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

                                  FORM 10-KSB/A

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

                   For the fiscal year ended December 31, 1997

                                       OR

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

     For the transition period from __________________ to __________________

                           Commission File No. 1-11109


                           LUKENS MEDICAL CORPORATION
                 ----------------------------------------------
                 (Name of small business issuer in its charter)


         Delaware                                             22-2429965
         --------                                             ----------
(State or other jurisdiction                                 (IRS Employer
       of incorporation)                                 Identification Number)


3820 Academy Parkway North NE
Albuquerque, New Mexico                                       87109
-----------------------                                       -----
(Address of principal executive offices)                    (Zip Code)

Issuer's telephone number, including area code        (505) 342-9638
                                                      --------------

Securities registered under Section 12(b) of the Exchange Act:

     Title of each class               Name of each exchange on which registered
----------------------------           -----------------------------------------
Common Stock, $.01 par value                      Pacific Stock Exchange



Securities registered under Section 12 (g) of the Exchange Act:

                          Common Stock, $.01 par value
                          ----------------------------
                                (Title of Class)

     Check  whether  the issuer (1) filed all  reports  required  to be filed by
Section 13 or 15(d) of the  Exchange  Act during the past 12 months (or for such
shorter period that the  registrant was required to file such reports),  and (2)
has been subject to such filing requirements for the past 90 days. Yes X No


<PAGE>



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

     State issuer's revenues for its most recent fiscal year: $8,618,863.

     State the aggregate market value of the voting stock held by non-affiliates
computed by reference  to the price at which the stock was sold,  or the average
bid and  asked  price  of such  stock,  as of March  25,  1998:  $7,002,820.  In
determining  the market value of voting stock held by  non-affiliates,  share of
Common Stock of the  registrant  beneficially  owned by directors,  officers and
holders  or more  than 10% of the  outstanding  shares  of  Common  Stock of the
registrant  have been excluded.  The  determination  of affiliate  status is not
necessarily a conclusive determination for other persons.

     State the number of shares  outstanding of each of the issuer's  classes of
common equity,  as of March 1, 1998:  3,043,359 shares of Common Stock, $.01 par
value.




                                       2

<PAGE>



     The undersigned  Registrant hereby amends the following items of its Annual
Report on Form 10-KSB for the fiscal year ended  December 31, 1997, as set forth
on the pages attached hereto:

     Item 6: Management's Discussion and Analysis or Plan of Operations.
 
     Item 7: Financial Statements.






                                       3

<PAGE>



                                    PART II

ITEM 6.  MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS.


RESULTS OF OPERATIONS


     FISCAL YEAR ENDED DECEMBER 31, 1997 ("1997")  COMPARED TO FISCAL YEAR ENDED
DECEMBER 31, 1996 ("1996").

     Sales  increased  5%  to  approximately   $8.6  million  during  1997  from
approximately  $8.2 million  during  1996,  primarily as a result of the Pro-Tec
Acquisition.  Domestic  sales of sutures  primarily in the dental and veterinary
market in 1997 were  approximately  even with sales in 1996.  Anticipated  sales
growth  in  the  veterinary  market  as a  result  of  the  introduction  of the
monofilament  synthetic  absorbable  suture  was not  realized  in  1997  due to
production  problems  experienced by the Company's  supplier of suture material.
The  Company  believes  that  these  supply  problems  have been  remedied.  The
Company's  export  sales in 1997 and 1996  totaled  $1,651,451  and  $2,295,066,
respectively,  which  represents  19% and 28% of  total  sales  in each of those
years, respectively.

     Before the  product  restructuring  charge,  the  Company's  gross  margins
decreased slightly, from 29% in 1996 to 28% in 1997. Gross Margins for 1997 were
negatively  impacted by a repricing of  inventory  at December  31,  1997.  Such
repricing is reflected in the Audited Financial  Statements as an inventory cost
reduction  totaling  approximately  $772,000.  The  Company  expects  that gross
margins in its most rapidly growing product line,  lancets,  will improve in the
second  quarter  of 1998 due to  in-house  manufacturing  of  needles  (the most
expensive  component)  at its new  facility in Cochin,  India.  The Company also
expects  overall margins to increase in 1998 as the suture sales mix shifts from
the lower  priced  international  markets  to the more  lucrative  OEM  domestic
markets,  and due  partially to the addition of the Pro-Tec  Product Lines which
typically  carry  a  higher  gross  margin  than  the  Company  has  experienced
historically.

     Selling  expenses   increased  51%  in  1997  from  $716,042  in  1996,  to
$1,087,171, as a result of increases in the number of employees required to sell
and service the Pro-Tec and Ulster Product Lines,  increased  marketing expenses
relating  to the  Ulster  Product  Lines,  such  as  convention  and  literature
expenditures,  and charges for  uncollected  commissions  and an increase in the
reserve for uncollectible accounts receivable.

     General  and  administrative   expenses  increased  approximately  248%  to
$2,399,657  in 1997  compared  to  $965,180  in 1996,  due  mainly  to the costs
incurred in connection  with the Pro-Tec  Acquisition,  the costs related to the
discontinued product line, start-up costs relating to the India facility and the
development costs related to the synthetic absorbable suture.


                                       4

<PAGE>



     Research and development  expenses decreased  approximately 35%, to $70,386
in 1997  compared  to  approximately  $108,594  in 1996,  due  primarily  to the
finalization of the synthetic absorbable suture development project. The Company
does not  expect  to  expend  significant  funds  on  research  and  development
activities in 1998.

     During  1996 and most of 1997,  the Company  saw the  international  suture
market as a  significant  growth  area for the  Company.  A number  of  markets,
including the Middle East,  India,  South Africa and Brazil,  expressed  serious
interest in the Company's  cardiovascular  suture line (the "Cardio Line"),  and
its new synthetic  absorbable  suture in development at that time. Also, in late
1996, the Company was approached by a new U.S. venture which was interested in a
broad line of both products as well. Significant stocking orders were placed for
the  products  in these  lines in early  1997.  In  February  1997,  the Company
received FDA approval for the synthetic  absorbable  suture,  and began actively
marketing this new line.

     By late 1997, several new facts became apparent to the Company,  including:
(i)  international  customers of the Cardio Line were unable to meet their sales
goals with respect to the products, (ii) reorders were not meeting the Company's
expectations and (iii) several customers in India and South Africa were actually
returning products to the Company. In addition, the synthetic absorbable suture,
due to the high cost of new materials,  had a market price that was too high for
many export markets. The large U.S. customer for both suture lines was unable to
fulfill its initial commitments to the Company, and their large initial purchase
order had been canceled.  By December 31, 1997 the Company  determined that most
of the  Cardio  Line  inventory  should be  written  off.  While  the  synthetic
absorbable   suture  had  not  met  with   widespread   acceptance   or  success
internationally,  it had been well  accepted in certain  markets,  including the
domestic  dental and  veterinary  markets.  As a result,  the Company's  revenue
expectations from these two product lines  internationally have been scaled back
significantly.

     Concurrently  with events  surrounding  the  Company's  Cardio Line, in the
third  quarter of 1997,  the Company also  decided to refocus its  international
marketing  strategy to limit its product offerings to higher margin products and
regions.  Historically,  the  Company  carried  a very  large  product  line and
attempted  to sell  into  numerous  international  markets,  many of which  were
unprofitable.  By revising its  international  marketing  strategy,  the Company
hoped to  increase  its  profitability.  As a result,  the  Company  reduced its
standard  suture  product line to include only  approximately  250 catalog codes
(down from  approximately  750) and  intended to  de-emphasize  and even abandon
certain  international  markets. As a result of the foregoing,  in December 1997
the Company  wrote off  approximately  $3,030,000  of  inventory  consisting  of
discontinued catalog codes and expired inventory,  which included  approximately
$300,000 of  inventory  relating to the  Company's  "Sed-Control"  product.  The
resulting aggregate inventory write-off and repricing in December 1997 was equal
to  approximately  $4,100,000  (the  "Inventory  Writeoff").  As a result of the
Inventory  Writeoff,   and  increased  expenses  described  above,  the  Company
experienced  an operating  loss of  approximately  $4,200,000 for the year ended
December 31, 1997.

     Despite the foregoing, the overall volume for the Company's suture products
has  continued to increase in 1998 due to  successes  in other  markets with its
other suture products. The Company's joint venture in India, because it does not
produce sutures, was and is unaffected by the Company's refocused  international
strategy for these lines.  The Company's joint venture


                                        5

<PAGE>



in Brazil was and is also  relatively  unaffected due to the fact that while the
Brazil  joint  venture  does produce  suture  products,  the Cardio Line is very
limited in scope and had no significant  related  inventory.  Additionally,  the
products  produced by the Brazil joint venture are targeted to different markets
than those that the Company determined to exit.

     Interest  income was $5,000 in 1997  compared  to $6,000 in 1996.  Interest
expense increased to approximately  $433,000 in 1997 from approximately $198,000
in 1996 due primarily to the additional debt incurred  relating to the India and
Brazil Joint Ventures, and the Pro-Tec Acquisition.

     As result  of the  Inventory  Writeoff,  increased  expenses  and the other
income  adjustments  referred to above,  the Company  experienced  a net loss of
$4,182,958  for the year ended  December  31,  1997  compared to a net profit of
$463,481  for the year ended  December 31, 1996.  Without  giving  effect to the
Inventory Writeoff or acquisition costs, the Company experienced a net profit of
$334,262 for the year ended December 31, 1997.

LIQUIDITY AND CAPITAL RESOURCES

     The Company's  primary  capital needs have been to fund the working capital
requirements created by its sales growth and to make acquisitions.

