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




                                   FORM 10-KSB




                  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934

                     FOR THE FISCAL YEAR ENDED MAY 31, 1997

                           Commission File No. 0-21816

                                    PML, INC.
                 (Name of small business issuer in its charter)



           Delaware                                    93-1116123
(State or other jurisdiction of          (I.R.S. Employer Identification Number)
 incorporation or organization)


                              27120 SW 95TH Avenue
                            Wilsonville, Oregon 97070
          (Address of principal executive offices, including zip code)

                                 (503) 570-2500
                           (Issuer's telephone number)


Indicate by check mark whether the issuer (1) has filed all reports  required to
be filed by Section 13 or 15(d) of the  Securities  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
              ---

Indicate by check if  disclosure of  delinquent  filers  pursuant to Item 405 of
Regulation S-B is not contained herein,  and will not be contained,  to the best
of  registrant's   knowledge,  in  definitive  proxy  or  information  statement
incorporated  by reference  in Part III of this Form 10-KSB or any  amendment to
this Form 10-KSB.   Yes  X    No
                        ---

Revenues for the most recent fiscal year:  $13,319,120

The aggregate market value of voting Common Stock held by non affiliates  (based
on the closing sales price on the NASD Electronic  Bulletin Board) on August 28,
1997 was approximately $988,000.

Indicate by check mark  whether the issuer has filed all  documents  and reports
required  to be filed by Section 12, 13 or 15(d) of the  Exchange  Act after the
distribution of securities under a plan confirmed by a court.    Yes  X   No
                                                                     ---

As of August 28, 1997,  there were  1,776,816  shares of Common Stock with $0.01
par value  outstanding,  and 211,551  Class B Common Shares with $0.01 par value
outstanding.

Documents incorporated by reference:  N/A



<PAGE>
                                    PML, INC.
                                FORM 10-KSB INDEX



                                     Part I                                Page
                                     ------                                ----

Item 1.   Description of Business                                            2

Item 2.   Description of Properties                                          6

Item 3.   Legal Proceedings                                                  6

Item 4.   Submission of Matters to a Vote of Security Holders                6

                                  Part II
                                  -------

Item 5.   Market for Registrant's Common Equity and Related
             Stockholder Matters                                             7

Item 6.   Management's Discussion and Analysis of Financial Condition
             and Results of Operations                                       7


Item 7.   Financial Statements and Supplementary Data                    10 &
                                                                        F1-F18

Item 8.   Changes in and Disagreements with Accountants on Accounting
             and Financial Disclosure                                       10

                                 Part III
                                 --------

Item 9.   Directors, Executive Officers, Promoters and Control Personnel;
             Compliance with Section 16(a) of the Exchange Act              11

Item 10.  Executive Compensation                                            12

Item 11.  Security Ownership of Certain Beneficial Owners and Management    13

Item 12.  Certain Relationships and Related Transactions                    14

Item 13.  Exhibits, Financial Statement Schedules and Reports on Form 8-K   14

<PAGE>
                                    PML, INC.

                         1997 FORM 10-KSB ANNUAL REPORT


                                     PART I


Item 1.  Description of Business


General

      PML,  Inc.,  (the company),  formerly  known as Meda,  Inc., was formed on
September 3, 1991 by Monogenesis Corporation.  It was inactive until it acquired
all of the issued and outstanding stock of PML Microbiologicals,  Inc., formerly
known as Prepared Media  Laboratory,  Inc.  (PML), on December 4, 1992 in return
for shares of its stock. The Company  currently does all of its business through
PML, and references herein to "PML" and "the Company" are used  interchangeably.
In early 1997, the name of the parent and operating  companies were changed from
Meda,  Inc.  to PML,  Inc.  and from  Prepared  Media  Laboratory  , Inc. to PML
Microbiologicals, Inc., respectively.

      PML,  which  has  been  in  business  since  1969,  researches,  develops,
manufactures,  tests and  distributes a wide array of biological  products which
are  used  to  test  for  and  diagnose   various   conditions,   illnesses  and
contaminants.  Its  products  include the  following:  prepared  culture  media;
monophasic and biphasic blood culture systems; enzyme-based rapid identification
kits, disks and strips;  identification reagents in ampules and dropper bottles;
environmental systems for non-aerobic  organisms;  bacteriology and parasitology
stains;  inoculating  loops and  transport  swabs;  parasitology  transport  and
specimen processing kits; and lyophilized organisms.

      PML markets to both the clinical market  (diagnosis of diseases in humans)
and to the industrial  market  (environmental  and sterility  testing).  Typical
customers for PML's clinical  products are hospitals,  clinics,  and wholesalers
that  market to  hospitals  and  clinics.  PML's  industrial  customers  include
pharmaceutical  companies,  biotech  research  facilities,  and food  and  water
testing labs.

Products

      PML's  product  line  consists  of  diagnostic   products  and  supporting
materials used by both clinical and industrial  microbiologists.  Its diagnostic
products  include,  among other items,  prepared  culture media in Petri dishes,
tubes and  bottles  for use in  culturing  and  differentiating  organisms  from
specimens; various kits, disks and strips for rapid identification of organisms;
microdilution   ("MIC")   panels  for   determining   the   minimum   inhibitory
concentration of antibiotics  which may be used against the cultured  organisms;
and various  identification  stains and reagents.  Supporting  materials include
inoculating  loops for  inoculating  the specimen into culture media;  transport
media for keeping  specimens  viable until they are delivered to the laboratory;
lyophilized control organisms,  for quality control and training; gas generating
systems,  for providing the proper gaseous environment for culturing  organisms;
swabs for collecting specimens; and various fixatives and preservatives.

                                       2
<PAGE>
      The majority of PML's  products  have a defined shelf life ranging from as
little  as a few  weeks  for  media in Petri  dishes  to six  months or more for
products  in test tubes or  bottles.  Most  products  require  refrigeration  to
prevent  premature  deterioration.  and some  products  are stored  and  shipped
frozen. Most products can be shipped by common carrier overnight without special
protective  packaging  except in extreme  temperatures.  Some products,  such as
general  laboratory  reagents,  contain hazardous  chemicals and require special
storage, packaging, and shipping. See "Governmental Regulation."

Marketing

      PML markets its products primarily in the United States and Canada through
its internal sales  organization  and through a network of  distributors.  PML's
customers  include  both  clinical  and  industrial  microbiology  laboratories.
Hospital and private medical laboratories plus doctor's offices and clinics make
up most of the clinical  market.  The industrial  market  includes food and drug
packagers,  food and water testing labs, and  pharmaceutical  and  biotechnology
research firms. The veterinary market is also a growing segment.

      Based upon management's research and derived from sources which management
believes to be reliable,  the clinical  microbiology  market  exceeds $1 billion
annually in the United  States.  The  industrial  market is  estimated  to be in
excess of $100 million and growing.  The prepared  culture  media segment of the
clinical  microbiology market is estimated at over $200 million.  The balance of
this market  consists  of products  such as viral  identification  kits,  mainly
hepatitis  and  AIDS;  bacteriology  identification  test  kits;  and  automated
microbiology systems.

      Although  prepared  culture media  represents only a modest portion of the
total  microbiology  products market,  these products are some of the most basic
and essential tools used by  microbiologists.  Despite  technological  advances,
conventional  culture media is among the cheapest and most reliable  methods for
identification  of  microorganisms.   Product  differentiation  between  various
suppliers of prepared  culture media typically  shows only minimal  differences;
price and service are generally the key variables, and culture media tends to be
a very competitive  market. PML maintains a strong presence in this product line
because of its overwhelming  importance to microbiologists  and the proven value
of PML's  service  philosophy  in  gaining  and  keeping  customers.  PML's main
marketing  strategy is to acquire  and/or develop newer  technological  products
that  can be sold in  conjunction  with  conventional  culture  media  Marketing
selected products at the national,  regional and international  level is another
successful strategy.

      In  addition,  PML  intends  to  increase  its  focus  on  the  industrial
microbiology market, which is growing at a faster pace than the clinical market.
In  Fiscal  1997,  the  Company's  sales  in the  industrial  segment  increased
substantially,  and the Company is optimistic about further  increases in Fiscal
1998.

Distribution of Products

      To  address  service,  shipping,  and  shelf  life  requirements,  PML has
established  a  number  of  distribution   centers  in  or  near  the  following
metropolitan  areas  of  the  United  States  and  Canada:   Portland,   Oregon;
Sacramento,  California;  Providence, Rhode Island; Vancouver, British Columbia;
and  Toronto   (Mississauga),   Ontario.   Each  distribution   center  includes
temperature-controlled  storage areas and a full inventory of  routinely-ordered
products.  Each distribution  center receives the bulk of its inventory from the
nearest PML production  plant on a weekly basis with specialty  (products  other
than routine prepared culture media commercially  available from most suppliers)
and distributed  products coming from the Wilsonville plant, a Portland,  Oregon
suburb.  PML typically  ships a complete  customer  order within  twenty-four to
forty-eight hours of receipt of the order. For larger  customers,  such as major
hospital  laboratories,   PML  often  delivers  its  products  directly  to  the
customer's lab in its own delivery vehicles. Shipments to smaller or more remote
customers are made by common  carrier,  e.g.  United  Parcel  Service or Federal
Express.

                                       3
<PAGE>
Manufacturing

      At  present,   the  majority  of  PML's  sales   consist  of  products  it
manufactures  itself;  primarily a prepared culture media in Petri dishes, tubes
and bottles.  The  manufacturing  process is  essentially a mixing,  filling and
packaging operation.  The culture medium itself is a blend of powdered nutrients
which typically include beef and soy byproducts; agar, a seaweed derivative used
as a gelling  agent;  and other  nutritional  or diagnostic  substances  such as
animal  blood.  For  Petri  dishes,  the  powdered  nutrients  are  blended  and
rehydrated,  and the  resulting  liquid is  sterilized  in pressure  vessels and
aseptically  dispensed into  presterilized  plastic Petri dishes.  As the medium
cools it gels into a semi-solid  state and is then packaged for sale.  Tubed and
bottled media are prepared in a similar  manner  except that these  products are
usually sterilized after they are dispensed.

