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                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

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                                  FORM 10-KSB
                Annual Report Pursuant to Section 13 or 15(d) of

                      the Securities Exchange Act of 1934

                  For the fiscal year ended September 30, 1997
                         Commission file number 1-11700


                           HEMAGEN DIAGNOSTICS, INC.
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             (Exact name of registrant as specified in its charter)


            Delaware                                  04-2869857
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    (State or other jurisdiction                   (I.R.S. employer
  of incorporation or organization)               identification No.)


  34-40 Bear Hill Road, Waltham, Massachusetts          02154
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    (Address of principal executive offices)          (Zip Code)


                                 (781) 890-3766
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              (Registrant's telephone number, including area code)


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

        Title of each class
        on which registered               Name of each exchange
        -------------------               ---------------------

        Common Stock                      Boston Stock Exchange
        Common Stock Warrants             NASDAQ Stock Exchange


      Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 60 days.     Yes  [X]     No  [ ].

      Indicate by check mark 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
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB.         [X]

      The registrant had revenues of $12,991,102 in its most recent fiscal
year. The aggregate market value of the voting stock held by non-affiliates of
the registrant on December 16, 1997 was $13,675,183. As of December 16, 1997,
7,814,390 shares of Common Stock, $.01 par value per share and 2,695,255 of
Common Stock Warrants, were outstanding.

      Certain items of Part III of this Form 10-KSB incorporate by reference
certain portions of the registrant's definitive proxy statement to be filed
with the Securities and Exchange Commission in connection with the registrant's
1998 Annual Meeting of Stockholders.



      This report contains certain forward-looking statements that are subject
to risks and uncertainties, including but not limited to those discussed herein
in the section entitled "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and those discussed in the section
entitled "Risk Factors" in the Prospectus contained in the Company's
Registration Statements on Form S-3, File Nos. 333-6147 and 33-80009 (which
section is hereby incorporated by reference herein). These risks and
uncertainties could cause the Company's actual results in future periods to
differ materially from its historical results, and from any opinions or
statements expressed in forward-looking statements. Such forward-looking
statements speak only as of the date of this report, and the registrant
cautions readers not to place undue reliance on these statements.

Item 1.  Business.

General

      Hemagen Diagnostics, Inc. (the "Company") develops, manufactures and
markets proprietary medical diagnostic test kits, or "assays," used to aid in
the diagnosis of autoimmune and infectious diseases, in general health
assessment and for research purposes. The Company also develops, manufactures
and markets materials for the manufacture of such diagnostic test kits. The
Company generally focuses on markets which it believes offer significant growth
potential and limited competition.

      Until July 1995, the Company's products were based primarily on two
diagnostic technologies, hemagglutination and enzyme-linked immunosorbence
("ELISA" or "EIA"). In July 1995, the Company completed the acquisition of a
line of similar but complementary test kits using a third technology,
immunofluorescence, from Schiapparelli Biosystems, Inc. (The "VIRGO
Acquisition"). These acquired assays are sold under the registered trademark
VIRGO(R).

      On March 1, 1996, the Company acquired Reagents Applications, Inc.
("RAI") from Kone Holdings, Inc. RAI manufactures and markets a complete line
of clinical chemistry reagents and diagnostic products for in vitro diagnostic
use in hospitals, clinics and laboratories. These products are sold under the
RAICHEM(R) label directly and through a network of over 30 distributors located
in the United States and international markets. RAI also produces private label
reagents for domestic and international customers. Most RAI reagents can be
used in both automated and manual analyzers. RAI's leading product lines
include blood chemistry assays used to aid the monitoring and measurement of
health profiles, such as cholesterol, blood urea nitrogen (BUN), triglycerides,
glucose and uric acid.

      On November 1, 1996, the Company completed the purchase of substantially
all the assets of Cellular Products, Inc., now known as 872 Main Street
Corporation. 872 Main Street Corporation was operating under the provisions of
Chapter 11 of the United States Bankruptcy Code. The Company continues to
operate the facility located in Buffalo, New York through its wholly owned
subsidiary, Cellular Products, Inc. ("CPI"). CPI manufactures biotechnology
materials and assays for research and for the manufacture of clinical
diagnostic test kits.

      The Company offers approximately 110 test kits that have been cleared by
the United States Food and Drug Administration ("FDA") for sale in the United
States, including 16 test kits which were cleared during the fiscal year ending
1997. Several additional test kits are sold in foreign markets. The Company
markets and sells its brand name products worldwide, directly and through
national and international distributors and manufacturers' representatives. The
Company markets its products in South America through its majority owned
subsidiary, Hemagen Diagnosticos Comercio, Importacao e Exportacao, Ltd., a
Brazilian limited liability company ("HDC"). In addition, the Company sells
certain of its products on a private-label basis to multinational distributors
of medical diagnostics.

      In December 1994 the Company entered into a five-year agreement (the
"Carter-Wallace Agreement") with Carter-Wallace, Inc. ("Carter-Wallace") to
manufacture approximately 14 diagnostic test kits for the Wampole division of
Carter-Wallace. The test kits, which had previously been manufactured by
Carter-Wallace, are used to aid in the diagnosis of diseases such as rheumatoid
arthritis, mononucleosis, strep throat and rubella, as well as to detect
pregnancy. Carter-Wallace has agreed to purchase its requirements for these
test kits from the Company during the term of the Agreement, subject to the
Company maintaining certain quality standards. The test kits are sold by
Carter-Wallace to clinical laboratories and physicians' office laboratories
both domestically and abroad.

      From December 1994 through May 1995, the Company remodeled its
manufacturing facility and developed certain technical capabilities in
preparation for producing test kits under the Carter-Wallace Agreement. Initial
shipments of finished goods under the Carter-Wallace Agreement began during the
Company's third quarter of fiscal 1995 and full scale production commenced in
the Company's second quarter of fiscal 1996. The Carter-Wallace Agreement
contains provisions for two-year extensions and may be expanded to include
additional products.

      The Company owns a proprietary technique for preserving red blood cells,
a key component of the Company's hemagglutination assays. This technology
enables the Company to manufacture products which have a shelf life of up to 24
months (compared to a typical shelf life of 30 to 60 days for traditional
hemagglutination processes), provides quick and accurate results, require no
special laboratory equipment to perform and are more reliable than previously
available hemagglutination assays. The extended shelf life and improvements in
the consistency of these assays substantially eliminate limitations previously
encountered in the use of hemagglutination assays.

      The Company markets and sells certain of its products through third
parties, including Olympus America, Inc. ("Olympus"), an affiliate of Olympus
Optical Co., Ltd. of Japan, Sigma Diagnostics, Inc. ("Sigma"), a subsidiary of
Sigma-Aldrich Corp and Boehringer Mannheim, GmbH ("Boehringer" or "BM"). See
"Business - Distribution and Marketing"

      The Company owns a 51% interest in HDC, a Brazilian limited liability
company. HDC distributes most of the Company's products throughout South
America. HDC also completes light assembly of certain of the Company's
products. Unless the context otherwise requires, the term "Company" includes
HDC, RAI, CPI and the Virgo Acquisition.

Recent Developments

      Cellular Products, Inc.

      On November 1, 1996, the Company, through its wholly owned subsidiary,
CPI, acquired substantially all the assets of 872 Main Street Corporation
(formerly Cellular Products, Inc.) for $400,000 in cash and a $200,000
promissory note which was paid in full on November 1, 1997. CPI is based in
Buffalo, New York and is a manufacturer of biotechnology materials and assays
for research and for the manufacture of clinical diagnostic test kits. CPI's
principal focus is on infectious diseases, particularly retroviruses such as
HIV and HTLV. Its products are used in the growth and testing of these viruses
and as raw materials by manufacturers of clinical diagnostic assays for HIV and
HTLV. The product mix includes enzyme oligonucleotide assays, monoclonal
antibodies, recombinant growth factors, viral lysates and bulk raw materials.

      872 Main Street Corporation, originally founded in 1982 as Cellular
Products, Inc., was operating under the provisions of Chapter 11 of the federal
bankruptcy code since November 1994. The acquisition has enabled the Company to
produce several key raw materials for its tests, lowering its raw material
costs and has enhanced the Company's research programs.

      Donner Com. IND. LTDA

      The Company and Donner Com. IND. LTDA ("Donner"), a Brazilian
distributorship company, entered a distribution agreement under which Donner
will exclusively purchase products from the RAICHEM product line for resale
into Brazil. Donner has agreed to a minimum purchase amount of $2 million over
the term of the three year agreement once the Company's products have been
registered for sale in Brazil. The Company's subsidiary, HDC, will provide
regulatory assistance to Donnor and continue to sell the Company's other
products in South America.

      Phoenix Diagnostics, Inc.

      The Company, through it's subsidiary, RAI has obtained exclusive
distribution rights for all Phoenix Diagnostics products for a period of 3
years so long as the Company purchases a minimum annual amount of Phoenix
Diagnostics products. The Company has met its purchasing obligation for the
first year of the contract. The Company believes this strategic alliance will
complement RAI's existing product line by expanding the Company's line of
clinical chemistries available in a liquid format. The agreement expires in
March, 2000.

Technology

      The presence and concentration of certain antibodies in the blood of an
individual can assist physicians in the diagnosis of certain diseases. The
Company's assays are in vitro (outside of a patient's body) diagnostic tests
that are used to measure specific substances, either antigens or antibodies, in
blood or other body fluids. An antigen is a substance that reacts with a
particular antibody in a manner which, in the proper environment, is detectable
either by the naked eye or with the aid of a laboratory technique which
amplifies the reaction so that it is rendered visible. The Company's
hemagglutination, ELISA and immunofluorescence assays are three examples of
such an amplification. The Company's blood chemistry assays are used to aid the
monitoring and measurement of health profiles, such as cholesterol, blood urea
nitrogen (BUN), triglycerides, glucose and uric acid.

      The Company relies upon proprietary technologies in the manufacture of
its kits. These technologies include a lyophilization (freeze drying) technique
which substantially extends the shelf life of the Company's hemagglutination
assays, and proprietary methods to prepare antigens for its ELISA assays.

      ELISA

      ELISA (or EIA) tests employ small plastic vessels coated with particular
antigens. The test process involves introducing the patient's serum into the
vessel to allow a reaction to occur. If the antibody being tested for is
present, it will bind to the antigens on the inner surface of the vessel. After
the vessel is rinsed, the specifically bound antibody will remain while any
non-specific antibodies will be washed away. To detect the quantity of the
specific antibody, other compounds are added which will cause a color change in
the vessel, the intensity of which is proportionate to the quantity of the
specific antibody bound. If no color is noted, this indicates that the
patient's serum did not contain detectable quantities of the specific antibody.

      Immunofluorescence

      The Company's immunofluorescence tests utilize a fluorescent microscope.
Mammalian cells grown on microscope slides are treated with disease-producing
organisms (viral or bacterial). Serum from a patient is placed in contact with
the infected cells. If a patient has antibodies to the organism causing the
disease, the antibodies will bind to the organism. A chemical is added to the
slide which binds to the organism and the antibody, if present. When the slide
is illuminated with light at a specific wavelength in the microscope, the
chemically-treated cells will appear fluorescent, indicating a positive test
result. If the patient did not have the appropriate antibody, no fluorescence
will appear and the test result will be deemed negative.

      Clinical Chemistries

      The Company produces a line of general clinical chemistry reagents
utilizing colorimetric, turbidometric and enzymatic procedures. These chemistry
reagents are those most commonly performed in clinical laboratories as general
health screening tests and in the identifications of diseases. These tests can
be performed using a broad range of automated and semi-automated instruments
typically used by clinical laboratories.

      Hemaggglutination

      Hemagglutination is the agglutination or "clumping" of red blood cells
("RBCs"). Many substances, including certain antibodies, when placed in contact
with RBCs, will cause agglutination.

      Under the appropriate conditions, human RBCs may be modified or
sensitized by binding specific foreign antigens to their surface. These
sensitized RBCs will agglutinate when placed in contact with a specific
antibody to the foreign antigen. The presence of certain antibodies in an
individual's serum (blood from which clotted red blood cells have been removed)
can indicate certain diseases. By sensitizing RBCs with an antigen that
specifically reacts with a particular antibody, the simple visible observation
of the agglutination reaction will indicate the presence of the
disease-produced antibody. The use of RBCs instead of other particles can allow
for simple visual observation of the agglutination reaction in the proper
environment, and reduces the non-specific reactions seen in artificial systems
such as those that utilize latex particles.

      To perform the Company's hemagglutination test, a technician combines the
Company's sensitized RBCs with a patient's serum in a small well with a
V-shaped bottom according to a set of directions included with the Company's
test kits. If no agglutination takes place, the RBCs will settle to the bottom
of the well, resulting in a clearly visible red dot which indicates that the
test is negative.

      In contrast, if the particular antibody is present in the patient's
blood, the RBCs will agglutinate, which prevents the RBCs from settling to the
bottom of the well. Instead of the small red dot, the substance will appear a
diffuse red, which indicates a positive reaction.

      Acute Phase Reactants and Apolipoproteins

      The Company has developed a new application for its ELISA technology to
detect cardiovascular risk factors (apolipoproteins) and inflammatory signals
(acute phase reactants), the latter of which are present in a patient's blood
prior to the clinical manifestation of infection or inflammation. If
successful, these technologies could lead to earlier detection and prevention
of cardiovascular disease, the imminent rejection of transplanted organs, or
the onset of infections, than is possible with techniques now commercially
available. Such earlier detection could enable physicians to better plan
appropriate treatment of patients with these conditions. The Company currently
markets two test kits to detect inflammatory signals. Product sales for these
tests were approximately $224,000, and $155,000 in fiscal 1997, and 1996
respectively.

