ATRIX INTERNATIONAL INC, 10KSB, 1997-09-26

ATRIX INTERNATIONAL INC
10KSB, 1997-09-26
HARDWARE

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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________________________

FORM 10-KSB
Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the fiscal year ended: Commission file number:
June 30, 1997 0-18880
_____________________________

ATRIX INTERNATIONAL, INC.
(Exact name of Registrant as specified in its charter)
Minnesota 41-1591075
(State of Incorporation) (I.R.S. Employer Identification No.)
14301 Ewing Avenue South
Burnsville, MN 55306
(Address of principal (zip code)
executive offices)

Registrant's telephone number, including area code: (612) 894-6154
_____________________________

Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
_____________________________

Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934, during the past 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-B is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB.[ ]

The Registrant's revenues for the fiscal year ended June 30, 1997 were
$5,801,300.

As of September 12, 1997, 5,653,644 shares of Common Stock of the Registrant
were outstanding, and the aggregate market value of the Common Stock of the
Registrant (based upon the average closing bid and asked prices of the Common
Stock at that date, as reported by NASDAQ), excluding shares owned beneficially
by officers and directors, was approximately $2,826,822.

Part II of this Annual Report on Form 10-KSB incorporates by reference
information (to the extent specific pages are referred to herein) from the
Registrant's Annual Report to Shareholders for the year ended June 30, 1997 (the
"1997 Annual Report"). Part III of this Annual Report on Form 10-KSB
incorporates by reference information (to the extent specific sections are
referred to herein) from the Registrant's Proxy Statement for its annual meeting
to be held October 21, 1997 (the "1997 Proxy Statement").
<PAGE>

This annual report on Form 10-KSB contains certain forward-looking
statements. For this purpose, any statements contained in this report that are
not statements of historical fact may be deemed to be forward-looking
statements. Without limiting the foregoing, words such as "may," "will,"
"expect," "believe," "anticipate," "estimate," or "continue," or comparable
terminology, are intended to identify forward-looking statements. These
statements by their nature involve substantial risks and uncertainties, and
actual results may differ materially depending on a variety of factors,
including the Company's ability to substantially increase sales of its Copy
Management products and its Omega vacuum, loss of, or significant reduction in,
sales to a major customer, or other events.

ITEM 1. BUSINESS

Introduction
------------

The Company was formed in 1987 under the name Tiempo Equities, Inc. for use as
a vehicle to raise capital for investment in an operating business. In October
1990, Tiempo completed a merger with Atrix Tool, Inc., in which Atrix Tool was
merged into Tiempo, and Tiempo changed its name to Atrix International, Inc.
Atrix Tool was incorporated in Minnesota in 1981 and, prior to the merger, was
privately held. Prior to the merger, Tiempo had no business operations. As
used in this report the term "Company" or "Atrix" refers to the combined entity
and its predecessors.

In April of 1994, Atrix completed a study of the remote metering market and
decided to start an effort to develop products, based in its R3 technology, for
the Copy Control market which the Company believes is generating approximately
$40 million in sales annually. The Company negotiated a five year non-exclusive
agreement with Pitney Bowes for its new copy management system which became
active on September 30, 1994. Atrix filed a U.S. patent application covering
certain aspects of the R3 Copy Control System in March of 1995 and was notified
by the U.S. Patent and Trademark office in March of 1997 that its patent has
been approved to issue. During fiscal 1996, the Company introduced two new
software packages to enhance the sales and reporting capabilities for the Copy
Control System. WinTrax - TR, a transactional based software system for the
legal, public relations, and Copy Center markets was released in March of 1996.
This was followed with the introduction of WinTrax - PNP, a notebook software
package allowing the user to automatically retrieve, format, and report data
from R3 Copy Control modules. Both of these packages have been field tested and
are now available for commercial application.

During fiscal 1997, the Company introduced the A-Trax Production Monitoring
System, a new remote metering and monitoring product for the plastics molding
industry. This product is a retro fit system permitting plastic plants to
install units into existing molding machines. Up to 128 units can be networked
together with the Company's unique A-Trax software package. The A-Trax software
is a windows 95 based system, that is in real time communication with the remote
M1 meters. It gathers information regarding production counts, pressure or
temperature alarms, and start or stop times. From this information A-Trax
generates real time reports for operation productivity, plant efficiency, and
parts count. The system was developed with a development partner and has been
operational for several months. Because it was developed from the R3 copy
technology the Company believes it is very competitively priced and will provide
a platform to expand into this estimated $40 million annual plastics monitoring
market. The Company filed a U.S. patent application covering certain aspects of
this system in April of 1997.

1
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The Company has developed and is currently manufacturing and marketing a line
of field service vacuum cleaners for capturing toner from copy machines. Atrix
currently has five models of vacuum cleaners which vary in size and capacity.
All of the models are available with a rubber flex neck, crevice tool,
detachable crevice tool brush and stretch hose, which are statically dissipative
for maximum static protection. The Company also manufactures and markets a
Universal Filter for toner vacuums that is compatible with 3M, Eltrex, and Ulti
Vac vacuums. This unique product has better retention than the competitors
products and is priced aggressively. The Company has been issued a design
patent covering this filter by the U.S. Patent and Trademark Office.

The Omega vacuum, a new low cost full size field service vacuum, was
introduced in June of 1996. The Company believes that this new vacuum is the
lowest price full sized field service vacuum available in the market.
Additionally, the Omega vacuum offers finer filtration, and is quieter and more
durable than competitive models.

Since 1981, Atrix has distributed tools, custom tool kits and related products
to field service technicians for servicing office machines, computers, and
telecommunication products. The Company has developed what it believes to be a
unique procedure for supplying customers with specialized tools by providing
custom catalogs with competitive pricing for Fortune 2,000 Companies.

Product and Services
- --------------------

The Company's products and services consist of the following:

- R3 Copy Control System and Software

- A-Trax Production Monitoring System

- Vacuum Cleaners, Cleaning Equipment and Supplies

- Hand Tools and Custom Tool Kits

- Static Protection Products

- Instrumentation

- Specialty Tools

2
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R3 Copy Control System
----------------------

The R3 Copy Control System is a modular device that is installed on a copy
machine to remotely read, record and report a number of specific events and
automatically transmit the data to a central computer over a standard telephone
line. The copy control system is available in four configurations. Depending
on the model, the copy control system can provide some or all of the following
functions:

- Meter reading for reporting the number of copies made for billing purposes,
scheduling of preventative maintenance and/or measuring usage of supplies

- Service enable/disable to permit an operator to remotely disable and enable
the machine

- Control the access and to account for copy usage by user, group and
division

Selected configurations communicate over existing telephone lines, without the
need for a dedicated line, and multiple monitors may share the same telephone
line. Also, the communication can be initiated by either the host computer or
the monitor. The device consists of hardware, software and firmware including a
complete set of scheduling and reporting software. The R3 Copy Control products
are generally marketed in two formats: stand-alone and networked. The stand-
alone version is more of a commodity product that lends itself to mass
marketing. The networked version requires extensive marketing training. Both
types are targeted towards facilities management companies and large copy
equipment dealers.

During fiscal 1996, the Company introduced two new software packages to
enhance the sales of the R3 Copy Control product line. WinTrax - TR, a
transactional based system for the legal, public relations, and copy center
market was released in March of 1996. Atrix has installations at several large
customers and has recently trained its outside force on the benefits of the
WinTrax - TR system. WinTrax - PNP was introduced to the sales force in June of
1996. This unique software package permits end users to automatically extract
data from Copy Control units and formats the data into meaningful reports for
the user. The Company believes that this provides a strong competitive edge
over known competition.

The R3 copy control system is priced competitively over traditional copy
machine control devices. The retail price ranges from $175 to $930, depending
on the configuration.

Copy Control products accounted for approximately 6% of net sales in both
fiscal 1997 and 1996.

3
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A-Trax Production Monitoring System
-----------------------------------

The A-Trax Production Monitoring System is a "real time" system designed for
the plastics molding industry. It consists of a remote metering hardware module
(M1) that attaches directly to injection and/or blow molding machines. This
meter monitors the machines to measure startup times, report units produced, and
alerts the operator and/or production supervisor of quality problems associated
with pressure or temperature deviations. These alarms are highlighted on the
monitor at the molding machine and are also displayed on the screen of a
personal computer that monitors the entire network of M1s. In addition, the
operator can enter either the number of good or bad parts produced so the
inventory is always current.

The A-Trax software package can monitor up to 128 remote M1s in one facility.
It is a Windows 95 application. The production supervisor can monitor the
complete plant by viewing the PC monitor. Information regarding machine number,
mold number, job status, units produced, alarm status, average cycle times, and
operator efficiency is displayed. All of these fields are updated as new
information is transmitted from the factory floor to the central personal
computer utilizing the A-Trax software.