      With the exception of small batches,  PML produces most of its products on
custom-designed  semi-automated  production equipment.  For example, empty Petri
dishes are loaded into a filling machine where automated dispensing pumps fill a
measured  amount  of  culture  medium  into each  dish.  The dish  moves  onto a
refrigerated  cooling  conveyer  where gelling  occurs;  then, it is stacked and
packaged.  The finished  products are stored in a quarantine  area until quality
control testing is complete and the batch is approved for distribution.

      PML maintains a quality  control  laboratory in each of its  manufacturing
plants as part of its Total Quality Assurance  program.  The quality control lab
tests raw material samples prior to purchase,  and tests representative  samples
from each production batch for sterility, pH, color, and general appearance,  as
well as the  growth  of the  microorganisms  that the  product  is  designed  to
culture.

      In addition to culture media, PML produces a variety of ancillary products
such as stains, reagents, microdilution MIC panels, animal blood products, and a
variety  of  chemical  solutions  used  by  other  production  departments.  The
manufacturing  process for certain of PML's  ancillary  products such as stains,
reagents,  and other  chemical  solutions  generates  a small  amount (50 to 100
gallons per year) of  hazardous  materials  which  consist  primarily of organic
solvents and heavy metal salts.  PML hires  licensed  hazardous  waste  disposal
companies  for  the  disposal  of  these   materials  at  a  nominal  cost.  See
"Governmental Regulation."

Suppliers

      PML's largest suppliers provide Petri dishes,  blood and plastic packaging
material  which are available  from a number of sources in the United States and
Canada.  During  the past  year,  the  Company  has  reduced  its  purchases  of
dehydrated  media by  increasing  its  in-house  production  to 60% of its total
consumption  of  this  commodity.  Several  manufacturers  and  distributors  of
glassware,  chemicals  and  packaging  materials  exist in the United States and
Canada.

Competition

      The  market for  prepared  culture  media  continues  to change.  There is
continued  national  attention on the cost of health care and many hospitals and
clinical laboratories,  PML's primary customers,  are focusing on cutting costs.
As a result,  the prepared  culture media market has become  increasingly  price
competitive.  Most  hospitals  are now members of buying  groups  known as Group
Purchasing  Organizations  (GPOs), which negotiate single supplier contracts for
their members.  In the clinical products market,  PML's principal  competitor is
Becton Dickinson Microbiology Systems ("BDMS"), a subsidiary of Becton Dickinson
& Co.  In  addition  to BDMS,  there are  generally  smaller  local or  regional
competitors  in most areas where PML  markets.  Key  competitive  factors in the
clinical  microbiology  market  are  price,  quality,  service,  and  breadth of
distribution.  Although  PML  competes  favorably  in each of these  areas,  its
ability to  compete  in the  future  will  depend,  in part,  on its  ability to
continue to lower its culture media and distribution costs.

                                       4
<PAGE>
      In the  industrial  market,  the key  competitive  factors  are  features,
quality,  and  service;  price  competition  is not as prevalent as it is in the
clinical market. PML has only one other significant competitor in the industrial
market.  PML competes  favorably in the industrial market in all areas with this
competitor.

Research and Development

       PML does a small amount of pure research and  development  ("R & D"). The
principal  purposes of its current R & D activities  are to improve its products
(e.g.  testing   additional   ingredients  and  formulas  or  enhancing  certain
performance characteristics), to evaluate products being considered for addition
to PML's product line, and to develop new products for addition to its line. R &
D functions are presently  performed by multiple  departments  within PML and by
independent researchers and scientists that have been retained by PML.

Patents and Licenses

      PML owns a number of patents  and  trademarks  for  products  in the early
marketing  stage.  In  addition,  it has a  license  agreement  with  Definitive
Diagnostics,  Inc. to manufacture and market its PHASE2(R) blood culture system.
This license  agreement  began June 1, 1992 and runs for 6 years with two 2-year
extension periods. See Note 11 of Notes to Consolidated Financial Statements.

Employees

       On May 31, 1997 the Company had  approximately  168 full time  equivalent
employees,  compared with  approximately  163 at May 31, 1996. This increase was
due primarily to filling vacant  positions in  administrative  staffing from the
previous year. The Company's employees are not covered by collective  bargaining
agreements, and the Company considers its employee relations to be satisfactory.

Government Regulation

       As  a  manufacturer  of  medical  devices,  PML  is  subject  to  certain
regulations of the U.S. Food and Drug  Administration  (FDA) and Canada's Health
Protection  Branch (HPB).  These  regulations  require that the FDA register and
inspect  PML's  products,   facilities,   and  manufacturing  processes.   PML's
facilities,  processes and products have received all of the required approvals,
and PML believes that it is in substantial  compliance with all relevant FDA and
HPB requirements.

      In addition,  PML is subject to other federal,  state and local regulatory
requirements  relating to environmental  concerns,  waste management,  hazardous
materials  shipping,  and  health  and  safety  matters.  As with  many  similar
businesses,  some risk of costs and liabilities  related to these matters exists
in PML's business.  Management  believes that the Company's business is operated
in substantial  compliance with applicable regulations -- the violation of which
could have a material adverse effect on the Company.

Liability Insurance

      The Company  maintains  product  liability  insurance  in the amount of $3
million.  Product liability insurance is limited in availability and restrictive
in cost. Based on the essentially  confirmatory  nature of the majority of PML's
diagnostic  products,  PML's management believes that the Company is not subject
to significant  product  liability risk with its present  product line. To date,
PML has never had to negotiate a product liability claim.

                                       5

<PAGE>
Item 2.  Description of Properties

      PML currently  operates from six leased  locations in two  countries.  The
Company  expects no  difficulty in extending any of its leases as they come due.
The following  chart  summarizes the  significant  facilities  which the Company
leases.
<TABLE>
<CAPTION>
                                  Approximate           Approximate
                                 Square Footage        Square Footage           Lease
          Location               Manufacturing      Admin & Distribution     Expiration
          --------               --------------     --------------------     ----------
<S> <C>                          <C>                <C>                      <C>
1.  Wilsonville, Oregon               9,000                34,000            June 2004
2.  Mississauga, Ontario             16,000                 3,000            November 2000
3.  Mississauga, Ontario              4,000                    -             May 1998
4.  Richmond, British Columbia        2,000                 3,100            June 1998
5.  Providence, Rhode Island             -                 12,000            April 1999
6.  Sacramento, California               -                  2,000            January 1999
</TABLE>

      Each of the manufacturing  facilities has extensive leasehold improvements
and production  equipment.  In April 1997, the Company  consolidated  its Oregon
facilities  into  one new  building  in  Wilsonville,  Oregon.  PML's  Corporate
headquarters,  a manufacturing unit and a distribution center are now located in
this facility. The move eliminates  inefficiencies associated with the operation
of multiple  facilities;  and, it provides  additional  capacity for anticipated
growth in current product lines and in potential new business areas.

      The Wilsonville production facility supplies conventional culture media to
the western  United States region and provides  specialty  products to all other
locations. Equipment for the production of PML's PHASE2(R) blood culture system,
DUOTEK  sterility  testing  system,  MIC panels,  and dehydrated  media are also
located in Wilsonville.

      The Richmond  plant  produces high volume culture media for western Canada
and also produces PML's line of parasitology  products.  The  Mississauga  plant
produces  mostly  high-volume  culture  media  for  eastern  Canada  and for the
northern  United  States  regions,  and much of PML's  industrial  contact plate
product line. A second  Mississauga  facility  assembles  parasitology kits on a
contract basis for various Canadian accounts.

Item 3.  Legal Proceedings

      Occasionally,  the Company is a party to  incidental  suits or other legal
actions.  The  Company  is not aware of any  pending  and or  existing  material
lawsuits.

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

      The  Company  held its annual  meeting on  November  21,  1996 and at that
meeting it elected four members to the Board of  Directors;  changed the name of
the Company from Meda,  Inc.,  to PML,  Inc.;  increased  the Common shares from
2,000,000  to  2,500,000;  and  ratified  Price  Waterhouse  LLP as  independent
auditors.  The  directors  elected  and the votes  cast for all  matters  are as
follows:
<TABLE>
<CAPTION>
                                                Votes For     Votes Against     Abstain
                                                ---------     -------------     -------
<S>                                             <C>           <C>               <C>
      Kenneth L. Minton                           957,521             0          1,250
      Arthur R. (Ron) Torland (CLASS B)           211,551             0              0
      Craig S. Montgomery (CLASS B)               211,551             0              0
      Douglas C. Johnson (CLASS B)                211,551             0              0

      Change name from Meda, Inc to PML, Inc.   1,170,072           125            125

      Increase common shares from
         2,000,000 to 2,500,000                 1,169,072         1,125            125

      Ratification of auditors                  1,235,515           125          1,125
</TABLE>

                                       6
<PAGE>
                                     PART II


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

      The Company's common stock commenced trading on NASD's Electronic Bulletin
Board  system in January of 1993 under the  symbol  "MDAN."  Effective  March of
1997, the symbol was changed to "PMLI." The following  table sets forth the high
and low closing  bid prices for the last two years as  reported by The  National
Quotation Bureau.

     For the Quarterly                           High              Low
     Period Ended                              Bid Price         Bid Price
     -----------------                         ---------         ---------

     May, 1997                                 $0.59375          $0.59375
     February, 1997                            $0.59375          $0.59375
     November, 1996                            $0.62500          $0.62500
     August, 1996                              $0.53125          $0.37500
     May, 1996                                 $0.68750          $0.37500
     February, 1996                            $0.37500          $0.31250
     November, 1995                            $0.37500          $0.37500
     August, 1995                              $0.31250          $0.31250

      The Company  has not paid any cash  dividends  on the Common  Stock in the
past and  anticipates  that,  for the  foreseeable  future,  it will  retain any
earnings  available as dividends  for use in its business.  The  Company's  loan
agreement  does not allow the Company to declare or pay cash  dividends  without
the written  consent of the bank.  The preferred  shares have a provision  which
calls for the  accretion of dividends  annually at a rate of prime plus 1.5%. In
April of 1996,  the Company  offered to all of its  preferred  shareholders  the
option of converting  all or a portion of their  accreted  dividends into common
stock. One preferred  shareholder opted for the conversion of accreted dividends
totalling $37,346,  which the Company subsequently  converted into approximately
99,000 shares of common stock; the other shareholders  declined.  No conversions
were offered or accepted in fiscal year 1997.  May 31, 1997  accreted  dividends
totaled  $146,561.  See Note 8 of Notes to  Consolidated  Financial  Statements.
Approximately 1,240 record holders of Common Stock existed as of May 31, 1997.