Current Products

      ELISA Assays

      The Company develops and markets ELISA tests for the detection of disease
markers. As with corresponding hemagglutination tests produced by the Company,
most of the Company's ELISA assays test for elevated levels of antibodies,
which are useful indicators of certain diseases. ELISA tests are widely used by
large laboratories because these tests adapt easily to automated diagnostic
testing equipment. The Company's FDA cleared ELISA test kits aid in the
diagnosis of the following diseases:

      SLE (lupus)                             polymyositis
      mixed connective tissue disease         dermatomyositis
      Sjogren's syndrome                      connective tissue diseases
      cleroderma (systemic sclerosis)         Primary Biliary Cirrhosis
      cytomegalovirus infections              Chagas' disease
      Rheumatoid arthritis

      Certain of the Company's ELISA tests are also used to monitor the acute
phase response to infection and inflammation in diseases such as lupus and
rheumatoid arthritis. Several of the Company's ELISA tests are now available in
both lyophilized and all liquid formats.

      The Company's ELISA and hemagglutination kits (see below) include screen
tests in which up to six different diagnostic indices are monitored at the same
time, which is useful in the rapid initial screening of patients. If the screen
test is positive, individual kits are available to identify which of these six
indices is present.

      Immunofluorescence ("IFA") Products

      The Company's immunofluorescence products consist primarily of diagnostic
assays for infectious diseases. Immunofluorescence kits are used as primary or
confirmatory tests in many large clinical laboratories in the United States.
There are currently 15 kits sold in the immunofluorescence format.

      The Company's immunofluorescence products are used to aid in the
diagnosis of the following:

      cytomegalovirus infections           herpes simplex
      SLE (lupus)                          german measles
      connective tissue diseases           chicken pox
      primary bilary cirrhosis             infections with Epstein-Barr virus
      toxoplasmosis                        chlamydial infections
      syphilis                             measles
      primary RSV infections               mumps infections
      Autoimmune diseases

      Hemagglutination Assays

      The Company believes that it manufactures and markets the only
commercially available hemagglutination kits which test for antibodies to
antigens present in the nucleus of a cell ("extractable nuclear antigens," or
"ENAs") which are markers of certain autoimmune diseases. Each of the Company's
hemagglutination assays is based on the Company's proprietary technique to
lyophilize, or "freeze dry," the RBCs which form the central component of a
hemagglutination assay. The Company's proprietary lyophilization technique for
the preservation of RBCs permits the production of standardized, easy-to-use
and accurate hemagglutination tests with an extended shelf life, most of which
are attributes previously unavailable using hemagglutination assays. The
shelf-life of the lyophilized RBCs before reconstitution may be up to 24
months. A technician reconstitutes the powdered cells in a water-based solution
prior to introducing the patient's serum.

      Each hemagglutination test also requires a specific formula to sensitize
the RBCs prior to lyophilization such that they will react to a specific
antibody. For each of its tests, the Company uses a proprietary formula to
combine antigens and other reagents with RBCs in a manner that allows for
standard, sensitive and specific agglutination reactions. Results from the
Company's test kits are generally available within two hours. The Company's
hemagglutination test kits aid in the diagnosis of the following diseases:

      SLE (lupus)                              dermatomyositis
      mixed connective tissue disease          polymyositis
      Sjogren's syndrome                       rheumatoid arthritis
      scleroderma (systemic sclerosis)         Chagas' disease
                                               cytomegalovirus infections

      RAI Products

      The Company's general chemistry products, sold under the trade name
RAICHEM(R) consist of a broad range of assays used on automated and
semi-automated clinical chemistry analysis systems. Many of the RAICHEM(R)
assays are used in profiling general health conditions and as specific
indications of possible disease states. The most widely recognized general
chemistry tests made by the Company include those for blood levels of glucose,
cholesterol, triglycerides, uric acid, urea nitrogen and total protein. In all,
more than 60 of the Company's clinical chemistry products have been cleared by
the FDA for sale in the United States.

      CPI Products

      The Company's wholly owned subsidiary, CPI, manufactures and markets
biotechnology materials and assays for research and for the manufacture of
clinical diagnostic test kits. CPI's product line focuses on two target markets
within the bioreagents marketplace. The first is the research product market
which includes T Cell Growth Factors, Retro-Tek Antigen EIA kits, Gene
Detective EOA kits, monoclonal antibodies, Lymphocyte Isolation Adjuncts, and
Recombinant Growth Factors. The second market is the industrial raw materials
market. Major products in this area include purified viral lysates, monoclonal
antibodies, polyclonal antibodies and conjugates. CPI also services a number of
smaller markets with products such as the Retro-Tek IFA kits and is the
exclusive distributor for a product line manufactured by Genelabs Diagnostics
U.S.A. Inc.

New Products

      During the fiscal year ending September, 1997, the Company received FDA
clearance on 16 of its immunoassays and obtained the rights to market and sell
additional FDA cleared kits including kits to assist in the diagnosis of:

Cytomegalovirus:   An infection which may induce pneumonia, fever and hepatitis
                   among immunosuppressed patients.

dsDNA:             A test which aids in the diagnosis of systemic lupus 
                   erythematosus (lupus).

aCL Screen:        Anti-Cardiolipin (aCL) has been associated with lupus, other
                   connective tissue diseases as well as recurrent thrombosis,
                   thrombocytopenia and spontaneous abortions.

AMA:               The Anti-Mitochondria antibody has been associated with 
                   primary biliary cirrhosis, a disfunction of the liver.

RF SPIA:           A quantitative measure of rhematoid factor as an aid in the
                   diagnosis of rheumatoid arthritis and other inflammatory 
                   diseases.

Prealbumin SPIA:   An aid in the evaluation of nutritional deprivation in
                   newborns, the elderly, and dialysis and postsurgical 
                   patients. Prealbumin may also be used to monitor most forms
                   of acute and chronic hepatic diseases.

Cholesterol:       Cholesterol Rapid Liquid Reagent is a new cholesterol test
                   available in a liquid format.

Triglycerides:     Liquid Triglycerides GPO Reagent is a liquid reagent that is
                   used with cholesterol to monitor cardiovascular risk in
                   patients.

Liquid ENAs:       The Company has had eight of its ENA ELISA kits cleared for
                   U.S. sale in an all liquid format.

Phoenix kits:      The Company, through its RAI subsidiary has obtained
                   exclusive distribution rights for all Phoenix Diagnostics
                   products. This strategic alliance has added calibrators and
                   controls to the Company's clinical chemistry product line.

CMV antigen:       This antigen, which is a raw material for several of the
                   Company's products, is now manufactured at the Company's
                   Cellular Products, Inc. subsidiary. The Company estimates
                   that the internal manufacture of this antigen saved the
                   Company over $100,000 during the fiscal year ended 
                   September, 1997.

South American Activities

      In 1991, the Company began to market its product line in South America
through HDC. In fiscal 1994, HDC completed the renovation of a new
manufacturing and sales office facility in Sao Paulo, Brazil, which allows HDC
to complete light manufacturing of test kits in South America.

      The Company markets its full product line to the South American market,
including three proprietary assays for Chagas' disease. Chagas' disease
(American Trypanosomiasis) is an insect and blood transfusion transmitted
parasitic infection which eventually attacks the victim's cardiovascular
system. Due to poor sanitation and other factors, insects have transmitted
Chagas' disease widely throughout Central and South America, with substantial
encroachment into Mexico. In response to the need for efficient and accurate
testing for Chagas' disease, the Company has developed three diagnostic tests:
an instrument-free hemagglutination assay, an ELISA assay, and a
hemagglutination assay prepared specifically for use with certain automated
blood-typing instruments. The ELISA assay has received FDA clearance for sale
in the United States.

      The office in Sao Paulo is presently staffed by five full-time
salespeople administrators who receive and process orders, and four people in
production, shipping and technical support. In addition, Dr. de Oliveira, the
Company's Vice President of Research and Development, spends time in Brazil
attending to business of the Company. In fiscal 1997, and 1996 the Company
derived product sales through HDC of approximately $1,255,000, and $956,000
respectively. See "Business - Facilities."

      In August, 1997, the Company entered into a distribution agreement with
Donner Systems to distribute the Company's clinical chemistry product line in
Brazil. Donner has agreed to a minimum purchase amount of $2 million over the
term of the three year agreement once the Company's products have been
registered for sale in Brazil. The Company's subsidiary, HDC, will provide
regulatory assistance to Donner and continue to sell the Company's other
products in South America.

Distribution and Marketing

      General

      In the United States, the Company sells its products directly to clinical
laboratories and blood banks and on a private-label basis through multinational
distributors of medical diagnostics. Internationally, the Company sells its
products primarily through distributors. The Company grants exclusive and
non-exclusive distributorships, which generally cover limited geographic areas
and specific test kits. The Company's exclusive distributorship arrangements
generally condition exclusivity on the distributor maintaining minimum
purchases from the Company. The Company has relationships with approximately 35
exclusive and non-exclusive distributors and its products have been sold in
over 20 countries.

      Since 1989 the Company has been the exclusive provider of test kits to
detect CMV antibodies for use with the Olympus' PK Series Pre-Transfusion
instruments, the world's most widely used automated blood-typing instruments in
blood banks and large commercial laboratories. Pursuant to the terms of the
Company's agreement with Olympus, the Company provides CMV test kits for sale
by Olympus worldwide to users of the PK Series Pre-Transfusion instruments. The
agreement provides that Olympus must purchase a minimum number of
hemagglutination CMV test kits annually from the Company through February,
1998, subject to the Company meeting certain requirements. The agreement
specifies that during its term, the Company will not sell its CMV assays to any
customers in North America or Hawaii which use Olympus instruments or use
competing laboratory analysis equipment in blood banks. Sales of CMV assays to
Olympus were approximately $1,057,000, and $395,000 during fiscal 1997, and
1996, respectively. Olympus and the Company do not intend to renew this
exclusive agreement when it terminates in March, 1998.

      The Company also manufactures products on a private label basis for
Sigma, Boehringer, Hoffman La Roche, and Carter-Wallace pursuant to supply
agreements. Some of these agreements provide for minimum purchases; however,
the Company cannot predict the level of revenues it will derive from these
agreements.

      Carter-Wallace accounted for approximately 14% and 18% of the Company's
revenue for the fiscal years ended September 30, 1997 and 1996 respectively.
Although the Company expects that its relationship with Carter Wallace will
continue, if it were to cease doing business with the Company it would have a
material adverse effect on the Company's business.

      In July, 1995 the Company entered into an OEM agreement with Boehringer
which provided for certain minimum purchases. In 1997 these minimums were not
met, however, BM met its obligations to the Company by agreeing to a payment to
the Company in an amount which will satisfy the annual payable amount
obligated. The Company is currently in the process of renegotiating this
contract with regards to product pricing and minimum purchase amounts in future
years.

      The Company's South American Distribution and Marketing activities are
described in the section entitled "Business: South American Activities.

Products Under Development

      The Company is presently developing new products in areas described
below. The Company spent a total of approximately $1,072,000, and $778,000 on
Company-sponsored research and development for the fiscal years ended September
30, 1997, and 1996, respectively. The Company spent a total of approximately
$6,000, and $36,000 on externally-sponsored research and development for the
years ended September 30, 1997, and 1996, respectively.

      Autoimmune Diseases

      The Company intends to continue its development of products to aid in the
diagnosis of autoimmune diseases. Hemagglutination and ELISA kits for the
detection of antibodies associated with thyroiditis are currently under
development. In addition, assays to detect antibodies to histone proteins are
being developed. The Company believes that it will have commercially available
assays for these purposes in fiscal 1998, subject to obtaining appropriate
regulatory clearances.

      Acute Phase Reactants and Apolipoproteins

      The Company continues to develop an application for its ELISA technology
which would detect cardiovascular risk factors (apolipoproteins) and
inflammatory signals (acute phase reactants) that are present in a patient's
blood prior to the manifestation of disease. In addition, these assays could
lead to earlier detection of organ transplant rejection or infection than is
possible with techniques now commercially available. See "Business -
Relationship with Boston University."

      The Company has developed a unique modification of its ELISA technology
to test for acute phase reactants. This technology is licensed by the Company
from Boston University, which has a patent for the technology. See "Business -
Relationship with Boston University." The Company is exploring the use of the
new technology to produce a number of new test kits.

            The Company's acute phase reactant technology has a number of
            potential applications, including:

                  Transplantation
                  ---------------

                        The key to successful organ transplantation is to
                        ensure that the new organ is not rejected by the
                        recipient's body. This can be aided in part by
                        administering appropriate drugs prior to the time when
                        the recipient's body rejects the transplant. It has
                        been reported that during the early phase of the
                        rejection process, the body will produce increased
                        levels of certain acute phase reactants. Using the
                        Company's serum amyloid A ("SAA") assay, physicians may
                        be able to detect the point at which a body is
                        rejecting a transplanted organ earlier than current
                        techniques allow.

                  Cardiovascular Diseases
                  -----------------------

                        The Company is developing a panel of assays to measure
                        two blood lipoproteins, which are indicators of risk of
                        cardiovascular disease. High levels of these two
                        lipoproteins have been cited in a study supported by
                        the National Institutes of Health as more reliable
                        indices of cardiovascular risk than cholesterol levels.
                        Together with SAA, these technologies could detect high
                        risk levels in patients with chronic autoimmune
                        disease, such as rheumatoid arthritis.

