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                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                   FORM 10-KSB

(Mark One)

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

                    For the fiscal year ended: JUNE 30, 1998
                                               -------------

( ) TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT OF 1934
    [FEE REQUIRED]

                      For the transition period N/A to N/A

                         Commission File number: 0-24974

                               DIASYS CORPORATION
         ---------------------------------------------------------------
        (Exact name of small business issuer as specified in its charter)

           DELAWARE                                      06-1339248
---------------------------------                  -----------------------
   (State or other jurisdiction                     (I.R.S. Employer ID #)
 of incorporation or organization)                  

                   49 LEAVENWORTH STREET, WATERBURY, CT 06702
                   ------------------------------------------
                    (Address of principal executive offices)

                                  203-755-5083
                 ---------------------------------------------- 
                 (Issuer's Telephone number including area code)

                                      NONE
       -------------------------------------------------------------------
      (Former name, address and/or fiscal year if changed from last report)

Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange 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 XX No

Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. _____

Registrant's revenues for the most recent fiscal year were $435,365.

As of October 1, 1998, the aggregate market value of the registrant's voting
stock held by non-affiliates was $25,927,958 based upon an average closing price
of $8 5/8 for the five trading days immediately prior thereto.

As of October 1, 1998, the Registrant had 3,006,140 shares of common stock.

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                                     PART 1

ITEM 1.  DESCRIPTION OF BUSINESS

THIS ANNUAL REPORT ON FORM 10-K AND THE DOCUMENTS INCORPORATED HEREIN BY
REFERENCE CONTAIN FORWARD-LOOKING STATEMENTS BASED ON CURRENT EXPECTATIONS,
ESTIMATES AND PROJECTIONS ABOUT THE COMPANY'S INDUSTRY, MANAGEMENT'S BELIEFS AND
CERTAIN ASSUMPTIONS MADE BY MANAGEMENT. ALL STATEMENTS, TRENDS, ANALYSES, AND
OTHER INFORMATION CONTAINED IN THIS REPORT RELATIVE TO TRENDS IN NET SALES,
GROSS MARGIN, ANTICIPATED EXPENSE LEVELS AND LIQUIDITY AND CAPITAL RESOURCES, AS
WELL AS OTHER STATEMENTS INCLUDING, BUT NOT LIMITED TO WORDS SUCH AS
"ANTICIPATE", "BELIEVE", "PLAN", "ESTIMATE", "EXPECT", "SEEK", "INTEND", AND
OTHER SIMILAR EXPRESSIONS, CONSTITUTE FORWARD LOOKING STATEMENTS. THESE
FORWARD-LOOKING STATEMENTS ARE NOT GUARANTEES OF FUTURE PERFORMANCE AND ARE
SUBJECT TO CERTAIN RISKS AND UNCERTAINTIES THAT ARE DIFFICULT TO PREDICT.
ACCORDINGLY, ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE ANTICIPATED OR
EXPRESSED IN SUCH STATEMENTS. POTENTIAL RISKS AND UNCERTAINTIES INCLUDE, AMONG
OTHERS, THOSE SET FORTH HEREIN UNDER "ADDITIONAL FACTORS THAT MAY AFFECT FUTURE
RESULTS", AS WELL AS "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS--OVERVIEW" AND "--LIQUIDITY AND CAPITAL
RESOURCES". PARTICULAR ATTENTION SHOULD BE PAID TO THE CAUTIONARY STATEMENTS
INVOLVING THE COMPANY'S LIMITED OPERATING HISTORY, THE UNPREDICTABILITY OF ITS
FUTURE REVENUES, THE UNPREDICTABLE AND EVOLVING NATURE OF ITS BUSINESS MODEL,
THE INTENSELY COMPETITIVE ONLINE COMMERCE AND RETAIL BOOK ENVIRONMENTS AND THE
RISKS ASSOCIATED WITH CAPACITY CONSTRAINTS, SYSTEMS DEVELOPMENT, MANAGEMENT OF
GROWTH AND BUSINESS EXPANSION. EXCEPT AS REQUIRED BY LAW, WHETHER AS A RESULT OF
NEW INFORMATION, FUTURE EVENTS OR OTHERWISE. READERS, HOWEVER, SHOULD CAREFULLY
REVIEW THE FACTORS SET FORTH IN OTHER REPORTS OR DOCUMENTS THAT THE COMPANY
FILES FROM TIME TO TIME WITH THE SECURITIES AND EXCHANGE COMMISSION ("SEC").

Diasys Corporation (the "Company") designs, develops, manufactures and
distributes instruments which standardize and automate routine, labor intensive
procedures in hospital, clinical and private physician laboratories. The Company
was organized in March, 1992 in the State of Connecticut and effected a
statutory merger into a Delaware Corporation of the same name in December 1993.
The Company is completing its developmental stage, and since its inception has
engaged primarily in organizational activities and creation of several
proprietary products.

In January of 1995, the Company completed an initial public offering
("Offering") of 1,000,000 shares of its Common Stock, par value $.001 ("Common
Shares") and 500,000 Common Stock Purchase Warrants, each exercisable at a fixed
price into one Common Share ("Warrants"). The Company received net proceeds
after expenses of $3,961,179 from the Offering. In addition, on February 2,
1995, the Company's underwriter exercised its option to purchase 130,000
additional Common Shares and 70,000 Warrants from the Company pursuant to an
over-allotment option granted to the underwriter as part of the Offering. The
Company received an additional $561,425 in net proceeds from the exercise.
Accordingly, the Company realized $5,735,500 in proceeds from its Offering with
net proceeds after expenses of $4,522,604.

On July 24, 1997 the Company filed a post effective amendment consisting of
566,000 shares of Common Stock, par value $.001 (the "Common Stock"), issuable
upon the exercise of 566,000 Redeemable Common Share Purchase Warrants (the
"Redeemable Warrants"). The Redeemable Warrants were issued in connection with a
public offering of the Company's securities in January 1995 and subsequently
amended as to the expiration date and exercise price. Each Redeemable Warrant as
amended entitles the register holder thereof to purchase one share of Common
Stock at a price of $4.50 per share, subject to adjustment in certain
circumstances. Any Redeemable Warrant unexercised as of April 10, 1998 expired.
As of April 10, 1998, 552,640 Redeemable Warrants were exercised. Accordingly,
the Company received $2,497,068 in proceeds from the exercise of such Warrants.

PRODUCTS

Products used to automate and standardize routine urine sediment analysis
conducted in hospitals, private clinics, and physician group practices.

"R/S" SERIES

The "R/S" family of workstation products is comprised of the following: The R/S
1000 which serves the needs of small laboratories; the R/S 2000 which serves the
mid-sized user; and, the R/S 2003 which accommodates high volume laboratories.
All three workstations satisfy the critical requirements of routine analysis of
urine sediment at each level.

Under traditional methods for urinalysis, a technologist takes centrifuged urine
to a sink, pours off ("decants") all of the excess fluid ("supernatant"), and
brings the tube containing the concentrated urine sediment ("button") to a
standard upright microscope. The technologist then draws up some amount of the
button, using a plastic device called a pipette. A drop of specimen fluid is
then squeezed from the pipette onto a glass microscope slide. The technologist
places a very thin piece of glass ("cover slip") onto the drop of specimen
fluid. The cover slip is pressed down so as to remove bubbles, flatten clumps of
the button, and distribute the fluid somewhat evenly. The glass assembly is then
positioned onto the stage of a microscope and examined. At the end of the
examination, the glass slide, cover slip and pipette are thrown away. The entire
procedure typically takes between 1 and 4 minutes

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to complete. The traditional procedure for routine urinalysis is labor
intensive, requires many disposable items per test, is prone to variations in
and among tests, and exposes the technologist to potentially hazardous materials
contained in the specimen throughout the entire process. The "R/S" series
workstations correct these critical laboratory shortcomings by improving:

                  1.    Speed
                  2.    Cost-efficiency
                  3.    Accuracy/Reproducibility
                  4.    Safety.

     1. Speed: In most applications, the "R/S" series increases the number of
urine tests that can be performed by a technologist in a given amount of time.
This increased "throughput" is very important to routine urinalysis since the
financial ability to hire additional personnel typically lags far behind
increases in demands on laboratory services. The "R/S" series increases
throughput by automating the sample process and eliminating the need to
manipulate several disposable and movable items otherwise required by
traditional laboratory methods.

In operation, once the supernatant (excess) is decanted, the technologist loads
the "R/S" workstation with up to 24 urine tubes. The technologist then inserts
the unit's automatic aspirator ("pipette") into the first tube, presses the
unit's SAMPLE button, and a consistent amount of specimen fluid is automatically
transferred to an optical slide assembly mounted on the stage of the microscope.
It takes under 3 seconds for this transfer to be completed. The technologist
then analyzes the specimen as he or she would under conventional methods. When
the analysis is finished, the technologist presses the PURGE button and within 5
seconds, the system is purged with isotonic saline solution, ready for a new
sample.

With conventional methods, it takes the technologist approximately 20 seconds to
make and discard a slide. The "R/S" series does the same function in 8 seconds.
With conventional methods, the technologist generally inspects 9-to-15 fields of
view per slide in order to make a competent analysis. Current users of the "R/S"
workstations report that the same analysis can be achieved within 3-to-5 fields
of view. Some users have reported increased throughput of up to 50% over
traditional urinalysis procedures. The labor savings realized through increased
throughput allows the laboratory to allocate its personnel to other testing
functions.