Item 6.  Management's Discussion and Analysis of Financial Condition and Results
         of Operations

Forward Looking Statements
--------------------------

      Management's Discussion and Analysis of Financial Condition and Results of
Operations  contains certain forward looking statements that involve a number of
risks and  uncertainties.  For  example,  the Company has stated its belief that
sales of  industrial  products  should  increase  in the coming  year,  and that
reductions in the the cost of goods sold should result from improved procurement
practices.  Future demand for the Company's  products,  including its industrial
products,  is  inherently  subject to supply and demand  conditions,  and to the
unpredictable decisions of other market participants.  There can be no assurance
that sales will increase  generally or within any specified product line or that
the Company's margins will stabilize or improve. Other elements that could cause
results to differ materially  include  competitive  pressures and factors listed
from  time to time in the  Company's  reports  to the  Securities  and  Exchange
Commission, including, but not limited to, this report on Form 10-KSB.

                                       7
<PAGE>
Results of Operations
---------------------

      The Company  continued its strong  financial  performance  in fiscal 1997,
earning net income of $669,371 or $0.30 per share for the year,  compared with a
net income of $206,001 or $0.09 per share the prior year. This  improvement came
even though the Company experienced a small decline in net sales for the year of
3.8%.

      The Company's  performance was especially strong in the second half, as it
continued to benefit from its cost control efforts,  earning $550,054 (including
a $220,000  deferred tax  adjustment) in that period,  compared with earnings of
$276,877 (including a $98,000 deferred tax adjustment) in the same period a year
ago.

      The  improvement  in the Company's  performance  resulted from a number of
factors which are addressed in more detail in the following section. In general,
the  Company  cut  costs by  improving  operations,  particularly  by  improving
customer  service and product  quality,  reducing waste,  and reducing  overtime
through operational improvements.  The Company also continued the improvement of
its procurement process,  initiated last year, which has resulted in significant
savings in the costs of materials and services.

      Partially  offsetting the favorable impact of the cost reduction  program,
was the impact of a slight decrease in the value of the Canadian dollar relative
to the U.S.  dollar.  Approximately  41% of the Company's sales are Canadian and
are therefore affected by the level of the Canadian dollar. The average exchange
rate in 1997 decreased to .732 compared to .735 in 1996.  This translates into a
decrease in sales  dollars of about  $22,000 in fiscal 1997 over 1996 due to the
effect of the exchange rate.

      The remaining reduction in sales is due to continued pricing pressure from
competition and from cost containment  measures in the health care industry such
as buying groups and reduced testing.

      The following  table  presents the  percentage  relationship  that certain
items in the Company's  Consolidated  Statement of Operations  bear to sales for
the period indicated.

                                                           Percent of Sales
                                                           Year Ended May 31,
                                                         ---------------------
                                                          1997           1996
                                                         ------         ------
     Net Sales                                           100.0%         100.0%
     Cost of Goods Sold                                   59.8           64.3
                                                         ------         ------
     Gross Profit                                         40.2           35.7
     Selling, general and administrative expenses         34.6           33.0
                                                         ------         ------
     Operating Income                                      5.6            2.7
     Other expense                                         2.2            1.9
                                                         ------         ------
     Income before income taxes                            3.4            0.8
     Income tax benefit                                    1.6            0.7
                                                         ------         ------
     Net income                                            5.0%           1.5%
                                                         ======         ======

                                       8
<PAGE>
Year Ended May 31, 1997 compared With Year Ended May 31, 1996
-------------------------------------------------------------

      Sales in fiscal 1997 totalled $13.32 million,  a decrease of $530 thousand
or 3.8%  year-over-year.  This decrease was primarily in the clinical sector and
was due to a number of  factors  including  some loss of  business  to  hospital
buying groups because of their increased use of group  purchasing  organizations
(GPOs). The Company made up for much of these lost sales with increased sales of
specialty  products  not  included in GPO  contracts.  In  addition,  industrial
microbiology  market sales have been  increasing  and nearly offset the clinical
decline in the fourth quarter when the sales decrease was just $30 thousand.

      Gross profit  improved to 40.2% of sales up from 35.7% the prior year.  In
fiscal 1997,  market and Company actions that improved gross profit included the
following:  decreased sales of lower margin commodity-type  products;  increased
sales of higher  margin  specialty  products;  improved  operating  efficiencies
resulting in reduced scrap and outdates;  lower  material  costs; a modest price
increase put into effect in January 1997; and a revaluation of U.S. and Canadian
finished goods of about $91 thousand.  Management  believes that there have been
no other changes in its sales or operations that would  materially  affect gross
profit.

      Selling,  general and administrative  expenses increased to 34.6% of sales
in 1997  compared  to 33.0% in 1996.  The  increase  was due  mainly to wage and
salary increases and higher  depreciation from leasehold  improvements and other
capital  investments.  Most other expense categories actually improved.  Freight
expense improved dramatically for a second consecutive year due to the full year
impact of  renegotiated  contracts,  dropping  nearly 32% in total dollars,  and
nearly 30% as a percentage of sales.  Rent expense decreased from 2% of sales to
1.9% as the Company  operated with fewer  locations by completing its relocation
discussed earlier and by subleasing its entire administration building.

Liquidity and Capital Resources
-------------------------------

      The Company has financed its operations over the years principally through
funds generated from operations and bank and stockholder loans. At May 31, 1997,
the Company had positive working capital of approximately  $99,000 compared with
negative  working  capital  of  about  $235,000  at May  31,  1996.  Much of the
improvement  in the  current  year  was  due to  eliminating  its  deferred  tax
valuation reserve which increased current assets by $220,000 partially offset by
an increase in its bank line of credit of about  $140,000.  The ratio of current
assets to current  liabilities  was 1.03 at May 31, 1997  compared to .93 at May
31,  1996.   Quick  liquidity   (current  assets  less  inventories  to  current
liabilities) was .62 at May 31, 1997 and .51 at May 31, 1996.

      The twelve-month  average collection period for trade receivables was 49.4
days at May 31, 1997 compared with 54 days at May 31, 1996.

      Net cash  provided by  operating  activities  was  $404,915 in fiscal 1997
compared with $830,819  provided by operations in fiscal 1996. The positive cash
this year was mainly from higher net income partially offset by the deferred tax
adjustment  discussed  in the  earlier  section.  Net  cash  used  in  investing
activities was $637,316 in fiscal 1997 compared with $24,376 used by the Company
in  investing  activities  in fiscal  1996.  The Company  spent  $659,982 on the
purchase of plant,  property and  equipment  during  fiscal 1997,  compared with
$52,747  in  fiscal  1996.  Financing  activities  provided  cash  of  $296,924,
primarily  from an  increase in the bank line of credit and long term bank loans
from the Company's new lender, compared with $827,095 used during fiscal 1996 to
pay down the bank line and bank loans with the Company's previous lender.

                                       9
<PAGE>
      Due, in part,  to a  September  16, 1996  increase  in the  interest  rate
charged by its former lender, the Company negotiated a larger and more favorable
four year financing  agreement with another lender  effective  December 1, 1996.
The new  financing  agreement  included  interest  at prime  plus 2.5% which was
lowered to 2.0% on June 1, 1997 and will  decrease each of the next two years if
certain  financial  ratios are met. In addition,  the loan allows the Company to
borrow  against both  equipment  and  inventory as well as accounts  receivable.
Proceeds  from the new loan were used to pay off all  outstanding  debt from the
prior  lender  and will  provide  the funds for  future  expansion  and  capital
expenditures.  The Company  has already  used part of these new funds to achieve
cost  efficiencies by consolidating  all its Oregon  facilities and is currently
making much needed improvements in MIS systems.  Management expects that both of
these investments will payback in about two years.

      As part of the new financing  agreement,  the Company  obtained a new bank
line of credit that has a current  maturity  date of November 30, 2000.  The new
line of credit is secured  substantially  with all of the assets of the Company.
The  available  amount  under the line of credit is based upon 80% to 85% of the
eligible accounts  receivable and 30% to 40% of eligible inventory at the end of
each  reporting  period,  not to exceed $2.5 million.  The Company also borrowed
$400,000 on December 1, 1996,  under a new  four-year  loan  secured by eligible
operating equipment. The rate of interest charged on the line is prime plus 2.5%
and will decrease each year if the company meets certain financial ratios.  This
loan will be repaid  primarily out of the Company's  receivable  collections and
other cash provided by operating activities.

      The Company may require additional capital to finance current  operations,
make enhancements to or expansions of its manufacturing  capacity, in accordance
with its business strategy, or for additional working capital, for inventory and
accounts  receivable.  The Company may also seek additional funds through public
or private  debt or through bank  borrowings.  No  assurances  can be given that
future  financings  will be  available  with terms  acceptable  to the  Company.
Without such future financing,  the Company's ability to finance its growth will
be severely limited.

      The Company's total debt structure at May 31, 1997 was as follows:
<TABLE>
<CAPTION>
                                                                      Long-Term        Current-Portion
                                                                     ------------      ---------------
<S>                                                                  <C>               <C>
     Revolving credit at prime plus 2.50%, due November 30, 2000     $          0      $  1,248,928
     Note payable at prime plus 2.50%, due November 30, 2000              258,322           100,008
     Note payable at prime plus 1.25%, due November 1998                    6,383            11,894
     Note payable at 10%, due January 1998                                      0            10,000
     Note payable at prime plus 1%, due December 1999                      35,821            11,679
     Note payable at 8%, due May 2000                                      51,543            23,923
     Capital Lease obligations, due July 1999                              40,246            40,143
     Note payable at 6%, due May 2005                                      70,000            10,000
     Note payable at 12%, due April 2000                                   82,269            15,529
     Trade A/P converted to notes payable at 6%, due February 2001        511,127            82,614
                                                                      ------------      ------------
       Total  long  debt                                              $  1,055,711      $  1,554,718

     Total Notes payable to related parties                                      0           247,550
                                                                      ------------      ------------
     Total long and short term debt                                   $  1,055,711      $  1,802,268
                                                                      ============      ============
</TABLE>
Item 7.  Financial Statements and Supplementary Data

      The information  required by this item is included on pages F-1 to F-18 of
this report.