Additionally, the A-Trax software package includes reporting modules that
highlight unit and plant productivity reports. It uses full color "state of the
art" graphics to display pressure and or temperature curves. These can be used
to provide quality reports to customers of the molding company.

Atrix believes that the A-Trax System will be competitively priced in this
estimated $40 million annual market. The suggested retail price for an M1 is
$1,495 and the A-Trax software sells for $7,500 per installation.

Presently, the Company has one installation at a development partners facility
in the Minneapolis area. Over 30 M1 are networked together and communicating
with one central personal computer. Additionally two units have been sent to a
software house for evaluation and another installation is planned for the
November 1997 timeframe.

Vacuum Cleaners, Cleaning Equipment and Supplies
------------------------------------------------

Every equipment service business needs cleaning supplies and equipment for the
maintenance of office equipment and other products. These supplies include
vacuum cleaners, solvents, detergents, towels and optical cleaners.

4
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The Company has developed and is currently manufacturing and marketing a line
of field service vacuum cleaners for capturing toner from copy machines. Atrix
currently has five models of vacuum cleaners which vary in size and capacity.
The Atrix Junior model is the smallest vacuum and is designed for field service
technicians who generally walk from job to job. The AAA model is a medium-sized
vacuum and is the Company's most popular model. The HCTV is a large capacity
vacuum for use with large volumes of toner or developer and is designed for use
by in-house servicing technicians. The HCTV has 3.5 or 5 gallon disposable
toner filter. The UK model is a medium-sized vacuum designed for the European
market and targeted to high volume service and laser cartridge recyclers. The
three domestic models have high capacity filters that are able to trap particles
as small as 0.3 micron. All of the models are available with a rubber flex
neck, crevice tool, detachable crevice tool brush and stretch hose, which are
statically dissipative for maximum static protection. Atrix also sells these
utensils separately. The personal, AAA and UK models have UL, CSA, CE, and TUV
approval.

In March of 1996 Atrix begun developing a new vacuum based on the experience
it gained from the Porous Media acquisition in November 1995. The new vacuum
line -The Omega Series- combines the best features of the Atrix AAA vacuum, the
Porous Media vacuum, and other vacuums being marketed. The Company believes
that the Omega vacuum is the most efficient, safest, and quietest vacuum
available within its price range. Additionally the Company has added features
that position the new Omega series to be sold into the asbestos and lead
abatement markets as well as the industrial vacuum markets.

Along with vacuum cleaners, the Company also supplies the other expendable
cleaning supplies used by service technicians, such as solvents, detergents,
towels and optical cleaners. These items are readily available from numerous
alternative sources. Atrix has introduced a line of "universal" filters that
can be used in toner vacuums of its major competitors, including 3M Corporation.

The suggested retail prices for the Company's vacuum cleaners range from $99
to $300, depending on the model. Atrix believes that its personal model is the
lowest priced static-free, micro toner vacuum on the market.

Vacuums, cleaning equipment and supplies accounted for approximately 34% and
29%, respectively, of net sales in fiscal 1997 and 1996.

Hand Tools and Custom Tool Kits
-------------------------------

The Company distributes hand tools and assembles and distributes customized
hand tool kits to businesses engaged in servicing office and telecommunication
equipment. These tools are generally manufactured by a third party and include
such tools as screwdrivers, pliers, wire strippers, wrenches, files, chisels,
crimpers, gauges, hammers, knives and ratchets. Customers that purchased more
than $50,000 of products in fiscal 1997 include AT&T, Avnet Industrial, Unisys,
OCE Office Systems, Sears, Hewlett Packard, Longs Ltd., Ames Supply, and Kodak.
Sales to these customers currently comprise approximately 70% to 80% of the
Company's sales of tools and tool kits. For many of these customers, servicing
of their products has become and is an important part of their revenues.

5
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The Company's marketing strategy for its tools and tool kits is to assist its
customers in maintaining a high level of quality and service, while offering
improved cost control. Atrix has been selling tools and tool kits since 1981
and, during that time, has developed the knowledge and experience necessary to
provide its customers with high quality tools and kits while controlling costs.
Whenever possible, the Company assists its customers in the selection of
individual tools and in the design and selection of a tool kit. The Company is
also able to provide most replacement tools the same day ordered. In addition,
the Company monitors the performance of the various tools that it provides to
its customers. The Company works with its suppliers and customers to minimize
problems with tools and provide the best tool for the task to be performed.
Atrix also works directly with the customer's tool committee or engineering
group to assist the customers in finding appropriate solutions or substitutions
for tools that are not satisfactory. The Company believes that this strategy
helps customers reduce their tool costs and avoid costly mistakes.

As a result of the AT&T breakup, Lucent Technologies awarded Avnet Industrial
a contract for the purchase of field service tools. Shortly thereafter, Atrix
negotiated a three year subagreement with Avnet to provide the tools previously
supplied by Atrix directly to AT&T. While Atrix intends to supply tools
throughout the three year period, sales will be at a lower margin, and Atrix
expects the volume to decline. Prior to Avnet being awarded the supply contract
by Lucent Technologies, sales to AT&T had accounted for approximately 23% of the
Company's total revenues. Consequently, the Company is focusing it's sales
efforts on the more profitable vacuum and Copy Control products.

The Company has developed a specialized tool support system for Unisys. Atrix
provides storage for the tools to be purchased by Unisys on a consignment basis
and provides detailed reporting, including product description, unit quantity,
unit cost and total cost.

Tools and tool kit revenues accounted for approximately 38% and 44%,
respectively, of net sales in fiscal 1997 and 1996.

Static Protection Products
--------------------------

In response to the problems associated with static electricity, the Company
has developed and supports many products which protect expensive electronic
components from damage caused by static electricity. One of the products that
the Company markets is a complete line of storage cases which are used by field
service personnel to carry static sensitive electronic components, such as
printed circuit boards, to and from service sites. Another static protection
product offered by the Company is the Field Service Workstation. The
Workstation consists of a mat along with an anti-static wrist strap, which
provide for the safety of technicians as well as the static sensitive
components. The mat and wrist strap enables the technician to ground himself
and allows for static to dissipate into the workstation mat for proper
grounding. The Company also sells an anti-static watch that combines the
function of a wrist strap with a digital chronograph. The anti-static watch
encourages technicians to wear a wrist strap when servicing a machine, and the
Company believes that it is the only one of its kind.

Static protection products accounted for approximately 4% of net sales in both
fiscal 1997 and 1996. Sales of static protection products have increased
recently as the computer industry has improved and manufacturers seek to comply
with ISO 9000 standards.

6
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Instrumentation
---------------

At the present time, the Company markets recognized brand names in meters and
other instrumentation, such as Fluke, Beckman and Simpson. The Company also
markets a number of diagnostic instruments for electronic equipment such as
EPROM duplicators, telephone test sets, hard and floppy disk analyzers, break
out boxes, electrometers and power surge suppressers. Atrix supplies meters to
field service technicians directly and also handles warranty repair on behalf of
the manufacturers to reduce down time to the technician.

Instrumentation accounted for approximately 14% and 12%, respectively, of net
sales in fiscal 1997 and 1996.

Specialty Tools
---------------

The Company also has the expertise to design and manufacture specialty and
custom tools to meet customer needs in unique or problem areas. Specialty tools
are designed by the Company's engineers along with the customer to the
customer's specifications and are purchased and assembled by the Company. For
example, Atrix assisted Xerox in designing a tool called the RHHD which is a
remote hand-held device used by the technician to enable and disable various
copier functions. Atrix is currently producing and selling approximately ten
specialty tools.

The Company's gross margins on specialty tools range from 40% to 60%.
Specialty tools accounted for approximately 3% of net sales in both fiscal 1997
and 1996.

Markets
- -------

The Company believes there is a developing market in several industries for
the technology used in the new R3 Copy Control System. Initially, Atrix has
focused on the copy machine market. In July of 1995, the Company introduced a
new version of the R3 Copy Control System at the NOMDA show in Las Vegas. This
new product features the ability to accumulate date stamped transactions for
detailed billing and accounting. It is estimated that over $40 million of copy
control products are shipped annually, and Atrix began shipping product into
this market in March of 1995.

Based on the number of field service technicians and an assumed usage rate of
vacuum cleaners, Atrix estimates the world-wide market for vacuum cleaners and
filters used in the maintenance of office equipment to be approximately $15 -
$20 million annually.

The Company's markets tools and tool kits, instrumentation, repair and
replacement parts, and cleaning equipment and supplies to field service
technicians for servicing office products, computers, and telecommunication
equipment. This market has continued to grow as the use of copying machines,
printers, FAX machines, personal computers, digital key sets and other office
and telecommunication equipment has increased throughout the workplace. The
growth of this market must be supported with trained field service technicians
who are generally responsible for installation and removal, maintenance and
repair, rehabilitation and upgrading, parts and consumable supplies, and
operator training and technical support. Atrix believes that as the U.S.
economy grows and shifts to a service economy, the opportunities for companies
that provide office machine service and support, like Atrix, will increase.

