SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                                    FORM 10-KSB


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

For the fiscal year ended February 28, 1997

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

For the transition period from _______________to ________________


                          Commission File No. 33-51218

                          MEDISCIENCE TECHNOLOGY CORP.
                 (Name of Small Business Issuer in its Charter)


      New Jersey                                             22-1937826
(State or Other Jurisdiction of                           (I.R.S. Employer
Incorporation or Organization)                           Identification No.)

               1235 Folkestone Way, Cherry Hill, New Jersey 08034
                    (Address of Principal Executive Offices) 

Issuer's Telephone Number, Including Area Code:              (609) 428-7952

                                      None
--------------------------------------------------------------------------------
         Securities registered under Section 12(b) of the Exchange Act: 

                     Common Stock, par value S.01 per Share
--------------------------------------------------------------------------------
         Securities registered under Section 12(g) of the Exchange Act: 

         Check  whether  the issuer:  (1) has filed all  reports  required to be
filed by Section 13 or 15(d) of the  Exchange  Act during the past 12 months (or
for such shorter  period that the  registrant was required to file such reports)
and (2) has been subject to such filing requirements for the past 90 days.
Yes [X] 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 will not be
contained,  to the  best of  registrant's  knowledge,  in  definitive  proxy  or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB [X].
<PAGE>
The  Registrant  did not have any sales,  and had  interest  income of  $62,475,
during its fiscal year ended February 28, 1997.

The  aggregate  market value of the voting stock held by  non-affiliates  of the
Registrant, as of June 13, 1997, was: $15,807,384.

The numbers of shares outstanding of each of the registrant's  classes of stock,
as of June 13, 1997, were:

  Title of Each Class                         Number of Shares Outstanding
  -------------------                         ----------------------------

  Common Stock, par value $.01                         34,933,618
  per share

  Preferred Stock, par value $.01                           2,074
  per share
<PAGE>
                          MEDISCIENCE TECHNOLOGY CORP.
                          ANNUAL REPORT ON FORM 10-KSB 
                                TABLE OF CONTENTS

                                     PART 1

                                                                                
Item 1.    Description of Business
Item 2.    Description of Properties 
Item 3.    Legal Proceedings 
Item 4.    Submission of Matters to a Vote of Security Holders

                                     PART II

Item 5.    Market For Common Equity and Related Shareholder Matters
Item 6.    Management's Discussion and Analysis of Plan of Operation 
Item 7.    Financial Statements  
              Report of Independent Public Accountants                          
              Consolidated Balance Sheets- February 28, 1997, and 
                February 29, 1996
              Consolidated Statements of Operations for the years ended
                February 28, 1997, February 29, 1996 and February 28, 1995  
              Consolidated Statement of Stockholders' Equity for the years ended
                February 28, 1997, February 29, 1996 and February 28, 1995
              Consolidated Statements of Cash Flows for the years ended
                February 28, 1997, February 29, 1996 and February 28, 1995 
              Notes to Consolidated Financial Statements                        

Item 8.    Changes in and Disagreements with Accountants on Accounting and
             Financial Disclosures 


                                    PART III

Item  9.   Directors, Executive Officers, Promoters and Control Persons; 
             Compliance with Section 16(a) of the Exchange Act  
Item 10.   Executive Compensation 
Item 11.   Security Ownership of Certain Beneficial Owners and Management
Item 12.   Certain Relationships and Related Transactions 
Item 13.   Exhibits, List and Reports on Form 8-K 
<PAGE>
                                     PART I

ITEM 1.  DESCRIPTION OF BUSINESS

Introduction

         This Annual  Report on Form  10-KSB  contains  certain  forward-looking
statements  within the meaning of Section 27A of the  Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934. Actual events or results may
differ  materially from those projected in the  forward-looking  statements as a
result of the factors described herein. Such forward-looking statements include,
but are not limited to, statements concerning business strategy, development and
introduction of new products,  research and  development,  marketing,  sales and
distribution,  manufacturing, competition, third-party reimbursement, government
regulation (including, but not limited to, FDA requirements), continued clinical
trial relationships and operating and capital requirements.

         Mediscience  Technology  Corp.  (the  "Company")  designs and  develops
proprietary  diagnostic  medical  devices that detect cancer using light induced
native  tissue  fluorescence  and  Raman  spectroscopy  to  distinguish  between
malignant and normal or benign tissue. Animal and human tissue contain molecules
that emit and scatter  naturally  when excited by light at certain  wavelengths.
Since the  molecular  makeup of tissue  changes  as it  becomes  cancerous,  the
Company's  medical  devices are able to detect a shift in the  resulting  native
tissue  fluorescence  and Raman  spectra  allowing them to  distinguish  between
normal or benign  tissue and  cancerous  tissue.  The Company also is developing
optical imaging  technology to  non-invasively  detect and  characterize  deeply
embedded lesions such as breast,  prostate and brain tumors using ultrafast time
resolved methods.

Background

         On December  1, 1988 the  Company  acquired  from  Professor  Robert R.
Alfano all the outstanding stock of Laser Diagnostic Instruments,  Inc. ("LDI"),
which is presently a wholly-owned subsidiary of the Company. The principal asset
of LDI  was  the  ownership  of all  rights,  title  and  interest  in a  patent
application  entitled "Method and Apparatus for Detecting Cancerous Tissue Using
Visible Luminescence", which was subsequently granted as patent number 4,930,516
by the U.S.  Patent and  Trademark  Office on June 5,  1990.  The  research  and
development  activities  of the Company are the subject of this patent and other
patents  subsequently  applied  for or granted to the  Company,  acquired by the
Company or  exclusively  licensed to the Company.  The Company has  successfully
conducted  laboratory and other  pre-clinical  testing all of which continues to
support the Company's belief that its proprietary native tissue fluorescence and
Raman  spectrum  cancer  detection  technology  ("its  Technology"),  when fully
developed,  will  be  useful  in the  screening  and  or  diagnosis  of  cancer.
Management believes that its Technology,  if successfully  developed,  will have
substantial commercial appeal due to its non-invasive character, its delivery of
immediate,  real-time  results,  its  diagnostic  sensitivity  and its appeal to
physicians who can generate  additional office revenues that currently accrue to
an off site pathology  laboratory.  On January 6, 1997, the Company received FDA
approval of its  Investigational  Device Exemption to initiate phase II clinical
trials with its CD Scan medical device for early stage detection of cancer. (See
"Government Regulation (FDA Matters)" below).
<PAGE>
Strategy

         The  Company's  strategy  is to develop  one or more  products  for the
non-invasive or  minimally-invasive  diagnosis of specific types of cancer which
it ultimately  plans to market  worldwide either directly for its own account or
in various types of partnering or licensing  arrangements  with other firms. The
United  States  will  be  the  principal  direct  focus  of  the  Company  while
international  markets are expected to be addressed via  partnering or licensing
arrangements with other companies.

         The Company believes its Technology will have rather broad  application
utility in cancer  diagnosis,  however,  each  approved  labeled  indication  is
expected to require separate premarketing approval (a "PMA"), which will be both
time-consuming  and costly.  The Company therefore plans to carefully select and
prioritize  its targeted  diagnostic  applications  to insure the best  possible
payback on its product and clinical development investments.

         The  Company  has   successfully   conducted   pre-clinical   in  vitro
investigations  with tissue  removed  from the upper  aerodigestive  tract,  the
cervix, the breast and the colon. A human clinical in vivo feasibility study was
successfully  completed for the upper  aerodigestive  tract and additional human
clinical in vivo feasibility studies are scheduled for the breast and esophagus.
Other  possible  application  opportunities  will be  evaluated  during 1997 and
pre-clinical  in vitro  evaluations  are expected to be undertaken  for the more
promising opportunities before moving on to human in vivo clinical studies.

The Products

         The Company has  developed  three  prototype  products  that employ its
Technology for cancer  diagnosis.  They include Cancer Detection ("CD") Scan, CD
Ratiometer  and CD Map. These devices use lamp light to provide a broad spectrum
of safe,  scanning  excitation light  wavelengths to insure that the appropriate
target  tissue  molecules  are   sufficiently   fluoresced  to  provide  maximum
diagnostic sensitivity.  A fiberoptic probe is attached to each of the Company's
devices which is used to transmit the optical  excitation  signal and to receive
the native fluorescent response. The CD instruments are believed to have a great
deal of  versatility  and a broad  range of  potential  alternative  application
depending on the preferred  configuration of the fiberoptic  probe. For example,
the  fiberoptic  probe can be  configured  as a  convenient  hand held probe for
easy-to-access areas such as the oral cavity or the skin surface, or the optical
fiber can be fed down the working  channel of a rigid or flexible  endoscope for
assessment of the upper or lower GI tract,  or the optical fiber can be inserted
into  a  cytoscope  for  urinary  tract   exploration,   or  a  colposcope   for
gynecological evaluation or a laparoscope for evaluation of internal organs, and
even through a core biopsy  needle,  to optically  assess  breast  tumors or for
optical  assessment of other deep tissue tumors,  such as sometimes occur in the
pancreas, liver or prostate.

         The CD Scan product prototype is oriented toward medical  research.  It
is  designed  to provide  optical  scanning  capability  of a broad  spectrum of
optical  wavelengths  for  evaluation  of tissue.  The Company  uses the CD Scan
whenever possible to help define the critical scanning and emission  wavelengths
for its two other prototype  products.  CD Ratiometer on the other hand is being
designed  as a simple,  compact  instrument  with  user  friendly  features  and
characteristics.  It is designed to optically  assess the scanned tissue only at
pre-established  optical  wavelengths  and report out  essentially  a yes, no or
<PAGE>
maybe  result on a computer  screen,  instantaneously.  CD  Ratiometer  with its
anticipated  assortment of probe designs is expected to be the preferred product
for medical  practitioners to use in the office or clinical setting. CD Map is a
vision  instrument that is being designed to optically  assess an area of tissue
rather than selective  individual points.  Although it is at an earlier stage of
design  than  either CD Scan or CD  Ratiometer,  it is  expected  to report  out
results similar to the CD Ratiometer but in pseudocolored  graphics (a "map") on
a computer screen distinguishing the normal areas from cancerous areas via color
differentiation.  CD Map, if it can be successfully developed, is expected to be
especially  useful in assisting cancer surgeons in defining the surgical margins
of tumors,  real time,  during cancer surgery without the use of extrinsic dyes,
drugs or other invasive agents.

Research and Product Development

         The potential utility of native tissue fluorescence spectroscopy for in
vivo cancer  detection in humans was first  discovered  by  Professor  Robert R.
Alfano,  Distinguished  Professor of Physics and Engineering at the City College
of the City  University of New York ("CUNY") in the early 1980's.  Subsequent to
acquisition by the Company of LDI from Dr. Alfano in 1988, the Company  retained
Dr.  Alfano as a  consultant  to advise and assist  the  Company to develop  its
Technology.  Shortly thereafter, the Company also developed a research agreement
with  the  Research  Foundation  of CUNY to  provide  research  and  development
services to the Company. In 1992, the Company, CUNY, and the Research Foundation
of CUNY established the Mediphotonics  Laboratory ("MPL") at the City College of
New York which  currently  provides  research  and  development  services to the
Company. (See "Research Arrangements with the City University of New York").

         The staff of the MPL, which is supervised by Dr. Alfano,  developed the
Company's  current  prototype  CD  devices.  It  has  also  conducted  in  vitro
pre-clinical  testing of various  human tissue  types such as breast,  cervical,
colon and the upper  aerodigestive  tract,  to  develop  the  preferred  optical
scanning and emission  wavelengths  that yield the most  definitive  information
about the native  fluorescent  characteristics  of specific scanned tissue.  The
insight gained from this work has been the principal source of knowledge for the
subsequently  issued and  pending  patents  for which the  Company  either  owns
outright or possesses a world wide exclusive  license.  The information  gleaned
from this work was also the source for a number of scientific  papers  published
in peer-reviewed  journals and for  presentations  made at scientific  symposia.
This in vitro pre  clinical  research  and  development  work also  provided the
starting  basis for the optical  scanning  parameters  for the Company's in vivo
human clinical studies.

Clinical Development

         The Company's CD products are designed primarily to be used directly on
human  patients  in vivo.  Part of the  process of product  development  and FDA
approval (see  "Government  Regulation  (FDA  Matters)") is the  development  of
sufficiently   compelling   clinical   evidence   to   demonstrate   safety  and
effectiveness  of one or more of the  Company's  prototype  CD products for each
intended  diagnostic  application  ( labeled or intended  use ).  Because of the
anticipated  clinical  utility of the  Company's  Technology  and  prototype  CD
products,  the  Company  has  been  able  to  develop  important   collaborative
relationships with some of the most highly regarded cancer research hospitals in
the United  States to assist it in the clinical  evaluation  of its prototype CD
products.   These  institutions  include  Memorial   Sloan-Kettering,   Columbia
Presbyterian  Hospital and the New York Hospital (Cornell Medical Center),  each
of New York, and  Massachusetts  General  Hospital  (Harvard  Medical School) in
Boston.
<PAGE>
         The Phase I clinical feasibility study of the upper aerodigestive tract
was carried out at Memorial Sloan-Kettering under the Principle Investigation of
Stimson P. Schantz,  M.D., Associate Professor of Surgery and Director of Cancer
Prevention.  It was  established  in  this  study  that  the  Company's  CD Scan
prototype product is able to distinguish  between cancerous and normal tissue in
the oral cavity  using its  Technology.  A phase II clinical  study in the upper
aerodigestive tract is scheduled to begin shortly.

         At least two other clinical  studies are also scheduled to begin during
1997. One such clinical study is focused on diagnosis of breast cancer using the
Company's second prototype product,  CD Ratiometer.  This clinical study will be
conducted at Massachusetts General Hospital under the Principle Investigation of
Daniel B. Kopans, M.D., Associate Professor of Radiology, Harvard Medical School
and Section Head, Breast Imaging,  Massachusetts  General Hospital, to determine
whether the Company's Technology can optically  distinguish on a real-time basis
between  cancerous  and  benign  breast  tumors in vivo by  passing a  specially
designed  optical fiber,  attached to the CD  Ratiometer,  through a core biopsy
needle  placed to within  one  millimeter  of the  tumor by  stereotactic  x-ray
guidance.  If the  technique  ultimately  proves  successful,  it will offer the
potential to further  reduce the  frequency of the  highly-invasive  practice of
open surgical  biopsy  currently  employed while providing  additional  valuable
cancer staging  information to the radiologist when the tumor is cancerous.  The
clinical  feasibility  study  will  be  sponsored  by the  Company  and  will be
partially  funded  by  the  United  States  Army  Medical  Research  Acquisition
Activity. If successful,  this phase I clinical feasibility study should provide
the basis for  additional  clinical  investigation  to establish  the safety and
effectiveness  of CD Ratiometer in providing  minimally-invasive,  real time, in
vivo  diagnosis  of  breast  tumors.  The  second,  planned,  phase  I  clinical
feasibility study will be done at New York Hospital's  Cornell Medical Center to
assess the  potential  utility of the Company's CD  Ratiometer  with  fiberoptic
probe adapted to a flexible endoscope  furnished by Pentax Precision  Instrument
Corporation for monitoring Barrett's Esophagus. The clinical trial agreement was
executed on April 24, 1997.  Barrett's  Esophagus is a malady that is thought to
be a  possible  precursor  to  esophageal  cancer in certain  people.  Barrett's
patients are routinely  monitored  because of the  heightened  risk that a small
proportion of them is predisposed  toward the development of esophageal  cancer.
The current medical practice requires that multiple excisional biopsies be taken
during  regularly  scheduled  follow-up  appointments  (typically  annually)  to
monitor the  progression  of the disease.  The  practice is painful,  costly and
probably  unnecessary in the majority of the Barrett's suffering  population but
the current  state of medical  practice  does not provide  sufficient  molecular
information to distinguish between the high risk group and the lower risk group.
It is hoped that endoscopic application of the Company's Technology will provide
gastroenterologists with the ability to better assess the condition of Barrett's
tissue in the  esophagus  without the need for the painful  multiple  excisional
biopsies.  It is also  hoped that this  additional  molecular  information  will
provide the ability to assess the relative risk of Barrett's patients toward the
development  of  esophageal  cancer  allowing  gastroenterologists  to establish
individual patient monitoring  schedules  appropriate to their relative level of
perceived risk.