Item 8.  Changes in and Disagreements with Accountants on Accounting Disclosure

      PML's independent  accountants,  Price Waterhouse LLP, were engaged on May
21,  1996 and have been  re-engaged  for the  current  year.  There have been no
disagreements  with the  accountants  on any matter of accounting  principles or
practices, financial statement disclosures, or auditing scope or procedures.

                                       10
<PAGE>
                                    PART III


Item 9.  Directors, Executive Officers, Promoters and Control Personnel;
         Compliance with Section 16(a) of the Exchange Act


Directors and Executive Officers of the Company
-----------------------------------------------

      The directors and executive officers of the Company are as follows:

                                                                     Term as
             Name                       Position                Director Expires
             ----                       --------                ----------------
      A. Ron Torland              Chairman of the Board               1997

      Kenneth L. Minton           President and
                                     Chief Executive Office
                                     Director                         1997

      James N. Weider             Chief Financial Officer,
                                     Vice President-Finance,
                                     Secretary, Treasurer             N/A

      Douglas C. Johnson          Director                            1997

      Craig S. Montgomery         Director                            1997


      A.  Ron  Torland,  age  50,  has  been  employed  by  the  Company  or its
predecessor  since  1970.  He became  Chairman  of the Board in 1988,  was Chief
Executive Officer from 1988 to 1996, and was President from 1982 to 1988. He was
Treasurer  from 1972 to 1996 and a member of the  Board of  Directors  since the
Company was  incorporated  in 1972. Mr. Torland holds a B.S.  degree in business
administration and served in the U.S. Army from 1968 to 1970.

      Kenneth L. Minton, age 47, was hired as the Company's  President and Chief
Executive  Officer in April,  1996, and was elected to the Board of Directors in
November,  1997.  Prior to joining  PML, he was  President  and Chief  Operating
Officer of Hind, Inc., a manufacturer and distributor of high end sports apparel
from 1993 to 1996,  and Vice  President  of  Microwave  Applications  Group,  an
electronics  manufacturer,  from 1985 to 1993.  Prior to 1985,  Mr.  Minton  had
extensive  experience  in  operations,  finance,  sales and marketing in several
industries. Mr. Minton holds a B.S. degree in Business Administration.

      James N. Weider,  age 54, has been  employed by the Company  since August,
1995 as its  CFO,  Vice-President  -  Finance  and  Secretary.  He  also  became
Treasurer in 1997. He has both a B.S. in business  administration,  with a major
in accounting,  and an MBA from The Ohio State  University,  and has also passed
the CPA exam. Prior to coming to the Company,  Mr. Weider was the Vice President
- Finance at TNT Reddaway  Truck Line from 1989 to 1995 and spent six years with
Tektronix and seventeen years with International Harvester.

      Douglas  C.  Johnson,  age 41, has been a director  of the  Company  since
March,  1996.  He holds a B.A.  degree in Music  from  Fort  Wright  College  in
Spokane,  Washington,  and a Masters  Degree  from the  University  of  Southern
California in Los Angeles.  He has been a professional opera singer for 13 years
and returned to the U.S. three years ago after nine years in Europe.

                                       11
<PAGE>
      Craig S.  Montgomery,  Ph.D., 43, has been a director of the Company since
March, 1996. He is a licensed clinical  psychologist.  From 1983 to 1991, he was
Program  Director  of New  Day  Center,  Portland,  Oregon,  a  residential  and
outpatient facility for chemical dependency treatment. From 1991 to 1993, he was
Clinical Supervisor of both the New Day Center and the Dual Diagnosis program at
Portland Adventist Hospital and Caremark  Behavioral Health Services.  He is now
in private  practice.  Dr.  Montgomery  holds a Masters  Degree from  Pepperdine
University and a Ph.D. from the California School of Professional  Psychology in
San Diego, California.

      No director holds a directorship in any other Company  reporting under the
Securities and Exchange Act of 1934.

Significant Employees

      There are no significant employees other than those listed above.

Family Relationships

      Mr.  Torland  and Dr.  Montgomery  are  stepbrothers.  Mr.  Johnson is Dr.
Montgomery's and Mr. Torland's brother-in-law.

Involvement in Certain Legal Proceedings

      None.

Item 10.  Executive Compensation

      The following table sets forth the compensation of all executive  officers
of the Company for the fiscal year ending May 31, 1997 and 1996, who received or
earned total annual salary and bonuses during that period in excess of $100,000.
<TABLE>
<CAPTION>
      Name of Individual         Annual Compensation
          and Position                  Year              Salary         Bonus     Other Compensation

<S>                                     <C>               <C>            <C>       <C>
      Kenneth L. Minton, CEO            1997              150,023        66,389           None
                                        1996               17,310         None            None

      Woody Streb, VP Marketing         1997               92,447        25,000           None
                                        1996                None          None            None
</TABLE>
      No  officer,  director  or  employee  was  beneficiary  of  any  long-term
compensation or other  compensation in excess of the dollar values  reflected in
item  402(b)(2)(iii)(c).  No director  received any  compensation for his or her
services as a director.

                                       12
<PAGE>
Item 11.  Security Ownership of Certain Beneficial Owners and Management

      The following table sets forth  information  with respect to the ownership
of issued and  outstanding  shares of the  Company as of the date hereof by each
director,  executive  officer,  and  person  known  to  the  Company  to be  the
beneficial owner of more than 5% of any class of the Company's voting securities
as of August 31, 1997:

                                                        Amount and
                      Name and Address                  Nature of        Percent
Title of              of Beneficial                     Beneficial       of
Class                 Owner                             Ownership        Class
-------------------   -------------------------------   ----------       -------
Common Shares         A. Ron Torland                     110,381            6.2%
                      10595 SW Kiowa Street
                      Tualatin, OR  97062

Common Shares         Arthur N. Torland                  522,372           29.4%
                      10755 SW Lucas
                      Tualatin, OR  97062

Common Shares         Julian G. Torland                  267,900           15.1%
                      11100 SW North Dakota Street
                      Tigard, OR  97223

Common Shares         Douglas C. & Joanne E. Johnson     146,832            8.3%
                      8728 SW Pamlico Court
                      Tualatin, OR  97062

Common Shares         Craig S. Montgomery                 47,243            2.6%
                      12600 SE Rachella Court
                      Boring, OR  97009

Class B
Common Shares         A. Ron Torland                      142,902          67.5%
                      10595 SW Kiowa Street
                      Tualatin, OR  97062

Class B
Common Shares         Julian G. Torland                    68,649          32.5%
                      11100 SW North Dakota Street
                      Tigard, OR  97223

Class A Convertible
Preferred Shares      Arthur N. and Bessie M. Torland       2,750          55.6%
                      8520 SW Avery Street
                      Tualatin, OR  97062


Class A Convertible
Preferred Shares      Julian G. Torland                       700          14.1%
                      11100 SW North Dakota Street
                      Tigard, OR  97223

Class A Convertible
Preferred Shares      Douglas C. & Joanne E. Johnson        1,500          30.3%
                      8728 SW Pamlico Court
                      Tualatin, OR  97062

                                       13
<PAGE>
      The directors and officers of the Company,  as a group, own 304,456 common
shares,  representing  17.1% of that class, and 142,902 shares of Class B common
shares,  representing  67.5%  of  that  class,  and  1,500  shares  of  Class  A
convertible preferred, representing 30.3% of that class.

      There are no  arrangements  which may result in a change of control of the
Company.


Item 12.  Certain Relationships and Related Transactions

      The  Company  leases  equipment  and  laboratories  and did  lease  office
facilities from Arthur & Bessie Torland,  Julian Torland, and Ron Torland,  some
of whom hold more than ten percent of certain  classes of voting  securities  of
the Company under four operating  leases.  Total rental  expense  incurred under
these four  operating  leases was  approximately  $150,000 and $90,000 in fiscal
1997 and 1996,  respectively.  (See Note 11 on Notes to  Consolidated  Financial
Statements.

      The  Company  has  a  Technology   License   Agreement   with   Definitive
Diagnostics,  Inc. ("DDI"). See Patents and Licenses.  Under the agreement which
extends  for six  years,  the  Company  will  manufacture  and  market  products
developed  by DDI and pay a royalty  based upon the number of units sold.  Total
royalties  of $28,855  were  incurred in fiscal 1997 and $38,650 in fiscal 1996.
DDI is owned by Messrs.  Arthur and Ron Torland,  both shareholders  owning more
than ten  percent  of a class of stock of the  Company.  Ron  Torland  is also a
director of the Company.

      Joanne E.  Johnson,  wife of director  Doug C.  Johnson;  Ron  Torland,  a
stockholder and director;  Arthur & Bessie Torland,  shareholders;  and L. Bruce
Ham, brother-in-law of a director all have five year six percent notes issued in
fiscal 1996 with a balance of $82,788.

      There  are no other  transactions,  or  series  of  similar  transactions,
involving amounts in excess of $60,000.


Item 13.  Exhibits, Financial Statement Schedules and Reports on Form 8-K

(a)  Exhibits

Exhibit                    Description of Exhibit

    3             Articles of Incorporation and Bylaws

    4             Instruments defining the rights of holder (none)

    9             Voting Trust Agreement (none)

   10             Material contracts
                  a.       Employment Agreement with Lester L. Leno
                  b.       Consulting Agreement with Interim Management Co.
                  c.       Employment Agreement with Kenneth L. Minton
                  d.       1994 Stock Option Plan for Non-employee Directors.
                  e.       1994 Stock Option Plan

                                       14
<PAGE>
   11    *        Statement re: Computation of per share earnings

   16             Letter on changes and certifying accountants

   18             Letter on change in accounting principles

   19             Previously unfiled documents (none)

   21             Subsidiaries of Registrant

   22             Published report regarding matters submitted to vote (none)

   24             Power of Attorney (none)

   28             Additional exhibits (none)

      Each  exhibit  marked with a single  asterisk is filed with this report on
form  10-KSB.  Except as  otherwise  indicated,  each  exhibit  not so marked is
incorporated  by reference to the exhibit filed by the Company with its previous
filings to the SEC.