                  Rheumatoid Arthritis
                  --------------------

                        In connection with the Company's development program,
                        the Company has sold test kits utilizing its acute
                        phase reactant technology to Pfizer for use in the
                        evaluation of Pfizer's experimental drug Tenidap(R) for
                        the treatment of rheumatoid arthritis.

      Infectious Diseases

      The Company continues to develop additional assays to aid in the
diagnosis of infectious diseases. The Company recently completed the
development of products known as a "ToRCH panel" which include assays for
toxoplasmosis, rubella, CMV, and herpes. The Company is also developing test
kits for Lyme disease and for Epstein-Barr virus. As with all of the Company's
products under development, these products will have to undergo FDA review
before they can be marketed and sold in the United States. The CMV IgG has
received clearance from the FDA and data is being collected for the submission
of the other assays.

      Clinical Chemistry Reagents

      The Company continues to develop additional assays and reagents to fill
in its clinical chemistry reagent product line sold under the RAICHEM label.
Almost all of the powdered clinical chemistry assays are now available in
liquid format, making RAICHEM one of the most completed clinical chemistry
lines offered worldwide. Continuing efforts are directed at increasing the line
of Serum Protein Immunoassays (SPIAs). Plans are in place for development of a
kit to measure blood levels of ferritin, glycated hemoglobin, myoglboin and
troponin I and troponin T.

Relationship with Boston University

      Dr. Carl Franzblau, the Chairman of the Board, Chief Executive Officer
and President of the Company, serves as a Professor and Chairman of the
Department of Biochemistry and as Associate Dean for Graduate Affairs at Boston
University School of Medicine. Dr. Alan Cohen, a Director of the Company,
served as a Professor of Medicine and Pharmacology at Boston University School
of Medicine. Lawrence Gilbert, a Director of the Company, was also the Director
of the Patent and Technology Administration at Boston University through
December, 1994. Dr. John I. Sandson, a Director of the Company, is Dean
Emeritus of Boston University School of Medicine. Charles W. Smith, a Director
of the Company, served as Senior Vice President of Boston University from 1984
through 1989 and as its Treasurer from 1983 through June 1992. The Company
believes that the continuing relationship between Boston University and these
individuals, particularly Dr. Franzblau, is beneficial to the Company,
particularly with respect to providing the Company with access to new
developments in scientific areas related to the Company's business.

      License Agreements

      In March 1992, the Company entered into a license agreement (the "B. U.
License Agreement") with Boston University (the "University") pursuant to which
the Company has obtained the exclusive right to use certain of the University's
patented technology to manufacture and market assays for the detection of acute
phase reactants. See "Business - Products under Development." Pursuant to the
B. U. License Agreement, the Company is obligated to pay an annual royalty of
5% of the first $50,000 of the Company's net sales of these assays, and 10% of
the Company's net sales of these assays in excess of $50,000 until the Company
has paid the University a license fee of $10,000 and reimbursed it for certain
patent expenses. Thereafter, the Company will pay a 5% royalty on its net sales
of these assays. Sales under the B.U. License Agreement have been immaterial to
date.

      In July 1994, the Company entered into a second license agreement with
the University under which the Company obtained the exclusive right to use
additional patented and patent-pending technology of the University to
manufacture and market certain products. The royalties due under the terms of
the agreement are the same as the B.U. License Agreement and will be applied to
a license fee of $15,000. No royalties were paid in the years ended September
30, 1997 or 1996 and no amounts were accrued for royalties at September 30,
1997 or 1996. The agreement terminates upon the termination of the patents.

      Product Development Agreement

      On February 14, 1992 the Company entered into a product development
agreement with the University to develop a urine-based assay to measure levels
of desmosine, which can indicate certain diseases such as cystic fibrosis and
emphysema. This agreement was terminated in 1993.

Manufacturing and Sources of Supply

      The Company manufactures its hemagglutination and ELISA test kits
primarily at its facility in Waltham, Massachusetts, and its products based on
immunofluorescence technology at its facility in Columbia, Maryland. The
Company's clinical chemistry products are produced at the Company's facility in
San Diego, California and the raw material and research lines are produced in
Buffalo, New York. The Company purchases RBCs and some of the antigens and
other reagents used in the kits from outside vendors. Most reagents used in the
Company's test kits are manufactured at the Company's facilities. The Company
uses lyophilization equipment to preserve sensitized RBCs for its
hemagglutination test kits.

      All components used in the Company's products are available from multiple
sources, except for an antigen called SSA, which the Company uses in two of its
ELISA and two of its hemagglutination test kits. The Company believes that the
supplier of this antigen produces this antigen for many customers. Management
believes that if necessary, the Company could produce sufficient quantities of
this antigen itself. Therefore, if the supply of this antigen were to cease,
the Company believes it would not have a long-term material adverse impact on
the Company's business taken as a whole.

Government Regulation

      The Company's manufacturing, distribution, and marketing of diagnostic
test kits are subject to a number of both domestic and international regulatory
controls. In the United States, the Company's production and marketing
activities are subject to regulation by the United States Food and Drug
Administration ("FDA"), under the authority of the Federal Food Drug, and
Cosmetic Act, as amended by the Medical Device Amendments Act of 1976, The Safe
Medical Devices Act of 1990, and The Medical Device Amendments of 1992.

      These regulations require that the Company must formally notify the FDA
of its intentions to market in vitro diagnostic devices through a regulatory
submissions process, either the 510(k) review process or the Premarket Approval
process ("PMA"). When a 510(k) review process is used the Company is required
to demonstrate that the product is "substantially equivalent" to another
product in commercial distribution in the United States before May 28, 1976, or
which has subsequently been classified as a Class 1 or Class 2 medical device.
The Company can not proceed with sales of its diagnostic products until it
receives clearance from the FDA. Currently, the majority of products that are
reviewed by the 510(k) process are cleared within 90 days.

      In cases where there are no existing FDA approved products "substantially
equivalent" to the new product, an approved PMA, which involves a lengthier and
more burdensome process, could be required before the FDA would allow
commercial distribution.

      The Company is also required to register with the FDA as a device
manufacturer and list its devices. As such, the Company is subject to
inspection on a routine basis for compliance with the FDA's Quality System
Regulations (QSR). These regulations require that the Company manufacture its
products and maintain its documents in a prescribed manner with respect to
manufacturing, testing, control, and distribution activities. In addition, the
Company is required to comply with various FDA requirements for labeling,
pursuant to the Medical Device Reporting Act regulations. Finally, the FDA
prohibits an approved device from being marketed for unapproved applications.
The Company believes it is in conformity with all such regulations.

      The regulatory controls being imposed upon the Company with respect to
the international distribution, and marketing of in vitro diagnostic devices
are increasing. Specifically, member nations of the European Community are
developing a standardized quality system similar to QSR called EN 29000 that is
anticipated to be effective no sooner than 1998 and will allow companies a
three year period to conform to the directive. The Company will be required to
conform to the EN 29000 regulations for any product sold in the European
Community. The Company expects to be able to conform to these regulations
within the required timeframe.

Competition

      The clinical diagnostic industry is highly competitive. There are many
companies, both public and private, engaged in diagnostics-related research and
development, including a number of well-known pharmaceutical and chemical
companies. Competition is based primarily on product reliability, customer
service and price. Some of these companies have substantially greater capital
resources and have marketing and business organizations of substantially
greater size than the Company. Many companies have been working on
immunodiagnostic reagents and products, including some products believed to be
similar to those currently marketed or under development by the Company, for a
longer period of time than has the Company. The Company believes that its
primary competitors in the diagnostics market include Abbott Laboratories,
Sigma Diagnostics, Trace-America, Inc., Gull Laboratories, Inc., INOVA, Sanofi
Diagnostics Pasteur, Inc. and Diamedix Corporation. The Company expects
competition within this industry to intensify.

Product Liability

      The testing, marketing and sale of clinical diagnostic products entail an
inherent risk of allegations of product liability, and there can be no
assurance that product liability claims will not be asserted against the
Company. The Company may incur product liability due to product failure or
improper use of products by the user. Inaccurate detection may result in the
failure to administer necessary therapeutic drugs or administration of
unnecessary and potentially toxic drugs. Even with proper use of a product,
there may be specific instances in which the results obtained from the
Company's test kits could lead a physician to incorrectly predict the
appropriate therapy for a particular patient. The Company maintains product
liability insurance in the amount of up to $5,000,000 per incident and in the
aggregate which, based on the Company's experience and industry practice, the
Company believes to be adequate for its present operations. No assurance can be
given that the amount of the Company's insurance is sufficient to fully insure
against claims which may be made against the Company.

Patents and Proprietary Rights

      The Company protects its technology primarily as trade secrets rather
than by relying on patents, either because patent protection is not possible
or, in management's opinion, would be less effective than maintaining secrecy.
In addition, the Company relies upon confidentiality agreements with its
employees. To the extent that it relies on confidentiality agreements and trade
secret protection, there can be no assurance that the Company's efforts to
maintain secrecy will be successful or that third parties will not be able to
develop the technology independently. The Company may in the future apply for
patent protection for certain of its technology when management believes such
protection would be beneficial to the Company. The protection afforded by
patents depends upon a variety of factors which may severely limit the value of
the patent protection, particularly in foreign countries, and no assurance can
be given that patents, if granted, will provide meaningful protection for the
Company's technology.

Royalty Obligations

      The Company is required to pay royalties to third parties on sales of
some of its products and proposed products. See "Business - Relationship with
Boston University"

Employees

      As of September 30, 1997, the Company had 108 full-time employees, of
which four are executive officers, 29 are employed in sales, marketing, general
and administrative activities and 75 are involved in production and research
and development.

      None of the Company's employees are represented by a labor organization
and the Company is not a party to any collective bargaining agreement. The
Company has never experienced any strike or work stoppage and considers its
relationship with its employees to be excellent.


Item 2. Description of Property.

      The Company maintains its principal executive offices, laboratory and
production operations in Waltham, Massachusetts in two adjacent buildings; one
a 4,000 sq. ft. facility which houses the Company's research and development
laboratories, and the other a 15,000 sq. ft. facility which accommodates the
laboratory and production operations and the executive offices of the Company.
The Company pays rent in the amount of $133,500 per annum for the two
facilities pursuant to the terms of that lease which ends May 30, 2002. The
Company also leases 29,000 square feet in a production facility in Columbia,
Maryland where it manufactures the immunofluorescence products. Under the
Columbia lease, which extends through June 30, 2000, the Company pays $105,045
per annum in rent. The Company also leases 20,100 square feet in San Diego,
California, where it manufactures the RAICHEM products. Under the San Diego
lease, which extends through September 30, 2005, the Company pays approximately
$201,000 per annum. In addition, the Company leases a 1,900 square foot
warehouse facility near its production site for which it pays $13,080 per annum
on an annual lease which may be renewed each April 1. As part of the purchase
of substantially all the assets of 872 Main Street Corporation in November,
1996, the Company acquired the land and building located at 872 Main Street in
Buffalo, New York. CPI operates out of this facility which consists of
approximately 15,000 square feet of space. The Company believes that its
facilities are adequate for its present and foreseeable needs.

      The Company's 51%-owned subsidiary leases approximately 4,500 square feet
in Sao Paulo, Brazil pursuant to a lease which expires in September 30, 1998.
This subsidiary pays rent in an amount of approximately $5,500 per month for
this space. The Company believes that its facilities in Sao Paulo are adequate
for its present and foreseeable needs.


Item 3. Legal Proceedings.

      The Company is not presently involved in any material pending litigation.


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

      None.



                                    PART II


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

      The Company's Common Stock has been traded on the over-the-counter market
through the National Association of Securities Dealers Automated Quotation
System ("NASDAQ") since February 4, 1993. The Company's Common Stock is also
traded on the Boston Stock Exchange. On December 16, 1997, the closing bid and
ask price of the Common Stock reported by NASDAQ was $1.75 and $1.88 per 
share, respectively.

      For the periods indicated, the following table sets for the range of high
and low bid prices for the Common Stock as reported by NASDAQ during Fiscal
1996 and 1997. These prices reflect inter-dealer prices, without retail
mark-up, mark-down or commission, and may not represent actual transactions.

<TABLE>
<CAPTION>

                                                      High       Low
                                                      -----     -----
<S>                                                   <C>       <C>
1996
----
First Fiscal Quarter. . . . . . . . . . . . . . .     $3.50     $1.75
Second Fiscal Quarter . . . . . . . . . . . . . .     $4.13     $2.50
Third Fiscal Quarter. . . . . . . . . . . . . . .     $4.13     $2.63
Fourth Fiscal Quarter . . . . . . . . . . . . . .     $3.13     $2.00

1997
----
First Fiscal Quarter. . . . . . . . . . . . . . .     $2.94     $2.12
Second Fiscal Quarter . . . . . . . . . . . . . .     $2.69     $2.06
Third Fiscal Quarter. . . . . . . . . . . . . . .     $2.38     $1.44
Fourth Fiscal Quarter . . . . . . . . . . . . . .     $2.19     $1.75

1998
----
First Quarter (through December 16, 1997) . . . .     $2.47     $1.69
</TABLE>


      As of December 16, 1997, there were approximately 199 holders of record
of the Company's Common Stock.

      For the periods indicated, the following table sets for the range of high
and low bid prices for the Common Stock Warrants as reported by NASDAQ during
Fiscal 1996 and 1997. These prices reflect inter-dealer prices, without retail
mark-up, mark-down or commission, and may not represent actual transactions.

