  including
acceptance by third parties,  actual results could differ  materially from those
projected in the forward-looking statements.


                                       8
<PAGE>

Item 8. Financial Statements and Supplementary Data.

     Financial statements and supplementary financial information required to be
filed hereunder may be located through the Index to Financial Statements.

Item 9. Disagreements on Accounting and Financial Disclosure.

     The Company has not filed a Form 8-K under the  Securities  Exchange Act of
1934 reporting a change of accountants.

Item 10. Directors, Executive Officers, Promoters and Control Persons of the 
         Registrant.

     The information  called for under this caption is incorporated by reference
from the material  captioned  "Election of Directors" in the proxy statement for
the Company's  annual meeting of  shareholders  to be held on November 11, 1997.
Additional  information  required to be reported under this caption may be found
in the last paragraph of Item 1 to this report.

Item 11. Management Remuneration.

     The information  called for under this caption is incorporated by reference
from the material captioned  "Remuneration of Directors and Executive  Officers"
in the proxy  statement for the Company's  annual meeting of  shareholders to be
held on November 11, 1997.

Item 12. Security Ownership of Certain Beneficial Owners and Managers.

     The information  called for under this caption is incorporated by reference
from the  material  captioned  "Principal  Holders  of  Voting  Securities"  and
"Election of Directors" in the proxy statement for the Company's  annual meeting
of shareholders to be held on November 11, 1997.

Item 13. Certain Relationships and Transactions

     The information  called for under this caption is incorporated by reference
from the material  captioned  "Election of Directors" in the proxy statement for
the annual meeting of shareholders to be held on November 11, 1997.

Item 14. Exhibits, Financial Statements Schedules and Reports on Form 8-K

     The following documents are filed as a part of this report:

     1.   Financial Statements

               See the Index to Consolidated  Financial Statements and Schedules
          attached to this report.

     2.   Exhibits

          See the Index to Exhibits attached to this report.
          No reports on Form 8-K have been filed  during the last quarter of the
          period covered by this report.


                                       9
<PAGE>



                                   SIGNATURES

     Pursuant  to the  requirements  of  Section  13 or 15(d) of the  Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, "hereunto duly authorized.

SAGE LABORATORIES, INC.

By   /s/  Carl A. Marguerite            Chairman              September 15, 1997
   -----------------------------
     Carl A. Marguerite

     Pursuant to the  requirements  of the Securities  Exchange Act of 1934, the
registrant  has duly  caused  this  report  to be  signed  on its  behalf by the
undersigned, thereunto duly authorized.

 By      /s/  Carl A. Marguerite        Chairman, Chief       September 15, 1997
   -----------------------------        Executive Officer,    
         Carl A. Marguerite             Principal Executive   
                                        Officer, Treasurer    
                                        and Director          
                                                              
                                                              
By   /s/  Louis J. Lanzillo, Jr.        President, Chief      September 15, 1997
   -----------------------------        Operating Officer
     Louis J. Lanzillo, Jr.             and Director
                                   
                                                              
By      /s/  John E. Miller             Director              September 15, 1997
   -----------------------------                              
        John E. Miller                                        
                                                              
By      /s/ David M. Pozar              Director              September 15, 1997
   -----------------------------                              
        David M. Pozar                                        
                                                              
By      /s/ C. Duncan Soukup            Director              September 15, 1997
   -----------------------------                              
        C.  Duncan Soukup                                     
                                                           

                                       10
<PAGE>


                                   APPENDIX A
                         ITEM 6. SELECTED FINANCIAL DATA

<TABLE>
<CAPTION>
                                                                              FISCAL YEARS ENDED JUNE 30,
                                                  ----------------------------------------------------------------------------------
                                                     1993             1994             1995             1996                1997
                                                  -----------      -----------      -----------      -----------      --------------
<S>                                               <C>              <C>              <C>              <C>              <C>           
Net Sales and Contract Revenues                   $ 6,627,000      $ 8,167,000      $ 9,154,000      $ 9,769,000      $ 8,934,000.00


Net Income                                            956,000        1,198,000        1,389,000        1,609,000             692,000

Net Income Per Common and
  Common Equivalent Share                                0.66             1.00             1.20             1.38                0.59

Total Assets                                       10,821,000       10,359,000       11,611,000       13,028,000          12,996,000

Total Current Assets                                7,987,000        7,242,000        8,603,000        9,706,000           9,628,000

Total Current Liabilities                           1,820,000        2,046,000        2,083,000        2,075,000           1,641,000

Working Capital                                     6,167,000        5,196,000        6,520,000        7,631,000           7,987,000

Long Term Debt:
  Industrial Revenue Bond                           1,167,000          999,999          833,333          666,665             500,000
                                                  -----------      -----------      -----------      -----------      --------------

  Total Long Term Debt                              1,167,000          999,999          833,333          666,665             500,000
                                                  -----------      -----------      -----------      -----------      --------------

Stockholders' Equity                                7,526,000        7,075,000        8,488,000       10,096,000          10,711,000

Cash Dividends Declared
  Per Common Share                                       0.10             0.10             0.10             0.10                0.10


Weighted Average Number of
  Common and Common Equivalent
  Shares Outstanding                                1,457,065        1,197,035        1,159,390        1,169,086           1,169,616
                                                  ===========      ===========      ===========      ===========      ==============

</TABLE>

                                       11
<PAGE>


D. INDEX TO EXHIBITS

      Exhibit
      Number            Description
      ------            -----------
      3.1               Restated Articles of Organization
                        as amended October 27, 1987 and
                        November 14, 1995