Business Development and Marketing

         More than  1,200,000  new cancer  cases are  diagnosed  annually in the
United States according to the American Cancer Society. It is estimated by Theta
Corporation, a market research firm, that as many as 85 million people currently
alive in the United  States,  nearly one third of the  population,  will develop
<PAGE>
cancer  during their  lifetimes.  Cancer care and treatment is estimated to cost
$104 billion  annually,  $35 billion of which is estimated to be the direct cost
of the disease.  Cancer therapy has  progressed  rapidly in recent years but the
axiom that early  diagnosis is still critical for  successful  treatment for the
majority of cancer types still remains true.

         Although  several cancer  screening  techniques  have been developed to
provide  early  indication  of  various  types of  cancer  in  humans,  such as,
mammography  for breast  cancer,  PAP tests for cervical  cancer,  PSA tests for
prostate cancer and chest x-rays for lung cancer, excisional biopsy is still the
"gold standard" for making a definitive cancer diagnosis and for cancer staging,
i.e.,  determining the extent of the progression of the disease prior to mapping
out the most appropriate course of therapy.

         The excisional biopsy,  however, often requires a significant amount of
surgical  intervention  to collect an  adequate  tissue  sample to make a proper
diagnosis  and  staging  determination.  The process  can  sometimes  expose the
patient to unnecessary risks,  lengthy hospital stays, long recovery times, pain
and discomfort and significant health care expense.  The Company's Technology is
believed to offer the potential of a less physically invasive method to diagnose
and stage a variety of  cancers  without  the  excessive  costs and  potentially
debilitating  effects  of the  excisional  biopsy.  The  most  widely  practiced
technique for definitive  diagnosis of breast cancer, the leading cause of death
among American  women between the ages of 40 and 55, is open surgical  biopsy (a
specific type of excisional biopsy) which is done under a general anesthetic and
typically  results in  surgical  excision  of a golf  ball-sized  mass of breast
tissue.  About  800,000 such  procedures  are  performed  annually in the United
States at an estimated annual cost of between $2 billion and $4 billion.  If the
Company can  successfully  adapt its  technology  to diagnose  and stage  breast
cancers,  it  believes  it will save up to half the  current  cost,  eliminate a
significant amount of patient  discomfort for those patients  determined to have
cancer and  eliminate  most of the trauma for the 70% to 80% of the patients who
are found not to have cancer.

         The  Company  believes  that  its  Technology  and  one or  more of its
prototype CD products  will  potentially  be useful in diagnosis and staging for
more than half of the various types of cancers.  In addition to the pre-clinical
and clinical  evaluations  currently on the docket or already  completed,  i.e.,
upper aerodigestive  tract, breast and esophagus,  the Company is in the process
of creating a prioritized list of other potential applications that it will then
evaluate on a pre-clinical basis and, if successful, it contemplates progressing
to the  clinical  evaluation  phase  and on to the  premarket  approval  ("PMA")
application phase.

         The Company plans to develop  certain of its CD products for diagnostic
applications,  (sometimes  referred to as "labeled  indications"),  that it will
ultimately  market for its own account in the United  States.  In addition,  the
Company also plans to  co-develop  one or more of its  prototype CD products for
specific  cancer  diagnostic  applications  with  one  or  more  selected  other
companies.  The Company has nurtured relationships with a small number of highly
qualified  other  companies  who have  expressed  interest  in working  with the
Company to co-develop one or more of the Company's  existing  prototype products
or  possibly  variations  thereof in exchange  for  certain as yet  undetermined
rights to commercially exploit a finished approved product in the marketplace.
<PAGE>
         The Company has in the past and continues  presently to encourage these
possible  collaborations   especially  with  firms  that  have  strong  existing
franchises in certain specialized fields of diagnosis and treatment and who have
established  reputations with prospective  purchasers of diagnostic products and
who have proven  selling,  marketing  and  distribution  capabilities.  A select
number  of  these  kinds of  relationships,  if the  Company  is  successful  in
fostering  them,  are  expected  to add value to the Company by  stretching  and
leveraging the Company's  financial resource base with development and licensing
revenues that the Company can then use to help fund the  development  of its own
products.

         The Company also  believes that a market for its CD products will exist
in the European  Union and possibly in Asia. The Company  contemplates  making a
concerted effort to identify one or more possible  licensees to help develop its
products or variations  thereof for the key markets of the European Union during
1997. It will also make a preliminary investigation of the potential for utility
of its  products  in Asia and if the  findings  are  positive,  will  develop  a
strategy for exploiting its technology and products in that region as well.

Manufacturing

         The Company's  prototype  products  have been  assembled to date by the
staff  of the MPL at the  City  College  of New York  from  components  that are
generally  readily  available from one or more sources in the  marketplace.  The
Company contemplates continuing with this approach until the quantity of devices
projected to be required makes it appropriate and necessary to set up a contract
manufacturer to assemble its products.  Although  additional design improvements
will likely be required to refine the current prototype  products for commercial
use it is still believed that the key  components  will be available from one or
more suppliers. The Company executed a lease agreement,  dated January 19, 1997,
with City College  providing for 900 square feet of space as an  "incubator"  in
which  prototypes  of the products  will be designed and  assembled by MPL staff
working in concert with personnel from an engineering design firm engaged by the
Company.

         The Company  plans to  outsource  the  manufacture  and assembly of its
medical device products to contract  manufacturers when it is no longer feasible
for the MPL to perform that service. The Company's contract manufacturer(s) will
be selected from a list of highly qualified  companies who are familiar with the
regulatory  requirements of the FDA for the manufacture of medical devices,  who
are  registered  with and in good standing  with the FDA and who employ  current
Good  Manufacturing  Practices ("GMP") in accordance with FDA guidelines.  Pepco
Manufacturing Company ("Pepco") of Somerdale, New Jersey, which is owned by John
M. Kennedy, an officer, director and a principal stockholder of the Company, has
been granted a right of first refusal to manufacture  the Company's  products on
terms and  conditions  no less  favorable to the Company  than those  offered by
other  qualified  manufacturers.  It is believed  that Pepco is currently or can
become  qualified to  manufacture  the  Company's  products.  In the event of an
opportunity  for a  business  arrangement  with a major  marketing  co-developer
involving  manufacture  as well,  Pepco has consented to relinquish its right of
first refusal in the best interests of the Company.
<PAGE>
Research Arrangements with the City University of New York

         In  June  1992,  the  Company  and  the  Research  Foundation  of  CUNY
established  the MPL at the  Institute  of  Ultrafast  Spectroscopy  and  Lasers
("IUSL")  at the City  College of New York.  Dr.  Robert  Alfano,  Distinguished
Professor  of Physics and  Engineering  at City  College and the Director of the
IUSL, is also  responsible  for  supervising the operations of the MPL. The IUSL
includes  approximately  60 scientists  of which about 20 hold  Ph.D.'s,  9 hold
various other graduate degrees and about 30 are graduate students from which the
MPL draws its  research  talent and  expertise.  The Company  provides a funding
grant  to the MPL  annually  in  accordance  with a  budget  of  activities  and
expenditures negotiated between the Company, CCNY and the Research Foundation of
CUNY. The arrangement is renewable  annually and may be terminated without cause
by either  party  upon 90 days  notice  prior to June  first of each  year.  The
Company agreed to grant funds amounting to $431,017 for the 1996/1997  budgetary
year. In comparison,  the Company  provided funding of $242,948 and $245,750 for
the budgetary years ending on May 31, 1996 and May 31, 1995 respectively.

         The  objective of the MPL is to research the use of light and ultrafast
laser  technology  for cancer  diagnosis  and  therapeutic  purposes.  The major
projects  of the MPL  have  been  the  development  of the  Company's  prototype
products,  CD Scan,  CD Ratiometer  and CD Map,  including  the  enhancement  of
fiberoptic  attachments  to enable the devices to be used with various  types of
endoscopes and core biopsy needles. The MPL has additionally  conducted in vitro
pre clinical  evaluation of various  tissues to determine  the most  appropriate
excitation and emission  wavelengths for use with the device for different types
of human tissue and cancers, assembled the prototype CD products for use in vivo
for human  clinical  trials and created the  algorithms  and  computer  software
necessary for the accurate performance of the instruments.

         Prior  to  the  current  arrangement,  the  Company  and  the  Research
Foundation  of CUNY on behalf of the City  College of New York  worked  together
under a Research Agreement pursuant to which the Company and the City College of
New York jointly  sponsored the research and  development of a cancer  detection
apparatus using visible luminescence.  The results of such research includes the
development  of the  proprietary  rights  that are  subjects  of  several of the
Company's  patents  and  the  development  of some  of the  Company's  prototype
products.  The  Research  Agreement  provided  that all patent  rights or any CD
inventions conceived or discovered during its term vest in the Company,  subject
to a royalty  payable to the Research  Foundation  of CUNY of 5% of the sales of
products resulting from any of the inventions. Beginning in 1992 in concert with
the  formation  of the MPL,  new  inventions  and  patentable  discoveries  were
assigned  to the  Research  Foundation  of CUNY and the Company was (or will be)
granted an exclusive  worldwide  license to exploit the inventions.  The royalty
rate was  reduced  to 3.5% of the  sales of  products  resulting  from  patented
inventions conceived or discovered  subsequent to June 1, 1992. In the event the
Company has not made any lawful sale of any products or sublicensed  any patents
at or above  reasonable  market  price within five years from the date of patent
application, the Company has agreed to negotiate a minimum royalty or return all
rights with respect  thereto to the Research  Foundation  of CUNY.  The Research
Foundation of CUNY owns all copyright and  publication  rights to the results of
the research,  subject to the Company's right to produce,  translate and use all
materials  copyrighted by the Research  Foundation of CUNY for the Company's own
purposes on a royalty free, non-transferable and non-exclusive basis.
<PAGE>
         In 1994, the Company became a consortium industrial partner in the CUNY
Center for Advanced  Technology in Ultrafast Photonic Materials and Applications
(the "CAT"). The participation fee paid was $25,000. The Company's membership in
the CAT has brought it into contact with other members of the New York State CAT
consortium  partners and has facilitated its  participation  in several SBIR and
NIST proposals.  On May 1, 1997, the Company confirmed its continuing commitment
to the CAT at the same  participation  level of  $25,000  per annum for 1996 and
1997.

Competition

         Cancer screening and diagnosis is a subject of intense current research
and  development  activity.  Medical  practitioners,  health care payors,  other
diagnostic  medical  device  companies  and patients are all  searching for less
invasive,  lower  cost and more  effective  ways for early  stage  diagnoses  of
cancer. The Company's native tissue fluorescence  spectroscopy  technology is an
emerging field of medical diagnostics.

         Xillix Corporation, British Columbia, Canada, is the only competitor of
which  the  Company  is aware  with a  commercial  light-based  product.  Xillix
received  premarket  approval  from the FDA in September  1996 for its LIFE-Lung
Fluorescence  Endoscopy  System  according  to  public  disclosures  made by the
company.  Xillix in  association  with  Olympus of Japan has  developed  a laser
induced  fluorescence  spectroscopy device for use with a Bronchoscope for early
detection of lung  cancer.  Xillix and Olympus are also  developing  the LIFE-GI
Fluorescence Endoscopy System for the gastrointestinal tract.

         LifeSpex, Inc, Houston, Texas, is also working in the field using laser
induced  fluorescence  spectroscopy to develop an optical  screening  device for
early detection of cervical cancer in vivo. LifeSpex has a relationship with the
University of Texas and the MD Anderson Cancer  Treatment  Hospital that appears
similar to the relationship that the Company has with the Research Foundation of
CUNY.

         The  Company is also aware of other  technologies  that may compete for
cancer diagnostic business. In breast cancer diagnosis alone, there are at least
three other technologies vying for clinical and commercial superiority. Advanced
Technology Laboratories, Bothell, Washington, recently received FDA approval for
the use of one of its ultrasound medical devices for diagnosis of certain breast
lesions. Biofield, Roswell, Georgia, a development stage company, is researching
and developing products that measure the cellular electrical charge distribution
to  detect  epithelial  cancers  and is  currently  conducting  clinical  trials
targeted to diagnose breast cancers using its new technology.  Biopsys,  Irvine,
California,  has  developed  and  recently  received FDA approval for a new core
biopsy gun as an  improvement  to the  original  core  needle for less  invasive
breast cancer biopsy.

         The main established  competitor technology to both the Company and its
existing and potential new technology  competitors,  however, is the traditional
excisional biopsy. It is entrenched,  trusted and effective. However, it suffers
from many deficiencies  that the Company's  Technology and prototype CD products
are designed to address.  These  deficiencies  include,  among others, [1] it is
physically invasive,  [2] there is generally a lapse of one or more days between
taking the excisional sample and receiving the pathology  results,  [3] there is
risk of human error in accurately  reading the pathology slides and [4] there is
risk of mislabeling or mishandling the samples as they are transferred  from the
physician's office to the external pathology  laboratory.  Excisional biopsy can
also be extremely  costly,  especially if an operating  room setting and general
anesthesia  is  required,  and the  Company's  patient  recovery  time is  often
prolonged due to the healing process related to the excisional biopsy.
<PAGE>
         The Company believes its technology has certain advantages over that of
other developers of fluorescence  techniques  described above.  Broad band xenon
lamp, not laser, is used as the excitation  source.  Laser energy,  which is far
more expensive,  is not needed.  More importantly,  a laser can only interrogate
tissue at a single  wavelength.  To improve both the Sensitivity and Specificity
of the method it is necessary to use several  wavelengths to derive  information
from several key fluorescent  molecules.  In the Company method, scans or ratios
are taken both by holding the excitation  wavelength  constant with the emission
wavelength as the variable and by reversing the constant and variable. With this
technique,  the Company  believes its  Technology  is further  advanced than its
direct  competitors'  and that  its  proprietary  rights  are  protected  by its
patents.  However,  the competition  from both new firms offering  potential new
methods of cancer diagnosis and from  established  firms already in the business
is expected to be intense.  Many of the competing  firms have greater  resources
than the Company including financial resources, more employees,  larger research
staffs  and more  experience  in the  cancer  diagnosis  field.  There can be no
assurances that the Company's Technology,  even if successfully developed,  will
be commercially accepted in the marketplace.