     Bank  Financing.  As of December 31, 1997, the Company had drawn all of its
$1,750,000  working  capital portion of its line of credit with its lending bank
(the  "Line  of  Credit").  The  Line of  Credit  also  includes  an  additional
$1,250,000  commitment  for the  issuance of standby and  commercial  letters of
credit. On December 31, 1997,  approximately  $882,000 in letters of credit were
outstanding under this letter of credit  commitment.  The Line of Credit matures
and expires on August 30, 1998 unless it is renewed, and all outstanding amounts
are due and payable on such date.  The Company  expects the Line of Credit to be
renewed  for an  additional  year  prior  to  its  expiration.  There  can be no
assurances,  however, that such a renewal will be forthcoming, or, if available,
will be on terms acceptable to the Company.

     As of December 31, 1997, the Company had approximately $142,000 outstanding
under a working  capital line of credit (the "SBA L/C  Facility")  with the U.S.
Small  Business  Administration  ("SBA"),  which  provided  working  capital for
foreign  sales up to the lesser of (a) $600,000 or (b) 80% of the face amount of
negotiated letters of credit issued for the benefit of the Company and delivered
to the lender. It is the Company's  understanding  that due to the fact that the
majority of the letters of credit received by the Company from its international
customers did not meet the criteria set forth by the SBA,  combined with various
other factors,  including the existence of technical financial covenant defaults
under the Line of Credit as a result of the Inventory Writeoff, the SBA declined
to renew  this line for 1998 and all  outstanding  amounts  are  required  to be
repaid as each outstanding letter of credit is drawn upon.


                                        6

<PAGE>



     At the same time,  during  December 1997 and the first quarter of 1998, the
Company has  experienced  increased sales of certain  products,  requiring it to
significantly  increase its  purchases of raw  materials  necessary to fill such
orders. Due to the decreased liquidity caused by losing the SBA L/C Facility, as
well as the  increased  outlays for raw  materials,  the  Company  has  recently
experienced a shortage of working capital. As a result, the Company has recently
experienced difficulties financing its sales growth and has failed to timely pay
certain  amounts  due under  certain  term loans  granted to the  Company by its
lending bank in connection with the Line of Credit.  The Company's  lending bank
has indicated to the Company that it does not currently intend to accelerate the
indebtedness  outstanding  under the Line of Credit.  No assurance  can be given
that the Company's  lending bank will not hereafter  accelerate the indebtedness
due under the Line of Credit if the Company's  payment default is not cured in a
timely manner.

     The Company is currently seeking to renegotiate its financial  covenants in
the Line of Credit to remove the existing technical covenant defaults. There can
be no  assurance  given  that the  Company  will  successfully  renegotiate  its
financial covenants or cure the payment default under certain of its term loans.
In any such  case,  in the event  that the  Company's  lending  bank  decides to
accelerate  all  amounts  payable  under  the Line of  Credit,  there  can be no
assurance  given  that the  Company  would be able to  refinance  or repay  such
indebtedness.  Additionally,  no assurance can be given that the Company will be
able to increase its liquidity,  either through increased availability under its
lines of credit or internally  generated  cash flow, to enable it to continue to
fund its growth.

     To fund future acquisitions and joint ventures, the Company is reliant upon
obtaining long-term borrowing and/or equity financing.  Management believes that
the Company will have access to the capital  resources  necessary to continue to
fund such expansion,  although there is no assurance that such financing will be
available or, if available,  will be on terms  acceptable to the Company.  For a
more complete description of the Company's current credit facilities, see Note 5
to Notes to Consolidated Financial Statements.

     Stockholder  Loans.  On February  28,  1997,  the Company  entered  into an
agreement  with John H.  Robinson  and Robert L.  Priddy,  each a  director  and
substantial  stockholder  of the Company,  whereby  Messrs.  Robinson and Priddy
loaned the Company an aggregate of  $1,000,000.  Such loans bear interest at the
rate of 10% per  annum,  are  repayable  on or  before  January  1, 1999 and are
subordinated to the Line of Credit. In connection  therewith,  Messrs.  Robinson
and Priddy were each issued  warrants to purchase  15,000 shares of Common Stock
at an exercise price of $8.25 per share,  and warrants to purchase an additional
35,000  shares  of  Common  Stock at $6.00 per  share.  See  "Item  12.  Certain
Relationships and Related Transactions."

     In the past,  the Company has been reliant upon Messrs.  Robinson or Priddy
to finance the costs  associated  with certain  acquisitions  and to


                                       7

<PAGE>



restructure certain indebtedness,  on terms favorable to the Company.  There can
be no  assurance  the  such  financing,  or other  third  party  debt or  equity
financing,  will be available in the future or, if  available,  will be on terms
acceptable to the Company.

OTHER INFORMATION

     Sales to the U.S.  Government.  During  1996,  the  department  of the U.S.
Government  responsible for procuring medical supplies,  such as sutures,  began
purchasing more of such items outside the  traditional  bid system.  The Company
has been successful over the last several years in obtaining  substantial awards
under the bid system.  The new system,  which  incorporates local dealers called
Prime Vendors,  is less sensitive to price and more sensitive to the impact of a
direct sales force.  As a result of the foregoing,  since the Company has only a
limited sales force, there can be no assurance that the Company will continue to
meet or  exceed  its  historical  levels  of sales of its  products  to the U.S.
Government in the future and during 1997 sales were nominal.

     Acquisition  of  the  Pro-Tec  Product  Lines.  For a  description  of  the
consideration  paid and  payable by the Company in  connection  with the Pro-Tec
Acquisition,   including,   without  limitation,  the  Common  Stock  issued  in
connection therewith,  see Note 15 to Notes to Consolidated Financial Statements
and the  Company's  Current  Report  of Form 8-K  filed in  connection  with the
Pro-Tec Acquisition.

     Pro-Tec Stock Price Guarantee.  In connection with the Pro-Tec Acquisition,
the Company  agreed to  guarantee  the value of the Common  Stock  issued to the
former owner  pursuant to such  acquisition  for a period of six months from the
effective date of the Registration  Statement on Form S-3 which was filed by the
Company to register the resale of such shares. As a result of the decline in the
price to the Company's  Common Stock during such period (and taking into account
certain  other  adjustments),  the  Company  owes the  former  owner of  Pro-Tec
approximately $300,000, which amount is payable either by the issuance of shares
of the Company's  Common Stock or a one-year  promissory  note.  The Company and
such  individual are currently  negotiating to extend the term of the payment of
this amount. No agreement,  however,  has yet been finalized and there can be no
assurance given that any such agreement will be reached.

     Net Operating Loss Carryforwards.  As of December 31, 1997, the Company had
net operating loss  carryforwards  ("NOLs") of approximately  $13,775,000  which
will expire from 1998 through 2010. The  deductibility of portion of the NOLs is
subject to an annual  limitation of approximately  $460,000;  the excess of such
annual  limitation  over the  amount to be used in  subsequent  year  until they
expire. See Note 10 of Notes to Consolidated Financial Statements.


                                       8

<PAGE>



     Year 2000 Disclosure.  The Company believes that its operations will not be
materially  disrupted by any problems  associated  with the "Year 2000" syndrome
after January 1, 2000; however, there can no assurances in this regard.

ITEM 7.  FINANCIAL STATEMENTS.

     The  responses  to this item are  submitted  in a separate  section of this
Annual Report on Form 10-KSB/A.  See Index to Consolidated  Financial Statements
on page 11.









                                       9

<PAGE>



                   LUKENS MEDICAL CORPORATION AND SUBSIDIARIES


                        CONSOLIDATED FINANCIAL STATEMENTS


                           DECEMBER 31, 1997 AND 1996







                                       10

<PAGE>



                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS


                                                                            PAGE
                                                                            ----
INDEPENDENT AUDITORS' REPORT ..............................................   12

FINANCIAL STATEMENTS
 Consolidated Balance Sheets for the years ended
   December 31, 1997 and 1996 .............................................   13

 Consolidated Statements of Operations for the years ended
   December 31, 1997 and 1996 .............................................   15

 Consolidated Statements of Stockholders' Equity for the years ended
   December 31, 1997 and 1996 .............................................   16

 Consolidated Statements of Cash Flows for the years ended
   December 31, 1997 and 1996 .............................................   17
  
 Notes to Consolidated Financial Statements as of December 31, 1997 .......   19


                                       11

<PAGE>



                         INDEPENDENT AUDITORS' REPORT

To the Board of Directors and Stockholders of
Lukens Medical Corporation

     We have  audited the  accompanying  consolidated  balance  sheets of Lukens
Medical  Corporation and  Subsidiaries as of December 31, 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 consolidated financial statements based on our audits.

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

     In our opinion,  the consolidated  financial  statements  referred to above
present  fairly,  in all material  respects,  the  financial  position of Lukens
Medical  Corporation  and  Subsidiaries  at December 31, 1997 and 1996,  and the
results of their  operations  and their cash flows for the years then ended,  in
conformity with generally accepted accounting principles.