<TABLE>
<CAPTION>

                                                      High       Low
                                                      -----     -----

<S>                                                   <C>       <C>
1996
----
First Fiscal Quarter. . . . . . . . . . . . . . .         -         -
Second Fiscal Quarter . . . . . . . . . . . . . .         -         -
Third Fiscal Quarter. . . . . . . . . . . . . . .         -         -
Fourth Fiscal Quarter . . . . . . . . . . . . . .     $0.63     $0.63

1997
----
First Fiscal Quarter. . . . . . . . . . . . . . .     $1.63     $0.63
Second Fiscal Quarter . . . . . . . . . . . . . .     $1.25     $0.63
Third Fiscal Quarter. . . . . . . . . . . . . . .     $1.06     $0.31
Fourth Fiscal Quarter . . . . . . . . . . . . . .     $0.97     $0.38

1998
----
First Quarter (through December 16, 1997) . . . .     $0.69     $0.38
</TABLE>


      As of December 16, 1997, there were approximately 77 holders of record of
the Company's Common Stock Warrants.

Dividends

      The Company has never paid cash dividends. The Company currently intends
to retain all future earnings, if any, for use in its business and does not
anticipate paying any cash dividends in the foreseeable future.


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

      This section contains certain forward-looking statements that are subject
to risks and uncertainties including but not limited to those discussed in the
section entitled "Risk Factors" in the Prospectus contained in the Company's
Registration Statement on Form S-3, File Nos. 333-6147 and 33- 80009 (which
section is hereby incorporated by reference herein). These risks and
uncertainties could cause the Company's actual results in future periods to
differ materially from its historical results, and from any opinions or
statements expressed in forward-looking statements. Such forward-looking
statements speak only as of the date of this report, and the Company cautions
readers not to place undue reliance on these statements.

Overview

      Historically, the Company has concentrated its efforts on developing,
manufacturing and marketing medical diagnostic test kits used to aid in the
diagnosis of certain diseases and the profiling of general health conditions.
Since the fiscal year ending 1995, the Company has also concentrated its
expansion efforts on synergistic acquisitions of companies, product lines and
assets. The Company presently has approximately 120 different test kits
available for general sale, approximately 110 of which have received FDA
clearance for sale in the United States.

Results of Operations

      Fiscal Year Ended September 30, 1997 Compared to Fiscal Year Ended
September 30, 1996

      Revenues increased to approximately $12,991,000 from approximately
$10,219,000 (27%), primarily as a result of (i) sales from the Company's
November 1, 1996 acquisition of CPI which accounted for approximately
$1,433,000 of the increase, (ii) an approximately $945,000 increase from a full
year of sales from the Company's March 1, 1996 acquisition of RAI, compared
with seven months of sales in fiscal 1996, and (iii) increased sales of CMV
test kits for use on Olympus' PK Series Pre- Transfusion instruments of
approximately $662,000. (See Business: Distribution and Marketing).

      Cost of product sales increased to approximately $7,598,000 from
approximately $6,213,000 (22%) due to the increase in sales. Cost of product
sales as a percentage of sales decreased from 61% to 59% due to a change in
product mix and savings on cost of raw materials manufactured by the Company's
subsidiary, CPI.

      Research and development expenses increased to approximately $1,078,000
from approximately $814,000 (32%), primarily due to increased personnel costs
in support of the Company's program to develop and complete studies related to
FDA 510(k) submissions, and the addition of RAI and CPI related research and
development expenses. During the fiscal year ended September 30, 1997, the
Company received FDA clearance to market 16 new clinical tests.

      Selling, general and administrative expenses increased to approximately
$3,808,000 from approximately $3,237,000 (18%), primarily due to the addition
of RAI and CPI expenses. SG&A expenses decreased as a percentage of revenues
from 32% to 29% due to the Company's utilization of its present infrastructure
to manage additional operations.

      Net other expense decreased to approximately $102,000 from approximately
$419,000 due to a decrease in interest expense and a one time expense relating
to the issuance of warrants during the previous year. During the fiscal year
ended September, 1996 the Company converted notes in the aggregate amount of
$1,550,000 into 1,550,000 shares of common stock. The Company also completed an
equity private placement offering which netted $6,410,000 in March, 1996. The
cash provided from this offering was used to reduce the Company's long term
debt, purchase RAI and CPI, and increase working capital for the Company.

      Net income was approximately $405,000 compared to a loss of approximately
$464,000 the previous year primarily due to higher RAI, CPI and CMV sales, and
a reduction in non-operating expenses.

Liquidity and Capital Resources

      The Company has financed its capital expenditures, operating requirements
and growth primarily from the initial public offering of its common stock, a
bridge loan, lease financing arrangements, borrowings from nonaffiliates and
related parties, cash flow from operations and private placements completed in
September 1995 and March, 1996.

      On November 1, 1996 the Company, through its wholly owned subsidiary,
CPI, completed the purchase of substantially all the assets of 872 Main Street
Corporation (formally Cellular Products, Inc.) for $400,000 in cash and a
$200,000 promissory note which was paid in full on November 1, 1997. CPI is
based in Buffalo, New York and is a manufacturer of biotechnology materials and
assays for research and for the manufacture of clinical diagnostic test kits.
Its products are used in the growth and testing of retroviruses and as raw
materials by manufacturers of clinical diagnostic assays. The product mix
includes enzyme oligonucleotide assays, monoclonal antibodies, recombinant
growth factors, viral lysates and bulk raw materials. The Company believes the
acquisition will enable the Company to produce several key raw materials for
its tests, allow for better control of manufacturing costs and enhance the
Company's research programs.

      At September 30, 1997, the Company's working capital was approximately
$6,157,000 compared to approximately $5,417,000 at September 30, 1996. This
increase was principally due to the Company's net income of approximately
$405,000 and proceeds of approximately $198,000 from the issuance of common
stock in connection with the exercise of warrants and options.

      Inventory balances increased from approximately $3,178,000 on September
30, 1996 to approximately $3,954,000 on September 30, 1997 due to the purchase
of CPI inventory, purchases of inventory in support of Carter Wallace sales,
and purchases of inventory in support of sales of new products. The Company
often purchases large quantities of raw materials due to issues of price,
quality and availability. Accounts payable and accrued expenses decreased from
approximately $1,429,000 to approximately $785,000 primarily due to the
reduction in payables to Carter Wallace for inventory transferred to Hemagen
during the year ended September, 1995, and a decrease in trade payables.
Accounts Receivable balances increased from approximately $1,674,000 to
approximately $2,289,000 primarily due to an increase in fourth quarter sales.

      Long term debt decreased from approximately $958,000 on September 30,
1996 to approximately $537,000 on September 30, 1997, due to the payment of the
Company's capital lease obligations.

      At September 30, 1997 the Company had capital finance arrangements with
one company totaling approximately $537,000. The Company used this financing to
acquire blood typing machines and other equipment. The Company is required to
pay an average of $34,000 per month in the aggregate under these arrangements
during fiscal 1998. These arrangements run through 1998.

      Management believes its cash and cash equivalents and short-term
investments, together with anticipated cash flow from operations, are
sufficient to meet the Company's cash needs for its ongoing business.

Impact of Inflation

      Domestic inflation during the last two fiscal years has not had a
significant effect on the Company's business activities. Translation and
transaction gains and losses between the Company and its subsidiary in Brazil
are expensed each period.

New Accounting Pronouncements

      Effective October 1, 1996, the Company adopted the provisions of
Statement of Financial Accounting Standards No. 123 ("SFAS 123"), "Accounting
for Stock-Based Compensation." SFAS 123 allows the Company to account for its
stock-based employee compensation plans based upon either a fair value method
or the intrinsic value method currently followed by the Company. The Company
has chosen to retain its current method of accounting for stock-based
compensation plans, and therefore, the adoption of SFAS 123 has had no impact
on the Company's financial position or results of operations. All required
disclosures are included in the Company's financial reports.

      Statement of Financial Accounting Standards No. 128 ("SFAS 128")
"Earnings Per Share", issued by the Financial Accounting Standards Board is
effective for financial statements for the fiscal years ending after December
15, 1997. The new standard establishes standards for computing and presenting
earnings per share.

      The effect of adopting SFAS 128 is not expected to be material. The
Company is required to adopt the disclosure requirements of SFAS 128 during the
year ending September 30, 1998.

      In June 1997, the Financial Accounting Standards Board issued two new
disclosure standards. Results of operations and financial positions will be
unaffected by the implementation of these new standards.

      Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income, " ("SFAS 130") establishes standards for reporting and
display of comprehensive income, its components, and accumulated balances.
Comprehensive income is defined to include all changes in equity except those
resulting from investments by owners and distributions to owners. Among other
disclosures, SFAS No. 130 requires that all items that are required to be
recognized under current accounting standards as components of comprehensive
income by reported in a financial statement that is displayed with the same
prominence as other financial statements.

      SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information, " which supersedes SFAS No. 14, "Financial Reporting for Segments
of a Business Enterprise," establishes standards for the way that public
enterprises report information about operating segments in annual financial
statements and requires reporting of selected information about operating
segments in interim financial statements issued to the public. It also
establishes standards for disclosures regarding products and services,
geographic areas, and major customers. SFAS No. 131 defines operating segments
as components of an enterprise about which separate financial information is
available that is evaluated regularly by the chief operating decision maker in
deciding how to allocate resources and in assessing performance.

      Both of these new standards are effective for financial statements for
the periods beginning after December 15, 1997 and require comparative
information for earlier years to be restated. Due to the recent issuance of
these standards, management has been unable to fully evaluate the impact, if
any, they may have on future financial statement disclosures.


Item 7. Financial Statements and Supplementary Data.

      See Item 13 below and the Index therein for a listing of the financial
statements and supplementary data filed as part of this report.


Item 8. Change in Certifying Accountants

      On January 29, 1996 Price Waterhouse LLP declined to stand for reelection
as independent accountants for the Company.

      There were no disagreements between the Company and Price Waterhouse LLP
regarding any matters of accounting principles or practices, financial
statement disclosure or auditing scope or procedures in connection with the
audit of each of the Company's fiscal years in the period October 1, 1994
through September 30, 1995, or at any time through January 29, 1996 which, if
not resolved to the satisfaction of Price Waterhouse LLP would have caused
Price Waterhouse LLP to make reference to the subject matter of such
disagreement in connection with its report. There have been no reportable
events (as defined by Regulation S-B Item 304(a)(1)(iv)(B)) during the period
from October 1, 1994 through September 30, 1995, and during the period through
January 29, 1996. In addition, during this period, the Company has not
consulted another accountant regarding the application of accounting principles
to a specific transaction.

      The report of Price Waterhouse LLP upon the Company's financial statement
for the fiscal year ending September 30, 1995 contained neither an adverse
opinion nor a disclaimer of opinion nor was such report qualified or modified
as to uncertainty, audit scope or accounting principles.

      Price Waterhouse LLP has furnished the Company with a letter addressed to
the SEC stating that it agrees with the above statements. A copy of this
letter, dated February 2, 1996 was filed as an exhibit to the Company's report
on Form 8-K filed with the Commission on February 3, 1996 and is incorporated
herein by reference.

      On May 20, 1996 the Board of Directors of the Company approved the
engagement of BDO Seidman, LLP as the independent accountants for the Company.


                                    PART III

      Items 9 to 12 are incorporated herein by reference to the Company's
definitive proxy statement to be filed with the Securities and Exchange
Commission.


                                    PART IV

Item 13. Exhibits, List and Reports on Form 8-K.


      (a)(1)   Financial Statements. The financial statements required to be
               filed by Item 7 herewith are as follows:

<TABLE>
<CAPTION>

                                                                               Page
                                                                            -----------

<S>                                                                         <C>
Report of Independent Certified Public Accountants - BDO Seidman, LLP       F-2
Consolidated Balance Sheets at September 30, 1997 and 1996                  F-3 to F-4
Consolidated Statements of Operations for the years ended September 30,
 1997, and 1996                                                             F-5
Consolidated Statements of Stockholders' Equity for the years ended 
 September 30, 1997, and 1996                                               F-6
Consolidated Statements of Cash Flows for the years ended September 30, 
 1997, and 1996                                                             F-7
Notes to Consolidated Financial Statements                                  F-8 to F-30
</TABLE>

      (a)(2)   Exhibits.

               (i)   The following exhibits, required by Item 601 of Regulation
                     S-B, are filed herewith:

      10ii     Distribution agreement between the Company and Donnor Com. IND.
               LTDA

      10jj     Distribution agreement between the Company and Phoenix 
               Diagnostics, Inc.

               (ii)  The following exhibits were filed as part of the
                     Company's Form SB-2 Registration Statement (33-52686-B)
                     declared effective by the Securities and Exchange
                     Commission (the "Commission") on February 4, 1993 and
                     are herein incorporated by reference:


<TABLE>
<CAPTION>

Exhibit No.      Title
-----------      -----

   <S>           <C>
    3a           Certificate of Incorporation.

    3b           Bylaws.

    3c           Certificate of Agreement of Merger between Hemagen
                 Diagnostics Inc., a Massachusetts corporation, and the
                 Company, dated May 1, 1992.

    3d           Articles of Merger between Hemagen Diagnostics Inc., a
                 Massachusetts corporation, and the Company, dated May
                 1, 1992.


<CAPTION>

Exhibit No.      Title
-----------      -----

   <S>           <C>
    4a           Rights of security holders (included in Exhibits 3a and 3b).

    4b           Specimen Stock Certificate.

   10a           Technology Purchase Agreement between Dr. de Oliveira and Dr.
                 Lazzari and Seragen, Inc., dated April 15, 1983.

   10b           Assignment and Assumption Agreement between the Company and
                 Seragen, Inc., dated September 12, 1985.