Government Regulation  (FDA Matters)

         The FDA classifies medical devices into one of three classes,  Class I,
II or III. This  classification is based on the controls deemed necessary by the
FDA to reasonably  ensure the safety and  effectiveness  of the device.  Class I
devices are those  whose  safety and  effectiveness  can  reasonably  be ensured
through  the  use of  general  controls,  such  as  labeling,  adherence  to GMP
requirements and the "510-(k)" process of marketing  pre-notification.  Class II
devices are those  whose  safety and  effectiveness  can  reasonably  be ensured
through  implementation  of general and special  controls,  such as  performance
standards,  postmarket  surveillance,  patient  registries,  and FDA guidelines.
Class III devices are those devices that must receive premarket approval ("PMA")
to insure their safety and  effectiveness.  They are generally  life-sustaining,
life-supporting,  or implantable  devices, and also include devices that are not
substantially  equivalent  to a  legally  marketed  Class I or II device or to a
Class III device  first  marketed  prior to May 28, 1976 for which a PMA has not
yet been requested by the FDA.

         The Company  believes that clinical  applications  of its native tissue
fluorescence  spectroscopy devices (CD Scan, CD Ratiometer and CD Map) are Class
III medical  devices  because  they lack  substantial  equivalency  to a legally
marketed  Class I or II device or a pre-1976  Class III device.  Because of this
classification,  the Company  does not qualify for the 510-(k)  process  (market
pre-notification)  of regulatory  compliance  but instead is obliged to submit a
full PMA to the FDA for its careful review and, hopefully,  approval. Laboratory
versions of its native tissue fluorescence spectroscopy devices for non-clinical
in vitro applications may face a less lengthy approval process.

         FDA review and approval of PMA Applications usually takes from 12 to 24
months after they are submitted and considered "complete" (meaning that they are
sufficiently  in  compliance  with  filing   requirements   that  the  FDA  will
substantively  review the application) but sometimes can take longer and on rare
occasions can take less time.  Additional delay often results from  insufficient
clinical data to satisfactorily  prove safety and effectiveness for the proposed
intended use of the device and it is not unusual for an applicant to be required
to produce  additional  data to satisfy  an  objection  raised by the FDA in its
review process prior to granting a PMA.
<PAGE>
         Although  Management of the Company believes that its cancer diagnostic
products  will  ultimately  be approved,  there is no assurance the FDA will act
favorably or quickly in making such reviews and approving its products for sale.
Delays or  unanticipated  costs may be encountered by the Company in its efforts
to secure  governmental  approvals  or  licenses,  which could delay or possibly
preclude the Company from marketing its CD products.

         To the extent the  Company  intends to market it CD products in foreign
markets it will be subject to foreign  governmental  regulations with respect to
the  manufacture  and sale of its medical  device  products.  The Company cannot
accurately  estimate  the cost and time that will be required in order to comply
with such regulations.

Patents and Proprietary Rights

         The medical device industry places considerable importance on obtaining
patent  protection and protecting trade secrets for new  technologies,  products
and processes because of the substantial  length of time and expense  associated
with bringing new products  through  development and regulatory  approval to the
marketplace.  Accordingly,  the Company or the Research Foundation of CUNY files
patent  applications  to protect  technologies  that the  Company  believes  are
significant  to the  development of the Company's  business.  The Company either
owns  or  holds  exclusive  licenses  to 14  U.S.  patents  and  has  rights  to
exclusively license U.S. pending patents of which 24 are in the US and (1) is in
Japan. There can be no assurance,  however, that the pending patent applications
will ultimately issue as patents,  or if patents do issue,  that the claims will
be sufficiently broad to protect what the Company believes to be its proprietary
rights.  In addition,  there can be no assurance  that issued patents or pending
patent  applications  will not be challenged or circumvented by competitors,  or
that the rights granted  thereunder  will provide  competitive  advantage to the
Company.

         The Company also relies on trade  secrets and know how that it seeks to
protect, in part, through the use of confidentiality agreements. There can be no
assurance that these agreements will not be breached, that the Company will have
adequate  remedies for any breach,  or that the Company's trade secrets and know
how  will  not  otherwise  become  known  to  or   independently   developed  by
competitors.

Third Party Reimbursement

         If the  Company is  successful  in  developing  its  cancer  diagnostic
Technology  and one or more  medical  devices  that  are  used  by  health  care
providers for diagnostic  testing for which the providers may seek reimbursement
from third-party payors,  principally,  in the United States, Medicare, Medicaid
and private  health  insurance  plans,  and in many other  countries,  typically
national government  sponsored health and welfare plans, such reimbursement will
be subject to the regulations  and policies of  governmental  agencies and other
third-party payors.  Reduced governmental  expenditures in the United States and
in many  other  countries  continue  to put  pressure  on  diagnostic  procedure
reimbursement. The Company cannot predict what if any changes may be forthcoming
in  these  policies  and  procedures,  nor the  effect  of such  changes  on the
Company's business potential.
<PAGE>
Other Technologies and Other Applications

         The  Company,   in  addition  to  its  developments  in  native  tissue
fluorescence  spectroscopy  has also invented certain other  potentially  useful
diagnostic optical imaging technology. The optical imaging technology uses laser
light to image  dense  tissues by  capturing  the early  photons of light  shown
through the imaged tissue and gating off the scattered,  later  arriving  light,
which  reduces  the   interference  and  results  in  clearer  images  than  can
traditionally be seen using currently  available  optical imaging  technologies,
such as,  computed  tomography  scanning  or x-rays or  mammograms.  In 1994 the
Company  and the  General  Electric  Company  ("GE")  acting  on  behalf  of its
Corporate  Research and Development  component  signed a five year non-exclusive
Collaborative  Research  Agreement to explore  potential  uses of the  Company's
optical imaging technology. (See "Subsequent Events" below).

         The objective of the  collaboration  is to develop optical  mammography
(and   optical   tomography)   systems   for   clinical   trials  and   eventual
commercialization.  Optical  mammography,  for  example,  is  an  extension  and
refinement of the technique of  diaphanography  that involves  illuminating  the
breast with bright light in order to search for  indication  of pathology in the
observed  transillumination  pattern.  Strong  scattering  of light by  tissues,
however, severely deteriorates the image and limits the use of diaphanography as
a screening procedure. So, a major thrust of the optical mammography research is
to devise  methods to eliminate the  scattered  light so that a precise image of
the breast image may be formed.  The aim of the proposed research is to evaluate
and test the system components, source and detector geometries,  grating methods
for scattered light  rejection,  image  acquisition,  enhancement,  and analysis
hardware  and  algorithms,  and methods for medical  diagnosis of images so that
design parameters for the optimal system may be specified.

         The impetus for developing a breast cancer  screening  system that uses
optical  radiation  stems both from safety  concerns as well as from a desire to
overcome  some of the  limitations  of the current  "gold  standard",  the x-ray
mammography.  Because of the exposure to cumulative  ionization radiation doses,
the  use of  x-ray  mammography  as a  routine  screening  tool  is  potentially
hazardous.  X-ray mammography  cannot  distinguish  between malignant and cystic
tumors  in  general.  The  ability  of the  method  to  detect  small  tumors is
problematic,  especially  for  dense  young  breasts.  Optical  mammography  has
demonstrated   advantages  in  these  respects.   First,  optical  radiation  is
non-invasive  and  non-ionizing.  Second,  cystic  lesions show up as regions of
increased  brightness,   while  malignant  tumors  appear  as  dark  regions  in
transilluminated  image,  and,  hence,  may be  distinguished.  Third,  there is
particular  promise  for use with the  younger  age group  because  differential
spectroscopic  techniques  will be  incorporated  that can emphasize  diagnostic
structures over the fibrous background.

Subsequent Events

         On April 21, 1997,  the Company  announced the  contracting  of a joint
collaboration with GE and the Research Foundation of CUNY to develop proprietary
imaging technology for medical purposes.  The development and  commercialization
of non x-ray based  optical  mammography  and optical  tomography  products with
greater effectiveness, decreased side effects and improved cost efficiencies are
the  objective  of  this  collaboration.   The  Research  Foundation  of  CUNY's
contractual  commitment is anticipated to amount in excess of $3,800,000  over a
five-year period. The Company's  contribution to this joint collaborative effort
is its patents in the field of optical  imaging.  (See Item 13,  Exhibit  10.28,
below).
<PAGE>
         On  June  3,  1997,  the  Company  was  issued  U.S.  Patent  5,625,402
"Technique  for   Determining   Whether  a  Cell  is  Malignant  as  Opposed  to
Non-Malignant Using Extrinsic Fluorescence Spectroscopy". This invention relates
to an automated  system  depicting the spatial  distribution  of cells within an
area of a pap smear-type sample characterizing which of the cells are malignant.

         On June 16,  1997,  the  Company  was issued  Japanese  Patent  4473/91
"Method and  Apparatus  for  Distinguishing  Cancerous  Tissue from Benign Tumor
Tissue, Benign Tissue or Normal Tissue Using Native  Fluorescence".  This patent
expires January 18, 2011 and corresponds to the Company's U.S. Patent  5,131,398
which was issued on July 21, 1992.

         On June 15, 1996,  the Company,  Mallinckrodt  Medical Inc., St. Louis,
Missouri,  and the Research Foundation of CUNY entered into a research agreement
in the field of imaging and  photophysics  related to the use of contrast  dyes.
Inventions   developed  under  this  research  agreement  utilizing   technology
protected  by patents  owned or licensed to the Company will result in royalties
to be negotiated  in good faith by the  respective  parties on a sharing  basis.
(See Item 13, Exhibit 10.25, below.)

         The Company  has also  explored  certain  other  non-medical  potential
applications  of its  technologies.  A feasibility  evaluation was  successfully
carried out using one of the  Company's  technologies  to  optically  detect the
cleanliness after washing and rinsing  pharmaceutical  processing  vessels.  The
Company is currently discussing with the client the possibility of developing an
instrument that can be used  commercially to support the client's market leading
position in pharmaceutical processing vessel cleaning system services.

Scientific/Medical Advisory Board

         The Company  established a Scientific  Advisory Board in January,  1993
under the  chairmanship of Professor Robert R. Alfano to provide critical review
and  analysis of its research  and product  development  programs in the area of
photonics  (lasers and optics)  and to serve as a source of  information  on new
product ideas, new technologies  and current research  activities.  Its function
served the Company well during the formative stages of its research.  Currently,
the Board  consisting of Dr. Alfano and one other  continuing  member,  is being
expanded to include increased  representation  from the medical arts,  including
pathology,  and will be staffed with medical  specialists who are skilled in the
medical fields of primary interest to the Company.  The Company believes that it
will be able to  attract  accomplished  clinicians  who  will  help  guide it in
clinical study design aimed at gaining  regulatory  approval for applications of
the Company's diagnostic technology. They will also be called upon to advise the
Company about priorities and unmet needs in their respective  disciplines and in
matters such a  physician's  habits and  preferences  that would bear on product
design and configuration. (see Management)

Employees

         As of February 28,  1997,  the Company had one  full-time  employee and
several key retained  consultants  who dedicate a  substantial  portion of there
time toward the affairs of the Company and the full-time  equivalent of a number
of scientists,  most of whom hold Ph.D.'s. in physics or electrical  engineering
or lesser  advanced  degrees  in  similar  disciplines  from the MPL at the City
College of New York (See "Research  Arrangements with the City University of New
York"). None of the employees,  retained  consultants or contract researchers is
governed by any collective  bargaining  agreement and the relations  between the
Company and its  employees,  retained  consultants  and contract  researchers is
believed to be satisfactory.
<PAGE>
ITEM 2. DESCRIPTION OF PROPERTIES

         The Company's  headquarters  are located at 1235 Folkestone Way, Cherry
Hill,  New  Jersey,  which is owned by Peter  Katevatis,  who is Chairman of the
Company.  Such offices are occupied in accordance with an oral  arrangement with
Mr. Katevatis pursuant to which the Company is required to pay its proportionate
share of  utilities  and  taxes.  The New York  Office is  located at the leased
"incubator" site at CCNY.
 
ITEM 3. LEGAL PROCEEDINGS

         The  Company is not  presently  a party to any  litigation,  nor to the
knowledge of management is any litigation threatened against the Company,  which
may materially affect the Company.

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

         During its  fiscal  year  ended  February  28,  1997,  no matters  were
submitted to a vote of the Company's security holders.
<PAGE>
                                     PART II


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


         (a) Market  Information.  The  Company's  Common Stock is traded on the
over-the-counter market under the symbol, "MDSC". The following table sets forth
the range of high and low bid  quotations of the Company's  Common Stock for the
periods set forth below,  as reported by the National  Association of Securities
Dealers,  Inc.  Such  quotations  represent  inter-dealer  quotations,   without
adjustment for retail markets, markdowns or commissions,  and do not necessarily
represent actual transactions.
<TABLE>
<CAPTION>


 Fiscal Period                          Common Stock
 -------------                          ------------
                                   High               Low
                                   Bid                Bid
                                   ---                ---
<S>               <C>            <C>                <C>
1997

1st Quarter       5/31/96        1 31/32            1 9/32
2nd Quarter       8/31/96        1 19/32              15/16
3rd Quarter       11/30/96       1                     5/8
4th Quarter       2/28/97        1                     1/2

1996

1st Quarter       5/31/95        0.5625             0.28125
2nd Quarter       8/31/95        1.9375             0.3125
3rd Quarter       11/31/95       2.00               0.6875
4th Quarter       2/29/96        1.9625             0.6875
</TABLE>

         (b)  Holders.  The  approximate  number  of  holders  of  record of the
Company's  Common  Stock and Series A  Preferred  Stock as of June 13, 1997 were
1,174 and 8 respectively.

         (c)  Dividends.  The Company has not paid or declared any  dividends on
its Common Stock since its inception,  and intends to reinvest earnings, if any,
in the Company to  accelerate  its  growth.  Accordingly,  the Company  does not
contemplate  or  anticipate  paying any  dividends  upon its Common Stock in the
foreseeable future.
<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF PLAN OF OPERATIONS           
          

Results of Operations

YEAR ENDED FEBRUARY 28, 1997 COMPARED TO
YEAR ENDED FEBRUARY 29, 1996


The Company had no revenues during its fiscal years ended February 28, 1997 (its
"1997  fiscal  year") and  February  29,  1996 (its  "1996  fiscal  year").  The
Company's primary focus was the development of its light-based technology.