7
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Currently, emerging service market opportunities exist in the
telecommunication industry, office automation and the personal computer
industry. In the past, manufacturers of office equipment generally included
field service as a function of sales and marketing and treated service as an
overhead cost of doing business. Today it is emerging as its own industry.
This emergence evolved through the development of high technology electronic
products such as personal computers, peripherals (such as printers and data
storage devices) copying machines and FAX machines, which are now used
extensively in day-to-day business operations. Today, field service has
attained departmental status and has become its own profit center within
manufacturers of this type of equipment.

According to industry estimates, there are approximately 1,100,000 field
service technicians in the U.S., approximately 5,900 field service organizations
servicing office equipment and approximately 3,300 field service organizations
servicing telecommunications equipment.

Sales and Marketing
- -------------------

The Company's customers include manufacturers, dealers and purchasers of
office equipment. The Company maintains active personal contact with its
current customers, as well as prospective customers, by telephone, through
personal visits and at trade shows. Atrix also occasionally places
advertisements in trade journals, such as Field Service Manager and Business
Technology Association. Atrix also sells certain of its products through major
office supply catalogs; currently products are sold through seven domestic
catalogs and four European catalogs. The Company's sales strategy is to
persuade potential customers that the Company's products and services will
benefit the customer's present method of doing business, and that the Company's
products and services have significant advantages over the products and services
of competitors.

Atrix has invested in a desk top publishing system to produce customized
catalogs for large customers. The customized catalogs typically contain tools,
vacuum cleaners, cleaning supplies, instrumentation and various other products
which are frequently purchased by the customer. The Company has produced
customized catalogs for Avnet Industrial, Ricoh, Alco Standard, Danka, and
Unisys. The Company also plans to offer customized catalogs to other large
customers.

Atrix currently employs eight people in sales and marketing positions. Seven
are located in the Minneapolis area and one is in another location. Six of the
eight are outside salespeople who are responsible for calling directly on larger
customers to stimulate business using outside catalogs. Atrix has also
appointed five U.S. distributors and three international distributors for
distribution of the Omega vacuum for maintenance of office equipment and eight
distributors for distribution of the Omega vacuum for the asbestos and lead
abatement industry.

In Europe, sales are made through eight independent European distributors and
two sales representatives in Germany. Atrix has also appointed nonexclusive
distributors covering Australia, Canada Korea and South America. Atrix had
foreign sales of approximately $757,000 (approximately 13% of net sales) and
approximately $829,000 (approximately 14% of net sales) respectively, in fiscal
1997 and 1996. Since May 1994, the Company's vacuums have been carried in one
of Europe's largest office equipment catalogs, INMAC. The Company anticipates
that foreign sales will continue to be a significant part of its business.

8
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Major Customers and Distributors
- --------------------------------

In fiscal 1997, the Company had one customer that accounted for 23% of total
sales. The loss of this customer could have a material adverse effect on the
Company. Important customers and distributors include: Ames Supply, Aramsco,
Pitney Bowes, Hewlett Packard, Ikon, Inmac Corporation, Ipco, Leco, Katun
Corporation, McMaster Carr, OCE, Sears, Avnet Industrial, Unisys Corporation,
AT&T, Unisys Company, Longs International and Xerox.

The Company generally conducts business with its customers with letter
agreements, contracts and/or purchase orders.

Competition
- -----------

While the patent has been approved for the new R3 Copy Management System, it
faces substantial competition in this area of its business from companies
seeking to provide automated billing and tracking of office machine usage using
other technologies.

At the present time, there are a few other U.S. companies which sell vacuum
cleaners for use in the maintenance of office equipment and other products,
including 3M Corporation and Eltrex Corporation. The Company's AAA and Omega
model compete directly with a product manufactured by 3M Corporation. In the
European market, Convac is the Company's most significant competitor.

There are many national, regional and local companies which assemble and sell
hand tools and hand tool kits to businesses engaged in servicing office
equipment. The Company's primary competitors on a national basis are Jensen
Tool, Arizona; Marshall Industries, California; Kaufman Distributing Company,
Georgia; Ames Supply Company, Illinois; and Katun, Minnesota. In addition, any
one of the many companies that manufacture and sell hand tools could develop
hand tools kits that would directly compete with Company products and services.
Similarly, companies or persons not now recognized in the industry may design
and develop products and services which are competitive with and superior to the
Company's products and services.

Some of the present and potential competitors of the Company have greater
manufacturing and marketing capabilities than the Company and greater research,
development, financial, and personnel resources and more extensive business
experience than the Company. Although the Company believes that its products
and marketing system possess advantages over competing products currently being
marketed, there can be no assurance that Company will be able to continue to
compete effectively in the marketplace as its present and potential competitors
are able to duplicate or improve upon its products, marketing system, or other
services.

Research and Development
- ------------------------

The Company's research and development activities are generally focused in two
areas: designing specialty tools and cleaning equipment in response to specific
customers or industry needs, and the design and development of software and
hardware to further the acceptance of the R3 Copy Management System. The demand
for these products continue to grow for the following reasons:

9
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- Existing electronic equipment generates demand for new servicing tools and
equipment due to cost containment pressures.

- New products and technology for the office environment, such as laser
printers, fax machines, and multi-purpose copiers, printers, fax machine
create a demand for new servicing and reporting technology.

Atrix has developed several new products, including:

- The Universal toner filter that can be used in 3M, Eltrex, Ulti Vac and
Atrix AAA Vacuums.

- The Omega vacuum cleaner introduced in June of 1996.

- The copy management system packages WinTrax - TR and WinTrax - PNP.

- The new A-Trax Production Monitoring System for the plastics industry.

The Company believes that its ability to develop specialty products for its
customers and to develop its own products is important to the success of its
business operations. However, there can be no assurance that the Company will
be able to continue to develop such products, or that such products will achieve
any degree of market acceptance.

Patents and Proprietary Protection
- ----------------------------------

The Company has been issued a U.S. design patent relating to certain features
of its universal vacuum filter product. In addition, in March 1997, the Company
was notified by the U.S. Patent and Trademark office that a utility patent
covering certain aspects of the Company's R3 Copy Control System has been
approved to issue. In May 1997, the Company applied for a U.S. patent covering
certain aspects of its new A-Trax Production Monitoring System. There can be no
assurance, however, that any patents will issue on patent applications or that
any patents granted will be valid or otherwise of value to the Company. The
Company currently relies on trade secret law to protect its rights to
proprietary information. No assurance can be given, however, that the Company
will be successful in maintaining the confidentiality of its proprietary
information. In the absence of valid patent or trade secret protection, the
Company may be vulnerable to competitors who could lawfully attempt to copy the
Company's products. Moreover, there can be no assurance that other competitors
may not independently develop the same or similar technology. Similarly, while
the Company believes that is has all rights necessary to manufacture and sell
its products without infringement of patents or other rights held by others, the
Company has not conducted a formal infringement search and there can be no
assurance that such conflicting rights do not exist.

Suppliers
- ---------

The Company believes that supplies and component parts for all of the products
that it distributes (but does not manufacture) are available from a number of
suppliers and subcontractors and that the loss of any one supplier or
subcontractor would not have a material adverse effect on the Company.

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<PAGE>

The Company has single-source suppliers for three of the components used in
products that the Company manufactures and multiple suppliers for the remaining
components. One of these single-source suppliers has a named back-up supplier,
and the other two make plastic parts with tooling that is owned by the Company.
Although the loss of one of these suppliers could take up to two months to
replace, the Company does not believe that the loss of any of these three
suppliers would have a material adverse effect on the Company.

Employees
- ---------

As of June 30, 1997, the Company had 28 full-time employees, 4 in management,
6 in administration, 2 in research and development, 8 in sales and marketing and
8 in manufacturing and warehouse. In addition, the Company had 9 part-time
employees, 2 in sales and 7 in manufacturing and warehouse. The Company is not
subject to any collective bargaining agreement and believes that its employee
relations are good.

ITEM 2. DESCRIPTION OF PROPERTY

Facilities
- ----------

The Company's facilities are located at 14301 Ewing Avenue South, Burnsville,
Minnesota 55306, and consist of approximately 37,500 square feet of office,
manufacturing and warehouse space. The Company leases this space pursuant to a
lease which provides for rent of approximately $16,616 per month (including
operating expenses and real estate taxes). The lease expires in 1998, and the
Company has an option to renew the lease for one additional five year period at
an increased rental rate. The Company anticipates that it will be able to find
suitable space at another location on satisfactory terms if it chooses not to
renew the lease.

ITEM 3. LEGAL PROCEEDINGS

NONE

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

No matter was submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this Report.

ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT

The Company's executive officers and their ages along with the offices held as
of September 15, 1996, are as follows:

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<TABLE>
<CAPTION>
NAMES OF NOMINEES AGE POSITION
- ----------------- --- --------
<S> <C> <C>

Steven D. Riedel 54 President, Chief Executive Officer,
Chief Financial Officer and Director

Clifford B. Meacham 63 Vice Chairman of the Board of Directors

Dean L. Gerber 41 Vice President and Chief Financial Officer
</TABLE>

STEVEN D. RIEDEL joined Atrix as President on December 8, 1992. He became
Chief Executive Officer and was appointed to the Board of Directors in May of
1993. He also was appointed Chief Financial Officer from November 1993 to August
1997. Prior to joining Atrix, he was President and Chief Executive Office of
EnerconData. Mr. Riedel was also employed by Northern Telecom as Vice President
of Product Management for IOS division in Minneapolis. Previously, he held
numerous management positions with Burroughs Corporation with the most recent
being regional sales manager for the 15 state midwest region.

CLIFFORD B. MEACHAM was the President and Treasurer of Atrix Tool, Inc., as
well as one of the directors and the majority shareholder of Atrix Tool, Inc.
from the date of its incorporation in 1981. He was elected as a member of the
Board of Directors and as an officer and as president of the Company effective
with the merger of Atrix Tool, Inc. into Tiempo Equities, Inc. on October 17,
1990. In April 1996, Mr. Meacham retired from active employment with the
Company. Mr. Meacham is an engineer, having graduated from the Utica Institute
of Technology, Utica, New York in 1952.

DEAN L. GERBER joined Atrix as Controller in September 1996. He became Vice
President and Chief Financial Officer in August 1997. Mr. Gerber, a Certified
Public Accountant, was previously employed for fifteen years by Unisys
Corporation and by the Arizona Country Club prior to that, as Controller.

PART II

ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

The information under the caption "Atrix Stock Trading Prices" on page 4 of
the Company's 1997 Annual Report is incorporated herein by reference.

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

The Company's management discussion and analysis on pages 5 through 7 of
the Company's 1997 Annual Report is incorporated herein by reference.

ITEM 7. FINANCIAL STATEMENTS

The Company's financial statements and the report of its independent
accountants included on pages 8 through 16 of the Company's 1997 Annual Report
are incorporated herein by reference.

12
<PAGE>

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

Not applicable.

PART III

ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

A. Directors of the Company.
------------------------

The information under the captions "Election of Directors -- Information About
Nominees" and "Election of Directors -- Other Information About Nominees" in the
Company's 1997 Proxy Statement is incorporated herein by reference.

B. Executive Officers of the Company.
---------------------------------

Information concerning Executive Officers of the Company is included in this
Report under Item 4A "Executive Officers of the Registrant."

C. Section 16(a) Beneficial Ownership Reporting Compliance
-------------------------------------------------------

The information under the caption "Section 16(a) Beneficial Ownership
Reporting Compliance" in the Company's 1997 Proxy Statement is incorporated
herein by reference.

ITEM 10. EXECUTIVE COMPENSATION

The information under the captions "Election of Directors -- Director
Compensation" and "Compensation and Other Benefits" in the Company's 1997 Proxy
Statement is incorporated herein by reference.

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT

The information under the caption "Principal Shareholders and Ownership of
Management" in the Company's 1997 Proxy Statement is incorporated herein by
reference.

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information under the caption "Certain Transactions" in the Company's 1997
Proxy Statement is incorporated herein by reference.

ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K

(a.) Exhibits

13
<PAGE>

The exhibits to this Report are listed in the Exhibit Index on pages 16
through 17 of this Annual Report on Form 10-KSB.

A copy of any of the exhibits listed or referred to above will be furnished at
a reasonable cost to any person who was a shareholder of the Company as of
September 12, 1997, upon receipt from any such person of a written request for
any such exhibit. Such request should be sent to Atrix International, Inc.,
14301 Ewing Avenue South, Burnsville, MN 55306, Attention: Sharon Maras

The following is a list of each management contract or compensatory plan or
arrangement required to be filed as an exhibit to this Annual Report on Form 10-
KSB pursuant to Item 14(c):

1. Supplemental Retirement Benefit Agreement between the Company and Clifford
Meacham, dated April 1, 1996. Filed herewith. Incorporated by reference
to Exhibit 10.2 to the Company's Annual Report on Form 10-KSB for the year
ended June 30, 1996.

2. 1994 Stock Option Plan. Incorporated by reference to Exhibit 10.4 to the
Company's Annual Report on Form 10-KSB for the year ended June 30, 1994.

(b.) Reports on Form 8-K: None during the fourth quarter of the fiscal year
ended June 30, 1997.

14
<PAGE>

SIGNATURES

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

Dated: September 26, 1997 ATRIX INTERNATIONAL, INC.

By /s/ Steven D. Riedel
-----------------------------------
Steven D. Riedel
Chief Executive Officer and President

Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below on September 26, 1997 by the following persons
on behalf of the Company and in the capacities indicated.

Signature Title
--------- -----

/s/ Steven D. Riedel
- --------------------------- President (Principal Executive Officer)
Steven D. Riedel and Director

/s/ Dean L. Gerber
- --------------------------- Vice President and Chief Financial Officer
Dean L. Gerber (Principle Financial and Accounting Officer)

- --------------------------- Vice Chairman and Director
Clifford B. Meacham

- --------------------------- Chairman of the Board and Director
W. William Bednarczyk

/s/ Gordon H. Ritz
- --------------------------- Director
Gordon H. Ritz, Sr.

- --------------------------- Director
Charles J.B. Mitchell, Jr.

/s/ William E. Bennett
- --------------------------- Director
William E. Bennett

/s/ Lester H. Eck
- --------------------------- Director
Les Eck

15
<PAGE>

ATRIX INTERNATIONAL, INC.

EXHIBIT INDEX TO ANNUAL REPORT
ON FORM 10-KSB
For the Fiscal Year Ended June 30, 1997

Item No. Item Method of Filing
- -------- ---- ----------------
<S> <C> <C>
3.1 Restated Articles of Incorporation,
as amended, of the Company......... Incorporated by reference to Exhibit 2C to the Company's
Registration Statement on Form S-1 (File No. 33-40571).

3.2 Bylaws of the Company.............. Incorporated by reference to Exhibit 3B to the Company's
Registration Statement on Form S-18 (File No. 33-2448C).

4.1 Specimen form of the Company's
Common Stock Certificate........... Incorporated by reference to Exhibit 4B to the Company's
Registration Statement on Form S-1 (File No. 33-40571).

4.2 Restated Articles of Incorporation,
as amended, of the Company......... See Exhibit 3.1.

4.3 Bylaws of the Company.............. See Exhibit 3.2.

10.1 Supplemental Retirement Benefit
Agreement between the Company and
Clifford Meacham dated
April 1, 1996...................... Incorporated by reference to Exhibit 10.2
to the Company's Annual Report on Form 10-
KSB for the year ended June 30, 1996.

10.3 1994 Stock Option Plan............. Incorporated by reference to Exhibit 10.4
to the Company's Annual Report on Form 10-
KSB for the year ended June 30, 1994 (File
No. 0-18880).
10.4 Form of Warrant dated
November 5, 1993................... Incorporated by reference to Exhibit 10.5
to the Company's Registration Statement on
Form SB-2 (File No. 33-75092).

</TABLE>

<PAGE>

<S> <C> <C>
10.5 Form of Warrant dated
September 30, 1995 ........... Incorporated by reference to Exhibit 10.5
to the Company's Annual Report on Form 10-
KSB for the year ended June 30, 1996 (File
No. 0-18880).

10.6 Form of Investment Agreement,
dated September 30, 1995 ..... Incorporated by reference to Exhibit
10.6 to the Company's Annual Report on
Form 10-KSB for the year ended June 30,
1996 (File No. 0-18880).

10.7 Loan Agreement dated
April 25, 1995 between the
Company and Riverside Bank.... Incorporated by reference to Exhibit
10.7 to the Company's Annual Report on
Form 10-KSB for the year ended June 30,
1995 (File No. 0-18880).

10.8 Amendment to Riverside Loan
Agreement, dated
October 25, 1995 ............. Incorporated by reference to Exhibit 10.1
to the Company's Quarterly Report on Form
10-QSB for the quarter ended December 31,
1995 (File No. 0-18880).

10.9 Amendment to Riverside Loan
Agreement, dated
May 21, 1997.................. Filed herewith electronically.

10.10 Lease Agreement dated
December 29, 1987 between Paul
and Lillian P. Strom and the
Company....................... Incorporated by reference to Exhibit 10G
to the Company's Registration Statement on
Form S-18 (File No. 33-2448C).
13.1 1997 Annual Report to
Shareholders.................. Filed herewith electronically.