   10c           Product Development Agreement between the Company and Boston
                 University, dated February 14, 1992.

   10d           License Agreement between the Company and Boston University,
                 dated March 1992.

   10e           Distributorship Agreement between the Company and Eurobio
                 Laboratories, dated June 11, 1991.

   10f           Distributorship Agreement between the Company and
                 International Reagents Corporation, dated February 1, 1990.

   10g           Financial Assistance Agreement between the Company and
                 Hemagen Diagnosticos, Comercio, Importacao e Exportacao Ltd.,
                 dated July 31, 1991.

   10h           Distribution Agreement between the Company and Hemagen
                 Diagnosticos, Comercio, Importacao e Exportacao Ltd., dated
                 July 31, 1991.

  *10i           Form of Employment Agreement between the Company and Dr.
                 Franzblau.

  *10j           Form of Employment Agreement between the Company and Dr. de
                 Oliveira.

  *10k           1992 Stock Option Plan.

   10l           Distributorship Agreement between the Company and Labor
                 Diagnostika GmbH, dated July 1, 1990.

   10m           Product Purchase Agreement between the Company and Olympus
                 Corporation, dated February 24, 1989.

   10n           OEM Agreement between the Company and Sigma Diagnostics,
                 Inc., dated May 11, 1992.

   10o           Note issued by the Company to Boston University, dated
                 December 15, 1985.

   10p           Letter Agreement between the Company and Antonio Lazzari,
                 M.D., dated April 28, 1985.

   10q           Lease between the Company and Philip Pagliazzo and Rose
                 Pagliazzo, dated May 15, 1992.

   10r           Distribution Agreement between the Company and Olympus
                 Corporation, dated September 1, 1992.

  *10s           Form of Employment Agreement between the Company and Mr. von
                 Stein.

   10t           Product Development Agreement between the Company and Sigma
                 Diagnostics, Inc., dated October 16, 1992.

  *10u           Revised Employment Agreement between the Company and Dr. de
                 Oliveira.

  *10v           Revised Employment Agreement between the Company and Dr.
                 Franzblau.

   10w           Description of the Company's lease for certain premises
                 located in Waltham, Massachusetts.

   10x           Lease for office space of Hemagen Diagnosticos, Comercio,
                 Importaceo e Exportaceo, Ltd. ("HDC") in Sao Paulo, Brazil.

   10x           Description of the Lease for office space of HDC in Sao
                 Paulo, Brazil.

   10y           Equity Purchase Agreement between the Company and HDC, dated
                 as of October 1, 1992.

   10aa          Form of Warrant issued in connection with the Bridge Loan and
                 Statement of Registration Rights.

   10cc          Form of Subscription Agreement used in connection with the
                 Bridge Loan.

   21            List of the Company's Subsidiaries.

-------------------
<F*>  These exhibits relate to a management contract or compensatory plan or
      arrangement.
</TABLE>


               (iii) The following exhibit was filed as part of the Company's 
                     Form 10-QSB for the quarter ended March 30, 1993.

<TABLE>
<CAPTION>

Exhibit No.      Title
-----------      -----

   <S>           <C>
   10a           Master Lease Agreement between the Company and Aberlyn
                 Capital Management Limited Partnership, dated April 1, 1993.
</TABLE>


               (iv)  The following exhibit was filed as part of the Company's 
                     Form 10-KSB for the Fiscal Year ending September 30, 1994.

<TABLE>
<CAPTION>

Exhibit No.      Title
-----------      -----

   <S>           <C>
   10a           Product Development Agreement between the Company and
                 Boehringher Mannheim GmbH, dated November 25, 1993.

   10b           Option Agreement between the Company and Boston University,
                 dated October 15, 1993.
</TABLE>


               (v)   The following exhibits were filed as part of the Company's 
                     Form 10QSB for the quarter ending December 31, 1994

<TABLE>
<CAPTION>

Exhibit No.      Title
-----------      -----

   <S>           <C>
   10dd          Distributorship Agreement between the Company and Labor
                 Diagnostika GmbH dated October 1, 1994

   10ee          Agreement between the Company and Carter-Wallace, Inc. dated
                 December 22, 1994.

   10ff          License Assignment and License Agreement between the Company
                 and Aberlyn Capital Management Limited Partnership dated
                 December 30, 1994.
</TABLE>


               (vi)  The following exhibits were filed as part of the Company's
                     Form 10-KSB for the year ending September 30, 1996.

<TABLE>
<CAPTION>

Exhibit No.      Title
-----------      -----

   <S>           <C>
   10gg          Distributorship Agreement between the Company and
                 Schiapparelli Biosystems, B.V.

   10hh          Distributorship Agreement between the Company and Olympus
                 America, Inc.

   23a           Consent of Independent Certified Public Accountants - BDO
                 Seidman, LLP

   23b           Consent of Independent Certified Public Accountants - Price
                 Waterhouse LLP
</TABLE>

      (b)      Reports on Form 8-K. (i) On July 13, 1995 the Company filed a
               form 8-K related to the purchase VIRGO(R) product line.

               The Following financial statements were filed with the form 8K.

               Report of KPMG Peat Marwick.

               Statement of Inventory and Equipment and Leasehold Improvements 
                 of immunofluorescent Assay and IL-2 Product Lines of
                 Schiapparelli Biosystems, Inc. for the year ended December
                 31, 1994.

               Statement of Operations before Administrative, Interest and
                  Income Tax Expenses of Immunofluorescent Assay and IL-2
                  Product Line for the six month ended June 30, 1995
                  (unaudited).

               Pro forma Condensed and Combined Statement of Operations of
                  the Company and certain assets acquired from Schiapparelli
                  for the nine months ended June 30, 1995 and the year ended
                  September 30, 1994 (unaudited).

               (ii)  On December 27, 1995 the Company filed a form 8-K 
                     announcing the intention of purchasing RAI.

               (iii) On February 3, 1996 the Company filed a form 8-K
                     announcing that Price Waterhouse had declined to stand
                     for reelection as independent accountants for the
                     Company.

               (iv)  On March 4, 1996 the Company filed a form 8-K related
                     to the purchase of RAI.

               The following financial statements were filed with the form 8-K.

               Audited Financial Statements for Reagents Applications, Inc.
                  as of December 31, 1994 and 1993.

               Pro Forma Financial Information for the Registrant and RAI
                  for the year ended September 30, 1995 and for the three
                  months ended December 31, 1995 and December 31, 1994.

               (v)   On May 22, 1996 the Company filed a form 8-K related to
                     the approval of BDO Seidman, LLP as the independent
                     accountants for the Company.

               (vi)  On November 14, 1996 the Company filed a form 8-K
                     related to the purchase of the assets of 872 Main Street
                     Corporation (formally Cellular Products, Inc.).



                                   SIGNATURES

      In accordance with Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.

                                        HEMAGEN DIAGNOSTICS, INC.


Date:  December 23, 1997                By: /s/ Dr. Carl Franzblau
                                            -----------------------------------
                                                Dr. Carl Franzblau, President


      In accordance with the Securities Exchange Act of 1934, this report has
been signed below by the following persons on behalf of the registrant and in
the capacities and on the date indicated.

<TABLE>
<CAPTION>

              Name                                     Capacity                            Date
              ----                                     --------                            ----

<S>                                    <C>                                           <C>
/s/ Carl Franzblau                     President and Chairman of the Board of        December 23, 1997
----------------------------------     Directors (Principal Executive Officer)
    Carl Franzblau, Ph.D.


/s/ William Franzblau                  Chief Financial Officer (Principal            December 23, 1997
----------------------------------     Financial Officer)
    William Franzblau


/s/ Myrna Franzblau                    Treasurer (Principal Accounting Officer)      December 23, 1997
----------------------------------
    Myrna Franzblau


/s/ Alan S. Cohen                      Director                                      December 23, 1997
----------------------------------
    Alan S. Cohen, M.D.


/s/ Lawrence Gilbert                   Director                                      December 23, 1997
----------------------------------
    Lawrence Gilbert


                                       Director                                      December __, 1997
---------------------------------- 
    Ricardo M. de Oliveira, M.D.


/s/ John I. Sandson, M.D.              Director                                      December 23, 1997
----------------------------------
    John I. Sandson, M.D.


/s/ Charles W. Smith                   Director                                      December 23, 1997
----------------------------------
    Charles W. Smith
</TABLE>


                           HEMAGEN DIAGNOSTICS, INC.

                               INDEX TO EXHIBITS


<TABLE>
<CAPTION>

Exhibit No.      Title
-----------      -----

   <S>           <C>
   10ii          Distribution Agreement between the Company and Donnor Com. IND. LTDA

   10jj          Distribution Agreement between the Company and Phoenix Diagnostics, Inc.

   23a           Consent of Independent Certified Public Accountants - BDO Seidman, LLP
</TABLE>


                                                     Hemagen Diagnostics, Inc.
                                                              and Subsidiaries

                                    Index to Consolidated Financial Statements
------------------------------------------------------------------------------


<TABLE>

<S>                                                                <C>
Report of Independent Certified Public Accountants                 F-2


Consolidated financial statements:

  Balance sheets                                                   F-3 to F-4

  Statements of operations                                         F-5

  Statements of stockholders' equity                               F-6

  Statements of cash flows                                         F-7

  Notes to consolidated financial statements                       F-8 to F-30
</TABLE>


<PAGE> F-1


Report of Independent Certified Public Accountants


To the Board of Directors and Stockholders of
Hemagen Diagnostics, Inc.


We have audited the accompanying consolidated balance sheets of Hemagen
Diagnostics, Inc. and subsidiaries as of September 30, 1997 and 1996, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Hemagen
Diagnostics, Inc. and subsidiaries at September 30, 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.


                                       BDO Seidman, LLP


Boston, Massachusetts
November 14, 1997


<PAGE> F-2


                                                      Hemagen Diagnostics, Inc.
                                                               and Subsidiaries

                                                    Consolidated Balance Sheets
-------------------------------------------------------------------------------

<TABLE>
<CAPTION>

September 30,                                                              1997            1996
------------------------------------------------------------------------------------------------------

<S>                                                                        <C>             <C>
Assets

Current:
  Cash and cash equivalents                                                $   294 086     $   756 919
  Short-term investments                                                       730 827       1 360 249
  Accounts receivable, less allowance for doubtful accounts of $55,500 
   and $53,800 at September 30, 1997 and 1996, respectively                  2 288 793       1 673 791
  Inventories                                                                3 953 601       3 178 180
  Prepaid expenses and other current assets                                    221 646         271 800
                                                                           ---------------------------

      Total current assets                                                   7 488 953       7 240 939

Property and equipment, net of accumulated depreciation                      2 545 470       2 931 879

Other assets                                                                 1 512 227       1 636 412
                                                                           ---------------------------

                                                                           $11 546 650     $11 809 230
                                                                           ===========================
</TABLE>


See accompanying notes to consolidated financial statements.


<PAGE> F-3


                                                      Hemagen Diagnostics, Inc.
                                                               and Subsidiaries

                                                    Consolidated Balance Sheets
                                                                    (Continued)
-------------------------------------------------------------------------------


<TABLE>
<CAPTION>

September 30,                                                                      1997           1996
-------------------------------------------------------------------------------------------------------------


<S>                                                                                <C>            <C>
Liabilities and Stockholders' Equity

Current liabilities:
  Accounts payable and accrued expenses                                            $   785 135    $ 1 428 790
  Notes payable                                                                        198 983              -
  Current maturities of long-term debt                                                 347 388        395 034
                                                                                   --------------------------

      Total current liabilities                                                      1 331 506      1 823 824

Long-term debt, less current maturities                                                189 281        562 672
                                                                                   --------------------------

      Total liabilities                                                              1 520 787      2 386 496
                                                                                   --------------------------

Minority interest in consolidated subsidiary                                                 -              -

Commitments and contingencies (Note 15)

Stockholders' equity:
  Preferred stock, $.01 par value - 1,000,000 shares authorized; none issued                 -              -
  Common stock, $.01 par value - 30,000,000 shares authorized; 7,776,890 and
   7,620,890 shares issued and outstanding at September 30, 1997 and 1996,
   respectively                                                                         77 769         76 209
  Additional paid-in capital                                                        13 329 197     13 132 757
  Accumulated deficit                                                               (3 375 103)    (3 780 232)
                                                                                   --------------------------

                                                                                    10 031 863      9 428 734
                                                                                   --------------------------

  Less - receivable from stockholders                                                   (6 000)        (6 000)
                                                                                   --------------------------

      Total stockholders' equity                                                    10 025 863      9 422 734
                                                                                   --------------------------

                                                                                   $11 546 650    $11 809 230
                                                                                   ==========================
</TABLE>


See accompanying notes to consolidated financial statements.


<PAGE> F-4


                                                      Hemagen Diagnostics, Inc.
                                                               and Subsidiaries

                                          Consolidated Statements of Operations
-------------------------------------------------------------------------------


<TABLE>
<CAPTION>

Years ended September 30,                                 1997            1996
-------------------------------------------------------------------------------------


<S>                                                       <C>             <C>
Revenue:
  Product sales                                           $12 971 102     $10 161 335
  Research and development contracts                           20 000          58 000
                                                          ---------------------------

                                                           12 991 102      10 219 335
                                                          ---------------------------

Cost and expenses:
  Cost of product sales                                     7 597 981       6 213 398
  Cost of research and development revenue                      5 928          36 040
  Research and development                                  1 072 188         777 718
  Selling, general and administrative                       3 808 000       3 237 045
                                                          ---------------------------

                                                           12 484 097      10 264 201
                                                          ---------------------------

  Operating income (loss)                                     507 005         (44 866)
                                                          ---------------------------

Other income (expenses):
  Interest income                                              63 727         106 566
  Interest expense                                           (131 806)       (517 052)
  Foreign exchange loss                                       (18 306)        (21 179)
  Other income (expense)                                      (15 491)         12 545
                                                          ---------------------------

                                                             (101 876)       (419 120)
                                                          ---------------------------

Net income (loss)                                         $   405 129     $  (463 986)
                                                          ===========================

Net income (loss) per share                               $       .05     $      (.08)
                                                          ===========================

Weighted average shares outstanding                         7 676 561       5 666 357
                                                          ===========================
</TABLE>


See accompanying notes to consolidated financial statements.


