UNITED STATES SECURITIES AND EXCHANGE COMMISSION

                             Washington, D.C. 20549

                                   FORM 10-KSB

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

                   For the fiscal year ended 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 are 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

     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. [ ]


<PAGE>



     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.

DOCUMENTS INCORPORATED BY REFERENCE

Part III - Items 9, 10, 11 and 12          Included  in  the   Company's   Proxy
                                           Statement   to  be  filed   with  the
                                           Securities  and  Exchange  Commission
                                           prior to April 30, 1998.

Part III - Certain  exhibits  listed
in response to Item 13(a)                  Included in prior  filings made under
                                           the   Securities   Act  of  1933,  as
                                           amended,  and the Securities Exchange
                                           Act of 1934, as amended.

Transitional Small Business Disclosure Format:  Yes           No   X
                                                     -----       -----



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                                     PART 1

ITEM 1.  DESCRIPTION OF BUSINESS

     Lukens Medical  Corporation (the "Company") was incorporated under the laws
of the State of New Jersey on  December  27,  1982 and  operated  under the name
Gyneco, Inc. until 1987 when it was renamed Lukens Corporation -- New Jersey. On
April 27, 1988, the Company  reorganized in the State of Delaware by merger with
and into its Delaware wholly-owned subsidiary,  Lukens Medical Corporation.  All
references  to the  Company  herein  include  the  operations  of the  Company's
wholly-owned  subsidiaries.  The Company's executive offices are located at 3820
Academy Parkway North NE, Albuquerque, New Mexico 87109 and its telephone number
is (505) 342-9638.

     The  Company  has  been  engaged  since  1906 in the  design,  development,
manufacturing  and  marketing of wound  closure  products for use in the medical
industry,  including,  without  limitation,  suture products and bone wax suture
products include sutures (a product  consisting of suture material attached to a
surgical  needle) and  ligatures  (suture  material  not  attached to a surgical
needle).  Suture  materials  are  made  from  silk,  catgut  and  other  similar
materials.  Bone wax is a product used to temporarily  seal severed bones during
surgery.  The Company  markets its  products for general  surgery  applications,
including for use in oral and  veterinary  surgery,  and for  specialty  surgery
applications,  including  for  use in  plastic,  ophthalmic  and  cardiovascular
surgery.

     In March 1996,  the Company,  through a wholly-owned  subsidiary,  acquired
assets constituting the following three product lines of Ulster Scientific, Inc.
("Ulster")  of New Paltz,  New York (the  "Ulster  Acquisition"):  (i)  lancets,
including  needles and accessories,  (ii) dispettes and (iii) infection  control
kits  (collectively  referred to herein as the "Ulster Product Lines").  Lancets
are finger-prick devices used to draw small amounts of blood,  primarily to test
glucose levels.  Dispettes are disposable  diagnostic  devices used primarily in
physicians' offices to test blood.  Infection control kits contain various items
used in medical and  scientific  facilities  to clean up blood and other  bodily
fluid spills.  Approximately  30% of the Company's  revenues for the fiscal year
ended December 31, 1997 are  attributable  to the sale of such  products.  For a
further description of these Ulster Product Lines, see "Ulster Product Lines."

     In January 1997, the Company  entered into a new joint venture with certain
of its international  distribution  partners to manufacture  hypodermic needles,
and  other  medical  products  for  distribution  worldwide  (the  "India  Joint
Venture").  As part of the  transaction,  the joint  venture  acquired a modern,
fully-equipped  22,000  square foot plant in the Cochin  Export Zone in Southern
India. See "India Joint Venture."

     In May 1997, the Company  acquired a new  subsidiary,  Pro-Tec  Containers,
Inc.  ("Pro-Tec")  of Sanford,  Florida  (the  "Pro-Tec  Acquisition").  Pro-Tec
manufactures and markets a line of sharps disposal  containers which are used by
health care  providers  for safe disposal of used  "sharps,"  such as hypodermic
needles,  scalpels,  blades,  lancets,  and suture needles (the "Pro-Tec Product
Lines").  Approximately  8% of the Company's  revenues for the fiscal year ended
December  31, 1997 are  derived  from the sale of such  products.  For a further
description of these Pro-Tec Product Lines, see "Pro-Tec Product Lines."

     Also  in  May  1997,   the   Company   acquired  a  51%   interest  in  its
Brazilian-based  distributor,  Techsynt, which then changed its name to Techsynt
Lukens Ltd.  ("Techsynt").  Techsynt is engaged primarily in the manufacture and
marketing of sutures for the Brazilian  market,  although it is anticipated that
Techsynt will eventually export sutures to selected other markets worldwide, and
will market  certain of the Company's  other  products where the local market is
suitable.  Techsynt  did not  commence  operations  until  October 1, 1997,  and
therefore  did not  contribute  significant  revenues or earnings for the fiscal
year ended December 31, 1997.


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PRODUCTS

     SUTURE PRODUCTS.  During 1997, the surgical suture industry  represented in
excess of $2.4  billion of the overall  disposable  surgical  product  industry,
approximately 60% of which represented the international market and 40% of which
represented the domestic  market.  Surgical suture products are comprised of two
principal categories:  (i) general surgical suture products,  and (ii) specialty
surgical  suture  products.  Differentiating  the  categories  are the  physical
properties of the surgical  needle such as size,  sharpness and  ductility,  the
type of  suture  material  used,  as well as  packaging  and cost.  The  Company
designs, develops, manufactures and markets suture products for both general and
specialty surgery uses.

     The  Company's   general   surgical   suture   products  are  comprised  of
approximately 250 standard products and approximately  3,000 additional products
which  the  Company  is  capable  of  providing  to meet the  specifications  of
particular  surgeons  and  practitioners.  General  surgical  sutures  primarily
include  standard  needles.  The Company  designs,  develops,  manufactures  and
markets  suture  products  that cover a broad  spectrum of surgical  categories,
including,  without limitation,  general, ob-gyn, urology,  orthopedic, oral and
veterinary surgery, all of which generally utilize the same types of needles and
suture  materials.  The  Company  markets  and sells  its full  line of  general
surgical suture products worldwide. See "Sales, Marketing and Customers."

     The Company's  specialty  surgical suture products consist of an innovative
line of  laser-drilled  needles  and  suture  materials  for use in the areas of
plastic, ophthalmic, cardiovascular and oral surgery. One major advantage to the
specialty  surgeon of utilizing a drilled  needle stems from the manner in which
the suture  material  is  attached  to such a needle.  When  suture  material is
attached to many  standard  needles,  the back end of the needle is sliced open,
the suture is placed in the  opened  portion of the needle and the metal is then
crimped together  (referred to as "channel swaging") to hold the suture material
in the needle.  Over the years,  specialty  surgeons have recognized that one of
the major  problems  with such  sutures  is that the  crimped  end of the needle
becomes  larger in diameter than the rest of the needle,  creating a larger hole
in the  tissue  than is  required.  Laser-drilled  needles  offer a  significant
improvement to the standard method.  Because the Company's specialty needles are
laser-drilled,  as opposed to sliced  open,  there is no bulge at the end of the
needle when the suture  material is inserted and crimped into place.  During the
laser  drilling  process,  the  excess  metal is  removed  from the  needle.  In
addition,  because the distortion of the remaining metal is minimal, as compared
to the standard process,  the end of the laser-drilled needle is not as prone to
breakage or snapping. See "Production and Quality Assurance."

     Laser-drilled  needles  are  manufactured  for the  Company by  independent
suppliers  in  accordance  with the  Company's  specifications  using 300 Series
stainless  steel, an alloy which is more corrosion  resistant than the materials
from which standard  needles are generally made. This special alloy of stainless
steel also enables the Company's needles to remain sharper than standard needles
after repeated passes through tissue. In addition,  as a result of using the 300
Series  stainless  steel,  the  Company's  laser-drilled  needles  are also less
brittle and more  ductile  than  standard  needles.  The  Company  relies on the
confidential  treatment of its proprietary  needle design  specifications by its
suppliers.  See "Suppliers,"  "Competition" and "Patent and Proprietary Rights."
The  Company  markets  and sells its full line of  specialty  surgical  products
worldwide. See "Sales, Marketing and Customers."

     BONE WAX.  The Company  believes it is one of only three  companies  in the
United  States  that  sells,   and  has  the  approval  of  the  Food  and  Drug
Administration (the "FDA") to manufacture and market, bone wax. Bone wax is used
to temporarily seal severed bones during surgery.  The Company  manufactures its
bone wax primarily from bees wax.  Although the total  worldwide bone wax market
is  relatively  small  (estimated by the Company to be  approximately  $7 to $10
million  annually),  gross margins in this area are relatively high. The Company
sells bone wax worldwide.

ULSTER PRODUCT LINES

     The Company's Ulster Product Lines are as follows:

     LANCETS,  NEEDLES AND  ACCESSORIES.  The  Company  markets a broad range of
blood lancet-type  devices,  including  general purpose style,  safety style and
automatic  single-use  style. The target markets for lancets


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include hospitals,  nursing homes, doctors' offices,  industrial  establishments
and the  home-use  market.  Blood  lancing-type  devices  are used  for  several
purposes,  including routine lab testing,  diabetic monitoring,  and cholesterol
monitoring.

     DISPETTES.   Dispettes   are   disposable   diagnostic   devices  used  for
sedimentation rate testing of blood and are a more affordable alternative to the
expensive  automated blood testing labs. Because dispettes are convenient,  easy
to use, and  relatively  inexpensive  to purchase,  the primary market for these
products  are small  medical  clinics and  individual  physician  practices.  As
sophisticated  blood testing technology in the United States continues to become
more  prevalent,  the use of dispettes is expected to  gradually  diminish.  The
Company  intends to expand the marketing of this product  internationally  where
access to sophisticated blood analysis technology is more limited.