     2. Cost-Efficiency: The increased throughput of the "R/S" series
workstations result in better allocation of staff time over total lab
requirements. The lab can therefore perform more and/or varied functions without
increasing staff. Labor savings is a significant benefit to laboratories since
labor costs and overhead associated therewith are the single largest expenditure
of most laboratories, accounting for 60-70% of direct costs. In addition to
labor savings, the "R/S" series workstations eliminate the need to purchase and
make space for pipettes, microscope slides and cover slips. The only disposable
item connected with the "R/S" workstations is the tube in which the urine was
originally centrifuged. Moreover, since there are no consumable items, the cost
traditionally incurred in disposing of such bio-hazardous items is also saved.

     3. Accuracy And Reproducibility: Many laboratory handbooks state that test
standardization is a key element of any quality control or quality assurance
program. The same handbooks criticize conventional methods of slide preparation
because specimen volume and fluid distribution tend to vary significantly from
test to test. The "R/S" series workstations eliminates technologist variations
in test procedures. Unlike manual pipetting, the peristaltic pump of the "R/S"
workstations is designed to deliver a consistent amount of specimen fluid each
time to the optical slide chamber and, since the dimensions of the optical slide
chamber are constant, the volume size and depth of view are also constant, test
after test.

     4. Safety: Routine urinalysis requires substantial contact with urine and
constant manipulation of the specimen. The surge of AIDS, hepatitis B,
tuberculosis, and government regulations in connection therewith have prompted
many laboratories to seek automated and safe procedures for urinalysis. The
"R/S" series workstations provide such safety and automation by preparing and
disposing of specimen samples without the technologist ever touching the
specimen. Furthermore, since the specimen is in a sealed environment, the risk
of spillage, overflow, and similar counter top accidents is avoided.

"FE" SERIES:

The FE-2 is the first of a new family of products designed by the Company for
use in microbiology. More specifically, the FE-2 is a counter top instrument
which automates and reduces the cost of microscopic analysis of fecal
concentrates. Microscopic analysis of feces is performed by thousands of
hospital, public health and private commercial laboratories world wide in order
to detect the presence of ova (eggs), cysts, and parasites in the lower
intestinal tract of humans and animals. The presence of such organisms is
critical to the proper care of the patient. The test is non-invasive, can be
performed on an out-patient basis, and quickly provides confirmatory results.

While there are multiple methods for preparing fecal concentrates, the end
result is fecal material which has been filtered and suspended in formalin, a
10% formaldehyde solution. The technologist then centrifuges the material, pours
off ("decants") all of the excess fluid ("supernatant"), resuspend the fecal
concentrate in saline solution, and brings the tube containing the fecal
concentrate to a standard upright microscope. The technologist then draws up
("aspirates") some amount of the concentrate using a pipette. A drop of
concentrate is then squeezed from the pipette onto each of two glass microscope
slides. Onto one slide the

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technologist will add either: (i) a drop of iodine to highlight possible eggs,
cysts or parasites; or, (ii) a drop of saline solution in order to dilute the
concentrate in case the other slide is too dense to analyze. The technologist
then places an oversized ("extended") cover slip onto the drop of concentrate.
Each cover slip is pressed down so as to remove air bubbles, flatten clumps of
concentrate, and distribute the fluid somewhat evenly. Each glass assembly is
then positioned onto the stage of a microscope and examined, one after the
other. At the end of the examination, the glass slides, cover slips and pipette
are thrown away. The entire procedure typically could take as long as 15 minutes
to complete.

Like the analysis of urine sediment, the analysis of fecal concentrates is labor
intensive, requires many disposable items per test, is prone to variations in
and among tests, and exposes the technologist to the specimen throughout the
entire process. In addition but unlike urinalysis, fecal concentrates are
generally prepared with formalin which is both noxious and potentially
carcinogenic. The Occupational Health and Safety Administration ("OSHA")
requires periodic monitoring of air formalin (formaldehyde) in laboratories with
air concentration levels above 0.75 parts per million. Prolonged inhalation of
the formalin in the fecal concentrates, therefore, is intensely discouraged by
both the examining technologist and the laboratory environmentalist.

The FE-2 workstation corrects the procedural shortcomings of current
methodologies in several significant ways. The FE-2 requires no special
training. To operate, the technologist inserts the instrument's automatic dual
aspirator into a prepared fecal concentrate and presses the "SAMPLE" button on
the control console of the workstation. Within 5 seconds, a consistent, measured
amount of concentrate is automatically transferred to the workstation's optical
slide assembly (OSA) on the stage of the microscope. During this process, one
chamber of the OSA is inoculated with 10 ul of the fecal concentrate. The other
chamber is inoculated with an equal mix of 5 ul of fecal concentrate and 5 ul of
an iodine solution (or isotonic saline solution as the laboratory may prefer).
Observations are conducted through the stage-mounted (OSA) which is included
with the FE-2. The chambers of the OSA are constructed of a seamless, high
optical quality glass capillary. The width of the viewing area of each capillary
is equal to the width of a standard 10x lens objective so that scanning is
quicker and more precise. When observations of both the stained and unstained
fecal concentrates are complete, the technologist may either: (a) purge the OSA
by pressing either PURGE button on the control console; or, (b) view a
succeeding portion of the concentrate by pressing the SAMPLE button. Pressing
the SAMPLE button will advance the concentrate forward by 50ul thereby
displaying a new portion of the concentrate in the OSA. This "Jog" may be
performed twice after the original sample is made. Purging the system takes
about 7 seconds, after which time the FE-2 is ready to make the next concentrate
slides.

The FE-2 increases the level of safety and precision by automating the
aspiration, resuspension, staining or diluting, transfer, presentation and
disposal of fecal concentrates. It also eliminates the need and cost of
disposable pipettes, microscope slides, and cover slips. The FE-2 reduces
analysis time and increases accuracy by establishing strict physical parameters
of the viewing area. Moreover, since the fecal concentrate is contained in and
manipulated through a sealed system, the technologist is no longer exposed to
prolonged inhalation of the formalin.

THE CYTOCOUNTER:

The Company has developed a new methodology for cell counting, sorting and
analysis for research applications, especially with regard to the study of human
diabetes. Work with cultured cells often requires a precise knowledge of the
cell count both to standardize conditions and to carry out quantitative
experiments. Although not yet released to market, the CytoCounter has been
successfully tested in Germany and is the subject of a scholarly article
published in one of the world's leading research magazines. The Company expects
to release the CytoCounter early next year.

Additional Workstation Products:

The Company is developing several additional workstation products which automate
and standardize routine analysis of human and non-human fluids, one of which is
currently being tested in Germany. Each workstation is or will be designed to
increase the precision and reduce the cost of performing an otherwise labor
intensive, manually oriented laboratory procedure.

SALES, MARKETING, AND DISTRIBUTION

NORTH AMERICA:

The Company sells and services its workstation-products through its headquarter
offices in Waterbury, Connecticut and four decentralized locations throughout
the United States and Canada. North America is organized into seven distinct
sales regions. Each region is staffed by a manager and each manager is
responsible for sales and service of the Company's products in his/her region.
North American sales efforts are supported by a manager of marketing information
systems, a director of strategic accounts and a marketing associate each located
at the Company's headquarter offices.

Each sales manager earns a base salary, increasing commissions based upon
achievement of sales quotas and an incentive bonus based upon:

(i) producing a specified level of net operating profit for the region; 


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(ii) displacing competition with the Company's workstation products;

(iii) implementing network standardization programs for laboratory networks and
affiliations; and,

(iv) promoting the Company's workstation products as part of a system with Bayer
Corporation (see: STRATEGIC RELATIONSHIPS below).

The Company does not rely on independent sales representatives and/or dealers to
promote and/or distribute the Company's workstation products in North America.

Sales in North America are facilitated by a series of marketing programs which
include telemarketing, direct mail campaigns, advertising in key trade journals,
participation in technical workshops, and exhibitions at national trade shows.

INTERNATIONAL:

The Company is commencing distribution operations in Europe, South America,
Central America, China and parts of Pacific-Asia. The Company is in the process
of hiring an international sales and business manager who will devote
substantially all of his or her business time and efforts to managing and
enhancing the Company's growing international presence. The Company has
appointed a country agent in England and another in Japan to assist with and
oversee European and Pacific-Asian operations. Neither agent is an employee of
the Company and each is compensated on monthly retainer and a percentage of
territorial sales only.

The Company has installed workstations in Portugal, Spain, France
Belgium/Luxembourg, Italy, Switzerland, Israel, Qatar, Mexico, Brazil and
Bolivia. The Company has started to implement its distribution in China, Japan,
Taiwan and Singapore.

STRATEGIC RELATIONSHIPS:

Bayer Corporation:

On December 29, 1997, the Company announced that it entered into a Strategic
Cooperation Agreement with the Diagnostics Division of Bayer Corporation, the
United States subsidiary of the international chemical and health care
conglomerate, Bayer AG headquartered in Germany. Under the Cooperation
Agreement, Bayer and DiaSys recommend and refer each other's urinalysis
workstations to hospital and commercial laboratory customers in the United
States. The companies also confer on account strategy and provide unified
network standardization plans at the request of the customer. Each company
installs and services its own equipment.

Bayer Incorporated:

On June 27, 1996 the Company entered into a strategic cooperation agreement with
Bayer Inc. of Canada. Under the agreement, Bayer's Health Care Division and the
Company will jointly market their urine analysis workstations to hospitals and
clinical reference laboratories in Canada. The two companies have also agreed to
engage in joint product development if and as mutually advisable. Bayer Inc. is
the Canadian subsidiary of the health care giant Bayer A.G. headquartered in
Germany.

Other Significant Contracts:

The Company has established a number of important relationships with large scale
customers. These relationships include: SmithKline Beecham Clinical
Laboratories; Quest Diagnostics; Kaiser Permenente (Southern California
region); AmeriNet, Inc.; Mid-Atlantic Group Network of Shared Services,
Inc. (MAGNET); and the Purchase Connection.

The Company has also been awarded a supplier's contract by the General Services
Administration (GSA) of the United States of America.