<PAGE> F-5


                                                      Hemagen Diagnostics, Inc.
                                                               And Subsidiaries


                                Consolidated Statements of Stockholders' Equity
-------------------------------------------------------------------------------


<TABLE>
<CAPTION>

                                                    Common Stock        Additional                   Receivable
                                                --------------------     Paid-in     Accumulated        from       Stockholders'
                                                 Shares     Par Value    Capital       Deficit      Stockholders      Equity
                                                ---------   ---------   ----------   ------------   ------------   --------------

<S>                                             <C>          <C>        <C>           <C>              <C>          <C>
Balance at September 30, 1995                   3 162 000    $31 620    $5 154 912    $(3 316 246)     $(6 000)     $ 1 864 286
  Issuance of common stock upon conversion
   of subordinated debt                         1 550 000     15 500     1 502 565             -             -        1 518 065
  Issuance of common stock, net of expenses,
   in connection with private placement 
   offering                                     2 695 255     26 953     6 383 216             -             -        6 410 169
  Exercise of common stock purchase warrants       90 517        905          (905)            -             -                -
  Exercise of common stock purchase warrants       45 259        453          (453)            -             -                -
  Exercise of common stock purchase warrants       45 259        452          (452)            -             -                -
  Issuance of common stock to employees under
   stock option plan                                5 100         51         8 899             -             -            8 950
  Issuance of common stock to Board of 
   Directors under stock option plan                7 500         75        11 175             -             -           11 250
  Issuance of common stock purchase warrants            -          -        50 000             -             -           50 000
  Issuance of common stock to Board of 
   Directors in lieu of compensation               20 000        200        23 800             -             -           24 000
  Net loss                                              -          -             -      (463 986)            -         (463 986)
                                                -------------------------------------------------------------------------------

Balance at September 30, 1996                   7 620 890     76 209    13 132 757    (3 780 232)       (6 000)       9 422 734
  Issuance of common stock to employees under
   stock option plan                               56 000        560        97 440             -             -           98 000
  Exercise of common stock purchase warrants      100 000      1 000        99 000             -             -          100 000
  Net income                                            -          -             -       405 129             -          405 129
                                                -------------------------------------------------------------------------------

Balance at September 30, 1997                   7 776 890    $77 769   $13 329 197   $(3 375 103)      $(6 000)     $10 025 683
                                                ===============================================================================
</TABLE>


See accompanying notes to consolidated financial statements.


<PAGE> F-6


                                                      Hemagen Diagnostics, Inc.
                                                               and Subsidiaries

                                                       Statements of Cash Flows


<TABLE>
<CAPTION>

Years ended September 30,                                                               1997          1996
------------------------------------------------------------------------------------------------------------------

<S>                                                                                     <C>           <C>
Cash flow from operating activities:
  Net income (loss)                                                                     $ 405 129     $  (463 986)
  Adjustments to reconcile net income (loss) to cash provided (used)
    by operating activities:
    Depreciation and amortization                                                         847 296         763 041
    Compensation relating to the issuance of warrants and common stock                          -          74 000
    Amortization of deferred financing costs and debt discount                             11 190               -
    Foreign exchange loss                                                                  18 306          21 179
    Changes in operating assets and liabilities, net of effects of 
     purchase of CPI in 1997 and RAI in 1996:
    Accounts receivable                                                                  (405 345)        135 435
    Inventories                                                                          (319 019)       (306 967)
    Prepaid expenses and other current assets                                              53 854            (471)
    Accounts payable and accrued expenses                                                (771 101)        329 871
    Deferred revenue                                                                            -         (20 000)
                                                                                        -------------------------

      Net cash provided (used) by operating activities                                   (159 690)        532 102
                                                                                        -------------------------

Cash flow from investing activities:
  Payment for acquisitions, net of cash acquired                                         (395 479)     (4 920 548)
  Purchases of short-term investments                                                           -      (1 360 249)
  Proceeds from maturity of short-term investments                                        629 422         803 000
  Purchases of property and equipment                                                    (325 082)       (234 343)
  Other assets                                                                             (8 095)        345 973
                                                                                        -------------------------

      Net cash used by investing activities                                               (99 234)     (5 366 167)
                                                                                        -------------------------

Cash flows from financing activities:
  Repayments of notes payable to related party                                                  -        (350 000)
  Proceeds from issuance of long-term debt                                                      -         108 392
  Repayments of long-term debt                                                           (405 876)     (1 930 844)
  Proceeds from issuance of common stock, net                                                   -       6 410 169
  Exercise of stock options and warrants                                                  198 000          20 200
                                                                                        -------------------------

      Net cash provided (used) by financing activities                                   (207 876)      4 257 917
                                                                                        -------------------------

Effect of exchange rates on cash and cash equipments                                        3 967               -
                                                                                        -------------------------

Net decrease in cash and cash equivalents                                                (462 833)       (576 148)
Cash and cash equivalents, beginning of year                                              756 919       1 333 067
                                                                                        -------------------------

Cash and cash equivalents, end of year                                                  $ 294 086     $   756 919
                                                                                        =========================

Cash payments of interest                                                               $ 147 840     $   507 849
                                                                                        =========================
</TABLE>


Supplemental disclosure of non-cash financing and investing activities, see
Note 2.


See accompanying notes to consolidated financial statements.


<PAGE> F-7


                                                      Hemagen Diagnostics, Inc.
                                                               and Subsidiaries

                                     Notes to Consolidated Financial Statements
-------------------------------------------------------------------------------


1.    Nature of Business and Organization

      Hemagen Diagnostics, Inc. ("Hemagen" or the "Company") is a biotechnology
      company which develops, manufactures, and markets laboratory medical
      diagnostic kits used to aid in the diagnosis of certain autoimmune and
      infectious diseases. In the United States, the Company sells its products
      directly to clinical laboratories and blood banks and on a private-label
      basis through multinational distributors of medical supplies.
      Internationally, the Company sells its products primarily through
      distributors. The Company was incorporated in the Commonwealth of
      Massachusetts in 1985 and reincorporated in the state of Delaware in
      1992.


2.    Significant Accounting Policies

      Estimates and Assumptions

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

      Principles of Consolidation

            The accompanying consolidated financial statements include the
            accounts of the Company and Hemagen Diagnostics Commercio,
            Importaco & Exporataco, Ltd. ("HDC") for the two years ended
            September 30, 1997, the accounts of Reagents Applications, Inc.
            ("RAI") from March 1, 1996, and the accounts of Cellular Products,
            Inc. ("CPI") from November 1, 1996, the effective dates of the RAI
            and CPI acquisitions as described in Note 3. All significant
            intercompany balances and transactions have been eliminated in
            consolidation.

            The Company has a 51% interest in HDC. All losses of HDC in excess
            of the minority shareholders' investment have been allocated to the
            Company.

      Foreign Currency Translation

            The functional currency of HDC is the U.S. dollar. Certain assets
            (primarily inventories and property and equipment) and liabilities
            and related income and expenses of HDC are remeasured into U.S.
            dollars at exchange rates in effect when the assets were acquired
            or the liabilities were incurred. All other assets and liabilities
            are translated at the exchange rates in effect as of the balance
            sheet date, and income and expense items are translated at average
            exchange rates for the period. Remeasurement gains and losses are
            included in operations as they occur.

      Cash Equivalents and Short-Term Investments

            The Company considers all investments with an original maturity of
            three months or less to be cash equivalents. The Company invests
            its excess cash in certificates of deposit.

            Short-term investments are accounted for in accordance with
            Statement of Financial Accounting Standards No. 115 ("SFAS No.
            115"), "Accounting for Certain Investments in Debt and Equity
            Securities," which requires that debt and marketable equity
            securities be classified as trading, available-for-sale, or
            held-to-maturity. Available-for-sale securities are reported in the
            balance sheet at fair value with unrealized gains or losses
            included in a separate component of stockholders' equity. At
            September 30, 1997 and 1996, the Company held certificates of
            deposit of $730,827 and $1,360,249, respectively. All certificates
            held at September 30, 1997 mature within one year. These
            certificates of deposit are classified as available-for-sale and
            are recorded at cost at September 30, 1997 and 1996, which
            approximates fair value.

      Inventories

            Inventories are stated at the lower of cost, determined on a
            first-in, first-out basis, or market.

      Property and Equipment

            Property and equipment is stated at cost. Depreciation is provided
            on a straight-line basis over the estimated useful lives of the
            related assets. Expenditures for repairs and maintenance are
            expensed as incurred.

      Goodwill

            Goodwill resulting from the excess of cost over fair value of net
            assets acquired is being amortized on a straight-line basis over 15
            years. The Company evaluates the recoverability and remaining life
            of its goodwill and determines whether the goodwill should be
            completely or partially written-off or the amortization period
            accelerated. The Company will recognize an impairment of goodwill
            if undiscounted estimated future operating cash flows of the
            acquired business are determined to be less than the carrying
            amount of the goodwill. If the Company determines that the goodwill
            has been impaired, the measurement of the impairment will be equal
            to the excess of the carrying amount of the goodwill over the
            amount of the undiscounted estimated future operating cash flows.
            If an impairment of goodwill were to occur, the Company would
            reflect the impairment through a reduction in the carrying value of
            goodwill.

      Income Taxes

            The Company utilizes the liability method of accounting for income
            taxes, as set forth in Statement of Financial Accounting Standards
            No. 109, "Accounting For Income Taxes." Under this method, deferred
            tax liabilities and assets are recognized for the expected future
            tax consequences of temporary differences between the carrying
            amount and the tax basis of assets and liabilities.

      Revenue Recognition

            Revenue from the sale of products is recognized when the product is
            shipped. Revenue from contracts to conduct research and development
            is recognized using the percentage-of-completion method. Losses are
            provided for at the time that management determines that contract
            costs will exceed related revenues. The portion of contract
            billings related to research and development not complete at the
            balance sheet date is included in deferred revenue.

      Advertising

            The Company expenses advertising costs as incurred. Advertising
            expense was approximately $94,000 and $48,000 in fiscal 1997 and
            1996, respectively.

      Net Income (Loss) Per Share

            Net income (loss) per share is based on the weighted average number
            of shares of common stock and common stock equivalents outstanding
            during each period, and shares obtainable through conversion of
            convertible debt. Common stock equivalents, consisting of
            outstanding stock options and warrants, are included in the
            computation when their effect is dilutive.

      Statement of Cash Flows - Disclosure of Non-Cash Financing and Investing
      Activities

            During 1996, the Company forced the conversion of $1,550,000 of
            notes payable into 1,550,000 shares of common stock. Also in
            connection with the conversion, common stock purchase warrants with
            a total estimated value of $50,000 were issued.
            
            Common stock with a value of $24,000 was issued to non-employee
            members of the Board of Directors in lieu of compensation during
            1996.

            During 1996, 181,035 warrants were exercised in a non-monetary
            transaction whereby the Company forgo its rights to the cash
            consideration upon exercise of these warrants in return for the
            warrant holder's forfeiture of their right to exercise the
            remaining 68,965 warrants.

            Instruments with a net book value of $114,523 and $157,319 were
            transferred from fixed assets to inventory during 1997 and 1996,
            respectively.

      New Accounting Pronouncements

            Effective October 1, 1996, the Company adopted the provisions of
            Statement of Financial Accounting Standard No. 123 ("SFAS 123"),
            "Accounting for Stock-Based Compensation." The Company has elected
            to continue to account for stock options at their intrinsic value
            with disclosure of the effects of fair value accounting on net
            earnings (loss) and earnings (loss) per share on a pro forma basis.

            Statement of Financial Accounting Standards No. 128, "Earnings per
            Share," ("SFAS No. 128") issued by the Financial Accounting
            Standards Board is effective for financial statements for fiscal
            years ending after December 15, 1997. The new standard establishes
            standards for computing and presenting earnings per shares.

            The effect of adopting Statement of Financial Accounting Standards
            No. 128, "Earnings per Share," is not expected to be material. The
            Company is required to adopt the disclosure requirements of SFAS
            No. 128 during the year ended September 30, 1998.

            In June 1997, the Financial Accounting Standards Board issued two
            new disclosure standards. Results of operations and financial
            position will be unaffected by implementation of these new
            standards.

            Statement of Financial Accounting Standards No. 130, "Reporting
            Comprehensive Income," ("SFAS No. 130") establishes standards for
            reporting and display of comprehensive income, its components, and
            accumulated balances. Comprehensive income is defined to include
            all changes in equity except those resulting from investments by
            owners and distributions to owners. Among other disclosures, SFAS
            No. 130 requires that all items that are required to be recognized
            under current accounting standards as components of comprehensive
            income be reported in a financial statement that is displayed with
            the same prominence as other financial statements.