NEFF & COMPANY LLP

Albuquerque, New Mexico
March 27, 1998

                                       12

<PAGE>



                   LUKENS MEDICAL CORPORATION AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                           DECEMBER 31, 1997 AND 1996


<TABLE>
<CAPTION>

                                                            1997            1996
                                                       --------------   ------------
<S>                                                     <C>              <C>       
ASSETS
Current assets:
 Cash and cash equivalents (Note 11) ...............    $    74,048         878,090
 Accounts receivable, net of allowance of
   $40,000 in 1997 and $5,790 in 1996
   (Notes 5 and 6) .................................      1,836,542       1,901,947

 Inventory (Notes 2, 5, 6, and 14) .................      5,105,900       5,565,210
 Prepaid expenses ..................................        127,080          34,290
                                                        -----------       ---------
   Total current assets ............................      7,143,570       8,379,537
Fixed assets, net (Notes 3, 5, 6 and 8) ............      3,599,150       2,062,842
Intangible assets, net of accumulated amortization
 of $1,222,264 and $966,065 in 1997 and 1996,
 respectively (Notes 4 and 15) .....................      2,215,420       1,098,487

Other assets .......................................         85,754         261,294
                                                        -----------       ---------
   Total assets ....................................    $13,043,894      11,802,160
                                                        ===========      ==========
</TABLE>


                                       13

<PAGE>

<TABLE>
<CAPTION>
                                                                       1997               1996
                                                                 ----------------   ----------------
<S>                                                               <C>                   <C>       
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
 Accounts payable ............................................    $   1,864,832          1,406,243
 Accrued liabilities .........................................          138,016             62,139
 Current maturities of long-term debt (Notes 5 and 6) ........        5,146,950          2,002,191
 Current maturities of obligations under
   capital leases (Note 8) ...................................          146,893             39,825
                                                                  -------------          ---------
   Total current liabilities .................................        7,296,691          3,510,398
Long-term debt, excluding current maturities
 (Notes 5, 6 and 11) .........................................           73,483            796,446
Stockholder payable and accrued interest (Notes 7 and 11).....        2,290,991          1,157,408
Obligations under capital leases, excluding current maturities
 (Note 8) ....................................................          266,256             59,378
                                                                  -------------          ---------
   Total liabilities .........................................        9,927,421          5,523,630
                                                                  -------------          ---------
Commitments and contingencies (Notes 5, 8, 13, 15, and 16) .
Minority interests ...........................................           74,955                 --
                                                                  -------------          ---------
Stockholders' equity (Notes 5 and 9):
 Common stock $.01 par value, authorized 20,000,000 shares;
 issued  and outstanding 3,043,359 shares in 1997 and
 2,731,988 shares in 1996 ....................................           30,434             27,320
 Additional paid-in capital ..................................       18,526,035         17,213,952
 Accumulated deficit .........................................      (15,461,903)       (10,962,742)
 Foreign currency translation adjustments ....................          (53,048)                --
                                                                  -------------        -----------
   Total stockholders' equity ................................        3,041,518          6,278,530
                                                                  -------------        -----------
   Total liabilities and stockholders' equity ................    $  13,043,894         11,802,160
                                                                  =============        ===========

</TABLE>

         The Notes to Consolidated Financial Statements are an integral
                            part of these statements.


                                       14

<PAGE>



                   LUKENS MEDICAL CORPORATION AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                     YEARS ENDED DECEMBER 31, 1997 AND 1996


<TABLE>
<CAPTION>
                                                          1997            1996
                                                    ---------------   ------------
<S>                                                 <C>               <C>
Net sales (Note 12) .............................    $  8,618,863      8,178,576
Cost of sales (Note 14) .........................       5,469,327      5,496,534
Inventory cost reduction ........................         770,000        300,000
Product restructuring charge (Note 14) ..........       3,005,280             --
                                                     ------------      ---------
 Gross profit (loss) ............................        (625,744)     2,382,042
                                                     ------------      ---------
Selling expenses ................................       1,087,171        716,042
General and administrative expenses .............       2,399,657        965,180
Research and development expenses ...............          70,386        108,594
                                                     ------------      ---------
   Total operating expenses .....................       3,557,214      1,789,816
                                                     ------------      ---------
   Earnings (loss) from operations ..............      (4,182,958)       592,226
                                                     ------------      ---------
Other income (expense):
 Interest income ................................           5,236          6,578
 Interest expense ...............................        (433,463)      (197,566)
 Minority interests' share of loss ..............          80,570             --
 Other, net .....................................          31,454         62,243
                                                     ------------      ---------
   Total other expense, net .....................        (316,203)      (128,745)
                                                     ------------      ---------
   Earnings (loss) before income taxes ..........      (4,499,161)       463,481
Income tax expense (Note 10) ....................              --             --
                                                     ------------      ---------
   Net earnings (loss) ..........................    $ (4,499,161)       463,481
                                                     ============      =========
Basic net earnings (loss) per share .............    $      (1.48)           .17
                                                     ============      =========
Dilutive net earnings (loss) per share ..........    $      (1.48)           .15
                                                     ============      =========
Weighted average number of common shares
 outstanding - basic ............................       3,043,359      2,677,698
                                                     ============      =========
Weighted average number of common shares
 outstanding - dilutive .........................       3,043,359      3,068,113
                                                     ============      =========
</TABLE>


         The Notes to Consolidated Financial Statements are an integral
                            part of these statements.


                                       15

<PAGE>



                  LUKENS MEDICAL CORPORTATION AND SUBSIDIARIES
                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                     YEARS ENDED DECEMBER 31, 1997 AND 1996

<TABLE>
<CAPTION>
                                          COMMON STOCK                                        FOREIGN
                                        (NOTES 9 AND 15)     ADDITIONAL                      CURRENCY
                                     ----------------------    PAID-IN      ACCUMULATED     TRANSLATION
                                        SHARES     AMOUNT      CAPITAL        DEFICIT       ADJUSTMENTS      TOTAL
                                     ----------- ---------- ------------ ----------------- ------------ ---------------
<S>                                  <C>         <C>        <C>          <C>               <C>          <C>
Balance, December 31, 1995 .........  2,611,418   $26,115    16,938,696    $ (11,426,223)          --       5,538,588
Exercise of options for common
 stock .............................    120,570     1,205       275,256               --           --         276,461
Net earnings (loss) ................         --        --            --          463,481           --         463,481
                                      ---------   -------    ----------    -------------           --       ---------
Balance December 31, 1996 ..........  2,731,988    27,320    17,213,952      (10,962,742)          --       6,278,530
Exercise of options for common
 stock .............................    111,371     1,114       478,103               --           --         479,217
Issuance of common stock for busi-
 ness acquisition ..................    200,000     2,000       833,980               --           --         835,980
Net earnings (loss) ................         --        --            --       (4,499,161)          --      (4,499,161)
Foreign currency translation adjust-
 ments .............................         --        --            --               --      (53,048)        (53,048)
                                      ---------   -------    ----------    -------------      -------      ----------
Balance, December 31, 1997 .........  3,043,359   $30,434    18,526,035    $ (15,461,903)     (53,048)      3,041,518
                                      =========   =======    ==========    =============      =======      ==========
</TABLE>

         The Notes to Consolidated Financial Statements are an integral
                            part of these statements.





                                       16

<PAGE>



                   LUKENS MEDICAL CORPORATION AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                     YEARS ENDED DECEMBER 31, 1997 AND 1996

<TABLE>
<CAPTION>
                                                                          1997               1996
                                                                    ----------------   ---------------
<S>                                                                 <C>                <C>
Cash flows from operations:
 Net earnings (loss) ............................................     $ (4,499,161)          463,481
 Adjustments to reconcile net earnings
   to cash flows applied to operating activities:
   Minority interest in net loss ................................          (80,570)               --
   Depreciation .................................................          398,943           262,941
   Amortization of intangible assets ............................          256,199           169,563
   Decrease in inventory valuation allowance ....................               --           250,000
   Loss on disposal of fixed assets .............................               --             9,855
   Accrued interest due stockholder .............................          133,583            79,024
Changes in current assets and liabilities:
 Accounts receivable ............................................          245,235          (632,736)
 Inventory ......................................................          472,310        (1,966,159)
 Prepaid expenses ...............................................          (92,305)          (10,834)
 Other assets ...................................................            4,667          (176,579)
 Accounts payable ...............................................          385,025           741,163
 Accrued liabilities ............................................           62,634           (20,916)
                                                                      ------------        ----------
   Net cash applied to operating activities .....................       (2,713,416)         (831,197)
                                                                      ------------        ----------
Cash flows from investing activities:
Purchase of equipment ...........................................       (1,311,378)         (561,910)
Purchase of intangible assets ...................................          (29,602)         (785,377)
Proceeds from disposal of equipment .............................           26,417                --
Proceeds from joint venture formation,
 net of cash transferred ........................................          155,525                --
Business acquisitions, net of cash purchased ....................         (224,916)               --
                                                                      ------------        ----------
   Net cash flows applied to investing activities ...............       (1,383,954)       (1,347,287)
                                                                      ------------        ----------
Cash flows from financing activities:
Proceeds from issuance of common stock
 and equivalents ................................................          479,217           276,461
Borrowings on long-term debt ....................................        5,174,575         2,621,155
Principal payments on long-term debt and capital leases .........       (3,360,440)         (280,091)
Borrowings from major stockholders ..............................        1,000,000           400,000
                                                                      ------------        ----------
Net cash flows provided by
 financing activities ...........................................        3,293,352         3,017,525
                                                                      ------------        ----------
</TABLE>

         The Notes to Consolidated Financial Statements are an integral
                            part of these statements.


                                       17

<PAGE>



                   LUKENS MEDICAL CORPORATION AND SUBSIDIARIES
                CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
                     YEARS ENDED DECEMBER 31, 1997 AND 1996


<TABLE>
<CAPTION>

                                                                       1997          1996
                                                                  -------------   ----------
<S>                                                               <C>             <C>
Net increase (decrease) in cash and cash equivalents ..........      (804,042)     839,041
Cash and cash equivalents at beginning of year ................       878,090       39,049
                                                                     --------      -------
Cash and cash equivalents at end of year ......................    $   74,048      878,090
                                                                   ==========      =======
Supplemental disclosures:
Cash paid for interest ........................................    $  274,767      113,532
                                                                   ==========      =======
Production equipment acquired with capital
 leases .......................................................    $  375,484       63,095
                                                                   ==========      =======
</TABLE>



         The Notes to Consolidated Financial Statements are an integral
                            part of these statements.