General and administrative  expenses  increased  approximately 70%, or $820,000,
during its 1997 fiscal year as compared to its 1996 fiscal year.  The  principal
reason for the increase was in April 1996 various  directors and shareholders of
the  Company,  collectively  exercised  options  for  2,763,166  shares  of  the
Company's Common Stock at no cost in  consideration  for the cancellation of the
remaining  452,582  options held by these  individuals.  The exercise  price for
these  options  was $0.25 per  share  and,  accordingly,  the  Company  recorded
approximately $691,000 as additional  compensation expense. An additional reason
for the increase was in March 1996 the Company incurred a compensation charge in
connection  with the  amendment of an employment  agreement  with a key officer,
whereby  annual  compensation  was fixed at  $100,000  per year for a three year
period. As a result,  stock was issued to an officer as additional  compensation
for the amendment which increased compensation approximately $181,000 during the
current year when  compared to the prior year.  The Company also  increased  its
outside consulting approximating $119,000 for costs associated with its Food and
Drug Administration applications.

The  increases  for the 1997 fiscal year were  partially  offset by decreases in
other  consulting  fees,  professional  fees,  salaries  and  license fee income
credited against general and administrative expense of $32,000, $54,000, $50,000
and $25,000, respectively, when compared to the 1996 fiscal year.

The  Company's  product  development  expense  increased  approximately  80%, or
$300,400, during the 1997 fiscal year when compared to the 1996 fiscal year. The
Company conducts a number of R&D projects with the City College of CUNY.  During
the 1997 fiscal year the Company advanced or accrued  approximately  $384,000 to
CUNY for  reimbursement of development  costs. In addition,  increases were also
attributable  to research  conducted  at  Sloan-Kettering  Institute  for cancer
research and to patent application filings and fees.

The  Company   increased  its   advertising,   travel  and   marketing   expense
approximately  34%, or  $24,700,  during its 1997 fiscal year as compared to its
1996 fiscal year. This reflects  increased  activity with prospective  corporate
business "partners" and increased fund-raising efforts.

Net interest income increased by  approximately  $53,000 in the 1997 fiscal year
due to increased  cash balances  invested in money market funds,  derived from a
prior private placement.
<PAGE>
Year Ended February 29, 1996 Compared to
Year Ended February 28, 1995

The Company had no revenues  during its fiscal year ended February 28, 1995 (its
"1995 fiscal year").

General and administrative  expenses  increased  approximately 31%, or $277,000,
during its 1996 fiscal year as compared to its 1995 fiscal year.  The  principal
reasons for the increase were a compensation charge of approximately $309,000 in
the form of restricted shares issued to an officer of the Company (See Note 8 of
Consolidated Notes to Financial Statements) and an increase in professional fees
and consulting fees in the amounts of $37,000 and $28,000 respectively. This was
partially offset by the  non-recurrence of a $92,000 charge for public relations
and  administrative  costs  in  its  1995  fiscal  year  and  the  reduction  of
approximately $10,000 in automobile expenses.
 
The Company's  product  development  expenses  decreased  approximately  14%, or
$60,000,  during the 1996 fiscal year when compared to the 1995 fiscal year. The
Company  reports  its  R&D  expenses  which  includes   compensation   and  cash
out-of-pocket infusion of funds from grant support or corporate collaborators.

The  Company   increased  its   advertising,   travel  and   marketing   expense
approximately  72%, or  $31,000,  during its 1996 fiscal year as compared to its
1995 fiscal year. This reflects  increased  activity with prospective  corporate
business "partners" and increased fund-raising efforts.

The improvement in net interest of approximately  $52,000 to income of $9,042 in
the 1996  fiscal  year from a net  expense of $43,679 in the 1995 fiscal year is
due mainly to the  non-recurrence of $50,548 in interest charges incurred in its
bridge financing which was converted to equity. The private placement expense of
$200,000 in its 1995 fiscal year was a non-recurring charge (See Note 2 of Notes
to Consolidated Financial Statements.

Liquidity and Capital Resources

The Company's working capital as of February 28, 1997 was $189,199  representing
an increase of  approximately  $580,000 during the 1997 fiscal year.  During its
1997  fiscal  year,  the  Company  successfully  completed  a private  placement
offering of 2,666,667  shares of its Common Stock for proceeds to the Company of
approximately  $2,000,000.  The  Company's  ability to maintain  its  operations
throughout its history has been dependent upon the periodic  infusion of capital
and the willingness of its creditors to accept payment beyond normal terms.

The ability of the Company to generate  significant  revenues from operations is
largely dependent upon obtaining  regulatory approval for the  commercialization
of its CD  Technology.  There  can be no  assurance  as to  whether  or when the
various requisite  governmental approvals will be obtained or the terms or scope
of these  approvals.  The  Company  intends  to defray  the  costs of  obtaining
regulatory  approval  for  the  commercialization  of  such  technology  by  the
establishment of clinical trial arrangements with medical institutions,  similar
to its agreement with Sloan-Kettering  Memorial Hospital. The Company intends to
continue  to pursue  the  establishment  of  co-promotion  arrangements  for the
marketing,  distribution  and commercial  exploitation  of its cancer  detection
technology.  Such  arrangements,  if established,  may include up-front payments
sharing of sales revenues after  deduction of certain  expenses,  and/or product
development funding.
<PAGE>
Management  of the  Company  anticipates  that  substantial  resources  will  be
committed  to a  continuation  of its research  and  development  efforts and to
finance government regulatory  applications.  While management believes that the
Company  will  obtain  sufficient  funds to satisfy  its  liquidity  and capital
resource  needs for the short term, no assurances  can be given that  additional
funding, or capital from other sources, such as co-promotion arrangements,  will
be obtained on a  satisfactory  basis.  In the  absence of the  availability  of
financing on a timely basis, the Company may be forced to materially  curtail or
cease its  operations.  The  Company's  operating and capital  requirements,  as
described  above,  may change  depending upon several  factors,  including:  (i)
results  of  research  and   development   activities;   (ii)   competitive  and
technological  developments;  (iii) the  timing and cost of  obtaining  required
regulatory  approvals for its products;  (iv) the amount of resources  which the
Company devotes to clinical  evaluation and the  establishment  of marketing and
sales  capabilities;  and (v) the Company's  success in entering  into, and cash
flows derived from, co-promotion arrangements.
<PAGE>
ITEM 7. FINANCIAL STATEMENTS  








                   Mediscience Technology Corp. and Subsidiary


 Consolidated Financial Statements as of February 28, 1997 and February 29, 1996


                                  Together With


                    Report of Independent Public Accountants




<PAGE>
                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS 

To Mediscience Technology Corp.:


We have audited the  accompanying  consolidated  balance  sheets of  Mediscience
Technology  Corp. (a New Jersey  corporation)  and subsidiary as of February 28,
1997  and  February  29,  1996,  and  the  related  consolidated  statements  of
operations,  stockholders'  equity and cash flows for each of the three years in
the  period  ended  February  28,  1997.  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 consolidated  financial statements referred to above present
fairly,  in  all  material  respects,  the  financial  position  of  Mediscience
Technology  Corp.  and subsidiary as of February 28, 1997 and February 29, 1996,
and the results of their  operations  and their cash flows for each of the three
years in the  period  ended  February  28,  1997 in  conformity  with  generally
accepted accounting principles.

The accompanying  consolidated  financial statements have been prepared assuming
that the Company will continue as a going concern.  The Company has no revenues,
has incurred significant losses from operations,  has an accumulated deficit and
requires  substantial  additional capital to fund its operations.  These factors
raise  substantial doubt about the ability of the Company to continue as a going
concern.  Management's plans in regard to these matters are described in Note 1.
The  financial  statements  do  not  include  any  adjustments  relating  to the
recoverability  and  classification  of asset carrying amounts or the amount and
classification  of liabilities that might result should the Company be unable to
continue as a going concern.



                                                       ARTHUR ANDERSEN LLP


Roseland, New Jersey
April 25, 1997
<PAGE>
<TABLE>
<CAPTION>
                               MEDISCIENCE TECHNOLOGY CORP. AND SUBSIDIARY

                 CONSOLIDATED BALANCE SHEETS -- FEBRUARY 28, 1997 AND FEBRUARY 29, 1996


                                       ASSETS                                 1997              1996
                                                                         ------------      ------------
<S>                                                                      <C>               <C>
CURRENT ASSETS:
   Cash and cash equivalents (Note 2) ..............................     $    678,397      $    110,161
   Other asset .....................................................           31,664                 0
                                                                         ------------      ------------

                Total current assets ...............................          710,061           110,161

EQUIPMENT, net of accumulated depreciation of $150,820 and
   $118,605 in 1997 and 1996, respectively (Note 2) ................           40,275            67,481

INTANGIBLES, net of amortization of $198,725 and $173,125
   in 1997 and 1996, respectively (Note 2) .........................          300,283           325,883
                                                                         ------------      ------------

                Total assets .......................................     $  1,050,619      $    503,525
                                                                         ============      ============

                        LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
   Accounts payable ................................................     $    101,313      $     16,785
   Accrued liabilities (Notes 3 and 4) .............................          419,549           483,752
                                                                         ------------      ------------

                Total current liabilities ..........................          520,862           500,537
                                                                         ------------      ------------

COMMITMENTS AND CONTINGENCIES (Notes 3 and 7)

STOCKHOLDERS' EQUITY (Notes 2, 3, and 8):
   Preferred stock, $.01 par value; authorized 50,000 shares-
     Series A preferred stock; issued and outstanding 2,074 shares
       (preference on liquidation $20,740) .........................               21                21
   Common stock, $.01 par value; authorized 39,950,000 shares;
     issued and outstanding 34,691,952 and 28,474,455 shares in 1997
     and 1996, respectively ........................................          346,920           284,745
   Additional paid-in capital ......................................       17,430,196        14,275,896
   Common stock subscription receivable ............................                0           (18,750)
   Accumulated deficit .............................................      (17,247,380)      (14,538,924)
                                                                         ------------      ------------

                Total stockholders' equity .........................          529,757             2,988
                                                                         ------------      ------------

                Total liabilities and stockholders' equity .........     $  1,050,619      $    503,525
                                                                         ============      ============
                       The accompanying notes to consolidated financial statements
                             are an integral part of these balance sheets.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
                                        MEDISCIENCE TECHNOLOGY CORP. AND SUBSIDIARY

                                           CONSOLIDATED STATEMENTS OF OPERATIONS

                                 FOR THE YEARS ENDED FEBRUARY 28, 1997, FEBRUARY 29, 1996

                                                   AND FEBRUARY 28, 1995




                                                     1997            1996              1995
                                                 -----------      -----------      -----------
<S>                                             <C>              <C>              <C>
NET SALES ..................................    $         0      $         0      $         0

COST OF SALES ..............................               0                0                0
                                                ------------     ------------     ------------

                Gross profit ...............               0                0                0
                                                ------------     ------------     ------------

GENERAL AND ADMINISTRATIVE EXPENSE
   (Notes 2, 3 and 4) ......................       1,997,422        1,177,006          899,905

PRODUCT DEVELOPMENT EXPENSE (Note 4) .......         675,178          374,781          434,859

ADVERTISING, TRAVEL AND MARKETING
   EXPENSE .................................          98,331           73,599           42,753
                                                ------------     ------------     ------------

                Total expenses .............       2,770,931        1,625,386        1,377,517
                                                ------------     ------------     ------------

OTHER EXPENSE (INCOME):
   Interest expense (income), net ..........         (62,475)          (9,042)          43,679
   Private placement expenses (Note 2) .....               0                0          200,000
                                                ------------     ------------     ------------

                Total other expense (income)         (62,475)          (9,042)         243,679
                                                ------------     ------------     ------------

                Net loss ...................    ($ 2,708,456)    ($ 1,616,344)    ($ 1,621,196)
                                                ============     ============     ============

NET LOSS PER COMMON SHARE (Note 6) .........     ($      .08)     ($      .06)     ($      .07)
                                                ============     ============     ============

                  The accompanying notes to consolidated financial statements
                           are an integral part of these statements.
                                         
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
                                       MEDISCIENCE TECHNOLOGY CORP. AND SUBSIDIARY

                                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY ( NOTE 8)

                      FOR THE YEARS ENDED FEBRUARY 28, 1997, FEBRUARY 29, 1996 AND FEBRUARY 28, 1995


                                                                     Preferred                    Common                   
                                                                       Stock                      Stock                    
                                                                     Number of      Preferred   Number of        Common    
                                                                       Shares        Stock        Shares          Stock    
                                                                       ------        -----        ------          -----    
<S>                                                                     <C>          <C>       <C>            <C>
BALANCE, February 28, 1994                                              2,074          21      20,414,038        204,140   

   Conversion of private placement bridge loan 
         and interest into common stock, net of costs of $170,645           0           0       2,151,087         21,511   
    Issuance of common stock for services rendered in 
         connection with a private placement                                0           0         200,000          2,000   
    Issuance of common stock for cash                                       0           0          40,000            400   
    Issuance of common stock for legal and consulting                                                                      
         services rendered                                                  0           0         147,500          1,475   
    Issuance of common stock for services rendered in connection                                                           
         with a failed private placement                                    0           0         200,000          2,000   
    Exercise of options and warrants for common stock                       0           0         388,000          3,880   
    Net loss for the year ended February 28, 1995                           0           0                              0   
                                                                        -----        ----      ----------     ---------- 
                                                                                                                          
BALANCE, February 28, 1995                                              2,074        $ 21      23,540,625     $  235,406   
                                                                                                                           
    Issuance of common stock for cash                                       0           0       3,393,000         33,930   
    Exercise of options and warrants for common stock                       0           0         323,750          3,238   
    Issuance of common stock for legal and consulting
         services rendered                                                  0           0         392,500          3,925   
    Stock issued to officer as additional compensation                      0           0         824,580          8,246   
    Cash received in advance for stock issuance in March 1996               0           0               0              0   
    Net loss for the year ended February 29, 1996                           0           0               0              0   
                                                                        -----        ----      ----------     ----------
                                                                                                                           
BALANCE, February 29, 1996                                              2,074         $21      28,474,455     $  284,745   

    Collection of stock subscription receivable                             0           0               0              0   
    Issuance of common stock for cash in connection with a
         private placement                                                  0           0       2,666,667         26,666 
    Stock issued upon exercise of stock options at 
         no cost                                                            0           0       2,843,166         28,432   
    Stock issued to officer as additional compensation                      0           0         602,664          6,027   
    Exercise of warrants for common stock                                   0           0         100,000          1,000   
    Issuance of common stock for consulting services                        0           0           5,000             50   
    Net loss for the year ended February 28, 1997                           0           0               0              0  
 
                                                                        -----        ----      ----------     ----------   
BALANCE, February 28, 1997                                              2,074         $21      34,691,952     $  346,920   
                                                                        =====         ===      ==========     ==========   
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
                                             MEDISCIENCE TECHNOLOGY CORP. AND SUBSIDIARY