RESEARCH AND DEVELOPMENT

In fiscal year 1998, 1997, and 1996 the Company spent approximately $406,000,
$408,000 and $251,000 respectively on research and development. The Company
conducts research and product development through its product development and
technical support staff.

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COMPETITION

THE "R/S" SERIES:

The Company knows of no other product which competes directly with the "R/S"
series workstations. There are however five competing technologies for the "R/S"
series: (i) traditional use of a microscope to examine a glass slide of urine
sediment; (ii) traditional use of a microscope to examine urine sediments
introduced into a pre-formed plastic slide assembly; (iii) a video imaging
system which automatically "recognizes" and "counts" pre-stored images of
"common shapes" found in urine sediment; (iv) a laser based system which detects
"abnormal" urines thereby reducing the number which must be manually analyzed;
and, (v) pre-screening using chemically treated reagent or "dip" strips.

The oldest technology is the use of a microscope to examine a glass slide of
urine sediment. However, as described elsewhere, the use of microscope slides
and cover slips is time consuming, prone to inconsistencies, and expensive.
Pre-formed plastic slides are easier to handle than glass and provide more
standardization. However, the optical quality seen through plastic slides tends
to be significantly inferior to that of glass and the cost is generally higher.
The video imaging system on the market provides a "standard procedure" for
urinalysis, dispenses with the need for costly consumable items such as glass or
plastic slides, and, sharply reduces exposure to potentially infectious
materials carried in urine. However, since the instrument requires expensive
proprietary reagents to operate and costs between $85,000 and $200,000 to
acquire, the Company believes that only the largest laboratories with the most
liberal budgets can justify the purchase and/or use of such a system. The
laser-based system screens-out "normal" urines thereby reducing the number of
"abnormal" urines requiring manual analysis. In addition to still requiring
manual analysis of some samples, the laser based system costs approximately
$120,000 which therefore places the instrument out of the economic reach of most
laboratories. Lastly, reagent strips are very efficient for determining chemical
compositions, but they do not detect the existence of many types of particulate
matter otherwise having clinical significance.

FE-2:

The Company knows of no other workstation product which automates resuspension,
aspiration and presentation of fecal concentrates for microscopic analysis.

The Company expects to encounter competition in the laboratory equipment
industry. While the Company believes that the "R/S" series and FE-2 workstations
are currently the only products of their type in the market, many of the
Company's competitors and potential competitors have substantially greater
resources, including capital, research and development, personnel and
manufacturing and marketing capabilities, and also may offer well established,
broad product lines and ancillary services. Some of the Company's competitors
have long-term or preferential supply arrangements with hospitals. Such
arrangements may act as a barrier to market entry to the Company's products.
Competing companies may succeed in developing products that are more efficacious
or less costly, and such companies may also be more successful than the Company
in production and marketing. Rapid technological development by others may
result in the Company's products becoming obsolete before the Company recovers a
significant portion of the research, development and commercialization expenses
incurred with respect to those products. There can be no assurance that the
Company will be able to compete successfully.

MANUFACTURING AND WARRANTY OBLIGATION

The Company internally designs and manufactures its workstation products. The
Company purchases sub-assemblies and parts designed according to Company
specifications, and assembles and final tests the sub-assemblies and parts
within its own facility. The Company has developed alternate qualified vendors
for its critical raw material and supplies that could fulfill its requirements
if needed. Implementation of the plan has resulted in higher manufacturing
quality, reduced lead time to delivery and reduced costs in manufacturing.

The Company provides its customers with a one year "swap out" warranty against
defects in parts or workmanship on all new or refurbished units from the date of
delivery, generally defined as FOB, DiaSys. This means that in the event a unit
fails from a defect in parts and/or workmanship during the warranty period, the
Company will replace the unit with a new or refurbished unit at the Company's
option. For service after the initial year of warranty, the Company offers
optional extended warranty protection plans and provides repair and service at
an hourly rate plus parts and material. The Company experiences minimal
additional costs associated with its warranty obligations.

TRADE SECRETS, PATENTS AND TRADEMARKS

PATENTS:

The Company has been granted numerous patents on its "R/S" and "FE" series
technology. Three such patents have been issued by the United States Department
of Commerce both on the concept and specific architecture of the Company's urine
and feces 

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workstation products. The Company has also been granted similar patent
protection in Japan, Singapore, Taiwan, Austria, Belgium, Denmark, England,
France, Germany, Greece, Ireland, Italy, Luxembourg, Liechtenstein, Monaco, the
Netherlands, Portugal, Spain, Sweden, and Switzerland.

TRADE NAMES:

The Company has been granted trade name protection for UriZyme, an enzyme based
cleaning material for its workstation products. The Company has four additional
applications pending for trade names in the United States, Europe and Japan.

INSURANCE:

The Company has purchased patent insurance from the Reliance Insurance Company.
Under the policy, Reliance will provide the Company with up to $500,000 (with a
$500,000 aggregate policy) in legal fees and assistance in the event that
litigation is required to protect or prosecute the Company's proprietary rights
under its patents.

There can be no assurance that any future applications by the Company for patent
protection will result in patents being issued, or, if issued, that such patents
will provide a competitive advantage or will afford protection against
competitors, with similar technology, or that competitors of the Company will
not circumvent, or challenge the validity of any patents issued or licensed by
the Company. Moreover, there can be no assurance that the Company's
non-disclosure agreements and other safeguards will protect its proprietary
information and trade secrets or provide adequate remedies for the Company in
the event of unauthorized use or disclosure of such information, or that others
will not be able to independently develop such information.

GOVERNMENT REGULATION

The Company has obtained safety certifications for its workstation products
from: (i) Underwriters Laboratories (UL) and TUV Rhineland of North America,
Inc. as well as CS, VDE and CE.

On May 23, 1995, the Company received clearance from the Food and Drug
Administration (FDA) to release the R/S 2003 and related products to market. In
the same letter, the FDA stated that any of the Company's future products which
are substantially equivalent to the new workstations may be marketed directly
without first submitting pre-market notification.

Although the "R/S" series and FE-2 workstations are exempt from FDA 510(k)
pre-market notification requirements, the development, testing, manufacturing
and marketing of the Company's products in the United States are regulated by
the FDA, which generally requires clearance of such products before marketing.
Moreover, regulatory approval, if granted, may include significant limitations
on the indicated uses for which a product may be marketed. Failure to comply
with applicable regulatory requirements can result in, among other things,
fines, suspensions of approvals, product seizures, injunctions, recalls of
products, operating restrictions and criminal prosecutions. There can be no
assurance that the Company will be able to obtain the necessary regulatory
clearance for the manufacturing and marketing of other products which are
currently in the development stage, either in the United States or in foreign
markets on a timely basis or at all. Certain of the Company's future diagnostic
products may require submission to the FDA of an application for Pre-market
Approval. Delays in receipt of or failure to receive clearances to commence
clinical studies or to market products, or loss of previously received
clearances, would adversely affect the marketing of the Company's proposed
products and the results of future operations.

Commercial distribution in most foreign countries is also subject to varying
government regulations. In addition, federal, state and international government
regulations regarding the manufacture and sale of diagnostic devices are subject
to future change, and additional regulations may be adopted which may prevent
the Company from obtaining, or affect the timing of, future regulatory
clearances and may adversely affect the Company.

The Company's manufacturing process is subject to stringent federal, state and
local regulations governing the use, generation, manufacture, storage, handling
and disposal of certain materials and wastes, and regarding the manufacture,
testing, labeling, record keeping, and storage of diagnostic devices, including
current Good Manufacturing Practices regulations and similar foreign
regulations. Although the Company believes that it and its subcontractors have
complied in all material respects with such laws and regulations, there can be
no assurance that the Company will not be required to incur significant costs in
the future in complying with manufacturing and environmental regulations.

YEAR 2000 COMPLIANCE

The Company believes that it will not be adversely effected by the year 2000
problem. The Company's workstation products use microprocessors which are not
date dependent. The Company's internal information systems are LAN'ed, PC-based
and run on highest revision level DOS and/or Windows programs. The Company has
also asked its suppliers to certify that they are or will be year 2000
compliant, and has made it clear that any non-compliant vendor will be
disqualified from further business.

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LABORATORY REGULATIONS

Regulations issued under the Clinical Laboratory Improvement Amendments of 1988
("CLIA") became effective September 1, 1992. CLIA is intended to increase the
quality of laboratory services and extends these requirements to physicians
office laboratories. CLIA requires laboratory licensing and written operational
and quality control procedures for tests that are carried out in the laboratory.
It establishes personnel standards regarding qualification and training of
individuals who carry out the tests. It also mandates periodic inspection and
proficiency evaluation of the performance of these procedures and individuals.
CLIA requires the more complex procedures such as clinical microscopy to be
performed by more skilled medical technologists. The CLIA requirements have
caused more physician offices to transfer their urinalysis testing to reference
laboratories and has resulted in consolidation of many smaller reference
laboratories.

The Company believes that the "R/S" series and FE-2 workstations improve
laboratory operations, increase procedural quality and reduce labor costs.
Therefore, the Company believes the CLIA regulations are likely to help rather
than hinder its sales efforts in the longer term.

BIOHAZARD CONTAINMENT

OSHA mandated that all necessary precautions be taken to ensure the safety of
clinical laboratory personnel handling biohazard materials including bodily
fluid specimens that may contain life-threatening, blood-borne infectious
pathogens such as tuberculosis, hepatitis B and human immunologic viruses. To
the Company's knowledge, OSHA has not published any comparisons or analysis of
manual versus automated or semi-automated urinalysis procedures. However, the
Company believes that while conventional urinalysis has not been barred by the
OSHA regulations, it does expose technicians to potentially infectious urine
several times during the procedure, including accidental spillage and splashing
in the course of a number of its manipulative steps. In the event of such
inadvertent contact, skin cuts and abrasions which may occur from sharp edges in
the handling of microscope slides, cover slips and chipped or broken glass and
plastic ware, may become infected.