     INFECTION  CONTROL KITS.  Infection control kits contain various items used
in medical and  scientific  facilities  to clean up blood and other bodily fluid
spills.  The infection  control clean-up kits are marketing by the Company under
the "BASKIT" name. Under the Occupational  Safety and Health Act (OSHA),  safety
spill clean up kits, such as the one marketed by the Company, are required to be
maintained  in  any  facility  working  with  blood  and  other  bodily  fluids,
including,  without  limitation,  hospitals,  laboratories,  doctors offices and
ambulances.

     With the  exception  of certain raw  materials  produced  in the  Company's
Indian facility (see India Joint Venture),  the Company does not manufacture any
of the  products  in the Ulster  Product  Lines.  The  Company  purchases  these
products under agreements with certain  suppliers and,  following  sterilization
and  packaging,  resells the products to other medical supply  distributors  and
end-users. See "Suppliers."

PRO-TEC PRODUCT LINES

     In May 1997,  in  connection  with the  Pro-Tec  Acquisition,  the  Company
acquired  and began  selling  the  products in the Pro-Tec  Product  Lines.  The
Pro-Tec Product Lines consists of sharps disposal  containers  which are used by
health care  providers  for safe disposal of used  "sharps,"  such as hypodermic
needles,  scalpels,  blades,  lancets,  and suture  needles.  These products are
available  in  a  variety  of  sizes  and   configurations   to  suit  both  the
hospital-based and office-based  healthcare market segments. All of the products
in  the  Pro-Tec  Product  Lines  are   manufactured   and  shipped  by  outside
contractors.

NEW PRODUCTS

     In September  1997, the Company began marketing a device known as an aortic
punch, a product which is used by  cardiovascular  surgeons in performing bypass
procedures.  The device has several  unique  patented  features which enable the
surgeon to more  easily  perforate  the aorta  prior to  connecting  a new blood
vessel.  The Company  estimates  that the  worldwide  market for this product is
approximately  $7 million.  The Company has begun domestic  distribution of this
product  through  manufacturers'  representatives.  Due  to  the  product  being
launched  late in the year and the  relatively  long sales  cycle,  sales of the
aortic punch contributed less than 1% to the Company's revenues during 1997.

     Also in the  fourth  quarter,  the  Company  introduced  a  product  called
"Sed-Control,"  which can be used in conjunction with the Company's dispettes to
verify the accuracy of the test.  This product has met with very limited success
due, in the Company's  opinion,  to its relatively short shelf life, the lack of
regulatory  requirements to utilize such a control,  and heavy price competition
from other suppliers of such controls. The Company does not anticipate that this
product will generate substantial revenues in the future.

INDIA JOINT VENTURE

     In  January  1997,  the  Company  entered  into  a  new  joint  venture  to
manufacture  hypodermic  needles,   syringes  and  other  medical  products  for
distribution worldwide. As part of the transaction, the joint venture acquired a
modern,  fully-equipped  22,000  square foot plant in the Cochin  Export Zone in
Southern India.  The new subsidiary,  Lukens Medical Products Private Ltd., is a
joint venture between the Company and certain of its international  distribution
partners.  The Company is the majority shareholder,  and manages the operations,
with all partners


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contributing to the marketing of the products. Production began in November 1997
of lancet wires, also called lancet needles,  which prior to being  manufactured
in-house, were the most costly component in the lancets marketed by the Company.
It  is  anticipated  that  certain  other  disposables,  such  as  syringes  and
hypodermic needles will be manufactured in the facility by the end of 1998.

BRAZIL JOINT VENTURE

     In  May  1997,  the  Company  acquired  a 51%  interest  in  its  exclusive
distribution  in Sao Paulo,  Brazil.  The Company  plans to expand the venture's
existing suture manufacturing  capacity,  and begin producing its new, synthetic
absorbable  sutures in Brazil.  Eventually  the Brazil Joint Venture will export
sutures to many of the Company's international markets.  Currently, Brazil has a
staff of 11 engaged primarily in suture production,  and markets via tenders and
a network of several independent sales  representatives.  Techsynt operates in a
5,000 square foot leased facility in Sao Paulo, Brazil.

SALES, MARKETING AND CUSTOMERS

     PRODUCT SALES.  The Company's  principal  means of selling its products has
been through independent distributors that have entered into either exclusive or
non-exclusive arrangements with the Company. Such arrangements have involved the
grant by the Company of  exclusive  or  semi-exclusive  rights to sell  specific
products or product lines in particular geographic territories.  Such agreements
generally  contain  specified  minimum  sales  levels  required in order for the
distributor  to  maintain  exclusivity,  as well  as  provisions  requiring  the
distributors to participate in trade shows and  conventions in their  respective
territories in order to promote the Company's products.

     MARKETING  STRATEGY.  The Company's  domestic  strategy with respect to its
suture products is to focus its marketing  energies on its general and specialty
surgical products which are used by doctors and practitioners  primarily outside
of a hospital (i.e., in doctors' offices, dentists' offices,  veterinary clinics
and outpatient plastic and ophthalmic  surgical  centers),  and where purchasing
decisions are made outside of the large hospital and institutional  environment.
To this end, the Company  aggressively  markets in the United  States its dental
and  veterinary  general  surgical  suture  products  and its plastic  specialty
surgical suture products. The Company also continues to market and sell its line
of general and specialty surgical products to selected markets  internationally,
where it is better able to compete solely as a quality, low-cost supplier to the
foreign hospital and institutional  market. As a result of the recent receipt by
the Company of approval from the FDA to begin marketing its synthetic absorbable
suture  product for human use, the Company  believes that its ability to compete
in parts of the worldwide suture market will be enhanced.

     In the third  quarter of 1997,  the  Company  refocused  its  international
marketing  strategy to limit its product offerings to higher margin products and
regions.  As a result,  the Company  reduced its standard suture product line to
include only  approximately 250 catalog codes (down from  approximately 750) and
intends to  de-emphasize  and even abandon  certain  international  markets.  In
connection  with this new  strategy,  in December  1997,  the Company  wrote-off
approximately  $3,030,000  worth of inventory  consisting of these  discontinued
catalog codes. See "Item 6. Management's Discussion and Analysis of Operations."

     While the Ulster Product Lines and the Pro-Tec  Product Lines are currently
marketed entirely in the United States, the Company intends to launch certain of
these products internationally in 1998 and 1999.

     The Company  currently has a domestic  staff of five  employees  engaged in
direct sales, telemarketing and direct mail promotion of general surgical suture
products and bone wax products worldwide, as well as providing marketing support
to the Company's  specialty and general suture  distributors.  In addition,  the
Company  has a four  person  sales  staff  and a team  of  eight  manufacturer's
representatives responsible for selling all the Company's products in the United
States.

     CUSTOMERS.  The primary customers for the Company's suture products are its
distributors,  who then resell the products to end users,  generally under their
own brand  names.  The Company  sells its products  directly to certain  foreign
governments and is also a party to exclusive  agreements with  distributors in a
number of foreign  countries,  including  South  Africa,  Honduras and Italy and
non-exclusive  agreements  in Costa  Rica and Saudi  Arabia


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for the  sale of its  general  surgery  products  (as  well  as  certain  of the
Company's specialty  products)  primarily under the "Lukens' name.  Customers of
the Ulster Product Lines primarily include large medical and laboratory  product
distributors, as well as mail order diabetic supply houses.

RESEARCH AND DEVELOPMENT ACTIVITIES

     During 1996, the Company's research and development efforts were focused on
finalizing its FDA submission for a braided synthetic absorbable suture product.
The Company  received  clearance  from the FDA in February of 1997 to market its
synthetic  absorbable  suture  product for human use.  The Company  released its
braided  synthetic  absorbable  suture  product to the human  market in April of
1997.  See  "Government  Regulations."  The  current  Research  and  Development
activities  of the  Company  are focused on the  development  of a  monofilament
synthetic  absorbable  suture,  the new products to be manufactured by the India
Joint  Venture,  and ongoing  improvements  to the Company's  product line.  The
Company does not expect to expend  significant funds on research and development
activities in 1998.

PRODUCTION AND QUALITY ASSURANCE

     The  Company's  manufacturing  operations  for the  production  of surgical
sutures  generally  consist of joining surgical needles with suture material and
packaging the finished suture  product.  The Company's  general  surgical suture
production  operations are primarily conducted in Juarez,  Mexico pursuant to an
agreement whereby a maquiladora  conducts  manufacturing and assembly operations
for the Company's  benefit,  with the Company  supplying all parts,  components,
materials,  machinery and equipment and bearing all labor costs. In addition,  a
number of the  Company's  suture  products are also  produced at its facility in
Albuquerque,   New  Mexico.  Suture  production  and  packaging  operations  are
extremely exacting and labor intensive processes. Because of the extensive range
of  possible  needle/suture  material  combinations  and  the  large  number  of
short-run,  special orders which must be filled, it is not economically feasible
to automate the predominant portion of the Company's production activities. Most
must instead be done by hand by highly-trained employees.

     Materials (i.e.,  needles and "suture materials") which comprise the suture
products  are  purchased  from a number of  vendors.  Upon their  receipt by the
Company,  all  materials  are subject to  inspection  by the  Company's  quality
assurance staff. Tests conduced by the Company's quality assurance staff include
visual  inspection  as well as physical  tests.  Conformity  with the  Company's
specifications  is of prime importance and one of the staff's goals is to detect
non-conforming  components  prior to  assembly  and  packaging.  Upon  approval,
needles and suture  materials are released to storage  areas for  pre-processing
preparation and subsequent assembly.