                                       18

<PAGE>



                   LUKENS MEDICAL CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 1997

NOTE 1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     Organization  and  Business  Activities.   Lukens  Medical  Corporation,  a
Delaware  corporation,  and its  wholly-owned  subsidiaries,  (the Company) is a
disposable  surgical  products  company  engaged  in  the  design,  development,
manufacture,  and  marketing  of  needle  suture  products,   disposable  safety
scalpels,  lancets,  disposal  supplies,  and bone wax. The Company  markets its
products  worldwide  to  hospitals,  independent  care  facilities,  physicians'
offices,  and to the United States government  directly and through  independent
distributors.

     In addition to its facility in  Albuquerque,  New Mexico which includes the
operations of Lukens Medical Corporation and its wholly owned subsidiary ProTec,
Inc., the Company's operations include the following:

          Lukens Medical Products  Limited,  a 90 percent owned joint venture in
     Cochin, India that serves primarily as a manufacturing facility.

          Techsynt-Lukens Industrial,  Commercial,  Import and Export Limited, a
     51 percent owned joint venture in Sao Paolo,  Brazil, that manufactures and
     sells the Company's products.

          Somar-Lukens  S.A de C.V., a 50 percent owned joint venture in Piedras
     Negras,  Mexico that is not yet active and as of December 31, 1997,  had no
     assets or operations.

     The Company utilizes  contract  manufacturing  facilities in Piedras Negras
and Ciudad Juarez,  Mexico for certain  suture  products.  These  facilities are
operated by contractors and are not owned by the Company.

     Principles of Consolidation.  The consolidated financial statements include
the accounts of Lukens Medical  Corporation and its wholly-owned  subsidiary and
majority  owned  joint  ventures.  All  significant  intercompany  accounts  and
transactions have been eliminated in consolidation.

     Cash and Cash Equivalents.  Cash and cash equivalents consist substantially
of  cash  in  banks  and  repurchase  agreements  which  are  collateralized  by
government  securities at a 102 percent of fair market value and recorded in the
bank's name. The Company considers all highly liquid financial  instruments with
original maturities of three months or less to be cash equivalents.

     Inventory. Inventory, which consists principally of the Company's products,
supplies and components, is stated at the lower of cost or market value. Cost is
determined  using the first-in,  first-out  (FIFO) method.  Market value for raw
materials is based on replacement costs and for other inventory  classifications
on net realizable  value.  Appropriate  consideration is given to deterioration,
obsolescence  and other factors in evaluating  net realizable  value.  Inventory
costs include material, labor, and manufacturing overhead.

     Fixed Assets.  Equipment and leasehold  improvements  are recorded at cost.
Depreciation  expense is calculated using the straight-line  method based on the
estimated useful lives of the respective  assets which  approximate three to ten
years.  The  Company  follows  the  policy  of  capitalizing  expenditures  that
materially  increase asset useful lives and charging  ordinary  maintenance  and
repairs to operations as incurred.

     Intangible Assets.  Intangible assets consist principally of costs incurred
to obtain Food and Drug  Administration  approvals,  trademarks,  organizational
costs,  patents, non compete agreements and goodwill.  The Company evaluates its
intangible assets annually to determine potential  impairment that may have been
caused due to changing  circumstances  or events by comparing the carrying value
to the  undiscounted  future  net cash flows of related  assets.  No  impairment
losses have been  recognized  in the periods  presented.  Intangible  assets are
being amortized using the straight-line method over periods of 8 to 10 years.


                                       19

<PAGE>



                   LUKENS MEDICAL CORPORATION AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (CONTINUED)


NOTE 1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)

     Capitalization of Interest.  Interest is capitalized in connection with the
construction  and  start-up of major  facilities.  The  capitalized  interest is
recorded  as part of the asset to which it  relates  and is  amortized  over the
asset's estimated useful life. In 1997, $80,828 of interest was capitalized.  No
interest was capitalized in 1996.

     Income Taxes.  The Company accounts for its income taxes in accordance with
Financial  Accounting  Standards  Statement No. 109, Accounting for Income Taxes
(SFAS 109).  SFAS 109 requires a company to recognize  deferred tax  liabilities
and assets for the  expected  future tax  consequences  of events that have been
recognized  in a  company's  financial  statements  or tax  returns.  Under this
method,  deferred  tax  liabilities  and  assets  are  determined  based  on the
difference  between the financial  statement  carrying  amounts and tax basis of
assets and  liabilities  using enacted tax rates in effect in the years in which
the  differences  are expected to reverse.  The Company has provided a valuation
allowance  to offset the  benefit of any net  operating  loss  carryforwards  or
deductible temporary differences.

     Translation of Foreign  Currencies.  The translation of foreign  currencies
into U.S. dollars is performed for balance sheet accounts using current exchange
rates in effect at the balance  sheet date and for revenue and expense  accounts
using an average  exchange  rate for the period.  The gains or losses  resulting
from translation are included in shareholders'  equity. The functional  currency
of  operations  in India  and  Brazil  is the local  currency  - the  functional
currency  of the  operations  in  Mexico  is the US  dollar,  which  is also the
currency of the books of record.

     Net  Sales.  Sales  are  recorded  at the time products are shipped, net of
sales returns and allowances.

     Research  and  Development  Expenses.  Research  and  development costs are
expensed as incurred.

     Long-Lived  Assets.  Statement  of  Financial Accounting Standards No. 121,
Accounting  for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be  Disposed  of  (SFAS  121),  was  adopted  as  of  January  1, 1996. SFAS 121
standardized  the  accounting  practices  for the recognition and measurement of
impairment  losses on certain long-lived assets. The adoption of SFAS 121 had no
effect on the results of operations or financial position.

     Effect  of  New  Accounting  Pronouncements. Effective January 1, 1996, the
Company  adopted  SFAS  No.  123,  Accounting  for Stock-Based Compensation. The
Company  adopted  this  pronouncement  by  making  the  required  pro forma note
disclosure  only.  Accordingly,  the adoption of SFAS No. 123 did not impact the
Company's results of operation or financial condition.

     Earnings Per Share.  Effective  for the year ended  December 31, 1997,  the
Company adopted SFAS 128,  Earnings Per Share.  In adopting this  pronouncement,
the Company  computed the earnings (loss) per share on the basis of the weighted
average  number of common  shares  outstanding  during the year and included the
effect  of  potential  common  stock  to the  extent  they  are  dilutive.  This
pronouncement was adopted for both 1997 and 1996,  however,  there was no impact
on the earnings per share previously reported for 1996.


<TABLE>
<CAPTION>
                                                          FOR THE YEAR ENDED DECEMBER 31, 1997
                                                     -----------------------------------------------
                                                          INCOME             SHARES        PER-SHARE
                                                        (NUMERATOR)      (DENOMINATOR)      AMOUNT
<S>                                                  <C>                <C>               <C>
       Net loss ..................................     $ (4,499,161)              --            --
                                                       ------------               --            --
       Loss to common stockholders-
        basic and diluted loss per share .........     $ (4,499,161)       3,043,359         (1.48)
                                                       ============        =========         =====
</TABLE>


     The  warrants  and options  described in Note 9 and 15 were not included in
potential common stock as the effect of conversion would be antidilutive.


                                       20

<PAGE>



                   LUKENS MEDICAL CORPORATION AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (CONTINUED)

NOTE 1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)

<TABLE>
<CAPTION>
                                                               FOR THE YEAR ENDED DECEMBER 31, 1996
                                                           --------------------------------------------
                                                               INCOME           SHARES        PER-SHARE
                                                            (NUMERATOR)     (DENOMINATOR)      AMOUNT
<S>                                                        <C>             <C>               <C>
       Net earnings ....................................      $463,481
                                                              --------
       Basic EPS .......................................       463,481        2,677,698          .17
       Effect of dilutive options and warrants .........            --          390,415           --
                                                              --------        ---------          ---
       Diluted EPS .....................................      $463,481        3,068,113          .15
                                                              ========        =========          ===
</TABLE>


     Warrants and options  described in Note 9 and 15 to purchase 964,227 shares
of common  stock were not  included in  potential  common stock as the offset of
conversion would be antidilutive.

     The Company  uses the fair value of goods or services  received or the fair
value of the options or warrants issued,  whichever is more reliably measurable,
to  determine  the  expense  to  record  for  options  or  warrants   issued  to
non-employees. Such amounts were not material and not recorded in 1996 or 1997.

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

     Reclassification.  The Company has reclassified certain amounts in the 1996
financial statements to conform to the 1997 presentation.

NOTE 2. INVENTORY

     Inventory consists of the following components at December 31:

<TABLE>
<CAPTION>
                                         1997           1996
                                    -------------   ------------
<S>                                 <C>             <C>
       Raw materials ............    $1,938,343      2,767,214
       Work-in-process ..........     1,972,124      1,419,685
       Finished goods ...........     1,261,603      1,444,481
       Less reserves ............       (66,170)       (66,170)
                                     ----------      ---------
                                     $5,105,900      5,565,210
                                     ==========      =========
</TABLE>

NOTE 3. FIXED ASSETS

     Fixed assets owned or held under  capital lease (see Note 8) consist of the
following at December 31:

<TABLE>
<CAPTION>
                                                        1997           1996
                                                   -------------   ------------
<S>                                                <C>             <C>
       Building ................................    $  899,762             --
       Leasehold improvements ..................       227,112        172,677
       Production equipment ....................     3,951,117      3,018,600
       Office equipment ........................       286,461        229,646
       Construction in progress ................       198,075             --
                                                     5,562,527      3,420,923
        Less accumulated depreciation ..........     1,963,377      1,358,081
                                                    ----------      ---------
                                                    $3,599,150      2,062,842
                                                    ==========      =========
</TABLE>


                                       21

<PAGE>



                   LUKENS MEDICAL CORPORATION AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (CONTINUED)

NOTE 3. FIXED ASSETS - (CONTINUED)

     Production equipment valued at $807,543 and $776,553, respectively, was not
being  utilized  in 1996 or 1997 and as of  December  31,  1997,  was in Piedras
Negras, Mexico in anticipation of the start up of a joint venture (See Note 15).