23.1 Consent of Independent
Accountants................... Filed herewith electronically.

27.1 Financial Data Schedule....... Filed herewith electronically.

</TABLE>

<PAGE>
Exhibit 10.9

[LETTERHEAD OF RIVERSIDE BANK]

May 21, 1997

Dean Gerber
Atrix International

Dear Mr. Gerber:

Please be informed we have released certificate of deposit #109063 in the
principal amount of $267,917, as part of the collateral structure for your
current line of credit. It is no longer a requirement that the loan be
secured with this additional collateral.

This certificate is currently being held in our safekeeping department and will
mature in late October. If you have any further questions please feel free to
call me at 897-0263.

Sincerely,

/s/ Dave Peterman
- ----------------------
Dave Peterman
Credit Analyst

<PAGE>
<TABLE>
<CAPTION>
Financial Highlights
- --------------------------------------------------------------------------------------------------------
For Years Ending June 30,

1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Operating Results
Net Sales $5,801,300 $6,028,427 $5,778,179 $5,023,079 $4,580,764
Income (loss) from operations 57,813 142,896 156,540 (628,658) (524,171)
Patent infringement settlements 0 1,990 169,496 1,117,364
Net income (loss) 200,870 144,041 300,282 405,189 (602,154)
Net income (loss) per share 0.04 0.03 0.06 0.08 (0.12)
Weighted average number
of common shares outstanding 5,653,644 5,541,345 5,201,978 5,167,722 5,192,549

Balance Sheet Data
Total assets 4,084,724 4,095,959 3,380,115 3,097,398 2,558,870
Long-term debt, net
of current maturities 111,294 162,607 8,106 13,766 62,656
Working capital 1,766,717 1,648,615 1,217,401 875,172 143,447
Shareholders' equity 2,468,677 2,267,807 1,800,016 1,499,734 1,100,068
Book value per
common share 0.44 0.40 0.35 0.28 0.21
Common shares outstanding
at June 30, 5,653,644 5,653,644 5,201,978 5,201,978 5,155,038
</TABLE>

Atrix Stock Trading Prices

The Company's Common Stock is currently traded in the over-the-counter market
and is quoted on the National Association of Securities Dealers, Inc. Automated
Quotation System (NASDAQ). The table at the right sets forth, for the periods
indicated, the high and low bid prices for the Company's common stock as
reported by NASDAQ. Such quotations represent interdealer prices, without retail
markup, markdown or commission, and do not necessarily represent actual
transactions.

As of September 12, 1997, there were 5,653,644 shares of Common Stock
outstanding, held of record by approximately 191 persons. The Company has not
declared or paid any cash dividends on its Common Stock since its inception and
does not intend to pay any dividends for the foreseeable future.

<S> <C> <C>
Fiscal Year 1997 High Low
---- ---
First Quarter (from July 1, 1996) 7/8 9/16
Second Quarter 13/16 1/2
Third Quarter 13/16 1/2
Fourth Quarter 3/4 1/2

Fiscal Year 1996 High Low
---- ---
First Quarter (from July 1, 1995) 1 13/16
Second Quarter 15/16 3/4
Third Quarter 3/4 11/16
Fourth Quarter 27/32 25/32
</TABLE>

Atrix International, Inc. 4 1997 Annual Report
<PAGE>

Management's Discussion & Analysis
- --------------------------------------------------------------------------------

Net Sales
- ---------

Net sales decreased by $227,127 or approximately 4% to $5,801,300 in fiscal 1997
from $6,028,427 in 1996 and $5,778,179 in 1995. Sales for the year ended June
30, 1997, (exclusive of royalties), were $5,801,300 compared to sales for the
previous year of $6,021,988. Royalty payments were $0 for the current year and
$6,439 for the previous year. These payments were a result of a number of patent
infringement settlements from prior years.

The primary reason for the decrease in sales during 1997 was a decrease in the
less profitable distribution sales.

For fiscal 1997, sales of Copy Management products fell by 8% over sales of
$348,598 in the prior year. Sales of Copy Management products increased in
fiscal 1996 after the Company entered into a five-year agreement with Pitney
Bowes Copier Division for development and sales of the Company's current Copy
Management System and introduced the WinTrax software for its Copy Management
Systems. Sales in fiscal 1996 included a nonreccuring inventory stocking
shipment of approximately $100,000 from Pitney Bowes that was not replicated in
fiscal 1997, which accounted for the decrease in fiscal 1997. The Company
expects Copy Control sales will increase in fiscal 1998.

Sales of vacuums and supplies were $1,955,070, $1,759,366 and $1,417,994 in
1997, 1996 and 1995, respectively. The increase in 1997 from prior years was
primarily due to the strong acceptance of the Omega vacuum product line, which
was introduced in June of 1996. The Company anticipates vacuum sales to continue
to increase in fiscal 1998.

Distribution sales were $3,048,152, $3,384,882 and $3,056,923 in 1997, 1996 and
1995 respectively. The increase in fiscal 1996 was primarily due to increased
distribution through custom catalogs, which the Company began developing in
fiscal 1996 for some of its key customers. The decrease in fiscal 1997 was
primarily due to a reduction of both loose tools and tool kits, and occurred as
a result of the break-up of AT&T, a major tool customer. The decrease also
reflects the Company's decision to de-emphasize sales of tool products and focus
its efforts on the more profitable lines of vacuum products and copy control
products. Accordingly, the Company expects distribution sales to continue to
decline.

Royalties
- ---------

The Company received R3 patent royalties of $0, $6,439 and $408,364 in 1997,
1996 and 1995 respectively, due to enforcement of its R3 patent during these
years. The R3 patent expired in April 1995 and therefore the Company does not
expect to receive meaningful royalties in future periods.

The following table shows the Company's revenues for the periods indicated by
product line, total manufactured products and total distributed products.

Years Ended June 30,

Product Line 1997 1996 1995
---- ---- ----

Vacuums and Supplies $1,955,070 $1,759,366 $1,417,994
ESD Equipment 216,461 234,285 281,287
Circuit Board Cases 29,057 67,935 27,940
Special Assemblies 176,587 206,922 437,463
---------- ---------- ----------
Total Manufacturing 2,377,175 2,268,508 2,164,684
---------- ---------- ----------

Loose Tools 1,930,572 2,292,800 1,921,650
Tool Kits 296,325 376,869 368,641
Instrumentation 821,255 715,213 766,632
---------- ---------- ----------
Total Distribution 3,048,152 3,384,882 3,056,923
---------- ---------- ----------

Copy Control Monitor 322,246 348,598 147,691
Royalties 0 6,439 408,364
Disposal 0 0 517
Injection Molding Monitor 53,727 20,000 0
---------- ---------- ----------
Total Sales $5,801,300 $6,028,427 $5,778,179
---------- ---------- ----------

Atrix International, Inc. 5 1997 Annual Report
<PAGE>

- -------------------------------------------------------------------------------

Gross Profit
- ------------

The gross profit margin as a percentage of sales was 29.3% in 1997, 29.4% in
1996 and 33.1% in 1995.

The gross profit margin decreased slightly in 1997 from 1996 due primarily to
changes in the Company's product mix, moving away from the less profitable
distribution sales and towards the more profitable vacuum products, which was
largely offset by an increase in the inventory reserve. The decrease in the
gross profit margin from fiscal 1995 to 1996 was primarily due to the decrease
in royalties from fiscal 1995 to 1996. The Copy Control royalties had carried a
gross margin of approximately 50%.

Selling, General and Administrative Expenses
- --------------------------------------------

Selling, general and administrative expenses were $1,642,760, $1,630,934 and
$1,754,398 in 1997, 1996 and 1995, respectively, which were 28%, 27% and 30% of
sales for the years 1997, 1996 and 1995 respectively. The primary components of
selling, general and administrative expense are salaries, commissions, employee
benefits, research and development, retirement benefits, rent and insurance.

The increase in expenses in fiscal 1997 was due to an increase in retirement
benefits paid during the year of $26,000, in addition to establishing a reserve
for future retirement benefits of $56,000. These expenses and reserves were
largely offset by decreases in catalog expenses of $33,000 and research and
development expenses of $41,000. Catalog expense decreased from fiscal 1996, as
fiscal 1996 included a one-time mailing of approximately 40,000 catalogs.
Research and development costs decreased in fiscal 1997 as expenses relating to
the development of the A-Trax Production Monitoring System were capitalized. The
Company expects operating expenses as a percentage of sales to be lower in
fiscal 1998.

The decrease in operating expenses in 1996 from 1995 was primarily due to a
reduction in patent amortization of $143,000.