     Although many suture products  consist solely of the "thread" (e.g.,  silk,
catgut or other  materials),  most  consist  of suture  material  which has been
attached to one or two needles.  Braided suture materials  (e.g.,  silk) used in
the Company's products undergo "tipping," a process which creates a hardened tip
on the end of the suture  material to facilitate  the attachment of the material
to the needles. The attaching process, known as "swaging", is a critical step in
the Company's  production  process,  with the minimum strength of the attachment
prescribed by the U.S. Pharmacopeia.  The attaching process is largely performed
by individuals operating small, pedal activated machines which form the metal of
the needle around the thread,  crimping the two  together.  After  swaging,  the
completed sutures are wound by hand onto small cards and then packaged according
to suture type and intended use. Packaged and boxed sutures are either delivered
to subcontractors for sterilization, or, in the case of synthetic absorbable and
certain other sutures sterilized in-house. After sterilization, the products are
returned to the production department for additional packaging and distribution.
The Company's  quality  assurance  department is responsible  for in-process and
post-production analyses of all of the Company's products.  Quality assurance is
supported  through  the use of both manual and  computerized  systems to provide
traceability of product batches and track each stage of the production  process.
The Company's  production and quality assurance  operations must comply with the
FDA's current GMP regulations  and are subject to periodic FDA  inspection.  See
"Government Regulations."

     The  production of bone wax entails the  preparation  of the  beeswax-based
product at the Company's New Mexico  facility,  where it is packaged and sent to
subcontractors for sterilization by gamma radiation.  The products in the Ulster
Products  Lines are largely  purchased in finished  condition and do not involve
extensive


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processing  by the  Company.  The  products  in the  Pro-Tec  Product  Lines are
produced,  and  shipped  directly  to  the  Company's  customers,   by  contract
manufacturers  utilizing the Company's molds. The hypodermic  needles,  syringes
and related  medical  products to be produced by the India Joint Venture will be
manufactured and molded at the facility acquired by the joint venture.

SUPPLIERS

     The Company's specialty needles are currently manufactured to the Company's
specifications  by two  independent  overseas  vendors.  The  Company's  general
surgery needles and its suture materials are supplied by a number of independent
manufacturers.  The  Company  believes  that  there are a number of  alternative
sources for all of such  products  and product  components.  Further,  while the
Company relies upon  confidentiality  agreements with its suppliers of specialty
needles to protect its particular  proprietary needle design and specifications,
specialty  needles  are  not  proprietary  to  the  Company  and  the  Company's
arrangements  with its  suppliers of specialty  needles are not  exclusive.  See
"Competition."

     While the Company  manufactures  its newly  approved  synthetic  absorbable
suture products,  it purchases the synthetic  absorbable  suture threads used in
these products from third-party  suppliers.  While these materials are currently
available upon  commercially  reasonable  terms, any disruption of the supply of
these  materials could have an adverse impact upon the ability of the Company to
produce its synthetic absorbable suture line.

     In connection with the Ulster Acquisition, the Company entered into two new
exclusive  supply  arrangements  with the principal  suppliers of certain of the
products in the Ulster  Product Lines.  The supply  agreement with Guest Elchrom
Scientific AG, relating to the dispette products, entitles the Company to act as
such supplier's exclusive distributor of such products in the United States. The
Company's  supply agreement with Korea Techma,  Inc.,  relating to the automatic
single-stick  lancet sold under the "Gentle-let 1" tradename,  also entitles the
Company to act as such  supplier's  exclusive  distributor in the United States.
The other products in the Ulster Product Lines are purchased by the Company on a
purchase-order  basis  from  various  other  suppliers.  In  general,  the molds
utilized  by such  suppliers  in the  manufacture  of the other  products in the
Ulster  Product  lines are not  proprietary  to the  Company  and the  Company's
arrangements with such suppliers are not exclusive.

     The products in the Pro-Tec Product Line are all molded by outside contract
manufacturers,  who also ship the products  directly to the Company's  customers
which saves the Company shipping and warehousing expense. The Company uses three
primary vendors for molding, and holds title to all of its molds.

COMPETITION

     For the past 40 years,  the global  suture  market has been  dominated by a
small number of companies,  primarily Ethicon, Inc. ("Ethicon"),  a wholly-owned
subsidiary of Johnson & Johnson,  Inc., and Sherwood Davis & Geck, a division of
American Cyanamid Company.  In addition,  there are several small national firms
and regional  suppliers of suture  products  with which the Company  competes in
both the general surgery and specialty  surgery markets.  In 1992, United States
Surgical Corporation ("USSC") entered the market with a full line of general and
specialty surgery products.  USSC is currently the world's leading  manufacturer
and marketer of surgical  staplers and endoscopic  instruments  and supplies and
they are beginning to gain market share.

     The Company believes that the extensive experience of its management group,
its  access  to  an  abundant  and  skilled  labor  pool,   and  its  economical
manufacturing  operations  have  enabled  the  Company to  position  itself as a
quality,  low-cost  supplier of general and specialty surgery suture products to
the foreign hospital and institutional  market,  and thus to compete in the sale
of  such  products  on  the  basis  of  price.  The  Company  currently  markets
approximately 250 products for use in general surgical  procedures,  and has the
capability and know-how to manufacture  approximately  3,000 additional products
in order to meet the specifications of particular  customers.  With the addition
of the Company's new synthetic  absorbable  suture line,  the Company's  product
line  offerings are  comparable  to those  offered by Ethicon,  Davis & Geck and
USSC.  The Company  believes  that its ability to remain a low-cost  producer of
general and specialty surgical suture products in certain  international markets
and its focus on


                                       8

<PAGE>



the dental and veterinary  surgical suture markets, as well as certain specialty
niches  in the  United  States  will  be  important  to its  ability  to  remain
competitive with the larger and better capitalized competitors in these markets.

     With respect to the Ulster Product Lines,  in the lancet and needle market,
the Company has essentially  four major  competitors:  Sherwood Medical Company,
Owen Mumford, Ltd., Gainor Medical U.S.A., Inc. and Can-Am Care Corporation.  LP
Italiana SpA and Polymedco are considered the Company's only  competitors in the
dispette  market.  The Company  believes the following four criteria,  listed in
order  of  priority,  influence  market  share:  price,  availability,  customer
relationships  and a well rounded  product line. The Company hopes to capitalize
on Ulster's  twenty years of  experience  in the market and its existing  client
base, augmented by the Company's international presence, to compete effectively.
However, the Company's  competitors in this area are larger,  better capitalized
and maintain  larger sales forces than the Company and are therefore  formidable
competitors.

     With  respect to the Pro-Tec  Product  Lines,  the Company has  essentially
three major  competitors:  Sage  Products,  Inc.,  Graphic  Controls,  Inc.  and
Becton-Dickinson,  Inc.  The Company  believes  that this  market is  influenced
primarily  by price and  complacency.  The fact that  these  products  are often
physically  attached to walls and  fixtures,  there is sometimes  resistence  to
switching  among  competing  brands.  The Company  believes  that its ability to
provide a low-priced product, combined with a nearly identical customer base for
its Ulster Product Lines, will enable it to effectively  compete in this market.
However, the Company's  competitors in this area are larger,  better capitalized
and maintain  larger sales forces than the Company and are therefore  formidable
competitors.

GOVERNMENT REGULATIONS

     The Company's  products and operations are subject to regulation by the FDA
in the United States and by comparable  regulatory  agencies in certain  foreign
countries.  Under the Federal Food, Drug and Cosmetic Act (the "FD&C Act"),  the
FDA  has  promulgated   regulations  and  established  guidelines  and  policies
governing  "medical  devices",  including  certain of the  products  sold by the
Company.  Under these regulations,  the Company's products may not be shipped in
interstate  commerce (including export) without prior authorization from the FDA
(except any devices that were in commercial  distribution  prior to May 28, 1976
that  were not then  regulated  as drugs and that have not  changed  since  that
time).  Such  authorization  is based on a review of the  products'  safety  and
effectiveness  for their intended use.  Medical devices may be authorized by the
FDA for marketing  either  pursuant to a pre-market  notification  under Section
510(k) of the FD&C Act ("510(k)") or a pre-market approval  application ("PMA").
A 510(k)  consists  of a  submission,  90 days  prior to planned  marketing,  of
information sufficient to establish that the device is substantially  equivalent
to a device marketed prior to May 28, 1976 or a device substantially  equivalent
to such a device.  Such  information  normally  consists of data  comparing  the
respective devices, and may include data from clinical studies. A finding by the
FDA of substantial equivalence may take significantly longer than 90 days. A PMA
consists  of  information  sufficient  to  establish  that a device  is safe and
effective for its intended use,  including data from clinical and other studies.
FDA  approval  of a PMA,  may take as long as several  years.  Whether a product
requires a 510(k) or a PMA, depends on its classification  under the law and FDA
regulations.  Most of the Company's  products require 510(k)s,  although certain
products  which the Company may  develop in the future  might  require a PMA. In
addition,  the  testing  of  medical  devices  through  clinical  investigations
generally requires FDA authorization.

     The  Company  believes  that it  currently  has in place all the  requisite
authorizations  to market its current line of products,  including nine PMAs and
sixteen 510(k)s.  The Company's  current line of suture products includes all of
the major suture  materials that are marketed in the United States.  The Company
believes that all of its current suture and  non-suture  products are covered by
its PMAs and 510(k)s, or are otherwise legally marketed,  and that, in view of a
reclassification  of suture  products by the FDA,  those  products for which the
Company has PMAs now require only 510(k)s;  however,  there is no assurance that
the FDA would agree with these positions.