The Company believes the "R/S" series and FE-2 workstations offer a contained
method of analyzing urine sediment and fecal concentrates and that each
workstation mitigates the risks associated with handling potentially biohazard
material.

MEDICARE/MEDICAID COST CONTAINMENT

The Company believes that the recent effort to contain costs have caused some
hospitals to reduce the number of urine sediment tests conducted, thus
diminishing the relative cost effectiveness of the "R/S" series and FE-2
workstations. Overall, hospitals have become significantly more cost-conscious.
Perhaps more important, hospitals have imposed more intense reviews of capital
acquisitions, particularly for new systems like the "R/S" series and FE-2
workstations, which address areas traditionally not requiring significant
capital investments.

However, laboratories must contend with the aforementioned new OSHA and CLIA
regulations. Since the Company's products are designed to reduce the amount of
labor required to perform laboratory tests and the specimen biohazard exposure,
as well as to standardize and improve the analytical quality of the urinalysis
procedure, the Company believes these factors could enhance its competitive
position in the market. There can be no assurance, however, that continued
reductions in reimbursements will not have a material adverse affect on sales
and Company operations.

Health Care reform continues to be top priority of the present administration.
At the present time, the Company is unable to predict what affect, if any, a
change in the health care system would have on the Company. While the Company
believes that the cost-effectiveness of the "R/S" series and FE-2 workstations
should benefit medical and clinical laboratories, medical and clinical
laboratories may elect to postpone important decisions regarding capital
expenditures until any changes in the health care system are completed and their
full scope and effect known.

PRODUCT LIABILITY

The Company faces potential liability in connection with the use of its
products. The Company has purchased product liability insurance in the amount of
$2,000,000. The Company believes that its present insurance is sufficient for
its current level of business operations. There can be no assurance however that
such insurance will be sufficient to cover potential claims or that the present
level of coverage will be available in the future at a reasonable cost.

ENVIRONMENTAL COMPLIANCE

The Company believes that its manufacturing process conforms to all federal,
state and local environmental regulations. There can be no assurances, however,
that the Company will not be required to incur significant costs in the future
in complying with environmental regulations.

                                       8
<PAGE>

EMPLOYEES

As of September 30, 1998 the Company employed 19 persons, 9 of whom were engaged
in sales and marketing, 3 in research and development, 2 in manufacturing, and 5
in administrative, finance and other clerical support activities.

ITEM 2.  PROPERTIES

The Company leases 8,290 square feet of space at 49 Leavenworth Street,
Waterbury, Connecticut for its headquarters, research and development and
assembly operations. The Company's lease expires February 28, 2001. The Company
pays an annual rent of $64,488.00 inclusive of all management fees, real estates
taxes, common area charges and other such expenses normally incurred in a
leasehold facility. The Company pays rent in equal monthly installments of
$5,374.00.

ITEM 3.  LEGAL PROCEEDINGS

As previously disclosed and as disclosed herein, the Company announced on
January 12, 1998, that it entered into a product integration agreement
("Agreement") with Intelligent Medical Imaging, Inc. (NASD:IMII). Under the
Agreement, IMI was to purchase 200 of the Company's workstation products by June
30, 1997 and integrate such products into IMI's new core laboratory workstation
for further resale by IMI to its customers. On March 27, 1997 the Company
completed delivery of the first 100 workstations to IMI. The remaining 100 units
were pending the assignment of a delivery date as prescribed by the Agreement.
On June 16, 1997, IMI advised the Company that it was rejecting all workstation
products as non-conforming under the terms of the Agreement. On July 2, 1997 and
following several communications between the parties, the Company notified IMI
that it had suspended the Agreement pending the resolution of the outstanding
disputes including any issues of conformity of goods and non-payment for the
goods delivered. On July 17, 1998 IMI notified the Company that it had
terminated the Agreement due to the Company's failure to deliver conforming
goods and other alleged breach(es) of the Agreement.

The Agreement mandates arbitration of all controversies arising between the
parties. On January 12, 1998, DiaSys served IMI a formal notice and request for
arbitration. DiaSys seeks $2.7 million in damages and IMI has counter claimed
for damages of $2.1 million. The Company believes it will ultimately prevail in
the arbitration and that IMI's counterclaim lacks merit, was asserted only for
strategic purposes, and is procedurally barred by specific provisions of the
Agreement. The arbitration was heard October 5-7, 1998 before a panel of
3 arbitrators. The arbitrators will render judgement within 45 days tereafter.

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

None.

                                     PART II

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
        MATTERS

The Company is authorized to issue 10,000,000 shares of Common Stock, $0.001 par
value, of which 3,006,140 shares were issued and outstanding as of September 1,
1998.

Commencing January 10, 1995 the Company's Common Stock began trading on the
NASDAQ Small Cap Market System under the symbol DIYS for the Common Stock and
DIYSW for the Warrants.

The Company reported $2,497,068 in proceeds from the exercise of 552,640
Redeemable Warrants as of April 10, 1998. Any Redeemable Warrants unexercised as
of April 10, 1998 expired. As of September 1, 1998 the Company's Common Stock
was held by in excess of 600 beneficial holders.

The following table sets forth the high and low closing bid quotations for the
Company's Common Stock and Warrants as reported by NASDAQ for the periods
indicated. These quotations represent bid prices between dealers, do not include
retail mark-ups, markdowns or commissions, and do not necessarily represent
actual trade transactions.

                                  COMMON STOCK

    Year Ended June 30, 1998                      High               Low
    ------------------------                      ----               ---
    1st Quarter                                   6 5/8               6
    2nd Quarter                                   6 1/2               6
    3rd Quarter                                   7 1/16              7
    4th Quarter                                   10 1/4              10 1/4

                                       9
<PAGE>



    Year Ended June 30, 1997                      High               Low
    ------------------------                      ----               ---
    1st Quarter                                   6 5/8               6
    2nd Quarter                                   6 1/2               6
    3rd Quarter                                   6 3/4               6
    4th Quarter                                   6 3/4               6

                                    WARRANTS

    Year Ended June 30, 1998                      High                Low
    ------------------------                      ----                ---
    1st Quarter                                   1 5/8               1 1/8
    2nd Quarter                                   1 1/8                 1/2
    3rd Quarter                                   3                   2 5/8
    4th Quarter                                   2 5/8 (*)           2 1/2 (*)

    Year Ended June 30, 1997                      High                Low
    ------------------------                      ----                ---
    1st Quarter                                   1  5/8              1 1/8
    2nd Quarter                                   1  1/8                1/2
    3rd Quarter                                   1  1/8                5/8
    4th Quarter                                   1  3/8                5/8

* All unexercised warrants expired on April 10, 1998 in accordance with their
terms.

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

Certain statements contained herein are not based on historical facts, but are
forward-looking statements that are based upon numerous assumptions about future
conditions that could prove not to be accurate. Actual events, transactions and
results may materially differ from the anticipated events, transactions or
results described in such statements. The Company's ability to consummate such
transactions and achieve such events or results is subject to certain risks and
uncertainties. Such risks and uncertainties include, but are not limited to: the
existence of, demand for, and acceptance of the Company's products and services;
the ability of the Company to develop new and timely products; the ability of
the Company to maintain and expand its business relationship with Bayer
Corporation and Bayer Incorporated (see: STRATEGIC RELATIONSHIPS above); the
effect of regulatory approvals and developments, economic conditions, the impact
of competition, the outcome of the Company's claims in arbitration against
Intelligent Medical Imaging Inc. (see: LEGAL PROCEEDINGS above); and, other
factors affecting the Company's business that are beyond the Company's control.
The Company undertakes no obligation and does not intend to update, revise or
otherwise publicly release the result of any revision to these forward-looking
statements that may be made to reflect future events or circumstances.

LIQUIDITY AND CAPITAL RESOURCES

                                              FISCAL
                                  ------------------------------
                                  1998                      1997
                                  ----                      ----
                                 (IN DOLLARS, EXCEPT FOR RATIOS)

TOTAL CURRENT ASSETS           2,552,268                 1,706,708
TOTAL CURRENT LIABILITIES         56,154                   125,298
WORKING CAPITAL                2,496,114                 1,581,410
WORKING CAPITAL RATIO TO 1          45.5                      13.6

FISCAL YEAR ENDED JUNE 30, 1998 COMPARED TO FISCAL YEAR ENDED JUNE 30, 1997

Working capital increased by $914,704 from June 30, 1997 to June 30, 1998. Cash
and equivalents increased by $878,083 over the same period. The increase in cash
and equivalents was substantially the product of proceeds from the exercise of
548,740 Redeemable Common Share Purchase Warrants (see: DESCRIPTION OF BUSINESS
above).

Inventory increased from $366,106 in fiscal year 1997 to $390,141 in fiscal year
1998. The increase in inventory was due to a repositioning of the Company's
inventory from raw and work in process (WIP) to finished goods.

The Company's fixed assets, net of depreciation, increased from $79,866 for 1997
to $82,244 for 1998. The increase was due to the purchase of certain tools and
equipment used in manufacturing.

                                       10
<PAGE>

As of June 30, 1998 the Company had no outstanding debt other than customary
trade payables.

The Company has sufficient funds and resources on hand to discharge its
obligations as they become over due over the foreseeable future. Management
believes that its over-all strategic operating plan minimizes financial risk in
the following ways:

      1. The Company's product development plan calls for interrelated
workstations which share and build upon a common technology. Shared technology
allows the Company to mature relatively basic products into more complex
workstations in building block progression. This metered progression proves the
along the way and generates revenue from sales of the individual building block
products.