      3.2               Bylaws of the Company as amended by the
                        directors on September 4, 1996.

      3.3               Mortgage and Trust Agreement (incorporated by
                        references to Exhibit 3.3 to the Company's
                        report on Form 10-K for the fiscal year ended
                        June 30, 1991)

      3.4               Bond   Purchase   and  Guaranty
                        Agreement    (incorporated   by
                        references  to  Exhibit  3.4 to
                        the  Company's  report  on Form
                        10-K for the fiscal  year ended
                        June 30, 1991)

      10.1              Executive Bonus Plan - 1/20/89
                        (incorporated by reference to
                        Exhibit 10.1 to the Company's
                        report on Form 10-K for the fiscal
                        year ended June 30, 1989)

      10.2              Stock Option Plan dated
                        September 2, 1989 (incorporated by
                        reference to Exhibit 10.2 to the
                        Company's report on Form 10-K for
                        the fiscal year ended June 30, 1989)

      10.3              Restricted Stock Plan dated May 4,
                        1987 (incorporated by reference to
                        Exhibit 10.3 to the Company's report
                        on Form 10-K for the fiscal year
                        ended June 30, 1989)

      10.4              Employment Agreement with attached exhibits
                        between Company and Louis J. Lanzillo, Jr.,
                        dated September 4, 1996.

      22                Subsidiaries

      24                Consent of Accountants


                                       12
<PAGE>



                   List of Financial Statements and Schedules
<TABLE>
<CAPTION>
                                                                                   Page
                                                                                   ----
<S>                                                                                <C>
Appendix                                                                           AF-O

Report of Independent Public Accountants                                            F-1


Consolidated Balance Sheets as of June 30, 1997 and June 30, 1996                   F-2

Consolidated Statements of Income for each
of the three fiscal years in the period ended June 30, 1997                         F-3

Consolidated Statements of Stockholders' Investment for each
of the three fiscal years in the period ended June 30, 1997                         F-4

Consolidated Statements of Cash Flows for each of the three fiscal years in
the period ended June 30, 1997                                                      F-5

Notes to Consolidated Financial Statements                                          F-6
</TABLE>


                                       13
<PAGE>

                              ARTHUR ANDERSEN LLP


                    SAGE LABORATORIES, INC. AND SUBSIDIARIES

                        CONSOLIDATED FINANCIAL STATEMENTS
                          AS OF JUNE 30, 1997 AND 1996
                         TOGETHER WITH AUDITORS' REPORT



<PAGE>


                    SAGE LABORATORIES, INC. AND SUBSIDIARIES

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
                                  JUNE 30, 1997



                                                                          PAGE

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS                                   F-1


CONSOLIDATED BALANCE SHEETS--JUNE 30, 1997 AND 1996                        F-2


CONSOLIDATED STATEMENTS OF INCOME FOR EACH OF THE
THREE YEARS IN THE PERIOD ENDED JUNE 30, 1997                              F-3


CONSOLIDATED STATEMENTS OF STOCKHOLDERS' INVESTMENT
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JUNE 30, 1997              F-4


CONSOLIDATED STATEMENTS OF CASH FLOWS FOR EACH OF THE
THREE YEARS IN THE PERIOD ENDED JUNE 30, 1997                              F-5


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                                 F-6




<PAGE>

                              ARTHUR ANDERSEN LLP

                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS



To Sage Laboratories, Inc.:

We  have  audited  the   accompanying   consolidated   balance  sheets  of  Sage
Laboratories, Inc. (a Massachusetts corporation) and subsidiaries as of June 30,
1997 and 1996, and the related consolidated statements of income,  stockholders'
investment  and cash flows for each of the three years in the period  ended June
30, 1997. These consolidated  financial statements are the responsibility of the
Company's  management.  Our  responsibility  is to  express  an opinion on these
consolidated financial statements based on our audits.

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

In our opinion, the consolidated  financial statements referred to above present
fairly, in all material  respects,  the financial position of Sage Laboratories,
Inc.  and  subsidiaries  as of June 30, 1997 and 1996,  and the results of their
operations  and their cash flows for each of the three years in the period ended
June 30, 1997, in conformity with generally accepted accounting principles.


                                             /s/     ARTHUR ANDERSEN LLP




Boston, Massachusetts
August 22, 1997



                                      F-1
<PAGE>



                    SAGE LABORATORIES, INC. AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                    June 30,              
                       ASSETS                                1997            1996      
<S>                                                       <C>           <C>        
CURRENT ASSETS:
   Cash and cash equivalents                              $ 5,280,584   $ 5,878,691
   Accounts receivable, net of reserve of $62,000 in
     1997 and $50,000 in 1996                               1,749,778     1,993,452
   Inventories                                              1,936,015     1,348,469
   Prepaid expenses and other current assets                  661,883       485,405



                                                          -----------   -----------

         Total current assets                               9,628,260     9,706,017
                                                          -----------   -----------






PROPERTY, PLANT AND EQUIPMENT, AT COST:
   Land, buildings and improvements                         4,191,088     3,989,760
   Machinery and laboratory equipment                       2,180,492     1,753,072
   Furniture, fixtures and motor vehicles                     691,192       664,894
                                                          -----------   -----------
                                                            7,062,772     6,407,726
   Less--Accumulated depreciation and amortization          3,869,877     3,302,607
                                                          -----------   -----------
                                                            3,192,895     3,105,119
                                                          -----------   -----------