     The  Company  is  subject to  additional  requirements  under the FD&C Act,
including registration,  recordkeeping and reporting requirements.  In addition,
the FDA regulates the promotion of medical  devices  (except for advertising for
non-restricted  devices which is regulated by other authorities),  in particular
to ensure  that  devices  are  promoted  within  the  terms of their  authorized
labeling guidelines. The Company's manufacturing operations must comply with the
FDA's current GMP regulations and are subject to periodic FDA inspection.


                                       9

<PAGE>



     Commencing on June 14, 1998, all medical devices  imported into Europe must
bear the CE mark. To begin affixing the CE mark to its products,  a company must
have implemented a quality management system in accordance with ISO 9001 Quality
Standard  requirements and have its products approved by an appropriate Notified
Body. While less than 5% of the Company's  revenues are generated in Europe, the
Company sees  potential for growth in this market,  as well as other benefits of
ISO approval. Accordingly, the Company is currently in the process of formal ISO
third-party  registration  of its  quality  system  and is  also  preparing  for
submission the necessary  technical  dossiers for the relevant products to be CE
marked.

     Future changes in  regulations  or  enforcement  policies could impose more
stringent  requirements  on the Company,  compliance  with which could adversely
affect the  Company's  business.  Failure to comply with  applicable  regulatory
requirements  could  result  in  enforcement  action,  including  withdrawal  of
marketing  authorization,  injunction,  seizure of products,  and  liability for
civil and/or criminal penalties.

PATENTS AND PROPRIETARY RIGHTS

     The Company considers its technology and procedures  relating to its suture
lines proprietary and relies primarily on trade secret laws and  confidentiality
agreements to protect its technology and  innovations.  Employees,  distributors
and key suppliers of the Company, as well as consultants which from time to time
may be hired, enter into confidentiality  and/or invention assignment agreements
providing for  non-disclosure of proprietary and trade secret information of the
Company  and the  assignment  to the  Company of all  inventions,  improvements,
technical information and suggestions relating in any way to the business of the
Company  (whether  patentable or not) which the employee or consultant  develops
during the period of their employment or association  with the Company.  Despite
these restrictions,  it may be possible for competitors or customers to copy one
or more aspects of the Company's products or obtain information that the Company
regards as proprietary. In addition, consultants of the Company will most likely
be employed by third parties,  and  accordingly,  disputes could arise as to the
proprietary  rights to  information  which has been applied to Company  projects
independently developed by such consultants.

     Furthermore,  there can be no assurance that others will not  independently
develop products similar to those sold by the Company.

     The Company owns one United  States patent  relating to its  cardiovascular
product  packaging  and has filed one  additional  patent  application  with the
United States Patent and Trademark Office relating thereto.  The Company is also
licensed  under a patent for the coating of  synthetic  absorbable  sutures.  In
addition,  in connection with the Ulster  Acquisition,  the Company acquired the
rights to a patent  covering a mold used in the  production and component of the
BASKIT product and various trademarks and trademark applications relating to the
products in the Ulster Product Lines.

     In connection with the Pro-Tec  Acquisition,  the Company  acquired several
patents and  trademarks  related to the sharps  containers  and Pro-ject  needle
holder.  While the  Company  may seek  patent  protection  in the future for new
products,  there can be no assurance  that any patents,  or patents which may be
issued,  will provide the Company with  sufficient  protection in the case of an
infringement  of its  technology or that others will not  independently  develop
technology comparable or superior to the Company's.

     Although the Company  believes that the products sold by it do not and will
not infringe upon the patents or violates the proprietary  rights of others,  it
is possible that such  infringement  or violation has occurred or may occur.  In
the event that any products  sold by the Company are deemed to infringe upon the
patents or proprietary rights of others, the Company could be required to modify
its  products  or  obtain a  license  for the  manufacture  and/or  sale of such
products. There can be no assurance that, in such an event, the Company would be
able to do so in a timely  manner,  upon  acceptable  terms and conditions or at
all, and the failure to do any of the  foregoing  could have a material  adverse
effect upon the Company.

     The Company has acquired a registered  trademark for the "Lukens" name. The
Company  believes  that this name,  established  in 1906,  is  important  to its
business  and  prospects.  In  connection  with the Ulster  Acquisition  and the
Pro-Tec  Acquisition,  the Company  acquired  all rights to the  trademarks  and
tradenames used in


                                       10

<PAGE>



connection  with the sale of the products in those  lines.  The Company has also
obtained a perpetual, non-exclusive, license to use the name "Ulster Scientific"
in connection with the sale of the products in the Ulster Product Lines.

PRODUCT LIABILITY AND INSURANCE

     The use of the  Company's  products  entails  an  inherent  risk of medical
complications  to patients and resultant  product  liability  claims.  While the
Company  presently  maintains  product  liability  insurance in the amount of $2
million per  occurrence  and in the aggregate  which it believes is adequate for
its current activities,  there can be no assurance that the Company will be able
to obtain such insurance in the future or that such insurance will be sufficient
to cover all possible liabilities. In the event of a successful suit against the
Company or one of its customers,  lack or  insufficiency  of insurance  coverage
could have a material  adverse  impact on the Company.  To date, the Company has
had no material product liability claims.

EMPLOYEES

     At March 13, 1998,  the Company  worldwide had 201 employees  (including 67
contract  employees and 134 full time  employees),  of which 177 were engaged in
production,  2 in  development  activities,  11 in sales and marketing and 11 in
finance  and  administration.  The  Company's  employees  are not covered by any
collective  bargaining  agreement.  The  Company  considers  relations  with its
employees to be good.

ITEM 2.  DESCRIPTION OF PROPERTY

     On July 1, 1996, the Company relocated its principal offices and certain of
its production facilities to, and now occupies, approximately 17,000 square feet
of space  in  Albuquerque,  New  Mexico  which is  leased  by the  Company  (the
"Facility"). Rental payments on the Facility are equal to $10,000 per month. The
term of the lease  expires  on August  31,  2001,  with  two,  two-year  renewal
options. Management believes that the Facility is in good condition, is suitable
and  adequate  for  the  Company's  current  and  proposed  use  thereof  and is
adequately covered by insurance.

     In connection  with the Ulster  Acquisition,  the Company  leased  Ulster's
25,000 square foot  warehouse and office  facility in New Paltz,  New York for a
period of one year, at a rent equal to $12,500 per month.  Such lease expired in
March,  1997. In 1996,  the Company  relocated  the Ulster  Product Lines to the
Facility in Albuquerque, New Mexico.

     The  Company  currently  leases a 5,000  square foot  warehouse  and office
facility in  Sanford,  Florida at a rent equal to $2,600 per month from which it
sells its products in the Pro-Tec  Product  Lines.  Such lease expires in March,
2001.  Management believes that such facility is in good condition,  is suitable
and  adequate  for  the  Company's  current  and  proposed  use  thereof  and is
adequately covered by insurance.

     See  "Item  1.  Description  of  Business,  India  Joint  Venture,"  for  a
description  of the joint venture which owns a production  facility  utilized by
the Company in Southern India.  Since the facility is located in an export zone,
the India  Joint  Venture  leases  the site from the zone at a nominal  rate per
year.

     See "Item 1. Description of Business,  Brazil Joint Venture" for details on
the leased properties occupied by these entities.

ITEM 3.  LEGAL PROCEEDINGS.

     The Company is not a party to any material legal proceedings.

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

     None


                                       11

<PAGE>



                                    PART II

ITEM 5.  MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

     The Company's  Common Stock has been quoted on the National  Association of
Securities Dealers Automated Quotation ("NASDAQ") system under the symbol "LUKA"
since May 6, 1992.  The Common  Stock has also been listed on the Pacific  Stock
Exchange under the symbol "LKN" since May 6, 1992.

     The following table sets forth the range of high and low bid prices for the
Common Stock for the periods  indicated,  as reported by NASDAQ,  the  principal
system or exchange on which such securities are quoted or traded. The quotations
represent   "inter-dealer"   prices,   without  retail  mark-up,   mark-down  or
commission, and may not necessarily represent actual transactions.

<TABLE>
<CAPTION>
Common Stock

Fiscal Year Ending                                   Fiscal Year Ending
December 31, 1997          High ($)      Low ($)     December 31, 1996          High ($)      Low ($)
-----------------          --------     --------     -----------------          --------      -------
<S>                        <C>            <C>       <C>                         <C>          <C>
Quarter ended                                        Quarter ended
March 31, 1997             8 3/4          4 1/2      March 31, 1996             3 11/16       1 7/16

Quarter ended                                        Quarter ended
June 30, 1997              6 3/4          5 1/2      June 30, 1996              3 5/16        2 5/8

Quarter ended                                        Quarter ended
September 30, 1997         6 1/8          3 3/4      September 30, 1996         3 9/16        2 9/16

Quarter ended                                        Quarter ended
December 31, 1997          5 1/4          1 1/2      December 31, 1996          4 9/16        3
</TABLE>

     As of March 25, 1998, there were  approximately 82 holders of record of the
Company's Common Stock.

     On March 25,  1998,  the closing bid and asked  prices of the Common  Stock
were $3-1/4 and $3-3/8, respectively.

