ONGARD SYSTEMS INC, POS AM, 1997-05-27

ONGARD SYSTEMS INC
POS AM, 1997-05-27
PLASTICS, FOIL & COATED PAPER BAGS

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As filed with the Securities and Exchange Commission on May 27, 1997

Registration No. 333-4552

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

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REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933

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FORM SB-2
POST EFFECTIVE AMENDMENT NO. 1

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ONGARD SYSTEMS, INC.
(NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)

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<TABLE>
<S> <C> <C>
Delaware 5047 84-1149380
(State or other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer Identification No.)
Incorporation or Organization) Classification Code Number)

Mark E. Weiss
40 Commerce Drive 40 Commerce Drive
Hauppauge, New York 11788 Hauppauge, New York 11788
516-231-8989 516-231-8989
(Address and telephone number of principal (Name, address and telephone number
executive offices and principal place of business) of agent for service)
</TABLE>

Copies to:

Arnold R. Kaplan, Esq.
Reinhart, Boerner, Van Deuren, Norris & Rieselbach, P.C.
1700 Lincoln Street, Suite 3725
Denver, Colorado 80203
(303) 831-0909

Approximate date of proposed sale to the public: As soon as practicable
after the effective date of this Post Effictive Amendment.

If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]

If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]

If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]

The registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the registrant
shall file a further amendment which specifically states that this
registration statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933 or until the registration
statement shall become effective on such date as the Commission, acting
pursuant to said Section 8(a), may determine.

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ONGARD SYSTEMS, INC.

4,637,227 SHARES OF COMMON STOCK

The Prospectus relates to the sale of up to 4,637,227 shares (the "Shares")
of Common Stock, $0.001 par value (the "Common Stock") of OnGard Systems, Inc.
(the "Company") which may be offered by certain Selling Stockholders. The
Shares or rights to purchase the Shares were acquired by the Selling
Stockholders in various transactions as described under the caption "Selling
Stockholders," herein. The Selling Stockholders may offer the shares for sale
as described under the caption "Plan of Distribution."

Investment in the Company involves substantial risk and should be
considered only by persons able to sustain a total loss of their investment.
See "Risk Factors."

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION OR
ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR THE SOLICITATION OF AN
OFFER TO BUY, THE SECURITIES OFFERED HEREBY IN ANY STATE IN WHICH, OR TO ANY
PERSON TO WHOM, SUCH AN OFFER WOULD BE UNLAWFUL.

- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
UNDERWRITING
DISCOUNTS AND PROCEEDS TO SELLING
COMMON STOCK PRICE TO PUBLIC(1) COMMISSIONS(2) SHAREHOLDERS
- -------------------------------------------------------------------------------
Per Share $1.56 N/A $1.56

Maximum Total $7,234,074 N/A $7,234,074
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------

(1) Based on the average of the high and low price of the Company's Common
Stock as reported on the NASDAQ (Small-Cap-SM-) system as of May 12, 1997.

(2) No underwriter will participate in any sales on behalf of the Selling
Stockholders. See "PLAN OF DISTRIBUTION." All expenses of the offering,
which are estimated to be $50,000 will be paid by the Company.

OnGard Common Stock is quoted in the NASDAQ (Small-Cap-SM-) system under
the symbol "OGSI." The closing bid of OnGard Common Stock on May 12, 1997 was
$1.56. See "Price Range of Securities and Dividend Policy."

THE DATE OF THIS PROSPECTUS IS MAY 27, 1997.

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AVAILABLE INFORMATION

OnGard is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). Reports, proxy and
information statements and other information filed by OnGard can be inspected
and copied at the public reference facilities maintained by the Commission at
450 Fifth Street, N.W., Washington, D.C. 20549, and at the Commission's Regional
Offices located at Northwestern Atrium Center, 500 West Madison Street,
Suite 1600, Chicago, Illinois 60661, and Seven World Trade Center, 13th Floor,
New York, New York 10048. Copies of such material can be obtained from the
Public Reference Section of the Commission, 450 Fifth Street, N.W., Washington,
D.C. 20549, at prescribed rates.

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PROSPECTUS SUMMARY

The following summary is qualified in its entirety by the more detailed
information and financial statements and notes thereto contained elsewhere in
this Prospectus.

THE COMPANY

The Company designs, develops and markets products and services within the
infection control market. Although the Company initially focused on the
handling, storage and disposal of contaminated medical waste, more recently it
has expanded the scope of its products to include production of sterilization
supplies and equipment.

The Company's infection control activities were initially divided into
three primary components but are now in two components. The first component
includes medical waste services and products. OnGard's medical waste product
line, which features a mail-back service, allows for comprehensive product and
service offerings within non-hospital, clinical markets. See "Business-Medical
Waste Services."

The second component of the infection control market consists of
sterilization supplies and equipment. Sterilization involves the complete
elimination or destruction of all forms of microbial life, including high
numbers of bacterial spores. Sterilization is required for those instruments or
devices that penetrate skin or contact normally sterile areas of the body.
Since its acquisition of Pharmetics, now OST, the Company manufactures and
markets a complete line of institutional and pharmaceutical grade sterilizers,
washers and dryers. Sterilization supplies may include containers, wraps and
pouches and indicators and monitors which indicate that the sterilization
process has been completed. Sterilization supplies are primarily utilized by
hospital and clinical facilities during the reprocessing of reusable
instrumentation. Sterilization equipment may be used by hospitals in the
sterilization process for reusable instrumentation or for the sterilization of
materials prior to the disposal of medical waste, and by pharmaceutical
companies. The Company has developed three proprietary products which it has
begun to commercialize. These products and the markets they serve are central
to the Company's marketing efforts. See "Business-Commercialization of New
Products".

The third component previously consisted of sterile medical packaging,
which was designed and manufactured for medical device manufacturers.
Sterilization medical packaging is used to contain new, unused medical devices
during the sterilization process and maintain sterility during transport and
presentation. These products were primarily sold under private label. Sterile
medical packaging is constructed on specially designed machines that are capable
of handling multiple webs and completing sealing operations through the
application of heat and adhesives. In 1993, the Company acquired substantially
all of the assets of Med-Device Packaging, Inc. ("MDPI"), a company engaged in
the design, production and distribution of sterile medical packaging. A number
of customers of MDPI became customers of the Company. See
"Business-Sterilization Medical Packaging." Customers included Boston
Scientific, U.S. Surgical, Symbiosis and Baxter HealthCare. The Company
announced on November 3, 1995 it had signed a letter of intent to sell its
medical packaging line to Oliver Products of Grand Rapids, Michigan, and
consummated the transaction on December 7, 1995. The sale included production
equipment and inventory, with proceeds from the sale aggregating $620,500. The
gain on the sale was $233,000. The Company retained related accounts
receivable, which have since been collected. The Company intends to focus its
efforts on sterilization supplies and equipment, described above.

The Company, a Delaware corporation, was founded in 1989 as a successor by
merger to a Colorado corporation, On Guard Systems, Inc., which was founded
during December 1988. The Company's headquarters are currently located at 40
Commerce Drive, Hauppauge, New York 11788 and its telephone number is
(516) 231-8989. On November 3, 1995, the Company announced its plan to
consolidate its two facilities at its Hauppauge, New York facility. This
occurred by December 31, 1995. (See "Business-Facilities"). In the third
quarter of 1992, the Company completed its initial public offering of
920,000 shares of its Common Stock and 920,000 Warrants. Effective October 1,
1994, the Company acquired Pharmetics Incorporated ("Pharmetics"), a
sterilization equipment manufacturer, pursuant to a merger (the "Merger") of
Pharmetics with and into the Company's wholly owned subsidiary, OnGard
Pharmetics, Inc., which is now called OnGard Sterilization Technology, Inc.
("OST"). The Company acquired OST in a stock transaction for 359,602 shares
of the Company's common stock with a value of $2.6 million. See
"Business--Acquisition of Pharmetics."

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The Offering

Securities offered hereby. . . . . . . . . 4,637,227 shares of Common Stock,
$.001 par value, by the Selling
Stockholders, including 1,744,913
shares issuable upon exercise of
warrants, when and if such Selling
Stockholders exercise their
warrants, and 253,292 shares
issuable when and if holders of
Series A preferred stock convert
their shares to common stock. Such
warrants are subject to adjustment
based upon dilution protection
provisions which may be triggered
by the Company's financing
transactions.

Common Stock outstanding prior to the
offering . . . .. . . . . . . . . . . . . . 6,613,722 shares including
1,129,940 shares sold in March and
April 1996 pursuant to the exercise
of warrants issued in the Company's
initial public offering in 1992.
See "Price Range of Securities and
Dividend Policy."

Use of proceeds . . . . . . . . . . . . . . The Company will not receive any
proceeds from this offering.
However, in the event certain
stockholders exercise their
warrants, the Company may receive
up to $7.7 million. Because the
Company is unable to predict the
number of warrants that will be
exercised pursuant to this
offering, it has not allocated the
proceeds for specific purposes.
The Company anticipates using the
proceeds, if any, from such
excercise for working capital and
marketing.

Risk Factors . . . .. . . . . . . . . . . . Investment in the Company involves
substantial risk and should be
considered only by persons able to
sustain a total loss of their
investment. See "Risk Factors."

NASDAQ symbols . . . . . . . . . . . . . . Common Stock . . . . . . . OGSI
The Company's Common Stock is
quoted in the NASDAQ (Small-Cap-SM-)
system. Warrants also quoted in
the NASDAQ System expired April 30,
1996. Units, each consisting of
one share of Common Stock and one
Warrant, were quoted in NASDAQ but
were withdrawn by the Company from
quotation effective October 26,
1993.

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ONGARD SYSTEMS, INC.
SUMMARY FINANCIAL INFORMATION
<TABLE>
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31 MARCH 31
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1996 1995 1997 1996
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<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues . . . . . . . . . . . . . . . . $ 3,688,186 $4,975,069 $1,288,324 $727,750
Operating Margin (Deficit) . . . . . . . (1,175,277) (311,289) (19,246) (159,539)
Operating Expenses . . . . . . . . . . . 5,053,537 6,485,513 1,154,399 1,447,578
Loss From Operations . . . . . . . . . . (6,228,814) (6,797,102) (1,173,645) (1,607,117)
Net Loss . . . . . . . . . . . . . . . . (6,287,298) (6,988,000) (1,187,995) (1,761,439)

SHARE DATA:

Net Loss Per Share . . . . . . . . . . . $ (.99) $(1.76) $ (.18) $(.32)
Weighted Average Shares Outstanding. . . 6,365,250 3,961,700 6,613,722 5,515,190
</TABLE>
BALANCE SHEET DATA: DECEMBER 31, 1996 MARCH 31, 1997
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Working Capital. . . . . . . . . . . . . $ 1,695,692 $ 702,335
Total Assets . . . . . . . . . . . . . . 8,727,538 8,126,037
Accumulated Deficit. . . . . . . . . . . (24,278,293) (25,466,288)
Stockholders' Equity . . . . . . . . . . 6,129,159 5,088,539
Common Stock Outstanding . . . . . . . . 6,613,722 6,613,722

<PAGE>

RISK FACTORS

Investment in the Company involves substantial risk and should be
considered only by persons able to sustain a total loss of their investment. In
addition to the other information contained in the Prospectus, prospective
investors should carefully consider the following risk factors in evaluating the
Company and its business.

ACCUMULATED LOSSES

OnGard was founded in June 1989 and made its first commercial shipments in
1990. OnGard has recorded a loss in each quarter since its inception, which
losses have increased substantially. OnGard expects losses to continue through
much of 1997. The accumulated losses of OnGard at March 31, 1997 were
$25,466,000. Stockholders' equity totaled $5,089,000 as of March 31, 1997.
There can be no assurance that OnGard will ever be able to operate profitably.

NEW BUSINESS COMBINATION

Effective October 1, 1994, the Company acquired Pharmetics pursuant to the
Merger. Investors bear inherent risks in any relatively new business
combination that has not competed in the market as an aggregate entity for an
extended period of time (see "Pharmetics Acquisition"). OnGard has historically
been engaged in disposable sterility products and their manufacture; Pharmetics
has competed in equipment sterilization products and their manufacture. There
is no assurance that OnGard can operate successfully in this new market.

WORKING CAPITAL DEMANDS

At March 31, 1997, OnGard had working capital of $702,000. However,
OnGard's working capital demands have continued to increase since its
acquisition of OST and due to the development of three new products, their
related commercialization, and for funding of OnGard's operations. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources." In order to fund its working
capital requirements, OnGard has had to continually obtain funds from the
capital markets.

For example, in April 1997, OnGard completed the documentation to $1.5
million (gross proceeds) in convertible debentures in an offshore offering of
debentures which are convertible into common stock, after a 45-day restriction
period, at a 22 1/2% discount from market price, and also obtained a commitment
for a bank credit line of $1.0 million guaranteed by two of its investors in
1997 in exchange for granting 375,000 warrants; it received net proceeds of $5.7
million from the exercise of warrants in April 1996; it completed a private
placement aggregating $7,714,070 in gross proceeds on September 29, 1995 (the
"September 1995 Private Placement") resulting from the sale of 2,204,021 shares
of its common stock; it raised $2,100,000 in gross proceeds from a private and
offshore offering of units in July 1994 (the "July 1994 Private Placement");
$1,500,000 in gross proceeds from a private offering of convertible debentures
in October 1994 (the "October 1994 Private Placement"); and $320,000 in gross
proceeds from the exercise of Class A Warrants during February 1995.

Although OnGard has been successful to date in obtaining sources of
financing sufficient to meet current and past due trade obligations and other
expenses and to enable it to pursue its business plans generally, there is no
assurance that it will be successful in this regard in the future. OnGard's
expenses have exceeded its revenues since inception, and if they continue to do
so, OnGard will need additional capital in the future. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Liquidity and Capital Resources."

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PHARMETICS ACQUISITION AND FINANCIAL INFORMATION; GOING CONCERN OPINION FROM
PHARMETICS' AUDITORS

Effective October 1, 1994, OnGard and Pharmetics completed the Merger in
which OnGard acquired the entire equity interest of Pharmetics in consideration
for Common Stock of OnGard and Pharmetics merged with OnGard Pharmetics, Inc.
("OGPI"), a wholly-owned subsidiary of OnGard, now called OnGard Sterilization
Technology, Inc. ("OST").

OST had incurred significant operating losses in recent fiscal years and
had encountered problems in paying its trade creditors and other obligations.
OnGard has been required to reverse this condition. The Company has already
resolved the majority of OST's creditor issues; however, during the period in
which the creditors were paid and in order to reverse operating losses, OST has
required and will require additional amounts of operating capital, which amounts
have been significant.

As of September 30, 1994, immediately preceding its acquisition by OnGard,
Pharmetics had a working capital deficiency of approximately $1,186,000
(including Pharmetics' demand loan payable to OnGard of $1,883,824) and an
accumulated deficit of $3,799,789. It had a net loss for the nine months ended
September 30, 1994 of $1,371,415. The losses had resulted in significant
liquidity problems for Pharmetics. OnGard extended intercompany loans to
Pharmetics totaling approximately $2,927,000 through December 31, 1994. The
independent auditors for Pharmetics issued their report, dated March 28, 1994,
for the year ended December 31, 1993, which indicated that Pharmetics' losses
and liquidity problems have raised substantial doubt about Pharmetics' ability
to continue as a going concern.

REGISTRATION REQUIREMENTS

The Shares cannot be exercised unless at the time of exercise the Shares
are qualified for sale in such person's state of residence or an exemption from
such qualification is available. In addition, unless the prospectus relating to
the shares is current as specified by the Securities Act of 1933, as amended,
the Company may decline to permit their exercise. No assurance can be given
that the Company will be able to maintain a current prospectus or effect any
required qualification.

DISCRETION OF BOARD OF DIRECTORS REGARDING USE OF PROCEEDS

If the Warrants to acquire 1,744,913 shares are exercised, the Board of
Directors of the Company will have broad discretion regarding the use of
proceeds from such exercise. See "Use of Proceeds." The Board's discretion in
this regard is particularly critical in light of the Company's need for
additional capital. See "Risk Factors - Working Capital Demands." The Board
of Directors will carefully determine that the use of any proceeds is consistent
with the Company's near and long term objectives regarding the need for
additional capital and product development. However, it is necessary that
investors trust the ability of the Company's directors to implement these
objectives in the best interest of the Company. See "Management."

OUTSTANDING WARRANTS

A portion of the Shares being offered hereby have not been issued by the
Company but are subject to Warrants issued by the Company to purchase such
Shares. Such Shares may not be sold by the owners of such warrants unless and
until they exercise such warrants. Each of the Warrants has an antidilution
provision which has been triggered by the Company's financing activities. The
impact of all of these has been included EXCEPT for the Company's April 1997
convertible debentures, debenture warrants and credit line warrants. The impact
of these will be determined when pricing contingencies have been finalized.

GUARANTORS' WARRANTS-1

OnGard had obtained debt financing facilitated by third party Guarantors,
John Pappajohn ($2 million) and Edgewater Private Equity Fund, L.P. ($.5
million), both of Des Moines, Iowa, totaling $2.5 million. The $2.5

7
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million loans were pursuant to notes ("Notes") executed by OnGard in favor of a
commercial lender, Norwest Bank Colorado ("Bank"). The Notes were secured by
OnGard's inventory, equipment, accounts receivable and intangible assets as well
as certificates of deposit provided by the Guarantors for the most recent $1.0
million. In consideration for the $2.5 million guarantee, OnGard issued the
Guarantors or its assigns five year warrants ("Guarantors' Warrants") to
purchase an aggregate of 600,000 shares of Company Common Stock at an exercise
price of $4 per share. The Notes, of which there were three, matured in April
1996 and were paid in full. The market price of OnGard Common Stock on the
three dates of the Guarantors' Warrant was $5-5/8, $6-5/8 and $5. The issuance
of these Guarantors' Warrants resulted in OnGard recording debt issuance costs
were amortized as a non-cash charge against earnings over the life of the loan.
The 600,000 warrants have an anti-dilution provision which has been triggered by
some of the Company's securities transactions. OnGard believes that the
exercise price of the initial 400,000 warrants issued in connection with the
original credit line of $1.5 million would be $3.41 and the shares issuable upon
exercise would be 468,700. OnGard believes the remaining 200,000 warrants
issued in connection with the subsequent $1.0 million would be adjusted to
224,080 shares and the exercise price would be $3.57.

GUARANTORS' WARRANTS-2

In April 1997 the Company obtained a commitment for a new bank credit line
for $1.0 million facilitated by the same guarantors described above. This
credit line matures twelve months from inception can be drawn upon by the
Company as needed through Norwest Bank, and is secured by the Company's tangible
and intangible assets. In consideration for their guarantee, the Company
provided 375,000 warrants to purchase shares of OnGard Common Stock at a price
equal to the lower of (i) the price per share at the closing date or (ii) $2.00
per share. The warrants have a 5-year term and an antidilution protection
provision. The issuance of these warrants will result in OnGard recording debt
issuance costs which will be amortized over the one-year life of the loan based
upon the fair value of the warrants.

CLASS A WARRANTS

The July 1994 Private Placement contained Warrants (the "Class A Warrants")
to purchase one share of the Company's Common Stock for $6. The Class A
Warrants will be exercisable until 5:00 p.m., Mountain Time, three years from
the final closing date of the July 1994 Private Placement, i.e., July 18, 1997.
The Class A Warrants contain an anti-dilution provision which is triggered by
(i) a sale of any shares of the Company's Common Stock for a consideration per
share less than the then current fair market value per share of Common Stock or
the purchase price pursuant to the Class A Warrants on the date of sale, (ii)
the issuance of any shares of Common Stock as a stock dividend to the holders of
Common Stock, and (iii) a subdivision or combination of the outstanding shares
of Common Stock into a greater or lesser number of shares. The Warrant
agreement specifically provides that anti-dilution provisions are NOT triggered
by the Pharmetics Merger or the initial 400,000 Guarantor's Warrants. Three
hundred thousand (300,000) Class A Warrants were issued, of which 71,429 were
exercised during the first quarter of 1995. The Company believes the adjusted
exercise price of each Class A Warrant would be $5.20 and the number of shares
issuable upon exercise of remaining Class A Warrants would be 268,341.

CLASS B WARRANTS

The sale of Series A Preferred Shares in the October 1994 Private
Placement, which was completed in February 1995, contained warrants (the "Class
B Warrants") to purchase one share of the Company's common stock for $6. A
total of 375,000 Warrants were issued. The Class B Warrants are identical in
terms as the Class A Warrants described above. The three year exercise period,
during which time the Class B Warrants are exercisable, expires on February 16,
1998. The Class B Warrants contain an anti-dilution provision that has been
triggered by the securities transactions which have occurred since the October
1994 Private Placement. The Company believes that the exercise price of each
Class B Warrant would be $5.23 for 287,471 warrants, and $5.31 for 141,060
warrants, and the number of shares issuable upon exercise of all the Class B
Warrants would be 428,531.

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UNDERWRITER'S WARRANTS AND EXERCISE THEREOF

Underwriter's warrants ("Underwriter's Warrants") to purchase a total of
80,000 units at a unit exercise price of $7.00 per unit (each unit consisting of
one share of Common Stock and one stock purchase warrant with an exercise price
of $9.45) were issued to the Royce Investment Group, the underwriter
("Underwriter"), as part of the Company's initial public offering. For the
five-year life of these warrants the Underwriter is given, at a nominal cost,
the opportunity to profit from a rise in the market value of Common Stock. The
Underwriter's Warrants contain an anti-dilution provision that has been
triggered by the securities transactions described above with the exception of
the impact of the April 1997 transactions which cannot be determined, as yet.
The Company believes the exercise price of each Underwriter's Warrant would be
$4.65 and the number of shares issuable upon exercise of such Underwriter's
Warrants would be 120,391.

The warrants underlying the Underwriter's Warrants also contain an anti-
dilution provision that has been triggered. OnGard believes the exercise price
of each warrant underlying the Underwriter's Warrants would be $6.25 and the
number of shares issuable upon exercise of the Warrants underlying the
Underwriter's Warrants would be 120,391.

The Underwriter of the Company's initial public offering has been granted
warrants to purchase a total of 30,000 Units (each Unit consisting of two shares
of common stock and one purchase warrant) at $7 per unit in connection with the
Company's July 1994 Private Placement. The 30,000 warrants underlying the
Underwriter's private placement warrants are identical in terms to the Class A
Warrants discussed above except that they are not subject to redemption. The
shares issuable upon exercise of these 30,000 warrants are not being offered
pursuant to this Prospectus. The Company believes that the exercise price of
the 60,000 shares underlying units would be $3.01 and the number shares would be
69,652 and that the exercise price of the purchase warrants would be $5.17 and
the number of shares would be 34,826.

CONVERTIBLE DEBENTURE WARRANTS

In April 1997 the Company sold convertible debentures in an offshore
offering totaling $1.5 million in gross proceeds. The Company provided the
placement agent, Dusseldorf Securities, with warrants equal to 10% of the funds
raised at a price equal to the lower of (i) market value of the Common Stock
price less 22 1/2% or (ii) the Common Stock price at the funding date. The date
upon which the price can be determined has not occurred at the date of this
prospectus. The Company will record the value of the issuance of warrants and
the guaranteed discount as non-cash interest expense, over the period from
issuance through the earliest conversion date.

LESSOR'S GRANTED RIGHTS

In connection with the acquisition of Pharmetics Incorporated, the Company
became liable for certain amounts of lease payments in arrears and owed by
Pharmetics to the lessor of its facilities in Hauppauge, New York. In December
1994, the Company entered into an agreement with EEC Corp., the lessor.
Pursuant to the agreement, OnGard issued 22,700 shares of its common stock to
EEC Corp. in settlement of the payments in arrears. The agreement provided
that if OnGard did not file a registration statement which included such shares
within 12 months of the date of the agreement, it would grant the right to
purchase 10,000 shares of its common stock to EEC Corp. at an exercise price of
$7.50 per share.

GOVERNMENT REGULATION - GENERAL

OnGard sells integrated systems that allow generators of infectious waste
to handle, store, and dispose of such waste in compliance with applicable
federal and state regulations. The Company is, or its products are, currently
subject to regulations of the Occupational Safety and Health Administration
("OSHA"), the U.S. Postal Service, and state and local regulation relating to
the handling and disposal of infectious waste. The Company's

9
<PAGE>

medical waste disposal products meet or exceed Postal Service regulations
regarding the transport of medical waste, and its mail-back waste kits bear
the Company's Postal Code numbers, U.S.P.S. -002 A-F. The enactment by
federal, state or local governments of significant new laws or regulations, or
a change in existing laws and regulations, including their interpretation,
relating to the handling, storage and disposal of medical waste, could
increase the cost of producing the Company's products or otherwise adversely
affect or eliminate the demand for its current products and could require the
Company to substantially change its products to address such changes.

The Company's medical waste product line, in its current form, is dependent
upon the ability of the U.S. Post Office to transport medical waste. Although
the Post Office has been transporting medical waste on a regulated basis since
1989, the Company cannot predict whether it will continue to do so. A decision
by the Post Office to discontinue the transport of medical waste would have a
material adverse effect on the Company.

STATE REGULATION

Although the U.S. Postal Service is authorized to, and does, transport
medical waste pursuant to federal regulations, and the Company believes its
products comply with such regulations, most states also have regulations that
determine appropriate methodologies for the handling and disposal of medical
waste. Typically, the state laws in question refer to generators of medical
waste as opposed to manufacturers of medical waste disposal products. Several
states, including New York, California, and New Jersey, require specific
approval of medical waste disposal programs including mail-back medical waste
products. During 1993, Minnesota and Maine took the position that mail-back
medical waste programs were not consistent with state regulations. The Company
made its distributors aware of these regulatory developments. The Director of
Pollution Control in Minnesota recently informed the Company that he intended to
address the situation through the proposal of new regulations that, if adopted,
would provide exemptions relating to the disposal of medical waste through the
U.S. Postal Service, and that no enforcement action would be taken in this
regard pending adoption of the new rules. There is no assurance, however, that
the State of Minnesota will not take such enforcement action. The Company does
not actively pursue mail-back medical waste programs in states that do not
encourage or that prohibit its use. Maine and Minnesota represent a small
percentage of the Company's current market and a correspondingly small
percentage of the potential market for the Company's medical waste kits.
Although the Company attempts to monitor regulatory developments in all states
in order to maintain regulatory compliance, because of the large number of
regulators it is possible the Company might not be immediately aware of changes
in relevant regulations. Regulations may change frequently, and the Company's
activities may be curtailed or limited to the extent that certain states
restrict the use of medical mail-back systems. The Company is not aware of any
attempt by a state to challenge the authority of the U.S. Postal Service under
applicable federal regulations to transport medical waste.

FDA REGULATION

The Company's medical waste product line and sterile medical packaging
products are considered medical devices and as such are subject to regulation by
the U.S. Food and Drug Administration (the "FDA"). The FDA is imposing more
stringent regulatory requirements with respect to these products. If the
Company ultimately were unable to obtain FDA regulatory clearances and maintain
Good Manufacturing Practice standards, the Company would be unable to sell these
products to its customers. It is possible that the FDA could exercise its
discretionary authority to prohibit manufacturers from commercially distributing
certain of its products and could require product recalls of specific companies'
products or on an industry-wide basis.

Although the FDA historically has not exercised device regulatory authority
over sharps containers, more recently the Company has learned that the FDA
intends to apply its statutory authority over devices to sharps containers on an
industry-wide basis. The Company subsequently received clearances for its
current line of sharps containers. Sharps containers are containers that are
used for the disposal of certain medical instruments which are defined as
"sharp." Various jurisdictions and entities have defined the term "sharp."
Generally speaking, sharps include used needles and syringes, broken glass and
other objects with exposed edges capable of inflicting puncture wounds.
Containers manufactured for disposal of sharps are generally made from plastic
resins, but can also be made from metal and certain configurations of paper-like
resins. The

10
<PAGE>

use of sharps containers is defined and described in the OSHA Bloodborne
Pathogen Rule. Generally speaking, sharps containers must be resistant to
puncture and leakage and capable of closure after use.

In June 1994 the Company received notification that all of its 510(k)
submittals for sharps containers had been approved and cleared for marketing.
The Company has an additional submittal for one of its sharps containers which
the FDA had advised it to withhold until the others had cleared, and which the
Company is now preparing for submission.

COMPETITION

The markets for the Company's products and services and those of OST are
highly competitive. Compared to the Company, the Company's primary competitors
have greater experience, financial, distribution and marketing resources, as
well as a more established market presence and reputation. There can be no
assurances that additional competition or alternatives will not develop. See
"Business--Competition."