NOTE 4. INTANGIBLE ASSETS

     Intangible assets consisted of the following at December 31,:

<TABLE>
<CAPTION>
                                                         1997            1996
                                                   ---------------   ------------
<S>                                                <C>               <C>
       Suture regulatory approvals .............    $    963,448        920,089
       Ulster Scientific non-compete agreements,
        patents and trademarks .................         642,069        642,069
       ProTec patents and goodwill .............       1,296,968             --
       Other ...................................         535,199        502,394
                                                    ------------        -------
        Total ..................................       3,437,684      2,064,552
       Accumulated amortization ................      (1,222,264)      (966,065)
                                                    ------------      ---------
                                                    $  2,215,420      1,098,487
                                                    ============      =========
</TABLE>


NOTE 5. BANK FINANCING INSTRUMENTS

     At  December  31,  1997,  the  Company  had the  following  bank  borrowing
agreements:

     A working capital line-of-credit  agreement,  which provides for borrowings
for  working  capital  up to the lesser of (a)  $1,750,000  or (b) the sum of 80
percent of eligible  accounts  receivable (as defined in the agreement) plus the
lesser of 40 percent of qualified inventory.  Interest is payable monthly on the
amount drawn at the Bank's  corporate base rate (the Bank's prime rate) plus .75
percent.  At December  31, 1997,  there was  $1,750,000  outstanding  under this
line-of-credit agreement.

     A  letter-of-credit  line,  which  provides  for other  credit  instruments
including commercial  letters-of-credit and banker's acceptances which guarantee
payment to raw material suppliers, and standby  letters-of-credit which may also
be used for the purchase of raw material on forward currency contracts.  The sum
of these shall not exceed  $1,250,000  at any one time.  At December  31,  1997,
there was $634,127 of Bankers'  acceptances and commercial letters of credit and
$124,577 in standby letters of credit outstanding under this line. Additionally,
under a  separate  letter  of  credit,  there  was a  $360,000  letter of credit
relating to the purchase of the India facility.

     A SBA equipment term loan, which provides for the purchase of equipment and
machinery  up to  $150,000,  interest  and  principal  payable  monthly on equal
installments  of  $2,510 at the New York  prime  rate as  published  in the Wall
Street  Journal,  plus 1.5 percent.  At December  31,  1997,  there was $114,018
outstanding under this agreement.

     A SBA equipment term loan, which provides for the purchase of equipment and
machinery  up to  $150,000,  interest  and  principal  payable  monthly on equal
installments  of  $2,535 at the New York  prime  rate as  published  in the Wall
Street  Journal,  plus 1.5 percent.  At December  31,  1997,  there was $135,221
outstanding under this agreement.

     On May 24, 1996, the Company  obtained a bank term loan for the purchase of
equipment  and  machinery  in the amount of  $120,000,  interest  and  principal
payable  monthly on equal  installments  of $3,859 at the bank's  corporate base
rate plus 1.5 percent. At December 31, 1997, there was $68,268 outstanding under
this agreement.


                                       22

<PAGE>



                   LUKENS MEDICAL CORPORATION AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (CONTINUED)

NOTE 5. BANK FINANCING INSTRUMENTS - (CONTINUED)

     On December 30, 1996, the Company  obtained a bank term loan for funding of
a joint  venture  in India in the amount of  $700,000,  interest  and  principal
payable monthly on equal  installments  of $14,700 at the bank's  corporate base
rate plus 1 percent. At December 31, 1997, there was $613,575  outstanding under
this agreement.

     On August 31,  1997,  the Company  obtained a bank term loan for funding of
general operations in the amount of $1,000,000,  interest plus principal payable
in equal monthly  installments of $21,011, at the bank's corporate rate plus .75
percent.  At  December  31,  1997,  there was  $972,099  outstanding  under this
agreement.

     On November 27, 1997, the Company  obtained a bank term loan for payment of
expired  letters-of-credit in the amount of $184,087 interest plus principal due
on March 27, 1998, at the bank's  corporate  rate plus 1.5 percent.  At December
31, 1997, there was $141,958 outstanding under this agreement.

     At December 31, 1997,  these bank credit  instruments  had covenants  which
provided,  among other things, for: the maintenance of tangible net worth of the
corporate  affiliates  on a  consolidated  basis  at any  time to be  less  than
$6,800,000,  a minimum  current  ratio,  as  defined in the  agreement,  of 2:1;
aggregate debt to consolidated  stockholders' equity of not greater than 1:1 and
fixed  charges  coverage  not less than 1:3. The  agreements  also provide for a
security  interest in substantially  all of the Company's assets and has certain
covenants  which  restrict  the  Company's  payment of  dividends  and  prohibit
incurring any additional material indebtedness without the consent of the Bank.

     As of  December  31,  1997,  the  Company  was in arrears on its bank notes
payable and did not meet the financial ratios required. The bank has not granted
a waiver for any default by the  Company;  as a result,  the notes  payable have
been classified as current.


NOTE 6. LONG-TERM DEBT

     Long-term debt consisted of the following at December 31:

<TABLE>
<CAPTION>
                                                                1997          1996
                                                            ------------   ----------
<S>                                                         <C>            <C>
Bank Debt:
Outstanding letter-of-credit payable to NationsBank,
 N.A. interest is accrued at the corporate base rate
 plus .75% (9.25% at December 31, 1997), maturing
 August 30, 1998 ........................................   $ 634,127       796,838

Outstanding line-of-credit payable to NationsBank,
 N.A. interest is accrued at the corporate base rate
 plus .75% (9.25% at December 31, 1997), maturing
 August 30,1998 .........................................   1,750,000       966,102

Various notes payable to NationsBank, N.A. interest is
 accrued at the base corporate rate (8.5% at December 31,
 1997) plus 1% to 1.5%, maturing between March
 1998 and November 2003 .................................   2,045,138       952,074
</TABLE>


                                       23

<PAGE>



                   LUKENS MEDICAL CORPORATION AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (CONTINUED)


NOTE 6. LONG-TERM DEBT - (CONTINUED)

<TABLE>
<CAPTION>
                                                                  1997           1996
                                                              ------------   ------------
<S>                                                           <C>            <C>
Other debt:

Community  Development Block Grant note, due in monthly
  installments of $4,167, plus interest at a rate equal
  to the six-month Treasury Bill rate with a minimum of
  7% and a maximum  of 9% (7% at  December  31,  1997),
  maturing July 7, 1998, secured by equipment purchased
  with the proceeds
  from the note ...........................................   $  20,973          83,623

Note payable to Kerala  State  Industrial  Corporation,
  due in monthly  principal  installments  of  $15,000,
  plus  interest  due  quarterly  at an annual  rate of
  15.5%,  maturing  March  1999  secured  by a  standby
  letter of credit with
  NationsBank, N.A. .......................................     240,000              --

Notes  payable  to the sole  stockholder  of ProTec for
  acquisition of ProTec Containers, Inc., terms to be
  finalized (Note 15) .....................................     454,163              --

Other bank notes ..........................................      76,032              --
                                                              ---------          ------
 Total long-term debt .....................................   5,220,433       2,798,637
 Current maturities of long-term debt .....................   5,146,950       2,002,191
                                                              ---------       ---------
 Long-term debt, excluding current maturities .............   $  73,483         796,446
                                                              =========       =========
</TABLE>

     The NationsBank, N.A. debt is secured by accounts receivable, inventory and
fixed  assets of the  Company,  except  for those  purchased  with the  proceeds
obtained from the Community Development Block Grant note.

     Future scheduled debt payments at December 31 are:


      1998 .....................................    $5,146,950
      1999 .....................................        73,483
                                                    ----------
                                                    $5,220,433
                                                    ==========


NOTE 7. STOCKHOLDER PAYABLE

     During 1995, a major stockholder loaned the Company $400,000 which defeased
a $350,000 line of credit and provided $50,000 for general operations.  The note
is due April  1999,  including  all  interest,  accrued at 8 percent.  The major
stockholder   also  received   warrants  for  400,000  shares  of  common  stock
exercisable at 1.10 per share (Note 9).

     In September 1995, the Company  received  $250,000 from the stockholder for
repayment of various capital leases. The note is due October 1999, including all
interest, accrued at 10 percent.

     In March 1996, the Company  received  $400,000 from the stockholder for use
in the  Ulster  acquisition.  The  note is due  September  2000,  including  all
interest, accrued at 10 percent.

     In March,  May and June 1997,  the Company  received a total of  $1,000,000
from two major  stockholders  to fund  expansion of the recently  acquired India
Facility,  expansion of capacity for  synthetic  absorbable  sutures and for the
acquisition of ProTec Containers, Inc. The notes are due May 1998


                                       24

<PAGE>



                   LUKENS MEDICAL CORPORATION AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (CONTINUED)


NOTE 7. STOCKHOLDER PAYABLE - (CONTINUED)

bearing  interest at 10%.  Each major  stockholder  also  received  warrants for
50,000 shares of common stock. These warrants are exercisable at $6.25 per share
(Note 9). Subsequent to year end these notes were extended to January 1999.


NOTE 8. LEASES

     The Company has five capital lease obligations for production equipment. At
December 31, 1997 and 1996, the Company had $501,992 and $126,508, respectively,
recorded as production  equipment under capital leases with related  accumulated
depreciation of $42,120 and $4,206, respectively (see Note 3).