     The  Company has never paid a cash  dividend on its capital  stock and does
not  anticipate  that it will declare or pay cash  dividends in the  foreseeable
future as earnings are expected to be retained to finance the company's  growth.
The Company's loan agreement with its bank contains  restrictions on the payment
of dividends. Subject to then existing loan agreements, declaration of dividends
in the future  will  remain  within the  discretion  of the  Company's  Board of
Directors, which will review its dividend policy from time to time.

CHANGES IN SECURITIES

     On December 1, 1997,  the Company  issued to Robert  Priddy,  the Company's
Chairman, options to purchase 300,000 shares of the Company's Common Stock at an
exercise price of $4.00 per share.  Such options vest in equal  installments  of
100,000 shares each on the date of grant and the first and second  anniversaries
thereof.  The option  expires on the  earlier to occur of  December  1, 2000 and
thirty  days after Mr.  Priddy is no longer of  director  of the  Company.  Such
option was issued from the shares reserved for issuance under the Company's 1992
Stock Option Plan which is registered  pursuant to a  Registration  Statement on
Form S-8.


                                       12

<PAGE>



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.

     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
$770,000.  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  33%  to
$1,286,938 in 1997 compared to $965,180 in 1996, due mainly to the  amortization
of the costs  incurred  in  connection  with the  joint  ventures,  the  Pro-Tec
Acquisition  and the  development  costs  related  to the  synthetic  absorbable
suture.

     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.

     In  connection  with  the  Company's  refocused   international   marketing
strategy,  and as a result of the inventory cost reduction  described  above, in
December  1997 the  Company  wrote off  approximately  $3,032,000  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  $3,400,000 for the year
ended December 31, 1997.

     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
$3,768,018  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,  the Company  experienced  a net profit of $334,262 for the
year ended December 31, 1997.


                                       13

<PAGE>



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  that  date,  approximately  $758,704  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.

     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,


                                       14

<PAGE>



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 $6.25
per share, and warrants to purchase an additional  35,000 shares of Common Stock
at  $6.25  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 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  $12,975,000  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.

     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. See Index to Consolidated  Financial Statements on
page 22.

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

     Not Applicable.


                                       15

<PAGE>



                                    PART III

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

     The information required under this item will be set forth in the Company's
proxy  statement to be filed with the Securities  and Exchange  Commission on or
before April 30, 1998 and is incorporated herein by reference.

ITEM 10. EXECUTIVE COMPENSATION.

     The information required under this item will be set forth in the Company's
proxy  statement to be filed with the Securities  and Exchange  Commission on or
before April 30, 1998 and is incorporated herein by reference.

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

     The information required under this item will be set forth in the Company's
proxy  statement to be filed with the Securities  and Exchange  Commission on or
before April 30, 1998 and is incorporated herein by reference.

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

     For  information  regarding  the  recent  loans to the  Company  by John H.
Robinson and Robert L. Priddy, two directors of the Company, and the issuance of
warrants in connection therewith,  see "Management's  Discussion and Analysis or
Plan of Operations." The other information  required under this item will be set
forth in the  Company's  proxy  statement  to be filed with the  Securities  and
Exchange  Commission on or before April 30, 1998 and is  incorporated  herein by
reference.

ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.

     (A) EXHIBITS.

Exhibit No.       Description

3.1             Certificate of Incorporation of the Registrant, as amended (1)

3.2             Form of Certificate of Amendment of Certificate of Incorporation
                (1)

3.3             Form of Amended and Restated Bylaws of the Registrant (1)

10.1            1988 Amended and Restated Stock Option Plan (1)

10.2            1992 Stock Option Plan (1)

10.3*           Exclusive  Distributorship  Agreement between the Registrant and
                Meadox Medicals, Inc. (1)

10.4*           Exclusive  Distributorship  Agreement between the Registrant and
                Cottrell Limited (1)

10.5*           Exclusive  Distributorship  Agreement between the Registrant and
                Convergenza, as amended (1)

10.6*           Exclusive  Distributorship  Agreement between the Registrant and
                HP-medica  GmbH (1)


                                       16

<PAGE>



10.7            Business  Loan and  Security  Agreement  among  the  Registrant,
                Lukens Corporation - New Mexico and Sunwest Bank of Albuquerque,
                N.A., as amended (1)

10.8            Form of Indemnity Agreement (1)

10.9            Employment Agreement between the Registrant and James A. Wimbush
                (1)

10.10           Employment  Agreements between the Registrant and each of Steven
                J. Schroeder, Robert S. Huffstodt, Scott Henderson and Donald E.
                Lawson (1)

10.11*          Collaborative  Development  Agreement between the Registrant and
                Medisorb Technologies International, L.P. (1)

10.12           Lease for Registrant's facility (1)

10.13           Form  of  Consulting   Agreement   between  the  Registrant  and
                Commonwealth Associates, Inc. (1)

10.14*          Exclusive  Distributorship  Agreement between the Registrant and
                Core Dynamics, Inc. (3)

10.15           Consulting  Agreement  between  the  Registrant  and  Kronenthal
                Associates (3)

10.16*          Exclusive  Patent License  Agreement  between the Registrant and
                Innovative Surgical Technology, Inc. (4)

10.17           Agreement,  dated  November 19, 1992,  between  Sunwest Bank and
                Albuquerque,    National   Association,   and   Lukens   Medical
                Corporation, a New Mexico corporation,  together with promissory
                note, as amended,  security  agreements  and mortgages  executed
                pursuant thereto (5)

10.18*          Amendment No. 1, dated as of May 17, 1994,  to Exclusive  Patent
                License Agreement,  dated August 9, 1993, between Lukens Medical
                Corporation,  a New Mexico corporation,  and Innovative Surgical
                Technology, Inc. (5)

10.19*          Manufacturing  Agreement,   dated  May  26,  1994,  between  the
                Registrant and West Texas Engineering, Inc. (5)

10.20*          Supply  Agreement,  dated June 29, 1994,  between Lukens Medical
                Corporation,  a New Mexico  corporation,  and Farman  Companies,
                Inc. d.b.a. Veterinary Products Laboratories (5)

10.21           Business Loan and Security  Agreement,  dated July 27, 1994 (the
                "Sunwest  Loan  Agreement")  as  amended  pursuant  to the Third
                Amendment  thereto,  dated as of  January  31,  1995,  among the
                Registrant, Lukens Medical Corporation (a New Mexico corporation
                formerly  known  as  Lukens  Corporation)  and  Sunwest  Bank of
                Albuquerque,  N.A., together with promissory notes, guaranty and
                security agreements executed pursuant thereto (5)

10.22*          Exclusive Distribution Agreement, dated October 7, 1994, between
                Lukens  Medical  Corporation,  a  New  Mexico  corporation,  and
                Dentsply International Inc. (5)

10.23           Amendment  No. 3, dated as of  November  2, 1994,  to 1992 Stock
                Option Plan (5)


                                       17

<PAGE>



10.24*          Supplier/Distributor Agreement, dated November 14, 1994, between
                Lukens Medical Corporation, a New Mexico corporation,  and Henry
                Schein, Inc. (5)

10.25           Amendment  No. 4, dated as of  January  3,  1995,  to 1992 Stock
                Option Plan (5)

10.26           Promissory Note of the Company to John H. Robinson,  dated as of
                April 13, 1995,  in the original  principal  amount of $400,000;
                Commitment  letter  of John H.  Robinson,  dated as of April 13,
                1995 (5)

10.27           Warrant,  dated as of April 13, 1995,  granted by Lukens Medical
                Corporation, a Delaware corporation, to John H. Robinson

10.28           Lease for the Facility,  dated July 14, 1995, between Rio Rancho
                Public Schools, as landlord, and Lukens Medical Corporation,  as
                tenant.

10.29           Fourth Amendment,  Fifth Amendment,  Sixth Amendment and Seventh
                Amendment to the Sunwest Loan  Agreement,  dated April 10, 1995,
                April  28,   1995,   July  14,  1995  and   December  31,  1995,
                respectively.

10.30           Promissory  Notes of the Company to Sunwest Bank of Albuquerque,
                N.A.  relating to certain  loans  guaranteed  by the U.S.  Small
                Business  Administration,  in the original  principal amounts of
                $150,000,  $500,000 and $420,000,  dated as of October 31, 1995,
                October  31,  1995 and  February  15,  1996,  respectively,  and
                related Loan and Security Agreements.