OTHER ASSETS:
   Notes receivable from an officer/stockholder                23,047        55,043
   Other assets                                               151,457       161,536
                                                          -----------   -----------

         Total other assets                                   174,504       216,579
                                                          -----------   -----------

                                                          $12,995,659   $13,027,715
                                                          ===========   ===========

<CAPTION>

                                                                     June 30,   
      LIABILITIES AND STOCKHOLDERS' INVESTMENT                1997              1996
<S>                                                       <C>           <C>        
CURRENT LIABILITIES:
   Current maturities of long-term debt                   $   166,667   $   166,667
   Accounts payable                                           427,022       394,221
   Accrued expenses-
     Compensation                                             635,297       762,025
     Commissions                                              155,701       136,364
     Taxes other than federal income taxes                         --        85,259
     Federal income taxes                                          --       261,827
     Other                                                    256,191       268,191
                                                          -----------   -----------

         Total current liabilities                          1,640,878     2,074,554
                                                          -----------   -----------

LONG-TERM DEBT, NET OF CURRENT MATURITIES                     500,000       666,665
                                                          -----------   -----------

DEFERRED INCOME TAXES                                         144,000       190,000
                                                          -----------   -----------

COMMITMENTS (Notes 6 and 9)

STOCKHOLDERS' INVESTMENT:

   Common stock, $.10 par value-
      Authorized--10,000,000 shares

      Issued--2,681,980 shares in 1997 and
       2,678,480 shares in 1996                               268,198       267,848

   Capital in excess of par value                           2,038,757     2,030,182
   Retained earnings                                       13,852,814    13,276,809
                                                          -----------   -----------
                                                           16,159,769    15,574,839
   Less-
     Cost of 1,517,215 shares of treasury stock             5,448,988     5,448,988
     Deferred compensation                                         --        29,355
                                                          -----------   -----------

         Total stockholders' investment                    10,710,781    10,096,496
                                                          -----------   -----------

                                                          $12,995,659   $13,027,715
                                                          ===========   ===========
</TABLE>


              The accompanying notes are an integral part of these
                       consolidated financial statements.



                                      F-2
<PAGE>



                    SAGE LABORATORIES, INC. AND SUBSIDIARIES

                        CONSOLIDATED STATEMENTS OF INCOME


<TABLE>
<CAPTION>
                                                    ---------- Years Ended June 30,----------
                                                        1997           1996           1995
<S>                                                 <C>            <C>            <C>        
NET SALES AND CONTRACT REVENUE                      $ 8,933,629    $ 9,768,809    $ 9,154,059

COST OF SALES AND CONTRACT COSTS                      5,236,758      4,812,675      4,394,464

ENGINEERING AND NEW PRODUCT DEVELOPMENT COSTS           317,734        272,014        199,918
                                                    -----------    -----------    -----------

         Gross profit                                 3,379,137      4,684,120      4,559,677

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES          2,599,411      2,343,222      2,402,174
                                                    -----------    -----------    -----------

         Operating income                               779,726      2,340,898      2,157,503

INTEREST INCOME                                         278,508        302,901        194,528

INTEREST EXPENSE                                        (55,772)       (68,922)       (79,597)

INCOME FROM RENTAL PROPERTY                              68,670         54,614          6,506
                                                    -----------    -----------    -----------

         Income before provision for income taxes     1,071,132      2,629,491      2,278,940

PROVISION FOR INCOME TAXES:
   Federal                                              309,000        791,000        680,000
   State                                                 70,000        229,000        210,000
                                                    -----------    -----------    -----------

         Net income                                 $   692,132    $ 1,609,491    $ 1,388,940
                                                    ===========    ===========    ===========

NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE   $       .59    $      1.38    $      1.20
                                                    ===========    ===========    ===========

WEIGHTED AVERAGE NUMBER OF COMMON AND
COMMON EQUIVALENT SHARES OUTSTANDING                  1,169,616      1,169,086      1,159,390
                                                    ===========    ===========    ===========

DIVIDENDS PAID                                      $   116,127    $   115,826    $   112,725
                                                    ===========    ===========    ===========

</TABLE>

              The accompanying notes are an integral part of these
                       consolidated financial statements.



                                      F-3
<PAGE>


                    SAGE LABORATORIES, INC. AND SUBSIDIARIES

               CONSOLIDATED STATEMENTS OF STOCKHOLDERS' INVESTMENT


<TABLE>
<CAPTION>
                                               Common Stock      Capital in                                                Total
                                            Number       $.10     Excess of      Retained    Treasury       Deferred   Stockholders'
                                           of Shares   Par Value  Par Value      Earnings  Stock, at Cost Compensation  Investment
<S>                                        <C>         <C>        <C>          <C>           <C>           <C>         <C>        
BALANCE, JUNE 30, 1994                     2,613,480   $261,348   $1,833,057   $10,506,929   $(5,388,251)  $(138,316)  $ 7,074,767
   Net income                                     --         --           --     1,388,940            --          --     1,388,940
   Payment of $.10 per share cash dividend        --         --           --      (112,725)           --          --      (112,725)
   Amortization of deferred compensation          --         --           --            --            --      54,505        54,505
   Exercise of stock options                  37,000      3,700      104,685            --            --          --       108,385
   Purchase of treasury stock                     --         --           --            --       (31,827)         --       (31,827)
   Stock option compensation grants               --         --        6,060            --            --          --         6,060
                                          ----------   --------   ----------   -----------   -----------   ---------   -----------