(b)  Reports on Form 8-K.

      A paper filing  report on form 8-K was filed with the SEC on May 21, 1996.
This report related to a change in the Company's outside auditors. Subsequent to
the  paper  filing of Form  8-K,  the  Company  was  requested  to file the same
information via the EDGAR system during the first quarter ended August 31, 1996.

                                       15
<PAGE>
                                   SIGNATURES

      In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized in the City of Tigard, State of Oregon, on August 28, 1997.

                            PML, INC.

                            By: /s/ Kenneth L. Minton
                                ----------------------
                            Kenneth L. Minton, Chief Executive Officer



      In accordance  with the Exchange Act, this report has been signed below by
the  following  persons on August 28, 1997,  on behalf of the Company and in the
capacities indicated.


Signatures                  Title
----------                  -----

/s/ Kenneth L. Minton       President and Chief Executive Officer
---------------------       (Principal Executive Officer), Director
Kenneth L. Minton



/s/ James N. Weider         Vice President-Finance, Secretary and Treasurer, CFO
---------------------       (Principal Financial and Accounting Officer)
James N. Weider



/s/A. Ron Torland           Chairman of the Board
---------------------
A. Ron Torland



/s/Doug C. Johnson          Director
---------------------
Doug C. Johnson



/s/Craig S. Montgomery      Director
---------------------
Craig S. Montgomery



                                       16
<PAGE>

                                  REPORT OF INDEPENDENT ACCOUNTANTS


To the Board of Directors and Stockholders
of PML, Inc. (formerly Meda, Inc.)


In our opinion,  the  accompanying  consolidated  balance  sheet and the related
consolidated statements of operations, of stockholders' equity and of cash flows
present fairly, in all material  respects,  the financial  position of PML, Inc.
(formerly  Meda,  Inc.) and its  subsidiary  at May 31,  1997 and 1996,  and the
results of their  operations  and their cash flows for the years then ended,  in
conformity  with  generally  accepted  accounting  principles.  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  audit.  We  conducted  our audit of these  statements  in  accordance  with
generally accepted auditing standards which 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,
assessing the  accounting  principles  used and  significant  estimates  made by
management,  and evaluating the overall  financial  statement  presentation.  We
believe  that our audit  provides a reasonable  basis for the opinion  expressed
above.



/s/Price Waterhouse LLP
-----------------------
PRICE WATERHOUSE LLP

Portland, Oregon
July 7, 1997


















                                     F - 1

<PAGE>
PML, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>

                                                                        May 31,                May 31,
Assets                                                                    1997                   1996
                                                                  -------------------    -------------------

<S>                                                               <C>                    <C>
Current Assets:
 Cash                                                             $           74,410     $            9,887
 Trade accounts receivable, less allowance for doubtful
   accounts of $81,609 in 1997 and $126,982 in 1996                        1,773,446              1,651,918
  Inventories:
     Raw Materials                                                           756,388                808,680
     Work in Process                                                           4,583                  9,167
     Finished Goods                                                          699,093                604,902
  Deferred income taxes                                                      318,854                 98,000
  Prepaid expenses and other current assets                                   70,669                 49,583
                                                                  -------------------    -------------------

     Total Current Assets                                                  3,697,443              3,232,137

Property, plant and equipment - net                                        1,717,951              1,358,854
Intangible assets - net                                                       64,801                 10,122
Other assets                                                                  83,554                 66,623
                                                                  -------------------    -------------------
          Total Assets                                            $        5,563,749     $        4,667,736
                                                                  ===================    ===================


Liabilities and Stockholders' Equity

Current Liabilities:
  Accounts payable                                                $        1,054,462     $        1,416,515
  Accrued salaries and wages                                                 375,249                151,546
  Accounts payable  - related parties                                          2,175                  6,440
  Other accrued liabilities                                                  364,076                291,742
  Notes payable - related parties                                            247,550                257,770
  Bank line of credit                                                      1,248,928              1,106,761
  Current portion of borrowings - related parties                             69,073                 59,499
  Current portion of borrowings                                              236,717                176,785
                                                                  -------------------    -------------------
     Total Current Liabilities                                             3,598,230              3,467,058
                                                                  -------------------    -------------------


Borrowings - related parties less current portion                            164,958                145,354
Borrowings, less current portion                                             890,753                814,887
                                                                  -------------------    -------------------
Total Borrowings, less current portion                                     1,055,711                960,241
                                                                  -------------------    -------------------


Stockholders' Equity
  Preferred stock, $.01 par value; authorized 25,000 shares,
    no shares issued or outstanding                                                -                      -
  Class A convertible preferred stock, stated and liquidation
    value $100 per share; authorized 7,500 shares, issued and
    outstanding 4,950 shares, including accreted dividends                   641,561                592,974
  Common stock, $.01 par value; authorized 2,500,000 shares,
    issued and outstanding 1,776,816 shares                                   17,768                 17,768
  Class B common stock, $.01 par value; authorized 250,000 shares,
    issued and outstanding 211,551 shares.                                     2,116                  2,116
  Class D common stock, $.01 par value, authorized 100 shares,
    no shares issued or outstanding.                                               -                      -
  Additional Paid In Capital                                                 144,701                144,701
  Accumulated Equity (Deficit)                                               103,662               (517,122)
                                                                  -------------------    -------------------
     Total Stockholders' Equity                                              909,808                240,437
                                                                  -------------------    -------------------
          Total Liabilities and Stockholders' Equity              $        5,563,749     $        4,667,736
                                                                  ===================    ===================
</TABLE>

                 See notes to consolidated financial statements

                                      F - 2
<PAGE>
PML, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
TWO YEARS ENDED MAY 31,
<TABLE>
<CAPTION>

                                                      1997                     1996
                                              -------------------    --------------------
<S>                                           <C>                    <C>
Net sales                                     $       13,319,120     $        13,849,481

Cost of goods sold                                     7,959,121               8,901,494
                                              -------------------    --------------------

     Gross profit                                      5,359,999               4,947,987

Selling, general, and
  administrative expenses                              4,605,214               4,577,871
                                              -------------------    --------------------

Operating income                                         754,785                 370,116
                                              -------------------    --------------------

Other (income) expense:
  Interest expense                                       282,016                 294,172
  Other                                                   13,612                 (33,795)
                                              -------------------    --------------------
     Total other expense                                 295,628                 260,377
                                              -------------------    --------------------


Income before income taxes                               459,157                 109,739

Income tax benefit                                       210,214                  96,262
                                              -------------------    --------------------

Net Income                                    $          669,371     $           206,001
                                              ===================    ====================


Net Income per common share                   $             0.30     $              0.09
                                              ===================    ====================
</TABLE>




                 See notes to consolidated financial statements

                                      F - 3
<PAGE>
PML, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
TWO YEARS ENDED MAY 31, 1997
<TABLE>
<CAPTION>
                                                                                                            Retained
                                                          Class A                   Class B   Additional    Earnings
                                                        Convertible       Common     Common    Paid-in    (Accumulated
                                                      Preferred Stock     Shares     Shares    Capital      Deficit)       Total
                                                      ----------------  ---------  ---------  ----------  ------------  ----------

<S>                                                   <C>               <C>        <C>        <C>         <C>           <C>       
Balance, May 31, 1995                                 $       580,820   $ 14,497   $  2,116   $     -     $  (673,623)  $ (76,190)
  Common Stock returned and cancelled                              -         (27)        -          27             -           -
  Preferred Stock dividends accreted                           49,500         -          -          -         (49,500)         -
  Stock issued to employees                                        -       1,870         -      68,255             -       70,125
  1995 401K match                                                  -         432         -      40,069             -       40,501
  Conversion of accreted dividends to Common Stock            (37,346)       996         -      36,350             -           -
                  Net income                                       -          -          -          -         206,001     206,001
                                                      ----------------  ---------  ---------  ----------  ------------  ----------
Balance, May 31, 1996                                         592,974     17,768      2,116    144,701       (517,122)    240,437

     Prefered Stock dividends accreted                         48,587         -          -          -         (48,587)         -
                    Net Income                                     -          -          -          -         669,371     669,371
                                                      ----------------  ---------  ---------  ----------  ------------  ----------
Balance, May 31, 1997                                 $       641,561   $ 17,768   $  2,116   $ 144,701   $   103,662   $ 909,808
                                                      ================  =========  =========  ==========  ============  ==========
</TABLE>























                 See notes to consolidated financial statements

                                      F - 4
<PAGE>
PML, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
TWO YEARS ENDED MAY 31,
<TABLE>
<CAPTION>

                                                                                   1997                     1996
                                                                           -------------------    ---------------------

Cash Flows from Operating Activities:
<S>                                                                        <C>                      <C>
     Net  income                                                           $          669,371       $          206,001
                                                                           -------------------    ---------------------
     Adjustments to reconcile net income to
            net cash provided by (used in) operating activities:
         Depreciation and amortization                                                279,275                  313,972
         (Gain) loss on sale of equipment                                               3,449                  (14,206)
         Deferred income taxes                                                       (220,854)                 (98,000)
            Accounts receivable                                                      (121,528)                 540,855
            Inventories                                                               (37,315)                 237,769
            Other assets                                                              (97,202)                 118,729
            Accounts payable and accrued liabilities                                  (70,281)                (474,301)
                                                                           -------------------    ---------------------
            Total adjustments                                                        (264,456)                 624,818
                                                                           -------------------    ---------------------
         Net cash provided by operating activities                                    404,915                  830,819
                                                                           -------------------    ---------------------

Cash Flows from Investing Activities:
     Proceeds from sale of assets                                                      22,666                   28,371
     Purchase of property, plant and equipment                                       (659,982)                 (52,747)
                                                                           -------------------    ---------------------
         Net cash used in investing activities                                       (637,316)                 (24,376)
                                                                           -------------------    ---------------------

Cash Flows from Financing Activities:
     Proceeds from issuance of notes payable and bank credit line                   5,991,969                  333,610
     Repayment of demand notes and bank credit line                                (5,808,792)                (995,959)
     Proceeds from issuance of long-term debt                                         501,120                   23,000
     Repayment of long-term debt                                                     (387,373)                (187,746)
                                                                           -------------------    ---------------------
         Net cash provided by  (used in) financing activities                         296,924                 (827,095)
                                                                           -------------------    ---------------------
Increase (decrease) in cash                                                            64,523                  (20,652)