10.31           Promissory Note of the Company to John H. Robinson,  dated as of
                September  11,  1996,  in  the  original   principal  amount  of
                $250,000;  Promissory  Note of the Company to John H.  Robinson,
                dated as of March 5, 1996, in the original  principal  amount of
                $400,000

10.32           Distribution  Agreement,  dated  as of  March  5,  1996,  by and
                between   Guest  Elchrom   Scientific  AG  and  Lukens   Medical
                Corporation, a New Mexico corporation

10.33           Agreement of Purchase  and Sale of Assets,  dated as of March 4,
                1996 by and among the Company, Ulster Scientific, Inc. and Peter
                F. Lordi, Jr. (6)

10.34           Lease  Agreement,  dated  as of March 5,  1996,  between  Ulster
                Scientific,  Inc., a New York  corporation,  Peter F. Lordi, Jr.
                and Lukens Medical Corporation, a New Mexico corporation (6)

10.35           Consulting  Agreement,  dated as of March 5, 1996, between Peter
                F.  Lordi,  Jr. and  Lukens  Medical  Corporation,  a New Mexico
                corporation (6)

10.36           Warrant,  dated as of March 5, 1996,  granted by Lukens  Medical
                Corporation, a Delaware corporation, to Peter F. Lordi, Jr. (6)

10.37           Lease between Kenneth I. White, as landlord,  and Lukens Medical
                Corporation, as tenant, dated May 31, 1996 (7)

10.38           Joint Venture/Stockholders'  Agreement, dated as of February 21,
                1997,  between Lukens Medical  Products  Private Limited and the
                stockholders  of  the  company  listed  on  the  signature  page
                thereto. (8)


                                       18

<PAGE>



10.39           Letter Agreement,  dated as of February 28, 1997, between Lukens
                Medical  Corporation  and John H. Robinson;  Promissory  Note of
                Lukens Medical Corporation dated as of February 28, 1997 to John
                H.  Robinson in the amount of  $150,000;  and Warrant  Agreement
                between Lukens Medical  Corporation and John H. Robinson,  dated
                as of February 28, 1997 (8)

10.40           Letter Agreement,  dated as of February 28, 1997, between Lukens
                Medical  Corporation  and Robert L. Priddy;  Promissory  Note of
                Lukens  Medical  Corporation  dated as of  February  28, 1997 to
                Robert  L.  Priddy  in  the  amount  of  $150,000;  and  Warrant
                Agreement  between  Lukens  Medical  Corporation  and  Robert L.
                Priddy, dated as of February 28, 1997 (8)

10.41           Agreement  of  Merger  and  Reorganization,  dated as of May 12,
                1997,  by  and  among  Lukens   Medical   Corporation,   Pro-Tec
                Containers, Inc., a Florida corporation, Treesa Spencer, and PTC
                Merger Corp., a Florida  corporation,  and the exhibits  thereto
                (other than those exhibits which correspond to agreements listed
                below. (9)

10.42           Consulting  Agreement,  dated as of May 23, 1997, between Treesa
                Spencer and Pro-Tec Containers, Inc., a Florida corporation. (9)

10.43           Non-Transferable  Subordinated  Promissory  Note,  dated May 12,
                1997, by Registrant to Treesa Spencer. (9)

21              Subsidiaries

23              Consent of Neff & Company

27              Financial Data Schedule

----------
(1)  These  exhibits  were  filed  as  exhibits  to the  Company's  Registration
Statement  on Form S-1  (File  No.  33-46466)  and are  incorporated  herein  by
reference.

(2) This  exhibit was filed with the  Company's  Amendment  No. 1 to its Current
Report on Form 8-K dated July 17, 1992 and is incorporated herein by reference.

(3) These exhibits were filed as exhibits to the Company's Annual Report on Form
10-KSB for the year  ended  December  31,  1992 and are  incorporated  herein by
reference.

(4) These exhibits were filed as exhibits to the Company's Annual Report on Form
10-KSB for the year  ended  December  31,  1993 and are  incorporated  herein by
reference.

(5) These exhibits were filed as exhibits to the Company's Annual report on Form
10-KSB for the year  ended  December  31,  1994 and are  incorporated  herein by
reference.

(6) These  exhibits  were filed as exhibits to the Company's  Current  Report on
Form 8-K filed on March 18, 1996, and are incorporated herein by reference.

(7) This exhibit was filed as an exhibit to the  Company's  Quarterly  Report on
Form 10-QSB for the quarter ended June 30, 1996, and is  incorporated  herein by
reference.

(8) These  exhibits were filed as an exhibit to the  Company's  Annual Report of
Form 10-KSB for the year ended December 31, 1996, and are incorporated herein by
reference.

(9) These  exhibits  were filed as exhibits to the Company's  Current  Report on
Form 8-K filed on December 29, 1997, and are incorporated herein by reference.

*    Confidential  treatment  has been granted with respect to portions of these
     exhibits.


                                       19

<PAGE>



         (B)  REPORTS ON FORM 8-K.

                  On December 29, 1997,  the Company  filed a Current  Report on
Form 8-K to disclose the Inventory Writeoff.








                                       20

<PAGE>





                                     LUKENS MEDICAL CORPORATION AND SUBSIDIARIES

                                               CONSOLIDATED FINANCIAL STATEMENTS

                                                      DECEMBER 31, 1997 AND 1996


<PAGE>




                   LUKENS MEDICAL CORPORATION AND SUBSIDIARIES

                                    CONTENTS

                                                                            PAGE

INDEPENDENT AUDITORS' REPORT                                                  1

FINANCIAL STATEMENTS

               Consolidated Balance Sheets                                    2

               Consolidated Statements of Operations                          4

               Consolidated Statements of Stockholders' Equity                5

               Consolidated Statements of Cash Flows                          7

               Notes to Consolidated  Financial Statements                    9


<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.

                                                          /s/ Neff & Company LLP
Albuquerque, New Mexico
March 27, 1998

                                                                               1

<PAGE>



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

<TABLE>
<CAPTION>

ASSETS
                                                                               1997              1996

<S>                                 <C>                                  <C>                       <C>    
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 $1,283,569 and $966,065 in 1997 and 1996,
    respectively (Notes 4 and 15)                                              3,001,139         1,098,487

Other assets                                                                      85,754           261,294
                                                                         ---------------           -------





               Total assets                                              $    13,829,613        11,802,160
                                                                         ===============        ==========
</TABLE>


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


                                                                               2

<PAGE>



LIABILITIES AND STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
                                                                               1997              1996

<S>                                                                      <C>                     <C>      
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                                                               129,531                 -
                                                                         ---------------         ---------

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                                                      (14,730,760)      (10,962,742)
    Foreign currency translation adjustments                                     (53,048)                -
                                                                         ---------------         ---------
               Total stockholders' equity                                      3,772,661         6,278,530
                                                                         ---------------         ---------
               Total liabilities and stockholders' equity                $    13,829,613        11,802,160
                                                                         ===============        ==========
</TABLE>


                                                                               3

<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
                                                                         ---------------         ---------
        Gross profit                                                           2,379,536         2,382,042
                                                                         ---------------         ---------
Selling expenses                                                               1,087,171           716,042
General and administrative expenses                                            1,286,938           965,180
Research and development expenses                                                 70,386           108,594
Product restructuring charge (Note 14)                                         3,332,280                 -
                                                                         ---------------         ---------
        Total operating expenses                                               5,776,775         1,789,816
                                                                         ---------------         ---------
        Earnings (loss) from operations                                       (3,397,239)          592,226
                                                                         ---------------         ---------

Other income (expense):
    Interest income                                                                5,236             6,578
    Interest expense                                                            (433,463)         (197,566)
    Minority interests' share of loss                                             25,994                 -
    Other, net                                                                    31,454            62,243
                                                                         ---------------         ---------
        Total other expense, net                                                (370,779)         (128,745)
                                                                         ---------------         ---------
        Earnings (loss) before income taxes                                   (3,768,018)          463,481

Income tax expense (Note 10)                                                           -                 -
                                                                         ---------------         ---------
           Net earnings (loss)                                           $    (3,768,018)          463,481
                                                                         ===============           =======

Basic net earnings (loss) per share                                      $         (1.24)              .17
                                                                         ===============           =======
Dilutive net earnings (loss) per share                                   $         (1.24)              .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.


                                                                               4

<PAGE>


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

<TABLE>
<CAPTION>
                                                                   COMMON STOCK                
                                                                 (NOTES 9 AND 15)              ADDITIONAL
                                                         ---------------------------------       PAID-IN 
                                                              SHARES            AMOUNT           CAPITAL


<S>                                                           <C>        <C>                    <C>       
Balance, December 31, 1995                                    2,611,418  $        26,115        16,938,696
Exercise of options for common
  stock                                                         120,570            1,205           275,256

Net earnings (loss)                                                   -                -                 -
                                                              ---------  ---------------        ----------

Balance December 31, 1996                                     2,731,988           27,320        17,213,952

Exercise of options for common
  stock                                                         111,371            1,114           478,103

Issuance of common stock for
  business acquisition                                          200,000            2,000           833,980

Net earnings (loss)                                                   -                -                 -

Foreign currency translation
  adjustments                                                         -                -                 -
                                                              ---------  ---------------        ----------

Balance, December 31, 1997                                    3,043,359  $        30,434        18,526,035
                                                              =========  ===============        ==========
</TABLE>



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


                                                                               5

<PAGE>



                                             FOREIGN
                                            CURRENCY
                       ACCUMULATED         TRANSLATION
                         DEFICIT           ADJUSTMENTS         TOTAL

                     $   (11,426,223)                -        5,538,588


                                   -                 -          276,461

                             463,481                 -          463,481
                     --------------------------------------------------

                         (10,962,742)                -        6,278,530


                                   -                 -          479,217


                                   -                 -          835,980

                          (3,768,018)                        (3,768,018)


                                   -           (53,048)         (53,048)
                     ---------------------------------------------------

                         (14,730,760)          (53,048)       3,772,661
                     ==================================================



<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)                                                  $    (3,768,018)          463,481
    Adjustments to reconcile net earnings
        to cash flows used in operating activities:
           Minority interest in net loss                                         (25,994)                -
           Depreciation                                                          398,943           262,941
           Amortization of intangible assets                                     317,504           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                       (1,866,416)         (831,197)
                                                                         ---------------------------------

Cash flows from investing activities:
    Purchase of equipment                                                     (1,561,378)         (561,910)
    Purchase of intangible assets                                               (876,626)         (785,377)
    Proceeds from disposal of equipment                                           26,417                 -
    Proceeds from joint venture formation,
        net of cash transferred                                                  155,525                 -
    Cash purchased with business acquisitions                                     25,084                 -
                                                                         ---------------------------------
               Net cash flows applied to
                  investing activities                                        (2,230,978)       (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.


                                                                               7

<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.


                                                                               8

<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 currently inactive.

     Contract maquiladora  manufacturing facilities in Piedras Negras and Ciudad
     Juarez, Mexico.