     The present value of future  minimum  capital lease payments as of December
31, 1997 follows:


            1998 ..................................    $190,530
            1999 ..................................     157,186
            2000 ..................................      92,152
            2001 ..................................      59,805
                                                       --------
              Total minimum lease payments ........     499,673

            Less amount representing interest
              (at rates ranging from 8% to 16%) ...      86,524
                                                       --------
            Present value of net minimum capital
              lease payments ......................     413,149
            Current maturities of obligations under
              capital leases ......................     146,893
                                                       --------
            Obligations under capital leases, ex-
              cluding current maturities ..........    $266,256
                                                       ========


     The Company  leases its  facilities  and certain  equipment  under terms of
various  operating  leases.  Future minimum rental  payments  required under the
operating leases as of December 31, 1997, are as follows:


Year ending December 31:
         1998 ............................................    $125,748
         1999 ............................................     128,953
         2000 ............................................     132,253
         2001 ............................................      86,925
                                                              --------
                 Total minimum payments required .........    $473,879
                                                              ========


     Total rental expense for operating leases during 1997 and 1996 was $147,807
and $111,787, respectively.


                                       25

<PAGE>



                   LUKENS MEDICAL CORPORATION AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (CONTINUED)


NOTE 9. STOCK WARRANTS AND OPTIONS

     Warrants for Common Stock

     The following warrants are outstanding at December 31, 1997:


         NUMBER OF SHARES      EXERCISE         DATE           DATE OF
       COVERED BY WARRANTS       PRICE      EXERCISABLE       EXPIRATION
      ---------------------   ----------   -------------   ---------------
               435,000            6.00     Presently       May 6, 1998
                65,000            4.50     Presently       June 11, 1999
               400,000            1.10     Presently       April 13, 2000
                30,000            6.25     Presently       March 1, 2002
                70,000            6.25     Presently       May 1, 2002
                50,000            3.00     Presently       March 5, 2004


     Each warrant allows the holder to purchase one share of common stock at the
warrant price.

     Options for Common Stock

     In 1992, the Company adopted a stock option plan (1992 Plan) which provides
for the issuance of  incentive  and  nonqualified  stock  options for  officers,
directors, key employees, and consultants of the Company. The 1992 Plan replaced
a similar plan in effect in prior years.  The 1992 Plan allows the issuance of a
maximum of 850,000 options for exercise into common stock at an option price not
less than the fair market value (trading  value) of the common stock on the date
such options are granted.  Options outstanding under the 1992 Plan total 623,508
and 243,223 at December 31, 1997 and 1996, respectively. As of December 31, 1997
and 1996,  an  additional  104,800 and  108,000,  respectively,  of options were
granted  under  various  other plans.  The weighted  average  remaining  life of
employee  options  is  six  years.  The  weighted  average   remaining  life  of
non-employee  options  is four  years.  The  Company  has  filed a  registration
statement for its stock option plans.

     A summary of the common  stock  options  for  employees  for the year ended
December 31, 1997 and 1996 follows:

<TABLE>
<CAPTION>
                                                       WEIGHTED
                                                    AVERAGE OPTIONS
                                          OPTIONS        PRICE      EXERCISABLE
                                       -------------   ---------   ------------
<S>                                    <C>             <C>         <C>
Balance, December 31, 1995 .........       316,305        2.310
 Granted ...........................        82,800        3.500
 Expired ...........................      (135,112)       2.395
 Exercised .........................       (20,570)       1.954
                                          --------
Balance, December 31, 1996 .........       243,423        2.710        82,425
                                                          -----        ------
 Granted ...........................       164,600        5.780
 Expired ...........................       (41,144)       4.539
 Exercised .........................       (43,371)       2.089
                                          --------        -----
Balance, December 31, 1997 .........       323,508        4.125       108,400
                                          ========        =====       =======
</TABLE>


                                       26

<PAGE>



                   LUKENS MEDICAL CORPORATION AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (CONTINUED)


NOTE 9. STOCK WARRANTS AND OPTIONS - (CONTINUED)

     A summary of the common stock options for  non-employees for the year ended
December 31, 1997 and 1996 follows:

<TABLE>
<CAPTION>
                                                      WEIGHTED
                                                   AVERAGE OPTIONS
                                          OPTIONS       PRICE      EXERCISABLE
                                       ------------   ---------   ------------
<S>                                    <C>            <C>         <C>
Balance, December 31, 1995 .........      167,837        2.650
 Granted ...........................      103,000        5.167
 Expired ...........................      (63,037)       2.375
 Exercised .........................     (100,000)       2.650
                                         --------
Balance, December 31, 1996 .........      107,800        5.220       33,000
                                                         =====      =======
 Granted ...........................      300,000        4.000
 Exercised .........................       (3,000)       3.500
                                         --------        -----
Balance, December 31, 1997 .........      404,800        4.331      171,600
                                         ========        =====      =======
</TABLE>

     The following table summarizes  information about stock options outstanding
at December 31, 1997:


<TABLE>
<CAPTION>
                               OPTIONS OUTSTANDING                                  OPTIONS EXERCISABLE
                          -----------------------------                      ----------------------------------
                                            WEIGHTED-
                                             AVERAGE
                              NUMBER        REMAINING         WEIGHTED-           NUMBER           WEIGHTED-
        RANGE OF           OUTSTANDING     CONTRACTUAL         AVERAGE        EXERCISABLE AT        AVERAGE
    EXERCISE PRICES        AT 12/31/97         LIFE        EXERCISE PRICE        12/31/97        EXERCISE PRICE
-----------------------   -------------   -------------   ----------------   ----------------   ---------------
<S>                       <C>             <C>             <C>                <C>                <C>
$1.06 to 1.88 .........       45,500      7.7 years           $  1.35              24,294           $  1.45
$3.00 to 4.00 .........      479,908      5.6                    3.78             202,639              3.75
$4.50 to 5.00 .........       63,100      3.7                    4.93              14,358              4.95
$6.25 to 6.87 .........      139,800      3.6                    6.46              38,709              6.52
                             -------                                              -------
$1.06 to 6.87 .........      728,308      5.2                    3.69             280,000              3.99
                             =======                                              =======
</TABLE>


     On February 5, 1998, the Company granted  additional options under the 1992
plan to purchase 19,200 shares at an exercise price of $4.00 per share.

     The Company  applies APB  Opinion  No. 25 and  related  Interpretations  in
accounting for its plans.  FASB  Statement No. 123  Accounting  for  Stock-Based
Compensation  (SFAS 123) was issued by the FASB and, if fully  adopted,  changes
the methods for  recognition  of cost or plans  similar to those of the Company.
Adoption  of SFAS  123 is  optional;  however,  proforma  disclosures  as if the
Company adopted the cost recognition  requirements  under SFAS 123 are presented
below:

<TABLE>
<CAPTION>
                                                             1997                           1996
                                              ----------------------------------   ----------------------
                                                     AS                                AS
                                                  REPORTED           PROFORMA       REPORTED     PROFORMA
                                              ----------------   ---------------   ----------   ---------
<S>                                           <C>                <C>               <C>          <C>
Net income (loss) .........................     $ (4,499,161)       (5,264,788)     463,481      267,225
Basic earnings (loss) per share ...........            (1.48)            (1.73)         .17          .10
Diluted earnings (loss) per share .........            (1.48)            (1.73)         .15          .09
</TABLE>

     The calculation model used to determine the stocked based compensation cost
included in the above  proforma was the straight line method with graded vesting
compensation  calculations.  The calculation uses the 5 year Treasury Bill rate,
an expected  life of three years and an 82 percent  volitity  rate. No dividends
were used in the calculation.


                                       27

<PAGE>



                   LUKENS MEDICAL CORPORATION AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (CONTINUED)


NOTE 9. STOCK WARRANTS AND OPTIONS - (CONTINUED)

     The  effects  of  applying  SFAS 123 in this  proforma  disclosure  are not
indicative  of future  amounts.  SFAS 123 does not apply to awards prior to 1996
and additional awards in future years are anticipated.


NOTE 10. INCOME TAXES

     At  December  31,  1997 and 1996,  the  Company  had  deferred  tax  assets
amounting to approximately $5,400,000 and $4,200,000, respectively. The deferred
tax  assets  consist  primarily  of  the  tax  benefit  of  net  operating  loss
carryforwards and temporary  differences in depreciation and are fully offset by
a valuation allowance of the same amount.

     The net change in the  valuation  allowance  for deferred tax assets was an
increase of approximately  $1,200,000 in 1997 and did not change  materially for
1996.  The net change for 1997 is primarily due to the recording of the increase
of net operating loss carryforwards.

     Recoveries  for  income  taxes  differs  from  the  amount  of  income  tax
recoveries  determined by applying the applicable U.S.  statutory Federal income
tax  rate to the  pretax  loss as a  result  of the  increase  in the  valuation
allowance to offset the increase in the deferred tax assets.

     There is no income tax payable at December 31,  1996,  because of the usage
of net operating loss carryforwards.