      2. The Company's product manufacturing plan avoids the requirement for
large capital expenditures for plant and equipment, increases quality over
out-sourcing, and optimizes delivery times.

      3. The Company maintains a very tight control on its cost of goods and
quality of product design.

REVENUES

The Company's gross revenue remained essentially flat for 1998 compared to 1997.
The lack of increase was due primarily to the termination of a product
integration agreement by Intelligent Medical Imaging Inc (NASD: IMII), the
negative impact to the Company's sales and reputation in connection therewith,
diversion of management's focus to mitigate damage to the Company's reputation,
and time required to prepare for arbitration against IMI (see LEGAL PROCEEDINGS
above). 

COST OF GOODS

The Company's gross profit (Net Revenue less cost of goods sold) decreased by
$42,104 in fiscal year 1998 over 1997. The Company's gross profit percentage
(gross profit divided by net revenue) also decreased to 65.1% for fiscal year
1998 from 72.9% for fiscal year 1997. Management believes that the decrease in
gross profit and gross profit margins was substantially due to: (i) inspection
and re-manufacturing costs incurred with regard to certain workstation products
returned by Intelligent Medical Imaging Inc (see LEGAL PROCEEDINGS above); (ii)
the initial costs of expanding the Company's manufacturing facility and
capacity; (iii) reducing 18 units of "first generation" "R/S" workstations to
salvage value; and, (iv) an increase in international sales to distributors
which traditionally results in lower gross margins offset by lower costs of
sales and service.

SELLING GENERAL AND ADMINISTRATIVE

For the fiscal year ended June 30, 1998, the Company's expenses decreased from
$2,015,548 to $1,899,681, a decrease of $115,867 or 5.7%. The decrease in SG&A
expenses was primarily "non-cash" and due to the effect of the completion of a
certain investment banking relationship made with Lester Morse, Esq. P.C., as
assigned to WR Consulting, Inc. all as disclosed below and in previous period
filings with the Securities And Exchange Commission.

RESEARCH AND DEVELOPMENT

For the fiscal year ended June 30, 1998, research and development expenses
decreased slightly from $408,234 to $406,260. The Company presently has four new
workstation products is development and expects research and development
expenses to remain substantially unchanged for fiscal year 1999.

NET LOSS

The Company's net loss decreased from $2,004,575 in fiscal year 1997 to
$1,978,644 in fiscal year 1998.

INFLATION

Although the Company believes that inflation has not had a material adverse
effect on the results of the operations to date, any increases in costs of raw
materials to the Company could affect the prices charged by the Company to its
clients.

FISCAL YEAR ENDED JUNE 30, 1996 COMPARED TO FISCAL YEAR ENDED JUNE 30, 1997

Working capital decreased by $1,475,187 from June 30, 1995 to June 30, 1996.
Cash and equivalents decreased by $1,648,982 over the same period. The decrease
in cash and equivalents and in working capital were anticipated by the Company
as those costs customarily associated with the development and introduction of
new technologies to new markets. These customary costs

                                       11
<PAGE>


included: (i) an increase in the number of domestic sales offices and corporate
sales support personnel; (ii) increased sales related travel; (iii) increased
salary and benefits associated with two additional product development engineers
and one support person in Finance; (iv) increased product development expenses
for several new workstations; and, (v) increased legal fees for patent and
trademark protections in key markets of the world. The decrease in cash and
equivalents and in working capital was also occasioned by costs incurred in
connection with a certain product Integration agreement (Agreement) between the
Company and Intelligent Medical Imaging Inc (see LEGAL PROCEEDINGS above),
including legal fees, travel, salaries of support personnel, and development of
a software interface.

Inventory increased from $291,447 in fiscal year 1996 to $366,106 in fiscal year
1997. The increase in inventory was primarily due to: (i) additional purchases
of long lead time items; and, (ii) creation of an adequate level of finished
goods.

The Company's fixed assets net of depreciation increased from $58,234 in fiscal
year 1996 to $79,866 in fiscal year 1997. This increase was due to the purchase
of additional computer workstations for engineering, testing equipment,
software, and special tooling.

REVENUES

The Company's gross revenue increased by $211,832 or 90.2% in fiscal year 1997
over 1996.

COST OF GOODS:

The Company's gross profit (Net Revenue less cost of goods sold") increased by
$180,012 in fiscal year 1997 over 1996. The Company's gross profit percentage
(gross profit divided by Net Revenue) increased to 72.9% for fiscal year 1997 as
compared to 62.0% for fiscal year 1996. Management believes that the increase in
gross profit and gross profit margins are the combined result of savings
realized through greater economies of scale and continued success of the
Company's strategic growth plan.

SELLING GENERAL AND ADMINISTRATIVE

For the fiscal year ended June 30, 1997, the Company's expenses increased from
$1,105,157 to $2,015,548 an increase of $910,391 or 82.4%. The increase in SG&A
expenses was primarily "non-cash" and due to the effect of a certain investment
banking relationship made with Lester Morse, Esq. P.C., as assigned to WR
Consulting, Inc. (Agreement). Under the terms of the Agreement, the Investment
Banker committed to provide the Company with specific services and/or
undertakings (Services).

In return for Services, the Company issued to the Investment Banker 120,000
shares of the Company's common stock of which 60,000 such shares were issued to
Morse and 60,000 shares were issued to WR Consulting. Under applicable
accounting principles, the stock was valued at $5.75 per share and recognized as
a "non-cash" SG&A expense of $172,500 for each of the four quarters commencing
October 1, 1996. The increase in the Company's SG&A expense for the fiscal year
ended June 30, 1997 included the effect of the Agreement.

Without the effect of the Agreement, SG&A expenses would have increased from
$1,105,157 to $1,498,048.

The increase in Selling General and Administrative expense for the fiscal year
ended June 30, 1997 was primarily due to: (i) increased legal fees associated
with negotiating the product integration agreement with IMI; (ii) wages and
benefits associated with two additional employees; (iii) increased product
marketing expenses; (iv) increased sales office and sales related travel; and
(v) recognition of $47,000 of expense for "in-the-money" incentive stock options
held by certain employees and Directors of the Company as prescribed by
Statement of Financial Accounting Standards No. 123 using the Black Sholes
option pricing model.

RESEARCH AND DEVELOPMENT

For the fiscal year ended June 30, 1997, research and development expenses
increased from $250,930 to $408,234. Such increase was directly related to
purchases of materials for the prototype of three new workstation products and
costs associated with creating a software interface for units delivered to a
certain product integration agreement between the Company and Intelligent
Medical Instrument Inc. (see LEGAL PROCEEDINGS above).

NET LOSS

The Company's net loss increased from $1,039,026 in fiscal year 1996 to
$2,004,575 in fiscal year 1997. Management attributed the increased net loss to:
(i) the effect of the investment banking relationship with Lester Morse, Esq.
P.C., as assigned to WR Consulting, Inc. (see: SELLING GENERAL AND
ADMINISTRATIVE above; (ii) increased wages and benefits associated with
additional employees; (iii) increased product marketing expenses; (iv) office
and sales related travel; (v) increased legal fees associated with negotiating
the product integration agreement with IMI; (vi) recognition of stock option
expense as prescribed by Statement of Financial Accounting Standards No. 123;
and, (vii) increased research and engineering costs associated with new product
development.

                                       12
<PAGE>

INFLATION

Inflation had no material adverse effect on the Company's financial results for
the period ended June 30, 1997.

ITEM 7 FINANCIAL STATEMENTS AND SCHEDULES

     See Schedules

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

     None

                                    PART III

ITEM 9 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The information under the caption "Election of Directors and Officers" in the
Company's definitive Proxy Statement, to be filed pursuant to Regulation 14A for
the 1997 Annual Meeting of Shareholders, is hereby incorporated herein by
reference.

ITEM 10 EXECUTIVE COMPENSATION

The information under the caption "Executive Compensation" in the Company's
Proxy Statement to be filed pursuant to Regulation 14A for the 1997 Annual
Meeting of Shareholders is hereby incorporated herein by reference.

ITEM 11 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information under the caption "Voting Securities and Principal Holders
Thereof" and the information as to beneficial ownership of the Company's Common
Stock and Warrants in the table under the caption "Election of Directors" in the
Company's definitive Proxy Statement, to be filed pursuant to Regulation 14A for
the 1998 Annual Meeting of Shareholders, is hereby incorporated herein by
reference.

ITEM 12 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     None

                                     PART IV

ITEM 13 EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8K

     Form 8-K was filed on March 13, 1998

     Form 8-K was filed on April 13, 1998

                                       13
<PAGE>



SIGNATURES

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

(Registrant)

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

By: (Signature and Title)*                         Todd M. DeMatteo
--------------------------------------------------------------------------------
Date:                                              President, CEO and Director

Pursuant to the requirements of Securities Exchange Act of 1934, this report has
been signed below by the following persons on behalf of the registrant and in
the capacities and on the dates indicated.