Principles of Consolidation.  The consolidated  financial statements include the
accounts of Lukens Medical Corporation and its wholly-owned subsidiary and 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.


                                                                               9

<PAGE>



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


NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

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,  the rights to sell products  acquired,  goodwill and deferred start up
costs. The start up costs consist principally of costs incurred for the start up
of joint ventures and possible joint ventures in India,  Mexico, and Brazil. The
Company  evaluates  its  intangible  assets  annually  to  determine   potential
impairment by comparing the carrying value to the undiscounted future gross cash
margins of related  assets.  They are being  amortized  using the  straight-line
method over periods of 3 to 10 years.

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.

Net Sales.  Sales are recorded net of sales returns and allowances.

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


                                                                              10

<PAGE>



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


NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

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.

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:

                                             1997              1996
    Raw materials                    $     1,938,343         2,767,214
    Work-in-process                        1,972,124         1,419,685
    Finished goods                         1,195,433         1,378,311
                                     ---------------------------------
                                     $     5,105,900         5,565,210
                                     =================================


                                                                              11

<PAGE>



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


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>


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, 1997:

<TABLE>
<CAPTION>
                                                                               1997              1996

<S>                                                                      <C>                     <C>      
    Suture license rights and regulatory approvals                       $       963,448           920,089
    Ulster Scientific product rights                                             642,069           642,069
    ProTec patents and goodwill                                                1,296,968                 -
    Deferred start-up costs                                                      867,892            20,868
    Other                                                                        514,331           481,526
                                                                         ---------------------------------
               Total                                                           4,284,708         2,064,552

    Accumulated amortization                                                  (1,283,569)         (966,065)
                                                                         ---------------------------------
                                                                         $     3,001,139         1,098,487
                                                                         =================================
</TABLE>



                                                                              12

<PAGE>



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



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.  Under a separate  line of credit the Company
     had issued a $360,000  standby letter of credit relating to the purchase of
     the Indian 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.

     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.


                                                                              13

<PAGE>



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


NOTE 5. BANK FINANCING INSTRUMENTS (CONTINUED)

     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>


                                                                              14

<PAGE>



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


NOTE 6. LONG-TERM DEBT (CONTINUED)

<TABLE>
<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.



                                                                              15

<PAGE>



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


NOTE 6. LONG-TERM DEBT (CONTINUED)

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 January 1999 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)


                                                                              16

<PAGE>



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


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:

<TABLE>
<CAPTION>
<S>                                                                      <C>            
           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
                                                                         ===============
</TABLE>

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.



                                                                              17

<PAGE>



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


NOTE 9. STOCK WARRANTS AND OPTIONS

Warrants for Common Stock

The following warrants are outstanding at December 31, 1997:

<TABLE>
<CAPTION>
          NUMBER OF SHARES                 EXERCISE                  DATE                 DATE OF
         COVERED BY WARRANTS                 PRICE                EXERCISABLE           EXPIRATION
<S>            <C>                            <C>                 <C>                  <C>    
               500,000                        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
</TABLE>                                              

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. All options terminate three to ten years from
the date of issuance.  The Company has filed a  registration  statement  for its
stock option plans.

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

<TABLE>
<CAPTION>
                                                                                            OPTIONS
                                               OPTIONS            PRICE RANGE             EXERCISABLE
<S>                                            <C>             <C>             <C>       <C>            
Balance, December 31, 1995                     484,142    $    1.063           6.50
    Granted                                    185,800         3.00            7.00
    Expired                                   (198,149)        2.375           3.00
    Exercised                                 (120,570)        1.063           2.38
                                        -------------------------------------------
Balance, December 31, 1996                     351,223         1.063           7.00      $       115,425
                                        -------------------------------------------      ===============
    Granted                                    464,600         3.125           6.25
    Expired                                    (41,144)        1.063           7.00
    Exercised                                  (46,371)        1.063           4.50
                                        -------------------------------------------

Balance, December 31, 1997                     728,308         1.063           6.50      $       280,180
                                        ===========================================      ===============
</TABLE>


                                                                              18

<PAGE>



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


NOTE 9. STOCK WARRANTS AND OPTIONS (CONTINUED)

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)                            $    (3,768,018)    (4,533,645)       463,481         267,225

Basic earnings (loss) per share                        (1.24)         (1.49)           .17             .10

Diluted earnings (loss) per share                      (1.24)         (1.49)           .15             .09
</TABLE>


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 $5,100,000 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  $900,000 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.


                                                                              19

<PAGE>



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


NOTE 10. INCOME TAXES (CONTINUED)

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                       2,400,000             1,835,000               739,000               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                    -
2017                               -             2,400,000               816,000                    -
                  -----------------------------------------------------------------------------------
                  $        6,893,000            12,975,000             4,742,000              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.

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.


                                                                              20

<PAGE>



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


NOTE 11. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)

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  scales 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.

    Customer sales:

        Brazil                                         $        87,330
        India                                                        -
        Mexico                                                       -
        USA                                                  8,531,533
        Eliminations                                                 -
                                                       ---------------
           Consolidated                                $     8,618,863
                                                       ===============



                                                                              21

<PAGE>



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


NOTE 12. GEOGRAPHIC SEGMENT REPORTING (CONTINUED)

    Intercompany sales
        Brazil                                        $             -
        India                                                   3,362
        Mexico                                                      -
        USA                                                   134,105
        Eliminations                                         (137,467)
                                                      ---------------
           Consolidated                               $             -
                                                      ===============

    Loss before taxes:
        Brazil                                        $       (48,226)
        India                                                 (35,055)
        Mexico                                                      -
        USA                                                (3,674,679)
        Eliminations                                          (10,058)
                                                      ---------------
           Consolidated                               $    (3,768,018)
                                                      ===============

    Assets:
        Brazil                                        $       436,105
        India                                               1,601,084
        Mexico                                              2,381,085
        USA                                                 9,564,445
        Eliminations                                         (153,106)
                                                      ---------------
           Consolidated                               $    13,829,613
                                                      ===============

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.


                                                                              22

<PAGE>



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


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 the Company is in
violation of a certain patent which relates 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 patents.  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 (See Note
18). 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.


                                                                              23

<PAGE>



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


NOTE 14. PRODUCT LINE RESTRUCTURING AND INVENTORY REDUCTION (CONTINUED)

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,  along with the costs attributable to abandoning  certain  international
markets resulted in a product line restructuring charge of $477,268 for 1997.

During  1997  and  1996,  the  Company  experienced  reductions  in its  cost to
manufacture  certain products mainly from favorable  shifts in overhead,  labor,
and exchange rates.  In order to more accurately  reflect the new cost structure
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,  assumed $320,000 in supplier
liabilities,  and agreed to terms on a  consulting  and  royalty  contract  with
payments of 2 percent or more of certain  Ulster sales over eight years and with
minimum  payments of $90,000 per year for the next five years. In addition,  the
Company issued 200,000  warrants to the seller,  150,000 of which are contingent
upon future product sales.  The Company  acquired,  in addition to inventory and
equipment,  the  rights to sell  Ulster  product  lines,  trademarks,  and other
intangible assets. 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  issued  notes  totaling
approximately  $515,328 in exchange for all  outstanding  shares of ProTec.  All
intangibles are amortized over ten years.


                                                                              24

<PAGE>



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


NOTE 15. ACQUISITIONS AND JOINT VENTURES (CONTINUED)

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

    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)
                                                           =============== 

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)                                                  $    (3,698,478)          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                                                         $         (1.23)              .23
                                                                         =================================
           Dilutive                                                      $         (1.23)              .20
                                                                         =================================
</TABLE>


                                                                              25

<PAGE>



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


NOTE 15. ACQUISITIONS AND JOINT VENTURES (CONTINUED)

In 1996, the Company formed a joint venture 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.  As of December
31, 1997,  the venture was still in the process of setting up the  equipment and
configuring the production process.

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. The new
venture did not become operational until October 1, 1997.

On January 9, 1997, the Company  became the majority  shareholder in a new joint
manufacturing  venture based in Cochin,  India. 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.

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 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.


                                                                              26

<PAGE>



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


NOTE 17. GOING CONCERN CONSIDERATIONS (UNAUDITED)

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 and
its  viability as a going  concern 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.