            SFAS No. 131, "Disclosure about Segments of an Enterprise and
            Related Information," which supersedes SFAS No. 14, "Financial
            Reporting for Segments of a Business Enterprise," establishes
            standards for the way that public enterprises report information
            about operating segments in annual financial statements and
            requires reporting of selected information about operating segments
            in interim financial statements issued to the public. It also
            establishes standards for disclosures regarding products and
            services, geographic areas, and major customers. SFAS No. 131
            defines operating segments as components of an enterprise about
            which separate financial information is available that is evaluated
            regularly by the chief operating decision maker in deciding how to
            allocate resources and in assessing performance.

            Both of these new standards are effective for financial statements
            for periods beginning after December 15, 1997 and require
            comparative information for earlier years to be restated. Due to
            the recent issuance of these standards, management has been unable
            to fully evaluate the impact, if any, they may have on future
            financial statement disclosures.


3.    Acquisitions

      Effective March 1, 1996, the Company acquired 100% of the outstanding
      common stock of Reagents Applications, Inc., a manufacturer of diagnostic
      test kits for a cash purchase price of $4,979,195.

      The acquisition was recorded using the purchase method of accounting,
      whereby the net assets acquired were recorded at their estimated fair
      values and the excess of cost over the fair value of the net assets
      acquired of approximately $1,635,487 was allocated to goodwill and is
      being amortized over 15 years.


      The Company acquired certain assets, primarily inventory and fixed
      assets, and assumed certain liabilities of 872 Main Street Corp.
      (formerly Cellular Products, Inc.) on November 1, 1996 for total
      consideration and related costs of $738,600 and formed a new subsidiary,
      Cellular Products, Inc. ("CPI"). The purchase price consisted of $400,000
      in cash and an unsecured promissory note to 872 Main Street Corp. in the
      amount of $200,000 due November, 1997. The present value of the note
      payable at September 30, 1997 is $198,983. The acquisition was recorded
      using the purchase method of accounting.

      The excess of the fair value of net assets acquired over the purchase
      price was recorded as a reduction of the fixed assets acquired, in
      accordance with the provisions of Accounting Principles Board Opinion No.
      16, "Business Combinations." CPI manufactures biotechnology materials and
      assays for research and for the manufacture of clinical diagnostic test
      kits.

      The consolidated statements of operations and cash flows for the year-
      ended September 30, 1997 include the results of operations and cash flows
      for CPI from November 1, 1996 through September 30, 1997 and RAI for the
      entire year.

      The consolidated statements of operations and cash flows for the year
      ended September 30, 1996 include the results of operations and cash flows
      for RAI from March 1, 1996 through September 30, 1996.

      The unaudited pro forma combined results of operations of the Company and
      the businesses acquired in fiscal 1997 and 1996 for the years ended
      September 30, 1997 and 1996, assuming that the acquisitions had occurred
      at October 1, 1995 and after giving effect to certain pro forma
      adjustments are as follows:


      Years ended September 30,                  1997             1996
      -----------------------------------------------------------------------

      Revenue                                    $13 121 000      $14 039 000
      Net income (loss)                          $   432 000      $  (761 000)
      Net income (loss) per share                $       .06      $      (.12)


4.    Related Party Transactions

      Related Parties

            The Company's Chairman of the Board, Chief Executive Officer,
            President and principal stockholder is the Chairman of Boston
            University's (the "University") Biochemistry Department and a
            Professor and Associate Dean for Graduate Affairs of the
            University's School of Medicine. Certain other directors and
            stockholders of the Company are also employed by the University.
            The Company has entered into certain product development and
            license agreements with the University as further described below.

      Product Development Agreement

            In February 1992, the Company entered into a product development
            agreement with the University to develop, on a best efforts basis,
            a product which can indicate certain diseases. Under this
            agreement, the Company is obligated to provide facilities,
            personnel, supplies, and services totaling $100,000, which are
            recorded as research and development contract support costs as
            incurred. No such costs were incurred in the years ended September
            30, 1997 and 1996. The Company retains a 50% interest in all
            intellectual property developed.

            The University is obligated to provide $100,000 in cash to the
            Company over the term of the agreement to pay for the services of
            two employees of the Company and certain equipment and other costs
            which are recorded as costs of research and development revenues as
            incurred. No such costs were incurred in the years ended September
            30, 1997 or 1996. Revenue of $20,000 was recognized under the
            product development agreement in fiscal 1996. No amounts were due
            to the Company at September 30, 1997 or 1996 under this agreement.

            If the technology developed is licensed to a third party, royalties
            will be distributed in proportion to the number of patents and
            patent applications licensed to the Company and the University,
            respectively. License fees will be distributed equally up to a
            maximum of $215,000; thereafter, the fees will be allocated in the
            same manner as royalties.

            The agreement terminated in September 1993. The agreement provided
            that following its termination (i) if the Company and the
            University both desire to further develop and market the
            technology, that they enter into a joint venture for that purpose,
            (ii) if only the Company desires to further develop the technology,
            it may purchase the rights to the technology and reimburse the
            University for its initial $100,000 investment, (iii) if only the
            University desires to pursue the technology, then the University
            will repay the Company for its initial investment, (iv) if neither
            party desires to pursue the technology, neither party will have any
            obligation to the other. The rights to the technology will be
            assigned in accordance with patent law and the University shall own
            any equipment purchased with University funds. If neither party
            desires to pursue the technology, the Company has agreed to assign
            its rights to the technology to the University. The Company intends
            to further develop the technology and is discussing the
            alternatives with the University.

      License Agreements

            In March 1992, the Company entered into a license agreement with
            the University under which the Company obtained the exclusive right
            to use the University's patented and patent pending technology to
            manufacture and market certain products. Under the agreement, the
            Company is obligated to pay an annual royalty of 5% of the first
            $50,000 of the Company's net sales of these products and 10% of net
            sales of these products in excess of $50,000 until the Company has
            paid the University a license fee of $10,000 in total and
            reimbursed it for certain patent expenses. All royalties to be paid
            thereafter will equal 5% of the Company's net sales of these
            products. Sales of products using technology obtained under the
            agreement, but not specifically covered under the patent
            application, and sales which occur if no patents are granted, are
            subject to a 3% royalty for a period of ten years. The Company also
            agreed to pay the University 27.5% of royalties the Company
            receives if it sublicenses the technology and 25% of the license
            fees resulting from any sublicense agreement. There were no
            royalties paid in the years ended September 30, 1997 and 1996. The
            agreement terminates upon the termination of the patents.

            In July 1994, the Company entered into a license agreement with the
            University under which the Company obtained the exclusive right to
            use additional patented and patent-pending technology of the
            University to manufacture and market certain products. The
            royalties due under the terms of the agreement are the same as the
            initial license agreement and will be applied to the license fee of
            $15,000. No royalties were paid in the years ended September 30,
            1997 and 1996 and no amounts were accrued for royalties at
            September 30, 1997 or 1996. The agreement terminates upon the
            termination of the patents.


5.    Inventories

      Inventories consist of the following:

<TABLE>
<CAPTION>

      September 30,                   1997            1996
      ----------------------------------------------------------

      <S>                             <C>             <C>
      Raw materials                   $1 558 916      $1 278 021
      Work-in-process                    250 612         274 181
      Finished goods                   2 144 073       1 625 978
                                      --------------------------
                                      $3 953 601      $3 178 180
                                      ==========================
</TABLE>


6.    Property and Equipment

      Property and equipment include the following:

<TABLE>
<CAPTION>

      September 30,                                               1997          1996
      ------------------------------------------------------------------------------------

      <S>                                                         <C>           <C>
      Land                                                        $   16 000    $        -
      Building                                                       172 000             -
      Furniture and equipment                                      3 987 991     3 950 300
      Leasehold improvements                                         552 352       523 113
                                                                  ------------------------
                                                                   4 728 343     4 473 413

      Less accumulated depreciation and amortization               2 182 873     1 541 534
                                                                  ------------------------

                                                                  $2 545 470    $2 931 879
                                                                  ========================
</TABLE>

      Depreciation and amortization expense relating to property and equipment
      was $701,816 and $708,525 for the years ended September 30, 1997 and
      1996, respectively.

      Included in the above amounts is property and equipment acquired under
      capital leases of $119,135 and $534,114 at September 30, 1997 and 1996,
      respectively. Accumulated depreciation and amortization on property and
      equipment under capital leases totaled $83,395 and $321,671 at September
      30, 1997 and 1996, respectively.

      In fiscal 1996, the Company retired lease obligations amounting to
      $1,337,044 and acquired the ownership of the assets under these leases.


7.    Other Assets

      Other assets consist of the following:

<TABLE>
<CAPTION>

      September 30,                                               1997          1996
      ------------------------------------------------------------------------------------

      <S>                                                         <C>           <C>
      Goodwill, net of accumulated amortization of $163,549
       and $54,516 for 1997 and 1996, respectively                $1 471 938    $1 580 971

      Other                                                           40 289        55 441
                                                                  ------------------------

                                                                  $1 512 227    $1 636 412
                                                                  ========================
</TABLE>


8.    Accounts Payable and Accrued Expenses

      Accounts payable and accrued expenses include the following:

<TABLE>
<CAPTION>

      September 30,                          1997         1996
      --------------------------------------------------------------

      <S>                                    <C>          <C>
      Accounts payable - trade               $375 046     $  645 068
      Accrued professional fees                78 424        144 149
      Accrued vacation                        129 327        155 163
      Accrued other                           202 338        484 410
                                             -----------------------

                                             $785 135     $1 428 790
                                             =======================
</TABLE>


9.    Development and License Agreements

      In October 1992, the Company entered into a product development agreement
      with a customer, under which the customer and the Company would each
      contribute $93,500, subject to the Company meeting specified goals in
      connection with the development of a product line by December 31, 1993.
      The Company completed the development in the year ended September 30,
      1993, and all amounts due under the terms of the agreement were paid in
      full. Under this agreement, the customer received a perpetual,
      non-exclusive license to manufacture the product. The customer and the
      Company agreed to pay royalties to each other, ranging from 2% to 6%, on
      net sales of the product sold by the other during the first ten years
      after development. In addition, the selling party shall pay a royalty
      equal to 6% of net sales of the product to the other party until a total
      amount of $93,500 has been paid to the other party. After the Company has
      been reimbursed its $93,500 contribution, the balance of the customer's
      contribution not already repaid by the Company shall be repaid in eight
      quarters by offsetting any royalty payments due to the customer. If the
      customer elects not to manufacture the product itself, then Hemagen shall
      have the right of first refusal to manufacture the product for sale by
      the customer. Hemagen retains ownership rights in all technology
      developed under this agreement.

      There were no sales of this product in the years ended September 30, 1997
      or 1996. During 1997, the Company and the customer mutually agreed to
      discontinue research and development of the product line.

      In November 1993, the Company entered into a product development
      agreement with a customer under which the Company would develop a product
      which would work in conjunction with the customer's blood analyzer. Under
      the terms of the agreement, the Company would provide facilities and
      personnel and the customer would provide the use of its blood analyzer
      and materials. The Company completed the development in the year ended
      September 30, 1994. Under this agreement, the Company maintains exclusive
      rights to manufacture and sell the product. Subsequently, the Company
      entered into an OEM agreement with the customer which provided for
      certain minimum purchases by the customer. During 1997, the customer did
      not meet its minimum purchase requirement but agreed to satisfy the
      annual amount obligated. Sales to this customer amounted to $203,000 in
      1997 and $13,000 in 1996. The Company is currently renegotiating the
      terms of the agreement to eliminate the minimum purchase requirement.


10.   Financing Arrangements

      Long-Term 

            Debt Borrowings classified as long-term debt consist of the
            following:

<TABLE>
<CAPTION>

            September 30,                                    1997          1996
            -----------------------------------------------------------------------

            <S>                                              <C>           <C>
            Term loan at an effective interest rate of 
             approximately 13%, monthly principal and 
             interest payments of $31,309 from January
             1996 through December 1998                      $495 056      $789 340

            Obligations under capital leases (Note 15)         41 613       168 366
                                                             ----------------------

                                                              536 669       957 706

            Less current portion                              347 388       395 034
                                                             ----------------------

                                                             $189 281      $562 672
                                                             ======================
</TABLE>

      Term Loan

            In December 1994, the Company borrowed $1,000,000 from a leasing
            company, using certain patents as collateral, to fund working
            capital requirements. The Company's first year of interest was
            netted from the proceeds of the loan and recorded as prepaid
            interest. Principal and interest payments are due in monthly
            installments of $31,309 beginning in January 1996 through December
            1998, with a balloon payment of $100,000 due at the end of the
            term. At the Company's option, the amount due at the end of the
            term may be paid in four additional monthly installments of
            $25,437. Principal repayments for the fiscal years ending September
            30, 1998 and 1999 will be $305,775 and $189,281, respectively.

11.   Stockholders' Equity

      Preferred Stock

            The Company is authorized to issue up to 1,000,000 shares of
            preferred stock, $.01 par value per share. The preferred stock may
            be issued in one or more series, the terms of which may be
            determined at the time of issuance by the Board of Directors and
            may include voting rights, preferences as to dividends and
            liquidation, conversion and redemption rights, and sinking fund
            provisions.

      Common Stock

            During 1996, the Company forced the conversion of the unpaid
            principal balance of Subordinated Convertible Notes issued during
            1995 into 1,550,000 shares of common stock at a rate of $1.00 per
            share. All of these shares were registered with the SEC under the
            Securities Act of 1933 with the filing of a Form SB-2, registration
            statement, which, as amended, was declared effective on November
            11, 1996.