                                           CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY

                                      FOR THE YEARS ENDED FEBRUARY 28 (29), 1997, 1996 AND 1995
                                                             (continued)


                                                                                               Common                     
                                                                               Additional       Stock                      
                                                                                Paid-in      Subscriptions     Accumulated    
                                                                                Capital       Receivables        Deficit      
                                                                                -------       -----------        -------      
<S>                                                                           <C>               <C>             <C>    
BALANCE, February 28, 1994                                                     11,345,254             0         (11,301,384) 
                                                                                                                          
   Conversion of private placement bridge loan                                                                           
         and interest into common stock, net of costs of $170,645                 883,392             0                   0   
    Issuance of common stock for services rendered in                                                                     
         connection with a private placement                                       (2,000)            0                   0   
    Issuance of common stock for cash                                               9,600             0                   0   
    Issuance of common stock for legal and consulting                                                                     
         services rendered                                                        146,025             0                   0   
    Issuance of common stock for services rendered in connection                                                          
         with a failed private placement                                          198,000                                 
    Exercise of options and warrants for common stock                             145,620             0                   0   
    Net loss for the year ended February 28, 1995                                       0             0          (1,621,196)  
                                                                              -----------      --------         -----------  
                                                                                                   
BALANCE, February 28, 1995                                                     12,725,891             0         (12,922,580)  
                                                                                                                          
    Issuance of common stock for cash                                             839,320             0                   0   
    Exercise of options and warrants for common stock                             113,638       (18,750)                  0   
    Issuance of common stock for legal and consulting                                                                     
         services rendered                                                        276,075             0                   0   
    Stock issued to officer as additional compensation                            300,972             0                   0   
    Cash received in advance for stock issuance in March 1996                      20,000             0                   0   
    Net loss for the year ended February 29, 1996                                       0             0          (1,616,344)  
                                                                              -----------      --------         -----------   
                                                                                                                          
BALANCE, February 29, 1996                                                    $14,275,896       (18,750)        (14,538,924)  
                                                                                                                          
    Collection of stock subscription receivable                                         0        18,750                   0  
    Issuance of common stock for cash in connection with a                                                                    
         private placement                                                      1,953,333             0                   0   
    Stock issued upon exercise of stock options at                                                                    
         no cost                                                                  662,360             0                   0   
    Stock issued to officer as additional compensation                            484,657             0                   0   
    Exercise of warrants for common stock                                          49,000             0                   0   
    Issuance of common stock for legal consulting services                          4,950             0                   0   
    Net loss for the year ended February 28, 1997                                       0             0        ($ 2,708,456)  
                                                                              -----------      --------         -----------   
                                                                                                                          
BALANCE, February 28, 1997                                                    $17,430,196       $     0        ($17,247,380)  
                                                                              ===========       =======        ============   

                               The accompanying notes to consolidated financial statements
                                       are an integral part of these balance sheets
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
                               MEDISCIENCE TECHNOLOGY CORP. AND SUBSIDIARY

                                  CONSOLIDATED STATEMENTS OF CASH FLOWS

                        FOR THE YEARS ENDED FEBRUARY 28, 1997, FEBRUARY 29, 1996

                                          AND FEBRUARY 28, 1995

                                                              1997             1996             1995
                                                          -----------      -----------      -----------
<S>                                                       <C>              <C>              <C>
CASH FLOWS PROVIDED BY OPERATING ACTIVITIES:
     Net loss .......................................     ($2,708,456)     ($1,616,344)     ($1,621,196)
                                                          -----------      -----------      -----------
     Adjustments to reconcile net loss to net
       cash used in operating activities-
         Depreciation and amortization ..............          57,815           59,122           57,567
         Stock issued for consulting services and
           interest .................................           5,000          280,000          398,048
         Stock issued upon exercise of
           stock options at no cost .................         690,792                0                0
         Stock issued to officer as additional
           compensation .............................         490,684          309,218                0
         Changes in assets and liabilities-
           Decrease in prepaid expenses .............               0                0           11,233
           (Increase) decrease in other assets ......         (31,664)           4,564           45,716
           Increase (decrease) in accounts payable ..          84,528           12,790          (11,308)
           (Decrease) increase in accrued liabilities         (64,203)          20,248          (19,616)
                                                          -----------      -----------      -----------

                Total adjustments ...................       1,252,952          685,912          481,640
                                                          -----------      -----------      -----------

                Net cash used in operating activities      (1,475,504)        (930,402)      (1,139,556)
                                                          -----------      -----------      -----------
CASH FLOWS USED IN INVESTING ACTIVITIES:
   Purchase of fixed assets .........................          (5,009)          (6,426)          (9,573)
                                                          -----------      -----------      -----------
CASH FLOWS PROVIDED BY FINANCING ACTIVITIES:
     Decrease in stock subscription receivable ......          18,750                0                0
     Proceeds from issuance of common stock, net of
       costs ........................................       2,029,999          991,376          159,500
     Proceeds from issuance of bridge financing .....               0                0          854,355
                                                          -----------      -----------      -----------

                                                            2,048,749          991,376        1,013,855
                                                          -----------      -----------      -----------

                Net increase (decrease) in cash .....         568,236           54,548         (135,274)

CASH AND CASH EQUIVALENTS, beginning of year ........         110,161           55,613          190,887
                                                          -----------      -----------      -----------

CASH AND CASH EQUIVALENTS, end of year ..............     $   678,397      $   110,161      $    55,613
                                                          ===========      ===========      ===========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
                               MEDISCIENCE TECHNOLOGY CORP. AND SUBSIDIARY

                                  CONSOLIDATED STATEMENTS OF CASH FLOWS

                        FOR THE YEARS ENDED FEBRUARY 28, 1997, FEBRUARY 29, 1996

                                          AND FEBRUARY 28, 1995

                                              (continued)

                                                             1997           1996           1995
                                                          ----------     ----------     ----------
<S>                                                       <C>            <C>            <C>
SUPPLEMENTAL SCHEDULE OF NONCASH
   INVESTING AND FINANCING ACTIVITIES:
     Common stock was issued for the following-
         Legal and consulting services rendered           $    5,000     $  280,000     $  349,500
         To officer as additional compensation .             490,684        309,218              0
         Private placement bridge financing,
           net of costs ........................                   0              0        854,355
         Accrued liabilities, including interest                   0              0         50,548
                                                          ----------     ----------     ----------

                                                          $  458,184     $  589,218     $1,254,403
                                                          ==========     ==========     ==========






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

</TABLE>
<PAGE>
                   MEDISCIENCE TECHNOLOGY CORP. AND SUBSIDIARY


                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



(1)  ORGANIZATION OF THE COMPANY:

       The consolidated financial statements include the accounts of Mediscience
       Technology Corp.  ("Mediscience") and its wholly-owned subsidiary,  Laser
       Diagnostic Instruments, Inc. ("Laser") (collectively the "Company").

       The  Company is  principally  engaged in the  design and  development  of
       medical  diagnostic  instruments  that detect cancer in vivo in humans by
       using light to excite the molecules contained in tissue and measuring the
       differences in the resulting natural  fluorescence  between cancerous and
       normal tissue.

       The Company is subject  but not  limited to a number of risks  similar to
       those  of  other  companies  at  this  stage  of  development,  including
       dependence on key  individuals,  the development of  commercially  usable
       products  and  processes,   competition   from  substitute   products  or
       alternative  processes,  the impact of research  and product  development
       activity, competitors of the Company, many of whom have greater financial
       or other  resources than those of the Company,  uncertainties  related to
       technological  improvements and advances,  the ability to obtain adequate
       additional financing necessary to fund continuing  operations and product
       development  and  uncertainties  of  future  profitability.  The  Company
       expects to incur substantial additional cost before beginning to generate
       income from product sales,  including  costs related to ongoing  research
       and   development   activities,   preclinical   studies  and   regulatory
       compliance.  Although the Company was able to obtain additional financing
       in April 1996 (Note 8), substantial additional financing is needed by the
       Company.

       On April 21,  1997,  the Company  announced  the  contracting  of a joint
       collaboration  with  General  Electric  Company  (GE)  and  the  Research
       Foundation  of  the  City  University  of  New  York  (CUNY)  to  develop
       proprietary imaging technology for medical purposes.  The development and
       commercialization  of non x-ray  based  optical  mammography  and optical
       tomography  products with greater  effectiveness,  decreased side effects
       and improved cost  efficiencies are the objective of this  collaboration.
       The collaboration  will focus on noninvasive  methods to image subsurface
       tumors in the breast,  brain,  etc. CUNY,  through a NSASA  Institutional
       Research Award, through a Navy grant, and through the New York State HEAT
       program,  anticipates  more than  $3,800,000  of funding over a five year
       period to support his  collaboration.  GE did not  disclose the amount it
       intends  to  spend  on  the  development  and  commercialization  of  the
       Company's proprietary technology.
<PAGE>
       The Company's financial  statements have been prepared on a going concern
       basis which  contemplates  the  realization  of assets,  liabilities  and
       commitments  in  the  normal  course  of  business.  The  Company  has no
       revenues,  incurred substantial net losses and has an accumulated deficit
       through  February  28,  1997.  The Company  expects to incur  substantial
       expenditures  to further the  development  and  commercialization  of its
       products.  To achieve this,  management  will seek  additional  financing
       through  private  placements or other financing  alternatives,  and might
       also  seek  to  sell  the  Company  or its  technology.  There  can be no
       assurance that continued  financings  will be available to the Company or
       that, if  available,  the amounts will be sufficient or the terms will be
       acceptable to the Company.

(2)  SIGNIFICANT ACCOUNTING POLICIES:

       Use of Estimates-

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

       Cash and Cash Equivalents-

         Cash and cash equivalents  includes cash held in banks and mutual funds
         and is stated at cost, which  approximates  market. For purposes of the
         statement  of cash  flows,  the  Company  considers  all highly  liquid
         financial  instruments  purchased  with an  initial  maturity  of three
         months or less to be cash equivalents.

       Equipment-

         Equipment  is  stated  at cost.  Depreciation  is  computed  using  the
         straight-line method over an estimated useful life of five years.

       Long-Lived Assets-

         During  1996,  the  Company  adopted the  provisions  of  Statement  of
         Financial  Accounting Standards No. 121, "Accounting for the Impairment
         of  Long-Lived  Assets"  ("SFAS 121").  SFAS 121 requires,  among other
         things, that an entity review its long-lived assets and certain related
         intangibles for impairment  whenever changes in circumstances  indicate
         that the carrying amount of an asset may not be fully recoverable. As a
         result of its review,  the Company does not believe that any impairment
         currently exists related to its long-lived assets.

       Intangibles-

         Intangibles  include  goodwill and  patents.  Goodwill  represents  the
         excess  of the  purchase  price  over the net  assets  acquired  in the
         acquisition of Laser.  Goodwill of $460,000 is being  amortized over 20
         years, using the straight-line method.
<PAGE>
         Costs of patents are amortized  over the life of the patent,  generally
         fifteen  years,  using  the  straight-line  method.  Capitalized  costs
         related  to  unsuccessful  patent  applications  are  expensed  when it
         becomes determinable that such applications will not be successful.

         The  realization  of the carrying value of these assets is dependent on
         the success of the Company's future operations.

       Private Placement Expenses-

         In fiscal 1995,  the Company  issued  200,000 shares of common stock to
         the President of the Company. The President had previously  transferred
         200,000 of his own shares to two  individuals  who  assisted in a prior
         failed  private  placement  offering.   Accordingly,   $200,000,  which
         represents the approximate  fair market value of such shares,  has been
         recorded as an expense in the  accompanying  statement  of  operations.
         Expenses  associated  with  successful  private  placements  are netted
         against the proceeds of the respective private placements.

       Income Taxes-

         The Company accounts for income taxes under the provisions of Statement
         of  Financial  Accounting  Standards  No. 109,  "Accounting  for Income
         Taxes"  ("SFAS  109").  SFAS 109 utilizes  the  liability  method,  and
         deferred taxes are determined based on the estimated future tax effects
         of differences  between the financial statement and tax bases of assets
         and liabilities at currently enacted tax laws and rates.

       Accounting for Stock-Based Compensation-

         The  Financial  Accounting  Standards  Board has  issued  Statement  of
         Financial  Accounting  Standards No. 123,  "Accounting  for Stock-Based
         Compensation"  ("SFAS 123").  SFAS 123 requires that an entity  account
         for  employee  stock  compensation  under  a fair  value-based  method.
         However,  SFAS 123  also  allows  an  entity  to  continue  to  measure
         compensation cost for employee stock-based compensation plans using the
         intrinsic  value-based  method of accounting  prescribed by APB Opinion
         No.  25,  "Accounting  for  Stock  Issued  to  Employees"  ("APB  25").
         Effective for fiscal years beginning after December 15, 1995,  entities
         electing to continue with accounting  under APB 25 are required to make
         pro forma  disclosures  of net income and  earnings per share as if the
         fair value-based  method of accounting under SFAS 123 had been applied.
         The Company has elected  the  disclosure  requirements  of SFAS 123 and
         will continue to account for employee  stock-based  compensation  under
         APB 25. The Company's  proforma net loss and net loss per share did not
         materially differ from the amounts reported.

       Reclassifications-

         Certain   reclassifications  have  been  made  to  the  1996  financial
         statements to conform to the 1997 presentation.
<PAGE>
(3)  RELATED PARTY TRANSACTIONS:

       In May 1992, the Company  entered into a five year  employment  agreement
       with  Peter  Katevatis,  then  Chief  Executive  Officer,  President  and
       Stockholder of the Company.  Pursuant to the terms of such agreement, Mr.
       Katevatis was to be paid $190,000 per year,  plus annual  increases based
       on the consumer price index.  The employment  agreement  further provided
       for a bonus and fringe  benefits in accordance with policies and formulas
       mutually agreed upon by Mr. Katevatis and the Board of Directors.

       In January 1996, the Company  elected a new President and Chief Executive
       Officer,  Herbert L. Hugill. Mr. Katevatis remains chairman and Treasurer
       of the Company.  Accordingly, the employment agreement with Mr. Katevatis
       was amended  effective  March 1, 1996  providing  for an annual salary of
       $100,000  per year for the next  three  years.  In  connection  with this
       amendment, in March, 1996 the Company issued 552,664 restricted shares of
       the  Company's  common  stock to Mr.  Katevatis,  which was  recorded  as
       additional  compensation  expense in fiscal 1997 of  $453,184.  All other
       provisions of the agreement remained the same.