BALANCE, JUNE 30, 1995                     2,650,480    265,048    1,943,802    11,783,144    (5,420,078)    (83,811)    8,488,105
   Net income                                     --         --           --     1,609,491            --          --     1,609,491
   Payment of $.10 per share cash dividend        --         --           --      (115,826)           --          --      (115,826)
   Amortization of deferred compensation          --         --           --            --            --      54,456        54,456
   Exercise of stock options                  28,000      2,800       86,380            --            --          --        89,180
   Purchase of treasury stock                     --         --           --            --       (28,910)         --       (28,910)
                                          ----------   --------   ----------   -----------   -----------   ---------   -----------

BALANCE, JUNE 30, 1996                     2,678,480    267,848    2,030,182    13,276,809    (5,448,988)    (29,355)   10,096,496
   Net income                                     --         --           --       692,132            --          --       692,132
   Payment of $.10 per share cash dividend        --         --           --      (116,127)           --          --      (116,127)
   Amortization of deferred compensation          --         --           --            --            --      29,355        29,355
   Exercise of stock options                   3,500        350        8,575            --            --          --         8,925
                                          ----------   --------   ----------   -----------   -----------   ---------   -----------

BALANCE, JUNE 30, 1997                     2,681,980   $268,198   $2,038,757   $13,852,814   $(5,448,988)  $      --   $10,710,781
                                          ==========   ========   ==========   ===========   ===========   =========   ===========
</TABLE>


              The accompanying notes are an integral part of these
                       consolidated financial statements.



                                      F-4
<PAGE>

                    SAGE LABORATORIES, INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                 ----------Years Ended June 30,-----------
                                                                     1997          1996           1995
<S>                                                              <C>            <C>            <C>        
CASH FLOWS FROM OPERATING ACTIVITIES:
   Net income                                                    $   692,132    $ 1,609,491    $ 1,388,940
   Adjustments to reconcile net income to net cash provided by
   operating activities-
     Stock option compensation                                            --             --          6,060
     Depreciation and amortization                                   567,271        462,236        406,876
     Notes receivable from an officer/stockholder                     31,996         31,996         31,996
     Amortization of deferred compensation                            29,355         54,456         54,505
     Deferred income taxes                                            24,000        (28,000)      (124,000)
     Changes in assets and liabilities-
       Accounts receivable                                           243,674       (449,488)       210,475
       Inventories                                                  (587,546)       (52,393)      (482,511)
       Prepaid expenses and other current assets                    (176,478)        26,742         15,773
       Accounts payable                                               32,802         93,536         20,295
       Accrued expenses                                             (536,477)      (102,021)        17,198
                                                                 -----------    -----------    -----------

           Net cash provided by operating activities                 320,729      1,646,555      1,545,607
                                                                 -----------    -----------    -----------

CASH FLOWS FROM INVESTING ACTIVITIES:
   Purchases of property, plant and equipment, net                  (655,045)      (712,015)      (326,639)
   Decrease (increase) in other assets                                10,078        (95,604)        (3,680)
                                                                 -----------    -----------    -----------

           Net cash used in investing activities                    (644,967)      (807,619)      (330,319)
                                                                 -----------    -----------    -----------

CASH FLOWS FROM FINANCING ACTIVITIES:
   Exercise of stock options                                           8,925         89,180        108,385
   Purchase of treasury stock                                             --        (28,910)       (31,827)
   Payment of cash dividend                                         (116,127)      (115,826)      (112,725)
   Payments on long-term debt                                       (166,667)      (166,667)      (166,667)
                                                                 -----------    -----------    -----------

           Net cash used in financing activities                    (273,869)      (222,223)      (202,834)
                                                                 -----------    -----------    -----------

NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS                (598,107)       616,713      1,012,454

CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR                       5,878,691      5,261,978      4,249,524
                                                                 -----------    -----------    -----------

CASH AND CASH EQUIVALENTS, END OF YEAR                           $ 5,280,584    $ 5,878,691    $ 5,261,978
                                                                 ===========    ===========    ===========

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
   Cash paid during the year for-
     Interest                                                    $    58,422    $    73,606    $    77,524
                                                                 ===========    ===========    ===========
     Income taxes                                                $   946,569    $ 1,035,000    $   996,531
                                                                 ===========    ===========    ===========
</TABLE>

              The accompanying notes are an integral part of these
                       consolidated financial statements.


                                      F-5
<PAGE>

                    SAGE LABORATORIES, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  JUNE 30, 1997




(1)  OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     Sage  Laboratories  Inc. (the Company) is engaged  primarily in the design,
     manufacture   and  sale  of   specialized   components   suitable  for  the
     transmission, reception, modification and utilization of microwave energy.

     The accompanying  consolidated financial statements reflect the application
     of the following major accounting policies.

     (a)  Principles of Consolidation

          The  accompanying   consolidated   financial  statements  include  the
          accounts  of the  Company  and its  wholly  owned  subsidiaries,  Sage
          Laboratories  Investment  Corporation,   a  Massachusetts   securities
          corporation;  Sage Laboratories  Active Microwave,  Inc. (SLAM), a New
          Hampshire  corporation;  and Sage Laboratories  Foreign Sales, Inc., a
          U.S. Virgin Island corporation. All material intercompany transactions
          and balances have been eliminated in consolidation.

     (b)  Revenue Recognition

          With respect to contracts, the Company recognizes revenue on the basis
          of shipments by relating the total anticipated costs to total units to
          be produced and units actually  shipped.  Contract losses are recorded
          in total as soon as they can be reasonably anticipated.  Product sales
          are recognized upon shipment.