-------------------------------------------------------------------------------
Todd M. DeMatteo
President, CEO and Director                        Date:

--------------------------------------------------------------------------------
Conard R. Shelnut
Secretary and Director                             Date:

--------------------------------------------------------------------------------
Michael F. Primini
Chief Financial Officer;                           Date:
Assistant Secretary

--------------------------------------------------------------------------------
Walter Greenfield
Director                                           Date:

--------------------------------------------------------------------------------
Robert P. Carroll
Director                                           Date:

--------------------------------------------------------------------------------
Dr. Robert Engel
Director                                           Date:


                                       14
<PAGE>
<TABLE>
<CAPTION>

                          INDEX TO FINANCIAL STATEMENTS

                                                                                          Page
                                                                                          ----
<S>                                                                                     <C>
Report of Independent Auditors                                                             16

Financial Statements:

      Balance sheet at June 30, 1998                                                       17

      Statements of operations for the years ended June 30, 1998 and 1997 and
         the period March 27, 1992 (date of inception)
         through June 30, 1998                                                             18

      Statements of changes in stockholders' equity for the years ended
         June 30, 1998, 1997, 1996, 1995, for the sixth month period                     
         ended June 30, 1994 and for the periods ended December 31, 1993 and 1992        19 & 20

      Statements of cash flows for the years ended June 30, 1998 and 1997 and
         the period March 27, 1992 (date of inception) through June 30, 1998
                                                                                           21

      Notes to financial statements                                                       22-26
</TABLE>

                                       15
<PAGE>









                          INDEPENDENT AUDITORS' REPORT

Board of Directors
DiaSys Corporation

We have audited the balance sheet of DiaSys Corporation (a development stage
company) as of June 30, 1998 and the related statements of operations, changes
in stockholders' equity and cash flows for two years in the period then ended,
and the period March 27, 1992, date of inception, through June 30, 1998. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

We conducted our audits in accordance with 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 financial statements referred to above present fairly, in
all material respects, the financial position of DiaSys Corporation at June 30,
1998, and the results of its operations and its cash flows for the
aforementioned periods, in conformity with generally accepted accounting
principles.

                                              WISS & COMPANY, LLP

LIVINGSTON, NEW JERSEY
JULY 29, 1998

                                       16
<PAGE>

<TABLE>

<CAPTION>




                               DIASYS CORPORATION
                          (A Development Stage Company)

                                  BALANCE SHEET
                                  JUNE 30, 1998

                                     ASSETS
<S>                                                                                   <C>                <C> 
CURRENT ASSETS:
     Cash and equivalents                                                             $2,001,569
     Accounts receivable, less allowance for doubtful accounts of $19,000                112,044
     Finance receivables, net                                                             33,151
     Inventories                                                                         390,141
     Prepaid expenses and other current assets                                            15,363
                                                                                      ----------
                  Total Current Assets                                                                   $2,552,268

EQUIPMENT, FURNITURE AND FIXTURES, LESS
   ACCUMULATED DEPRECIATION                                                                                  82,244

PATENTS, LESS ACCUMULATED AMORTIZATION                                                                       53,478

LONG-TERM FINANCE RECEIVABLES, NET                                                                           55,752
                                                                                                         ----------

                                                                                                         $2,743,742
                                                                                                         ==========

                      LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
     Accounts payable and accrued expenses                                                                $  56,154

COMMITMENTS

STOCKHOLDERS' EQUITY:
     Preferred stock $.001 par value:
        Authorized 100,000 shares, no shares issued                                   $     --
     Common stock $.001 par value:
        Authorized 10,000,000 shares, issued 2,998,640                                     2,999
     Additional paid-in-capital                                                        8,719,440
     Deficit accumulated during the development stage                                 (6,034,851)
                                                                                      ----------
                  Total Stockholders' Equity                                                              2,687,588
                                                                                                         ----------
                                                                                                         $2,743,742
                                                                                                         ==========
</TABLE>


                                       17
<PAGE>
<TABLE>
<CAPTION>

                               DIASYS CORPORATION
                          (A Development Stage Company)


                            STATEMENTS OF OPERATIONS

                                                                                                                March 27, 1992
                                                                                                         (date of inception) through
                                                                             Year Ended June 30,
                                                                     ----------------------------------
                                                                         1998                  1997              June 30, 1998
                                                                     ------------           -----------         ---------------
<S>                                                                  <C>                    <C>                    <C>
NET SALES                                                            $   435,365            $   446,669            $ 1,711,057

COST OF GOODS SOLD                                                       151,927                121,127                577,497
                                                                     -----------            -----------            -----------
GROSS PROFIT                                                             283,438                325,542              1,133,560
                                                                     -----------            -----------            -----------
OPERATING EXPENSES:
     Selling                                                             942,600                939,645              3,001,683
     General and administrative                                          484,581                558,403              2,117,335
     Investment banking advisory services                                472,500                517,500                990,000
     Research and development                                            406,260                408,234              1,456,431
                                                                     -----------            -----------            -----------
                                                                       2,305,941              2,423,782              7,565,449
                                                                     -----------            -----------            -----------
LOSS FROM OPERATIONS                                                  (2,022,503)            (2,098,240)            (6,431,889)

INTEREST INCOME                                                           43,859                 93,665                401,538

INTEREST EXPENSE TO STOCKHOLDERS
    AND RELATED PARTY                                                     --                      --                    (4,500)
                                                                     -----------            -----------            -----------
NET LOSS                                                             $(1,978,644)           $(2,004,575)           $(6,034,851)
                                                                     ===========            ===========            ===========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
                                                                       2,578,127              2,364,000
                                                                     ===========            ===========

BASIC AND DILUTED LOSS PER COMMON SHARE                              $      (.77)           $      (.85)
                                                                     ===========            ===========
</TABLE>

                                       18
<PAGE>
<TABLE>
<CAPTION>
                               DIASYS CORPORATION
                          (A Development Stage Company)


                  STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

                                                                                                                         Deficit
                                                                                                                       Accumulated
                                                                                      Common Stock                   Paid-in During
                                                                              ----------------------                 the Development
                                                                                Shares     Par Value     Capital          Stage
                                                                              ---------    ---------    ---------    ---------------
<S>                                                                           <C>            <C>        <C>              <C>
MARCH 27, 1992, DATE OF INCEPTION, TO DECEMBER 31, 1992:
     March 27, 1992, issuance of common stock for equipment 
      and technology valued at zero                                             594,000      $  594     $    (594)       $   --
     March 27, 1992, issuance of common stock for distribution data, use
      of office equipment and services in regard to formation of the
      Company, valued at zero                                                   504,000         504          (504)           --
     March 27, 1992, issuance of common stock for cash at $.14 per share        702,000         702        99,298            --
     Net loss                                                                      --          --            --             (58,759)
                                                                              ---------      ------     ---------         --------- 
BALANCE, DECEMBER 31, 1992                                                    1,800,000       1,800        98,200           (58,759)

YEAR ENDED DECEMBER 31, 1993:
     November 15, 1993, common stock issued for legal fees at $.17 per
      share                                                                      20,000          20         3,346            --
     Compensation forgiven by officers                                             --          --          178,169           --
     Net loss                                                                      --          --             --           (188,709)
                                                                              ---------      ------     ---------         --------- 
BALANCE, DECEMBER 31, 1993                                                    1,820,000       1,820       279,715          (247,468)

SIX MONTHS ENDED JUNE 30, 1994:
     Issuance of common stock for cash in a private placement at $2.50 per
      share, less related expenses of offering of $101,525                      185,000         185       360,790            --
     Net loss                                                                      --          --            --            (108,083)
                                                                              ---------      ------     ---------         --------- 
BALANCE, JUNE 30, 1994                                                        2,005,000       2,005       640,505          (355,551)

YEAR ENDED JUNE 30, 1995:
     Issuance of common stock and 570,000 warrants to purchase common 
      stock forcash in a public offering at $5.00 per share and $.15 per
      warrant, less related expenses of offering of $1,212,896                1,130,000       1,130     4,521,474            --
      Issuance of common stock for finders fee at $5.00 per share                 5,000           5        24,950            --
     Shares of stock of founding stockholders returned on the effective
       date of the initial public offering at no cost and later cancelled      (900,000)       (900)          900            --
     Net loss                                                                      --          --            --           (657,055)
                                                                              ---------      ------     ---------         ---------
</TABLE>
                                       19
<PAGE>
<TABLE>

<CAPTION>

                               DIASYS CORPORATION
                          (A Development Stage Company)


            STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (continued)

                                                                                                                          Deficit
                                                                                                                        Accumulated
                                                                                    Common Stock                        During the
                                                                               ----------------------      Paid-in      Development
                                                                                 Shares     Par Value      Capital         Stage 
                                                                               ---------    ---------    ----------     -----------
<S>                                                                            <C>           <C>         <C>            <C>
BALANCE, JUNE 30, 1995                                                         2,240,000     $ 2,240     $5,209,660     $(1,012,606)

YEAR ENDED JUNE 30, 1996:
     Net loss                                                                      --           --              --       (1,039,026)
                                                                               ---------     -------     ----------     -----------
BALANCE, JUNE 30, 1996                                                         2,240,000       2,240      5,209,660      (2,051,632)

YEAR ENDED JUNE 30, 1997:
     Issuance of 120,000 shares of common stock for investment banking
      advisory services at $5.75 per share                                       120,000         120        517,380           --
     Exercise of 4,000 warrants at $7.00 per share                                 4,000           4         27,996           --
     Issuance of common stock options to directors for services rendered           --           --           47,000           --
     Net loss                                                                      --           --              --       (2,004,575)
                                                                               ---------     -------     ----------     -----------
BALANCE, JUNE 30, 1997                                                         2,364,000       2,364      5,802,036      (4,056,207)

YEAR ENDED JUNE 30, 1998:
     Issuance of 50,000 shares of common stock for investments banking
      advisory services at $6.00 per share                                        50,000          50        299,950           --
     Issuance of 30,000 shares of common stock for warrant underwriting
      services at $8.75 per share                                                 30,000          30        262,470           --
     Valuation adjustment for stock issued for services                            --           --          172,500           --
     Exercise of 250 warrants at $5.25 per share, net of expenses of $163            250        --            1,150           --
     Exercise of 548,390 warrants at $4.50 per share, net of expenses of
      $305,991                                                                   548,390         549      2,161,215           --
     Exercise of 5,000 options at $2.50 per share                                  5,000           5         12,495           --
     Exercise of 1,000 options at $7.625 per share                                 1,000           1          7,624           --
     Net loss                                                                      --           --             --        (1,978,644)
                                                                               ---------     -------     ----------     -----------
BALANCE, JUNE 30, 1998                                                         2,998,640     $ 2,999     $8,719,440     $(6,034,851)
                                                                               =========     =======     ==========     =========== 
</TABLE>