     The net  operating  loss and  credit  for  increasing  research  activities
carryforwards as of December 31, 1997, expire as follows:


<TABLE>
<CAPTION>
                                                                INCREASING RESEARCH
                          APPROXIMATE NET OPERATING             ACTIVITIES BOOK/TAX
                              LOSS CARRYFORWARD                       CREDITS
                 -------------------------------------------   --------------------
                  STATE LOSS     FEDERAL LOSS
                    AMOUNT          AMOUNT       TAX EFFECT         TAX EFFECT
                 ------------   -------------   ------------   --------------------
<S>              <C>            <C>             <C>            <C>
1999 .........   $2,537,000              --        122,000              3,800
2000 .........           --       1,930,000        656,000             37,200
2001 .........    3,000,000       1,835,000        789,000             37,500
2002 .........           --       1,132,000        385,000              1,400
2003 .........    1,480,000       2,086,000        780,000             25,100
2004 .........      315,000         390,000        148,000                 --
2005 .........      161,000         278,000        102,000                 --
2006 .........           --          50,000         17,000                 --
2007 .........           --          26,000          9,000                 --
2008 .........           --          88,000         30,000                 --
2009 .........           --       2,760,000        938,000                 --
2012 .........           --       3,000,000      1,020,000                 --
                 ----------       ---------      ---------             ------
                 $7,493,000      13,575,000      4,996,000            105,000
                 ==========      ==========      =========            =======
</TABLE>


     The capital loss  carryforwards  of approximately  $271,000,  tax effect of
$105,000, expire in 1998.

     The deduction of federal net  operating  loss  carryforwards  is limited to
approximately $3,962,000 as of December 31, 1997. This limitation is based on an
annual  limitation of $460,000 plus  available  carryover of $654,000 and losses
incurred subsequent to 1992 of $5,248,000.  In addition,  should the sale of the
Company discussed in Note 16 occur, there may be additional limitations.


                                       28

<PAGE>



                   LUKENS MEDICAL CORPORATION AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (CONTINUED )


NOTE 11. FAIR VALUE OF FINANCIAL INSTRUMENTS

     The  following   methods  and  assumptions  are  used  by  the  Company  in
determining its fair value disclosures for financial investments:

     Cash and cash  equivalents.  The  carrying  amount  reported in the balance
sheet approximates fair value.

     Long-term debt including current  maturities and stockholder  payable.  The
floating-rate  long-term debt approximates its fair value. The fair value of the
fixed-rate stockholder payable is estimated using discounted cash flow analysis,
based on the Company's current incremental  borrowing rates for similar types of
borrowing arrangements.

     The carrying amounts and fair values of the Company's financial instruments
are:

<TABLE>
<CAPTION>
                                                                   CARRYING          FAIR
                                                                    AMOUNT          VALUE
                                                                -------------   -------------
<S>                                                             <C>             <C>
       Cash and cash equivalents ............................    $   74,078      $   74,078
       Long-term debt, including current maturities .........    $5,220,433      $5,220,433
       Stockholder payable and accrued interest .............    $2,290,991      $2,198,846
</TABLE>


NOTE 12. GEOGRAPHIC SEGMENT REPORTING

     The Company sells its products  throughout the world.  The Company's export
sales from U.S.  operations for 1997 and 1996 totaled $1,651,451 and $2,295,066,
respectively which represent 21 percent and 28 percent of total sales in each of
those  years.  Accounts  receivable  related  to  these  sales is  $878,000  and
$1,033,000 at December 31, 1997 and 1996, respectively.

     Geographic  information  for the year ended December 31, 1997, is presented
in the following table.  Transfers between  geographic area are accounted for at
amounts that are generally  above cost and consistent with rules and regulations
of governing tax authorities.  Such transfers are eliminated in the consolidated
financial statements. Operating income by geographic segment does not include an
allocation  of general  corporate  expenses  which are included in United States
operations. Identifiable assets are those that can be directly associated with a
particular geographic area and include intangible assets.


                                       29

<PAGE>



                   LUKENS MEDICAL CORPORATION AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (CONTINUED)


NOTE 12. GEOGRAPHIC SEGMENT REPORTING - (CONTINUED)

<TABLE>

<S>                                     <C>
  Customer sales:
       Brazil .....................     $     87,330
       India ......................               --
       Mexico .....................               --
       USA ........................        8,531,533
       Eliminations ...............               --
                                        ------------
       Consolidated ...............     $  8,618,863
                                        ============
  Intercompany sales
       Brazil .....................     $         --
       India ......................            3,362
       Mexico .....................               --
       USA ........................          134,105
       Eliminations ...............         (137,467)
                                        ------------
       Consolidated ...............     $         --
                                        ============
  Loss before taxes:
       Brazil .....................     $   (128,324)
       India ......................         (188,335)
       Mexico .....................               --
       USA ........................       (4,172,444)
       Eliminations ...............          (10,058)
                                        ------------
       Consolidated ...............     $ (4,499,161)
                                        ============
  Assets:
       Brazil .....................     $    356,007
       India ......................        1,447,804
       Mexico .....................        2,381,085
       USA ........................        9,021,104
       Eliminations ...............         (153,106)
                                        ------------
       Consolidated ...............     $ 13,043,894
                                        ============
</TABLE>

     The  Company's   worldwide   business  is  subject  to  risks  of  currency
fluctuations,  governmental  actions and other governmental  proceedings abroad.
The Company does not regard  these risks as a deterrent to further  expansion of
its methods of  operations  abroad.  However,  the Company  closely  reviews its
methods of  operations,  particularly  in less developed  countries,  and adopts
strategies responsive to changing economic and political conditions.


NOTE 13. COMMITMENTS AND CONTINGENCIES

     Employment Agreement.  The Company has entered into an employment agreement
with its Chief  Executive  Officer which provides for a three-year term expiring
in January 1998, with automatic one-year extensions  thereafter.  This agreement
provides for a base salary of $135,000 per annum.  This agreement  allows for an
annual base salary  increase  at least equal to the  percentage  increase in the
Consumer Price Index (or closest substitute for such index then available).  For
future years,  the employee's base salary shall increase no less than 10 percent
if the  Company's  net income  increases  at least 10 percent as compared to the
preceding year. The Chief Executive Officer is entitled to an annual bonus of up
to 35  percent  of base  compensation  for such  year for  achieving  objectives
established  jointly by the employees and Board of Directors,  as defined in the
agreement.


                                       30

<PAGE>



                   LUKENS MEDICAL CORPORATION AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (CONTINUED)


NOTE 13. COMMITMENTS AND CONTINGENCIES - (CONTINUED)

     Litigation. The Company is involved in litigation in the ordinary course of
business.  Management  believes,  after consulting with legal counsel,  that the
ultimate outcome of this litigation will not result in a material adverse impact
on the Company's financial statements.

     The  Company  has been  notified by a  competitor  asserting  that it is in
violation of a certain patent which relates to the single-stick  lancet product.
The Company  believes it is  indemnified  under an agreement with a supplier and
its  agreement  with  Ulster  Scientific,  Inc.  for the  purchase of the Ulster
product  lines.  Management  intends  to  vigorously  contest  the  competitor's
assertion and cannot estimate the potential liability, if any, at this time.

     Consulting  Agreement.  Effective March 1, 1996, the Company entered into a
one year  consulting  agreement,  which can be extended  annually,  with a major
stockholder. Payments under the agreement are $4,167 per month.

     Profit   Sharing/Savings   Plan.   The  Company  has  a  voluntary   profit
sharing/savings plan (Plan) covering substantially all employees residing in the
United  States over age 21 and who have been employed at least six months by the
Company.  The Plan is qualified  under  section  401(k) of the Internal  Revenue
Code. The Plan provides for voluntary  employee  contributions and discretionary
Company profit sharing/savings plan contributions.  The Company matches employee
contributions at a rate of 50 percent of their  contributions up to 3 percent of
their base pay.  In  addition,  the Plan  provides  that the Company may pay for
certain  administrative  costs of the  Plan.  For 1997 and 1996,  there  were no
Company  profit  sharing  contributions.   Company  matching  contributions  and
administrative  expenses  for 1997  and  1996  were  approximately  $36,000  and
$24,500, respectively.


NOTE 14. PRODUCT LINE RESTRUCTURING AND INVENTORY REDUCTION

     During the fourth quarter of 1997,  the Company  implemented a new strategy
of focusing its marketing efforts for sutures mainly on domestic accounts.  This
new strategy lead to a review of the product lines  manufactured  by the Company
and inventories  held by the Company in certain cases for more than three years.
These inventories had been purchased or manufactured to service a clientele that
failed to grow, thereby putting the value of such inventories in question. After
attempting with limited  success,  to sell these  inventories at any price below
the costs necessary is some cases to finish the product,  the Company elected to
write off the items in question as of December 31, 1997.  The resultant  product
line restructuring charge was $2,855,012.

     Also in 1997,  the  Company  attempted  to  launch a new  product  into the
diagnostic  market.  This  effort  was  unsuccessful.  The costs of the  product
purchased for his effort amounting to $150,268 was written off.

     Certain  international  markets for sutures were  abandoned and the related
receivables  aggregating  to $327,000 were written off to operating  expenses as
part of the product line restructuring. 

     During  1997  and  1996,  the  Company  reduced  inventory  values  to  net
realizable  value  (replacement  cost)  which  was  lower  than  cost due to the
reduction in utility.  As a result,  inventory carrying amounts were reduced and
cost of sales increased by approximately $770,000 in 1997 and $300,000 in 1996.


NOTE 15. ACQUISITIONS AND JOINT VENTURES

     On March 4, 1996,  the Company  completed an  acquisition  of three product
lines  from  Ulster  Scientific,  Inc.  (USI),  a  New  York  corporation.   The
acquisition  was  accounted for under the purchase  method.  USI was a wholesale
distributor  of medical  supplies.  The Company paid $248,000  cash, and assumed
$320,000 in supplier  liabilities  for a total purchase  price of $568,000.  The
Company also agreed to terms on a consulting and royalty  contract with payments
of 2 percent or more of certain Ulster sales


                                       31

<PAGE>



                   LUKENS MEDICAL CORPORATION AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (CONTINUED)


NOTE 15. ACQUISITIONS AND JOINT VENTURES - (CONTINUED)

over eight years and with minimum payments of $90,000 per year for the next five
years. The Company assigned no value to this contract in recording the purchase.
In  addition,  the  Company  agreed to issue  warrants to the seller to purchase
200,000  shares of common stock at $3.00 per share  expiring in eight years.  No
value was assigned to these warrants in recording the purchase, 150,000 of which
are contingent upon future product sales. The Company  acquired,  in addition to
inventory and equipment,  patents,  trademarks, and other intangible assets. The
intangibles  purchased  totaled  $490,000  related to a non  compete  agreement,
patents, and trademarks. All intangibles are amortized over eight years.