DEPENDENCE ON KEY CUSTOMERS AND SUPPLIERS

In 1993, the Company entered into a five-year supply, distribution and
licensing agreement with Sherwood Medical Company ("Sherwood"), pursuant to
which the Company sells products to Sherwood for resale where Sherwood takes
the inventory risk of such resale. This arrangement was limited to the
Company's mail-back medical waste products and accessories. These products
appeared on the market with both the Sherwood Monoject trademark and the
OnGard Systems trademark. The distribution arrangement was exclusive, with
several exceptions which the Company and Sherwood continued to negotiate as
the Company analyzed new markets it wanted to pursue independently. These
exceptions included the Company's direct sales relationships with Caremark,
Inc. ("Caremark"), Quantum Health Resources ("Quantum"), and a group of
individual customers that have had an existing direct purchasing arrangement
with the Company, and certain retail markets. As a result of the Company's
continuing increase in direct selling, this arrangement with Sherwood has
been concluded. For the year ended December 31, 1996, none of the Company's
customers would be characterized as major customers. For the year ended
December 31, 1995, Boston Scientific was the Company's only major customer,
comprising $512,000 in revenues or 10% of the Company's total revenues. For
the year ended December 31, 1994 the Company had three major customers which
accounted for an aggregate of 41% of revenues: Boston Scientific, 16%;
Caremark, 13% and Omni Construction, 12%.

As certain films which are used in the production of AutoPak are available
only from single source, the loss of supply from such sources could disrupt the
Company's manufacturing operation. The Company has had ongoing relations with
its suppliers, many of which are large corporations, and does not anticipate
such disruptions. However, there can be no assurance that such disruptions will
not occur.

DEPENDENCE ON PATENTED AND PROPRIETARY TECHNOLOGY

The Company has obtained patents covering different aspects of its
technology. To the extent competitors develop equivalent or superior
non-infringing technology in these areas, or to the extent that the Company is
unable to enforce any patent, the Company's ability to market and sell its
products could be materially adversely affected. In addition, the Company may
incur significant costs defending its patents from

<PAGE>

infringement by others. See "Business--Patents and Trademarks." The Company
has also filed several patent applications relating to certain of its key
products, such as the mail-back system and AutoPak-TM-. There is no assurance
that any of these applications will be granted.

DEPENDENCE ON KEY PERSONNEL

The Company relies to a substantial degree on its president, Mark E. Weiss.
Mr. Weiss had an employment agreement with the Company through December 31,
1995. The Board of Directors has agreed to extend the employment agreement
through three additional years. The agreement is terminable by OnGard for
cause, as defined therein, without further obligation. Mr. Weiss has agreed not
to compete in the business of providing medical waste regulatory compliance
services to health care facilities and providers without the written consent of
the Company for two years after the termination of the employment agreement.
See "Management--Employment Agreements." The loss of Mr. Weiss would materially
adversely affect the Company. See "Management--Executive Officers and
Directors." The Company does not maintain key man life insurance on any of its
employees.

PRODUCT LIABILITY EXPOSURE

As a seller of medical infection control and waste handling systems, the
Company could face product liability claims potentially based on accidental
infections, loss of waste disposal packages in the mail, or other unforeseen
circumstances. See "Business--Legal Proceedings." For example, the Company's
sharps containers are used to store "sharps" such as contaminated needles; such
needles and other "sharps" pose obvious risks to persons using or coming in
contact with them. The Company cannot guarantee that its products will not be
misused, or even if used correctly, that accidents will not occur. Risks posed
to persons using, handling, storing or shipping sharps are especially severe in
today's environment of serious blood-borne diseases, such as acquired immune
deficiency syndrome. The Company maintains product liability insurance in an
aggregate amount of $1 million and umbrella coverage for an additional $5
million. There can be no assurance that such coverage will be adequate to cover
future product liability claims, if any, or that it will continue to be
available at reasonable prices. See "Business--Insurance" and "Business--Legal
Proceedings."

NEW PRODUCTS

The Company has designed a new product line consisting of sterilization
supplies and equipment. Sterilization supplies and equipment are used by health
care facilities during reprocessing of reusable instruments and devices. The
Company's sterilization supplies product line includes a variety of pouches and
bags used to contain devices and instruments during sterilization. The
Company's primary product in this line is AutoPak-TM-, a proprietary product for
which it has received 510(k) notice from the FDA and has just commenced selling
during 1996. Sterilization equipment may include products for the sterilization
of reusable instruments or sterilization for treatment of materials prior to
disposal of medical waste. The Company has developed and sold, in limited
quantities, Wasteclave-TM-, a highly efficient hospital autoclave. In addition,
HiVac-TM-, a tabletop steam sterilizer, has been sold into the European market.
As some of these products are currently commencing sales, the Company will rely
on its existing products, primarily its medical waste products, and the sale of
institutional grade sterilizers, washers and dryers to generate revenues. See
also "Business--Acquisition of Pharmetics." The Company has expended funds on
product development and may continue to incur expenses without offsetting
revenue or the assurance that it will ever derive revenue from its activities.
No assurances can be given that the new products being developed by the Company,
if introduced, will be accepted or competitive in the market or that the Company
will be able to sell such products on a profitable basis.

RELIANCE ON THIRD PARTIES

Although the Company owns the molds and tooling used to manufacture its
products, the Company does not manufacture the components of its waste handling
and waste disposal products and is therefore dependent on other manufacturers
with whom the Company contracts for the manufacture of these components.
Although

12
<PAGE>

the Company has not experienced any difficulty in procuring the manufacture of
those products, there can be no assurance that the Company's needs for
products will continue to be met on a timely basis. The Company contracts for
incineration services for its waste disposal systems with National Medical
Waste, Inc., a subsidiary of BioMedical Waste Systems, Inc. ("BioMedical
Waste") and Waste Management, Inc. National Medical Waste had incurred
recurring operating losses and experienced a working capital deficiency that
raised substantial doubts about its ability to continue as a going concern.
National Medical Waste has merged with BioMedical Waste. The inability to
continue shipping medical waste to National Medical Waste would require the
Company to rely entirely on Waste Management, Inc. See "Business -- Medical
Waste Services -- INCINERATION CONTRACT".

The Postal Service subcontracts with other carriers, such as airlines, to
perform some functions relating to the transport of medical waste. If these
carriers determined that they were unwilling or unable to continue providing
transportation services, the Company's mail-back program in its current form
would be adversely affected. There is no guarantee that third-party
transporters, including the U.S. Postal Service, will continue their present
policies and practices with respect to the transport of medical waste.

NO DIVIDENDS

The Company has paid no cash dividends on its Common Stock since its
inception and does not expect to declare or pay any cash dividends in the
foreseeable future. Any future dividends will depend upon the earnings if any,
of the Company, its financial requirements, and other factors. The Common Stock
should not be purchased by investors who anticipate the need for dividends from
their investments.

POTENTIAL FUTURE SALES PURSUANT TO RULE 144

Of the 6,613,722 shares of Common Stock currently issued and outstanding as
of March 31, 1997, 2,887,044 are currently freely traded, an additional
2,639,023 are being registered pursuant to the Prospectus and 1,087,654 are
"restricted securities," as that term is defined in Rule 144 promulgated under
the Securities Act. In general, under Rule 144, as effective April 29, 1997, a
person who has satisfied a one-year holding period may, under certain
circumstances, sell within any three-month period a number of shares which does
not exceed the greater of 1% of the then outstanding shares of Common Stock or
the average weekly trading volume in shares during the four calendar weeks
immediately prior to such sale. Rule 144 also permits, under certain
circumstances, the sale of shares without any quantity or other limitation to a
person who is not an affiliate of the Company and who has satisfied a two-year
holding period. The holders of all shares of the Company's Common Stock
outstanding on August 11, 1992, the date of the Company's initial public
offering, agreed not to publicly offer, sell or otherwise dispose of any of
their shares of Common Stock for a period of 24 months after that date without
prior written consent of the Underwriter. The 1,087,654 shares of restricted
stock are available for sale pursuant to Rule 144 at this time. Any sales of
substantial amounts of the Common Stock in the open market could have a
significant effect on the market price of securities of the Company. See
"Description of Securities--Shares Eligible for Future Sale.

NASDAQ LISTING AND MAINTENANCE REQUIREMENTS

The Company's Common Stock are quoted in the NASDAQ (Small-Cap-SM-) system.
Units, each consisting of one share of Common Stock and one Warrant, were quoted
in the NASDAQ (Small-Cap-SM-) system but were withdrawn by the Company from
quotation effective October 26, 1993. The Company's warrants were quoted
separately on that exchange until they expired on April 30, 1996.

There is no assurance that any class of the Company's securities will
continue to be quoted in the NASDAQ (Small-Cap-SM-) system. Failure to continue
to be quoted in the NASDAQ (Small-Cap-SM-) system would be likely to decrease
liquidity in the market for the Company's securities because non-NASDAQ
securities traded over-the-counter generally trade at lower volume levels.

13
<PAGE>

THE COMPANY

The Company's infection control activities were previously divided into
three primary components but now are in two components. The first component
includes medical waste services and products. OnGard's medical waste product
line, which features a mail-back service, allows for comprehensive product and
service offerings within non-hospital, clinical markets. See "Business-Medical
Waste Services."

The second component of the infection control market consists of
sterilization supplies and equipment. Sterilization involves the complete
elimination or destruction of all forms of microbial life, including high
numbers of bacterial spores. Sterilization is required for those instruments or
devices that penetrate skin or contact normally sterile areas of the body.
Through its acquisition of Pharmetics, now OST, the Company manufacturers and
markets a complete line of institutional and pharmaceutical grade sterilizers,
washers, and dryers. Sterilization supplies may include containers, wraps and
pouches and indicators and monitors which indicate that the sterilization
process has been completed. Sterilization supplies are primarily utilized by
hospital and clinical facilities during the reprocessing of reusable
instrumentation. Sterilization equipment may be used by hospitals in the
sterilization process for reusable instrumentation or for the sterilization of
materials prior to the disposal of medical waste, and by pharmaceutical
companies. The Company has developed three proprietary products which it has
commercialized. These products and the markets they serve are central to the
Company's marketing efforts. See "Business--Commercialization of New Products".

The third component previously consisted of sterile medical packaging,
which is designed and manufactured for medical device manufacturers.
Sterilization medical packaging is used to contain new, unused medical devices
during the sterilization process and maintain sterility during transport and
presentation. These products were primarily sold under private label. Sterile
medical packaging is constructed on specially designed machines that are capable
of handling multiple webs and completing sealing operations through the
application of heat and adhesives. In 1993, the Company acquired substantially
all of the assets of Med-Device Packaging, Inc. ("MDPI"), a company engaged in
the design, production and distribution of sterile medical packaging. A number
of customers of MDPI became customers of the Company. See "Business-
Sterilization Medical Packaging." Customers include Boston Scientific, U.S.
Surgical, Symbiosis and Baxter HealthCare. The Company announced on November
3, 1995 it had signed a letter of intent to sell its medical packaging line to
Oliver Products, of Grand Rapids, Michigan. This transaction closed on
December 7, 1995. The sale, which was in the form of an asset transaction,
was comprised of production equipment, including three pouch manufacturing
machines, a printing press, plates and dies and testing equipment, open
customer accounts and historic records and inventory. The purchase price for
these assets was $620,500. The gain on the sale was $233,000. The Company
retained related accounts receivable of approximately $316,000. No warranties
or guarantees were provided with the assets delivered. The Company intends to
focus its efforts on sterilization supplies and equipment, described above.

The Company, a Delaware corporation, was founded in 1989 as a successor by
merger to a Colorado corporation, On Guard Systems, Inc., which was founded
during December 1988. The Company's headquarters are currently located at 40
Commerce Drive, Hauppauge, New York, 11788 and its telephone number is
(516) 231-8989. On November 3, 1995 the Company also announced its plan to
consolidate its two facilities at its Hauppauge, New York facility. This
occurred by December 31, 1995. (See "Business Facilities"). In the third
quarter of 1992, the Company completed its initial public offering of
920,000 shares of its Common Stock and 920,000 Warrants. Effective October 1,
1994, the Company acquired Pharmetics Incorporated in a stock transaction for
359,602 shares of the Company's common stock, with a value of $2.6 million
("Pharmetics"), a sterilization equipment manufacturer. See "Business--
Acquisition of Pharmetics."

14
<PAGE>

USE OF PROCEEDS UPON EXERCISE OF WARRANTS

The Company is not able to predict the number of such warrants that will be
exercised; however, the holders of such warrants have requested that the Company
include the shares issuable upon exercise of the warrants in this offering. The
holders of the warrants may not offer the shares for sale unless they exercise
the warrants. If all of the warrants are exercised, the Company would receive an
aggregate of approximately $7.7 million. See "Risk Factors -- Outstanding
Warrants".

Because the Company is unable to predict the number of warrants that will
be exercised, it has not allocated the proceeds for a specific purpose. The
Company anticipates using the net proceeds from the exercise of the warrants, if
the maximum amount is raised, for working capital ($7.2 million), and enhanced
marketing ($.5 million). However, as the Company cannot predict when or if the
warrants will be exercised, or the amount of proceeds therefrom, it cannot rely
on the proceeds for budgeting purposes. The Company will utilize these funds
when and if they are available to further the objectives of its business
activities. Such activities include further investment in the sterilization
product line and completion thereof and purchase of additional equipment to
increase capacity. In addition, the Company will continue to look for strategic
acquisitions that will enhance the Company's ability to serve infection control
and other markets. However, the Company does not have any agreements,
agreements in principle, arrangements or understandings relating to any possible
acquisition.

15
<PAGE>

PRICE RANGE OF SECURITIES AND DIVIDEND POLICY

The Company's Common Stock is quoted in the NASDAQ (Small-Cap-SM-) system
and its trading symbol is OGSI. As of December 31, 1995, there were
approximately 142 record holders and approximately 1,357 beneficial holders of
Common Stock. There were 6,613,722 shares outstanding as of April 30, 1997.
Prior to the initial public offering in August 1992, there was no market for
the Company's Common Stock.

The tables below set forth the high and low closing bid prices of the
Company's Common Stock, Warrants and Units (each unit consisting of one share of
Common Stock and one Warrant) as reported by the National Association of
Securities Dealers, Inc. ("NASD") for each of the quarters indicated since the
Company's initial public offering (such quotations represent prices between
dealers, not actual transactions, and do not include retail mark-ups, mark-
downs, or commissions). The Company withdrew the Units from quotation in NASDAQ
(Small-Cap-SM-) system effective October 26, 1993. The warrants expired on
April 30, 1996.

Year: Quarter Common Stock Year: Quarter Common Stock
- -------------- ------------ -------------- ------------
High Bid Low Bid High Bid Low Bid
-------- ------- -------- -------
1992: 1995:
Third Quarter 4-1/2 4-1/2 First Quarter 8-1/4 6-1/2
Fourth Quarter 4-1/2 4-1/2 Second Quarter 7 4-1/2
1993: Third Quarter 9-1/2 4
First Quarter 4-7/8 4-1/2 Fourth Quarter 8-3/4 6-5/8
Second Quarter 5-1/3 4-7/8 1996:
Third Quarter 6-3/4 5-1/8 First Quarter 9-1/4 6-5/8
Fourth Quarter 8-3/8 6-5/8 Second Quarter 7-1/4 4-1/2
1994: Third Quarter 5-1/4 2-5/8
First Quarter 7-3/4 6-3/4 Fourth Quarter 3-3/8 1-7/8
Second Quarter 8-1/4 4-1/8 1997:
Third Quarter 9 6 First Quarter 3-1/4 2
Fourth Quarter 9 6-1/2

Warrants Units
-------- -----
Year: Quarter High Bid Low Bid High Bid Low Bid
- -------------- -------- -------- -------- -------
1992:
Third Quarter 7/8 1/2 5-3/8 5
Fourth Quarter 13/16 3/4 5-1/4 5-1/8
1993:
First Quarter 1 3/4 5-3/4 5-1/4
Second Quarter 1-1/8 7/8 6 5-3/4
Third Quarter 1-7/8 1 8-3/8 6-1/8
Fourth Quarter 4-1/4 1-3/4 12-1/4* 8-1/4*
1994:
First Quarter 4 3-1/4
Second Quarter 2-13/16 1/2
Third Quarter 4 2-1/2
Fourth Quarter 3-3/8 3
1995:
First Quarter 3-3/4 2
Second Quarter 2-1/2 1
Third Quarter 5-1/4 1
Fourth Quarter 3-5/8 1-7/8
1996:
First Quarter 4-7/8 1-7/8
Second Quarter 1-1/4 1
- ---------------------------------
*Through October 25, 1993.
**Through April 30, 1996.

16
<PAGE>

The closing bid price of OnGard Common Stock in the NASDAQ (Small-Cap-SM-)
system on May 12, 1997 was $1.56.

The Company has never paid any cash dividends on its Common Stock and does
not expect to pay any cash dividends in the foreseeable future. The Company
intends to reinvest its earnings in the continued development and expansion of
its business.

<PAGE>

SELLING STOCKHOLDERS

The following table provides certain information with respect to the
persons offering the Shares pursuant to this prospectus (the "Selling
Stockholders") including the transaction in which they acquired the Shares,
their name, the number of issued Shares being offered, the number of Shares
underlying warrants held by certain Selling Stockholders and the percentage
of the outstanding common stock of the Company being offered by each Selling
Stockholder if that amount equals 1% or more of the common stock outstanding.

<TABLE>

TRANSACTION IN NAME SHARES RIGHTS TO SHARES TO PERCENT OF
WHICH PRESENTLY ACQUIRE BE OFFERED COMMON STOCK
SHARES/RIGHTS OWNED SHARES(8) OWNED AFTER
ISSUED SALE(1)
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
July 1994 Private Northwest Holdings, Ltd. ------- 92,243 92,243 1.1%
Placement
Planate Business S.A. 71,429 ------- 71,429 ---

William C. and Edna Bartlet 3,570 2,095 5,665 ---

Patrick Bennett 42,856 25,156 68,012 ---

Charles E. Bohmert Jr. 14,284 8,385 22,669 ---

Richard M. and Patricia H. Clark 14,284 8,385 22,669 ---

Robert A. Epstein 14,284 8,385 22,669 ---

Robert A. Epstein Pension Plan 14,284 8,385 22,669 ---

Charles T. Genovese 3,570 2,095 5,665 ---

Herman Jeffer 57,142 33,542 90,684 1.1%

Eng-Chye Low 57,140 33,541 90,681 1.1%

Dennis Scott Mair 28,570 16,771 45,341 ---

V.J. Melone Trust 28,570 16,771 45,341 ---

Elliot S. and Lois Schlissel 14,306 8,398 22,704 ---

Nicholas Veenstra 3,570 2,095 5,665 ---

Neil Wager 3,570 2,095 5,665 ---

Placement Agent's Royce Investment Group Inc.(2) ------- 345,260 345,260
Unit Purchase Option
4.5%

Pharmetics Royce Investment Group, Inc.(2) 16,000 ------- 16,000
Acquisition

Loan Guarantee John Pappajohn(3) ------- 580,740 580,740 7.2%

Edgewater Private Equity ------- 112,040 112,040
Fund(3) 8.1%
October, 1994 Edgewater Private Equity Fund 253,292 287,471 540,763
Private Placement

18
<PAGE>

TRANSACTION IN NAME SHARES RIGHTS TO SHARES TO PERCENT OF
WHICH PRESENTLY ACQUIRE BE OFFERED COMMON STOCK
SHARES/RIGHTS OWNED SHARES(8) OWNED AFTER
ISSUED SALE(1)
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
October, 1994 Private Waal Investments, Ltd. Sold 141,060 141,060 1.7%
Placement
Lease Settlement EEC Corp. 22,700 10,000 32,700 ---

September, 1995 Haussman Holdings(4) 456,000 ------- 456,000 5.7%
Private Placement

Montgomery Growth Partners 64,000 ------- 64,000
(4)
2.5%
Montgomery Growth Partners II 140,000 ------- 140,000
(4)
Nosrob Investments 72,000 ------- 72,000 ---

Quota Fund(4) 360,000 ------- 360,000 4.5%

Montgomery Small Capital 56,000 ------- 56,000 ---
Partners II(4)

Oak Hall Investors, L.P. 71,500 ------- 71,500
1.8%
Oak Hall Equity Fund 71,500 ------- 71,500

Okebena Partnership K 143,000 ------- 143,000 1.8%

Bank of New York as Trustee 143,000 ------- 143,000 1.8%

Joe Riccardo 40,000 ------- 40,000 ---

Steve Frank 20,000 ------- 20,000 ---

Anthony Pace 29,000 ------- 29,000 ---

Scott Shevick 14,500 ------- 14,500 ---

Jerry Callaghan 40,000 ------- 40,000 ---

Thomas Kearns(5) 50,000 ------- 50,000 ---

Oscar Schafer 14,500 ------- 14,500 ---

Lawrence Kohn 14,500 ------- 14,500 ---

Peter Riccardo 4,000 ------- 4,000 ---

Frank Morris 10,000 ------- 10,000 ---

19
<PAGE>

TRANSACTION IN NAME SHARES RIGHTS TO SHARES TO PERCENT OF
WHICH PRESENTLY ACQUIRE BE OFFERED COMMON STOCK
SHARES/RIGHTS OWNED SHARES(8) OWNED AFTER
ISSUED SALE(1)
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
September, 1995 H. Michael Weaver 15,000 ------- 15,000 ---
Private Placement
Paul Rizzo(6) 20,000 ------- 20,000 ---

Stuart Bondurant & Susan Ehringhaus 5,000 ------- 5,000 ---

Leonard Weiss 27,500 ------- 27,500 ---

Eric Steiner(7) 14,500 ------- 14,500 ---

Domenick Treschitta(6) 29,000 ------- 29,000 ---

Barbara Treschita 10,000 ------- 10,000 ---

D. Ware Branch, M.D. 8,500 ------- 8,500 ---

Gregg and Sallee Middlekauff 7,142 ------- 7,142 ---

Ronald Katz, M.D. 7,150 ------- 7,150 ---

Michael R. Barr 7,000 ------- 7,000 ---

Courtney Brown 7,000 ------- 7,000 ---

Dennis LaValle 10,000 ------- 10,000 ---

David Cohn 7,000 ------- 7,000 ---

Frank Eagan 20,000 ------- 20,000 ---

JAM Enterprises (10) 29,000 ------- 29,000 ---

Frisian Holdings, Ltd.(9) 71,428 ------- 71,428 ---

Herb Lyman 7,000 ------- 7,000 ---

Peter Salas 7,000 ------- 7,000 ---

George Wood 8,925 ------- 8,925 ---

Jerry Armstrong 8,925 ------- 8,925 ---

Ray Brownlie 8,925 ------- 8,925 ---

James Wallace 8,925 ------- 8,925 ---

20
<PAGE>

TRANSACTION IN NAME SHARES RIGHTS TO SHARES TO PERCENT OF
WHICH PRESENTLY ACQUIRE BE OFFERED COMMON STOCK
SHARES/RIGHTS OWNED SHARES(8) OWNED AFTER
ISSUED SALE(1)
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
September, 1995 John Mack 28,600 ------- 28,600 ---
Private Placement
Priscilla Perez 3,000 ------- 3,000 ---

Abbey Herman 14,000 ------- 14,000 ---

Other Akin Gump 12,500 ------- 12,500 ---

Lou Wertman 2,105 ------- 2,105 ---

Eric Steiner 10,268 ------- 10,268 ---
</TABLE>

(1) Assumes exercise of all warrants. Presented for all share ownership which
would comprise 1% or more of the Company's outstanding common stock.

(2) Royce Investment Group, Inc. was (a) underwriter of the Company's initial
public offering in August, 1992, (b) placement agent for the Company's
April and July 1994 private placement, (c) investment banker with respect
to the Company's acquisition of Pharmetics, and (d) received fees with
respect to the exercise of the Company's warrants issued in its August,
1992 public offering.

(3) John Pappajohn and Edgewater Private Equity Fund have guaranteed certain
bank debt of the Company. See "RISK FACTORS -- Outstanding Warrants --
Guarantors' Warrants."

(4) Haussman Holdings, Montgomery Growth Partners, Montgomery Growth Partners
II, Nosrob Investments, Quota Fund and Montgomery Small Capital Partners II
are under the control of Montgomery Asset Management, L.P. See "PRINCIPAL
SHAREHOLDERS."

(5) Thomas Kearns served as a director of the Company from December, 1995
through March 6, 1997. See "MANAGEMENT."

(6) Paul Rizzo and Domenick Treschitta were consultants to the Company and
served as directors of the Company from approximately June 1996 through the
first week in March 1997.

(7) Eric Steiner is a co-founder of the Company, has served as a director of
the Company since its inception and is a principal stockholder. See
"MANAGEMENT" and "PRINCIPAL SHAREHOLDERS."

(8) Reflects the adjusted number of shares into which the rights to acquire
shares would be converted. These rights, when granted, provided for a
dilution projection provision which had been triggered by the Company's
various financial transactions. Excluded from the calculation, currently,
are the Company's two financing transactions in April 1997; $1.5 million in
convertible debentures and warrants and the $1.0 guarantor's warrants. The
pricing of these shares is contingent on certain events and a calculation
of their impact cannot be completed at the date of this memorandum.

(9) Includes principals of Royce Investment Group; see note 2 above.

(10) Anthony Esposito, currently a Director of the Company, is a participant in
this investors group.

21
<PAGE>

PLAN OF DISTRIBUTION

The Shares are being offered by the Selling Stockholders from time to time on
the NASDAQ (Small-Cap-SM-) system, in privately negotiated transactions or on
other markets. Any Shares sold in brokerage transactions will involve customary
broker's commissions. No underwriter will participate in any sales on behalf of
the Selling Stockholders.

22
<PAGE>

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

GENERAL

SALES, MARKET DEVELOPMENT AND MAJOR CUSTOMERS

Since the formation of the Company's predecessor in December 1988, the
Company has been engaged in developing products and market positions for the
control of infectious diseases. It has recently expanded its disposable
supplies business to include equipment lines. During 1992, concurrent with
the publication of OSHA's Bloodborne Pathogen Rule which increased awareness
of regulatory control of contaminated medical instruments, the Company
successfully negotiated medical waste mail-back product sales to Caremark and
Quantum Health Resources, which are primarily engaged in the service of home
care patients. Revenues attributable to Caremark and Quantum for the year
ended December 31, 1994 were $508,000 and $100,000 respectively. Caremark
would be characterized as a major customer constituting 13% of the Company's
total sales in 1994. In January, 1995, Coram Inc. purchased a division of
Caremark, resulting in sales to both Coram Inc. and Caremark Therapeutic,
Inc. For the years ended December 31, 1995 and 1996, sales to Caremark,
Coram and Quantum were $398,000, $165,000 and $134,000, respectively and
$317,000, $150,000 and $45,000, respectively. A customer group list was
purchased by OnGard from ProMed Sharps in December 1992. During the year
ended December 31, 1996, sales to ProMed customers were approximately
$159,000. In February 1993, the Company and Sherwood entered into a
five-year Supply, Distribution and Licensing Agreement ("Sherwood Agreement")
which gives OnGard's medical waste mail-back products access to Sherwood's
extensive distribution system. The exclusive arrangement has since
terminated in the third quarter of 1995. For the year ended December 31,
1994, the Company's revenues attributable to the Sherwood Agreement were
approximately $356,000. While no longer a major customer, Sherwood
represented $99,000 of the Company's sales for the year ended December 31,
1995 but had no sales to Sherwood thereafter. The Company also continues to
expand its direct selling capabilities.

With the acquisition of MDPI in 1993 and OST in late 1994, the Company
emphasized a direct sales approach. It expanded its sales staff with
experienced personnel in both the packaging and equipment lines to expand its
market position. Boston Scientific, a sterile packaging customer, has been a
major customer representing 16% of the Company's total sales in 1994. OST
had one customer, Omni Construction, which accounted for 12% of the Company's
revenues in 1994. On November 3, 1995 the Company announced it had signed a
letter of intent with Oliver Products of Grand Rapids, Michigan for the sale
of its medical device packaging business. This transaction closed on
December 7, 1995. The sale included production equipment and inventory with
proceeds from the sale aggregating $620,500. The gain on the sale was
approximately $233,000. The Company retained all related accounts
receivable. Accordingly, Boston Scientific will no longer be a major
customer. Revenues from Boston Scientific approximated $512,000 in 1995.
However, net profitability from this and other packaging line accounts was
nominal after accounting for direct selling expenses and allocation of
general and administrative expense. Accordingly, the Company believes the
loss of this customer will have no impact on the results of operations and
capital resources. OST had no customer which accounted for 10% of the
Company's revenue in 1995 or 1996.