                                       20
<PAGE>
<TABLE>
<CAPTION>

                               DIASYS CORPORATION
                          (A Development Stage Company)


                            STATEMENTS OF CASH FLOWS

                                                                                                                   March 27, 1992
                                                                                     Year Ended June 30,        (date of inception)
                                                                                -----------------------------         Through
                                                                                    1998              1997         June 30, 1998
                                                                                -----------       -----------      ------------- 
<S>                                                                             <C>               <C>               <C>         
CASH FLOWS FROM OPERATING ACTIVITIES:
     Net loss                                                                   $(1,978,644)      $(2,004,575)      $(6,056,263)
     Adjustments to reconcile net loss to net cash flows from operating 
       activities:
           Compensation forgiven by officers                                           --                --             200,000
           Amortization of patents                                                   40,446            37,617           115,054
           Depreciation of equipment, furniture
              and fixtures                                                           22,785            16,057            59,862
           Provision for losses on accounts receivable
              and sales returns in 1997                                                --             326,031           345,031
          Common stock issued for services                                          472,500           517,500           990,000
          Common stock options issued for services                                     --              47,000            47,000
           Changes in operating assets and liabilities:
              Accounts receivable                                                    85,719          (475,991)         (435,663)
              Inventories                                                           (24,035)          (74,659)         (390,141)
              Prepaid expenses and other current assets                               3,990             8,614           (15,363)
              Accounts payable and accrued expenses                                 (69,144)           42,210            59,474
                                                                                -----------       -----------       ----------- 
                    Net cash flows from operating activities                     (1,446,383)       (1,560,196)       (5,081,009)
                                                                                -----------       -----------       ----------- 
CASH FLOWS FROM INVESTING ACTIVITIES:
     Purchases of equipment, furniture and fixtures                                 (25,163)          (37,688)         (142,106)
     Costs of patents                                                               (21,010)          (65,095)         (168,531)
     Increase in direct finance receivables                                         (88,903)           --               (88,903)
                                                                                -----------       -----------       ----------- 
                    Net cash flows from investing activities                       (135,076)         (102,783)         (399,540)
                                                                                -----------       -----------       ----------- 
CASH FLOWS FROM FINANCING ACTIVITIES:
     Offering costs                                                                  14,003           (14,003)       (1,289,421)
     Proceeds from issuance of common stock
        and warrants                                                              2,445,539            28,000         8,771,539
                                                                                -----------       -----------       ----------- 
                    Net cash flows from financing activities                      2,459,542            13,997         7,482,118
                                                                                -----------       -----------       ----------- 
NET CHANGE IN CASH AND EQUIVALENTS                                                  878,083        (1,648,982)        2,001,569

CASH AND EQUIVALENTS, BEGINNING OF PERIOD                                         1,123,486         2,772,468              --
                                                                                -----------       -----------       ----------- 
CASH AND EQUIVALENTS, END OF PERIOD                                             $ 2,001,569       $ 1,123,486       $ 2,001,569
                                                                                ===========       ===========       ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
     Interest paid                                                              $       --        $      --         $      --
                                                                                ===========       ===========       ===========
     Income taxes paid                                                          $       --        $      --         $      --
                                                                                ===========       ===========       ===========
NONCASH FINANCING ACTIVITIES -
     Issuance of common stock for finders
        fees and expenses                                                       $       --        $      --         $    25,000
                                                                                ===========       ===========       ===========
     Application of deferred offering costs at
        June 30, 1994                                                           $       --        $      --         $    25,000
                                                                                ===========       ===========       ===========
</TABLE>

                                       21

<PAGE>


                               DIASYS CORPORATION
                          (A Development Stage Company)
                          NOTES TO FINANCIAL STATEMENTS

              

NOTE 1   --             NATURE OF THE BUSINESS AND SUMMARY OF SIGNIFICANT
                        ACCOUNTING  POLICIES:

                        NATURE OF THE BUSINESS - DiaSys Corporation ("the
                        Company"), designs, develops, manufactures, and
                        distributes proprietary products for medical and
                        clinical laboratory applications. The Company
                        distributes its products primarily through regional
                        sales managers employed by the Company and through
                        distributors in North America, Europe and Pacific Asia.

                        The Company is in the development stage and, since its
                        incorporation on March 27, 1992, has engaged in
                        organizational activities, development and marketing of
                        proprietary products used in routine laboratory analysis
                        of human lower body fluids including urine and feces.
                        The Company has had limited sales and has operated at a
                        loss since inception.

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

                        FINANCIAL INSTRUMENTS - Financial instruments include
                        cash and equivalents, accounts receivable, direct
                        finance receivables, accounts payable and accrued
                        expenses. The amounts reported for financial instruments
                        are considered to be reasonable approximations of their
                        fair values based on market information available to
                        management. The use of different market assumptions
                        and/or estimation methodologies could have a material
                        effect on the estimated fair value amounts.

                        REVENUE RECOGNITION - Revenue from equipment sales is
                        recognized at the time the equipment is shipped.

                        INCOME TAXES - Deferred income taxes arise from
                        temporary differences between financial and tax
                        reporting, principally bad debt expense and net
                        operating loss carryforwards.

                        FINANCING TRANSACTIONS - Certain of the Company's lease
                        and "use" based receivables are recorded utilizing the
                        sales-type method. When a finance transaction is
                        consummated, the Company records the minimum lease
                        payments receivable and the unearned income arising from
                        the lease. The unearned income is recognized over the
                        term of the lease using the interest method.

                        INVENTORIES - Inventories are stated at the lower of
                        cost (first-in, first-out method) or market and consist
                        of products manufactured by the Company, in addition to
                        products manufactured by subcontractors to Company
                        specifications.

                        EQUIPMENT, FURNITURE AND FIXTURES - Equipment, furniture
                        and fixtures are recorded at cost and are depreciated
                        primarily using the straight-line method over their
                        estimated useful lives of 3 to 10 years.

                        PATENT COSTS - The costs of obtaining patents are
                        amortized over a 3 year life for accounting purposes.

                        WARRANTY COSTS - Through March 1995, warranty costs were
                        incurred by subcontractors and accordingly, no accrual
                        was appropriate. Since April 1995, the Company assembles
                        its finished goods, and will repair or replace any unit
                        which fails to operate due to defective parts or
                        workmanship within one year from the purchase date. As
                        warranty costs remain and are expected to remain
                        insignificant, no accrual for warranty costs is
                        appropriate.

                        EARNINGS PER SHARE - Statement of Financial Accounting
                        Standards (SFAS) No. 128 "Earnings Per Share" requires
                        the disclosure of both diluted and basic earnings per
                        share. Basic earnings per share is based upon the
                        weighted average of all common shares outstanding. The
                        computation of diluted earnings per share does not
                        assume the conversion, exercise or contingent issuance
                        of securities that would have an antidilutive effect on
                        earnings per share.

                                       22
<PAGE>

                               DIASYS CORPORATION
                          (A Development Stage Company)
                          NOTES TO FINANCIAL STATEMENTS


                        CASH EQUIVALENTS - The Company considers money market
                        funds and all other highly liquid debt instruments
                        purchased with an original maturity of three months or
                        less to be cash equivalents.

                        STOCK OPTIONS - The Company accounts for stock option
                        grants using the intrinsic value based method prescribed
                        by APB Opinion No. 25. Since the exercise price equaled
                        or exceeded the estimated fair value of the underlying
                        shares at the date of grant, no compensation was
                        recognized in 1998 and 1997.

                        Had compensation cost been based upon the fair value of
                        the option on the date of grant, as prescribed by SFAS
                        No. 123, the Company's proforma net loss and net loss
                        per share would have been approximately $(2,142,449)
                        ($.83 per share) in 1998 and ($2,029,000) ($.86 per
                        share) in 1997, using the Black-Scholes option pricing
                        model.

                        The fair value of options granted in 1998 were estimated
                        at the date of grant using a Black-Scholes option
                        pricing model with the following weighted-average
                        assumptions, respectively: risk-free interest rates of
                        6.0%, dividend yield of 0.0%, volatility factors of the
                        expected market price of the Company's Common Stock of
                        42.8% and a weighted-average expected life of the
                        options of 8 years.

                        The Black-Scholes option valuation model was developed
                        for use in estimating the fair value of traded options
                        which have no vesting restrictions and are fully
                        transferable. In addition, option valuation models
                        require the input of highly subjective assumptions
                        including the expected stock price volatility. Because
                        the Company's employee stock options have
                        characteristics significantly different from those of
                        normal publicly traded options, and because changes in
                        the subjective input assumptions can materially affect
                        the fair value estimate, in management's opinion, the
                        existing models do not necessarily provide a reliable
                        single measure of the fair value of its employee stock
                        options.

                        RECENTLY ISSUED ACCOUNTING STANDARDS - In June 1997 the
                        Financial Accounting Standards Board (FASB) issued SFAS
                        No. 130, "Reporting Comprehensive Income," and SFAS No.
                        131, "Disclosures About Segments of an Enterprise and
                        Related Information." SFAS No. 130 establishes standards
                        for reporting comprehensive income in financial
                        statements and SFAS No. 131 expands certain reporting
                        and disclosure requirements for segments from current
                        standards. In February 1998, the FASB issued SFAS No.
                        132, "Employers' Disclosures about Pensions and Other
                        Postretirement Benefits." SFAS No. 132 revises
                        employers' disclosures about pension and other
                        postretirement benefit plans. The Company will adopt
                        these statements in fiscal 1999. In June 1998, the FASB
                        issued SFAS No. 133, "Accounting for Derivative
                        Instruments and Hedging Activities." This statement
                        establishes accounting and reporting standards for
                        derivative instruments, including certain derivative
                        instruments embedded in other contracts, and for hedging
                        activities. The adoption of these statements is not
                        expected to have a material effect on the Company's
                        financial statements.