Income From Operations
- ----------------------

Income from operations was $57,813 compared to $142,896 and $156,540 for 1997,
1996 and 1995 respectively. The $85,083 decrease from 1996 to 1997 can be
attributed to increased reserves of $89,000 for inventory, accounts receivable
and pension costs. Without the increases to reserves, the Company would have
reported income from operations of $146,813. The decrease in 1996 over 1995 is
due primarily to lower patent royalties and lower gross margins, while
controlling operating expenses. The Company expects to continue to generate
income from operations in fiscal 1998.

Interest Income/(Expense), Net
- ------------------------------

Net interest income/(expense) was $18,540, ($2,227) and ($18,404) in 1997, 1996
and 1995 respectively. The decrease in net interest expense in 1997 is primarily
due to minimizing line of credit draws while applying cash reserves against the
line of credit on a daily basis.

Income Taxes
- ------------

At June 30, 1997, the Company has net operating loss carryforwards of
approximately $1,087,000 for income tax purposes which expire in the years 2003
to 2008. The Company has not recognized any significant income tax expense
during 1995, 1996 or 1997, due to utilization

Atrix International, Inc. 6 1997 Annual Report
<PAGE>

Management's Discussion & Analysis
- --------------------------------------------------------------------------------

of available net operating loss carryforwards. During 1997, the Company
recognized approximately 124,000 in tax benefits primarily from tax loss
carryforwards.

Net Income
- ----------

Net income was $200,870 in 1997 compared to $144,041 and $300,282 for 1996 and
1995, respectively. The increase in net income from 1996 to 1997 of $56,829 was
primarily due to the tax carryforward benefit of $124,000 which the Company
recognized in fiscal 1997, and a net increase in interest income of $20,769
which was offset by the reserve increases discussed above. The decrease in net
income from fiscal 1995 to 1996 was primarily due to $408,364 in higher margin
patent royalties received in fiscal 1995.

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

The Company's cash and marketable securities at June 30, 1997 was $1,715,571
compared to $1,485,163 at June 30, 1996. Working capital increased to $1,766,717
from $1,648,615 at June 30, 1996. The current ratio as of June 30, 1997 and 1996
was 2.2 and 2.0 respectively. The increases in the Company's cash and working
capital position are primarily due to cash generated from operations.

In October 1996, the Company renewed its working capital line of credit with
Riverside Bank at an interest rate of prime. The borrowing base under the line
of credit is the lesser of (a) $1,250,000 or (b) the sum of (I) 75% of eligible
accounts receivable plus (ii) 50% of eligible inventory. As of June 30, 1997,
credit line advances were $850,000. The terms of the line of credit require the
Company to maintain tangible net worth of at least $1,700,000. The line of
credit is secured by the Company's assets. The line of credit has an initial
term that expires in October 1997, but is due on demand at any time. The Company
is required to pay accrued interest on a monthly basis.

Cash provided by operations increased to $521,358 in fiscal 1997 from $86,246 in
1996. The increase in 1997 was due primarily to increased net income, non-cash
depreciation, and amortization expense and other favorable changes in working
capital components. The Company also generated cash from investing and financing
activities due primarily to purchases of marketable securities and a decrease in
restricted cash.

The Company's plans for the fiscal year ending June 30, 1998 do not call for
additional capital. The Company plans to finance its operations for the fiscal
year ending June 30, 1998 with working capital and bank borrowing, if necessary.
The Company expects to generate cash from operations during fiscal 1998 by
increasing sales, improving gross profit margins and controlling operating
expenses. The Company believes that funds generated from operations and
borrowings available under the line of credit will be adequate to meet the
Company's working capital requirements for the foreseeable future.

Atrix International, Inc. 7 1997 Annual Report
<PAGE>

Report of Independent Accountants
---------------------------------

To The Board of Directors and Shareholders of
Atrix International, Inc.

In our opinion, the accompanying balance sheet and related statements of income,
of shareholders' equity and of cash flows present fairly, in all material
respects, the financial position of Atrix International, Inc. at June 30, 1997
and 1996, and the results of its operations and its cash flows for each of the
three years in the period ended June 30, 1997 in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.

/s/ Price Waterhouse
Minneapolis, Minnesota
July 31, 1997

Atrix International, Inc. 8 1997 Annual Report

<PAGE>
<TABLE>
<CAPTION>
Balance Sheet
- --------------------------------------------------------------------------------------------------------------------

June 30,
1997 1996
---- ----
<S> <C> <C>
Assets
Current Assets:
Cash and cash equivalents $1,386,514 $ 541,515
Restricted cash 250,000
Marketable securities, at cost 329,057 693,648
Accounts receivable, less allowance for doubtful accounts of
$27,000 and $16,000, respectively 543,091 757,650
Inventories 918,493 994,858
Prepaid expenses 94,315 76,489
---------- -----------
Total current assets 3,271,470 3,314,160
---------- -----------
Deferred income taxes 124,000
Property and equipment, net 375,624 492,096
Intangible assets, net 82,381 82,345
Capitalized software development costs, net 231,249 207,358
---------- -----------
Total assets $4,084,724 $ 4,095,959
========== ===========

Liabilities and Shareholders' Equity

Current Liabilities:
Accounts payable $ 494,766 $ 595,388
Notes payable - bank 850,000 941,299
Current maturities of long-term debt 62,622 76,553
Accrued liabilities 97,365 52,305
---------- -----------
Total current liabilities 1,504,753 1,665,545
Long-term debt, net of current maturities 111,294 162,607
---------- -----------
Total Liabilities 1,616,047 1,828,152
---------- -----------
Shareholders' Equity:

Preferred stock, $0.01 par value, 3,000,000
shares authorized, no shares issued
Common stock, $0.01 par value, 50,000,000
shares authorized, 5,653,644
shares issued and outstanding, respectively 56,536 56,536
Additional paid-in capital 3,276,969 3,276,969
Accumulated deficit (864,828) (1,065,698)
---------- -----------
Total shareholders' equity 2,468,677 2,267,807
---------- -----------
Total liabilities and shareholders' equity $4,084,724 $ 4,095,959
========== ===========
</TABLE>
See accompanying notes to the financial statements.

Atrix International, Inc. 9 1997 Annual Report
<PAGE>

Statement of Income
- --------------------------------------------------------------------------------
For Years Ending June 30, 1997, 1996, and 1995

[Artwork in Background]
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Net sales $5,801,300 $6,028,427 $5,778,179
Cost of sales 4,100,727 4,254,597 3,867,241
---------- ---------- ----------
Gross profit 1,700,573 1,773,830 1,910,938
Selling, general and administrative expenses 1,642,760 1,630,934 1,754,398
---------- ---------- ----------
Income from operations 57,813 142,896 156,540
Interest income/(expense), net 18,540 (2,227) (18,404)
Patent infringement settlements 0 1,990 169,496
---------- ---------- ----------
Income before income taxes 76,353 142,659 307,632
Income tax expense/(benefit) (124,517) (1,382) 7,350
---------- ---------- ----------
Net income $ 200,870 $ 144,041 $ 300,282
========== ========== ==========
Net income per share $ 0.04 $ 0.03 $ 0.06
Weighted average number of
common shares outstanding 5,653,644 5,541,345 5,201,978
</TABLE>
See accompanying notes to the financial statements.

Statement of Shareholder's Equity
- --------------------------------------------------------------------------------
For Years Ending June 30, 1997, 1996, and 1995

[Photo of sky screened back behind table]
<TABLE>
<CAPTION>
Common Stock Additional
Number Paid-in Accumulated
of Shares Amount Capital Deficit Total
--------- ------ ---------- ----------- -----
<S> <C> <C> <C> <C> <C>
Balance, June 30, 1994 5,201,978 $52,019 $2,957,736 $(1,510,021) $1,499,734

Net income 300,282 300,282
--------- ------- ---------- ----------- ----------
Balance, June 30, 1995 5,201,978 52,019 2,957,736 (1,209,739) 1,800,016

Warrants converted, net of related
expenses of $15,000 451,666 4,517 319,233 323,750

Net Income 144,041 144,041
--------- ------- ---------- ----------- ----------

Balance, June 30, 1996 5,653,644 56,536 3,276,969 (1,065,698) 2,267,807

Net Income 200,870 $ 200,870
--------- ------- ---------- ----------- ----------

Balance, June 30, 1997 5,653,644 $56,536 $3,276,969 $ (864,828) $2,468,677
========= ======= ========== =========== ==========
</TABLE>
See accompanying notes to the financial statements.