            Also during 1996, the Company filed a Form SB-2, registration
            statement, under the Securities Act of 1933 with the SEC in order
            to register 2,695,255 shares of common stock which were issued in a
            private placement offering (the "Private Placement Offering"). This
            registration statement, as amended, was declared effective on
            November 14, 1996. The Company received net proceeds after expenses
            of approximately $6,410,000 in connection with the Private
            Placement Offering.

            In connection with the exercise of certain common stock purchase
            warrants and options, the Company issued 156,000 and 193,635 shares
            of common stock during 1997 and 1996, respectively.

      Board of Directors Common Stock

            During 1996, the Company issued 20,000 shares of common stock to
            non-employee members of the Board of Directors in lieu of cash
            compensation. The related compensation expense is amortized over
            the one year service period.

      Common Stock Purchase Warrants

            In connection with certain bridge financing which was repaid in
            1993, the Company issued warrants to purchase 360,000 shares of
            common stock at $3.00 per share and a warrant to purchase 36,000
            shares of common stock at $3.60 per share exercisable through
            December 31, 1997. During 1995, the Company repriced 90,000
            warrants to individuals who participated in both the 1992 bridge
            financing and the 1995 private placement. The warrants were
            repriced from $3.00 per share to $1.50 per share. During 1996,
            7,500 of these warrants were exercised. The incremental value of
            the repriced warrants over the original warrants at the time of
            repricing was estimated by management and determined not to be
            material to the Company's results of operations or financial
            position. Upon the effective date of the registration statement
            filed in connection with the initial public offering, the warrant
            to purchase 36,000 shares was cancelled. This was replaced with
            warrants to purchase 100,000 shares of common stock at $8.00 per
            share exercisable through February 3, 1998. During 1995, 70,000 of
            these warrants were forfeited.

            In conjunction with certain sale and leaseback transactions
            occurring in 1993 and 1994, the Company issued warrants to purchase
            50,000 and 20,000 shares of common stock at $3.25 per share
            exercisable through April 1, 1998 and April 29, 1999, respectively.
            The value of the warrants at the time of issuance was estimated by
            management and determined not to be material to the Company's
            results of operations or financial position.

            In conjunction with a $1,000,000 term loan and a sale and leaseback
            transaction with a leasing company in fiscal 1995, the Company
            issued warrants to purchase 52,000 and 35,000 shares of common
            stock at $2.50 and $2.00 per share, respectively, exercisable
            through December 30, 1999 and June 30, 2000, respectively. The
            value of the warrants at the time of issuance was estimated by
            management to be $35,000 and $20,000, respectively.

            In 1995, the Company issued 250,000 warrants to purchase common
            stock at $1.00 per share exercisable through August 10, 2000 to
            three consultants for services provided to the Company during the
            period July 1, 1995 through June 30, 1996. The value of the
            warrants at the time of issuance was estimated by management to be
            $116,000. The value was amortized over the period the services were
            provided. During fiscal 1996, 181,035 warrants were exercised in a
            non-monetary transaction whereby the Company relinquished its
            rights to the cash consideration upon exercise of these warrants in
            return for the warrant holder's forfeiture of their right to
            exercise the remaining warrants.

            In October 1995, the Company issued 10,000 warrants to purchase
            common stock at $2.37 per share exercisable through October 16,
            1997 to an investor. The value of the warrants at the time of
            issuance was estimated by management and determined not to be
            material to the Company's results of operations and financial
            position.

            In connection with the Private Placement Offering, the Company
            issued 2,695,255 common stock purchase warrants exercisable at
            $2.75 per share and expiring on February 28, 2001.

            Also in connection with the Private Placement Offering, the Company
            issued Placement Agent Warrants allowing for the purchase of
            269,526 units at a price of $2.75 per unit. Each unit consists of
            one share of the Company's common stock and one common stock
            Purchase Warrant which entitles the holder to purchase one share of
            the Company's common stock for $2.75 per share, expiring February
            28, 2001. The Placement Agent Warrants expire February 28, 1999.

            In January 1996, the Company issued 100,000 warrants to purchase
            common stock at $1.00 per share exercisable through January 8,
            1999. The value of the warrants at the time of issuance was
            estimated by management to be $50,000. During fiscal 1997 the
            warrants were exercised.

      Reserved Shares

            At September 30, 1997, the Company has reserved 5,081,896 shares of
            common stock for issuance upon the exercise of outstanding common
            stock options and warrants. During March 1996, the Company's Board
            of Directors voted to increase the number of authorized shares of
            common stock from 10,000,000 to 30,000,000.

      1992 Stock Option Plan

            The 1992 Stock Option Plan (the "Plan") provides for the grant of
            incentive and nonqualified stock options for the purchase of shares
            of the Company's common stock by employees, directors, and
            consultants of the Company. In 1996, the stock option plan was
            amended to provide for the purchase of up to an aggregate of
            1,000,000 shares of the Company's common stock. The Board of
            Directors is responsible for the administration of the Plan. The
            Board determines the term of each option, the number of shares for
            which each option is granted and the rate at which each option is
            exercisable. The Company may not grant an employee incentive stock
            options with a fair market value in excess of $100,000 that is
            exercisable during any one calendar year. The term of incentive
            stock options granted cannot exceed ten years (five years for
            options granted to holders of more than 10% of the voting stock of
            the Company). The exercise price for incentive stock options
            granted may not be less than 100% of the fair market value per
            share of the underlying common stock (110% for options granted to
            holders of more than 10% of the voting stock of the Company). The
            Board, at the request of any optionee, may convert incentive stock
            options that have not been exercised at the date of conversion into
            nonqualified stock options.

            Changes in options outstanding under the 1992 Stock Option Plan are
            summarized as follows:

<TABLE>
<CAPTION>

                                                               Weighted-Average
                                                   Shares       Exercise Price
                                                  --------     ----------------

            <S>                                   <C>               <C>
            Balance, September 30, 1995           227 350           $2.56
            Granted                                11 000            2.00
            Exercised                              (5 100)           1.75
            Cancelled or expired                   (5 025)           1.75
            Balance, September 30, 1996           228 225            2.54
            Granted                               187 625            2.19
            Exercised                             (56 000)           1.75
            Cancelled or expired                  (50 900)           4.78
            Balance, September 30, 1997           308 950           $2.08
</TABLE>


            The following table summarizes information about stock options 
            outstanding at September 30, 1997:

<TABLE>
<CAPTION>
                                    Options Outstanding and Exercisable
                             -------------------------------------------------
                                                     Weighted-
                                                      Average        Weighted-
              Range of             Number            Remaining        Average
              Exercise         Outstanding at       Contractual      Exercise
               Prices        September 30, 1997     Life (years)       Price
            ------------     ------------------     ------------     ----------

            <S>                   <C>                   <C>            <C>
            $       5.00            6 000                .7            $5.00
                    2.19          176 800               4.2             2.19
                    2.00           14 400               3.4             2.00
                    1.75          111 750               2.7             1.75
            ----------------------------------------------------------------

            $1.75 - 5.00          308 950               3.5            $2.08
            ================================================================
</TABLE>


            The Company accounts for its stock-based compensation plan using
            the intrinsic value method. Accordingly, no compensation cost has
            been recognized for its stock option plan. Had compensation cost
            for the Company's stock option plan been determined based on the
            fair value at the grant dates for awards under the plan consistent
            with the method of Statement of Financial Accounting Standards No.
            123, "Accounting for Stock-Based Compensation," the Company's net
            income (loss) and earnings (loss) per share would have been
            adjusted to the pro forma amounts indicated below:

<TABLE>
<CAPTION>

            Years ended September 30,                      1997         1996
            ----------------------------------------------------------------------

            <S>                        <C>                 <C>          <C>
            Net income (loss)          As reported         $405 129     $(463 986)
                                        Pro forma           181 179      (476 286)
            Earnings (loss)            As reported         $    .05     $    (.08)
             per share                  Pro forma               .02          (.08)
</TABLE>

            In determining the pro forma amounts above, the Company estimated
            the fair value of each option granted using the Black-Scholes
            option pricing model with the following weighted-average
            assumptions used for grants in 1997 and 1996: dividend yield of 0%
            for both years and expected volatility of 27.6% for both years,
            risk free rates ranging from 5.95% to 6.13% for 1997 and 6.44% to
            6.65% for 1996, and expected lives of 5 years for 1997 and 1996.
            The weighted average fair value of options granted in fiscal 1997
            and 1996 was $223,950 and $12,300, respectively.


12.   Income Taxes

            Domestic and foreign income (loss) before income taxes and minority
            interest in net income (loss) of consolidated subsidiary are as
            follows:

<TABLE>
<CAPTION>

            Years ended September 30,        1997          1996
            --------------------------------------------------------

            <S>                              <C>           <C>
            Domestic                         $316 314      $(342 997)
            Foreign                            88 815       (120 989)
                                             -----------------------
                                             $405 129      $(463 986)
                                             =======================
</TABLE>

            The difference between income taxes provided at the Company's
            effective tax rate and the Federal statutory rate is as follows:


<TABLE>
<CAPTION>

            Years ended September 30,                                      1997          1996
            ---------------------------------------------------------------------------------------

            <S>                                                            <C>           <C>
            Federal tax (benefit) at statutory rate                        $ 137 744     $(157 755)
            Operating income offset by current tax loss generating
             no current or deferred tax effect                              (137 744)            -
            Losses without tax benefit                                             -       157 755
                                                                           -----------------------

                                                                           $       -     $       -
                                                                           =======================
</TABLE>


            Deferred tax assets and liabilities are comprised of the following:


<TABLE>
<CAPTION>

            September 30,                                       1997           1996
            ------------------------------------------------------------------------------

            <S>                                                 <C>            <C>
            Deferred tax assets:
              Net operating loss carryforwards                  $ 1 317 000    $   950 000
              Amortization of intangible assets                     324 000        579 000
              Research and development and investment tax 
               credit carryforwards                                 100 000         65 000
              Other                                                 134 000         80 000
                                                                --------------------------

              Gross deferred tax assets                           1 875 000      1 674 000

            Deferred tax asset valuation allowance               (1 824 000)    (1 285 000)
                                                                --------------------------

            Net deferred tax assets                             $    51 000    $   389 000
                                                                ==========================
</TABLE>


<TABLE>
<CAPTION>

            September 30,                                       1997        1996
            ------------------------------------------------------------------------

            <S>                                                 <C>         <C>
            Deferred tax liability:
              Basis difference of property and equipment        $51 000     $389 000
                                                                ====================
</TABLE>

            The change in the valuation allowance for deferred tax assets was
            an increase of $539,000 primarily related to carryforwards for net
            operating losses and research and development tax credits, since
            the realization of these future benefits is not sufficiently
            assured as of September 30, 1997. If the Company achieves continued
            profitability, these deferred tax assets may be available to offset
            future income tax liabilities.

            At September 30, 1997, the Company has approximately $3,292,000,
            $2,342,000 and $100,000 of federal, state, and foreign net
            operating losses, respectively, available to offset future taxable
            income, which expire on various dates through 2012. At September
            30, 1997, the Company has $100,000 of federal research and
            development tax credit carryforwards and $55,000 of state research
            and development and investment tax credit carryforwards available
            to offset future income taxes payable, which expire on various
            dates through 2011. Ownership changes as defined in the Internal
            Revenue Code may limit the amount of net operating loss and tax
            credit carryforwards that may be utilized annually.


13.   Significant Sales and Concentration of Credit Risk

      In 1997 and 1996, the Company derived revenues from a single customer
      totalling $1,880,000 and $1,832,000, respectively. The Company derived
      revenues from another customer amounting to $1,190,000 and $646,000 for
      the years ended 1997 and 1996, respectively. Revenues derived from export
      sales amounted to $4,777,000 in 1997 and $3,484,000 in 1996. Export sales
      to Europe were approximately $2,591,000 in 1997 and $2,383,000 in 1996.
      Export sales to South America were approximately $1,446,000 in 1997 and
      $1,100,000 in 1996 .


14.   International Operations

      The following is a summary of certain selected financial information as
      of September 30, 1997 and 1996 and for the years then ended of the
      Company's 51% owned subsidiary, excluding the applicable intercompany
      balances.


<TABLE>
<CAPTION>

      September 30,                                          1997           1996
      ------------------------------------------------------------------------------

      <S>                                                    <C>            <C>
      Assets                                                 $  852 578     $933 718

      Liabilities                                            $   82 952       71 802

      Revenues                                               $1 255 318     $955 944
</TABLE>


15.   Commitments

      Leases The Company leases certain office and manufacturing facilities
      under noncancelable operating leases. In addition, the Company leases an
      office and manufacturing facility under a cancelable operating lease
      which has no future minimum rental commitments. Future minimum lease
      commitments under the noncancelable operating leases and capital leases
      (see Note 6) are as follows:


<TABLE>
<CAPTION>

                                                              Operating      Capital
      Year ending September 30,                                 Leases       Leases
      ------------------------------------------------------------------------------

      <S>                                                     <C>            <C>
      1998                                                    $  467 000     $45 000
      1999                                                       451 000           -
      2000                                                       425 000           -
      2001                                                       336 000           -
      2002                                                       301 000           -
                                                              ----------------------

      Total minimum lease payments                            $1 980 000      45 000
                                                              ==========

      Less amount representing interest                                       (3 387)
                                                                             -------

      Present value of net minimum capital lease payments                    $41 613
                                                                             =======
</TABLE>

      Rent expense approximated $524,000 and $344,000 in 1997 and 1996,
      respectively.

      Minimum Purchase Obligation

            During 1997, the Company entered in an exclusive distribution
            agreement whereby it is required to purchase a minimum amount of
            products from the supplier. Future minimum purchase obligations
            amount to $200,000 in 1998 and $500,000 in 1999.