PRODUCT LINE EXPANSION

During 1990, substantially all of the Company's revenues came from the
sale of the Recapper and related products. The Recapper is a device which
allows clinicians to separate used needles from re-usable syringes without
directly touching the needle. During 1991 and 1992, the Company expanded its
product line into the medical waste mail-back business. During 1993, the
Company experienced significant revenue growth due to the addition of its
medical sterile packaging products. Growth in this market is attributable
largely to the Company's acquisition of the assets of MDPI described
elsewhere herein. Medical sterile packaging products were manufactured to
customer specifications and are sold to a variety of medical device
manufacturers. In June 1993, the Company relocated its operations to a
larger facility that includes a "white room" for the manufacturing of sterile
medical packaging. The Company made a significant investment in this new
facility

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<PAGE>

and equipment. Revenues attributable to sterile medical packaging business
for the year ended December 31, 1993, 1994, and 1995 were $1,715,000,
$1,813,000 and $1,905,000 respectively. This business provided the technical
skills and equipment to develop the Company's proprietary sterility assurance
product, AutoPak-TM-. Once developed, the Company elected to pursue this
market and divest selected assets of MDPI, as described above.

During 1996, the Company completed an exclusive marketing agreement with
Baxter Healthcare Corporation in an arrangement where Baxter buys
AutoPak-TM-from OnGard for resale and distribution of AutoPak-TM- into the
hospital market. Initial orders were received from Baxter in September 1996.
In the fourth quarter of 1996, the AutoPak-TM- agreement was integrated into
Allegiance, the $4.5 billion healthcare spin-off from Baxter. AutoPak-TM-
sales for the year ended December 31, 1996 to Baxter and other customers were
$257,000 and occurred primarily in the last half of 1996.

In October 1994, the Company acquired Pharmetics, now OST, which
expanded its activities into sterilization equipment. OST generated
$2,522,000 in revenues for the year ended December 31, 1996.

RESULTS OF OPERATIONS

The following table sets forth, for the periods indicated, certain items
from OnGard's Statements of Operations expressed as percentages of revenues:

Year Ended Three Months
December 31 Ended March 31
----------- --------------
1996 1995 1997 1996
---- ---- ---- ----
Revenues.......................... 100.0% 100.0% 100.0% 100.0%
------ ------ ----- ------
Costs of Sales.................... 131.9 106.3 101.5 121.9
------ ------ ----- ------
Operating Margin (deficit)........ (31.9) (6.3) (1.5) (21.9)
------ ------ ----- ------
Operating Expenses................
General and Administrative........ 56.2 52.6 29.2 100.8
Sales and Marketing............... 46.7 29.5 38.5 58.5
Depreciation and Amortization..... 10.6 6.2 8.5 10.2
Deferred Compensation............. 18.7 34.7 11.4 20.0
Research and Development.......... 4.8 7.4 2.0 9.4
------ ------ ----- ------
Total............................. 137.0 130.4 89.6 198.9
------ ------ ----- ------
Loss from Operations.............. (168.9) (136.7) (91.1) (220.8)
Interest and Other Expense........ (8.6) (11.1) (1.7) (27.3)
Interest and Other Income......... 8.4 5.6 .5 5.9
Forgiveness of Debt............... -- 2.1 -- --
Other Expenses.................... (1.4) (0.4)
------ ------ ----- ------
Net Loss.......................... (170.5)% (138.3)% (92.3)% (242.2)%
------ ------ ----- ------
------ ------ ----- ------

THREE MONTHS ENDED MARCH 31, 1997 COMPARED TO THREE MONTHS ENDED MARCH 31, 1996.

Revenues for the three months ended March 31, 1997 increased 77% or
$560,000 from $728,000 to $1,288,000 in the same period in 1996. Excluding
revenues of $21,000 in 1996 from a divested product line, revenues increased
82%. The increase is primarily attributable to the Company's equipment business
line which doubled from the prior year.

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<PAGE>

improvement in margin resulted in part from a increase in revenues of
$560,000 described above, offset partially by an increase in the level of
overhead costs associated with engineering and quality control which were
required to upgrade the performance and quality of the equipment product
line. Revenues, which were insufficient to offset fixed factory overhead,
resulted in a slight operating margin deficiency.

General and administrative expenses decreased $358,000, or 49% from
$734,000 to $376,000 for the respective three month periods ended March 31,
1997 and 1996. The decrease is the result of cost containment measures in a
broad category of expenses including legal, professional fees, travel and
office supplies, as well as expenditures incurred for relocation in the
quarter ended March 1996 which were not recurring.

Deferred compensation, the non-cash charges which reflect the difference
between market and exercise prices of stock options granted, increased $2,000
from $145,000 to $147,000 in the respective quarters ended March 31, 1997 and
1996.

Sales and marketing expenses increased $69,000 to $495,000 in the three
months ended March 31, 1997 versus $426,000 in the comparable period in 1995
or 16%. The Company has increased its direct selling efforts, including
manpower and collateral materials, in its equipment product line.

Research and development expenses decreased $42,000 to $26,000 from
$68,000, a 62% decrease, for the first quarter ended March 31, 1997 to the
comparable quarter in 1996. The decrease relates to the completion of
Autopak-Registered Trademark- development, and of the Company's compact
sterilizer product line.

Interest expense decreased from $186,000 to $19,000 for the comparable
quarters ended March 31, 1997 and 1996, a decrease of $167,000 or 90%. This
results from the payment in full of the Company's bank line, on April 15, 1996
offset by increases for interest related to assets financed by capital leases.

YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995.

Revenues for the twelve months ended December 31, 1996 decreased by
$1,287,000 or 26% from the comparable period in 1995, from $4,975,000 to
$3,688,000. However, after excluding sales related to MDPI of $1,905,000, which
was divested in December 1995, revenues increased by approximately $618,000 or
20%. This increase is attributable primarily to sales of AutoPak-TM- of
$257,000 and increased sales of the equipment lines of $461,000 offset partially
by reductions in sales of the Company's Mailback business.

Operating margin decreased $864,000 to a deficit of $1,175,000 (a deficit
of 31.9% of revenues) versus a deficit of $311,000 (a deficit of 6.3% of
revenues). The decrease is comprised of (1) a net decrease in sales of
$1,287,000 resulting from the sale of MDPI and its related product margin
contribution of approximately $441,000, (2) start-up production costs incurred
in connection with relocating AutoPak-TM- operations to New York, including
production equipment, material modifications, internal personnel and facility
restructuring costs of $147,000 and (3) the remainder in increased factory
overheads intended to improve the performance and quality of production,
including engineering, purchasing and quality control. In the aggregate,
revenues were insufficient to offset factory overheads resulting in an operating
margin deficiency.

General and administrative expenses decreased by $541,000 to $2,071,000 in
1996 versus $2,612,000 in 1995, a decrease of 21%. The decrease relates to
tighter expense controls including reductions in legal fees of approximately
$170,000, and numerous administrative expenses associated with the consolidation
of the Denver and New York locations into the New York facility, primarily
including rent offset by rental premiums received from the occupant of the
Denver facility, salaries, travel, telephone and other expenses.

Sales and marketing expenses increased 17%, or $255,000, from $1,468,000 in
1995 to $1,723,000 in 1996. The increase relates primarily to direct selling
costs in connection with the commercialization of

25
<PAGE>

AutoPak-TM-, its technical support personnel, related travel and collateral
materials of $684,000 offset, in part, by the elimination of sales expenses
associated with the divested MDPI business, of $391,000.

Research and development decreased from $370,000 for the twelve months
ended December 31, 1995 to $176,000 for the comparable period in 1996. This
decrease of 52%, or $194,000, reflects the completion of development costs
associated with both AutoPak-TM- and the tabletop sterilizer and
commercialization of both.

Depreciation and amortization increased $84,000 or 28%, from $308,000 to
$392,000 for the years December 3, 1995 and 1996 respectively. The increase is
predominately attributable to expanding the Company's manufacturing
capabilities in the equipment business.

Deferred compensation decreased from $1,728,000 in 1995 to $691,000 in
1996. The decrease relates to recording non-cash charges for fully vested
options granted in 1996 to certain directors, officers or consultants of the
Company, at prices below market price.

Interest expense decreased by $230,000, or 42%, from $549,000 in 1995
versus $319,000 in 1996. The decrease relates primarily to reduced interest on
the Company's bank line, of $345,000, which was paid at maturity on April 15,
1996, but was outstanding, in part or whole, throughout 1995. This decrease was
offset by increased interest on capital lease financing of manufacturing
equipment and leasehold improvements.

YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994.

Revenues for the twelve months ended December 31, 1995 increased 27% to
$4,975,000 from $3,928,000 in the same period in 1994, or $1,047,000. The
increase was attributable to sales from the Company's equipment line, OST, which
was consolidated in the Company's operating results for the entire year in 1995,
but only for the last quarter of 1994.

Operating margin decreased to a deficit of $311,289 (a deficit of 6.3%
of revenues) for the year ended December 31, 1995 compared to $457,636 (11.6%
of revenues) for the same period in 1994. The gross margin deficiency at the
Company's acquired equipment business line, OST, comprised $332,518 of the
deficit. This was the result of (1) a lack of financial resources for nearly
9 months during 1995 in which fixed factory overhead was incurred and charged
to operations without substantive revenue generation and, (2) upon
availability of funds, a significant allocation of production man hours was
applied to the development of two new proprietary products, a tabletop
sterilizer called HiVac-TM-, and a hospital autoclave, called Wasteclave-TM-.
As a result, shipments of revenue generating products were reduced and
insufficient to offset fixed factory overhead. At the Company's disposable
product line the operating margin was a positive $21,231. This amount
decreased due to unfavorable material and labor usage inefficiencies related
to the sterile medical packaging line selected assets of which were sold in
December 1995. The Company believes that revenue levels should be sufficient
in the later half of calendar year 1996 to provide positive operating
margins. Through that date it will fund margin deficiencies and losses with
existing funds from its September 1995 Private Placement, and with funds from
warrant exercises.

General and administrative expenses increased 78% to $4,339,822 (81% of
revenues) for the year ended December 31, 1995 from $2,440,935 (62% of
revenues) for the 1994 period. The increase is entirely attributable to a
non-cash charge for compensation expense related to fully vested, stock
option grants at prices less than market value, totaling $1,700,000. Other
than this, the administrative expenses at OST increased $513,000 due to a
full year of inclusion in 1995 versus one quarter in 1994 after the date of
the acquisition; remaining expenses decreased $426,000.

Sales and marketing expenses increased 159% from $568,488 in 1994 to
$1,468,319 for the year ended December 31, 1995. Of this increase $663,000 was
incurred at OST. This, and the remaining increase of $237,000 relates to the
Company's efforts to sell directly to its existing customers as well as the
development of new customers in conjunction with commercializing its new
products, AutoPak, HiVac and Wasteclave-TM-

26
<PAGE>

(see "Business-Products Under Development and Commercialization Activities").
The Company believes its sales and marketing expenses will continue to
increase during 1996 while it establishes its sales personnel complement and
marketing for this effort.

Depreciation and amortization increased from $150,930 to $307,813 for
the year ended December 31, 1994 and 1995 respectively or 104%.
Approximately $96,000 is attributable to a full year of amortization of
goodwill associated with the acquisition of OST versus one quarter in 1994,
and the purchase of an updated computer equipment network and software,
$60,000.

Research and development increased from $223,652 to $369,858 for the
year ended December 31, 1994 and 1995 respectively, or 65%. New equipment
products being or already developed at OST, accounted for an increase of
approximately $221,000. These products include HiVac and WasteClave
described above. R&D expenses for disposable products, specifically AutoPak,
declined $75,000 resulting from the completion of development of initial
product sizes.

Interest expense increased as a result of interest and debt issuance
cost amortization related to the Company's term loans. The Company obtained
a $1.5 million term loan facilitated by a third party guarantor ($764,000
outstanding at December 31, 1995). The total was received in two equal
parts in May and November 1994. The loan bears interest at the prime rate
plus 2%. The loan calls for monthly payments based on a 36 month
amortization schedule with a balloon payment due in April 1996. In April and
May 1995, the loan was increased by a total of $1.0 million under similar
terms, with the principal portion of the loan is due concurrently with the
balloon payment of the original loan in April 1996. The Company granted an
additional 200,000 warrants to guarantors of the Company's loan which
resulted in debt issuance costs.

On December 24, 1995 the Board of Directors granted 700,000 stock
options (600,000 at $3.50 and 100,000 at $1.00) to certain officers,
directors and consultants of the Company. In the fourth quarter of 1995 the
Company recorded compensation expense of $1,700,000 related to fully vested
options for an amount representing the difference between the exercise price
and fair market value of OnGard common stock on the date of the grant. The
Company also recorded deferred compensation expense of $1,087,500 for options
which vest ratably over two years, which will be charged to operations over
that time. The price of OnGard's common stock at the date of the grant was
$7 1/8.

LIQUIDITY AND CAPITAL RESOURCES

The Company's working capital at March 31, 1997 decreased to $702,000
from $1,696,000 at December 31, 1996. Cash and cash equivalents were $51,000
at March 31, 1997 versus $886,000 at December 31, 1996. Accounts receivable
increased $53,000 to $798,000 at March 31, 1996 from $745,000 at December
31, 1996. Inventory increased $224,000 to $2,326,000 at March 31, 1997 from
$2,102,000 at December 31, 1996.

The Company had an accumulated deficit of $25,466,000 at March 31, 1997
and expects losses to continue at least through much of 1997. Cash
requirements to fund operating losses have been met primarily through equity
and debt placements. Operating losses have accelerated since 1994 as a
result of funding the Company's acquired subsidiary, OST, both prior to and
after the acquisition, as well as expenditures to complete development of its
new products Autopak, HiVac-TM-, and Wasteclave-TM- and for selling
expenditures once and commercialized. The Company invested $1,883,824 in OST
prior to its acquisition, and issued 359,602 shares to acquire 100% of the
outstanding shares of Pharmetics. Subsequent to the date of its acquisition
of OST through December 31, 1996, a twenty six month period, the Company has
expended an additional $7,129,000 which has been used substantially to fund
OST's operating requirements. The operating requirements included the
repayment of past due trade credit, operating losses and, importantly, the
development of two new sterilization products: HiVac, a tabletop steam
sterilizer, and Wasteclave-TM-, a highly efficient hospital autoclave. The
Company's new products, which are proprietary, should generate better gross
margins than the existing products and should improve operating results. The
Company commenced selling these products in late 1995 but as it established a
sales force and marketing programs during early 1996 such

27
<PAGE>

expenditures increased causing continued losses until revenue growth is
sufficient to offset losses. Increased revenue growth in 1997 coupled with
cost reductions should significantly reduce losses during 1997. These losses
and their financing have been the most significant aspect of the Company's
cash flow.

Successful completion of the Company's initial public offering in 1992
provided approximately $4.0 million to expand marketing efforts for the
Company's initial product lines and continue product enhancement and
expansion. However, as working capital at December 31, 1994 amounted to a
deficit of $1,032,000, it became necessary for the Company to obtain
additional funds. In order to align its capital structure and working
capital deficiency, on September 29, 1995, the Company completed a private
placement (the "September 1995 Private Placement") of the sale of 2,204,021
shares of the Company's common stock at a price of $3.50 per share
aggregating gross proceeds of $7,714,028 and net proceeds of $7,634,028. The
September 1995 Private Placement requires that the Company register such
Common Shares issued in this placement six months after the closing date, by
March 29, 1996. Pursuant to the September 1995 Private Placement, the
Company also sold 100 shares of its Series B Redeemable Preferred Limited
Voting Stock (the "Series B preferred stock"). Provided that the holders of
the Series B preferred stock own in the aggregate at least 5% of the
Company's Common Stock, the holders of the Series B preferred stock can
nominate and elect one member to the Company's Board of Directors.

The Company had also obtained additional funding prior to the September
1995 Private Placement to finance operating losses. During July 1994, the
Company completed a Private Placement and an offshore offering of 300,000
units consisting of two shares of common stock and one warrant at $7 per
unit. In addition, the Company obtained debt financing facilitated by a
third-party Guarantor. A total of $1.5 million was completed in two equal
parts; the later half was contingent upon the Pharmetics merger which was
consummated effective October 1, 1994. The Note was secured by the Company's
inventory, equipment, accounts receivable and intangible assets. In
consideration for the $1.5 million guarantee, the Company issued to the
Guarantor or its assigns a five-year warrant ("Guarantor's Warrant") to
purchase 400,000 shares of Company Common Stock at an exercise price of $4.00
per share.

The Note payable to the bank called for monthly payments at an interest
rate of prime plus 2% based upon a 36-month payment schedule and a balloon
payment at the end of one and one-half years (April 1996). The Company repaid
the loan through existing cash on the due date.

During 1994, the Company also initiated a private offering of
Convertible Debentures ("Debentures") each unit of which consists of $100,000
in 6% Convertible Debentures and 25,000 redeemable class B common stock
warrants to acquire an equivalent number of common shares at $6.00 per share.
The Debentures were convertible into shares of the Company's common stock at
the option of the holder or into shares of the Company's Series A Convertible
Preferred Stock ("Series A Preferred Stock") at the option of the Company,
when such Series A Preferred Stock were approved by the Company's
Shareholders. Debenture conversion was to be based on a conversion ratio of
25,000 shares for each $100,000 Debenture converted, or $4.00 per share. In
January 1995, the Company's shareholders approved, by a majority vote, the
authorization of preferred stock. As a result, the total $1.5 million raised
from the offering through February 1995 became equity and the Company issued
375,000 Series A preferred shares and 375,000 Class B common stock warrants.

In addition, during February 1995 the Company sold shares, through the
exercise of Class A warrants from existing warrant holders, totaling $320,000
in gross proceeds. The Company provided an incentive to Class A warrant
holders by reducing the exercise price to $4.50 for a period of 30 days. In
April and May, 1995, the guarantor of the Company's bank line (described
above) and another investor in OnGard facilitated $1,000,000 of additional
bank borrowings. The two new $500,000 notes bear interest at the rate of 11%
per annum and mature on April 15, 1996. The three notes were paid in full at
maturity. An additional 200,000 warrants were provided to the guarantors in
exchange for their guarantees. Such warrants were issued under the same
terms as the 400,000 warrants described above.

The Company also obtained funds through the exercise of outstanding Common Stock
Purchase Warrants. These warrants were to expire on August 11, 1995, but were
initially extended until December 31, 1995 and

28
<PAGE>

thereafter until March 29, 1996 and April 30, 1996. Through the exercise of
Common Stock Purchase Warrants, the Company generated $5.7 million in net
proceeds. In addition, in April 1997, the Company obtained a commitment for
a credit line with a bank, secured by the Company's tangible and intangible
assets and facilitated guarantors ( the "Guarantors"), who are investors in
the Company. The credit line of $1.0 million matures 12 months from
inception, in May 1998, and bears interest at the LIBOR rate plus 2%. In
exchange for their guarantee, the Company granted 375,000 warrants to
purchase the Company's common stock price per share at the closing date or
$2.00 per share, whichever is lower. At maturity, the Company will seek
alternatives to repay the debt with new equity, or will determine if the line
can be extended or refinanced with new debt. In addition, the Company
completed the documentation for the sale of $1.5 million (gross proceeds),
10% of the funds raised, from convertible Debentures (the "Debentures"), and
anticipates funds will become available in May 1997. The Debentures are
convertible into common stock of the Company in $50,000 denominations at any
time after a 45-day restriction period at a price equal to the then fair
market value of the common stock less 22 1/2%, on the conversion date, or the
price at the funding date, whichever is lower. The Debentures bear interest
at the rate of 6% per annum until conversion; interest is payable quarterly
in cash or common stock of the Company, at the Company's option. The
Debentures mature five years from issuance at which time any remaining
amounts convert to common stock. The Company will grant warrants to the
placement agent, Dusseldorf Securities, equal to 10% of the funds raised at
the exercise price described above and pay placement fees of approximately
10% of the funds raised. The Company projects that these funds plus its
existing cash position will be sufficient to fund operations through at least
December 31, 1997. The placement agent has committed to financing an
additional $3.5 million until February 28, 1998, under the same terms
discussed above; the additional financing is solely at the Company's option.
However, in the event such commitment is unfulfilled by the Company, an
additional 2% of such unfulfilled commitment will be paid in warrants to the
placement agent on the terms described above. The Company will record the
value of warrants to the guarantors, and the discount from market price
provided to the Debenture holders, as a non-cash charge included as interest
expense.

Although the Company has been successful to date in obtaining sources of
financing sufficient to meet current trade obligations and other expenses and
to enable it to pursue its business plans generally, there is no assurance it
will be successful in this regard in the future. Furthermore, there can be
no assurance that the Company will be successful in securing other funds or,
that if successful, such funds will be adequate to fund the Company's
operations until it is able to generate cash from operations sufficient to
sustain its ongoing operations without additional external sources of
capital.

29
<PAGE>
BUSINESS

INFECTION CONTROL MARKET

The Company's infection control activities were initially divided into
three primary components but as described below, now have two components.
The first component includes medical waste services and products. The
Company's medical waste product line allows for comprehensive product and
service offerings within non-hospital, clinical markets. See "--Medical
Waste Services."

The second component of the infection control market consists of
sterilization supplies and equipment. Sterilization involves the complete
elimination or destruction of all forms of microbial life, including high
numbers of bacterial spores. Sterilization is required for those instruments
or devices that penetrate skin or contact normally sterile areas of the body.
Since its acquisition of Pharmetics, now OST, the Company manufacturers and
markets a complete line of institutional and pharmaceutical grade
sterilizers, washers and dryers. Sterilization supplies may include
containers, wraps and pouches and indicators and monitors which indicate that
the sterilization process has been completed. Sterilization supplies are
primarily utilized by hospital and clinical facilities during the
reprocessing of reusable instrumentation. Sterilization equipment may be
used by hospitals in the sterilization process for reusable instrumentation
or for the sterilization of materials prior to the disposal of medical waste,
and by pharmaceutical companies. The Company has developed three proprietary
products AutoPak-TM-, HiVac-TM-, and Wasteclave-TM-, which it has begun to
commercialize. These products and the markets they serve are central to the
Company's marketing efforts. See "Commercialization and New Products".

The third component previously consisted of sterile medical packaging,
which was designed and manufactured for medical device manufacturers.
Sterilization medical packaging is used to contain new, unused medical
devices during the sterilization process and maintain sterility during
transport and presentation. These products were primarily sold under private
label. Sterile medical packaging is constructed on specially designed
machines that are capable of handling multiple webs and completing sealing
operations through the application of heat and adhesives. The Company
acquired substantially all of the assets of MDPI, a Pennsylvania corporation
engaged in the design, production and distribution of sterile medical
packaging. A number of customers of MDPI became customers of the Company.
Customers include Boston Scientific, U.S. Surgical, Symbiosis and Baxter
HealthCare. The Company announced on November 3, 1995 it had signed a letter
of intent to sell its medical packaging line to Oliver Products of Grand
Rapids, Michigan. A definitive agreement was completed on December 7, 1995.
The Company intends to focus its efforts on sterilization supplies and
equipment, described below.

MEDICAL WASTE SERVICES

Non-hospital, small quantity generators produce significantly less medical
waste than large quantity hospital-based generators but pay a higher cost per
pound of waste. Several states have recently increased efforts to regulate home
bound and consumer generated medical waste. The Company introduced a consumer
version of its mail-back product during the fourth quarter of 1993. See "--
SMALL QUANTITY GENERATORS."

Currently, nearly all states regulate the disposal of medical waste. Some
states regulate the disposal of medical waste generated in the home environment,
and some local governments are responding to pressure to remove this waste from
municipal disposal systems. The Company's integrated medical waste handling
systems are designed to fit the specific needs of small quantity generators.

The handling of medical waste in health care facilities is primarily
regulated by the Occupational Health and Safety Administration ("OSHA"),
although other federal, state and local regulation may apply. The Company's
primary market for medical waste disposal services consists of physicians,
dentists and other non-hospital health care facilities that generate relatively
small quantities of regulated medical waste.

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<PAGE>

The Company utilizes the U.S. Postal Service to allow its customers to ship
contained medical waste from any location to the Company's contracted
incineration facilities. The Company believes that the U.S. Postal Service is
an effective means of providing nationwide transportation for the Company's
medical waste systems. The Company's medical waste disposal solutions
incorporate proprietary packaging designs that meet or exceed stringent Postal
Service regulations regarding the transport of medical waste. The Company's
medical mail-back products are authorized for transport by the Postal Service
under U.S. Postal Code number 39 CFR, Part III, and all OnGard mail-back medical
waste kits indicate OnGard's Postal Approval Code numbers, U.S.P.S.-002 A-F.
See " --MAIL-BACK SYSTEM." The Company has provided training and support to
employees at the Nashville Post Office, which is the primary destination for the
Company's mail-back system. In addition, the Company has worked with airline
personnel who handle OnGard's products at selected baggage facilities.

On February 23, 1993, the Company and Sherwood, a subsidiary of American
Home Products Corporation, entered into a five year supply, distribution and
licensing agreement (the "Sherwood Agreement"). Sales of the Company's
products to medical distributors were accomplished through the Sherwood
contract. However, the Company and Sherwood were continuously revising the
existing agreement in instances where the parties agree that a direct selling
approach by the Company was appropriate. Ultimately, the exclusive
relationship was terminated during the third quarter of 1995. Loss of the
Sherwood contract required the Company to make direct arrangements with the
distribution channels. This process began in the third quarter 1995.

MARKETS

The Company's initial product was the OnGard Recapper, a patented device
offering a mechanical alternative to unprotected handling of contaminated
needles. Prior to the Company's entering into the Sherwood Agreement,
purchasers of the Recapper and mail-back products included large dental
product distributors, such as Sullivan Dental Products, Inc. and Patterson
Dental Co., as well as large catalog distributors such as Henry Schein and
Darby Dental Supply. The Company is selling to some of these distributors
again.

Sherwood sales efforts began in March 1993. The first shipment of the
Company's products to Sherwood pursuant to the Sherwood Agreement occurred in
April 1993. For the years ended December 31, 1994 and 1995, the Company's
revenues attributable to the Sherwood Agreement were approximately $356,000
and $99,000, respectively. None were recorded thereafter.

In January 1993, the Company acquired the customer list of PRO-MED
SHARPS ("PRO-MED"), formerly a seller of medical waste mail-back kits within
the dental and physician office markets. PRO-MED discontinued sale of its
mail-back medical waste products. For a one time payment of $20,000, the
Company acquired the exclusive use of the PRO-MED mailing list and the
support of PRO-MED personnel in converting PRO-MED's customers to the
Company's product lines. Many PRO-MED customers are now being served by the
Company on a direct basis and through automatic reorder systems. For the
years ended December 31, 1994, 1995 and 1996, sales to PRO-MED and other
direct customers were $197,000, $240,000 and $159,000, respectively and
approximately $40,000 for the first quarter ended March 31, 1997. The
Company also continues to serve the home health care market. It has an
agreement to provide disposable containers and mail-back services to Caremark
Inc., a leading provider of home care services throughout the United States.
In January, 1995 Coram, Inc. purchased a division of Caremark, Inc.,
resulting in sales to Coram, Inc. and Caremark Therapeutic, Inc. During the
year ended December 31, 1996 and for the first quarter ended March 31, 1997,
approximate sales attributable to Caremark, Coram and Quantum totaled
$312,000, $150,000, and $45,000, and $88,000, $9,000, $17,000, respectively.
As a result of the purchase by Coram, Inc. of the Caremark division, Caremark
Therapeutic, Inc., neither Coram nor Caremark individually reached sales
levels which would constitute a major customer, i.e., exceeding 10% of the
Company's 1995 and 1996 sales.

In addition to the markets described above, there are a significant
number of insulin-dependent diabetics in the United States who use and
dispose of contaminated needles and syringes. In 1992, Florida

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began to regulate disposal of diabetic-used syringes. The Company believes
that this market can best be addressed through sales efforts directed at the
retail pharmacy level to coincide with insulin and syringe sales.

SMALL QUANTITY GENERATORS

The Company's waste disposal system is especially suited for small
quantity medical waste generators, many of whom are subject to some form of
regulation with respect to their waste disposal practices. Small quantity
medical waste generators are generally considered to be those medical
facilities that produce less than 50 pounds per month of regulated medical
waste.

INCINERATION CONTRACT

The Company has long-term contracts for incineration services with both
Waste Management, Inc. and National Medical Waste, Inc. The National Medical
Waste facility is operated by BioMedical Waste, a national operator of
medical waste incinerators and medical hauling systems. BioMedical Waste is
headquartered in Boston, Massachusetts and operates a medical waste
incinerator in Nashville, Tennessee that is utilized for destruction of
medical waste generated by OnGard customers. In 1992, the Company entered
into a five-year contract with National Medical Waste, Inc., a subsidiary of
BioMedical Waste, for incineration services which required the Company to pay
a one time fee of $50,000 for prepaid incineration.

National Medical Waste had incurred recurring operating losses and
experienced a working capital deficiency that raise substantial doubts about
its ability to continue as a going concern. National Medical Waste merged
into BioMedical Waste, which subsequently filed for protection pursuant to
Chapter 11 of the U.S. Bankruptcy Code. The Company has negotiated a new
waste disposal contract with a division of Waste Management, Inc. in
Chandler, Arizona, which provides all of these services. New orders for
Mailback products will dispose their waste at this facility. The costs under
this agreement are substantially lower than the National Medical Waste
contract. However, as the Company has Mailback products, previously sold,
with mailing labels addressed to National Medical Waste, it will continue to
utilize that facility until outstanding products have been delivered for
disposal. That entity has operated since its filing for bankruptcy and
continues to provide incineration services to its customers.