       In January 1996,  the Company  entered into an employment  agreement with
       Mr. Hugill. Pursuant to the terms of such agreement, Mr. Hugill was to be
       paid $50,000 per annum,  was issued options to purchase 200,000 shares of
       the  Company's  stock  (Note 8), and was to receive  warrants to purchase
       shares equal to 5% of the number of common shares  outstanding on January
       18, 1996 (or up to 10% as of such date at the  discretion of the Board of
       Directors) at an option price of $1.00 per share,  upon the attainment of
       certain  milestones  in the  future.  On January  31,  1997,  Mr.  Hugill
       resigned as President and Chief Executive  Officer of the Company and the
       200,000  options were  canceled.  The warrant  agreement was  amended and
       effective  January 31, 1997, Mr. Hugill was granted a warrant to purchase
       up to 473,220  shares of the  Company's  common stock at a price of $1.00
       per share.  This warrant is  exercisable  at any time through July,  2003
       except for 315,480 shares which is  exercisable  only upon the attainment
       of certain  milestones.  Compensation  expense will be recognized for the
       difference  between  the warrant  price and the fair market  value of the
       stock at the date that the  milestones  are  attained.  In addition,  the
       Company  issued  50,000  shares of common  stock to Mr.  Hugill  upon his
       termination. The Company recorded $37,500 as compensation expense for the
       fair value of the shares issued.

       Legal services rendered by Mr. Katevatis  amounted to $50,000 for each of
       the three years ended February 29, 1997.  These amounts have been charged
       to operations.

(4)  ACCRUED LIABILITIES:

       Accrued liabilities consist of the following-

                                                          1997              1996
                                                        --------        --------
       Legal and professional fees ...............      $194,700        $ 77,000
       Research and development (see Note 7) .....       224,849         233,350
       Salaries and wages ........................             0         173,402
                                                        --------        --------

                                                        $419,549        $483,752
                                                        ========        ========
<PAGE>
(5)  INCOME TAXES:

       The Company  accounts for income taxes in accordance with SFAS 109. Under
       SFAS 109,  deferred tax assets and  liabilities are computed based on the
       differences  between  the  financial  statement  and  income tax bases of
       assets and  liabilities  as  measured by  currently  enacted tax laws and
       rates.   As  of  February  28,  1997,  the  Company  has  operating  loss
       carryforwards  of approximately  $10,600,000  which may be used to reduce
       future income subject to income taxes and expire in various  amounts from
       1998 to 2012. As of February 28, 1997 and February 29, 1996,  the Company
       had a deferred tax asset of $3,600,000 and $3,000,000,  respectively, for
       which valuation allowances for the entire amounts were provided.

(6)  NET LOSS PER COMMON SHARE:

       Net loss per common share has been  computed on the basis of the weighted
       average number of shares  outstanding  during each year. No consideration
       has been given to the  potential  exercise of stock options as the effect
       would be  antidilutive.  Shares used in the  computation  of net loss per
       common share were  33,908,028,  26,261,301  and  23,578,353 for the years
       ended  February  28,  1997,  February  29, 1996 and  February  28,  1995,
       respectively.

       In  February  1997,  the  Financial  Accounting  Standards  Board  issued
       Statement of Financial  Accounting  Standards No. 128, Earnings Per Share
       ("SFAS 128").  SFAS 128 is effective for  financial  statements  for both
       interim  and annual  periods  ending  after  December  15, 1997 and early
       adoption is not  permitted.  When  adopted,  the  statement  will require
       restatement  of prior years'  earnings per share.  The Company will adopt
       this  statement for  reporting  periods  ending after  December 15, 1997.
       Assuming  that SFAS 128 had been  implemented,  basic  earnings per share
       would not have been materially  different than the amounts  presented for
       1997 or 1996.

(7)  COMMITMENTS AND CONTINGENCIES:

       In April 1992, the Company entered into a five year consulting  agreement
       (the "Agreement")  with Dr. Robert R. Alfano, a principal  shareholder of
       the Company and Chairman of its Scientific  Advisory  Board.  Pursuant to
       the terms of such Agreement, Dr. Alfano is to be paid a consulting fee of
       not less than  $150,000 per annum in exchange for services to be rendered
       for  approximately  fifty  (50)  days per  annum in  connection  with the
       Company's medical photonics business. The Agreement further provides that
       Dr. Alfano is to be paid a bonus and fringe  benefits in accordance  with
       policies  and formulas  provided to key  executives  of the  Company.  In
       August  1995,  the  contract  was  extended  to  March  2002.  All  other
       provisions of the agreement remained the same.

       The  Company  has  committed  to  fund  approximately   $295,000  over  a
       twelve-month  period beginning June 1, 1995 for Mediphotonics  Laboratory
       research at the City  College of the City  University  of New York (CCNY)
       under a contract which is renewed  annually.  The Company has funded CCNY
       approximately   $384,000,   $220,000   and   $295,000  for  each  of  the
       twelve-month periods ending May 31, 1997, 1996 and 1995.

       On July 1, 1994,  the  Company  entered  into a Research  Agreement  with
       Sloan-Kettering  Institute for Cancer Research and the Company has agreed
       to fund $100,000  towards such efforts.  The Company  funded  $80,000 and
       $20,000 in fiscal 1996 and in fiscal 1995.
<PAGE>
       In  connection  with the  acquisition  of  patent  rights  to its  cancer
       detection  technology,  the Company  assumed an  obligation to pay to Dr.
       Alfano's  daughter a royalty of one  percent of the gross  sales  derived
       from any  equipment  made,  leased or sold which  utilizes  the  concepts
       described in the Company's cancer  detection  patent.  Additionally,  the
       Company  is to pay a royalty  equal to three and one half  percent of the
       gross sales value of any invention from the Company's existing patents or
       newly obtained patents,  respectively.  No amounts have been paid for the
       three year period ended February 28, 1997.

       In addition to the above  royalties,  the Company has obtained  worldwide
       licensing  rights for patents from two universities and has agreed to pay
       royalties of four percent of the net sales of all products generated from
       the patents and fifty percent of any income received from sublicensing of
       the  patents.  No amounts  have been paid for the three year period ended
       February 28, 1997.

(8)  STOCKHOLDERS' EQUITY:

       Preferred Stock-

         The Company is authorized  to issue 50,000  shares of Preferred  Stock,
         $.01 par value per share,  which may be issued from time-to-time in one
         or more series,  the terms of which may be  designated  by the Board of
         Directors  without  further  action  by  shareholders.   The  Board  of
         Directors has  designated  2,074 shares of Preferred  Stock as Series A
         Preferred  Stock,  all of which series is issued and  outstanding as of
         February 28, 1997.  Any  preferred  stock issued will have  preferences
         with respect to dividends,  liquidation and other rights,  but will not
         have preemptive rights.

         Holders of Series A Preferred Stock are entitled to a preference of $10
         per share  before any  payment  is made to  holders of common  stock in
         liquidation  of the  assets of the  Company.  Additionally,  holders of
         Series A Preferred Stock have no redemption or dividend rights and vote
         only with  respect to  corporate  matters  affecting  their  respective
         rights, preferences or limitations, but do not vote for the election of
         directors or on general corporate matters.

       Common Stock Compensation Award-

         In December 1995, the Board approved the issuance of 824,580 restricted
         shares  of the  Company's  common  stock  to  Mr.  Katevatis  for  past
         performance and services rendered to the Company. The restricted shares
         were recorded based on their deemed fair market value and  accordingly,
         the  Company  recorded  a  compensation   charge  of  $309,218  in  the
         accompanying consolidated statement of operations.

       Private Placement Offering-

         During fiscal 1996, the Company closed on a private placement  offering
         ("Offering")  with Allen & Company  ("Allen"),  whereby Allen purchased
         2,000,000  restricted  shares of the Company's common stock at $.25 per
         share.  In connection  with the Offering,  Allen  received  warrants to
         purchase  975,000  shares of the  Company's  common  stock and  another
         individual, instrumental to the Offering, received warrants to purchase
         50,000  shares of the Company's  common  stock.  The warrants are fully
         vested and are exercisable at $1.00 per share.
<PAGE>
         In addition,  during fiscal 1996 the Company also sold 1,393,000 shares
         of common stock for aggregate proceeds of $373,250.

         During  fiscal  1997,  the  Company  successfully  completed  a private
         placement  offering  (the "97  Offering")  of  2,666,667  shares of its
         common stock for proceeds to the Company of  approximately  $2,000,000.
         In  connection  with the 97 Offering,  the Company  issued  warrants to
         purchase  400,000  shares of the Company's  common stock at an exercise
         price of $1.00 per share. The warrants are  exercisable,  at the option
         of the holder, at any time through March 27, 2003.

       Convertible Bridge Notes-

         During fiscal 1995, the Company  privately sold units,  each consisting
         of a promissory note, bearing interest at 10% per annum and convertible
         into  common  stock of the  Company  at $.50 per  share  under  certain
         conditions,  as  defined,  and a warrant to  purchase  shares of common
         stock of the Company at $.50 per share.  Total cash  proceeds  from the
         private   placement   financing  were  $1,025,000.   The  warrants  are
         exercisable for two years from the date of issuance. On January 3, 1995
         the promissory  notes were  converted,  including  interest of $50,548,
         into  common  stock at $.50 per  share,  and as a result  stockholders'
         equity was increased by $904,903, net of transaction costs of $170,645.
         In  addition,  200,000  shares  of  common  stock  were  issued  to  an
         individual who assisted in the private placement.

       Common Stock Issued for Service-

         During fiscal 1997 and 1996, respectively, the Company issued 5,000 and
         392,500 shares,  respectively,  of restricted  common stock for various
         legal and consulting  services  provided to the Company.  The number of
         shares  issued were  determined  based on the fair market  value of the
         services provided.

       Stock Options-

         Prior to fiscal 1996,  all stock options were issued at the  discretion
         of management.  In fiscal 1996, the Company  adopted the 1996 incentive
         stock option plan (the "Plan") which provides for granting of incentive
         stock  options  ("ISO's") to  employees.  Options vest over a period of
         time as determined by the Board of Directors  upon the granting of such
         options, except that no option shall be exercisable in whole or in part
         prior to the first  anniversary of the date of granting of such option.
         Options  are  exercisable  10 years from the grant date.  The  exercise
         price of ISO's granted under the Plan will not be less than 100% of the
         fair market value on the date of grant (110% for ISO's  granted to more
         than 10% stockholders).

         In April 1996,  Messrs.  Katevatis,  Kouvatis,  Kennedy and  Armstrong,
         directors  and  shareholders  of the  Company,  collectively  exercised
         options for 2,763,166  shares of the Company's  common stock at no cost
         in consideration  for the cancellation of the remaining 452,582 options
         held by these  individuals.  The exercise  price for these  options was
         $0.25 per share and,  accordingly,  the  Company  recorded  $690,792 as
         additional compensation expense.
<PAGE>
         Stock option  activity  during the three year period ended February 28,
         1997, was as follows-
<TABLE>
<CAPTION>
                                                                          Weighted
                                                                           Average
                                                        Exercise          Exercise  
                                          Shares        Price Range         Price
                                        ----------      --------------     --------
<S>                                     <C>             <C>                <C>
Outstanding, February 28, 1994 ....      4,003,748      $0.25-$2.00        $   0.33

Granted ...........................        145,000      $1.00-$2.00        $   1.14
Exercised .........................       (238,000)     $   0.25           $   0.25
                                        ----------      --------------     --------

Outstanding, February 28, 1995 ....      3,910,748      $0.25-$2.00        $   0.36

Granted ...........................        200,000      $    1.00          $   1.00
Exercised .........................       (180,000)     $    0.25          $   0.25
                                        ----------      --------------     --------

Outstanding, February 29, 1996 ....      3,930,748      $0.25-$2.00        $   0.40

Exercised .........................     (2,843,166)     $    0.25          $   0.25
Canceled ..........................       (652,582)     $0.25-$1.00        $   0.48
                                        ----------      --------------     --------

Outstanding, February 28, 1997 ....        435,000      $1.00-$2.00        $   1.25
                                        ==========      ==============     ========
</TABLE>

         Options  granted in fiscal 1995 were  granted for  consulting  services
         rendered.
<PAGE>
       Stock Warrants-

         Stock warrant  activity during the three year period ended February 28,
         1997, was as follows-
<TABLE>
<CAPTION>

                                                   Shares            Exercise
                                                  Available         Price Range
                                                 ----------         ------------
<S>                                              <C>                <C>
Outstanding February 28, 1994 ...........           235,912         $.53-$1.20

Granted .................................           306,250         $.50-$ .60
Exercised ...............................          (150,000)        $   .60
                                                 ----------         ------------

Outstanding, February 28, 1995 ..........           392,162         $.50-$1.20

Granted .................................         1,025,000
Exercised ...............................          (143,750)        $   .50
                                                 ----------         ------------

Outstanding February 29, 1996 ...........         1,273,412         $.50-$1.20

Granted .................................           873,220         $  1.00
Exercised ...............................          (100,000)        $   .50
                                                 ----------         ------------

Outstanding February 28, 1997 ...........         2,046,632         $.50-$1.20
                                                 ==========         ============
</TABLE>

         In connection with the private placement offerings described above, the
         Company  granted  warrants to purchase  400,000,  1,025,000 and 256,250
         shares  of  common  stock  in  1997,   1996  and  1995,   respectively.
         Additionally, a warrant was issued for 50,000 shares of common stock in
         exchange  for legal  services  provided in 1995.  In 1997,  the Company
         granted  warrants to  purchase  473,200  shares of common  stock to Mr.
         Hugill at an exercise price of $1.00 (Note 3).
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
                  ACCOUNTING AND FINANCIAL DISCLOSURE

         None.

                                    PART III


ITEM 9.  DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;  
         COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT

Officers and Directors

         The  directors,  executive  officers and  significant  employees of the
Company are:

Name                               Age           Position
----                               ---           --------

Peter Katevatis                    63            Chairman of the Board, Chief
                                                 Executive Officer and Treasurer

John M. Kennedy                    60            Vice President and Secretary

William Armstrong                  80            Director

Matthew Culligan                   78            Director

Herbert L. Hugill                  49            Director

Michael N. Kouvatas                70            Director

Ronald W. Krumm                    58            Director

John P. Matheu                     75            Director

Robert C. Miller                   31            Director

Clarence Z. Wurts                  56            Director

          Directors-hold  office until the next annual shareholders'  meeting or
until their successors have been duly elected and qualified.  Executive officers
are appointed by and serve at the pleasure of the Board of Directors.