Cash at beginning of period                                                             9,887                   30,539
                                                                           -------------------    ---------------------

Cash at end of period                                                      $           74,410       $            9,887
                                                                           ===================    =====================


Supplemental Disclosures:
     Interest paid                                                         $          264,776       $          271,929
     Income tax paid                                                                    5,503                    1,738
     Non Cash Items:
         Preferred stock dividends accreted                                            48,587                   49,500
         Accounts payable exchanged for long-term debt and notes payable                5,981                  644,106
         Accounts payable exchanged for capital stock issued to employees                   -                   70,125
         Accounts payable exchanged for capital stock issued to employee
            401k plan                                                                       -                   40,501
         Common shares reacquired                                                           -                       27
</TABLE>



                 See notes to consolidated financial statements

                                      F - 5
<PAGE>
PML, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
TWO YEARS ENDED MAY 31, 1997


1.    ORGANIZATION AND BASIS OF PRESENTATION

      PML, Inc.  ("PML" or the  "Company")  was  incorporated  as Meda,  Inc. in
      September  1991 and owns 100% of the  common  and  preferred  stock of PML
      Microbiologicals,  Inc. ("PML"), formerly Prepared Media Laboratory,  Inc.
      Effective  December 4, 1992, Meda acquired PML and issued PML shareholders
      1,164,526 Common Shares,  211,551 Class B Common Shares, and 4,950 Class A
      convertible  preferred  shares  of Meda.  This  business  combination  was
      accounted  for as a  reverse  acquisition  of Meda by PML  whereby  PML is
      deemed to be the acquirer for accounting purposes.

      As a result of the reverse  acquisition,  effective  December 4, 1992, PML
      stockholders' equity was adjusted to reflect the exchange of stock in Meda
      described above.

      The Company  produces and sells,  throughout the United States and Canada,
      to both the  clinical  market  (diagnosis  of  diseases in humans) and the
      industrial market (environmental and sterility testing). Typical customers
      for  the  Company's  clinical  products  are:  hospitals;   clinics;   and
      wholesalers that market to hospitals and clinics. The company's industrial
      customers include:  pharmaceutical companies; biotech research facilities;
      and food and water testing labs.

2.    SIGNIFICANT ACCOUNTING POLICIES

      Principles of  Consolidation  - The  accompanying  consolidated  financial
      statements  include the accounts of PML and its  wholly-owned  subsidiary,
      PML  Microbiologicals.   All  significant  intercompany  transactions  and
      balances have been eliminated.

      Revenue Recognition - Sales revenue net of allowances is recognized at the
      time the Company's product is shipped to customers.

      Inventories  -  Inventories  are  stated at the  lower of cost  (first-in,
      first-out method) or market.

      Property Plant and Equipment - Property,  plant,  and equipment are stated
      at cost. Depreciation of property,  plant, and equipment is provided using
      primarily the straight-line  method over the estimated useful lives of the
      assets  of 2 to  12  years.  Amortization  of  leasehold  improvements  is
      provided using the straight-line method over the estimated useful lives of
      the assets or the initial term of the lease, whichever is shorter.

      Intangible  Assets - Intangible  assets include a covenant not to compete,
      customer lists, and costs in excess of fair value of assets acquired.  The
      covenant  not to compete is being  amortized on the  straight-line  method
      over five years,  the term of the agreement.  The customer lists are being
      amortized on the straight-line  method over their expected useful lives of
      five and ten years. Cost in excess of fair value of the assets acquired is
      being amortized on the straight-line  

                                      F - 6
<PAGE>
      method over five years. Accumulated amortization at May 31, 1997 and 1996,
      was $240,499 and $235,993, respectively.

      Long-Lived  Assets - In March 1995,  the  Financial  Accounting  Standards
      Board  issued  Statement  of  Financial   Accounting  Standards  No.  121,
      "Accounting  for the  Impairment of Long-Lived  Assets and for  Long-Lived
      Assets to Be Disposed Of." The  statement  provides  that  impairments  of
      long-lived  assets be measured  and valued based on the  estimated  future
      cash  flows.  The Company  adopted the  statement  in 1996;  however,  the
      adoption  did not have a  significant  impact on the  Company's  financial
      position or results of operations.

      Profit  Sharing  Plan  - The  Company  has a  profit  sharing  plan  which
      qualifies  under Section  401(k) of the Internal  Revenue Code.  Under the
      plan,   eligible  U.S.  employees  may  contribute  up  to  15%  of  their
      compensation  with  a  Company  match,  at  its  option,  up to 3% of  the
      employees' total compensation.  The Company also has a profit sharing plan
      which covers eligible Canadian employees.  The Company is required to fund
      out of profits a minimum  contribution of $100 (CDN) per participant.  The
      Company  recorded  $4,971 of profit  sharing  expense  in fiscal  1997 and
      incurred a net profit  share  recovery in fiscal 1996 of ($1,887) due to a
      partial reversal of a prior year accrual.

      Foreign  Currency  - The  financial  statements  and  transactions  of the
      Company's  Canadian  division  are  maintained  in  Canadian  dollars  and
      remeasured  into the  Company's  functional  currency  (U.S.  dollars)  in
      accordance with Statement of Financial  Accounting  Standards ("SFAS") No.
      52. Nonmonetary  balance sheet items are remeasured at historical exchange
      rates.  Revenues and expenses are remeasured at the average  exchange rate
      for each fiscal year.

      Net  Income  (Loss) Per  Common  Share - Net  income  per common  share is
      computed based upon the  outstanding  weighted  average common and, to the
      extent they are dilutive,  common  equivalent  shares.  The following is a
      summary of the  computation  of net  income per share for two years  ended
      May 31, 1997.

                                                      Years Ended May 31,
                                               -------------------------------
                                                   1997               1996

      Net income                               $   669,371        $   206,001
      Preferred stock dividends accreted           (48,587)           (49,500)
                                               ------------       ------------
      Net income on common stock               $   620,784        $   156,501
                                               ============       ============
      Weighted average number of common
          shares outstanding                     2,060,257          1,806,337
                                               ============       ============

      Net income per common share              $      0.30        $      0.09
                                               ============       ============


                                     F - 7
<PAGE>
      In February 1997, the Financial Accounting Standards Board issued SFAS No.
      128  "Earnings  Per Share." In  accordance  with this  pronouncement,  the
      Company will adopt the new standard for periods  ending after December 15,
      1997.  Management  does not expect the adoption of this  pronouncement  to
      have a significant effect on reported earning per share information.

      Fair Value of Financial  Assets and  Liabilities  - Statement of Financial
      Accounting  Standards No. 107,  "Disclosures About Fair Value of Financial
      Instruments,"  requires  disclosure of the fair value of certain financial
      assets  and  liabilities.  The  Company  estimates  the fair  value of its
      monetary  assets and  liabilities  based upon the existing  interest rates
      related to such assets and liabilities compared to current market rates of
      interest for monetary  assets and liabilities of similar nature and degree
      of risk.  The  Company  estimates  that the  carrying  value of all of its
      monetary  assets  and  liabilities  approximates  fair value as of May 31,
      1997.

      Accounting   Estimates  -  The  preparation  of  the  Company's  financial
      statements in conformity  with generally  accepted  accounting  principles
      (GAAP) 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 reported
      periods. Actual results may differ from such estimates.

      Reclassifications  - Certain prior year amounts have been  reclassified to
      conform to the current year presentation.  These  reclassifications had no
      effect on previously reported results of operations.


3.    INVENTORIES

      Inventories consisted of the following:

                                                 May 31,
                                     -------------------------------
                                          1997              1996

      Raw materials                  $    756,388      $    808,680
      Work-in-process                       4,583             9,167
      Finished goods                      699,093           604,902
                                     -------------     -------------
             Total inventories       $  1,460,064      $  1,422,749
                                     =============     =============





                                     F - 8
<PAGE>
4.    PREPAID EXPENSES AND OTHER CURRENT ASSETS

      Prepaid expenses and other current assets consisted of the following:

                                                           May 31,
                                               -------------------------------
                                                   1997               1996

      Prepaid expenses and deposits            $    70,623        $    46,020
      Other receivables                                 46              3,563
                                               ------------       ------------
          Total prepaid expenses and other
               current assets                  $    70,669        $    49,583
                                               ============       ============

5.    PROPERTY, PLANT, AND EQUIPMENT

      Property, plant, and equipment consisted of the following:
<TABLE>
<CAPTION>
                                                                   May 31,
                                                       -------------------------------
                                                           1997             1996

<S>                                                    <C>                <C>        
      Manufacturing equipment                          $ 2,409,482        $ 2,360,256
      Office furniture and equipment                     1,049,809            724,378
      Service vehicles                                      57,522             58,448
      Leasehold improvements                               660,581            439,526
                                                       ------------       ------------
          Subtotal                                       4,177,394          3,582,608
      Less accumulated depreciation and amortization    (2,459,443)        (2,223,754)
                                                       ------------       ------------
      Property, plant, and equipment - net             $ 1,717,951        $ 1,358,854
                                                       ============       ============
</TABLE>

6.    NOTES PAYABLE TO RELATED PARTIES

      Notes payable to related  parties  consisted of unsecured  demand notes at
      prime  rate  plus 1% (9.5%  at May 31,  1997  and  9.25% at May 31,  1996)
      totaling $247,550 and $257,770 at May 31, 1997 and 1996, respectively.