Atrix International, Inc. 10 1997 Annual Report

<PAGE>

Statement of Cash Flows
- -------------------------------------------------------------------------------
For Years Ending June 30, 1997, 1996, and 1995
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 200,870 $ 144,041 $ 300,282
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 226,952 244,968 374,266
Deferred income taxes (124,000)
Changes in current assets and liabilities:
Accounts receivable 214,559 (11,160) 253,297
Inventories 76,365 (143,187) (148,042)
Prepaid expenses (17,826) (42,511) 3,998
Accounts payable (100,622) (66,252) (31,859)
Accrued liabilities 45,060 (39,653) (29,938)
---------- --------- ---------
Net cash provided by operating activities 521,358 86,246 722,004
---------- --------- ---------

Cash flows from investing activities:
Additions to property and equipment, net (19,122) (74,880) (117,290)
Purchase of product line (50,000)
Additions to capitalized software development costs (106,098) (18,099) (194,945)
Purchases of marketable securities, net 364,591 (503,648) (190,000)
Additions to intangible assets (9,187) (18,067) (14,424)
---------- --------- ---------
Net cash provided (used) by investing activities 230,184 (664,694) (516,659)
---------- --------- ---------
Cash flows from financing activities:
Proceeds (repayments) from notes payable - bank, net (91,299) 128,646 114,153
Repayments from notes payable - shareholders (65,015)
Repayments of long term debt (65,244) (49,688) (4,906)
Decrease in restricted cash 250,000 150,000
Net proceeds from exercise of common stock warrants 323,750
---------- --------- ---------
Net cash provided by financing activities 93,457 552,708 44,232
---------- --------- ---------
Net increase (decrease) in cash
and cash equivalents 844,999 (25,740) 249,577
Cash and cash equivalents - beginning of the year 541,515 567,255 317,678
---------- --------- ---------
Cash and cash equivalents - end of the year $1,386,514 $ 541,515 $ 567,255
========== ========= =========
</TABLE>
See accompanying notes to the financial statements.

Atrix International, Inc. 11 1997 Annual Report
<PAGE>

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

Note 1 Corporate Organization
- ------ ----------------------

Atrix International, Inc. (the Company) designs and manufactures toner vacuums,
vacuum filters and circuit board transport cases. The Company also designs the
hardware and software for R3 Remote Metering and Copy Control Products. In
addition, Atrix distributes tools, meters, electrostatic discharge (ESD) and
static control products and assembles tools kits for the telecommunication,
office machine and computer industries.

Note 2 Summary of Significant Accounting Policies
- ------ ------------------------------------------

Use of Estimates

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

Cash and Cash Equivalents

Cash equivalents consist of short-term, highly liquid investments with original
maturities of three months or less and are readily convertible to cash.

Restricted Cash

Restricted cash is comprised of a one-year certificate of deposit and maintained
with the lending bank. The restriction has been dropped in fiscal 1997 as
discussed in Note 6.

Marketable Securities

Marketable securities generally consist of certificates of deposits with
maturities over three months and up to one year. The Company's marketable
securities are classified as held to maturity and therefore, are carried at
amortized cost. The estimated fair value of the securities approximates their
amortized cost. Unrealized holding gains and losses were not significant.

Revenue Recognition

The Company recognizes revenue upon shipment of the product net of customer
discounts.

Concentration of Credit Risk

Financial instruments which potentially subject the Company to credit risk
consist primarily of accounts receivable. The Company grants credit to customers
in the ordinary course of business. See Sales to Major Customers and Export
Sales in Note 3.

Inventories

Inventories are stated at the lower of cost or market, cost being determined on
the weighted average method. Inventories are evaluated on a quarterly basis to
identify obsolete, slow moving and non-salable items. The Company establishes a
reserve to reduce the inventory to net realizable value when necessary.

Property and Equipment

Property and equipment are stated at cost. Depreciation and amortization, which
includes the amortization of assets recorded under capital leases, are computed
using the straight-line method over the estimated useful lives of the assets of
five to seven years or the initial lease terms. When assets are retired or
otherwise disposed of, the cost and related accumulated depreciation are removed
from the accounts, with any resulting gain or loss reflected in income for the
period. Expenditures for replacements and betterments are capitalized, while
maintenance and repairs are charged against income as incurred.

Atrix International, Inc. 12 1997 Annual Report
<PAGE>

Notes to Financial Statements

Research and Development

Research and development costs are charged to expense when incurred. The
costs were approximately $78,000, $120,000, and $12,000 for 1997, 1996 and 1995,
respectively. See the policy on Capitalized Software Development Costs section
for additional discussion on development activities.

Intangible Assets

Intangible assets consist of a granted patent relating to the Office Machine
Management System, goodwill, and other intangibles. The Company is amortizing
the intangible assets on a straight-line basis over the assets estimated useful
lives of seven to fifteen years. Periodically, management assesses whether
there has been a permanent impairment in the value of the intangible assets.

Capitalized Software Development Costs

The Company develops software and firmware that is an integral part of a
product expected to be sold in future years. Software development costs are
capitalized only upon the establishment of technological feasibility for the
related product. Capitalized costs consist mainly of salaries and programming
fees related to the development of software and firmware. The Company
commences amortization when the related product is available for general
release to customers. The Company assesses the realizability of the
capitalized software development costs on a quarterly basis by comparing the
amount of capitalized software costs with the expected future gross revenues of
the related product. The annual amortization for these capitalized costs
reflects the greater of the proportion of the current year's product revenues
to total expected product revenues, or on a straight-line basis over their
estimated useful life of six years. Accumulated amortization was $406,068 and
$323,861 at June 30, 1997 and 1996, respectively. Total amortization expense
for each of the years ended June 30, 1997, 1996 and 1995 of $82,206, $87,206
and $55,776, respectively, was recorded in cost of sales.

Net Income Per Share

Net income per share computations are based on the weighted average number
of common shares and common share equivalents outstanding during the year.

Cash Flows

The Company paid interest of $25,551, $62,326, and $69,950 during the years
1997, 1996 and 1995, respectively. No income taxes were paid in 1997 and 1996.
During 1995, the Company paid $8,880 in alternative minimum taxes.

Income Taxes

The Company accounts for income taxes in accordance with Financial
Accounting Board Statement No. 109, "Accounting for Income Taxes," which uses
an asset and liability approach that requires the recognition of deferred tax
assets and liabilities for the expected future consequences of events that have
been recognized in the Company's financial statements or tax returns.

Note 3 Sales to Major Customers and Export Sales
- ------ -----------------------------------------

In fiscal years 1997, 1996 and 1995, sales to major customers that exceeded
10% of total net sales were as follows:

<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Customer A 23% 23% 25%

</TABLE>

Accounts receivable from Customer A represented approximately 8% and 4% of
total receivables at June 30, 1997 and 1996 respectively. There were no other
significant concentrations of receivables.

Export Sales were approximately $757,000, $829,000, and $738,000 in fiscal
years 1997, 1996 and 1995, respectively. Substantially all of the Company's
export sales are negotiated, invoiced and paid in U.S. dollars, and were
generated from customers primarily in Europe and Asia.

Atrix International, Inc. 13 1997 Annual Report
<PAGE>

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

Note 4 Inventories
- ------ -----------

Inventories are comprised of the following at June 30:

1997 1996
---- ----
Raw materials $355,165 $448,291
Finished Goods 563,328 546,567
-------- --------
Total $918,493 $994,858
======== ========

Note 5 Property and Equipment
- ------ ----------------------
1997 1996
---- ----
Tooling and Molds $ 1,101,689 $ 1,092,009
Office Furniture & Fixtures 333,028 323,239
Manufacturing Equipment 151,036 146,719
Leasehold Improvement 81,186 80,432
Warehouse Equipment 50,066 49,627
Vehicles 0 8,860
----------- -----------
1,717,005 1,700,886
Accumulated Depreciation (1,341,381) (1,208,790)
----------- -----------
$ 375,624 $ 492,096
=========== ===========

Note 6 Line of Credit
- ------ --------------

The Company maintains a line of credit with a commercial Bank. The
borrowing base under the line of credit is the lesser of (a) $1,250,000 or (b)
the sum of (i) 75% of eligible accounts receivable and (ii) 50% of eligible
inventory. In addition, the Company is required to maintain tangible net worth
of $1,700,000 and a liabilities to tangible net worth ratio of less than 1.5.
A previous requirement for a $250,000 certificate of deposit as restricted cash
has been dropped by the Bank in fiscal 1997. The interest rate is at prime.
The line of credit has an initial term that expires October 31, 1997 but is due
on demand at any time. The Company is required to pay accrued interest on a
monthly basis.

Note 7 Long-term Debt
- ------ --------------

In November 1995, the Company issued acquisition notes payable totaling
$275,000 which are payable in varying periodic installments based on the terms
of the agreements. The interest is at prime and the obligations will be paid
through December 2000. Estimated principal payments of long-term debt are as
follows:

Years Ending June 30,

1998 $ 59,697
1999 22,500
2000 10,000
2001 78,085
--------
Total $170,282
========

Note 8 Leases
- ------ ------

The Company leases office, warehouse and production facilities as well as
certain office equipment under long-term operating and capital lease
agreements. The lease covering the facilities runs through April 1998 and
provides for a five-year renewal option.