     (c)  Engineering and New Product Development Expenses

          Research  and  development  expenses  are  charged  to  operations  as
          incurred. Research and development expenses of approximately $318,000,
          $272,000  and  $200,000  were   incurred  in  1997,   1996  and  1995,
          respectively.  In 1997,  1996  and  1995,  $0,  $25,000  and  $62,000,
          respectively, of the total research and development costs were related
          to new product development by SLAM.


                                      F-6
<PAGE>

                    SAGE LABORATORIES, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  JUNE 30, 1997

                                   (Continued)


     (d)  Depreciation and Amortization

          The Company  provides for  depreciation and amortization by charges to
          operations  to allocate  the cost of the assets  over their  estimated
          useful lives as follows:

<TABLE>
<CAPTION>
                                           Method of Depreciation              Estimated
        Assets Classification                 and Amortization                Useful Life
<S>                                            <C>                            <C>
Buildings and improvements                     Straight-line                  5-25 years
Machinery and laboratory equipment             Straight-line                  3-10 years
Furniture, fixtures and motor vehicles         Straight-line                  3-10 years
</TABLE>

     (e)  Warranty Costs

          Warranty  costs incurred by the Company during each of the three years
          in the period  ended June 30,  1997 were not  significant,  and future
          warranty costs are not expected to be significant.

     (f)  Inventories

          Inventories,  priced at the  lower of cost  (first-in,  first-out)  or
          market, are as follows as of June 30, 1997 and 1996:

                                                   1997              1996

              Raw materials and parts        $       813,606   $       406,581
              Work-in-process                        943,453           814,776
              Finished goods                         178,956           127,112
                                             ---------------   ---------------

                                             $     1,936,015   $     1,348,469
                                             ===============   ===============

          Work-in-process  and  finished  goods  include  material,   labor  and
          manufacturing overhead.

     (g)  Net Income per Common and Common Equivalent Share

          Net income per common and common  equivalent  share was computed based
          on the  weighted  average  number of common  shares and  common  share
          equivalents  outstanding  during the year.  Common  share  equivalents
          consist of  dilutive  outstanding  stock  options  computed  under the
          treasury stock method.  Fully diluted net income per common and common
          equivalent  share has not been presented since the result would not be
          materially different.


                                      F-7
<PAGE>

                    SAGE LABORATORIES, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  JUNE 30, 1997

                                   (Continued)


     (h)  Postretirement and Postemployment Benefits

          The Company has no obligations for  postretirement  or  postemployment
          benefits.

     (i)  Use of Estimates in the Preparation of Financial Statements

          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 revenue
          and expenses during the reporting period.  Actual results could differ
          from those estimates.

     (j)  New Accounting Standards

          In  March  1997,  the  Financial  Accounting  Standards  Board  issued
          Statement of Financial  Accounting  Standards (SFAS) No. 128, Earnings
          per Share.  SFAS No.  128  establishes  standards  for  computing  and
          presenting  earnings per share and applies to entities  with  publicly
          held common stock. This statement is effective for fiscal years ending
          after December 15, 1997,  and early  adoption is not  permitted.  When
          adopted,  SFAS  No.  128 will  require  restatement  of  prior  years'
          earnings  per share.  The Company  will adopt this  statement  for its
          fiscal  year  ended  June 30,  1998.  The  Company  believes  that the
          adoption of SFAS No. 128, including the effect on prior periods,  will
          not have a material effect on its financial statements.

     (k)  Concentration of Credit Risk and Significant Customers

          SFAS No. 105,  Disclosure of Information  About Financial  Instruments
          with   Off-Balance-Sheet   Risk   and   Financial   Instruments   with
          Concentrations of Credit Risk,  requires disclosure of any significant
          off-balance-sheet   and   credit   risk   concentrations.    Financial
          instruments that subject the Company to credit risk consist  primarily
          of cash  and cash  equivalents  and  trade  accounts  receivable.  The
          Company places its investments in highly rated financial institutions.
          The Company has not  experienced  any losses on these  investments  to
          date.  Accounts  receivable  of  $321,000  or  18% of  trade  accounts
          receivable  as of June  30,  1997  were due  from  one  customer,  who
          accounted for 15% of revenue during fiscal 1997.

          No  customer  accounted  for more than 10% of net  sales and  contract
          revenue in fiscal 1996, and two domestic  customers  accounted for 22%
          of revenue in fiscal 1995.

          During the years  ended June 30,  1997,  1996 and 1995,  export  sales
          accounted for approximately 16%, 20% and 24% of net sales and contract
          revenue, respectively.


                                      F-8
<PAGE>

                    SAGE LABORATORIES, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  JUNE 30, 1997

                                   (Continued)


     (l)  Fair Value of Financial Instruments

          SFAS No. 107,  Disclosures About Fair Value of Financial  Instruments,
          requires  disclosure  of an  estimate  of the fair  value  of  certain
          financial  instruments.   The  fair  value  of  financial  instruments
          pursuant to SFAS No. 107  approximated  their carrying  values at June
          30,  1997  and  1996.  Fair  values  have  been   determined   through
          information obtained from market sources and management estimates.