     On May 12,  1997,  the Company  acquired 100 percent of the stock of ProTec
Containers, Inc. a Florida corporation.  The acquisition was accounted for under
the purchase method.  ProTec is a manufacturer of containers for the disposal of
used medical "sharps",  such as hypodermic needles. The Company paid $250,000 in
cash to the owner of the  ProTec for  manufacturing  molds,  and issued  200,000
shares of its common stock, valued at $835,980 and recorded liabilities totaling
approximately  $515,328 in exchange for all  outstanding  shares of ProTec.  All
intangibles are amortized over ten years.

     In connection with the ProTec Acquisition,  the Company agreed to guarantee
the  value of the  common  sock  issued to the  former  owner  pursuant  to such
acquisition  for a  period  of  six  months  from  the  effective  date  of  the
Registration  Statement  on Form S-3 which was filed by the  Company to register
the resale of such shares. As a result of the decline in the price to the Lukens
Common  Stock  during  such  period  (and  taking  into  account  certain  other
adjustments),  the  Company  owes  the  former  owner  of  ProTec  approximately
$300,000, which amount is payable by the issuance of a one-year promissory note.
The amount was recorded by reducing the value of the common stock and  recording
the liability as a one year note payable (see Note 6).

     As a result of the  acquisition  of ProTec,  the Company had the  following
non-cash activity:

<TABLE>

<S>                                                      <C>
            Assets acquired:
              Accounts receivable, net .........................    $  179,830
              Inventory ........................................        13,000
              Fixed assets .....................................        77,854
              Intangible assets ................................     1,164,091
              Other ............................................         9,051
                                                                    ----------
                                                                     1,443,826

            Liabilities assumed:
              Accounts payable and accrued liabilities .........       (86,807)
              Notes payable ....................................       (30,795)
                                                                    ----------
                                                                      (117,602)
                      Notes payable issued .....................      (515,328)
                      Value of common stock issued .............      (835,980)
                                                                    ----------
                      Cash acquired ............................    $  (25,084)
                                                                    ==========
</TABLE>


                                      32

<PAGE>



                   LUKENS MEDICAL CORPORATION AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (CONTINUED)


NOTE 15. ACQUISITIONS AND JOINT VENTURES - (CONTINUED)

     The proforma results of operations for the year ended December 31, 1997 and
1996,  as though the companies had been combined at the beginning of that period
is as follows:

<TABLE>
<CAPTION>
                                                      1997             1996
                                                ----------------   ------------
<S>                                             <C>                <C>
       Net sales ............................     $  9,035,443      9,289,455
                                                  ============      =========
       Net earnings (loss) ..................     $ (4,429,621)       648,923
                                                  ============      =========
       Weighted  average number of common and
        common equivalent shares outstanding:
        Basic ...............................     $  2,996,612      2,877,698
                                                  ============      =========
        Dilutive ............................     $  2,996,612      3,268,113
                                                  ============      =========
       Net  earnings  (loss)  per  common and
        common equivalent share:
        Basic ...............................     $      (1.48)           .23
                                                  ============      =========
        Dilutive ............................     $      (1.48)           .20
                                                  ============      =========
</TABLE>

     In 1996, the Company formed a joint venture (Somar Lukens) with Serral, S.A
de C.V., a Mexican  Corporation,  to produce  needles.  The joint  venture is an
equal  partnership,  with each partner  retaining  ownership of the equipment it
provides and  purchasing  the products  produced.  As of December 31, 1997,  the
venture was still in the process of setting up the equipment and configuring the
production process. As of December 31, 1997, the Company had not contributed any
capital to the joint venture.

     In May 1997,  the Company  entered  into  another  joint  venture  with two
individuals  in Brazil to  manufacture  and market  sutures  into  international
markets.  The Company  owns 51 percent of the venture.  The venture  assumed the
suture  operations of a pre-existing  Brazilian  company,  Medical Express Ltda.
Under the terms of the joint  venture,  the Company  agreed to purchase and sell
inventory  to the  joint  venture  at  fully-loaded  manufacturing  cost plus 25
percent and not to sell products  purchased from the joint venture in Brazil. In
addition, the Company may not transfer its interest in the joint venture without
allowing the other shareholders the option of purchasing it. The new venture did
not become  operational  until  October 1, 1997.  As of December 31,  1997,  the
Company had invested $125,000 in the joint venture.

     On January 9, 1997,  the Company  became the majority  shareholder in a new
joint  manufacturing  venture  based in Cochin,  India.  Under the joint venture
agreement,  the Company was required to  contribute  $800,000 in capital and may
not  transfer  its  interest in the joint  venture  without  allowing  the other
shareholders  the option of  purchasing  it.  The  venture,  which  manufactures
syringes,  hypodermic  needles,  and  components  for  other  Company  products,
acquired  the basic  equipment  required  for the  process,  as well as a 22,000
square-foot  facility and began  operations in November  1997.  The venture will
market the products  through Lukens and the two minority  shareholders,  who are
all current  distribution  partners of Lukens, in various parts of the world. As
of December 31, 1997,  the Company owned 90 percent of the joint venture and had
invested $940,000.


NOTE 16. SUBSEQUENT EVENT

     On February 20, 1998,  the Company  announced that it was  negotiating  the
sale of the  Company to an unnamed  third  party.  The  proposal  most  recently
received  by the  Company  contemplates  a merger  pursuant  to  which  existing
shareholders of Lukens would receive approximately $4.00 in cash for each


                                      33

<PAGE>



                   LUKENS MEDICAL CORPORATION AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (CONTINUED)


NOTE 16. SUBSEQUENT EVENT - (CONTINUED)

share of Lukens Common Stock. No definitive terms have, as yet, been agreed upon
and the proposal is, and any other matters are subject to further review by both
boards,  the  completion  of due  diligence  reviews  and  the  negotiation  and
execution of definitive  agreements.  No assurance can be given that the current
negotiations  will  result in any  transaction  or as to the  ultimate  terms or
timing of any such transaction.


NOTE 17. LIQUIDITY

     The Company  produced a net loss in 1997.  At December  31,  1997,  current
liabilities  exceed  current  assets,  the  Company  is in  arrears  on its note
payments  to the bank and has  violated  its  debt  covenants.  The bank has not
granted a waiver on any  default by the  Company.  However,  the bank has stated
that as long as the Company  adheres to the payment  plan  submitted,  no action
will be taken.  Total  long-term  debt to the bank and a major  stockholder  has
increased over 1996 levels. Some of these borrowings have been used to acquire a
subsidiary  and to fund the start up of joint  ventures  causing an  increase in
intangible and other assets.  The Company's  capacity to meet its obligations is
dependent upon several factors,  such as returning to profitability,  developing
adequate liquidity,  adhering to debt covenants and required payments,  possible
debt restructuring or sale (see Note 16).

     In 1997, the Company  implemented a major  strategic shift in its marketing
approach  regarding its largest  product line,  sutures.  This shift,  away from
lower  priced  markets  where the Company had been  successful  in securing  new
business to a focus on certain domestic accounts,  was a result of the Company's
desire to improve  margins,  reduce inventory  requirements,  and provide a more
consistent  order  flow.  While the  Company  intends to utilize  its  Brazilian
facility  to  continue  to  service  selected  international   customers,   many
unprofitable  markets will be  abandoned.  This  strategy  led to a  significant
write-off of inventory at the end of 1997.

     In 1997,  the Company  also  expanded  its product  lines  further with the
acquisition  of ProTec  Containers,  Inc.,  and brought its  facility in Cochin,
India on-line for the  manufacture of certain key raw  materials.  These actions
provide an  opportunity  to increase  revenues  and overall  margins.  Cash flow
projections by management  anticipate  more abundant cash becoming  available in
May 1998.

     While the Company has been  successful in increasing  its orders in the new
areas of focus, and has been successful in producing  certain raw materials at a
lower cost,  there can be no assurance  that the Company  efforts will result in
profitability  from  operations  consistently in the future.  Additionally,  the
Company's  write-off  of  inventory  makes the  expansion  of its  credit  lines
unlikely in the near term,  and the financing of continued  internal  growth and
acquisitions difficult.


                                       34


<PAGE>



                                   SIGNATURES

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

                                               LUKENS MEDICAL CORPORATION

                                               By: /s/ Robert S. Huffstodt
                                                  ------------------------------
                                                  Robert S. Huffstodt, President
                                                  Date:  August 28, 1998

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

           SIGNATURE AND TITLE                                        DATE

/s/ Robert S. Huffstodt                                          August 28, 1998
-----------------------------------------------------
Robert S. Huffstodt
President and Chief Executive Officer
(Principal Executive Officer)


/s/ Michael Sobieski                                             August 28, 1998
-----------------------------------------------------
Michael Sobieski
Chief Financial Officer (Principal Financial Officer
and Principal Accounting Officer)


/s/ John H. Robinson                                             August 28, 1998
-----------------------------------------------------
John H. Robinson
Director


/s/ Robert L. Priddy                                             August 28, 1998
-----------------------------------------------------
Robert L. Priddy
Chairman of the Board of Directors


/s/ John Holmes                                                  August 28, 1998
-----------------------------------------------------
John Holmes
Director