Both waste disposal companies provide pick-up service at the U.S.
Postal Service destination points audit the waste and inputs and maintain the
records required by the Company. This arrangement is designed to assure the
Company that transported medical waste is destroyed in compliance with
applicable environmental and other regulations.

MAILBACK SYSTEM

The Company's mail back products comprise a fully prepaid system that
allows the user to collect and dispose economically of medical waste in
compliance with applicable regulations. For one price, the customer receives
disposable containers, packaging, tracking services, transportation and
incineration. An integral, four-part tracking form allows tracking from
generator to incinerator. The entire package is burned without being opened
by the incinerator personnel.

The system uses the Company's proprietary redundant packaging concept,
which incorporates two corrugated fiberboard packages with an intervening
plastic liner to enclose the waste container, containing liquid-activated
absorbent material. The system is self-sealing; it does not require any
special equipment, skill or tape. The packaging meets or exceeds current
postal regulation for integrity, strength and durability. This packaging
must pass Department of Transportation tests mandated by the U.S. Postal
Service, including a thirty-foot frozen drop, a five-foot drop of a thirteen
pound spike and a three pounds per square inch pressurized leak-proof test.
OnGard Mailback kits are available in special chemo-waste designated
containers

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as well as for sharps regulated medical waste. The Company received three
patents with respect to its Mailback system.

STERILIZATION MEDICAL PACKAGING

The following information is provided for an historic perspective.
Effective November 3, 1995 the Company announced it had signed a letter of
intent with Oliver Products of Grand Rapids, Michigan for the sale of its
medical device packaging line. This transaction closed on December 7, 1995.

Effective January 1, 1993, the Company, through a wholly owned
subsidiary, OnGard Systems Packaging, Inc. ("OSP"), acquired substantially
all of the assets of MDPI, a Pennsylvania corporation engaged in the design,
production and distribution of sterile medical packaging. The acquisition
was made pursuant to an asset purchase agreement among OSP, MDPI and Donald
Marotta, President and sole shareholder of MDPI. The closing date of the
acquisition was March 1, 1993 and the effective date was January 1, 1993.
The total purchase price of approximately $675,000 included the issuance of
50,000 shares of Common Stock valued for purposes of the Agreement at $4.75
per share. The remaining $437,500 of the purchase price included the
assumption of $205,000 of liabilities of MDPI. The assets acquired included,
among other things, accounts receivable, inventory, patterns and dies,
machinery and plant equipment, furniture and fixtures, cash and goodwill.
MDPI used these assets in its business of designing, producing and
distributing sterile medical packaging for the medical device industries.

The Company entered into a contract dated March 1, 1993 with SkyRun, Inc.
("SkyRun"), an affiliate of MDPI, for the construction by SkyRun of equipment
for the manufacture of medical packaging pouches. This new equipment is
suitable for the manufacture of the AutoPak-TM- product line discussed below as
well as other applications within the sterilization packaging field. See "--
Products Under Development." The Company has excluded this equipment from its
sale to Oliver Products described above. The manufacturing contract is a
"cost-plus" contract under which OnGard's ultimate payment obligation was
$233,000. Although in September 1993 the Company accepted delivery of this
machinery and is currently using it in its manufacturing operations, the Company
is continuing to make improvements to the machinery.

During the summer of 1993, the Company completed relocation of the former
MDPI from Doylestown, Pennsylvania to Denver, Colorado. The packaging business
formerly carried on by MDPI was operational in the Denver facility.

COMMERCIALIZATION OF NEW PRODUCTS

The Company has focused its efforts on the development of sterilization
supply and equipment product lines. The Company's ability to introduce
sterilization supply product lines will be subject to the receipt of regulatory
clearance from the FDA. See "--Regulations--THE FOOD AND DRUG ADMINISTRATION."
There is no assurance as to when or if the FDA will give the Company regulatory
clearance for all of its sterilization pouch products. In December 1994, the
Company received clearance on AutoPak-TM- , the central product of its
sterilization supply line. AutoPak-TM- was introduced into hospitals for
commercial use through an exclusive marketing agreement with Baxter Healthcare
Corporation. Baxter Healthcare Corporation of Deerfield, Illinois is a
worldwide leader in the manufacture and marketing of healthcare products in 100
countries. The Baxter V. Mueller division, which sells AutoPak-TM-, markets
surgical instruments and surgical use products to healthcare companies and
hospitals. The territory covered by the exclusive agreement is the United
States and Canada. The Company received its first orders from Baxter in
September 1996. During the fourth quarter of 1996, the AutoPak-TM- product line
was integrated into Allegiance Corporation, the $4.5 billion healthcare spin-off
from Baxter Healthcare Corporation. The Company plans to offer a comprehensive
product line which will include its AutoPak-TM- product line, a variety of
self-seal and heat-seal sterilization packages and an integrated sterilization
indicator and monitor product line. The market for sterilization supplies is
primarily hospital based. There can be no assurance that the Company can
compete effectively outside of its traditional market.

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The Company has also developed small, competitively priced sterilizers
for use in hospital, laboratory and other markets. A tabletop sterilizer,
called HiVac-TM-, has completed development. Sales during 1996 exceeded
$200,000 for a specific, non-hospital user in Europe. This same purchaser
has provided OnGard with an initial purchase order for 1997 which aggregates
$284,000. The Company anticipates additional orders during 1997.

The AutoPak-TM- System is a proprietary disposable, heavy duty large
plastic/non-woven fabric pouch and a proprietary loading system for
sterilization of large instrument trays and soft goods. The product is intended
to compete in the markets served by central supply room wrap and reusable
instrument tray containers. AutoPak-TM-'s advantages include visual access,
reduced storage space, decreased loading time and waste reduction. The loading
system consists of a tray holder which will facilitate enclosure of the
instrument tray within the AutoPak-TM- Pouch. The Company has filed for and
been granted patent protection on the construction of the package and on the
materials contained therein.

To facilitate manufacture of AutoPak-TM-, new and proprietary materials
were required and developed through a relationship between OnGard and American
National Can Company ("American National Can"). In June 1993, the Company and
American National Can entered into two letter agreements (the "Letter
Agreements") which outlined the principal points of agreement between the
parties. The parties have used the points of agreement in the Letter Agreements
as the basis of their relationship. The Company has an exclusive right to
purchase these proprietary materials from American National Can and American
National Can has an exclusive right to supply these materials for the AutoPak-
TM- product line. In addition, American National Can has agreed to provide
research and development advice for further OnGard product development.

The Company will also sell some of its sterilization equipment directly
into the hospital market. Wasteclave-TM-, the Company's product for the
sterilization of hospital medical waste has been developed and shipped to three
customers.

With respect to all of the products discussed above, there can be no
assurance that regulatory clearances will be obtained (other than AutoPak-TM-,
for which clearance has been received), that any of such products will be
commercially successful.

ACQUISITION OF PHARMETICS

Effective October 1, 1994, the Company acquired Pharmetics through OnGard
Pharmetics, Inc. (now OST), a wholly owned subsidiary of the Company The merger
agreement provided for the issuance of one share of the Company's Common Stock
for every twelve (12) shares of Pharmetics common stock and 200 shares of the
Company's Common Stock for each share of Pharmetics preferred stock. Thus,
based upon a closing price of OnGard of $8.125 and Pharmetics of $.50 on
September 16, 1994, 3,103,225 outstanding shares of Pharmetics common stock with
an aggregate value of $1,551,613 were exchanged for 258,602 shares of OnGard
Common Stock with an aggregate value of $2,101,141 and 400 outstanding shares of
Pharmetics preferred stock with an aggregate value of $400,000 were exchanged
for 85,000 shares of OnGard Common Stock (which amount included an aggregate of
5,000 shares of Common Stock of OnGard paid to preferred stockholders of
Pharmetics in lieu of accrued and unpaid dividends) with an aggregate value of
$690,625. In addition, Royce Investment Group was granted 16,000 shares of
OnGard Common Stock with an aggregate value of $130,000.

OST, a Delaware corporation, is engaged in the business of designing,
manufacturing and remanufacturing sterilization equipment, washers, dryers and
associated instrumentation. OST's customers include pharmaceutical and medical
device manufacturers, hospitals, clinics, physicians, diagnostic and research
laboratories, and universities. OST offers service for its equipment, as well
as for its competitors' equipment, in the form of preventive maintenance
contracts and per diem arrangements.

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Pharmaceutical and medical device manufacturers use OST's sterilization
equipment in their manufacturing process to reduce or eliminate the possibility
that the products they produce will cause disease or complicate treatment.
Hospitals, clinics, physicians, laboratories and universities use OST's
sterilizers to render their instruments and apparatus biologically sterile so
that their use by humans and animals will not transmit or induce illness.
Hospitals can also use OST's sterilizers to sterilize medical waste before
discarding.

The predecessor of OST, Pharmetics, was organized in 1980 and initially
operated as a manufacturers' representative for major brands of sterilization
equipment. In 1982, Pharmetics commenced manufacturing sterilization equipment
of its own design. During the latter part of 1987 and early part of 1988,
Pharmetics expanded its product line and commenced the design and manufacture of
washers and dryers. OST is marketing its washers and dryers to the same
industries to which it sells its sterilizers. The washers cleanse with high
temperature water pressure, agitation and detergents and are used by customers
in washing items prior to sterilization or with items that require cleansing
without sterilization. The dryers are used in conjunction with the washers.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources" for further information
concerning OST.

In January 1996, the Company relocated from Denver, Colorado, and combined
its two facilities to the space Pharmetics formerly occupied. In connection
with the relocation, the Company renovated its manufacturing and office space
and expanded its manufacturing equipment infrastructure.

MANUFACTURING AND ENGINEERING

OnGard currently operates a manufacturing and assembly facility in
Hauppauge, New York. The New York facility houses machinery required for the
production of AutoPak-TM- and other pouches and for OST's medical equipment
products. OnGard also has a machine shop which is utilized to maintain and
construct equipment as required. Materials and supplies for these products are
available from several sources. On November 3, 1995 the Company announced it
would close its Denver facility and consolidate facilities at its Hauppauge, New
York operation on or about December 31, 1995. (See "Facilities"). In
connection with the closing of the Denver facility, the Company incurred certain
shipping and relocation costs, which were not material.

OnGard designed, developed and owns the molds and tooling used for blow
molding and injection molding the sharps containers sold as part of its Mailback
line, and the tools used to manufacture the corrugated cardboard components of
the waste disposal system. OnGard contracts with third parties for the
manufacture of the molded plastic containers, corrugated fiberboard cartons and
other components and thus is dependent on them for the manufacture of these
products and components. OnGard assembles its Mailback products and ships
finished, complete kits to customers.

OnGard purchases raw materials for its AutoPak-TM- product line from a
variety of sources. Principal suppliers include American National Can ("ANC").
A two month inventory of raw materials is generally kept on hand. As certain
proprietary films are available only from ANC, the loss of supply from such
sources could disrupt manufacturing operations.

OnGard's proprietary packaging products are being developed and designed
primarily by Mark Weiss, President; and Clay Cannady, Director, Sterility
Assurance Products and Lawrence Cabeceiras, Vice President of Sales and
Marketing.

OST fabricates pressure vessels and washer and dryer housings in-house.
Other components and supplies are generally available from a variety of sources.
Components are assembled at the OST facility located at 40 Commerce Drive,
Hauppauge, New York 11788.

OST requires progress payments on all non-standard equipment. In the event
of an order cancellation, progress payments are applied against the work in
process. OST offers a one year warranty on all equipment.

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In the event that OST cannot repair a defective unit, it will replace it
during the warranty period. Order cancellations and product returns have
been immaterial.

REGULATION

OSHA

OSHA regulates work places in general, including medical care
facilities. The OSHA blood-borne pathogen regulations encourage the
development of certain safe workplace practices for the handling of used
sharps. The rules encourage both engineering and procedural solutions
consistent with the use of the Company's products. No assurance can be given
that OSHA will not develop new regulations and new interpretations of
existing regulations to the Company's detriment. The Company's manufacturing
and assembly operations are subject to OSHA inspection

POST OFFICE

The U.S. Postal Service has been transporting medical waste on a
regulated basis since 1989. In 1992 the Post Office adopted rules for the
mailing of regulated materials that mandate rigorous testing, certification
and bonding requirements for packaging used to transport medical waste. The
Company's products are designed for shipment via first class/priority mail as
required by Post Office regulations. The Company's packaging meets or
exceeds all requirements published in the Domestic Mail Manual. In five
states, there is a further requirement for the use of registered mail, return
receipt requested, service. The Company's kits sold in those states include
the additional documentation and postage necessary to comply.

STATE AND LOCAL REGULATION

Most states have regulations that determine appropriate methodologies
for the handling and disposal of medical waste. Several states, including
New York, California and New Jersey, require specific approval of medical
waste disposal programs including mail-back medical waste products. The
Company has obtained approvals from these states. In Minnesota, a change in
the overall environmental regulatory framework resulted in mail-back medical
waste being excluded in new regulations put into effect during the summer of
1993. Minnesota took the position that use of the Company's system by
practitioners was inconsistent with applicable state regulations. The
Company made its distributors aware of this development. The Director of
Pollution Control in Minnesota recently informed the Company that he intended
to address the situation through the proposal of new regulations that, if
adopted, would provide exemptions relating to the disposal of medical waste
through the U.S. Postal Service. The Company cannot predict when or if these
new regulations will be adopted. However, the Director of Pollution Control
has orally informed the Company that no enforcement action will be taken in
this regard pending the adoption of the new rules. Regardless of these oral
representations, there is no assurance that the State of Minnesota will not
take such enforcement action. Environmental regulations in Maine are also
inconsistent with mail-back medical waste programs. The Company has informed
its distributors about Maine's position. The Company does not actively
pursue mail-back medical waste programs in states that do not encourage or
prohibit its use. Maine and Minnesota represent a small percentage of the
Company's current market and a correspondingly small percentage of the
potential market for the Company's medical waste kits.

Although the Company attempts to monitor regulatory developments in all
states in order to maintain regulatory compliance, because of the large
number of regulators it is possible the Company might not be immediately
aware of changes in relevant regulations. Regulations may change frequently,
and the Company's activities may be curtailed or limited to the extent that
certain states restrict the use of medical mail-back systems.

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THE FOOD AND DRUG ADMINISTRATION

The Company's existing and planned products are or may be subject to
regulation by the FDA pursuant to the provisions of the Federal Food, Drug,
and Cosmetic Act ("FDC Act"). Under the FDC Act, several, if not all, of the
Company's infection control products, sterilization medical packaging and
sterilization supplies are subject to regulation as medical devices.

Medical devices are classified into either Class I, II or III. Class I
and II devices are not expressly approved by the FDA. However, pursuant to
section 510(k) of the FDC Act, the manufacturer or distributor of a Class I
or II device that is initially introduced commercially on or after May 28,
1976 must notify the FDA of its intent commercially to introduce the device
through the submission of a premarket notification (a "510(k) notice").
Before commercial distribution can commence, the FDA must review the 510(k)
notice and clear the device for commercial distribution. The FDA normally
has 90 days to review the 510(k) notice and grant or deny clearance to market
on the basis that it is substantially equivalent to a device marketed before
May 28, 1976. Alternatively, the FDA may postpone a final decision and
require the submission of additional information, which may include clinical
data. If additional information is required, review and clearance of a
510(k) notice may be significantly delayed. In order to clear a Class I or
II device for marketing, the FDA must determine, from the information
contained in the 510(k) notice, that the device is "substantially equivalent"
to one or more Class I or II devices that are legally marketed in the United
States.

If a device is not considered "substantially equivalent," it is
regulated as a Class III medical device. In general, a Class III medical
device must be expressly approved by the FDA for commercial distribution
pursuant to the submission of a Premarket Approval Application ("PMA"). A
PMA must contain, among other information, substantial information about the
manufacture of the device and data from adequate and well controlled clinical
trials that demonstrate that the device is both safe and effective. The PMA
approval process is substantially more complex and lengthy than the 510(k)
premarket notification process. Once a PMA is submitted, it may take 16-24
months, or longer, for the FDA review and approval, if such approval is
granted at all.

A medical device, whether cleared for marketing under the 510(k) pathway
or pursuant to a PMA approval, is subject to ongoing regulatory oversight by
the FDA to ensure compliance with regulatory requirements, including, but not
limited to, product labeling requirements and limitations, including those
related to promotion and marketing efforts, Current Good Manufacturing
Practice requirements, record keeping and medical device (adverse reaction)
reporting.

FDA regulatory oversight also applies to the Company's sterile medical
packaging products, which are used by other companies in packaging their own
medical devices. Generally, FDA acceptance of the suitability of such
packaging products is made in the context of regulatory submissions of other
companies concerning the device to be packaged. Thus, the Company requires
no separate FDA clearance or approval of these packaging products. Within
this framework, the principal regulatory responsibilities of the Company for
its sterile medical packaging products are to ensure that the packaging
products are manufactured in conformity with Current Good Manufacturing
Practice requirements. Although the Company believes that all of its
manufacturing activities are in conformity with Current Good Manufacturing
Practice requirements, there can be no guarantee of compliance.

Historically, the FDA has not exercised device regulatory authority over
some types of infection control products, such as sharps containers or mailer
packages, including those used in the Company's mail-back system, and has
allowed companies to begin commercial introduction (on or after May 28, 1976)
of these types of products without a 510(k) clearance. On February 3, 1994,
the FDA issued a written policy statement which allowed manufacturers of
sharps containers a "discretionary period" of 180 days (until August 2, 1994)
to continue marketing their products already in distribution (introduced on
or after May 28, 1976) without the benefit of 510(k) clearance provided that
required 501(k) notices are submitted to FDA prior to the conclusion of the
discretionary period. Manufacturers of sharps containers also must comply
with FDA device listing and establishment registration requirements. The FDA
has indicated that there is no change in its regulatory

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posture toward the mailer packages used in the mail-back system and that it
does not intend to regulate this product as a medical device. There can,
however, be no assurance that the FDA will maintain its current regulatory
posture toward the mailing package.

OGSI submitted all but one of the 510(k) notices and expects to submit the
remaining one in the near future. In June 1994, the Company received
notification that all of its 510(k) submittals for sharps containers had been
approved and cleared for marketing. The Company has an additional submittal for
one of its sharps containers which the FDA had advised it to withhold until the
others had cleared, which it is now preparing for submission. The Company has
also received clearances relating to its AutoPak-TM- products.

ENVIRONMENTAL REGULATION

The Environmental Protection Agency (the "EPA") has the authority to
regulate medical waste under the Resource Conservation Recovery Act. Although
the EPA has not to date issued any formal rules covering medical wastes, it has
issued a guide for infectious waste management.

The Hazardous Materials Transportation Act ("HMTA") governs the packaging
and transportation of hazardous materials in commerce. The HMTA prescribes
certain packaging requirements for enumerated regulated medical waste and
infectious substances. Regulations promulgated by the Department of
Transportation pursuant to the HMTA describe the requirements to be observed in
preparing the materials for shipment, including shipment by highway. The
regulations also cover inspection, testing and retesting of the transportation
of hazardous materials.

The Congress and the EPA may adopt new, or modify existing, laws,
regulations and policies regarding the regulation of medical waste. The Company
cannot predict what effect, if any, future regulation may have on its
operations.

PATENTS AND TRADEMARKS

The OnGard product line includes patented and other proprietary products.
The OnGard Recapper was awarded U.S. Patent No. 4,986,816. The Company was also
awarded patents on the OnGard Medical Waste System (U.S. Patent No. 5,097,950,
350,604 and 5,427,238). The Company was also awarded two patents on AutoPak-TM-
(U.S. Patent No. 5,459,978 and 5,590,777). Although the Company believes its
patents are valuable and provide a competitive advantage, there is no assurance
that any patents held or secured by the Company will provide any protection or
commercial or competitive benefit to the Company. In addition, the Company may
incur substantial legal expenses attempting to enforce its patents. There is
also no assurance that the Company's products will not infringe upon patents
held by others.

The Company owns the registered trademark "OnGard" in its stylized form.
In addition, the Patent and Trademark Office has approved the Company's
applications (which are in the final stages of pendency) with respect to "OnGard
Systems" in stylized and plain letter form and with respect to AutoPak-TM-. The
Company believes that it has established valuable trademark rights in OnGard,
OnGard Systems and AutoPak-TM-. The Company retains all rights to its
trademarks under the terms of the Sherwood Agreement. The Company's unified
approach to product name, logo and identity is reflected in its promotional
literature, packaging and labeling and the Company intends to continue to
promote this identity in all its product offerings and strategic alliances.

EMPLOYEES

As of March 31, 1997, the Company had approximately 80 employees. None of
the Company's employees are subject to a collective bargaining agreement. The
Company believes that its relations with its employees are good.

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COMPETITION

The Company operates and markets its mail-back systems in an increasingly
competitive environment. Competitors include local and national hauling
services and some local or regional mail-back services. At the current time,
the Company is aware of five companies which have approval from the U.S. Postal
Service to offer mail-back services. None of these companies offer the
selection of sizes and capacities currently provided by OnGard.

The Company's primary competitor in the mail-back medical waste handling
business is a joint venture between Becton Dickinson, a manufacturer of
hypodermic needles, and Browning-Ferris Industries, a national waste hauling
company. Sherwood and Becton Dickinson are competitors within the needle and
syringe sales market and each has the capability to sell needles, syringes and
mail-back systems. In addition, both Sherwood and Becton Dickinson have
extensive distribution capacities within the target markets. The Company
believes that its pricing for mail-back systems is competitive.

The sterile packaging industry is extremely competitive. The Company
competes with a variety of large and small manufacturers who have similar
capabilities. The sterilization supplies market is also competitive and is
dominated by several large companies with complete product lines.

The market for sterilization equipment is also highly competitive and many
competitors of OST have greater financial resources. These companies include
Steris/AMSCO and Tuttenauer, which may sell either institutional or tabletop
sterilizers, or hospital autoclaves.

BACKLOG

As of March 31, 1997, the Company had open orders which aggregated
$2,700,000. Of these, approximately $608,000 were backlog orders. For these
purposes, "backlog" refers to orders received for the purchase of products which
were due by the above date but had not yet been delivered.

INSURANCE

The Company maintains general liability and umbrella insurance with
coverage limits up to $7 million in the aggregate. The Company also carries
other customary business insurance. The Company has posted a $50,000 bond with
the U.S. Postal Service under its new regulations. The Company does not
maintain key man life insurance on any of its employees.

FACILITIES

On November 3, 1995 the Company announced its plans to consolidate
operations at its facility in Hauppauge, New York. The consolidation was
completed by December 31, 1995. The Company closed its Denver facility.
Effective April 1, 1996, the Company had an agreement with a new lessee and the
landlord in which the Company has assigned all its rights and interest in 34,000
of the 50,000 square feet which it previously occupied. Under the terms of the
agreement the Company will receive amounts ranging from $5,200 to $6,700 per
month through May 31, 1998 in consideration for the assignment of its existing
lease. Effective April 1, 1996, the Company was released from any monthly lease
payments or responsibilities associated with this lease. The Company has also
leased some of the remaining space for short term durations and uses a portion
for storage.

The Company's corporate and administrative offices, as well as production
for AutoPak, are now located at 40 Commerce Drive in Hauppauge, New York.
Approximately 35,000 square feet is used for

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manufacturing and the balance of 7,000 square feet is used for offices. A
new lease commenced February 1, 1995. For the three successive annual
periods, the annual rent is $116,025 per annum; in the fourth and fifth year,
the annual rent is $162,078 and $172,788, respectively. In addition, the
landlord advanced $350,000 to remodel the facility in early 1996. This
amount is being repaid by the Company in two repayment schedules: the first
of which for $50,000 was repaid beginning February 1, 1996 and ending January
1, 1997 for $4,359 per month and the second, for $300,000, will be repaid
over 36 months, beginning February 1, 1996 for $9,600 per month. Prior
amounts due the landlord, which were unpaid under Pharmetics lease
arrangements, totaling $170,248, were repaid with 22,700 shares of
unregistered OnGard Common Stock. The Company had agreed to include such
shares in its next registration statement. Such registration statement had
not occurred by December 15, 1995, and accordingly, the Company granted
the right to the landlord to purchase an additional 10,000 shares of OnGard
Common Stock at an exercise price of $7.50. The grant must be exercised by
December 15, 1997.

LEGAL PROCEEDINGS

The Company does not have any pending legal proceedings other than ordinary
routine litigation incidental to its business. As a seller of medical infection
control and waste handling systems, the Company could face product liability
claims or other claims potentially based on accidental infections, loss of waste
disposal packages in the mail, or other unforeseen circumstances. The Company
maintains product liability insurance in an aggregate amount of $1 million plus
umbrella coverage for an additional $5 million. There can be no assurance that
such coverage will be adequate to cover future product liability claims or that
it will continue to be available at reasonable prices.

OST, by its merger with Pharmetics, is party to a number of lawsuits filed
primarily by trade creditors, and it owed withholding and other payroll related
taxes amounting to approximately $230,000, including interest and penalties.
The Company has been successful in negotiating settlements to these claims to
date and the Company believes that these claims will not have a materially
adverse effect on OST's financial condition or results of operations. In
addition, although there have been no legal proceedings in this regard, in the
second quarter of 1994 the Company initiated, and has completed, discussions
with federal and New York state tax authorities to pay prior federal
(approximately $110,000), unemployment (approximately $21,000) and New York
state (approximately $102,000) taxes, payment for which are due over specified
time periods, and which the Company is paying for on a monthly basis. Through
March 31, 1997, the Company had completed payments to Federal and Unemployment
tax authorities in accordance with the deferred payment arrangements and expects
to complete the New York State deferred payment plan, as scheduled, by the third
quarter 1997.

On April 19, 1996, a patent infringement lawsuit was filed in the United
States District Court, Central District of California, entitled KENNETH R.
WILKES and KENPACK INCORPORATED vs. ONGARD SYSTEMS, INC. AND ONGARD PHARMETICS,
INC. This matter has been resolved between the parties without litigation.

In April 1997, the Company became one of three defendants in a $2.0 million
suit alleging improper work conditions for an outside contractor who was injured
in January 1996 as a result of a fall from a ladder while installing electrical
equipment. The Company believes its insurance coverage will be adequate to
cover this claim in the event the plaintiff prevails.

40
<PAGE>

PART III

ITEM 9. EXECUTIVE OFFICERS, DIRECTORS AND SIGNIFICANT EMPLOYEES

OnGard's executive officers, directors and significant employees are as
follows:

Name Age Title
- ---- --- -----

Mark E. Weiss 44 President, Treasurer, Director
and Chief Executive Officer

Philip B. Kart 46 Vice President and Chief
Financial Officer

Eric L. Steiner, M.D. 43 Director

Anthony Esposito 48 Director

Clay C. Cannady 35 Director of Sterility
Assurance Products

Lawrence H. Cabeceiras 40 Vice President, Marketing

James Terracciano 40 Vice President, Technology

Mark E. Weiss is a co-founder of OnGard and has served as a director,
President and Treasurer since OnGard's inception. Prior to OnGard's
inception, from September 1987 to June 1989, Mr. Weiss was President and
Chief Executive Officer of HealthCare United Management Corporation, a health
insurance management organization, and President of HealthCare United, a
federally-qualified health maintenance organization. HealthCare United was
operating under the supervision of the Colorado Division of Insurance when
Mr. Weiss joined the organization as part of a work-out team. As President
of HealthCare United, Mr. Weiss worked with the Colorado Division of
Insurance to place HealthCare United in an orderly receivership, ensuring
that beneficiary coverage was maintained. Prior to that, Mr. Weiss was an
independent consultant. Mr. Weiss has a bachelor's degree in mathematics,
with a minor in chemistry, from the University of Colorado.

Philip B. Kart joined the Company in March 1994 as Vice President and
Chief Financial Officer. Prior to joining the Company, from 1989 to 1994,
Mr. Kart was a principal in Big Stone Partners, a financial advisory firm
which assisted growing and troubled businesses in operations restructuring
and financial management. Prior to that, Mr. Kart held financial officer or
management positions with Lasertrak Corporation, a venture capital backed
aviation equipment company, Agrigenetics Corporation, a $100 million (sales)
biotechnology company and Union Carbide Corporation. He was also with the
public accounting firm of Price Waterhouse. Mr. Kart has a bachelor's degree
from Wagner College, an M.B.A. from City University of New York and is a
C.P.A.

Eric L. Steiner, M.D., is a co-founder of OnGard and has served as a
director since OnGard's inception. He is not an employee of OnGard. Since
1981, Dr. Steiner has been a board-certified anesthesiologist, specializing
in cardiovascular anesthesia, and is past Chairman of the Department of
Anesthesiology at Mercy Medical Center in Denver. Dr. Steiner is a 1978
graduate of Hahnemann Medical College and a 1974 graduate of the University
of Pittsburgh.