         Peter  Katevatis has served as Chairman of the Board of Directors since
1993.  He served as President  and Chief  Executive  Officer of the Company from
November,  1983  until the  appointment  of  Herbert  L.  Hugill and served as a
director of the Company  since 1981.  From 1981 until his  election as President
and Chief Executive Officer,  Mr. Katevatis was a Vice President of the Company.
Mr.  Katevatis  was elected as  Treasurer of the Company in January,  1996.  Mr.
Katevatis  has been a  practicing  attorney in  Philadelphia,  Pennsylvania  and
Marlton,  New  Jersey,  and is also  licensed as an attorney in the State of New
York and in the  District of Columbia.  He also served as a Managing  Partner of
Penn National Leasing and was a principal  shareholder of Penn National Leasing,
Inc. an  equipment  leasing  company  located in Cherry  Hill,  New Jersey.  Mr.
Katevatis is currently a trustee of the New Jersey  State's Police and Firemen's
Retirement  Pension  Fund and  served as a member of the New  Jersey  Investment
Council  from 1990 until  December,  1992.  He is also a member of the  American
Arbitration  Association  and a  member  of  the  National  District  Attorney's
Association.
<PAGE>
         John M. Kennedy currently serves as Vice President and Secretary of the
Company,  as well as being a director of the Company since 1982. Mr. Kennedy has
served the Company as Vice  President  since  1983,  as  Treasurer  from 1984 to
January, 1996 and as Secretary since 1986. Mr. Kennedy is Chairman of the Board,
Secretary-Treasurer  and General Manager,  of Pepco  Manufacturing  Co., a sheet
metal fabricator for the electronics industry located in Somerdale,  New Jersey.
Mr. Kennedy also serves as  commissioner  of the Delaware River Port  Authority.
Mr.  Kennedy  was a director of First  Peoples  Bank of New Jersey from 1979 and
served as a member of its  executive  board  until  1994 when  Core-States  Bank
purchased First Peoples.

         William W.  Armstrong  has served as a Director  of the  Company  since
1978.  He has been in  retirement  since 1982  following  a 36 year  career as a
research  scientist for Pfizer Inc, a world wide health care,  personal care and
specialty  chemicals  manufacturer  headquartered  in New York  City.  Since his
retirement,  Mr.  Armstrong  has  continued to serve as a  consultant  to Pfizer
concerning  programs  involved with disperse  systems and complex  liquids,  his
field of  expertise.  He has been  awarded 14 patents  concerned in general with
therapeutic agent dosage delivery systems.

         Matthew  Culligan has served as a Director of the Company  since March,
1990.  Since  1988,  Mr.  Culligan  has served as Chairman  and Chief  Executive
Officer of Culligan/Kahn  Associates,  a broadcast production company located in
New York, New York. Mr. Culligan,  in 1984,  founded  Environmental  Monitor,  a
non-profit  organization  dedicated  to  providing  a  computerized  service  of
environmental  conditions,  and currently  serves as its Chairman.  Mr. Culligan
has, at various  times  during his career,  served as President of the NBC Radio
Network;  Executive  Vice  President of NBC  Television;  Chairman of the Mutual
Broadcasting  Company;  and as Chairman and President of Curtis Publishing Inc.,
the publisher of, among other  periodicals,  Saturday Evening Post,  Ladies Home
Journal and Holiday.  Mr. Culligan has also been the author of twelve  published
books and was the creator of two television shows.

         Herbert L. Hugill was elected a Director of the Company in January 1996
and served as President and Chief  Executive  Officer until January 1997. He was
President of R.P. Scherer North America, a Division of R.P. Scherer  Corporation
from December 1991 through October 1995 and Vice President,  Sales and Marketing
from June 1989 to December 1991.  From January 1987 to June 1989 he was Director
of Corporate Development of R.P. Scherer Corporation.

         Michael N. Kouvatas has served as a Director of the Company since 1971.
For more  than the past five  years,  Mr.  Kouvatas  has been an  attorney  with
offices in Haddonfield, New Jersey.

         Ronald W. Krumm has served as a Director  of the Company  since  March,
1990.  From January,  1989 through May, 1990, Mr. Krumm served as Executive Vice
President of Polar Molecular Corporation,  a producer of gasoline fuel additives
located in Saginaw, Michigan. Prior thereto, until his retirement after 31 years
service, Mr. Krumm was employed in various marketing and technical capacities by
Pfizer Inc. From 1983 to 1988 he was Senior  Marketing  Manager  responsible for
new business development for Pfizer Specialty Chemicals.
 
         John P. Matheu has served as a Director  of the Company  since July 23,
1996.  Mr.  Matheu  is  currently  general  partner  and  co-founder  of MATCO &
Associates,  a firm specializing in providing management  consulting services to
decision  makers in  biopharmaceutical,  medical  device and health  care firms.
Previously, he was employed by Pfizer Inc during which time he held a wide range
<PAGE>
of management positions primarily in distribution,  marketing and sales. As Vice
President, he established and directed Pfizer's generic drug division.  Prior to
that assignment he directed Pfizer  Laboratories'  800 person field sales force,
its hospital marketing group and its training department.  he left Pfizer Inc in
1984 and founded Matheu Associates, a management consulting firm.

         Robert C. Miller has served as a Director of the Company  since May 30,
1996. Mr. Miller is a Vice President and Director of the investment banking firm
of Allen & Company Incorporated and has been associated with the firm since June
1986.  Mr.  Miller is a director  of  Envirogen,  Inc.,  a public  environmental
company, Audits & Survey's Worldwide,  Inc., a public medical device company, as
well as a director of several privately-held  companies in which Allen & Company
Incorporated has an investment.

         Clarence Z. Wurts has served as a Director  of the  Company  since July
23, 1996.  Mr. Wurts is founder,  President and CEO of  Philadelphia  Investors,
Ltd., a full service regional investment bank. Previously,  he was President and
Director of Edward C. Rorer & Co., Inc. and Partner of Alex Brown & Sons.

         There are no family relationships among directors and, to the knowledge
of the Company,  there have been no legal  proceedings  or judgments  during the
past five years which would be  material  to the  evaluation  of the ability and
integrity of any director.

Scientific Advisory Board

         The Scientific  Advisory Board's Chairman is Dr. Robert R. Alfano.  Dr.
Alfano is Distinguished Professor of Science and Engineering and the Director of
the IUSL at the City  College of CUNY.  He is  co-author  of a number of patents
concerning the Company's photonic technology and a principal  stockholder of the
Company.  He supervises  the research and  development  of the Company's  cancer
diagnostic technology and is principal  investigator at CCNY. Since 1972, he has
been  affiliated with the Physics  Department of CCNY. He presently  directs the
Institute for Ultrafast  Spectroscopy  and Lasers and the Photonics  Engineering
Laboratories  at  City  College.  From  1964 to  1972,  he was a  member  of the
technical  staff of General  Telephone &  Electronics  Laboratories.  Dr. Alfano
received an Alfred P. Sloan Fellowship Research Corporation Award and was made a
Fellow of the  American  Physical  Society in 1976.  In 1983,  he  received  the
Outstanding  Italian-American  Award for Science.  In May,  1989, Dr. Alfano was
elected a Fellow of the Optical  Society of America for his studies of ultrafast
phenomena. He has been a consultant to several major corporations including GTE,
Clairol,  Phillips Dental and Hamamatsu Photonics. Dr. Alfano is on the advisory
board  of  Photonics  Spectra  Magazine.   He  is  a  reviewer  for  prestigious
professional   journals  in  the  fields  of  physics,   optics,   photobiology,
photochemistry and biophysics.  He received his B.S. and M S. degrees in Physics
from Fairleigh Dickinson University in 1963 and 1964, respectively.  He received
his Ph.D. in Physics from New York University in 1972.
<PAGE>
         Stimson P. Schantz, M.D., is Director of Cancer Prevention,  Department
of Surgery Cornell University Memorial  Sloan-Kettering Cancer Center, New York,
New York. Dr. Schantz has been appointed as the principal investigator under the
Company's  Clinical Trial Agreement with Memorial Hospital for Cancer and Allied
Diseases   and,  in  such   capacity,   oversees   the  pilot  study  of  tissue
autofluorescence  pursuant to such agreement.  Between 1984 and 1991, Dr Schantz
served in various  faculty  positions at the M.D.  Anderson Cancer Center in the
Department  of Head and Neck Surgery.  Dr.  Schantz is presently a member of the
Society of Surgical Oncology,  American Society for Head and Neck Surgeons,  the
Society of Head and Neck  Surgery,  and has served as the  director  of research
programs and as a member of the research  committee at the  University of Texas,
M.D Anderson  Cancer  Center.  He has been the  recipient of several  honors and
awards,  including  the First  Independent  Investigator  Award of the  National
Cancer  Institute  awarded in March,  1988 and an NCI  contract to study  cancer
biomarkers awarded in November 1995. Dr. Schantz serves as a reviewer and editor
of a number of professional  medical  publications and is the author of numerous
papers,  articles,  books and chapters, and abstracts. He was awarded a Bachelor
of Arts Degree from Harvard  College in 1970 and his M D from the  University of
Cincinnati in 1975.

         Each member of the  Scientific  Advisory Board is paid a fee of  $1,000
for each meeting attended.  Additionally,  certain members past and present have
been granted an option of unlimited  duration to purchase  10,000  shares of the
Company's Common Stock at a price of $2.00 per share.

ITEM 10. EXECUTIVE COMPENSATION

         The  following  table  sets  forth a summary  of  compensation  paid or
accrued to the  executive  officers of the  Company  for the fiscal  years ended
February  28, 1997,  February 29, 1996 and February 28, 1995 whose  compensation
exceeded $100,000.
<TABLE>
<CAPTION>
                           SUMMARY COMPENSATION TABLE 

Name and Principal        Year Ended                            Other Annual
Position                 Feb. 29 (28)          Salary           Compensation
--------                 ------------          ------           ------------
<S>                         <C>              <C>                 <C>
Peter Katevatis             1997             $100,000 (1)        $523,231 (2)
Chairman and
Chief Executive             1996             $208,578 (1)        $ 64,176 (2)
Officer
                            1995             $199,500 (1)        $ 77,383 (2)
</TABLE>
         (1) See Note 3 Of Notes to Consolidated Financial Statements.

         (2) Includes  payment to Mr.  Katevatis  of $50,000 for legal  services
rendered  during each of the fiscal years ended February 28, 1997,  February 29,
1996 and 1995 ("fiscal  years,  1997, 1996 and 1995"  respectively),  and fringe
benefits  under his  employment  agreement for  automobile  expenses of $12,721,
automobile insurance of $2,856 and health insurance of $4,470 paid during fiscal
year 1997; for automobile expenses of $4,928, automobile and insurance of $2,155
and health  insurance  of $7,093 paid during  fiscal year 1996;  for  automobile
expenses of $17,489,  automobile  insurance  of $2,575 and health  insurance  of
$7,319 paid during fiscal year 1995.  Fiscal year 1997 also includes $453,184 of
stock compensation expense. See Note 3 to Notes to Consolidated Statements.
<PAGE>
Option Exercises and Holdings

          In April 1996,  Messrs.  Katevatis,  Kouvatis,  Kennedy and Armstrong,
directors and shareholders of the Company,  collectively  exercised  options for
2,763,166 shares of the Company's  common stock at no cost in consideration  for
the cancellation of the remaining 452,582 options held by these individuals. The
exercise  price for these  options  was $0.25 per share  and,  accordingly,  the
Company recorded $690,792 as additional compensation expense.

         The following table provides information regarding the number of shares
covered  by both  exercisable  and  non-exercisable  stock  options  held by the
Company's  executive  officers  at  February  28,  1997  (See Note 8 of Notes to
Consolidated Financial Statements).  In addition, the following table sets forth
the values for  "in-the-money"  options,  which  represent  the positive  spread
between the  exercise  price of the  existing  options  and $.50,  which was the
closing price for the Company's Common Stock in the  over-the-counter  market on
February 28, 1997.
<TABLE>
<CAPTION>
                     UNEXERCISED OPTIONS AT FISCAL YEAR-END 

   Number of Shares Underlying                    Value of Unexercised
     Unexercised Options at                     In-the-Money Options at
            Year End                                    Year End  
  ------------------------------              ------------------------------ 
  Exercisable      Unexercisable              Exercisable      Unexercisable
<S>                     <C>                      <C>                <C>
     - 0 -             - 0 -                     - 0 -              - 0 -
</TABLE>

         The Company does not have any other  contingent  forms of  compensation
for officers and directors,  including any pension,  retirement,  stock bonus or
other  compensation  plan. No  compensation  has been paid to any individual for
services rendered as a director.
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
                  AND MANAGEMENT

         The following table sets forth certain   information  at June 13,  1997
with respect to (i) those  persons known by the Company to be the owners of more
than 5% of the  Company's  Common  Stock,  (ii) the  ownership of the  Company's
Common Stock by each director,  and (iii) the ownership of the Company's  Common
Stock by all executive officers and directors of the Company as a Group.  Except
as otherwise indicated, each of the stockholders named below has sole voting and
investment power with respect to the Shares of Common Stock  beneficially  owned
by him:
<TABLE>
<CAPTION>
                                                   Amount of
Name and Address                            Beneficial Ownership                Percentage of Class
----------------                            --------------------                -------------------
<S>                                              <C>                                  <C>
Peter Katevatis
P.O. Box 598, Woodcrest
Cherry Hill, NJ 08003                            4,725,595 (1)(2)(3)(4)(5)(12)        13.67 %

John M. Kennedy
c/o Pepco Manufacturing Co.
100 East Evergreen Avenue
Somerdale, NJ 08083                              2,677,933 (5)(6)(12)                  7.75

William W. Armstrong
P.O. Box 607
Tupper Lake, NY 12986                              355,200 (5)(7)(12)                  1.03

Michael Kouvatas
27 Kings Highway East
Haddonfield, NJ 08033                              684,666 (5)(8)(12)                  1.98

Ronald W. Krumm
49 Willow Place
Albertson, NY 11507                                274,166 (9)(12)                     0.89

Matthew J. Culligan
410 East 65 Street
New York, NY 10021                                  20,000 (10)                        0.06

Herbert L. Hugill
160 Turtle Creek Circle                                 
Oldsmar, FL 34677                                    - 0 - (15)                        0.00
                                                             
Robert C. Miller
c/o Allen & Company, Incorporated
711 Fifth Avenue
New York, NY 10022                                   - 0 - (14)                        0.00

Dr. Robert R. Alfano
c/o City College of CUNY
Convent Avenue @ 138th Street
New York, NY 10031                               1,414,000 (11)                        4.10

All directors and officers
as a group (8 persons)                           8,770,894 (13)                       25.38
</TABLE>
<PAGE>
(1) Includes the issuance of a net of 398,167  restricted shares acquired by Mr.
Katevatis  pursuant to the exercise of stock options  described in footnotes (5)
and (12) below.

(2) Includes 824,500  restricted shares issued for past performance and services
rendered  to  the  Company.  See  Note  8 of  Notes  to  Consolidated  Financial
Statements.

(3) Includes 552,664  restricted  shares issued in consideration for contractual
reduction  in  salary  described  in Note 3 of Notes to  Consolidated  Financial
Statements.

(4) Excludes 50,000 shares owned by Mr. Katevatis' daughter as custodian for his
grandchildren,  and a total of 500,000  shares  owned by his sons,  as to all of
which he disclaims beneficial ownership.