(2)  CASH AND CASH EQUIVALENTS

     The Company  considers  all highly  liquid  investments  with a maturity of
     three months or less when purchased to be cash  equivalents.  Cash and cash
     equivalents,  which are recorded at amortized cost (which approximates fair
     market value), consist of the following at June 30:

                                                 1997             1996

        Cash                               $       336,336   $        24,208
        Money market mutual fund                 3,828,612         4,795,421
        Fixed time deposit                       1,115,636         1,059,062
                                           ---------------   ---------------

                                           $     5,280,584   $     5,878,691
                                           ===============   ===============

(3)  LINE OF CREDIT

     At June 30, 1997, the Company has available an unsecured  revolving line of
     credit of $2,000,000 with a bank, expiring on November 30, 1997. Borrowings
     under the line bear interest at the  Company's  option at either the bank's
     prime rate (8.5% at June 30, 1997) or 30-, 60-, 90- or 180-day LIBOR (5.72%
     to 5.94% at June 30, 1997) plus 1.75%.  There were no borrowings  under the
     line during fiscal 1997.



                                      F-9
<PAGE>

                    SAGE LABORATORIES, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  JUNE 30, 1997

                                   (Continued)


(4)  LONG-TERM DEBT

     Long-term debt consists of an Industrial Revenue Bond, payable in quarterly
     principal  installments  of  $41,667  through  April  2001.  The bond bears
     interest  at 88.6% of the  prime  rate  (8.5%  at June 30,  1997),  payable
     quarterly  through  April  2001.  The  bond is  collateralized  by land and
     buildings.

     Maturities of long-term debt are as follows:

        Fiscal Year

        1998                                $    166,667
        1999                                     166,667
        2000                                     166,667
        2001                                     166,666
                                           -------------

                 Total                      $    666,667
                                            ============

(5)  INCOME TAXES

     The Company  follows the provisions of SFAS No. 109,  Accounting for Income
     Taxes.  The  provision  for income taxes for each of the three years in the
     period ended June 30, 1997 consists of the following:

                                    1997              1996             1995
        Current-
           Federal             $      290,000   $      813,000     $    775,000
           State                       65,000          235,000          239,000
                               --------------   --------------    -------------

                                      355,000        1,048,000        1,014,000
                               --------------   --------------    -------------
        Deferred (Prepaid)-
           Federal                     19,000          (22,000)         (95,000)
           State                        5,000           (6,000)         (29,000)
                               --------------   --------------    -------------

                                       24,000          (28,000)        (124,000)
                               --------------   --------------    -------------

                               $      379,000   $    1,020,000     $    890,000
                               ==============   ==============     ============


                                      F-10
<PAGE>

                    SAGE LABORATORIES, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  JUNE 30, 1997

                                   (Continued)


     The  provision  for income  taxes for each of the three years in the period
     ended June 30, 1997 is reconciled to the U.S. statutory rate as follows:

<TABLE>
<CAPTION>
                                                                           1997             1996            1995
<S>                                                                   <C>              <C>             <C>          
        Provision at statutory rate                                   $      364,000   $      894,000  $     775,000
        Increase (decrease) in income taxes resulting from-
           State income taxes, net of federal benefit                         46,000          151,000        137,000
           Tax benefit of foreign sales corporation                          (31,000)         (25,000)       (22,000)
                                                                      --------------   --------------  -------------

                  Provision for income taxes                          $      379,000   $    1,020,000  $     890,000
                                                                      ==============   ==============  =============
</TABLE>

     Under SFAS No. 109,  the Company  records a deferred tax asset or liability
     based on the  enacted  tax rates that are  expected to be in place when any
     differences between the financial statement and tax bases of liabilities or
     assets  reverse.  The  approximate  income  tax  effect  of each  temporary
     difference  constituting  the  deferred  tax  asset  (included  in  prepaid
     expenses and other  current  assets) and the deferred tax  liability in the
     accompanying  consolidated  balance sheets as of June 30, 1997 and 1996 are
     as follows:

                                                     1997             1996
        Deferred tax assets-
           Accruals currently not deductible   $      189,000    $      210,000
           Receivable reserves                         25,000            20,000
           Inventory reserves                         162,000           216,000
                                               --------------    --------------

                                               $      376,000    $      446,000
                                               ==============    ==============

        Deferred tax liabilities-
           Depreciation                        $     (115,000)   $     (151,000)
           Deferred compensation                            -           (13,000)
           Other                                      (29,000)          (26,000)
                                               --------------    --------------

                                               $     (144,000)   $     (190,000)
                                               ==============    ==============


                                      F-11
<PAGE>

                    SAGE LABORATORIES, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  JUNE 30, 1997

                                   (Continued)


(6)  COMMITMENTS

     SLAM conducts its operations in leased  facilities under an operating lease
     agreement that expires in March 1999.

     Future minimum lease commitments under this operating lease are as follows:

        Fiscal Year

                 1998                          $    23,000
                 1999                               17,000
                                               -----------

                 Total                         $    40,000
                                               ===========

     Rent expense under the  operating  lease for the years ended June 30, 1997,
     1996  and  1995  was   approximately   $32,000  ,  $23,000   and   $23,000,
     respectively.

(7) STOCKHOLDERS' INVESTMENT

     (a)  Stock Option Plan

          The  Company  has an  incentive  stock  option  plan  under  which key
          employees may be granted  options to purchase common stock at not less
          than fair market value at the date of grant.  Options are  exercisable
          as determined by the compensation  committee of the Board of Directors
          and expire no later than 10 years from the date of grant.

          No accounting  recognition  is given to incentive  stock options until
          they are  exercised,  at which time the par value is  credited  to the
          common stock account, and the difference between the proceeds received
          and the par  value is  credited  to the  capital  in excess of the par
          value account. An employee may exercise an outstanding stock option by
          delivering to the Company shares of common stock  previously  acquired
          by the employee rather than paying cash. The number of shares that the
          employee  must  surrender  to the  Company  is equal to the  aggregate
          exercise  price of the stock options  divided by the fair market value
          of the Company's common stock on the exercise date.