Anthony Esposito was appointed to the Board, effective March, 1997, by the
existing Directors, pursuant to the Company's by-laws, to serve until the vote
at the next annual shareholders meeting. Mr.

<PAGE>

Esposito has broad experience with manufacturing operations; he has been
president of ECC Corporation, which manufactures industrial equipment, since
1976 as well as manages real estate interests.

Clay C. Cannady, Director of Sterile Assurance Products has been with
OnGard Systems since May 1993. From May 1988 to April 1993, he held various
positions in the Sales and Marketing Group of American National Can. Mr.
Cannady has a bachelor of arts degree from the University of Missouri and a
graduate degree from the University of North Carolina School of Business.

Lawrence H. Cabeceiras joined the Company in January 1995 as Vice
President, Sales and Marketing. Prior to joining the Company, he had been
with AMSCO (American Sterilizer Company) from 1980 through 1994, most
recently as Corporate Director of Marketing and Product Commercialization.
He had previously been with Union Carbide, Linde Medical Gas Division from
1978 to 1980. Mr. Cabeceiras has a B.A. and an M.B.A. from Tulane University

James Terracciano joined the Company in May 1996 as Vice President of
Technology and General Manager. Prior to joining the Company, he had been
with Lumex, Inc., a leading healthcare manufacturer from 1985 to 1996, as
Director of Technical Affairs. He had previously been with Grumman Aerospace
and Fairchild Republic from 1976 to 1985. Mr. Terracciano has a B.T. in
Mechanical Engineering from SUNY Farmingdale.

In connection with an initial public offering OnGard completed in
September 1992, Royce has the right pursuant to an underwriting agreement to
designate a member or a non-voting advisor to OnGard's Board of Directors
until August 1997. Royce has not yet exercised its right nor expressed its
intent with respect to designating such a person.

In connection with its investment in the September 1995 Private
Placement, Montgomery Asset Management has the right to nominate and elect
one member of the Company's Board of Directors. See "Description of Capital
Stock - Preferred Stock". Effective December 24, 1995, Dr. Derace L.
Schaeffer resigned from the Board. Montgomery's designee, Thomas F. Kearns,
Jr., was appointed to fill the vacancy on the Board. Mr. Kearns resigned
effective March 6, 1997. In addition, the Company accepted resignations of
both Mr. Treschitta and Mr. Rizzo on March 2 and March 6, 1997, respectively.

The following persons, each of whom was an officer or director of the
Company, or beneficial owner of more than 10% of the Company's Common Stock,
at any time during 1995, failed to file on a timely basis reports required by
Section 16(a) of the Exchange Act during 1995 or prior fiscal years:
Lawrence H. Cabercieras, Kent W. Cherrey and Eric L. Steiner.

<PAGE>

ITEM 10. EXECUTIVE COMPENSATION

The following table sets forth all annual and long-term compensation
paid by the Company to those officers whose total annual salary and bonus
exceeded $100,000, for services rendered during the calendar years indicated
below.

SUMMARY COMPENSATION TABLE

Annual Compensation Long-Term
Compensation
---------------------------------------------------
Name and Principal Year Salary Bonus Other Annual Stock Options
Position Compensation
- --------------------------------------------------------------------------------
Weiss, Mark 1996 $200,000 $75,000 (3)
President 175,000(1)
- --------------------------------------------------------------------------------
Weiss, Mark 1995 $150,941 $50,000 (3) 350,000(1)
President
- --------------------------------------------------------------------------------
Cabeceiras, Larry 1996 $120,000 -0- (3) -0-
Vice President
Marketing
- --------------------------------------------------------------------------------
Cabeceiras, Larry 1995 $110,909 -0- -0- 60,000(2)
Vice President
Marketing
- --------------------------------------------------------------------------------
Kart, Phil 1996 $119,000 -0- -0- 12,500(1)
Vice President
- --------------------------------------------------------------------------------
Kart, Phil 1995 $94,000 $26,000 -0- 25,000(1)
Vice President
- --------------------------------------------------------------------------------
(1) Exercisable at $3.50 per share and expire December 24, 2002.
(2) 15,000 options vested and exercisable on January 30, 1995 and 45,000 vested
equally in four annual installments exercisable at $6.50 per share. All
expire January 30, 2002.
(3) Less than $50,000 or 10% of the total of annual salary and bonus.
(4) Exercisable at $5.00 per share and expire in December 2000-2001.

INDIVIDUAL GRANTS

- --------------------------------------------------------------------------------
Percent of All
Options
Number of Granted to
Shares Employees in Exercise Expiration Date
Underlying Fiscal Year Price
Options
- --------------------------------------------------------------------------------
Weiss, Mark 175,000 41.1% $3.50 September 2003
- --------------------------------------------------------------------------------
Kart, Phil 12,500 3.0% $3.50 September 2003
- --------------------------------------------------------------------------------

The following table sets forth the number of shares of the Company's
Common Stock covered by outstanding stock options held by each of the named
executives at December 31, 1996, and the value at December 31, 1996, as
determined by the spread between the option price and the price of the
Company stock as reported by NASDAQ National Market (Small-CapSM). Options
granted to the named executives during the fiscal year are shown in the table
immediately above and are reflected in the following table.

<PAGE>

FISCAL YEAR-END OPTION VALUES

- --------------------------------------------------------------------------------
Number of Unexercisable Value of Unexercised In-the-Money
Options at Fiscal Year-End Options at Fiscal Year-End
-----------------------------------------------------------------
Name Exercisable Unexercisable Exercisable Unexcercisable
- --------------------------------------------------------------------------------
Weiss, Mark 547,500 175,000 -0- -0-
- --------------------------------------------------------------------------------
Cabeceiras, 30,000 30,000 -0- -0-
Larry
- --------------------------------------------------------------------------------
Kart, Phil 66,250 31,250 -0- -0-
- --------------------------------------------------------------------------------

COMPENSATION OF DIRECTORS

In September 1996, the Board of Directors granted 12,500 non-qualified
stock options to Dr. Eric Steiner, and 25,000 each to Mr. Thomas Kearns and
Mr. Paul Rizzo, pursuant to the Company's 1995 Stock Option Plan. The
options are exercisable at $3.50 per share and expire in September 2003. The
options are fully vested.

In December 1995, the Board of Directors granted 50,000 and 25,000
non-qualified stock options, respectively to Mr.. Thomas Kearns and Dr. Eric
Steiner, respectively, pursuant to the Company's 1995 Stock Option Plan. The
stock options are exercisable at $3.50 per share and expire on December 24,
2002. These options are vested 50% immediately, with the remainder vested
ratably over two years.

In December 1994, the Board of Directors granted 100,000 and 50,000
non-qualified stock options, respectively, to Drs. Schaffer and Steiner for
their services as directors of the Company pursuant to the Company's 1992
Stock Option Plan. The stock options are exercisable at $5.00 per share and
expire on December 22, 2001. The stock options granted to Dr. Schaffer vest
ratably over a four year period; the stock options granted to Dr. Steiner
vested immediately.

EMPLOYMENT AGREEMENTS

Mr. Weiss had an employment agreement with OnGard effective through
December 31, 1995. The Board of Directors has agreed to extend the employment
agreement through three additional years. The agreement is terminable by
OnGard for cause, as defined therein, without further obligation. If OnGard
terminates Mr. Weiss without cause, he will be entitled to a one-time payment
equal to five times his annual base salary at the amount in effect at the
date of the termination. Upon any termination, Mr. Weiss is subject to
two-year covenants not to compete. Effective January 1, 1996 Mr. Weiss'
annual base salary was increased to $200,000.

There are no arrangements pursuant to which any director of OnGard
receives cash compensation; however directors are provided stock options as
described above.

On December 22, 1994, pursuant to the Company's 1992 Stock Option Plan,
the Board of Directors voted to grant the following stock options to the
following people: Mark E. Weiss, options for 135,000 shares of Common Stock
at $5.00 per share, vesting immediately; Eric L. Steiner, M.D., options for
50,000 shares of Common Stock at an exercise price of $5.00 per share,
vesting immediately; Derace L. Schaffer, M.D., options for 100,000 shares of
Common Stock at an exercise price of $5.00 per share, vesting ratably over a
four year period beginning December 22, 1994; Philip B. Kart, options for
10,000 shares of Common Stock at $6.00 per share, vesting effective March 21,
1994, and options for 50,000 shares of Common Stock at $6.50 per share,
vesting ratably over a four year period beginning March 21, 1994; Clay C.
Cannady, options for 15,000 shares of Common Stock at $5-1/8 per share,
vesting effective May 10, 1993, and options for 45,000 shares of Common Stock
at $6.50 per share, vesting ratably over a four year period beginning May 10,
1993. All options expire seven years after the vesting date of the first
options to vest under the particular grant. See

<PAGE>

"Management Discussion and Analysis of Financial Condition and Results of
Operations--Year Ended December 31, 1994 Compared to Year Ended December 31,
1993."

On December 24, 1995, under similar grants, the Board of Directors voted
to grant stock options to the following people at $3.50 per common share,
vested 50% immediately and the remainder vested ratably over two years: Mark
E. Weiss, 350,000 options; Eric L. Steiner, M.D. 25,000 options; Thomas F.
Kearns, Jr., 50,000 options; Philip B. Kart was granted 25,000 options;
Joseph Riccardo, a consultant to the company, 100,000 options; Paul J. Rizzo,
a consultant to the company, 50,000 options. In addition, Domenick
Treschitta, a consultant to the Company and subsequently, a member of the
Board of Directors, was granted 100,000 options, all vested immediately, but
at $1.00 per common share.

In September 1996, the Board of Directors voted to approve options to
the following individuals at the then current market price of $3.50: Mark E.
Weiss, 175,000 options; Eric Steiner, M.D., 12,500 options; Thomas F. Kearns,
Jr., 25,000 options; Paul Rizzo, 25,000 options; Joseph Riccardo, 50,000
options, Philip B. Kart, 12,500 options.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth certain information regarding the
beneficial ownership of OnGard Common Stock as of December 31, 1996, by (i)
each person who is known by OnGard to own beneficially 5% or more of OnGard
Common Stock; (ii) each director and officer individually; and (iii) all
directors and officers as a group. Except as otherwise indicated, each
person has sole voting and investment power over the shares of OnGard Common
Stock listed as beneficially owned by him.

<PAGE>
<TABLE>
Name of individual
or number in group Shares Beneficially Percentage of
Outstanding owned Shares Outstanding (1)
- ------------------- -------------------------------------------------------
<S> <C> <C>
Mark E. Weiss 777,667 (2)(3) 11.7% (2) (3)
40 Commerce Drive
Hauppauge, NY 11788

Eric L. Steiner, M.D. 217,185 (3)(5) 3.3% (3) (5)
40 Commerce Drive
Hauppauge, NY 11788

Montgomery Asset Management, L.P 1,148,000 (6)(7) 17.4% (6) (7)
600 Montgomery Street
San Francisco, CA 94111

Mellon Bank Corporation 541,100 (9) 8.2% (9)
One Mellon Bank Center
Pittsburgh, PA 15258

Dreyfus Corporation and 541,100 (9) 8.2% (9)
Dreyfus Growth Capital
New York, NY

Quota Fund 360,000 (6) 5.4% (6)
600 Montgomery Street
San Francisco, CA 94111

Hausmann Funding 456,000 (6) 6.9% (6)
600 Montgomery Street
San Francisco, CA 94111

Lawrence H. Cabeceiras 26,250 (4) .4% (4)
40 Commerce Drive
Hauppauge, NY 11788

Clay C. Cannady 53,750 (4) .8% (4)
40 Commerce Drive
Hauppauge, NY 11788

Phil B. Kart 53,750 (4) .8% (4)
40 Commerce Drive
Hauppauge, NY 11788

Thomas F. Kearns 87,500 (4) (6) 1.3% (4) (6)
40 Commerce Drive
Hauppauge, NY 11788

Paul Rizzo 57,500 (6) .9% (6)
40 Commerce Drive
Hauppauge, NY 11788

<PAGE>

Domenick Treschitta 139,000 (6) (8) 2.1% (6) (8)
40 Commerce Drive
Hauppauge, NY 11788

Anthony Esposito 61,700 (4) 1.0% (4)
40 Commerce Drive
Hauppauge, NY 11788

All directors and officers 1,076,635 (4) 16.3% (4)
as a group (9 persons)
</TABLE>
(1) Includes outstanding OnGard Common Stock. Excludes preferred shares,
shares convertible from debentures, options and warrants, which can be
converted or exercised into Common Stock. See "Certain Transactions."

(2) Includes 113,667 shares owned of record by Blue River Irrevocable Trust
(see Footnote 5) and assumes exercise of options to buy 460,000 shares
granted to Mr. Weiss which are currently exercisable, 62,500 of which
expire in May 2003 and the remainder of which expire in December, 2002.
See "Management--Executive Compensation."

(3) The beneficial ownership of 113,667 shares (held by Blue River Trust) may
be attributable to both Mr. Weiss and Dr. Steiner and is included in each
of the totals of shares beneficially owned by them. See Footnotes 2 and 5.

(4) Assumes exercise of currently exercisable options to buy shares of OnGard
Common Stock granted as follows: (i) Mr. Weiss, 460,000 shares; (ii) Dr.
Steiner, 68,750 shares; (iii) Mr. Cannady, 53,750 shares; (iv) Mr. Kart,
53,750 shares; (v) Mr. Cabeceiras, 26,250 shares, and Mr. Esposito, 32,700
shares. See "Management--Executive Compensation," "--Compensation of
Directors," and "--Employment Agreements."

(5) Includes 113,667 shares owned of record by Blue River Irrevocable Trust.
Mr. Weiss serves as trustee of this trust for the benefit of Dr. Steiner
and his family. Under the terms of the trust, Mr. Weiss has the power to
vote and direct the disposition of these shares and may be considered the
beneficial owner thereof. Includes 10,000 shares owned of record by C.A.C.
401(k) Profit Sharing Plan for the benefit of Dr. Eric L. Steiner, 10,268
shares acquired in payment of indebtedness owed to Dr. Steiner, and 14,500
shares acquired in the September 1995 Private Placement. Also assumes
exercise of options to buy 50,000 shares granted to Dr. Steiner which are
currently exercisable and which expire in December, 2001, and 18,750 which
are exercisable and which expire December 2002.

(6) This beneficial owner purchased the Company's common shares during the
September 1995 Private Placement.

(7) Includes shares held by Quota Fund and Hausmann Funding, for which
Montgomery Asset Management maintains voting and dispositive power.

(8) Includes 10,000 shares purchased by Barbara Treschitta, Mr. Treschitta's
wife, in the September 1995 Private Placement.

(9) Mellon Bank has acquired shares in the public market as beneficial owner
for the Dryfus Corporation and the Dreyfus Growth Capital for which it has
voting and depositive power.

<PAGE>

CERTAIN TRANSACTIONS

In September 1992, OnGard completed an initial public offering of its
common stock whereby 920,000 Units, consisting of one share of Common Stock and
one Warrant, were sold at $5.00 per Unit resulting in net proceeds to OnGard of
approximately $3,718,000. Each Warrant entitles the holder to purchase one
share of Common Stock at an adjusted exercise price of $5.34 per share and was
exercisable through August 11, 1995, until the Company extended the expiration
date through April 30, 1996. An anti-dilution provision contained in these
warrants expired on August 11, 1995. See "Description of Securities--Redeemable
Common Stock Purchase Warrants." The Warrants are subject to redemption by
OnGard, subject to certain conditions, upon 30 days written notice. As of
April 10, 1996, 759059 Warrants had been exercised and converted into 960,210
shares.

Pursuant to the terms of the underwriting agreement relating to the initial
public offering, OnGard has entered into a five-year agreement providing for the
payment of a fee to Royce in the event Royce is responsible for a merger or
acquisition transaction to which OnGard is a party. OnGard will pay Royce an
amount equal to the following percentages of the consideration paid by or to
OnGard; 5% of the first $1,000,000 or portion thereof; 4% of the second
$1,000,000 or portion thereof; and 3% of the excess. The fee payable to Royce
will be in the same form of consideration as that paid by OnGard or to OnGard,
as the case may be. In connection with the Merger, Royce is receiving a fee of
approximately 16,000 shares of OnGard Common Stock.

Effective October 1, 1994, Pharmetics was merged into the Company's wholly-
owned subsidiary, OGPI, now OST. See "Business -- Acquisition of Pharmetics."

On June 28, 1995, the Company issued 10,268 shares of Common Stock to Dr.
Eric L. Steiner, a director of the Company, in repayment of a loan from Dr.
Steiner to the Company. For purposes of the repayment, the shares were valued
at $4.375 per share.

In September, 1995, the Company completed a private placement of
2,204,021 shares of the Company's Common Stock at a price of $3.50 per share
and receive an aggregate of $7,714,075 in gross proceeds. Pursuant to such
private placement, a group of investors under the control of Montgomery Asset
Management, L.P. acquired 1,148,000 shares of 21.4 percent of the shares
outstanding of the Company. At the same time, the same group of investors
purchased 100 shares of the Company's Series B Redeemable Preferred Limited
Voting Stock for an aggregate of $10. The Series B Preferred Stockholders,
provided they own in the aggregate at least five percent of the Company's
Common Stock, can nominate and elect one member to the Company's Board of
Directors. The Series B Preferred Stock is not entitled to any dividends
unless so declared by the Company's Board of Directors. If at any time the
holders of the Series B Preferred Stock in the aggregate own less than five
percent of the Company's common Stock, the Company may, upon ten days'
notice, redeem the Series B Preferred Stock at a price of $.10 per share.
There is no liquidation preference for the Series B shares unless the Board
elects to redeem these shares prior to liquidation.

Also in connection with the private placement discussed above, Dr. Eric
L. Steiner, a director of the Company, purchased 14,500 shares of the
Company's Common Stock, Thomas F. Kearns, Jr., a former director of the
Company, purchased 50,000 shares of the Company's Common Stock and Domenick
Treschitta, a former director of the Board of Directors and his wife,
Barbara Treschitta, purchased an aggregate of 39,000 shares of the Company's
Common Stock.

48
<PAGE>

DESCRIPTION OF CAPITAL STOCK

The authorized capital stock of OnGard consists of 25,000,000 shares of
OnGard Common Stock $.001 par value per share and 3,000,000 shares of OnGard
Preferred Stock $.001 par value purchase. At the date of this memorandum, OnGard
has outstanding 6,613,722 shares of OnGard Common Stock, and 253,292 of OnGard
Preferred Stock

PREFERRED STOCK

Holders of the 253,292 shares of OnGard Series A Preferred Stock are
entitled to one vote for each Common Stock into which it is then convertible,
on all matters to be voted on by the stockholders. Each share of Series A
Preferred Stock is convertible into one share of common stock. The Series A
Preferred stockholders will vote with the Common stockholders as a single
class. An affirmative vote of the majority of Series A Preferred Stock will
be necessary to alter the rights and preferences of the shares of Series A
Preferred Stock. Holders of the Series A Preferred Stock may convert their
shares into Common Stock at any time at their option. Dividends will be paid
only upon declaration by the Board of Directors, otherwise none are due or
payable on the Series A Preferred Stock. Holders will not be entitled to any
preemptive subscription or redemption rights. The Series A Preferred Stock
will have a preference in liquidation, dissolution or winding up of the
Company, whether voluntary or involuntary, equal to $4.00 per share plus any
accrued and unpaid dividends if declared by the Company's Board of Directors.
If the assets available for distribution are insufficient to pay the holders
of Series A Preferred Stock and the holders of all preferred stock that is
pari passu with the Series A Preferred Stock the full amount to which they
are entitled, then such holders shall share ratably in any distribution of
the assets of the Company in proportion to the amounts that would have been
payable with respect to their shares if all amounts payable with respect to
such shares were paid in full. Acquirers of preferred shares were also
granted Class B warrants described below.

Pursuant to the September 1995 Private Placement, the Company also sold
100 shares of its non-interest bearing Series B Redeemable Preferred Limited
Voting Stock Provided that the holders of the Series B preferred stock own
in the aggregate at least 5% of the Company's Common Stock, the holders of
the Series B preferred stock can nominate and elect one member to the
Company's Board of Directors. The Series B preferred stock is not entitled
to any dividends unless so declared by the Company's Board of Directors. If
at any time holders of the Series B preferred stock own less than five
percent of the Company's Common Stock, the Company may, upon ten days'
written notice, redeem the Series B preferred stock at a price of $.10 per
share. There is no liquidation preference for the Series B shares unless the
Board elects to redeem these shares prior to liquidation.

COMMON STOCK

Holders of OnGard Common Stock are entitled to one vote for each share
held of record on all matters to be voted on by the stockholders. Holders of
OnGard Common Stock are entitled to receive dividends when and as declared by
the Board of Directors out of funds legally available therefor. See,
however, "Market for OnGard Common Stock and Dividend Policy." Upon
liquidation or dissolution of OnGard, holders of OnGard Common Stock are
entitled to share ratably in the remaining assets of OnGard which may be
available for distribution after payment of OnGard's creditors. Holders of
OnGard Common Stock have no preemptive, subscription or redemption rights.
OnGard Common Stock has no cumulative voting rights; provided, however, that
the holders of the Company's Common Stock purchased on August 30, 1995 as
part of the September 1995 Private Placement have preemptive rights to
purchase their proportionate share of new securities that the Company may
issue. All outstanding shares of OnGard Common Stock are fully paid and
nonassessable.

49
<PAGE>

REDEEMABLE COMMON STOCK PURCHASE WARRANTS

OnGard issued Warrants to purchase 920,000 shares of OnGard Common Stock
at $6.75 per share as part of its initial public offering in 1992. The total
of 920,000 shares had been adjusted to 1,163,956 shares pursuant to an
anti-dilution provision. Each Warrant entitled the holder to purchase one
share of OnGard Common Stock at an adjusted exercise price of $5.34 per share
until 5:00 p m. Mountain Time, on April 30, 1996. The Warrants did not confer
upon the Warrant holder any voting or other rights of a stockholder of
OnGard. Upon notice to the Warrant holders, OnGard had the right to reduce
the exercise price or extend the expiration date of the Warrants. The
Company extended the expiration date of the warrants from August 11, 1995
originally to December, 31,1995 and then to March 29, 1996 and April 30, 1996.

The outstanding Warrants had an anti-dilution provision which was
triggered by the Company's Dilutive Transactions completed since the issuance
of these warrants and through the original expiration date of August 11,
1995. See "RISK FACTORS - Outstanding Warrants." Effective August 11, 1995,
the anti-dilution provision expired, although the Company extended the
exercise period to April 30, 1996.

The Warrants had been issued pursuant to a warrant agreement (the
"Warrant Agreement") between OnGard and Continental Stock Transfer & Trust
Company, New York, New York, as Warrant Agent, and are evidenced by Warrant
Certificates in registered form. The Warrants provide for adjustment of the
exercise price and for a change in the number of shares issuable upon
exercise to protect holders against dilution in the event of a stock
dividend, stock split, combination or reclassification of the OnGard Common
Stock or upon issuance of shares of OnGard Common Stock at prices lower than
the greater of the Warrant exercise price then in effect or the then market
price.

The exercise price of the Warrants was subject to adjustment as follows:

If OnGard issues any OnGard Common Stock, or any securities exercisable
for or convertible into Common Stock, for a consideration per share less than
the higher of either (a) the exercise price in effect immediately prior to
the issuance of such OnGard Common Stock or securities, or (b) the then
current market price per share of the OnGard Common Stock, then, the exercise
price in effect immediately prior to each such issuance shall (except as
otherwise provided in this clause) be adjusted by multiplying such exercise
price by

50
<PAGE>

a fraction, the numerator of which shall be the number of shares of OnGard
Common Stock outstanding (as defined in the Warrant Agreement) prior to such
issuance plus the number of shares of OnGard Common Stock which the aggregate
offering price of the total number of shares of OnGard Common Stock to be
issued (or deemed issued) would purchase at the higher of (a) the exercise
price then in effect or (b) the then current market price per share the
OnGard Common Stock, and of which the denominator shall be the number of
shares of OnGard Common Stock then outstanding (as defined in the Warrant
Agreement) plus the number of shares of OnGard Common Stock to be issued (or
deemed issued).

The Warrants did not confer upon the Warrant holder any voting or other
rights of a stockholder of OnGard. Upon notice to the Warrant holders, OnGard
had the right to reduce the exercise price and exercise its right extend the
expiration date of the Warrants until March 29, 1996. See "CERTAIN
TRANSACTIONS."

Through April 30, 1996, the Company received $6.0 million (gross proceeds)
from the exercise of approximately 890,000 Warrants converting to 1,128,000
shares.

UNDERWRITER'S UNIT PURCHASE WARRANTS

OnGard sold to the Underwriter of its initial public offering, for a price
of $10 in the aggregate, 80,000 warrants (the "Underwriter's Warrants'). The
total number of Underwriter's Warrants has been adjusted to approximately
120,391 pursuant to an anti-dilution provision. Each Underwriter's Warrant
entitles the holder to purchase one unit, at an adjusted price of $4.65 per
unit, through August 11, 1997. The units underlying the

51
<PAGE>

Underwriter's Warrants are substantially identical to the units sold to the
public, except that the Warrants contained in such units are not callable at
any time and the Underwriter's Warrants may be exercised by delivering cash
and/or securities of OnGard equal in value of the exercise price, based upon
the market value of the securities being delivered to OnGard. OnGard has
also granted certain redemption rights to the Underwriter with respect to the
Underwriter's Warrants and the units issuable thereunder. The Warrants
contained in such units are exercisable at $6.26 per share. The
Underwriter's Warrants contain an anti-dilution provision that was triggered
in connection with the Dilutive Transactions in which the Company has
engaged. See "RISK FACTORS--Underwriter's Warrants and Exercise Thereof."
These adjustments do not reflect shares OnGard anticipates issuing to Royce
in connection with the Merger. See "VOTING AND MANAGEMENT
INFORMATION--Management and Principal Shareholders of OnGard--Certain
Transactions."

The Placement Agent has also been granted warrants to purchase a total of
30,000 Units (each Unit consisting of two shares of common stock and one
purchase warrant) at $7 per unit in connection with the Company's private
placement completed in July, 1994. The 30,000 warrants underlying the
Underwriter's private placement warrants are identical in terms to the Class A
Warrants discussed above except that they are not subject to redemption. The
60,000 shares underlying these units, were initially granted at a price of $3.50
and the 30,000 warrants at a price of $6.00 per warrant. The Company believes
that, based upon the anti-dilution provision that has been triggered by the
Dilutive Transactions since the issuance of these units, the shares have been
adjusted to 69,652 and the exercise price to $3.01. The warrants have been
adjusted to 34,826 and the price to $5.17.

GUARANTORS' WARRANTS-1

In consideration for a $1.5 million guarantee of debt financing facilitated
by a third party guarantor, from a commercial lender, Norwest Bank, Colorado
("Bank") the Company issued the guarantor or its assigns a five year warrant to
purchase 400,000 shares of the Company's common stock at an exercise price of $4
per share until 5:00 p.m. New York Time on October 24, 1999. The Warrant does
not confer upon the holder any voting or other rights of a stockholder of
OnGard. In the event the Company files a new registration statement under the
Securities Act of 1933 with the Securities and Exchange Commission covering
securities of the Company, the holder of the Warrant will have the right to have
the shares issuable upon exercise of the Warrant included in such registration
to permit the public sale of the Warrant Shares. The Warrant contains an anti-
dilution provision to provide for adjustment of the exercise price and for a
change in the number of shares issuable upon exercise to protect the holder
against dilution in the event of a stock dividend, stock split, combination or
reclassification of the OnGard Common Stock. The Company believes the adjusted
exercise price of the warrants is $3.41 and number of shares is 468,700. In
addition, the guarantor, in conjunction with another investor in the Company,
guaranteed an additional $1.0 million of additional borrowings for which an
additional 200,000 warrants were granted at an exercise price of $4.00 per
share. These warrants are identical in terms to those previously provided but
expire on May 31, 2000. The Company believes the adjusted exercise price of
these warrants is $3.57 and the number of shares is 224,080.

GUARANTORS' WARRANTS-2

In April 1997 the Company obtained a commitment letter for new bank credit
line facilitated by the same guarantors, described above, for $1.0 million. The
credit line matures twelve months from inception, can be drawn upon by the
Company as needed through Norwest Bank, and is secured by the Company's tangible
and intangible assets. In consideration for their guarantee, the Company
provided 375,000 warrants to purchase shares of OnGard Common Stock at a price
equal to the lower of (i) the price at the closing date or (ii) $2.00 per share.
The warrants have a 5-year term and an antidilution protection provision. The
issuance of these warrants will result in OnGard recording debt issuance costs
which will be amortized as interest expense over the one-year life based upon
the fair value of the warrants.