(5) On December 13, 1985, the Company granted stock options at an exercise price
of $0.25 per share to the  following  Officers  and  Directors  in exchange  for
cancellation of certain of the Company's  accrued  indebtedness to such persons,
portions of which were assigned as follows:  Mr.  Katevatis  received options to
purchase  4,400,000 shares (2,200,000 of which were assigned by Mr. Katevatis to
Mr.  Kennedy);  Winston Frost, a former  director,  received options to purchase
476,000  shares,  238,000 of which were assigned by Mr. Frost to Mr.  Armstrong;
and Mr. Kouvatas received options to purchase 560,000 shares.

(6) Includes the issuance of a net of 1,833,333  restricted  shares  acquired by
Mr. Kennedy pursuant to the exercise of stock options described in footnotes (5)
and  (12).  Also  included  are  100,000  shares  registered  in the name of Mr.
Kennedy's wife.

(7) Includes the issuance of a net of 65,000  restricted  shares acquired by Mr.
Armstrong  pursuant to the exercise of stock options  described in footnotes (5)
and  (12).  Also  included  are  6,000  shares  registered  in the  name  of Mr.
Armstrong's wife.

(8) Includes the issuance of a net of 466,666  restricted shares acquired by Mr.
Kouvatas  pursuant to the exercise of stock  options  described in footnotes (5)
and (12). Also included are;  114,000 shares owned by Mr.  Kouvatas' wife; 6,000
shares for which Mr.  Kouvatas is  custodian  for three (3) of his  children and
36,000 shares for which Mr. Kouvatas' daughter is custodian for her two children
under the New Jersey Uniform Gift to Minors Act; and 30,000 shares registered in
the names of each his children.

(9)  Includes  the  issuance of a net of 166,666  shares  acquired by Mr.  Krumm
pursuant to the exercise of stock options on May 1, 1997;  also  includes  6,000
shares registered in the name of his wife's IRA.

(10) Includes  20,000 shares which may be acquired by Mr.  Culligan at $2.00 per
share pursuant to immediately exercisable stock options.

(11)  Includes  44,000 shares owned by Dr.  Alfano's  daughter and 44,000 shares
held by Dr. Alfano's wife in trust for their minor son.
<PAGE>
(12)  In  April  1996,  Messrs.  Katevatis,  Kouvatis,  Kennedy  and  Armstrong,
directors and shareholders of the Company,  collectively  exercised  options for
2,763,166 shares of the Company's  common stock at no cost in consideration  for
the cancellation of the remaining 452,582 options held by these individuals. The
exercise  price for these  options  was $0.25 per share  and,  accordingly,  the
Company recorded $690,792 as additional compensation expense.

(13)  Includes the shares  described in notes (1),  (6),  (7), (8), (9) and (10)
above.

(14)  Excludes   3,084,200  shares   beneficially  owned  by  Allen  &  Company,
Incorporated,  as  reflected  in  Amendment  No. 3 to their  Schedule  13G filed
February  14, 1997.  Mr.  Miller is a vice  president  and a director of Allen &
Company, Incorporated.

(15)  See Note 3 of Notes to Consolidated Financial Statements.

         The  foregoing  table  does  not  include  options  granted  to  former
placement  agents of the  Company's  securities  to purchase  111,912  shares of
Common Stock.


ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         During the fiscal year ended  February 28, 1989,  the Company  ratified
and confirmed a prior letter agreement granting Pepco  Manufacturing Co. a right
of first refusal for any and all manufacturing either for or through the Company
for a ten year period ending  October 29, 1997. The terms and provisions of such
arrangements  will be at least as favorable to the company as would otherwise be
available from  unaffiliated  third parties.  The Chairman of the Board of Pepco
Manufacturing  Co. is John M. Kennedy,  who serves as an officer and director of
the Company.  In the event of an opportunity for a business  arrangement  with a
major marketing  co-developer involving manufacture as well, Pepco has consented
to relinquish its right of first refusal in the best interests of the Company.

         On December 1, 1988,  the Company  acquired from Dr. Robert  Alfano,  a
principal  stockholder  of the Company and Chairman of the Company's  Scientific
Advisory  Board,  all of the issued and  outstanding  stock of Laser  Diagnostic
Investments, Inc. (previously defined as "LDI") in exchange for 1,500,000 shares
of the Company's Common Stock. Additionally, LDI is under an obligation to pay a
royalty in the aggregate  amount of 1% of gross sales from any  equipment  made,
leased or sold which embodies the concepts  described in patent number 4,930,516
to Michelle Alfano,  Dr. Alfano's  daughter.  In April, 1992 the Company entered
into a five (5) year Consulting  Agreement with Dr. Alfano. By letter Agreement,
dated August 5, 1995, the Company extended his Employment  Agreement to March 5,
2002  under  the  same  terms  and  conditions.  Pursuant  to the  terms of such
Consulting Agreement, Dr. Alfano is to be paid a consulting fee of not less than
$150,000 per annum in exchange  for  services to be rendered  for  approximately
fifty (50) days per annum in  connection  with the Company's  medical  photonics
business.  The Consulting  Agreement  further  provides that Dr. Alfano is to be
paid a bonus and fringe  benefits  in  accordance  with  policies  and  formulas
applied to the key executives of the Company.

         During the fiscal year ended February 28, 1997, Mr.  Katevatis was paid
$50,000 for legal services rendered and $20,047.
<PAGE>
ITEM 13. EXHIBITS, LISTS AND & REPORTS ON FORM 8-K
           
         (9) Exhibits.

10.01  Employment  Agreement  dated May 1, 1992 between the Registrant and Peter
Katevatis. (1)

10.02  Consulting  Agreement dated April 21, 1992 between the Registrant and Dr.
Robert R. Alfano. (2)

10.03 Extension Agreement between the Registrant and City College of the City of
New York. (3)

10.04 Research  Proposal to Registrant  submitted jointly by the City College of
the  City  University  of New  York  and the  Research  Foundation  of the  City
University of New York. (4)

10.07  Agreement,  dated  December 1, 1988, by and among the  Registrant,  Laser
Diagnostics,  Inc.  and Robert  Alfano,  as amended and  modified on October 24,
1988. (7)

10.08 Research Agreement between The Research  Foundation of the City University
of New York and the Registrant dated as of June 1, 1992. (8)

10.09 Clinical Trial Agreement  between Memorial  Hospital for Cancer and Allied
Diseases and the Registrant dated as of June 1, 1992. (9)

10.10  License  Agreement  between  Virginia  Commonwealth  University  and  the
Registrant. (10)

10.11 Letter Agreement  between Memorial Hospital for Cancer and Allied Diseases
and the Registrant dated March 30, 1993 amending  Clinical Trial Agreement dated
June 1, 1992. (11)

10.12  Amendment No. 3 to Agreement  between the  Registrant and City College of
the City University of New York.

10.13  Research  Agreement  effective  July 1, 1994 between the  Registrant  and
Sloan- Kettering Institute for Cancer Research. (12)

10.14 License  Agreement between Yale University and the Registrant dated May 4,
1993.

10.15  License  Agreement  between  Yale  University  and the  Registrant  dated
November 30, 1993.

10.16 Research  Agreement  effective July 1, 1994 between the Registrant and the
Trustees of Columbia University in the City of New York. (13)

10.17 Research  Agreement  effective July 1, 1994 between the Registrant and the
Free University, Amsterdam, N.V. (14)

10.18  Microbial  Detection  protocol  dated  August 15,  1994  between  and the
Registrant and Merck & Co. (15)

10.19 Collaborative  Research Agreement effective September 23, 1994 between the
Registrant and General Electric Company. (16)
<PAGE>
10.20 SBIR Grant Award  effective  September 30, 1994 between the Registrant and
the National Institutes of Health. (17)

10.21 Award / Contract  effective  September 30, 1994 between the Registrant and
the U.S. Army Medical Research Acquisition Activity. (18)

10.22 Clinical Trial Agreement effective December 1, 1994 between the Registrant
and the General Hospital  Corporation,  d.b.a.  Massachusetts  General Hospital.
(19)

10.23  Investment  Banking  Agreement  effective  August  8,  1995  between  the
Registrant and Allen & Company Incorporated. (20)

10.24 Employment Agreement effective January 18, 1996 between the Registrant and
H. L. Hugill. (21)

10.25  Collaborative  Research  Agreement  effective  June 15, 1996  between the
Registrant,  Mallinckrodt  Medical Inc. and the Research  Foundation of the City
University of New York. (22)

10.26 Investigational  Device Exemption granted January 3, 1997 by the U.S. Food
and Drug Administration. (23)

10.27  Employment  Agreement  Extension  effective  January 17, 1997 between the
Registrant and H. L. Hugill. (24)

10.28 Research Agreement effective April 21, 1997 among the Registrant,  General
Electric Company and the Research  Foundation of the City University of New York
(25).


(1)  Filed as Exhibit 10.1 to  Registrant's  Annual  Report on Form 10-K for the
     fiscal year ended February 28, 1993.

(2)  Filed as Exhibit 10.2 to  Registrant's  Annual  Report on Form 10-K for the
     fiscal year ended February 28, 1993.

(3)  Filed as Exhibit 10.3 to  Registrant's  Annual  Report on Form 10-K for the
     fiscal year ended February 28, 1993.
 
(4)  Filed as Exhibit 10.1 to  Registrant's  Annual  Report on Form 10-K for the
     fiscal year ended February 28, 1989 and incorporated by reference thereto.

(5)  Filed as Exhibit 10.3 to  Registrant's  Registration  Statement on Form S-1
     filed on July 5, 1991 and incorporated herein by reference thereto.

(6)  Filed as Exhibit 10.3 to  Registrant's  Annual  Report on Form 10-K for the
     fiscal year ended February 28, 1987 and incorporated by reference thereto.

(7)  Filed as Exhibit 10.5 to  Registrant's  Registration  Statement on Form S-1
     filed on July 5, 1991 and incorporated herein by reference thereto.

(8)  Filed as Exhibit 10.8 to  Registrant's  Registration  Statement on Form S-1
     filed on August 24, 1992 and incorporated herein by reference thereto.

(9)  Filed as Exhibit 10.9 to  Registrant's  Registration  Statement on Form S-1
     filed on August 24, 1992 and incorporated herein by reference thereto.
<PAGE>
(10) Filed as Exhibit 10.10 to  Registrant's  Annual Report on Form 10-K for the
     fiscal year ended February 28, 1993.

(11) Filed as Exhibit 10.11 to  Registrant's  Annual Report on Form 10-K for the
     fiscal year ended February 28, 1993.

(12) Filed as Exhibit 10.13 to  Registrant's  Annual Report on Form 10-K for the
     fiscal year ended February 28, 1995.

(13) Filed as Exhibit 10.16 to  Registrant's  Annual Report on Form 10-K for the
     fiscal year ended February 28, 1995.

(14) Filed as Exhibit 10.17 to  Registrant's  Annual Report on Form 10-K for the
     fiscal year ended February 28, 1995.

(15) Filed as Exhibit 10.18 to  Registrant's  Annual Report on Form 10-K for the
     fiscal year ended February 28, 1995.

(16) Filed as Exhibit 10.19 to  Registrant's  Annual Report on Form 10-K for the
     fiscal year ended February 28, 1995.

(17) Filed as Exhibit 10.20 to  Registrant's  Annual Report on Form 10-K for the
     fiscal year ended February 28, 1995.

(18) Filed as Exhibit 10.21 to  Registrant's  Annual Report on Form 10-K for the
     fiscal year ended February 28, 1995.

(19) Filed as Exhibit 10.22 to  Registrant's  Annual Report on Form 10-K for the
     fiscal year ended February 28, 1995.

(20) Filed as  Exhibit  A to  Registrant's  Current  Report  on Form  8-K  dated
     September 23, 1995.

(21) Filed as Exhibit A to  Registrant's  Current Report on Form 8-K dated April
     23, 1996.

(22) Filed as Exhibit A to  Registrant's  Current  Report on Form 8-K dated June
     15, 1996.

(23) Filed as Exhibit A to Registrant's Current Report on Form 8-K dated January
     6, 1997.
 
(24) Filed as Exhibit A to Registrant's Current Report on Form 8-K dated January
     28, 1997.

(25) Filed as Exhibit A to  Registrant's  Current Report on Form 8-K dated April
     21, 1997.

         (b)      Reports on Form 8-K

                  See Exhibit 10.25

                  Collaborative  Research  Agreement  effective  June  15,  1996
                  between the  Registrant,  Mallinckrodt  Medical  Inc.  and the
                  Research Foundation of the City University of New York. (22)

                  See Exhibit 10.26
<PAGE>
                  Investigational  Device  Exemption  granted January 6, 1997 by
                  the U.S. Food and Drug Administration. (23)

                  See Exhibit 10.27

                  Employment  Agreement  Extension  effective  January  17, 1997
                  between the Registrant and H. L. Hugill. (24)

                  See Exhibit 10.28

                  Research  Agreement  effective  April 21,  1997  with  General
                  Electric  Company  and  the  Research  Foundation of  the City
                  University of New York. (25)
<PAGE>

                                   SIGNATURES

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

                                                    MEDISCIENCE TECHNOLOGY CORP.



Date:  June 27, 1997                           By:  /s/Peter Katevatis  
                                                    ------------------  
                                                    Peter Katevatis
                                                    Chairman of the Board and
                                                    Chief Executive Officer 


                        POWER OF ATTORNEY AND SIGNATURES

         We, the  undersigned  officers and directors of Mediscience  Technology
Corp.,  hereby severally  constitute and appoint Peter  Katevatis,  our true and
lawful  attorney,  with  full  power  to  sign  for us and in our  names  in the
capacities  indicated below,  any amendments to this Report on Form 10-KSB,  and
generally to do all things in our names and on our behalf in such  capacities to
enable  Mediscience  Technology  Corp.,  to comply  with the  provisions  of the
Securities  Exchange Act of 1934, as amended,  and all the  requirements  of the
Securities and Exchange Commission.

         Pursuant to the  requirements  of Section 13 or 15(d) of the Securities
and  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 date
indicated:

     Signature                          Title                      Date
     ---------                          -----                      ----
/s/Peter Katevatis
------------------
Peter Katevatis, Esq.              Chairman of the Board      June  27, 1997
                                   Principal Executive and
                                   Financial Officer

/s/William Armstrong
--------------------
William Armstrong                  Director                   June  27, 1997

/s/Matthew J. Culligan
----------------------
Matthew J. Culligan                Director                   June  27, 1997

/s/Herbert L. Hugill
--------------------
Herbert L. Hugill                  Director                   June  27, 1997

/s/John M. Kennedy
------------------
John M. Kennedy                    Director                   June  27, 1997
                                   Principal Accounting
                                   Officer
<PAGE>
/s/Michael N. Kouvatas
---------------------- 
Michael N. Kouvatas, Esq.          Director                   June  27, 1997
 
/s/Ronald W. Krumm
------------------
Ronald W. Krumm                    Director                   June  27, 1997

John P. Matheu
-----------------
John P. Matheu                     Director                   June  27, 1997

Robert C. Miller
-------------------
Robert C. Miller                   Director                   June  27, 1997

Clarence Z. Wurts
--------------------
Clarence Z. Wurts                  Director                   June  27, 1997