                                      F-12
<PAGE>

                    SAGE LABORATORIES, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  JUNE 30, 1997

                                   (Continued)


          The following table summarizes incentive stock option activity for the
          three years ended June 30, 1997:

                                                                    Weighted
                                                                 Average Price
                                                        Shares     Per Share

              Options outstanding, June 30, 1994         73,000      $ 2.81
                 Exercised                              (33,000)       2.81
                 Expired                                 (5,000)       2.90
                                                       --------      ------

              Options outstanding, June 30, 1995         35,000        2.80
                 Granted                                101,500       20.51
                 Exercised                              (25,000)       2.90
                                                       --------      ------

              Options outstanding, June 30, 1996        111,500       18.89
                 Granted                                171,100       14.17
                 Exercised                               (3,500)       2.55
                 Expired                                (11,500)      19.78
                                                       --------      ------

              Options outstanding, June 30, 1997        267,600      $12.95
                                                       ========      ======

              Options exercisable, June 30, 1997        131,868      $12.83
                                                       ========      ======

          The  range of actual  exercise  prices  for  options  outstanding  and
          options exercisable as of June 30, 1997 was $2.55 to $21.75.

          At June 30, 1997,  500,000  shares of common  stock were  reserved for
          issuance   under  the  plan,  of  which  232,400  were  available  for
          additional grants.

     (b)  Director Stock Option Plan

          The Company has a Director  Stock Option Plan (the Plan),  the purpose
          of  which  is to  attract  and  retain  highly  qualified  nonemployee
          directors and to encourage their  ownership of common stock.  The Plan
          automatically  provides  for the annual  grant of options to  purchase
          2,500  shares of common  stock to each  director who is serving on the
          Board at the time of such grant and who is not also an employee of the
          Company or any subsidiary. The exercise price of the options was equal
          to 80% of the  fair  market  value  of the  shares  on the date of the
          grant.  During  fiscal  1997,  the Plan was amended to provide for the
          annual  automatic grant of 2,500 shares of the Company's  common stock
          to each  eligible  director at an exercise  price equal to 100% of the
          fair market value of the shares on the date of grant.


                                      F-13
<PAGE>

                    SAGE LABORATORIES, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  JUNE 30, 1997

                                   (Continued)


          The following table  summarizes  directors'  stock option activity for
          the three years ended June 30, 1997:

                                                                     Weighted
                                                                 Average Price
                                                        Shares     Per Share

              Options outstanding, June 30, 1994          5,000      $ 4.35
                 Granted                                  3,000        8.08
                 Exercised                               (4,000)       4.43
                                                        -------      ------

              Options outstanding, June 30, 1995          4,000        7.07
                 Granted                                 10,000       20.00
                 Exercised                               (3,000)       6.73
                                                        -------      ------

              Options outstanding, June 30, 1996         11,000       18.92
                 Granted                                  7,500       13.25
                                                        -------      ------

              Options outstanding, June 30, 1997         18,500      $16.62
                                                        =======      ======

              Options exercisable, June 30, 1997         18,500      $16.62
                                                        =======      ======

          The  range of actual  exercise  prices  for  options  outstanding  and
          options exercisable as of June 30, 1997 was $8.08 to $20.00

          At June 30,  1997,  47,000  shares of common  stock were  reserved for
          issuance  under the Plan,  of which 28,500  shares were  available for
          additional grants.


     (c)  Stock-Based Compensation

          The Company accounts for its stock-based compensation under Accounting
          Principals  Board  Opinion  No.  25,  Accounting  for Stock  Issued to
          Employees.  In October 1995, the Financial  Accounting Standards Board
          issued SFAS No. 123, Accounting for Stock-Based Compensation, which is
          effective for fiscal years beginning after December 15, 1995. SFAS No.
          123   establishes  a   fair-value-based   method  of  accounting   for
          stock-based   compensation   plans.   The   Company  has  adopted  the
          disclosure-only  alternative  under SFAS No. 123,  which  requires the
          disclosure of the pro forma effects on earnings and earnings per share
          as if the accounting  prescribed by SFAS No. 123 had been adopted,  as
          well as certain other information.


                                      F-14
<PAGE>

                    SAGE LABORATORIES, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  JUNE 30, 1997

                                   (Continued)


          The Company has computed the pro forma disclosures required under SFAS
          No. 123 for all stock  options  granted  during  fiscal  1996 and 1997
          using the  Black-Scholes  option pricing model  prescribed by SFAS No.
          123.

          The  assumptions  used and the weighted  average  information  for the
          years ended June 30, 1997 and 1996 are as follows:

<TABLE>
<CAPTION>
                                                                            Years Ended
                                                                             June 30,
                                                                      1997             1996
              <S>                                                  <C>              <C>
              Risk-free interest rates                               6.73%             5.83%
              Expected dividend yield                                 .80%             .80%
              Expected lives                                        7 years           7 years
              Expected volatility                                     14%               14%
              Weighted-average remaining contractual life of      
                options outstanding                                5.30 years       4.65 years
</TABLE>

          The effect of applying SFAS No. 123 would be as follows:

<TABLE>
<CAPTION>
                                                1997              1997             1996              1996
                                            As Reported        Pro Forma        As Reported       Pro Forma

              <S>                         <C>               <C>               <C>              <C>            
              Net income                  $       692,132   $       252,377   $     1,609,491  $     1,342,464
              Net income per share              $.59              $.22             $1.38            $1.15
</TABLE>