52
<PAGE>

CLASS A WARRANTS

The Private Placement of the Company's Common Stock completed in July,
1994 contained warrants (the "Class A Warrants") to purchase one share of the
Company's Common Stock for $6. The Class A Warrants are exercisable until
5:00 p.m., Mountain Time, three years from the final closing date of the
Private Placement. The Class A Warrants contain an anti-dilution provision
which is triggered by (i) a sale of any shares of the Company's Common Stock
for a consideration per share less than the then current fair market value
per share of Common Stock or the purchase price pursuant to the Class A
Warrants on the date of sale, (ii) the issuance of any shares of Common Stock
as a stock dividend to the holders of Common Stock, and (iii) a subdivision
or combination of the outstanding shares of Common Stock into a greater or
lesser number of shares. The Warrant agreement specifically provided that
anti-dilution provisions was not triggered by the Pharmetics' Merger or the
Guarantor's Warrants. The Class A Warrants are redeemable by the Company in
the event the closing price of the Company's Common Stock is at least $10 per
share per day for twenty consecutive trading days immediately preceding the
date of the notice of redemption. The Holders of the Class A Warrants and
securities issuable upon exercise thereof are granted both demand and
"piggyback" registration rights under certain conditions. Three hundred
thousand (300,000) Class A Warrants were issued, 71,429 were exercised during
the first quarter 1995. The Company believes that based on its securities
transactions since the date of the issuance of Class A warrants, the price
per share has been adjusted to $5.20 and shares issuable revised to 268,341.

CLASS B WARRANTS

The Class B Redeemable Common Stock Warrants sold in connection with
preferred shares described above are exercisable for a period of three years
from the closing date of the offering, until 5:00 p.m. Mountain Time on such
date. Each of 375,000 Warrant entitles the holder thereof to purchase one
share of Common Stock at a price of $6.00 per share. The Warrants are
redeemable by the Company in the event the closing price of the Company's
Common Stock is at least $10 per share per day for twenty consecutive trading
days immediately preceding the date of the notice of redemption. The
Warrants will be protected against dilution upon the occurrence of certain
events including sales of Common Stock for less than fair market value, stock
dividends, split-ups, reclassifications, mergers and asset sales. The
Company believes that based on its securities transactions since the date of
the issuance of the Class B warrants, the price per share has been adjusted
to $5.23, for 287,471 shares and $5.31 for 141,060 shares and the shares
issuable revised to 428,531.

CONVERTIBLE DEBENTURE WARRANTS

In April 1997 the Company sold convertible debentures totaling $1.5
million in gross proceeds. The Company provided the placement agent with
warrants equal to 10% of the funds raised at a price equal to the lower of
(i) market value of the Common Stock price less 22 1/2% after a 45-day
restriction period, or (ii) the Common Stock price at the funding date. As a
result of this uncertainty, the number of warrants cannot be determined yet,
but would approximate 100,000 warrants based on current market prices. The
Company will record the value of the issuance of warrants and the guaranteed
discount as non-cash interest expense.

CERTAIN STATUTORY PROVISIONS

The Company is subject to section 203 of the Delaware General
Corporation Law, which imposes restrictions on business combinations (as
defined therein) with interested persons (being any person who acquired 15%
or more of the Company's outstanding voting stock). In general, the Company
is prohibited from engaging in business combinations with an interested
person for a period of three years from the date a person becomes an
interested person, subject to certain exceptions. By restricting the ability
of the Company to engage in business combinations with an interested person,
the application of section 203 of the Company may

53
<PAGE>

provide a restriction on hostile or unwanted takeovers even if such proposals
are at a premium to current market prices of the common stock and are favored
by the majority of stockholders.

LIABILITY LIMITATIONS ON DIRECTORS AND OFFICERS

As permitted by the provisions of the Delaware General Corporation Law, the
Company's Certificate of Incorporation eliminates in certain circumstances the
monetary liability of directors of the Company of certain breaches of their
fiduciary duties as directors. However, these provisions do not eliminate the
liability of a director (i) for a breach of the director's duty of loyalty to
the Company or its stockholders, (ii) for acts or omissions by a director not in
good faith or which involve intentional misconduct or a knowing violation of
law; (iii) for liability arising under section 174 of the Delaware General
Corporation Law (relating to the declaration of dividends and purchase or
redemption of shares in violation of the Delaware General Corporation Law); or
(iv) for any transaction from which the director derived an improper personal
benefit. In addition, these provisions do not limit the rights of the Company
or its stockholders, in appropriate circumstances, to seek equitable remedies
such as injunctive or other forms of non-monetary relief. Such remedies may not
be effective in all cases.

Pursuant to the Company's By-Laws, and consistent with section 145 of the
Delaware Business Corporation Law, directors and officers of the Company are
entitled to mandatory indemnification from the Company against certain
liabilities and expenses (i) to the extent such officers or directors are
successful in the defense of a proceeding and (ii) in proceedings in which the
director or officer is not successful in the defense thereof, unless (in the
latter case only) it is determined that the director or officer breached or
failed to perform his duties to the Company and such breach or failure
constituted: (a) a willful failure to deal fairly with the Company or its
shareholders in connection with a matter in which the director or officer had a
material conflict of interest; (b) a violation of the criminal law unless the
director of officer had reasonable cause to believe his or her conduct was
lawful or had no reasonable cause to believe his or her conduct was unlawful;
(c) a transaction from which the director or officer derived an improper
personal profit; or (d) willful misconduct.

Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officer and controlling persons of the Company
pursuant to the foregoing provisions, the Company has been informed that in the
opinion of the Commission such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable.

TRANSFER AND WARRANT AGENT

The Company's transfer agent is Continental Stock Transfer and Trust Co.,
New York, New York. Continental Stock Transfer and Trust Co. will also serve as
Warrant Agent in connection with the exercise of the Warrants.

SHARES ELIGIBLE FOR FUTURE SALE

At April 30, 1996, OnGard had 6,613,722 shares of OnGard Common Stock
outstanding and 253,292 preferred shares outstanding which are convertible to
common stock. Of these shares, the 920,000 shares sold in the initial public
offering, 212,947 exchanged in the Pharmetics acquisition, 1,129,940 converted
from exercise of Common stock purchase warrants, 300,000 shares issued under
Regulation S and approximately 195,000 other shares may be freely traded without
restriction under the Securities Act of 1993 (the "Act"). An additional 125,000
preferred shares were also issued under Regulation S, converted to common stock,
and are traded without restriction. The Company is registering 2,639,023 common
shares by this Prospectus making them available for public sale. The remaining
1,091,811 shares of OnGard Common Stock (the "restricted shares") have been
issued and sold by OnGard in private transactions in reliance upon various
exemptions under the Act. Such shares will be eligible for public sale if
registered under the Act or sold in accordance with Rule 144 thereunder.

54
<PAGE>

In general, under Rule 144, beginning 90 days after August 11, 1992, the
date of the initial public offering, a person (or persons whose shares are
aggregated) who has beneficially owned his shares for at least one year,
including persons who may be deemed "affiliates" (as defined in the Securities
Act of 1933, as amended) of OnGard, is entitled to sell within any three-month
period a number of shares that does not exceed the greater of (a) 1% of the then
outstanding shares of OnGard Common Stock (approximately 66,000 shares) or (b)
the average weekly trading volume in the over-the-counter market during the four
calendar weeks preceding the date on which notice of such sale is filed with the
Securities and Exchange Commission. In addition, sales under Rule 144 are
subject to the certain other restrictions regarding the manner of sale, required
notice and availability of public information concerning OnGard. A person (or
persons whose shares are aggregated) who is not deemed an "affiliate" of OnGard
and who has beneficially owned his shares for at least two years would be
entitled to sell such shares under Rule 144 without regard to the volume
limitations and certain other restrictions.

The holders of 1,150,000 shares of registered shares agreed not to sell any
of their shares of OnGard Common Stock to the public for a period of 24 months
after August 11, 1992 without the prior written consent of the Underwriter.
Based upon available information, OnGard believes that, following the expiration
of such 24 month period, a substantial portion of such shares became eligible
for public sale pursuant to Rule 144 as described above. The holders of such
shares have agreed that, for three years following such 24 months period, all
sales of such shares shall be effected through or with the Underwriter, in the
following manner. Each such holder shall offer the Underwriter the exclusive
opportunity to purchase or sell such shares on terms at least as favorable as
such holder can obtain elsewhere. If the Underwriter fails to accept such
proposal within three business days, the Underwriter shall have no rights with
respect to the proposed transaction. If the proposal is thereafter modified in
any material respect, the Underwriter will have an additional right of refusal
on the terms described above.

In connection with its acquisition of assets of MDPI in March 1993, OnGard
privately issued 50,000 shares of common stock. These shares constitute
"restricted securities" for purposes of the Act. The purchaser of these
securities agreed that, in addition to applicable securities law restrictions,
it would not transfer the shares for a period of twelve months from the date of
purchase.

In connection with its acquisition of OST in October, 1994, OnGard issued
130,655 shares to the former majority holder of OST stock. The purchaser agreed
it would not transfer the shares for a period of twelve months from the date of
purchase.

55
<PAGE>

EXPERTS

The consolidated financial statements of OnGard Systems, Inc. as of
December 31, 1996 and for each of the two years in the period then ended
included in this prospectus have been audited by Arthur Andersen LLP,
independent public accountants, as indicated in their report with respect
thereto, and are included herein in reliance upon the authority of said firm as
experts in giving said report.

56
<PAGE>

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

ONGARD SYSTEMS, INC.

CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED
DECEMBER 31, 1996 AND 1995
Page
----
Report of Independent Public Accountants....................... F-1
Consolidated Balance Sheets.................................... F-2
Consolidated Statements of Operations.......................... F-3
Consolidated Statements of Stockholders' Equity................ F-4
Consolidated Statements of Cash Flows.......................... F-5
Notes to Consolidated Financial Statements..................... F-6

UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE
MONTHS ENDED MARCH 31, 1997 AND 1996

Consolidated Balance Sheets.................................... F-19
Consolidated Statements of Operations.......................... F-21
Consolidated Statements of Cash Flows.......................... F-22
Notes to Consolidated Financial Statements..................... F-24

57
<PAGE>

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To OnGard Systems, Inc.:

We have audited the accompanying consolidated balance sheets of OnGard
Systems, Inc. (a Delaware corporation) and subsidiary as of December 31, 1996
and 1995, and the related consolidated statements of operations,
stockholders' equity and cash flows for the years then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based
on our audits.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of OnGard Systems, Inc. and
subsidiary as of December 31, 1996 and 1995, and the results of their
operations and their cash flows for the years then ended in conformity with
generally accepted accounting principles.

ARTHUR ANDERSEN LLP
----------------------
ARTHUR ANDERSEN LLP
Melville, New York
April 11, 1997

F-1
<PAGE>
ONGARD SYSTEMS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1996 AND 1995
<TABLE>
ASSETS 1996 1995
------ ---- ----
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 885,552 $ 3,693,303
Restricted cash 50,000 97,363
Trade accounts receivable, net of allowance of
$40,000 and $119,186, respectively 744,856 656,274
Inventory, net 2,102,380 1,481,847
Prepaid expenses and other current assets 203,712 77,881
------------ ------------
Total current assets 3,986,500 6,006,668
------------ ------------

PROPERTY AND EQUIPMENT, net 1,836,056 1,152,573
------------ ------------
EQUIPMENT UNDER OPERATING LEASE, net 237,594 134,440
------------ ------------

OTHER ASSETS:
Excess cost over net tangible assets acquired, net 2,268,788 2,396,608
Intangible and other assets, net 303,359 238,258
Deposits 95,241 51,151
Debt guarantee fee, net - 140,740
------------ ------------
Total other assets 2,667,388 2,826,757
------------ ------------
$ 8,727,538 $ 10,120,438
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
Notes payable to bank $ - $ 1,764,270
Trade accounts payable 541,604 839,187
Accrued liabilities 1,242,257 1,251,050
Capital lease obligations 186,741 88,362
Customer deposits 221,359 89,994
Current portion of notes payable 98,847 -
------------ ------------
Total current liabilities 2,290,808 4,032,863

CAPITAL LEASE OBLIGATIONS 198,051 -
NOTES PAYABLE 109,520 50,735
------------ ------------
Total liabilities 2,598,379 4,083,598
------------ ------------

COMMITMENTS AND CONTINGENCIES (Notes 6 and 11)

STOCKHOLDERS' EQUITY:
Convertible Series A Preferred stock, $.001 par value,
3,000,000 shares authorized; 253,292 and 378,292
issued and outstanding as of December 31,1996 and 1995,
respectively; aggregated liquidation preference of
$1,013,168 and $1,513,168, respectively 778,167 1,228,167
Series B Redeemable Preferred stock, no par value;
100 shares issued and outstanding as of December 31,
1996 and 1995 10 10
Common stock, $.001 par value, 25,000,000 and 10,000,000
shares authorized as of December 31, 1996 and 1995,
respectively; 6,613,722 and 5,355,281 shares issued and
outstanding, respectively 6,614 5,355
Additional paid-in capital 30,212,161 23,983,803
Deferred compensation (589,500) (1,189,500)
Accumulated deficit (24,278,293) (17,990,995)
------------ ------------
Total stockholders' equity 6,129,159 6,036,840
------------ ------------
$ 8,727,538 $ 10,120,438
------------ ------------
------------ ------------
</TABLE>
The accompanying notes are an integral part of these balance sheets.

F-2
<PAGE>

ONGARD SYSTEMS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995

1996 1995
------------ ------------
REVENUES $ 3,688,186 $ 4,975,069

COST OF SALES 4,716,411 5,286,358
START UP PRODUCTION COSTS 147,052 -
------------ ------------

Operating margin (deficit) (1,175,277) (311,289)
------------ ------------

COSTS AND EXPENSES:
General and administrative 2,071,203 2,611,697
Sales and marketing 1,722,800 1,468,319
Depreciation and amortization 392,254 307,813
Deferred compensation 691,500 1,728,125
Research and development 175,780 369,859
------------ ------------

Total costs and expenses 5,053,537 6,485,813
------------ ------------

LOSS FROM OPERATIONS (6,228,814) (6,797,102)

INTEREST EXPENSE (319,027) (549,332)

OTHER EXPENSE (49,893) (23,365)

INTEREST AND OTHER INCOME, net 310,436 381,799
------------ ------------

LOSS BEFORE PROVISION FOR INCOME TAXES (6,287,298) (6,988,000)

PROVISION FOR INCOME TAXES - -
------------ ------------

NET LOSS $ (6,287,298) $ (6,988,000)
------------ ------------

NET LOSS PER SHARE (.99) (1.76)
------------ ------------

WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING 6,365,250 3,961,700
------------ ------------

The accompanying notes are an integral part of these statements.

F-3

<PAGE>

ONGARD SYSTEMS, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995

<TABLE>
Convertible Series A Series B Redeemable
Preferred Stock Preferred Stock Common Stock
---------------------- ------------------- ------------------
Shares Amount Shares Amount Shares Amount
-------- ---------- -------- -------- --------- ------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, December 31, 1994 - $ - - $ - 3,029,602 $3,030

Conversion of convertible debentures to Class A preferred
stock, net of debt discount 250,000 765,000 - - - -
Issuance of 3,292 Series A preferred shares for accrued
interest on convertible debentures 3,292 13,167 - - - -
Sale of 125,000 Series A preferred shares, net of
underwriters' commissions of $50,000 125,000 450,000 - - - -
Issuance of 100 shares of Series B redeemable preferred
limited voting stock - - 100 10 - -
Conversion of 71,429 Series A warrants to common stock,
net of underwriters commissions of $25,000 - - - - 71,429 71
Conversion of related party notes payable and interest
to common stock - - - - 12,373 12
Issuance of 200,000 warrants in connection with guarantee
of the Company's notes payable to bank - - - - - -
Issuance of 2,204,021 common shares in connection with
equity private placement, net of issuance costs of $80,000 - - - - 2,204,021 2,204
Deferred compensation related to stock options granted - - - - - -
Compensation related to stock options granted - - - - - -
Amortization of deferred compensation - - - - - -
Conversion of vendor payables to common stock - - - - 35,200 35
Exercise of common stock warrants - - - - 2,656 3
Net loss - - - - - -
-------- --------- --- --- --------- -----
BALANCE, December 31, 1995 378,292 1,228,167 100 10 5,355,281 5,355

Issuance of 1,129,941 common shares in connection with
conversion of common stock purchase warrants, net of
commissions and other expenses of $371,000 - - - - 1,129,941 1,130
Exercise of employee stock options - - - - 3,500 4
Conversion of Series A preferred stock to common stock (125,000) (450,000) - - 125,000 125
Amortization of deferred compensation - - - - - -
Deferred compensation related to issuance of stock options
to non-employee - - - - - -
Net loss - - - - - -
-------- --------- --- --- --------- -----
BALANCE, December 31, 1996 253,292 $ 778,167 100 $10 6,613,722 $6,614
-------- --------- --- --- --------- -----
-------- --------- --- --- --------- -----
</TABLE>

<TABLE>
Additional Total
Paid-In Deferred Accumulated Stockholders'
Capital Compensation Deficit Equity
----------- ------------ ------------ -------------
<S> <C> <C> <C> <C>
BALANCE, December 31, 1994 $12,765,948 $ (150,000) $(11,002,995) $ 1,615,983

Conversion of convertible debentures to Class A preferred
stock, net of debt discount - - - 765,000
Issuance of 3,292 Series A preferred shares for accrued
interest on convertible debentures - - - 13,167
Sale of 125,000 Series A preferred shares, net of
underwriters' commissions of $50,000 - - - 450,000
Issuance of 100 shares of Series B redeemable preferred
limited voting stock - - - 10
Conversion of 71,429 Series A warrants to common stock, net of
underwriters commissions of $25,000 296,359 - - 296,430
Conversion of related party notes payable and interest to
common stock 59,910 - - 59,922
Issuance of 200,000 warrants in connection with guarantee
of the Company's notes payable to bank 200,000 - - 200,000
Issuance of 2,204,021 common shares in connection with
equity private placement, net of issuance costs of $80,000 7,631,844 - - 7,634,048
Deferred compensation related to stock options granted 1,087,500 (1,087,500) - -
Compensation related to stock options granted 1,700,000 - - 1,700,000
Amortization of deferred compensation - 48,000 - 48,000
Conversion of vendor payables to common stock 228,062 - - 228,097
Exercise of common stock warrants 14,180 - - 14,183
Net loss - - (6,988,000) (6,988,000)
----------- ----------- ------------ -----------
BALANCE, December 31, 1995 23,983,803 (1,189,500) (17,990,995) 6,036,840

Issuance of 1,129,941 common shares in connection
with conversion of common stock purchase warrants,
net of commissions and other expenses of $371,000 5,664,237 - - 5,665,367
Exercise of employee stock options 22,746 - - 22,750
Conversion of Series A preferred stock to common stock 449,875 - - -
Amortization of deferred compensation - 691,500 - 691,500
Deferred compensation related to issuance of stock options
to non-employee 91,500 (91,500) - -
Net loss - - (6,287,298) (6,287,298)
----------- ----------- ------------ -----------
BALANCE, December 31, 1996 $30,212,161 $ (589,500) $(24,278,293) $ 6,129,159
----------- ----------- ------------ -----------
----------- ----------- ------------ -----------
</TABLE>

The accompanying notes are an integral part of these statements.

F-4
<PAGE>

ONGARD SYSTEMS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
1996 1995
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (6,287,298) $ (6,988,000)
Adjustments to reconcile net loss to net cash used in
operating activities-
Depreciation and amortization and non-cash interest 814,911 835,715
Compensation expense related to stock options granted 691,500 1,748,000
Gain on sale of packaging assets - (233,500)
Provision for doubtful accounts (79,186) 52,000
Write-off of selected intangible packaging line assets - 110,000
Changes in assets and liabilities:
Decrease (increase) in restricted cash 47,363 (47,363)
Decrease (increase) in trade accounts receivable (9,396) 625,846
Increase in inventory (737,113) (404,363)
Increase in prepaid expenses and other current assets (125,831) (71,556)
Decrease in trade accounts payable and accrued
liabilities (298,859) (1,045,803)
Increase in customer deposits 131,365 59,535
------------ ------------

Net cash used in operating activities (5,852,544) (5,359,489)
------------ ------------

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (312,965) (298,076)
Proceeds from sale of packaging assets - 620,500
Decrease (increase) in other assets (137,111) 68,134
------------ ------------

Net cash provided by (used in) investing activities (450,076) 390,558
------------ ------------

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of preferred stock - 450,010
Proceeds from issuance of common stock 22,750 7,944,641
Proceeds from conversion of warrants to common stock, net 5,665,367 -
Payment of notes payable to related parties (7,500) (55,500)
Proceeds from notes payable to bank - 1,000,000
Payment of note payable to bank (1,764,270) (666,109)
Payment of capital leases payable (229,108) (79,523)
Payment of leasehold improvements financed by owner
and other (192,370) -
------------ ------------

Net cash provided by financing activities 3,494,869 8,593,519
------------ ------------

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (2,807,751) 3,624,588

CASH AND CASH EQUIVALENTS, beginning of year 3,693,303 68,715
------------ ------------

CASH AND CASH EQUIVALENTS, end of year $ 885,552 $ 3,693,303
------------ ------------

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 170,019 $ 131,274
------------ ------------

SUPPLEMENTAL SCHEDULE OF NON-CASH FINANCING ACTIVITIES:
Conversion of convertible debentures to preferred stock - 765,000
Conversion of related party notes payable and accrued
interest to common stock - 59,922
Conversion of vendor payables to common stock - 228,097
Conversion of preferred stock to common stock 450,000 -
Leasehold improvements financed by owner 350,000 -
Acquisition of equipment through capital leases 525,128 145,517
Fair value of warrants issued to guarantor for bank
debt (Notes 8 and 9) - 200,000
Reclassification of inventory to equipment under
operating lease 116,580 134,440
</TABLE>
The accompanying notes are an integral part of these statements.

F-5
<PAGE>

ONGARD SYSTEMS, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 1996 AND 1995

1. ORGANIZATION AND BUSINESS:

OnGard Systems, Inc. ("OnGard" or the "Company") manufactures and markets
both equipment and disposable sterility assurance products for the control of
infectious diseases. These products serve a broad spectrum of healthcare
providers in a variety of markets. Through its 1994 acquisition of
Pharmetics, Inc. ("Pharmetics"), now known as OnGard Sterilization
Technologies, Inc. ("OST"), a wholly-owned subsidiary of the Company, the
Company manufactures sterilizers, washers and dryers used for the control of
infection in hospital, pharmaceutical, laboratory and research facilities.
The Company also sells products for the safe, efficient and economic
handling, storage, transportation and disposal of infectious medical waste,
and is also engaged in the production and distribution of sterile packaging.

During 1993, the Company and Med-Device Packaging, Inc. ("MDPI") entered into
an Asset Purchase Agreement (the "Purchase Agreement"), effective January 1,
1993, whereby the Company purchased substantially all of MDPI's assets and
assumed certain MDPI liabilities. Effective December 7, 1995, the Company
sold selected MDPI assets to another company in order to focus on its
proprietary sterilization packaging line, Autopak-TM-, and sterilization
equipment business. Sales proceeds for the packaging equipment and inventory
aggregated $620,500. The gain on the sale of these assets was $233,500. In
connection with the disposal, the Company wrote-off related goodwill and a
non-compete agreement aggregating $68,000 during 1995. The Company also
retained related accounts receivable.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

PRINCIPLES OF CONSOLIDATION

The accompanying consolidated financial statements include the accounts of
the Company and its wholly owned subsidiary. All significant intercompany
accounts and transactions have been eliminated in consolidation.

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.

CASH EQUIVALENTS

The Company considers all highly liquid cash investments with an original
maturity of three months or less to be cash equivalents.

F-6

<PAGE>

RESTRICTED CASH

The Company has a standby letter of credit for $50,000 for the transportation
of medical waste by the U.S. Postal Service. The letter of credit had no
balance outstanding at December 31, 1996 and 1995, and is backed by the
restriction of a $50,000 certificate of deposit, which is classified as
restricted cash in the accompanying consolidated balance sheets as of
December 31, 1996 and 1995. As of December 31, 1995, an additional $47,000
was held in escrow related to the sale of MDPI assets (Note 1).

INVENTORY

Inventory is stated at the lower of cost (first-in, first-out method) or
market. Work-in-process and finished goods inventory include direct
manufacturing costs and an allocation of overhead.

Inventory, net consists of the following:

December 31,
--------------------------
1996 1995
----------- -----------
Raw materials $ 1,356,476 $ 905,886
Work-in-process 629,280 477,901
Finished goods 116,624 98,060
----------- -----------
$ 2,102,380 $1,481,847
----------- -----------
----------- -----------

PROPERTY AND EQUIPMENT

Property and equipment are recorded at cost, less accumulated depreciation
and amortization. Depreciation and amortization are provided on a
straight-line basis over the following estimated useful lives:

Machinery and equipment 3 - 7 years
Furniture and fixtures 5 - 7 years
Leasehold improvements remaining term of lease or estimated
useful life, whichever is less

Expenditures for maintenance and repairs which do not materially prolong the
normal useful life of an asset are charged to operations as incurred.
Additions and improvements which substantially extend the useful lives of the
properties are capitalized. The cost and related accumulated depreciation
and amortization of property and equipment are removed from the accounts upon
retirement or other disposition, and any resulting gain or loss is reflected
in earnings.

EXCESS COST OVER NET TANGIBLE ASSETS ACQUIRED

Excess cost over net tangible assets acquired is being amortized over 20
years. The balances at December 31, 1996 and 1995 of $2,268,788 and
$2,396,608 are net of $287,594 and $159,774 of accumulated amortization,
respectively.

INTANGIBLE AND OTHER ASSETS

The costs of the Company's patents and trademark are being amortized on a
straight-line basis over 17 years from the date the patents and trademark
were obtained.

F-7

<PAGE>

DEBT GUARANTEE FEE

Debt guarantee fee reflected the fair value of warrants issued to the
guarantors of the Company's $2.5 million bank loans in exchange for the
guarantee (Note 8). The costs were amortized over the life of the loan as
interest expense. The Company obtained an investment banking opinion on the
fair value assigned to these warrants, which was fully amortized at December
31, 1996.

FAIR VALUE OF FINANCIAL INSTRUMENTS

The Company calculates the fair value of financial instruments and includes
this additional information in the notes to financial statements when the
fair value is different than the book value of those financial instruments.
When the fair value approximates book value, no additional disclosure is
made. The Company uses quoted market prices whenever available to calculate
these fair values. When quoted market prices are not available, the Company
uses standard pricing models for various types of financial instruments which
take into account the present value of estimated future cash flows. At
December 31, 1996 and 1995, the carrying value of all financial instruments
approximated fair value.

IMPAIRMENT OF LONG-LIVED ASSETS

During March 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of".
This statement establishes financial accounting and reporting standards for
the impairment of long-lived assets, certain identifiable intangibles, and
goodwill related to those assets to be held and used, and for long-lived
assets and certain identifiable intangibles to be disposed of. This
statement was adopted by the Company effective January 1, 1996. No
impairment loss was recognized as a result of the adoption of this statement.

WARRANTY RESERVE

The Company provides a warranty on its equipment sales. Estimated warranty
costs are accrued at the time the equipment is sold. The Company has a
warranty reserve of approximately $100,000 and $91,000 as of December 31,
1996 and 1995, respectively, which is included in accrued liabilities in the
accompanying consolidated balance sheets.

ACCRUED LIABILITIES

Accrued incineration and postage expenses represent the expected costs
associated with the ultimate disposal of the Company's mail-back products.
Mail-back products are disposable containers used to collect medical waste by
customers who then mail the filled containers through the U.S. Postal Service
(Note 11) to an incinerator. An accrual is made for each mail-back product
sold and, as the containers are received by the incinerator, charges for
incineration and postage are billed to and paid by the Company.

Accrued liabilities consist of the following:

December 31,
------------------------
1996 1995
--------- ----------
Legal $ 85,966 $ 125,343
Incineration and postage 420,000 370,089
Commissions 123,662 154,144
Accrued vacation, payroll and related taxes 155,165 123,253
Other 457,464 478,221
---------- ----------
$1,242,257 $1,251,050
---------- ----------
---------- ----------

F-8

<PAGE>

REVENUE RECOGNITION

The Company generally recognizes revenue from product sales upon shipment to
the customer. If a product shipment is delayed at the customer's request,
the Company recognizes revenue upon completion and acceptance by the
customer.

MAJOR CUSTOMERS

The Company had no single customer which would be characterized as a major
customer during 1996. The Company had one customer which accounted for 10%
of total revenue during 1995. As a result of the sale of medical device
packaging assets the Company no longer sells to this customer. During 1995,
one of the Company's 1994 major customers divested a division to another
entity resulting in the Company selling to both entities. Due to the
divestiture neither of these was a major customer, although the Company
retained the sales to both.