                                                                              27

<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:  March 30, 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                                  March 30, 1998
--------------------------------------------------------------
Robert S. Huffstodt
President and Chief Executive Officer (Principal
Executive Officer)

         /s/ Michael Sobieski                                     March 30, 1998
--------------------------------------------------------------
Michael Sobieski
Chief Financial Officer (Principal Financial Officer
and Principal Accounting Officer)

         /s/ John H. Robinson                                     March 30, 1998
--------------------------------------------------------------
John H. Robinson
Director

         /s/ Robert L. Priddy                                     March 30, 1998
--------------------------------------------------------------
Robert L. Priddy
Chairman of the Board of Directors

         /s/ John Holmes                                          March 30, 1998
--------------------------------------------------------------
John Holmes
Director


                                       22

<PAGE>



                                  Exhibit Index

<TABLE>
<CAPTION>
Exhibit No.                    Description                                       Page #
-----------                    -----------                                       ------

<S>             <C>
3.1             Certificate of Incorporation of the Registrant, as amended (1)

3.2             Form of Certificate of Amendment of Certificate of Incorporation
                (1)

3.3             Form of Amended and Restated Bylaws of the Registrant (1)

10.1            1988 Amended and Restated Stock Option Plan (1)

10.2            1992 Stock Option Plan (1)

10.3*           Exclusive  Distributorship  Agreement between the Registrant and
                Meadox Medicals, Inc. (1)

10.4*           Exclusive  Distributorship  Agreement between the Registrant and
                Cottrell Limited (1)

10.5*           Exclusive  Distributorship  Agreement between the Registrant and
                Convergenza, as amended (1)

10.6*           Exclusive  Distributorship  Agreement between the Registrant and
                HP-medica GmbH (1)

10.7            Business  Loan and  Security  Agreement  among  the  Registrant,
                Lukens Corporation - New Mexico and Sunwest Bank of Albuquerque,
                N.A., as amended (1)

10.8            Form of Indemnity Agreement (1)

10.9            Employment Agreement between the Registrant and James A. Wimbush
                (1)

10.10           Employment  Agreements between the Registrant and each of Steven
                J. Schroeder, Robert S. Huffstodt, Scott Henderson and Donald E.
                Lawson (1)

10.11*          Collaborative  Development  Agreement between the Registrant and
                Medisorb Technologies International, L.P. (1)

10.12           Lease for Registrant's facility (1)

10.13           Form  of  Consulting   Agreement   between  the  Registrant  and
                Commonwealth Associates, Inc. (1)

10.14*          Exclusive  Distributorship  Agreement between the Registrant and
                Core Dynamics, Inc. (3)

10.15           Consulting  Agreement  between  the  Registrant  and  Kronenthal
                Associates (3)

10.16*          Exclusive  Patent License  Agreement  between the Registrant and
                Innovative Surgical Technology, Inc. (4)
</TABLE>


                                       23

<PAGE>



10.17           Agreement,  dated  November 19, 1992,  between  Sunwest Bank and
                Albuquerque,    National   Association,   and   Lukens   Medical
                Corporation, a New Mexico corporation,  together with promissory
                note, as amended,  security  agreements  and mortgages  executed
                pursuant thereto (5)

10.18*          Amendment No. 1, dated as of May 17, 1994,  to Exclusive  Patent
                License Agreement,  dated August 9, 1993, between Lukens Medical
                Corporation,  a New Mexico corporation,  and Innovative Surgical
                Technology, Inc. (5)

10.19*          Manufacturing  Agreement,   dated  May  26,  1994,  between  the
                Registrant and West Texas Engineering, Inc. (5)

10.20*          Supply  Agreement,  dated June 29, 1994,  between Lukens Medical
                Corporation,  a New Mexico  corporation,  and Farman  Companies,
                Inc. d.b.a. Veterinary Products Laboratories (5)

10.21           Business Loan and Security  Agreement,  dated July 27, 1994 (the
                "Sunwest  Loan  Agreement")  as  amended  pursuant  to the Third
                Amendment  thereto,  dated as of  January  31,  1995,  among the
                Registrant, Lukens Medical Corporation (a New Mexico corporation
                formerly  known  as  Lukens  Corporation)  and  Sunwest  Bank of
                Albuquerque,  N.A., together with promissory notes, guaranty and
                security agreements executed pursuant thereto (5)

10.22*          Exclusive Distribution Agreement, dated October 7, 1994, between
                Lukens  Medical  Corporation,  a  New  Mexico  corporation,  and
                Dentsply International Inc. (5)

10.23           Amendment  No. 3, dated as of  November  2, 1994,  to 1992 Stock
                Option Plan (5)

10.24*          Supplier/Distributor Agreement, dated November 14, 1994, between
                Lukens Medical Corporation, a New Mexico corporation,  and Henry
                Schein, Inc. (5)

10.25           Amendment  No. 4, dated as of  January  3,  1995,  to 1992 Stock
                Option Plan (5)

10.26           Promissory Note of the Company to John H. Robinson,  dated as of
                April 13, 1995,  in the original  principal  amount of $400,000;
                Commitment  letter  of John H.  Robinson,  dated as of April 13,
                1995 (5)

10.27           Warrant,  dated as of April 13, 1995,  granted by Lukens Medical
                Corporation, a Delaware corporation, to John H. Robinson

10.28           Lease for the Facility,  dated July 14, 1995, between Rio Rancho
                Public Schools, as landlord, and Lukens Medical Corporation,  as
                tenant.

10.29           Fourth Amendment,  Fifth Amendment,  Sixth Amendment and Seventh
                Amendment to the Sunwest Loan  Agreement,  dated April 10, 1995,
                April  28,   1995,   July  14,  1995  and   December  31,  1995,
                respectively.


                                       24

<PAGE>



10.30           Promissory  Notes of the Company to Sunwest Bank of Albuquerque,
                N.A.  relating to certain  loans  guaranteed  by the U.S.  Small
                Business  Administration,  in the original  principal amounts of
                $150,000,  $500,000 and $420,000,  dated as of October 31, 1995,
                October  31,  1995 and  February  15,  1996,  respectively,  and
                related Loan and Security Agreements.

10.31           Promissory Note of the Company to John H. Robinson,  dated as of
                September  11,  1996,  in  the  original   principal  amount  of
                $250,000;  Promissory  Note of the Company to John H.  Robinson,
                dated as of March 5, 1996, in the original  principal  amount of
                $400,000

10.32           Distribution  Agreement,  dated  as of  March  5,  1996,  by and
                between   Guest  Elchrom   Scientific  AG  and  Lukens   Medical
                Corporation, a New Mexico corporation

10.33           Agreement of Purchase  and Sale of Assets,  dated as of March 4,
                1996 by and among the Company, Ulster Scientific, Inc. and Peter
                F. Lordi, Jr. (6)

10.34           Lease  Agreement,  dated  as of March 5,  1996,  between  Ulster
                Scientific,  Inc., a New York  corporation,  Peter F. Lordi, Jr.
                and Lukens Medical Corporation, a New Mexico corporation (6)

10.35           Consulting  Agreement,  dated as of March 5, 1996, between Peter
                F.  Lordi,  Jr. and  Lukens  Medical  Corporation,  a New Mexico
                corporation (6)

10.36           Warrant,  dated as of March 5, 1996,  granted by Lukens  Medical
                Corporation, a Delaware corporation, to Peter F. Lordi, Jr. (6)

10.37           Lease between Kenneth I. White, as landlord,  and Lukens Medical
                Corporation, as tenant, dated May 31, 1996 (7)

10.38           Joint Venture/Stockholders'  Agreement, dated as of February 21,
                1997,  between Lukens Medical  Products  Private Limited and the
                stockholders  of  the  company  listed  on  the  signature  page
                thereto. (8)

10.39           Letter Agreement,  dated as of February 28, 1997, between Lukens
                Medical  Corporation  and John H. Robinson;  Promissory  Note of
                Lukens Medical Corporation dated as of February 28, 1997 to John
                H.  Robinson in the amount of  $150,000;  and Warrant  Agreement
                between Lukens Medical  Corporation and John H. Robinson,  dated
                as of February 28, 1997 (8)

10.40           Letter Agreement,  dated as of February 28, 1997, between Lukens
                Medical  Corporation  and Robert L. Priddy;  Promissory  Note of
                Lukens  Medical  Corporation  dated as of  February  28, 1997 to
                Robert  L.  Priddy  in  the  amount  of  $150,000;  and  Warrant
                Agreement  between  Lukens  Medical  Corporation  and  Robert L.
                Priddy, dated as of February 28, 1997 (8)

10.41           Agreement  of  Merger  and  Reorganization,  dated as of May 12,
                1997,  by  and  among  Lukens   Medical   Corporation,   Pro-Tec
                Containers, Inc., a Florida corporation, Treesa Spencer, and PTC
                Merger Corp., a Florida  corporation,  and the exhibits  thereto
                (other than those exhibits which correspond to agreements listed
                below. (9)


                                       25

<PAGE>



10.42           Consulting  Agreement,  dated as of May 23, 1997, between Treesa
                Spencer and Pro-Tec Containers, Inc., a Florida corporation. (9)

10.43           Non-Transferable  Subordinated  Promissory  Note,  dated May 12,
                1997, by Registrant to Treesa Spencer. (9)

21              Subsidiaries

23              Consent of Neff & Company

27              Financial Data Schedule

----------
(1)  These  exhibits  were  filed  as  exhibits  to the  Company's  Registration
Statement  on Form S-1  (File  No.  33-46466)  and are  incorporated  herein  by
reference.

(2) This  exhibit was filed with the  Company's  Amendment  No. 1 to its Current
Report on Form 8-K dated July 17, 1992 and is incorporated herein by reference.

(3) These exhibits were filed as exhibits to the Company's Annual Report on Form
10-KSB for the year  ended  December  31,  1992 and are  incorporated  herein by
reference.

(4) These exhibits were filed as exhibits to the Company's Annual Report on Form
10-KSB for the year  ended  December  31,  1993 and are  incorporated  herein by
reference.

(5) These exhibits were filed as exhibits to the Company's Annual report on Form
10-KSB for the year  ended  December  31,  1994 and are  incorporated  herein by
reference.

(6) These  exhibits  were filed as exhibits to the Company's  Current  Report on
Form 8-K filed on March 18, 1996, and are incorporated herein by reference.

(7) This exhibit was filed as an exhibit to the  Company's  Quarterly  Report on
Form 10-QSB for the quarter ended June 30, 1996, and is  incorporated  herein by
reference.

(8) These exhibits were filed as exhibits to the Company's Annual Report on Form
10-KSB for the year ended  December 31,  1996,  and are  incorporated  herein by
reference.

(9) These  exhibits  were filed as exhibits to the Company's  Current  Report on
Form 8-K filed on December 29, 1997, and are incorporated herein by reference.

*    Confidential  treatment  has been granted with respect to portions of these
     exhibits.


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