NOTE 2   -              FINANCE RECEIVABLES:

                            Net investment in sales-type and 
                             "Use" base leases
                             are summarized as follows:

                            Minimum lease payments receivable        $105,299
                             Unearned income                          (16,396)
                                                                     -------- 

                            Net investment in sales-type leases      $ 88,903
                                                                     ========


                            Minimum lease payments to be received under the
                             above lease agreements as of June 30, 1998 
                             are as follows:

                               Year Ending June 30
                               -------------------
                                        1999                      $ 41,649
                                        2000                        37,399
                                        2001                        26,251
                                                                 ---------
                                                                  $105,299
                                                                  ========

                                       23
<PAGE>

                               DIASYS CORPORATION
                          (A Development Stage Company)
                          NOTES TO FINANCIAL STATEMENTS


NOTE 3   --             INVENTORIES:

                        Inventories at June 30, 1998 consist of the following:

                                Raw material                $183,011
                                Work-in-process                2,493
                                Finished goods               204,637
                                                            --------
                                                            $390,141
                                                            ========

NOTE 4   --             CONCENTRATION OF CREDIT RISK:

                        Included in cash and equivalents is a mutual fund
                        consisting of U.S. Treasury bill investments of
                        approximately $1,997,000 maturing at weekly intervals,
                        bearing interest between 4.8% and 5.0% per annum.

NOTE 5   -              EQUIPMENT, FURNITURE AND FIXTURES:

                        Equipment, furniture and fixtures at June 30, 1998 are
                        summarized as follows:

                                Machinery and equipment              $ 96,645
                                Furniture and fixtures                 45,354
                                                                     --------
                                                                      141,999
                                Less:  Accumulated
                                       depreciation                    59,755
                                                                     --------
                                                                     $ 82,244
                                                                     ========

NOTE 6   -              INCOME TAXES:

                        For income tax reporting purposes, the Company has a
                        December 31 year end. The Company has a net operating
                        loss carryforward of approximately $5,800,000 at June
                        30, 1998 (including net losses for the six months ended
                        June 30, 1998) which can be used to offset future
                        federal taxable income through 2012.

                        The significant components of the Company's deferred 
                        tax assets at June 30, 1998 are summarized below:

                              Allowance for doubtful accounts      $     8,000
                              Net operating loss tax 
                               carryforwards                         2,488,000
                                                                   -----------
                                                                     2,496,000

                              Valuation allowance                   (2,496,000)
                                                                   ----------- 
                                                                   $       --
                                                                   ===========  

                        A valuation allowance is provided when it is more likely
                        than not that some portion of the deferred tax asset
                        will not be realized. The Company has determined, based
                        on the Company's recent net loss, that a full valuation
                        allowance is appropriate at June 30, 1998.

NOTE 7   -              PREFERRED STOCK:

                        The Board of Directors is authorized to issue 100,000
                        shares of Preferred Stock, $.001 par value, in one or
                        more series and, to the extent now or hereafter
                        permitted by the laws of the State of Delaware, to fix
                        and determine the preferences, voting powers,
                        qualifications and special and relative rights or
                        privileges of each series including, but not limited to:
                        (i) the number of shares to constitute such series and
                        the distinguishing designation thereof; (ii) the
                        dividend rate on the shares of such series and the
                        preferences, if any, and the special and relative rights
                        of such shares of such series as to dividends; (iii)
                        whether or not the shares of such series shall be
                        redeemable and, if redeemable, the price, terms and
                        manner of redemption; (iv) the preferences, if any, and
                        the special and relative rights of the shares of such
                        series upon liquidation of the Company; (v) whether or
                        not shares of such series shall be subject to the
                        operation of a sinking fund and, if so, the terms and
                        provisions of such fund; (vi) whether or not such series
                        shall be convertible into shares of any other class or
                        other series of the same class of stock of the Company
                        and, if so, the conversion price or ratio and other
                        conversion rights; (vii) the conditions under which the
                        shares of such series shall have separate voting rights
                        or no voting rights; and (viii) such other designations,
                        preferences and relative, participating, optional or
                        other special rights and qualifications, limitations or
                        restrictions of such series to the full extent now or
                        hereafter permitted by the laws of the State of
                        Delaware. Notwithstanding the fixing of the number of
                        shares constituting a particular series, the Board of
                        Directors may at any time authorize the issuance of
                        additional shares of the same series.

                                       24
<PAGE>

                               DIASYS CORPORATION
                          (A Development Stage Company)
                          NOTES TO FINANCIAL STATEMENTS


NOTE 8   --             INCENTIVE STOCK OPTION PLAN:

                        The Company has an incentive stock option plan, the 1993
                        Incentive Stock Option Plan (the "Plan"), under Section
                        422 of the Internal Revenue Code whereby the Company
                        will reserve up to 100,000 shares of its common stock
                        for the purpose of granting options to purchase such
                        shares (the "Options") pursuant to the Plan. Options are
                        granted to its officers, employees, and directors, as
                        determined by the Board of Directors or by a committee
                        appointed by them, provided that the exercise price of
                        the Options is equal to or greater than the fair market
                        price of the Company's common stock on the date the
                        Option is granted. No Options may be granted under the
                        Plan after November 14, 2003. No Options may be
                        exercised until the twenty-fourth month following the
                        date the Option was granted. At such time, 50% of the
                        shares of common stock covered by the Option may be
                        exercised, the remaining 50% balance are exercisable
                        thirty-six months after issuance of the Option.

                        Unless otherwise provided, no Options granted under the
                        Plan are transferable by the Optionee other than by will
                        or by the law of descent and distribution. Options
                        granted under the Plan terminate within a specified
                        period of time following termination of an Optionee's
                        employment.

                        With respect to an Option granted to an employee who
                        possesses more than 10% of the voting rights of the
                        Company's outstanding capital stock on the date of
                        grant, the exercise price of the Option must be at least
                        equal to 110% of the fair market value of the shares
                        subject to the Option on the date of the grant. The
                        aggregate fair market value of the common stock
                        (determined at the date of the Option grant) for which
                        incentive stock options granted under the Plan may
                        become first exercisable in a calendar year may not
                        exceed $100,000. No Option will be exercisable prior to
                        two years from the date of grant and Options may not be
                        exercisable more than ten years after the date of grant
                        (five years if held by an employee holding more than 10%
                        of total voting rights).

                        During February 1996, the Plan was amended to increase
                        the number of shares of common stock available for
                        granting Options to purchase such shares to a total of
                        200,000 shares. An additional amendment, approved at the
                        1997 annual meeting, increased the number of shares to a
                        total of 300,000.

                        Outstanding Options at June 30, 1998 are as follows:
<TABLE>

<CAPTION>

                                                             Shares       Exercise Price                  Expiration
                         Exercise Date                      Issuable         Per Share                       Date
                         -------------                      --------      --------------                  -----------
                         <S>                                 <C>               <C>                      <C> 

                         February 1996                       30,000            $2.50                    February 2004
                         February 1997                        8,000             6.00                    February 2005
                         September 1997                       3,000             6.875                   September 2005
                         February 1998                        9,000             7.25                    February 2006
                         June 1998                            4,500             7.625                   June 2006
                         September 1998                      63,000             6.25                    September 2006
                         November 1998                        5,000             5.75                    November 2006
                         February 1999                       38,000             7.063                   February 2007
                         June 1999                           12,500             6.00                    June 2007
                         January 2000                        21,000             5.625                   January 2008
                         February 2000                       40,000             5.875                   February 2008
                         May 2000                             7,000             8.875                   May 2008
                                                            -------

                         Total Options Outstanding          241,000            $2.50-8.875
                                                            =======
</TABLE>

       Options under the Incentive Stock Option Plan are summarized as follows:


                                       25
<PAGE>

<TABLE>

<CAPTION>

                               DIASYS CORPORATION
                          (A Development Stage Company)
                          NOTES TO FINANCIAL STATEMENTS





                                                                                            Year Ended June 30, 1998
                                                                                     ---------------------------------------
                                                                                                               Weighted-
                                                                                        Shares                   Average
                                                                                     Under Option             Exercise Price
                                                                                     ------------             --------------
                             <S>                                                     <C>                          <C>  
                             Options outstanding at
                                beginning of year                                        185,000                  $5.79
                             Options granted                                              68,000                   6.11
                             Options expired/withdrawn                                    (6,000)                  7.06
                             Options exercised                                            (6,000)                  3.35
                                                                                     -----------
                             Options outstanding at end of year                          241,000                   5.79
                                                                                     ===========
                             Option price per share                                  $2.50-8.875
                                                                                     ===========
                             Options exercisable:
                                Number of shares                                          46,250                   3.96
                                                                                     ===========
</TABLE>


NOTE 9   --             COMMITMENTS:

                        LEASES - The following is a schedule of future minimum
                        rental payments required for all non-cancellable 
                        operating leases:

                               Year Ending June 30,
                               --------------------
                                       1999                    $ 64,476
                                       2000                      64,476
                                       2001                      42,984
                                                               --------
                                                               $171,936
                                                               ========

                        OFFICER'S COMPENSATION - One of the Company's officers
                        has an employment agreement for a one year term
                        effective January 1, 1998 which is renewable upon mutual
                        consent of the parties. For the years ended June 30,
                        1998 and 1997, the officer earned annual base
                        compensation of $142,500 and $135,000, respectively.

NOTE 10  --             MAJOR CUSTOMERS:

                        Sales to foreign customers as a percentage of net sales
                        totaled 29% in 1998 and 13% in 1997.

                                       26