                                     F - 9
<PAGE>
7.    BORROWINGS
<TABLE>
<CAPTION>
      Borrowings consisted of the following:
                                                                                          May 31,
                                                                               -----------------------------
                                                                                   1997             1996
                                                                               ------------     ------------
<S>                                                                            <C>              <C>
     First Interstate Bank of Oregon, N.A.:
          $1,600,000 revolving credit line due March 15, 1997 at the
            Bank's prime rate plus 3.00% (11.50% at May 31, 1997),
            and collateralized by substantially all assets of the
            Company.  This loan was paid in full December 2, 1996.             $        0       $ 1,106,761
          Note payable through March 1998 in monthly installments
            of $7,191 including interest at 8%, collateralized by trade
            accounts receivable, inventories, and equipment.  This loan
            was paid in full December 2, 1996.                                          0           139,796
          Note payable through January 1998 in monthly installments
            of $2,447 plus interest at the Bank's prime rate plus
            1.25% (9.75% at May 31, 1997), collateralized by trade
            accounts receivable, inventories, and equipment.  This loan
            was paid in full December 2, 1996.                                          0            28,359
      Norwest Business Credit, Inc:
          $2,500,000 revolving line of credit due November 30, 2000
              at the Bank's prime rate plus 2.5% (11.00% at May 31, 1997),
              and collateralized by trade accounts receivable  and raw
            materials.                                                           1,248,928                0
          Note payable through November 2000 in monthly installments
              of $8,334 including interest of prime plus 2.50% (11.00% at
              May 31, 1997) and collateralized by substantially all the
              Company's equipment.                                                 358,330                0
     JP Wilsonville, LLC:
          Unsecured note payable due in monthly installments of $2,202
            including interest of 12% for 36 months and unpaid balance
            due April 1, 2000.                                                      97,798                0
     Various Vendors:
          Unsecured notes payable with 6% interest
            due in installments through February 2001.                             510,953          545,226
     Various Vendors - Related parties:
          Unsecured notes payable with 6% interest
            due in installments through February 2001.                              82,788           89,345
     Ethel Wildt:
          Unsecured note payable with interest  at prime plus 1%
            due November 1998 to related party.                                     18,277           23,000
     Mary Brown:
          Unsecured note due in installments of $2,425, including
            interest at 8% through May 2000 related to repurchase                   75,466           99,318
            of common stock.
     Les Leno:
          Note payable through May 2005 in yearly principal
            installments of $10,000, interest at 6% related to                      80,000           90,000
            termination settlement with former president.
     Ronald Torland:
          Unsecured demand note with interest at 10% due
            January 1998 to a related party.                                        10,000           10,000
     Ronald Torland:
          Unsecured note payable with interest at prime plus 1%
            due December 1999 to a related party.                                   47,500           47,500
                                                                               ------------     ------------
                                                                                 2,530,040        2,179,305

                                     F - 10
<PAGE>
       Less amounts due within one year                                          1,514,575        1,305,819

                                                                                 1,015,465          873,486

       Total long-term portion - capital lease (see Note 9)                         40,246           86,755

           Total long-term obligations                                         $ 1,055,711      $   960,241
                                                                               ============     ============
</TABLE>
      Aggregate  maturities of borrowings for the years ending subsequent to May
      31, 1997 are as follows:

           1998                                          $ 1,514,575
           1999                                              313,522
           2000                                              426,195
           2001                                              235,748
           2002                                               10,000
         Thereafter                                           30,000
                                                         -----------
                Total                                    $ 2,530,040
                                                         ===========

      The various debt agreements with Norwest  Business  Credit,  Inc.  contain
      covenants which require the Company,  among other things,  to meet certain
      objectives  with  respect  to debt  service  coverage.  In  addition,  the
      agreements  place  certain  limitations  on  dividend  payments,   capital
      expenditures,  lease rental  payments and other  outside  borrowings.  The
      Company  is  either  in  compliance  with all debt  covenants  or has been
      granted waivers where applicable.

8.    STOCKHOLDERS' EQUITY

      Preferred  Shares - In  fiscal  1993,  the  Board of  Directors  adopted a
      resolution  authorizing  7,500 Class A Convertible  Preferred Shares under
      the following terms and conditions:

      Stated Value - $100 per share.

      Conversion  Feature - Convertible  by the holder into the number of Common
      Shares valued at $2.80 per share.

      Dividends  - Wells  Fargo  Bank of  Oregon,  N.A.  prime  rate  plus  1.5%
      cumulative,  annually,  payable  when  and as  declared  by the  Board  of
      Directors.  Such dividends are accreted in periods when the declaration is
      not made.

      Redemption  - Redeemed  for cash,  in whole or in part,  at 100% of stated
      value plus accrued and unpaid  dividends  to  redemption  date,  on a date
      determined by the Board of Directors.

      Liquidation Preference - Upon any liquidation,  dissolution, or winding up
      of the Corporation,  whether voluntary or involuntary,  holders of Class A
      Convertible  Preferred  Shares shall have  preference  and  priority  over
      Common Shares, Class B Common Shares, Class D Common Shares, and any other
      class of stock ranking junior to the Class A Convertible  Preferred Shares
      for payment out of the assets of the Company or proceeds

                                     F - 11
<PAGE>
      thereof  available for distribution to stockholders of $100 per share plus
      all  accrued  and unpaid  dividends.  The  holders of Class A  Convertible
      Preferred Shares shall not be entitled to any other payments.

      Holders of issued and outstanding Common Shares have preference over Class
      B Common Shares upon voluntary or  involuntary  liquidation of the Company
      only to the extent that  holders of Common  Shares shall be paid par value
      of such shares prior to any distributions being made to holders of Class B
      Common  Shares.  Holders of Class B Common  Shares  will then  receive par
      value for each share held and a sum equal to the  distribution  to be made
      on each Common Share.

      Pre-Emptive  Rights  - Under  the  terms  of the  amended  Certificate  of
      Incorporation  of PML,  the holders of shares of any class of stock of PML
      are not entitled to  cumulative  voting nor  preferential  or  pre-emptive
      right to subscribe  for,  purchase,  or receive any shares of any class of
      PML  stock  except  that  holders  of Class B  Common  Shares  shall  have
      pre-emptive  rights with respect to the issuance of Class B Common  Shares
      only. In addition, PML is not allowed to sell or offer to sell any Class B
      Common Shares  without prior  approval of the holders of a majority of the
      issued and  outstanding  Class B Common Shares.  Each Class B Common Share
      may be  converted  to one Common  Share at the  discretion  of the Class B
      shareholder.

      Stock Option Plans - Effective  September 6, 1994,  the Board of Directors
      adopted the "1994 Stock  Option  Plan" and the "1994 Stock Option Plan for
      Nonemployee  Directors"  (collectively,  the "Plans"). The Plans authorize
      650,000 shares be available for grant to eligible individuals and entities
      as defined by the Plans.  The term of each incentive stock option shall be
      established by the Plan administrator, or ten years, whichever is shorter.
      Options  granted under the Plans generally  become  exercisable in four to
      five equal  installments  beginning one year after the date of grant,  and
      expire ten years after the date of grant. During fiscal 1997 and 1996, the
      Company  granted 70,000 and 260,000  options,  respectively,  expiring ten
      years hence at option  prices of $0.3125 to $0.53 per share.  To date none
      of the options granted have been exercised.

      A summary of the status of the options  granted under the Plans at May 31,
      1997 and 1996,  together  with changes  during the period then ended,  are
      represented below. The numbers of options  exercisable at May 31, 1997 and
      1996 were 155,466 and 112,000, respectively.

                                                               Weighted Average
                                                Options         Exercise Price

       Outstanding at May 31, 1995               400,000             1.44
          Options granted at market price        260,000             0.40
          Options exercised                          -                 -
          Options canceled or expired           (295,000)            1.38
      Outstanding at May 31, 1996                365,000             0.68
          Options granted at market price         70,000             0.49
          Options exercised                          -                 -
          Options canceled or expired            (90,000)            0.99
      Outstanding at May 31, 1997                345,000             0.62

                                     F - 12
<PAGE>
      The  Company  applies  APB  Opinion  25  and  related  interpretations  in
      accounting for the Plans.  Accordingly,  no significant  compensation cost
      has been  recognized for options  granted under the Plans,  as options are
      granted at or  proximate  to the fair market  value at time of grant.  Had
      compensation  cost associated with the Plans been determined  based on the
      fair  market  value  at the  grant  date  for  options  under  the  Plans,
      consistent  with the  methodology  of Statement  of  Financial  Accounting
      Standards (SFAS) No. 123, the Company's net income would have been reduced
      to the pro forma amounts indicated below:

                                                       1997               1996
                                                    ---------          ---------
                                                           (in thousands)

           Net income, as reported                   669,371            206,001
           Net income, pro forma                     643,265            187,522
           Earnings per share, as reported              0.30               0.09
           Earnings per share, pro forma                0.29               0.08

      The effects of  applying  SFAS 123 to pro forma  disclosures  for 1997 and
      1996 are not likely to be representative of the effects on reported income
      for future years,  because  options vest over several years and additional
      awards generally are made each year.

      The fair  value of each  option  grant is  estimated  on the date of grant
      using  the   Black-Scholes   option-pricing   model  with  the   following
      weighted-average  assumptions  used for grants in 1997 and 1996:  expected
      volatility of 114% and 104%, respectively;  expected dividend yield of 0%;
      risk-free rate of return of 6.4%; and expected lives of seven years.

      Total fair value of options  granted at market  price was  computed  to be
      $32,317   and  $78,259  for  the  years  ended  May  31,  1997  and  1996,
      respectively.

      The following table summarizes  information  about options  outstanding at
      May 31, 1997.

                                                          Weighted Average
           Exercise        Number         Weighted           Remaining
         Price Range      of Shares     Average Price     Contractual Life
        -------------     ---------     -------------     ----------------
             $0.5300        50,000         $0.5300              9.33
             $0.3750        20,000         $0.3750              9.25
             $0.3750        60,000         $0.3750              9.00
             $0.3750       100,000         $0.3750              8.92
             $0.3125         5,000         $0.3125              8.58
        $0.375-$0.50        25,000         $0.4500              8.25
             $0.5000        40,000         $0.5000              8.17
             $1.5000        45,000         $1.5000              7.25

      Stock  Bonus  -  Subsequent  to May  31,  1995,  the  Board  of  Directors
      authorized a one-time  bonus to each employee of PML on the payroll at May
      1, 1995 in the form of 1,000 shares of PML common shares. At May 31, 1995,
      the Company accrued  compensation  expense of $70,125,  the estimated fair
      value of the common stock,  for this one-time  bonus.  There were no stock
      bonuses accrued in the fiscal year ended May 31, 1996, but the fiscal 1995
      accrual was issued in stock to employees. No stock bonuses were accrued or
      paid in the fiscal year ended May 31, 1997.