RESEARCH AND DEVELOPMENT

Research and development costs incurred by the Company associated with the
development of preproduction prototypes are expensed as incurred.

INCOME TAXES

The Company accounts for income taxes under the provisions of Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS
109"). SFAS 109 requires recognition of deferred income tax assets and
liabilities for the expected future income tax consequences, based on enacted
laws, of temporary differences between the financial reporting and tax bases
of assets and liabilities. In addition, SFAS 109 requires recognition of
deferred tax assets for the expected future tax effects of tax loss
carryforwards and tax credit carryforwards. Net deferred tax assets are then
reduced, if deemed necessary, by a valuation allowance for the amount of any
tax benefits which, more likely than not based on current circumstances, are
not expected to be realized (Note 7).

STOCK-BASED COMPENSATION

In October 1995, the Financial Accounting Standards Board issued SFAS No.
123, "Accounting for Stock-Based Compensation". This statement establishes a
fair value based method of accounting for an employee stock option or similar
equity instrument but allows companies to continue to measure compensation
cost for those plans using the intrinsic value based method of accounting
prescribed by APB Opinion No. 25, "Accounting for Stock Issued to Employees".
Companies electing to continue using the accounting under APB Opinion No. 25
must, however, make pro forma disclosures of net income and earnings per
share as if the fair value based method of accounting defined in SFAS No. 123
had been applied (Note 9). These disclosure requirements are effective for
years beginning after December 15, 1995. The Company has elected to continue
accounting for its stock-based compensation awards to employees and directors
under the accounting prescribed by APB Opinion No. 25 and to provide the
disclosures required by SFAS No. 123. As required, the Company has adopted
SFAS No. 123 to account for stock-based compensations awards to outside
consultants.

NET LOSS PER SHARE

Net loss per share is based on the weighted average number of common shares
outstanding during each year. Due to the Company's net losses in 1996 and
1995, common stock equivalents of the Company are not included in the net
loss per share calculation, as the inclusion of such common stock equivalents
would be antidilutive.

F-9
<PAGE>

RECENTLY ISSUED ACCOUNTING STANDARDS

In March 1997, the Financial Accounting Standards Board issued SFAS No. 128,
"Earnings Per Share". This statement establishes standards for computing and
presenting earnings per share ("EPS"), replacing the presentation of currently
required primary EPS with a presentation of Basic EPS. SFAS 128 is effective
for financial statements issued for periods ending after December 15, 1997,
including interim periods, and earlier application is not permitted. When
adopted, the Company will be required to restate its EPS data for all prior
periods presented. The Company does not expect the impact of the adoption of
this statement to be material to previously reported EPS amounts.

RECLASSIFICATIONS

Certain prior year amounts have been reclassified to conform with the current
year presentation.

3. PROPERTY AND EQUIPMENT:

Property and equipment consists of the following:

December 31,
-----------------------
1996 1995
---- ----

Furniture and fixtures $ 86,080 $ 62,256
Leasehold improvements 784,140 415,142
Machinery and equipment 2,079,400 1,418,999
2,949,620 1,896,397
----------- ----------
Less-Accumulated depreciation and amortization (1,113,564) (743,824)
----------- ----------
$ 1,836,056 $1,152,573
----------- ----------
----------- ----------

Equipment under capital leases, included in property and equipment was
approximately $520,000 and $87,000 as of December 31, 1996 and 1995,
respectively.

4. INTANGIBLE AND OTHER ASSETS:

Intangible and other assets consist of the following:

December 31,
-----------------------
1996 1995
---- ----

Patents and trademark $338,150 $245,132
Non-compete agreement - 36,662
Other 20,000 20,000
358,150 301,794
-------- --------

Less-Accumulated amortization (54,791) (63,536)
-------- --------
$303,359 $238,258
-------- --------
-------- --------

F-10

<PAGE>

5. NOTES PAYABLE TO RELATED PARTIES:

The Company had a note payable outstanding to an employee of the Company for
$48,000, which was paid in 1995. In 1989, the Company issued a $30,000
unsecured note to one of the founding stockholders of the Company as
consideration for funding start-up losses. The note provided for interest
payable at prime plus 1%, and matured June 28, 1993. This note, including
accrued interest, was settled in 1995 with the issuance of 10,268 shares of
the Company's common stock. Through its acquisition of Pharmetics, the
Company also had a $30,000 unsecured note payable to one of its employees
which had been classified as a current liability at December 31, 1994. The
note was repaid during 1995 and 1996 in part with 2,105 shares of the
Company's common stock and the remainder with $15,000 in cash.

6. LEASES:

The Company leases its New York office and warehouse facilities and a sales
office in Denver, and has other minor noncancelable operating leases
including office and factory equipment which range from three to five years.
In connection with the consolidation of its Denver and New York facilities,
in January 1996, the Company assigned the lease for its former Denver
facility effective April 1, 1996. Through this assignment, the Company was
granted complete release from its obligations under the lease and also
receives additional payments from the assignee in excess of its monthly
rental payments through May 1998. The New York facility lease expires in
January 2000. Total rental expense for 1996 and 1995 was $252,121 and
$258,651, respectively. Future minimum operating lease payments are as
follows, which excludes payments relating to the assigned lease in Denver:

1997 $223,000
1998 251,000
1999 261,000
2000 23,000
Thereafter -

The Company also leases certain fixed assets that are capitalized as of
December 31, 1996. Future obligations on these leases are approximately
$385,000, plus accrued interest of $85,000.

7. INCOME TAXES:

Net deferred tax assets and liabilities consist of the following:

December 31,
-----------------------
1996 1995
--------- --------
Current:
Accounts receivable $ 15,200 $ 45,291
Inventory 45,875 102,661
Other - 37,048
61,075 185,000
Noncurrent:
Fixed assets (50,000) (48,715)
Stock compensation 891,385 646,000
Net operating loss carryforwards 8,166,693 6,167,156
---------- ----------
9,008,078 6,764,441
---------- ----------

Total net deferred tax asset 9,069,153 6,949,441

Valuation allowance (9,069,153) (6,949,441)
---------- ----------
Net deferred tax asset $ - $ -
---------- ----------

F-11

<PAGE>

The Company's effective income tax rate was different than the statutory federal
income tax rate as follows:

<TABLE>
1996 1995
---- -----

Federal income tax (benefit) at statutory rates $(1,999,537) $(2,338,000)
State income tax (benefit), net of Federal effect (194,138) (227,000)
Valuation allowance on net operating loss carryforwards 2,193,675 2,565,000
----------- ----------
$ - $ -
----------- ----------
----------- ----------
</TABLE>

The Company has no state or federal income taxes currently payable at
December 31, 1996 or 1995.

The differences between the fiscal 1996 and 1995 losses reported for
financial reporting and income tax purposes relate primarily to differences
in the timing of certain reported items including depreciation and
amortization expense and provision for losses.

At December 31, 1996 and 1995, respectively, the Company has net operating
loss ("NOL") carryforwards of approximately $21,491,000 and $16,229,000
currently available for federal income tax purposes which expire through
2011. The Company's initial public offering ("IPO") and certain other
ownership changes have limited the Company's ability to utilize its NOL
carryforwards existing at the dates of the respective ownership changes. The
Pharmetics preacquisition NOL of approximately $3,990,000, which is included
in the above amount, will be significantly limited due to the change in
control resulting from the acquisition by OnGard.

The Company has determined that its net deferred tax assets as of December
31, 1996 and 1995 do not satisfy the realization criteria set forth in SFAS
109. Recognition of these benefits requires future taxable income, the
attainment of which is uncertain. Accordingly, a valuation allowance has
been recorded to offset the entire net deferred tax asset.

8. NOTES PAYABLE:

In 1994, the Company obtained a $1.5 million bank loan facilitated by a
third-party guarantor. The total $1.5 million was received in two equal
parts; the first half was a revolving credit facility and the second was
contingent upon completion of the Pharmetics merger, which was consummated
effective October 1, 1994 (Note 1). Upon issuance of the second $750,000,
the total revolving credit facility converted to a $1.5 million term loan,
dated November 1994, which bears interest at the prime rate plus 2%. As of
December 31, 1995, there was $764,270 outstanding under this term loan.
During 1995, the guarantor of the original loan and another investor in the
Company facilitated an additional $1,000,000 in bank borrowings due
concurrently with the original loan. These loans matured on April 15, 1996
and were paid off in their entirety.

During 1996, the Company entered into two new borrowing agreements with the
landlord of the Company's New York facility in order to finance certain
leasehold improvements. Under the terms of those agreements, the Company
borrowed $50,000 and $300,000 at an annual interest rate of 10%. The loans
are being repaid in monthly installments through January 1997 and January
1999, respectively. As of December 31, 1996, $208,000 was outstanding under
these agreements.

F-12
<PAGE>

9. STOCKHOLDERS' EQUITY:

PRIVATE EQUITY TRANSACTIONS

During August and September 1995, the Company received net proceeds of
approximately $7.6 million from the private placement of 2,204,021 shares of
its common stock at a price of $3.50 per share. The Company also issued 100
shares of its Series B redeemable preferred stock to the largest investor in
the private placement at an aggregate cost of $10 per share. The Series B
preferred shares carry no dividend or voting rights but convey the right to
elect one member of the Company's Board of Directors so long as at least 5%
of the Company's common stock is owned by the investor. The Series B holder
exercised this right effective December 1995. The stock purchase agreement
also provides this investor a preemptive right to purchase its pro rata share
of ownership in the Company subsequent to this private placement, allowing
for up to $7.0 million in gross proceeds from this placement.

In January 1995, the Company's shareholders approved, by a majority vote, the
authorization of up to 3,000,000 Series A preferred shares. Series A
preferred shares have a par value of $.001 per share, carry no dividend
rights unless declared by the Company's Board of Directors in their sole
discretion, and have a preference in liquidation of $4.00 per share plus any
accrued dividends, if such dividends have been declared. Each preferred
share is convertible into one share of the Company's common stock at the
option of the holder. The Series A preferred shareholders are entitled to
vote with the common shareholders as a single class. Each preferred share
conveys votes equal to the number of common shares into which it is
convertible. Upon authorization of the preferred stock issuance by the
Company's shareholders, the Company converted, at its option, $1,000,000 of
convertible debentures, which were outstanding at December 31, 1994, into
250,000 shares of convertible Series A preferred stock. Class B Preferred
Stock Warrants to acquire 250,000 shares of the Company's common stock at
$6.00 per share, which were issued in connection with the convertible
debentures, remain outstanding after the conversion.

During February 1995, the Company sold an additional $500,000 of preferred
stock units. Each unit consists of one share of Series A preferred stock at
a price of $4.00 per share and one warrant to acquire the Company's common
stock at an exercise price of $6.00 per share. A total of 125,000 Series A
preferred shares were sold, accompanied by 125,000 Class B Preferred Stock
Warrants.

PUBLIC OFFERING AND COMMON STOCK PURCHASE WARRANTS

In August 1992, the Company completed an IPO of its common stock whereby
920,000 units, consisting of one share of common stock and one purchase
warrant (the "Common Stock Purchase Warrant"), were sold at $5.00 per unit,
resulting in net proceeds to the Company of approximately $3,718,000. During
1995, 2,100 of these Common Stock Purchase Warrants were exercised (2,656
shares were issued pursuant to antidilution provisions of these warrants).
Each Common Stock Purchase Warrant entitled the holder to purchase one share
of common stock at an exercise price of $6.75 per share. The Common Stock
Purchase Warrants were subject to redemption by the Company in the event its
closing stock price equaled or exceeded $10.00 per share on the NASDAQ
exchange for 20 consecutive days and upon 30 days written notice. The
redemption provision expired in August 1995. The Common Stock Purchase
Warrants contained an antidilution provision which affects both the exercise
price of the warrant and the number of shares underlying the warrants, and
which has been triggered by various equity and debt financing transactions
which have occurred since that date. During 1995, the Company extended the
expiration date, but no other provisions, to December 31, 1995, March 29,
1996 and then to April 30, 1996. Approximately 1,130,000 options were
exercised prior to the final revised expiration date at an adjusted price of
$5.34 providing gross proceeds of $6,000,000 and net proceeds of $5,665,000.

F-13

<PAGE>

EQUITY PRIVATE PLACEMENT AND SERIES A WARRANTS

In July 1994, the Company completed a private placement of 300,000 equity
units, each unit consisting of two shares of the Company's common stock and
one warrant which was sold at $7.00 per unit. Each warrant (the "Series A
Warrants") entitles a holder to purchase one share of the Company's common
stock for $6.00. The Series A Warrants also contain an antidilution provision
which affects the number of shares and the price of each warrant. The
warrant agreement specifically provides that the antidilution provisions were
not triggered by either the Pharmetics merger (Note 1) or the Guarantor's
Warrants (Note 8 and below). The Series A Warrants are subject to redemption
on the same terms as the Common Stock Purchase Warrants described above. In
February 1995, 71,429 warrants were converted to common stock; the Company
had provided one-time pricing of $4.50 per share to incent this exercise,
which resulted in approximately $296,430 in net proceeds.

GUARANTOR'S WARRANTS

In connection with the guarantee of the Company's $1.5 million bank loan
(Note 8), the Company granted a total of 400,000 warrants (the "Guarantor's
Warrants") to purchase its common stock at a price of $4.00 per share to a
guarantor . The Guarantor's Warrants were granted in phases: 250,000
warrants were granted upon the guarantee of the first $750,000 loan amount
and, thereafter, an additional 150,000 warrants were granted upon issuance of
the aggregate $1.5 million note. The warrant agreement with the guarantor
contains antidilution provisions which specifically exclude the Pharmetics
merger (Note 1) and the equity private placement described above. During
1995, in connection with the guarantee of an additional $1.0 million in bank
loans, the Company granted a total of 200,000 additional warrants to the
original guarantor and another investor in the Company under similar terms as
the original warrants.

UNDERWRITER'S WARRANTS

Underwriter's warrants to purchase a total of 80,000 units at an exercise
price of $7.00 per unit, each unit consisting of one share of common stock
and one purchase warrant with an exercise price of $9.45, were issued to the
underwriter ("Underwriter") as part of the Company's IPO. The Underwriter's
warrants contain an antidilution provision that has been triggered by various
equity and debt financing transactions which have occurred since that date.
The warrants underlying the Underwriter's warrants have also been adjusted
based on similar antidilution provisions.

The Underwriter has also been granted warrants to purchase a total of 30,000
units (each unit consisting of two shares of common stock and one purchase
warrant) at $7.00 per unit in connection with the Company's equity private
placement. The 30,000 warrants underlying the Underwriter's equity private
placement warrants are identical in terms to the Class A Warrants discussed
above except that they are not subject to redemption.

SERIES B PREFERRED STOCK WARRANTS (SEE "PRIVATE EQUITY TRANSACTIONS" ABOVE)

In November 1994, the Company issued 250,000 Series B Preferred Stock
Warrants in connection with the sale of $1.0 million in convertible
debentures. The Series B Preferred Stock Warrants are identical in terms to
the Series A Warrants described above, and are subject to redemption by the
Company under the same terms and conditions as the Common Stock Purchase
Warrants described above. As part of a single transaction in February 1995,
the Company converted the debentures to preferred stock and sold an
additional $500,000 of preferred stock with identical warrants; 125,000
Series B Preferred Stock Warrants were also issued.

F-14

<PAGE>

A summary of the warrant terms, the Company's calculation of dilution
adjusted prices and shares at December 31, 1996, and potential maximum gross
proceeds to the Company are as follows:

<TABLE>
Series B
Preferred
Series A Guarantor's Underwriter's Stock
Warrants Warrants Warrants Warrants Total
-------- -------- -------- -------- -----
<S> <C> <C> <C> <C> <C>
Original number of shares (a) 228,571 600,000 250,000 375,000 1,453,571
Original price $6.00 $4.00 $3.50 - $9.45 $6.00
Dilution adjusted shares 268,341 692,780 345,260 428,501 1,734,882
Dilution adjusted price $5.20 $3.41 - $3.57 $3.01 - $6.25 $5.28 - $5.31
Maximum potential gross proceeds
($ millions) (b) $1.4 $2.4 $1.6 $2.3 $7.7
Expiration date 4-30-97, 10-24-99 8-11-97, 2-28-98
7-18-97 7-20-97
Redemption provision Yes No No Yes
</TABLE>

(a) 71,429 Series A Warrants exercised during 1995.

(b) There is no assurance that the full amount of these proceeds will be
received by the Company in the future.

STOCK OPTION PLAN

In January 1995, the Company's shareholders approved a stock plan (the "1994
Plan"), which superseded the pre-existing stock option plan (the "1992
Plan"). The 1994 Plan provides for the issuance of up to 1,500,000 shares of
common stock of either or both nonqualified or incentive stock options. The
option grants vest ratably over four years and may be exercised for a term of
10 years but not before six months following the date of grant. The option
price for incentive stock options granted shall be at least 100% of the fair
market value of the common stock at the date of grant. Nonqualified options
may be issued at less than the fair market value at the discretion of the
Committee. At December 31, 1996, 1,107,688 stock options granted to
employees and directors were exercisable. The Company accounts for awards
granted to employees and directors under APB Opinion No. 25, under which
compensation cost has been recognized for stock options granted at an
exercise price less than the market value of the options on the grant date.
Had compensation cost for all stock option grants in 1996 and 1995 been
determined consistent with SFAS No. 123, the Company's net loss and loss per
share would have been increased to the following pro forma amounts:

1996 1995
---- ----
Net loss: As Reported (6,287,298) (6,988,000)
Pro Forma (6,800,163) (7,746,636)

Primary EPS: As Reported (.99) (1.76)
Pro Forma (1.07) (1.96)

The effects of applying SFAS No. 123 in this pro forma disclosure are not
indicative of future amounts. SFAS No. 123 does not apply to awards prior to
1995, and additional awards in future years are anticipated.

F-15

<PAGE>

The following table reflects activity under the plan for the two-year period
ended December 31, 1996:

<TABLE>
1996 1995
-------------------- ---------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
------ ----- ------ -----
<S> <C> <C> <C> <C>
Outstanding at beginning of year 1,346,250 $4.49 527,500 $5.45
Granted 441,000 4.47 908,750 4.15
Exercised (3,500) 7.50 - -
Forfeited (237,750) 6.64 (75,000) 6.76
Canceled (30,250) 5.43 (15,000) 6.27
--------- ---------
Outstanding at end of year 1,515,750 4.12 1,346,250 4.49
--------- ---------
Exercisable at end of year 1,107,688 4.01 747,500 4.01
--------- ---------
</TABLE>

The fair value of the stock options granted is estimated on the date of grant
using the Black-Scholes option pricing model with an assumed expected life of
7 years, risk free interest rates of 6.36% in 1996 and 6.01% in 1995,
volatility of 56% in 1996 and 49% in 1995 and dividend yield of 0% in both
years. The weighted average fair values of options granted in 1995 at prices
below market value and at market value are $5.46 and $4.60, respectively.
The weighted average fair values of options granted in 1996 at prices at
market value and above market value were $4.19 and $1.83, respectively.

In December 1995, the Board of Directors granted 700,000 stock options
(600,000 at $3.50 and 100,000 at $1.00) to certain officers and directors of
the Company. In the fourth quarter of 1995, the Company recorded compensation
expense of $1,700,000 related to fully vested options for an amount
representing the difference between the exercise price and fair market value
of OnGard common stock on the date of the grant. The Company also recorded
deferred compensation expense of $1,087,500 for options which vest ratably
over two years, and related compensation will be charged to operations over
that time.

During 1996 under the 1994 Plan, the Company granted 50,000 options to an
outside consultant. All transactions with individuals other than those
considered employees, as set forth within the scope of APB Opinion No. 25,
must be accounted for under the provisions of SFAS No. 123. Under SFAS No.
123, the fair value of the options granted to the consultant at the date of
grant was $91,500. These options were granted for a term of up to seven
years at an exercise price equal to the market value at the date of grant.
At December 31, 1996, 25,000 of the options outstanding with respect to the
consultant were exercisable. Compensation expense recognized during fiscal
1996 related to these options was $45,750.

The following table summarizes information about stock options outstanding at
December 31, 1996:

<TABLE>
Options Outstanding Options Exercisable
------------------------------------------- ---------------------
Number Weighted Weighted Number Weighted
Outstanding Average Average Exercisable Average
at Remaining Exercise at Exercise
Range of Exercise Prices 12/31/96 Contractual Life Price 12/31/96 Price
- ------------------------ -------- ---------------- ----- -------- -----
<S> <C> <C> <C> <C> <C>
$1.00 to $1.50 100,000 5.98 $1.00 100,000 $1.00
3.42 to 5.13 1,188,000 6.43 3.86 887,500 3.99
5.14 to 7.72 227,750 6.21 6.81 120,188 6.70
--------- ---------
1.00 to 7.72 1,515,750 6.37 4.12 1,107,688 4.01
--------- ---------
</TABLE>

F-16
<PAGE>

10. TRANSACTIONS WITH MANAGEMENT:

In May 1992, the Company entered into an employment agreement with its
President, which expired on December 31, 1995. In December 1995, the Board
of Directors voted to extend this agreement for three years. The President's
employment agreement provides that if he is terminated without cause, he will
receive a one-time payment equal to five times the amount of his base salary
in effect at that time. The Company also has employment agreements with its
Vice Presidents of Sales and Technology. All of these agreements specify
minimum base salary amount, certain fringe benefits and incentive
compensation, including annual bonuses contingent on achievement of specific
objectives established by the Board of Directors.

11. CONTINGENCIES:

MAIL-BACK MEDICAL WASTE SERVICE

The Company provides a mail-back medical waste service to small quantity
generators of medical waste. The Company uses the U.S. Postal Service for
its mailings of medical waste. As such, the Company is subject to the U.S.
Postal Service's existing and evolving regulations pertaining to the
transportation of medical waste. Transportation, handling and storage of
medical waste may also be subject to rules and regulations promulgated by
various agencies such as the Occupational Safety and Health Administration,
the Department of Transportation and various state and local municipalities.
Changes in regulations could have a significant impact on the Company's
ability to market and transport its medical waste products and waste disposal
services.

LEGAL PROCEEDINGS

The Company does not have any pending legal proceedings other than ordinary,
routine litigation incidental to its business. However, as a seller of
medical infection control and waste handling systems, the Company could face
product liability claims or other claims potentially based on accidental
infections, loss of waste disposal packages in the mail or other unforeseen
circumstances. The Company maintains product liability and umbrella insurance
in an aggregate amount of $7,000,000, an amount it believes to be adequate.
However, there can be no assurance that such coverage will be adequate to
cover future product liability claims, if any, or that such product liability
insurance coverage will continue to be available at reasonable prices.

12. LIQUIDITY AND CAPITAL RESOURCES - SUBSEQUENT EVENTS:

The Company has an accumulated deficit of $24 million at December 31, 1996
and expects losses to continue for the foreseeable future. Additional
expenditures for equipment and marketing will also be required in order to
expand the market position of OnGard's sterilization supply and equipment
product lines. The Company needs additional capital in order to support its
operations until it generates sufficient cash flow from operations.

In April 1997, the Company obtained a $1.0 million bank loan facilitated by
third-party guarantors, who are either investors in or option holders of the
Company (the "Guarantors"). The loan matures twelve months from inception
for the then outstanding principal balance. Outstanding principal bears
interest at LIBOR plus 2%. The Company has provided its assets as collateral
for the funding, but is permitted to sell certain assets without a
commensurate reduction of the aggregate $1.0 million line. In connection
with the guarantee, the Company has granted the Guarantors a total of 375,000
warrants to purchase its common stock at a price of $2.00 or the common stock
price at the funding date, whichever is lower. The Company will amortize
debt guarantee fees over the life of the loan, as interest expense, for the
fair value of the warrants issued.

F-17
<PAGE>

Also in April 1997, the Company received $1.5 million from the sale of
convertible debentures (the "Debentures"). The Debentures are convertible
into common stock of the Company in $50,000 denominations at any time after a
45-day restriction period at a price equal to the then fair market value of
the common stock less 22-1/2%, or the common stock price at the funding date,
whichever is lower. The Debentures bear interest at the rate of 6% per annum
until conversion; such interest is payable quarterly in cash or common stock
of the Company at the Company's option.

The Debentures mature five years from issuance, at which time any remaining
amounts convert to common stock. The Company will grant warrants to the
placement agent equal to 10% of the funds raised at the exercise price
described above and pay placement fees of approximately 10% of the funds
raised. The placement agent has committed to financing an additional $3.5
million until February 28, 1998, under the same terms discussed above but the
additional financing is solely at the Company's option. However, in the
event such commitment is unfulfilled by the Company, an additional 2% of such
unfulfilled commitment will be paid in warrants on the terms described above.
The Company will record the value of warrants to the guarantors, and the
guaranteed discount from market price provided to the Debenture holders, as
non-cash interest expense.

Although the Company has been successful to date in obtaining sources of
financing sufficient to meet current trade obligations and other expenses and
to enable it to pursue its business plans generally, and although the
Company's management believes that the Company has, through its available
cash and lines of credit, sufficient resources through at least December 31,
1997, there is no assurance it will be successful in this regard in the
future. Furthermore, there can be no assurance that the Company will be
successful in receiving additional proceeds from the exercise of the warrants
outstanding, or that if successful, such funds will be adequate to fund the
Company's operations until it is able to generate cash from operations
sufficient to fund its operations without additional external sources of
capital.

F-18
<PAGE>

ONGARD SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS

March 31 December 31
1997 1996
ASSETS (Unaudited) (Audited)
- ------ ------------ ------------
CURRENT ASSETS:
Cash and cash equivalents $ 50,539 $ 885,552
Restricted cash 50,000 50,000
Trade accounts receivable, net of
allowance of $40,000, respectively 797,949 744,856
Inventory, net 2,326,453 2,102,380
Prepaid expenses and other 278,751 203,712
----------- -----------

Total current assets 3,503,692 3,986,500
----------- -----------

PROPERTY AND EQUIPMENT, net 1,752,538 1,836,056
----------- -----------

EQUIPMENT UNDER OPERATING LEASES, net 233,333 237,594
----------- -----------
OTHER ASSETS:
Excess cost over net tangible assets
acquired, net 2,236,833 2,268,788
Intangible and other assets, net 307,593 303,359
Deposits 92,048 95,241
----------- -----------

Total other assets 2,636,474 2,667,388
----------- -----------

TOTAL ASSETS $ 8,126,037 $ 8,727,538
----------- -----------
----------- -----------

The accompanying notes are an integral part of these financial statements.

F-19
<PAGE>

ONGARD SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
March 31 December 31
LIABILITIES AND STOCKHOLDERS' EQUITY 1997 1996
------------- -------------
(Unaudited) (Audited)
<S> <C> <C>
CURRENT LIABILITIES:
Trade accounts payable $ 963,772 $ 541,604
Accrued liabilities 1,298,341 1,242,257
Capital leases payable 186,992 186,741
Customer deposits 251,113 221,359
Current portion of notes payable 101,139 98,847
------------- -------------
Total current liabilities 2,801,357 2,290,808
------------- -------------

CAPITAL LEASES PAYABLE, NET OF CURRENT
PORTION 152,643 198,051
NONCURRENT TRADE ACCOUNTS PAYABLE 83,498 109,520
------------- -------------

Total liabilities $ 3,037,498 $ 2,598,379
------------- -------------

STOCKHOLDERS' EQUITY:
Convertible Series A Preferred stock; $.001 par
value, 3,000,000 shares authorized, 253,292 issued
and outstanding at March 31, 1997 and December 31,
1996, aggregate liquidation preference of $1,013,168 $ 778,167 $ 778,167
Series B Redeemable Preferred Stock, no par value;
100 shares issued and outstanding at March 31, 1997
and December 31, 1996 10 10
Common stock; $.001 par value, 25,000,000 shares
authorized, 6,613,722 shares issued and outstanding
at March 31, 1997 and December 31, 1996 6,614 6,614
Additional paid-in capital 30,212,161 30,212,161
Deferred compensation (442,125) (589,500)
Accumulated deficit (25,466,288) (24,278,293)
------------- -------------

Total stockholders' equity $ 5,088,539 $ 6,129,159
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $ 8,126,037 $ 8,727,538
------------- -------------
------------- -------------
</TABLE>

The accompanying notes are an integral part of these financial statements.