     (d)  Deferred Compensation

          During 1992,  the Company  issued 50,000 shares of its common stock to
          an  officer  as  additional  compensation.  The  stock is  subject  to
          forfeiture  by the officer  under  certain  conditions;  however,  the
          forfeiture  restriction  lapses in February 2002. At the discretion of
          the Company's Board of Directors, the forfeiture restriction on 10,000
          shares  may be  lapsed  each  year  if the  officer  achieves  certain
          predefined goals. The Company recorded deferred  compensation equal to
          the fair  market  value of the  stock on the date of the grant and has
          been  amortizing  the cost over five years,  which is the  anticipated
          vesting  period of the stock.  During  each of fiscal  1997,  1996 and
          1995,  the Board of Directors  approved the lapse of  restrictions  on
          10,000  shares  in  accordance  with  this  agreement.   During  1997,
          approximately  $29,000  was  charged  to  operations  as  compensation
          expense.  As of June 30,  1997,  the  restriction  on the final 10,000
          shares has lapsed.



                                      F-15
<PAGE>

                    SAGE LABORATORIES, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  JUNE 30, 1997

                                   (Continued)


          In connection with the stock grant,  the Company made certain loans to
          the  officer.   The  loans  are  evidenced  by   interest-free   notes
          receivable,  payable in five equal  annual  installments  beginning in
          December  1993.  Interest  is imputed on the notes at the  appropriate
          Internal  Revenue  Service  rate and included in  compensation  to the
          officer.

     (e)  Put-and-Call Agreement

          The Company has a put-and-call agreement with a relative of the former
          chairman of the Company's  Board of Directors  providing  that, in the
          event of the relative's death prior to August 31, 1998, the relative's
          estate  could  require the  Company to acquire  all of the  relative's
          Company  common  stock  (65,000  shares  as of June  30,  1997) at the
          average market value, as defined,  if the Company has achieved certain
          defined financial results.  The Company also has the option to require
          the  relative's  estate to sell to the Company  all of the  relative's
          stock at the average  market  value,  as defined,  in the event of the
          relative's  death  prior to August  31,  1998.  On July 3,  1997,  the
          Company  repurchased  all 65,000 shares from the relatives  estate for
          $13.95 per share or a total of $906,420  pursuant to the put provision
          of this agreement.

(8)  BONUS AND PROFIT-SHARING PLANS

     (a)  Bonus Plan

          The Company  maintains a  discretionary  executive  bonus plan that is
          based on a formula  established  by the Board of  Directors.  Expenses
          charged  to  operations  under this plan were  approximately  $56,500,
          $136,000 and $208,000 in 1997, 1996 and 1995, respectively.

     (b)  Employee Profit-Sharing Plan

          The  Company  has  a  profit-sharing  plan  in  which  each  qualified
          employee,  as defined,  becomes  eligible  to receive  benefits to the
          extent  of  his  or her  vested  interest  upon  retirement  or  other
          termination of employment. Contributions to the plan are determined by
          the  Board  of  Directors.   The  Company  contributed   approximately
          $200,000,  $173,000 and $199,000 to this plan in 1997,  1996 and 1995,
          respectively.

(9)  CONSULTING AND NONCOMPETE AGREEMENTS

     During 1993, the Company entered into a consulting  agreement with a former
     officer/stockholder of the Company.  Under the terms of the agreement,  the
     former officer/stockholder  provided consulting services to the Company for
     a three-year period,  ending in December 1995. The Company incurred $57,000
     and $122,000 in consulting  expense under this  agreement  during the years
     ended June 30, 1996 and 1995, respectively.


                                      F-16
<PAGE>

                    SAGE LABORATORIES, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  JUNE 30, 1997

                                   (Continued)


     During  1994,  the Company  entered into a  noncompete  agreement  with its
     founder and former  chairman of the Board of Directors.  Under the terms of
     the noncompete  agreement,  the former  chairman agreed not to compete with
     the  Company  directly  or  indirectly  through  August  1998.  The Company
     incurred  $80,000 in expense  under this  agreement  during the years ended
     June 30, 1997,  1996 and 1995. The Company's  future  commitment  under the
     noncompete agreement is as follows:

                Fiscal Year
             
                1998               $      80,000
                1999                      13,000
                                   -------------
             
                                   $      93,000
                                   =============
     
(10) QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)

     The following  table presents a summary of quarterly  results of operations
     for the years ended June 30, 1997 and 1996.

<TABLE>
<CAPTION>
                                                                                   1997
                                                     First Quarter   Second Quarter   Third Quarter   Fourth Quarter
        <S>                                         <C>              <C>             <C>              <C>           
        Net sales and contract revenues             $    1,864,089   $    2,702,379  $    2,177,710   $    2,189,451
        Gross profit                                       753,314        1,252,711         708,901          664,211
        Net income                                         168,567          358,613          87,614           77,338
        Net income per common and common                $   .14          $   .30         $   .08          $   .07
           equivalent share
<CAPTION>

                                                                                   1996
                                                     First Quarter   Second Quarter   Third Quarter   Fourth Quarter
        <S>                                         <C>              <C>             <C>              <C>           
        Net sales and contract revenues             $    2,216,056   $    2,680,312  $    2,089,982   $    2,782,459
        Gross profit                                       938,782        1,178,416       1,098,717        1,468,205
        Net income                                         183,090          351,459         415,330          659,612
        Net income per common and common                $   .16          $   .30         $   .36          $   .56
           equivalent share
</TABLE>

                                      F-17