                                     F - 13
<PAGE>
9.    COMMITMENTS AND CONTINGENCIES

      The Company leases certain laboratories,  facilities,  and equipment under
      noncancelable  long-term lease arrangements which also require the Company
      to pay executory costs such as property taxes, maintenance, and insurance.
      The  laboratories,  facilities,  and  equipment  leases are  operating and
      capital leases which expire in various years through 2004. Generally, such
      operating  leases include renewal options ranging from one to seven years.
      Rental  expense for  operating  leases was $578,101 and $566,000 in fiscal
      1997 and 1996  respectively.  Certain of the  operating  leases  represent
      related party transactions. See Note 11.

      Future  minimum lease  payments on such capital  leases and  noncancelable
      operating leases as of May 31, 1997 are as follows:

             Years Ending                                  Capital    Operating
                May 31,                                    Leases       Leases

                 1998                                  $   48,060   $   487,690
                 1999                                      36,201       382,785
                 2000                                       6,589       286,604
                 2001                                          -        269,027
                 2002                                          -        271,080
                                                       -----------  -----------
                Total                                      90,850   $ 1,697,186
                                                       ===========  ===========

           Less amount representing interest               10,461
                                                       -----------
           Present value of capital lease obligations      80,389

           Less current portion                            40,143
                                                       -----------
           Long-term portion                           $   40,246
                                                       ===========

F - 14
<PAGE>
 10.  INCOME TAXES

      Deferred income taxes are provided for the temporary  differences  between
      the financial reporting basis and the tax basis of assets and liabilities.
      Deferred  tax  assets  result  primarily  from the  recording  of  certain
      expenses which  currently are not deductible for tax purposes,  tax credit
      carryforwards, and Canadian net operating loss carryforwards. Deferred tax
      liabilities  result  principally  from  the  use,  for  tax  purposes,  of
      accelerated depreciation.

      A  reconciliation  between  the  statutory  federal  income tax  (benefit)
      expense and effective federal income tax (benefit) expense is as follows:

                                                         Years Ended May 31,
                                                      -------------------------
                                                         1997           1996

         Federal statutory (benefit) expense at 34%   $   156,113   $    39,053
         Tax effect of:
           Change in valuation allowance                 (414,636)     (146,464)
           Nondeductible permanent differences             16,547         5,117
           State income taxes and other, net               31,761         6,037

                    Total                             $  (210,214)  $   (96,262)

      The  components  of the  Company's  income tax  (benefit)  expense  are as
      follows:

                                                         Years Ended May 31,
                                                      -------------------------
                                                         1997           1996

         Current                                      $    10,640   $     1,738
         Deferred                                        (220,854)      (98,000)
                    Total                             $  (210,214)  $   (96,262)

      The domestic and foreign  components  of income (loss) before income taxes
      were as follows:

                                                         Years Ended May 31,
                                                      -------------------------
                                                         1997           1996

         Domestic                                     $    87,612   $   (46,264)
         Foreign                                          371,545       156,003

                    Income before income
                       taxes                          $    459,157  $   109,739

F - 15
<PAGE>
      At May 31, 1997 and 1996,  the  significant  components  of the  Company's
      deferred tax assets and liabilities are as follows:

                                                           1997            1996

         Deferred tax assets:
           Vacation accrual                           $    70,988  $     50,016
           Allowance for doubtful accounts                 31,502        49,040
           Net operating loss carryforwards               303,485       487,070
           Other                                           18,836        25,765
                                                      ------------ -------------
                    Total deferred tax assets             424,811       611,891

                    Valuation allowance                       -        (414,636)
                                                      ------------ -------------
         Deferred tax liabilities:
           Excess tax depreciation                       (105,957)      (99,255)
           Prepaid insurance                                  -              -
                                                      ------------ -------------
                    Total deferred tax liabilities       (105,957)      (99,255)
                                                      ------------ -------------
                    Net deferred tax asset           $    318,854  $     98,000
                                                      ============ =============

      The valuation allowance was recorded in 1996 to offset deferred tax assets
      which could only be realized by earning  taxable  income in future  years.
      Management  established  the  valuation  allowances  because  it could not
      determine if it was more likely than not that such income would be earned.
      In 1997 management  eliminated the allowance because it determined that it
      was likely that the deferred tax asset would be used within two years.

      The  Company  files US and  Canadian  tax  returns  on the  results of its
      operations  conducted in each  country.  At May 31, 1997,  the Company has
      available  approximately  $786,231 of unused operating loss carryforwards,
      to offset domestic taxable income, which expire 2010 and 2011.

11.   RELATED-PARTY TRANSACTIONS

      The  Company  has  entered  into  a  Technology   License  Agreement  with
      Definitive Diagnostics, Inc. ("DDI"). Certain stockholders and officers of
      the Company are also  stockholders and officers of DDI. Under the terms of
      the  agreement,  which began on June 1, 1992, was modified on February 28,
      1997, and extends over six years,  the Company will manufacture and market
      the  products  developed by DDI and pay a royalty of $.50 per unit through
      May 31, 1997.  Effective  June 1, 1997,  royalties will range from $.15 to
      $.35 per unit until $500,000 have been paid, and then will be $.00 to $.15
      per unit for the  remaining  life of the  agreement.  Total  royalties  of
      $28,855 and $38,650 were incurred in fiscal 1997 and 1996, respectively.

                                     F - 16
<PAGE>
      The Company  leases  laboratories,  office  facilities  and equipment from
      stockholders  under four operating leases.  The monthly  obligations under
      the leases were $5,500 per month,  expiring June 1998; $5,000 per month on
      a  month-to-month  basis which was  discontinued in June 1997,  $1,000 per
      month expiring May 31,  2000, and $1,100 a month on a month-to-month basis
      which discontinued in April 1997.

      One of the leases the Company entered into was a five-year equipment lease
      agreement  ("Agreement")  with DDI  commencing  June 1,  1992.  Under  the
      Agreement, the Company is required to pay rent in the amount of $1,000 per
      month for four months,  $2,500 per month for the  following  eight months,
      $4,000 per month for the following 12 months, and $5,500 per month for the
      remaining 36 months.  Upon  termination of the Agreement,  the Company may
      renew  the  lease at $5,500  per  month  for 12  months  or  purchase  the
      equipment at its fair market  value.  DDI forgave  rent for December  1994
      through May 1995.  In  addition,  DDI agreed to reduce  lease  payments to
      $1,500 per month for the period June 1995  through  November  1995,  after
      which  the  original  lease  terms  were  reinstated.  DDI is owned 51% by
      shareholder A. Ron Torland and 49% by shareholder Arthur N. Torland.

      The  Company's  leased  Tualatin  Manufacturing  Plant  is  owned  50%  by
      shareholders   Arthur  N.  Torland  and  Bessie  M.  Torland  and  25%  by
      shareholder Julian G. Torland. The Company moved out of this facility into
      its new  Wilsonville  facility  in June 1997.  The leased cold room at the
      Company's  Wilsonville  Distribution  Center is owned 50% by  shareholders
      Arthur N. Torland and Bessie M. Torland and 25% by  shareholder  Julian G.
      Torland.  The Company also pays rent to shareholders  for a small facility
      adjacent  to its  Tualatin  Manufacturing  Plant  which  is  owned  50% by
      shareholder  Arthur N. Torland and 50% by  shareholder  Julian G. Torland.
      The Company  subleases  this property to Clinical  Microbiology  Institute
      ("CMI"),  an  independent  third party.  Both this lease and sublease were
      discontinued in April 1997.  Total rental expense paid to stockholders for
      all leases was approximately  $150,000 and $90,000 in fiscal 1997 and 1996
      respectively.

















                                     F - 17
<PAGE>
12.   FOREIGN OPERATIONS

      The following table indicates the relative amounts of net sales, operating
      income,  and identifiable  assets of the Company by geographic area during
      fiscal years 1997 and 1996.

                                                      1997              1996
         Net sales:
           United States                        $   7,867,023     $   8,288,888
           Canada                                   5,452,097         5,560,593
                                                -------------     -------------
                    Total net sales             $  13,319,120     $  13,849,481

         Operating income:
           United States                        $     271,526     $     106,542
           Canada                                     483,259           263,574

                    Total operating income      $     754,785     $     370,116

         Identifiable assets:
           United States                        $  3,695,665      $   2,849,835
           Canada                                  1,868,084          1,817,901

                    Total identifiable assets   $  5,563,749      $   4,667,736

      Net currency  transactions  gains  (losses) from Canada were ($10,214) and
      $30,079 in 1997 and 1996, respectively.

      Sales between geographic areas and export sales are not material.

      The Company  maintains  separate  accounts for both the United  States and
      Canada down to the Gross Profit level. However,  some operating,  selling,
      general  and  administrative  expenses  are  captured  only on a Corporate
      level. Therefore, the Company has had to make substantial use of estimates
      and  allocations  in order to split its  operating  income on a geographic
      basis. The numbers shown represent  management's  best efforts to allocate
      total operating income.

13.   QUARTERLY FINANCIAL INFORMATION (Unaudited)
<TABLE>
<CAPTION>
      The following is a summary of operating  results by quarter for the fiscal
      years ended May 31, 1997 and 1996:

        1997                       1st Qtr      2nd Qtr      3rd Qtr      4th Qtr        Total
<S>                               <C>          <C>          <C>          <C>          <C>
        Net sales                 $3,240,712   $3,386,393   $3,280,227   $3,411,788   $13,319,120
        Gross profit               1,215,799    1,350,030    1,360,947    1,433,223     5,359,999
        Net income                     8,598      110,719      100,373      449,681       669,371
        Net earnings per share          0.00         0.05         0.04         0.21          0.30


        1996                       1st Qtr      2nd Qtr      3rd Qtr      4th Qtr        Total

        Net sales                 $3,539,216   $3,533,709    $3,335,007  $3,441,549   $13,849,481
        Gross profit               1,047,607    1,199,472     1,288,611   1,203,853     4,739,543
        Net income (loss)            (59,512)     (11,364)      116,549     160,328       206,001
        Net earnings (loss) per share  (0.04)       (0.01)         0.06        0.08          0.09

</TABLE>



                                          F - 18