Future minimum payments under the lease are as follows:

Years Ending Operating Capital
June 30, Leases Leases
------------ --------- -------
1998 $172,276 3,396
1999 4,808 238
2000 4,154 0
2001 1,385 0
-------- ------
Total $182,623 3,634
--------
Less Interest (204)
------
Total $3,430
======

Rental expense for operating leases was approximately $183,100, $198,200 and
$199,800 for 1997, 1996 and 1995 respectively.

Note 9 Stock Options and Warrants
- ------ --------------------------

Options

The Company adopted its 1994 Stock Option Plan in April 1994, which has
800,000 shares of Common Stock.

Atrix International, Inc. 14 1997 Annual Report
<PAGE>

Notes to Financial Statements

- --------------------------------------------------------------------------------

reserved for issuance pursuant to exercise of stock options. The plan provides
for the issuance of options to purchase Common Stock to directors, officers,
employees and consultants of the Company. Options granted under the plan may be
either non-qualified stock options or incentive stock options. Incentive options
must have an exercise price equal to at least 100% of the fair market value on
the date of grant and non-qualified options must have an exercise price equal to
at least 85% of the fair market value on the date of grant. Outstanding options
are generally exercisable immediately upon vesting, and expire five to ten years
from the date of grant. Canceled options are available for future grants.

The Company has adopted the disclosure-only provisions of SFAS No. 123.
Accordingly, no compensation cost has been recognized for the Company's stock
plan. For purposes of the pro forma disclosures below, the estimated fair value
of the options is amortized to expense over the options' vesting period. Had
compensation cost for the Company's stock plan been determined based on the fair
value at the grant date for awards during fiscal 1997 and 1996 consistent with
the provisions of SFAS No. 123, the Company's net income would have been
decreased to the pro forma amounts indicated below:

<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Net Income - as reported $200,870 $144,041
Net Income - pro forma $183,817 $141,171

Net Income per share - as reported $.04 $.03
Net Income per share - pro forma $.03 $.03

</TABLE>

The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in fiscal 1997 and 1996: dividend yield of 0%; risk-
free interest rates between 6.0% and 6.9%; expected lives of 8 years; and
expected volatility of 86%.

A summary of the activity of stock options is as follows:

<TABLE>
<CAPTION>
Weighted
Shares Average Exercise
Under Exercise Price
Option Price Range
------ ----- -----
<S> <C> <C> <C>
Outstanding June 30, 1995 492,400 $1.00 $0.88-$1.28
Granted 15,900 $1.00 $1.00
Canceled (25,500) $1.00 $1.00
-------
Outstanding June 30, 1996 482,800 $1.00 $0.88-$1.28
Granted 116,000 $ .66 $0.63-$0.71
Canceled (72,700) $ .91 $0.63-$1.00
-------
Outstanding June 30, 1997 526,100 $ .94 $0.63-$1.28
=======
</TABLE>

Stock options exercisable at June 30, 1997, 1996, and 1995 were 372,700, 360,280
and 316,100 respectively. The weighted average fair value of options granted
during fiscal 1997 and 1996 using Black-Scholes option-pricing model was $0.60
and $0.90, respectively.

The following table summarizes information about fixed-price stock options
outstanding at June 30, 1997:

<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
--------------------------------------- -----------------------
Number Weighted- Number
Outstanding Average Weighted- Exercisable Weighted
at Remaining Average at Average
Range of June 30, Contractual Exercise June 30, Exercise
Exercise Prices 1997 Life Price 1997 Price
- --------------- ---- ---- ----- ---- -----
<S> <C> <C> <C> <C> <C>
$0.63-$0.71 106,000 8.57 $0.66 23,200 $0.67
$0.88 5,000 7.01 $0.88 5,000 $0.88
$1.00-$1.28 415,100 6.11 $1.01 344,500 $1.01

</TABLE>

Warrants

In February and March of 1993, the Company issued warrants to purchase 250,625
shares of Common Stock at a price of $1.22 per share which expire on February
28, 1998. These warrants were issued in connection with the Company's sale of
promissory notes in the aggregate principal amount of $250,625. In November
1993, the Company issued warrants to purchase an aggregate of 315,000 shares of
Common Stock at a price of $1.38 per share, which expire on November 5, 1998.
These warrants were issued to directors of the Company who had guaranteed a
portion of the Company's line of credit.

Atrix International, Inc. 15 1997 Annual Report
<PAGE>

Notes to Financial Statements

A portion of the above warrants were exercised in connection with a private
offering completed on September 30, 1995 of 451,666 shares of common stock at
$.75 per share and the Company received net proceeds of $323,750. The holders
of the warrants that were exercised were granted new warrants to purchase
451,666 shares of Common Stock at $.75 per share.

Note 10 Income Taxes
- --------------------

The Company has available net operating loss and tax credit carryforwards for
income tax purposes of $1,086,937 and $83,688, respectively on June 30, 1997.
These carryforwards expire in the years ending June 30, 2003 through 2008.
Utilization of the net operating loss and tax carryforwards are subject to
certain limitations under Section 382 of the Internal Revenue Code. A valuation
allowance exists for a portion of the net tax benefit associated with all
carryforwards and temporary differences at June 30, 1997, as their realization
is not presently more likely than not. The Company has not paid any significant
income taxes during 1997, 1996 or 1995 due to utilization of available net
operating loss carryforwards.

Deferred tax assets (liabilities) consist of the following:

<TABLE>
<CAPTION>
June 30, 1997 June 30, 1996
<S> <C> <C>
Loss Carryforwards $ 476,078 $ 564,060
Research & Development
Credits 83,688 83,688
Inventory 11,453 17,163
Bad Debts 5,671 7,045
Fixed Assets 77,121 73,557
Amortization (186,033) (133,050)
--------- ---------
467,978 612,463
Less: Valuation Allowance (343,978) (612,463)
--------- ---------
$ 124,000 $ 0
========= =========
</TABLE>

Income tax expense (benefit) recorded differs from the expected federal tax rate
primarily due to utilization of net operating loss carryforwards in 1996 and
1995, and to recognizing $124,000 in tax benefits in 1997, from the reversal of
a portion of the deferred tax asset valuation allowance, as the utilization is
considered more likely than not.

Note 11 Patent Litigation Settlements
- -------------------------------------

In fiscal 1996 and 1995, the Company recorded net patent infringement
settlements from several companies totaling $1,990 and $169,496 respectively,
after legal and other expenses.

Note 12 Retirement Savings Plan
- -------------------------------

The Company maintains a defined contribution plan which qualifies under the
Internal Revenue Code Section 401(K). Substantially, all employees are eligible
to participate under the plan. Company contributions are discretionary and were
$5,129, $4,128, and $6,300 during 1997, 1996 and 1995 respectively.

Note 13 Purchase of Product Line
- --------------------------------

In November 1995, the Company completed the acquisition of a vacuum product line
from Porous Media. The Company acquired certain product line equipment and
intangibles. The purchase price consisted of cash and notes payable.

[GRAPHIC OF MAGNIFYING GLASS]

Atrix International, Inc. 16 1997 Annual Report

<PAGE>

Exhibit 23.1

CONSENT OF INDEPENDENT ACCOUNTANTS

We hereby consent to the incorporation by reference in the Prospectus
constituting part of the Registration Statement on Form S-3 (No. 333-00699) and
in the Registration Statement on Form S-8 (No. 33-80682) of Atrix International,
Inc. of our report dated July 31, 1997 appearing on page 8 of the Annual Report
to Shareholders which is incorporated in this Annual Report on Form 10-KSB.

/s/ Price Waterhouse LLP
Minneapolis, Minnesota
September 22, 1997

<PAGE>
<ARTICLE> 5
<LEGEND>This schedule contains summary financial information extracted from
the 1997 Atrix Annual Report and is qualified in its entirety by reference to
such financial statements.
</LEGEND>

<S> <C>
<PERIOD-TYPE> Year
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> JUN-30-1997
<CASH> 1,386,514
<SECURITIES> 329,057
<RECEIVABLES> 543,091
<ALLOWANCES> 0
<INVENTORY> 918,493
<CURRENT-ASSETS> 3,271,470
<PP&E> 375,624
<DEPRECIATION> 0
<TOTAL-ASSETS> 4,084,724
<CURRENT-LIABILITIES> 1,504,753
<BONDS> 0
<COMMON> 56,536
0
0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 4,084,724
<SALES> 5,801,300
<TOTAL-REVENUES> 5,801,300
<CGS> 4,100,727
<TOTAL-COSTS> 4,100,727
<OTHER-EXPENSES> 1,642,760
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (18,540)<FN>
<INCOME-PRETAX> 76,353
<INCOME-TAX> 124,517
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 200,870
<EPS-PRIMARY> .04
<EPS-DILUTED> .04

<FN>
Interest expense is net with interest income
</FN>

</TABLE>