F-20
<PAGE>

ONGARD SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS

Three Months Ended
March 31
---------------------------
1997 1996
----------- -----------
(Unaudited) (Unaudited)

REVENUES $ 1,288,324 $ 727,750

COST OF SALES 1,307,750 887,289
------------ ------------

Operating margin (deficit) (19,246) (159,539)
------------ ------------

COSTS AND EXPENSES:
Sales & marketing 495,404 425,756
General and administrative 376,125 734,166
Research and development 26,067 68,396
Deferred compensation 147,375 145,314
Depreciation and amortization 109,428 73,946
------------ ------------

Total expenses 1,154,399 1,447,578
------------ ------------

LOSS FROM OPERATIONS (1,173,645) (1,607,117)

INTEREST INCOME 6,148 41,628

OTHER INCOME 351 1,292

INTEREST EXPENSE (18,777) (186,448)

OTHER EXPENSES (2,072) (10,794)
------------ ------------

NET LOSS $ (1,187,995) $ (1,761,439)
------------ ------------
------------ ------------

NET LOSS PER SHARE $ (.18) $ (.32)
------------ ------------
------------ ------------

WEIGHTED AVERAGE NUMBER
OF SHARES OUTSTANDING 6,613,722 5,515,190
------------ ------------
------------ ------------

The accompanying notes are an integral part of these financial statements.

F-21
<PAGE>

ONGARD SYSTEMS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS

<TABLE>
Three Months Ended
March 31
----------------------------
1997 1996
----------- ------------
(Unaudited) (Unaudited)
<S> <C> <C>
CASH FLOWS USED IN OPERATING ACTIVITIES:
Net Loss $(1,187,995) $(1,761,439)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization and non-cash
interest 174,484 260,268
Compensation expense related to stock options 147,375 145,312
Allowance for doubtful accounts - (5,118)
Changes in assets and liabilities:
(Increase) in restricted cash - (1,770)
(Increase) in accounts receivable (53,093) (11,649)
(Increase) in inventory (224,073) (441,624)
(Increase) in prepaid expenses (75,039) (177,985)
Decrease (increase) in deposits 3,193 (60,746)
Increase (decrease) in customer deposits 29,754 (11,237)
Increase (decrease) in accounts payable
and accrued liabilities 467,626 (32,882)
----------- ------------
Net cash used in operating activities (717,768) (2,098,870)
----------- ------------

CASH FLOWS USED IN INVESTING ACTIVITIES:
Purchase of property and equipment (16,441) (139,265)
Increase in patent, patents pending and trademark (10,240) (17,568)
----------- ------------

Net cash used in investing activities $(26,681) $ (156,833)
----------- ------------
</TABLE>

The accompanying notes are an integral part of these financial statements.

F-22

<PAGE>

ONGARD SYSTEMS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS

Three Months Ended
March 31
---------------------------
1997 1996
------------- ------------
(Unaudited) (Unaudited)
CASH FLOWS FROM FINANCING ACTIVITIES:

Repayment of notes payable Bank $ - $ (141,948)
Payment of capital lease obligations (54,558) (41,072)
Payment of leasehold improvements financed
by owner (36,006) -
Net proceeds from issuance of common stock - 4,548,802
--------- ----------

Net cash provided by (used in) financing
activities (90,564) 4,365,782
--------- ----------

NET INCREASE (DECREASE) IN CASH (835,013) 2,110,079

CASH and cash equivalents, beginning of year 885,552 3,693,303
--------- ----------

CASH and cash equivalents, end of the period $ 50,539 $5,803,382
--------- ----------
--------- ----------

SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for interest $ 17,555 $ 30,583
--------- ----------
--------- ----------

SUPPLEMENTAL SCHEDULE OF NON-CASH
FINANCING AND INVESTING ACTIVITIES:

Stock Subscription Receivable - $ 513,719

Leasehold improvements financed by owner $ 22,902 $ 350,000

Acquisition of equipment through capital
leases $ 9,401 $ 431,112

Reclassification of finished goods
inventory to equipment, currently under
lease $ - $ 116,584

F-23
<PAGE>

ONGARD SYSTEMS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

1. BASIS OF PRESENTATION

The information in this Form 10-QSB includes the results of the Company and
its wholly-owned subsidiary, OnGard Sterilization Technology ("OST"), for
the periods ended March 31, 1997 and 1996. The data is unaudited, but
includes all adjustments including the elimination of intercompany accounts
and transactions which are, in the opinion of management, necessary for a
fair presentation of the interim periods presented. The accounting
policies utilized in the preparation of financial information are the same
as set forth in the Company's annual financial statements and should be
read in conjunction with the Company's Form 10-KSB. Certain prior period
balances have been reclassified to conform to the current period
classification. Results of operations for the three months ended March 31,
1997 may not necessarily be indicative of the full year results.

2. CONVERTIBLE DEBENTURE TRANSACTION

In April 1997, the Company completed the documentation for $1.5 million
(gross proceeds) from the sale of convertible debentures (the
"Debentures"), and anticipates the funding will occur in May 1997. The
Debentures are convertible into common stock of the Company in $50,000
denominations at any time after a 45-day restriction period at a price
equal to the then fair market value of the common stock less 22-1/2%, or
the common stock price at the funding date, whichever is lower. The
Debentures bear interest at the rate of 6% per annum until conversion; such
interest is payable quarterly in cash or common stock of the Company, at
the Company's option.

The Debentures mature five years from issuance, at which time any remaining
amounts convert to common stock. The Company granted warrants to the
placement agrent equal to 10% of the funds raised at the exercise price
described above and paid placement fees of approximately 10% of the funds
raised. The Company will record the value of the guaranteed discount from
market price provided to the Debenture holders as non-cash interest expense
over the period from issuance to the earlist conversion date.

3. INVENTORY

Inventory consists of the following:

March 31, 1997 December 31, 1996
-------------- -----------------
Raw materials $1,424,260 $1,356,476
Work in process 697,936 629,280
Finished goods 164,257 116,624
---------- ----------
$2,326,453 $2,102,380
---------- ----------
---------- ----------

F-24
<PAGE>

4. PROPERTY AND EQUIPMENT AND INTANGIBLE AND OTHER ASSETS

Property and equipment, at cost, consist of the following:

March 31, 1997 December 31, 1996
-------------- -----------------
Furniture and fixtures $ 87,545 $ 86,080
Leasehold improvements 812,475 784,140
Machinery and equipment 2,098,343 2,079,400
------------ -----------
2,998,363 2,949,620

Less accumulated depreciation (1,245,825) (1,113,564)
and amortization ----------- -----------

$ 1,752,538 $ 1,836,056
------------ -----------
------------ -----------

Intangible and other assets, at
cost, consist of the:

March 31, 1997 December 31, 1996
-------------- -----------------
Patents and trademarks $ 348,393 $ 338,150
Other intangible assets 20,000 20,000
------------ -----------
368,393 358,150

Less accumulated amortization (60,800) (54,791)
------------ -----------
$ 307,593 $ 303,359
------------ -----------
------------ -----------

5. DEBT GUARANTEE FEE

Debt guarantee fees reflected the estimated fair value of 600,000 warrants
issued to the guarantor of the Company's $2.5 million bank indebtedness in
exchange for the guarantee. The amount was amortized over the term of the
note, the period from October 1995 through maturity in April 1996, as a
non-cash charge against earnings which was included in interest expense
(Note 6). The Company obtained an investment banking opinion for the fair
value assigned to the first 400,000 warrants granted, and applied the same
value for the subsequent 200,000 warrants which were granted under the same
terms and conditions. The guarantee fee was fully amortized upon the
repayment of the debt in April 1996.

The Company will also record similar charges for the value of the 375,000
warrants granted to the guarantors in conjunction with a new credit
facility committed in April 1997 with funding anticipated in May 1997.
(Note 6).

F-25
<PAGE>

6. DEBT

In October 1994, the Company entered into a $1.5 million term loan with a
bank which was facilitated by a third party guarantor. The interest on the
loan was at the prime rate plus 2% and provided for a 36 month amortization
schedule with a balloon payment at the end of one and a half years from
inception. In April and May 1995, the guarantor of the $1.5 million note
and another guarantor ("the guarantors") facilitated an additional $1.0
million in indebtedness with the same bank. Two notes of $500,000 each
were executed with the principal amount due in April 1996; interest was
payable monthly. In exchange for their guarantees, the Company granted the
guarantors options to acquire a total of 200,000 shares at an exercise
price of $4.00 per share (Note 5). These two notes bear interest at 11%.
The three notes were paid in full in April, 1996, in accordance with the
maturity payment terms described above.

In April 1997 the Company obtained a commitment for a new credit facility
with a bank, which was facilitated by the same two guarantors of the
previous bank borrowing. The credit line of $1.0 million bears intrest at
the LIBOR rate plus 2%, and matures twelve months from inception. The
Company secured the credit facility with all of its tangible and intangible
assets. In exchange for their guarantees the Company granted the
guarantors 375,000 warrants to purchase OnGard common stock at a price of
$2 per share or the price per share at the closing date, whichever is
lower. The Company expects the documentation will be completed and funding
available in May 1997.

The Company will record the fair value of the warrants granted as a non-
cash fee, included as interest expense, and amortized over the life of the
loan.

7. WARRANTS

The Company has issued warrants in connection with the securities
transactions which have financed its operations since its initial public
offering, other than its September 1995 private placement described in Note
2. Warrants included with the Company's initial public offering expired on
April 30, 1996 and generated $6.0 million in gross proceeds from their
exercise.

Warrant prices and expiration periods of remaining warrants vary but key
terms, shown below, are included in each transaction. The Company has
excluded the dilution impact of both the convertible debenture and related
warrants, and guarantors 1997 warrants (both will be completed during May
1997) until the actual exercise price, which is subject to certain events,
can be determined (Note 2 and Note 6). A summary of the key warrant terms,
Company calculation of dilution adjusted prices and shares at March 31,
1997 and potential maximum gross proceeds to the Company are as follows:

F-26

<PAGE>

<TABLE>
Class A Guarantor's Underwriter's Class B
Warrants Warrants Warrants Warrants Total
-------- ----------- ------------- -------- -----
<S> <C> <C> <C> <C> <C>
Number of shares 228,571 (b) 600,000 250,000 375,000 1,453,571
Original price $6.00 $4.00 $3.50-$9.45 $6.00 -
Dilution adjusted shares 268,341 692,780 345,260 428,531 1,734,912
Dilution adjusted price $5.20 $3.41-$3.57 $3.01-$6.25 $5.23-$5.31 -
Maximum potential gross
proceeds ($ millions)(a) $1.4 $2.4 $1.6 $2.3 $7.7
Expiration date 4-20-97, 10-24-99, 08-11-97, 2-28-98
7-18-97 5-31-00 07-20-97
Redemption provision Yes No No Yes
</TABLE>

(a) There is no assurance that the full amount, if any, of these
proceeds will be received by the Company in the future.

(b) Number of shares have been adjusted to reflect 71,429 exercised
warrants.

PART I. ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

The following table sets forth, for the periods indicated, certain items
from the Company's Statements of Operations expressed as a percentage of
revenues.

Three Months
Ended March 31
-------------------
1997 1996
------ ------

Revenues. . . . . . . . . . . . . . . . . . . . 100.0% 100.0%
Cost of sales . . . . . . . . . . . . . . . . . 101.5 121.9
------ -------
Operating Margin (deficit). . . . . . . . . . . ( 1.5) (21.9)
------ -------

Operating Expenses:
General and administrative. . . . . . . . . . 29.2 100.8
Sales and marketing . . . . . . . . . . . . . 38.5 58.5
Depreciation and amortization . . . . . . . . 8.5 10.2
Deferred compensation . . . . . . . . . . . . 11.4 20.0
Research and development. . . . . . . . . . . 2.0 9.4
------ -------
Total . . . . . . . . . . . . . . . . . . . . . 89.6 198.9
------ -------

Loss from operations. . . . . . . . . . . . . . (91.1) (220.8)
Interest and other expenses . . . . . . . . . . (1.7) (27.3)
Interest and other income . . . . . . . . . . . .5 5.9
------ -------

Net loss. . . . . . . . . . . . . . . . . . . . (92.3)% (242.2)%
------ -------
------ -------

F-27

<PAGE>

THREE MONTHS ENDED MARCH 31, 1997 COMPARED TO THREE MONTHS ENDED MARCH 31, 1996

Operating margin improved to a deficit of $19,000 (a deficit of 2% of
revenues) for the three months ended March 31, 1997 compared to a deficit of
$160,000 (22% of revenues) for the same period in 1996. The improvement in
margin resulted in part from a increase in revenues of $560,000 described above,
offset partially by an increase in the level of overhead costs associated with
engineering and quality control which were required to upgrade the performance
and quality of the equipment product line. Revenues, which were insufficient to
offset fixed factory overhead, resulted in a slight operating margin deficiency.

General and administrative expenses decreased $358,000, or 49% from
$734,000 to $376,000 for the respective three month periods ended March 31, 1997
and 1996. The decrease is the result of cost containment measures in a broad
category of expenses including, legal, professional fees, travel and office
supplies, as well as expenditures incurred for relocation in the quarter ended
March 1996 which were not recurring.

Sales and marketing expenses increased $69,000 to $495,000 in the three
months ended March 31, 1997 versus $426,000 in the comparable period in 1995, or
16% . The Company has increased its direct selling efforts, including manpower
and collateral materials, in its equipment product line.

Research and development expenses decreased $42,000 to $26,000 from
$68,000, a 62% decrease, for the first quarter ended March 31, 1997 to the
comparable quarter in 1996. The decrease relates to the completion of Autopak-
Registered Trademark- development, and of the Company's compact sterilizer
product line.

Interest expense decreased from $186,000 to $19,000 for the comparable
quarters ended March 31, 1997 and 1996, a decrease of 167,000 or 90%. This
results from the payment in full of the Company's bank line, on April 15, 1996
offset by increases for interest related to assets financed by capital leases.

LIQUIDITY AND CAPITAL RESOURCES

The Company's working capital at March 31, 1997 decreased to $702,000 from
$1,696,000 at December 31, 1996. Cash and cash equivalents were $51,000 at
March 31, 1997 versus $886,000 at December 31, 1996. Accounts receivable
increased $53,000 to $798,000 at March 31, 1997, from $745,000 at December 31,
1996. Inventory increased, net, $224,000 to $2,326,000 at March 31, 1997 from
$2,102,000 at December 31, 1996.

F-28

<PAGE>

Successful completion of the Company's initial public offering in 1992
provided funds to expand development efforts for the Company's existing product
line and continue product enhancement and expansion. The Company had raised
additional funds through various private transactions since that date, however,
as working capital at December 31, 1994 amounted to a deficit of $1,032,000, it
became necessary for the Company to obtain additional funds. In order to align
its capital structure and working capital deficiency, on September 29, 1995, the
Company completed a private placement (the "September 1995 Private Placement")
of the sale of 2,204,021 shares of the Company's common stock at a price of
$3.50 per share aggregating gross proceeds of $7,714,000. Pursuant to the
September 1995 Private Placement the Company registered such Common Shares
issued in this placement. The Company also sold 100 shares of its Series B
Redeemable Preferred Limited Voting Stock (the "Series B preferred stock") in
the September 1995 Private Placement. Provided that the holders of the Series B
preferred stock own in the aggregate at least 5% of the Company's Common Stock,
the holders of the Series B preferred stock were granted the right to elect one
member to the Company's Board of Directors, which they exercised effective
December 24, 1995.

The Company had also previously generated funds through $2.5 million in
notes payable to a bank which had been facilitated by third party guarantors
(Note 6). The notes called for a 36 month amortization schedule and a balloon
payment at the end of one-and-a-half years in April, 1996. The balloon payment
($1,622,000) was paid in full from the Company's cash position in April, 1996.

In addition, the Company obtained funds through the exercise of outstanding
Common Stock Purchase Warrants. These warrants were to expire on August 15,
1995, but were initially extended until December 31, 1995 and thereafter until
March 29, 1996 and April 30, 1996. Through the exercise of Common Stock
Purchase Warrants, the Company generated $6.0 million in gross proceeds through
the expiration date of the Common Stock Purchase Warrants, April 30, 1996.

Most recently, in April 1997, the Company obtained a commitment for a $1.0
bank line of credit facilitated by the guarantors who had facilitated the
Company's previous bank line. The line bears interest at the LIBOR rate plus 2%
and matures twelve months from inception. The Company provided the guarantors
with warrants to purchase 375,000 shares of common stock at a price of $2 or the
price at the closing date, whichever is lower. The Company expects the closing
date and funds to become available in May 1997. The Company also obtained a
commitment for the sale of $1.5 million in convertible debentures. The
Debentures are convertible into common stock at a price equal to the lower of
(i) the fair market value at the closing date less 22 1/2 percent or (ii) the
price at the funding date. The debentures are convertible after a 45 day
restriction period. Interest on the debentures of 6% per annum is payable in
cash or common stock at the Company's option. The Company anticipates funding
during May 1997.

Although the Company has been successful to date in obtaining sources of
financing sufficient to meet current trade obligations and other expenses and to
enable it to pursue its business plans generally, there is no assurance it will
be successful in this regard in the future. Furthermore, there can be no
assurance that the Company will be successful in securing other funds or, that
if successful, such funds will be adequate to fund the Company's operations
until it is able to generate cash from operations sufficient to sustain its
ongoing operations without additional external sources of capital.

F-29

<PAGE>

GOVERNMENT REGULATION

The Company's existing and planned products are or may be subject to
regulation by the FDA pursuant to the provisions of the Federal Food, Drug, and
Cosmetic Act ("FDC Act"). Under the FDC Act, several, if not all, of the
Company's infection control products, sterilization medical packaging and
sterilization supplies are subject to regulation as medical devices.

Medical devices are classified into either Class I, II or III. Class I and
II devices are not expressly approved by the FDA. However, pursuant to
section 510(k) of the FDC Act, the manufacturer or distributor of a Class I or
II device that is initially introduced commercially on or after May 28, 1976
must notify the FDA of its intent commercially to introduce the device through
the submission of a premarket notification (a "510(k) notice"). Before
commercial distribution can commence, the FDA must review the 510(k) notice and
clear the device for commercial distribution. The FDA normally has 90 days to
review the 510(k) notice and grant or deny clearance to market on the basis that
it is substantially equivalent to a device marketed before May 28, 1976.
Alternatively, the FDA may postpone a final decision and require the submission
of additional information, which may include clinical data. If additional
information is required, review and clearance of a 510(k) notice may be
significantly delayed. In order to clear a Class I or II device for marketing,
the FDA must determine, from the information contained in the 510(k) notice,
that the device is "substantially equivalent" to one or more Class I or II
devices that are legally marketed in the United States.

If a device is not considered "substantially equivalent," it is regulated
as a Class III medical device. In general, a Class III medical device must be
expressly approved by the FDA for commercial distribution pursuant to the
submission of a Premarket Approval Application ("PMA"). A PMA must contain,
among other information, substantial information about the manufacture of the
device and data from adequate and well controlled clinical trials that
demonstrate that the device is both safe and effective. The PMA approval
process is substantially more complex and lengthy than the 510(k) premarket
notification process. Once a PMA is submitted, it may take 16-24 months, or
longer, for the FDA review and approval, if such approval is granted at all.

A medical device, whether cleared for marketing under the 510(k) pathway or
pursuant to a PMA approval, is subject to ongoing regulatory oversight by the
FDA to ensure compliance with regulatory requirements, including, but not
limited to, product labeling requirements and limitations, including those
related to promotion and marketing efforts, Current Good Manufacturing Practice
requirements, record keeping and medical device (adverse reaction) reporting.

FDA regulatory oversight also applies to the Company's sterile medical
packaging products, which are used by other companies in packaging their own
medical devices. Generally, FDA acceptance of the suitability of such packaging
products is made in the context of regulatory submissions of other companies
concerning the device to be packaged. Thus, the Company requires no separate
FDA clearance or approval of these packaging products. Within this framework,
the principal regulatory responsibilities of the Company for its sterile medical
packaging products are to ensure that the packaging products are manufactured in
conformity with Current Good Manufacturing Practice requirements. Although the
Company believes that all of its manufacturing activities are in conformity with
Current Good Manufacturing Practice requirements, there can be no guarantee of
compliance.

F-30
<PAGE>

Historically, the FDA has not exercised device regulatory authority over
some types of infection control products, such as sharps containers or mailer
packages, including those used in the Company's mail-back system, and has
allowed companies to begin commercial introduction (on or after May 28, 1976) of
these types of products without a 510(k) clearance. On February 3, 1994, the
FDA issued a written policy statement which allowed manufacturers of sharps
containers a "discretionary period" of 180 days (until August 2, 1994) to
continue marketing their products already in distribution (introduced on or
after May 28, 1976) without the benefit of 510(k) clearance provided that
required 501(k) notices are submitted to FDA prior to the conclusion of the
discretionary period. Manufacturers of sharps containers also must comply with
FDA device listing and establishment registration requirements. The FDA has
indicated that there is no change in its regulatory posture toward the mailer
packages used in the mail-back system and that it does not intend to regulate
this product as a medical device. There can, however, be no assurance that the
FDA will maintain its current regulatory posture toward the mailing package.

OnGard submitted all but one of the 510(k) notices during 1994. In June
1994, the Company received notification that all of its 510(k) submittals for
sharps containers had been approved and cleared for marketing. The Company has
an additional submittal for one of its sharps containers which the FDA had
advised it to withhold until the others had cleared, which it is now preparing
for submission. The Company has also received a 510(k) notice for its
submission of AutoPak-Registered Trademark-.

F-31
<PAGE>

PART II. OTHER INFORMATION

Item 6. Exhibits and Reports on Form 8-K.

One on May 6, 1997, Item 5 - Other Events, reflecting the
resignation of certain directors of OnGard's Board.

F-32
<PAGE>

SIGNATURE

In accordance with to the requirements of the Exchange Act, the registrant
has caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.

ON-GARD SYSTEMS, INC.

Dated: May 14, 1997 /s/ PHIL B. KART
----------------------------
Phil B. Kart
Vice President and Principal
Financial Officer

F-33
<PAGE>

II. INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS

Consistent with section 145 of the Delaware General Corporation Law
("Delaware Law"), Article VII of the Company's By-Laws provides that the
Company shall indemnify any person in connection with legal proceedings
threatened or brought against him by reason of his present or past status as
an officer or director of the Company, provided that the person acted in good
faith and in a manner he reasonably believes to be in or not opposed to the
best interests of the Company, and with respect to any criminal action or
proceeding, had no reasonable cause to believe his conduct was unlawful. The
Company shall also indemnify any such person in connection with any action by
or in the right of the Company provided the person acted in good faith an in
a manner he reasonably believed to be in or not opposed to the best interests
of the Company except that no indemnification may be made if such person is
adjudged to be liable to the Company unless the court in which such action
was brought determines, upon application, that despite such adjudication, the
person is fairly and reasonably entitled to such indemnification as the court
deems proper. In addition, to the extent that any officer or director is
successful in the defense of any such legal proceeding, the Company is
required to indemnify him against expenses, including attorneys' fees, that
are actually and reasonably incurred by him in connection therewith. The
By-Laws also contain a nonexclusivity clause which provides in substance that
the indemnification rights under the By-Laws shall not be deemed exclusive of
any other rights to which those seeking indemnification may be entitled under
any agreement with the Company, any By-Law, any vote of stockholders or
disinterested directors of the Company or otherwise.

Consistent with section 102(b) of the Delaware Law, Article VIII of the
Company's Certificate of Incorporation provides that a director of the
Company shall not be liable to the Company or its stockholders for damages
for breach of fiduciary duties as director, subject to certain limitations.
Article VIII does not eliminate or limit the liability of a director for (a)
any breach of the director's duty of loyalty to the Company or its
stockholders; (b) any acts of omissions not in good faith or which involved
intentional misconduct or a knowing violation of law; (c) any conduct that is
the subject of section 174 of the Delaware Law; or d) any transaction from
which the director derived an improper personal benefit.

ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION

None of the expenses of issuances and distribution are being paid by the
Selling Stockholders.

The expenses of issuance and distribution which are to be paid by the
Company are estimated as follows:

Item Amounts
---- ---------
Blue Sky Expenses $ 6,250.00
Legal Fees and Expenses 15,625.00
Accounting Fees and Expenses 5,000.00
Fees and Expenses of Transfer Agent 3,125.00
Printing and Engraving Expenses 5,000.00
----------
Total $35,000.00

II-1

<PAGE>

ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES

During the past three years, the Company issued securities which were
not registered under the Securities Act of 1933 (the "Act"), as described
below.

On April 20, 1994, the Company issued a total of 150,000 units, each
unit consisting of two shares of the Company's Common Stock and one warrant
to purchase one share of the Company's Common Stock at an exercise price of
$6.00 per share, to two offshore investors at an issue price of $7.00 per
unit. The sales and issuances of securities in these transactions were
deemed by the Company to be exempt from registration under the Act by virtue
of Regulation S under the Act. The sales occurred outside of the United
States in an offshore transaction and each purchaser signed a representation
that he was not a U.S. person within the meaning of Rule 902(o) under the Act
and that until the expiration of six months from the date the securities were
issued any offer or sale of the securities (including the warrants and common
stock issuable upon exercise thereof) shall not be made by him in the United
States or to a U.S. person or for the account of a U.S. person. The
purchasers further acknowledged with respect to the warrants: (a) that the
common stock to be issued upon exercise of the warrants has not been
registered under the Act; (b) the warrants sold offshore in the offering may
not be exercised by or on behalf of any U.S. person unless registered under
the Act or an exemption from such registration is available; (c) any person
attempting to exercise a warrant sold offshore in the offering will be
required to provide (i) written certification that he is not a U.S. person
and that the warrant is not being exercised on behalf of a U.S. person, or
(ii) a written opinion of counsel, satisfactory to the Company, to the effect
that the warrant and the common stock to be delivered upon exercise thereof
have been registered under the Act or are exempt from registration
thereunder; and (d) the warrants will bear a legend reflecting the foregoing
restrictions. All securities issued to these persons contained legends
restricting their transfer pursuant to the foregoing restrictions. Royce
Investment Group, Inc., the placement agent, received: (i) a placement fee
equal to 10% of the proceeds from these sales; (ii) a non-accountable expense
allowance equal to 3% of the proceeds from these sales and (iii) a unit
purchase option to purchase, at $7.00 per unit, 10% of the units sold in this
offering.

On July 18, 1994 the Company issued a total of 150,000 units, each unit
consisting of two shares of the Company's common stock and one warrant to
purchase one share of the Company's common stock at an exercise price of
$6.00 per share, to a group of 15 accredited investors, as that term is
defined in Rule 501 of Regulation D promulgated under the Act at an issue
price of $7.00 per unit. The sales and issuances of securities in these
transactions were deemed by the Company to be exempt from registration under
the Act by virtue of Regulation D under the Act. The recipients represented
and acknowledged that they are "accredited investors" within the meaning of
Rule 501 under the Act; in the normal course of their business, they invest
in or purchase securities similar to the units, and they have such knowledge
and experience in financial and business matters that they are capable of
evaluating the merits and risks of purchasing the units. They further
represented that they had access to such financial and other information
concerning the Company and the units as they deemed necessary in connection
with their decision to purchase the units, including an opportunity to ask
questions of, and request information from, the Company and that there were
purchasing the units for their own account, and not with a view to, or offer
or sale in connection with, any distribution thereof. All securities issued
to these persons contained legends restricting their transfer without
compliance with applicable securities laws. Royce Investment Group, Inc.,
the placement agent, received: (i) a placement fee equal to 10% of the
proceeds from these sales; (ii) a non-accountable expense allowance equal to
3% of the proceeds from these sales and (iii) a unit purchase option to
purchase, at $7.00 per unit, 10% of the units sold in this offering.

On November 4, 1994 and February 16, 1995 the Company issued a total of
15 units to two accredited investors at a price of $100,000 per unit. The
initial 10 units issued on November 4, 1994 consisted of $100,000 of 6%
Convertible Debentures due February 28, 1998 and 25,000 Redeemable Common
Stock Purchase Warrants to acquire an equivalent number of shares of Common
Stock at $6.00 per share. Pursuant to shareholder authorization received on
January 24, 1995 and the terms of the Debentures, the Debentures comprising a
part of such 10 units were converted into Series A Convertible

II-2

<PAGE>

Preferred Stock at the rate of one share of Series A Convertible Preferred
Stock for each $4.00 in principal amount of the Debentures. Interest on the
Debentures from the date of issuance to the date of conversion was paid by
the issuance of an additional 3,292 shares of Series A Convertible Preferred
Stock. Each of the additional five units issued on February 16, 1995
consisted of 25,000 shares of Series A. Convertible Preferred Stock and
25,000 Redeemable Common Stock Purchase Warrants to acquire an equivalent
number of shares of Common Stock at $6.00 per share. The sale and issuance
of securities in these transactions were deemed by the Company to be exempt
from registration under the Act by virtue of Regulation D under the Act. The
recipients represented their intention to acquire the securities for
investment only and not with a view to distribution thereof, that they were
not formed for the specific purpose of acquiring the securities and that they
had total assets in excess of $5,000,000. Legends setting forth the
restrictions on transfer without compliance with applicable securities laws
were placed on each certificate representing the shares issued in these
transactions.

On December 15, 1994 the Company issued 22,700 shares of Common Stock to
EEC Corp. The issuance of these securities was pursuant to an agreement
between the Company and the recipient with respect to the payment of lease
payments in arrears. For purposes of the transaction the issue price was
agreed to be $7.50 per share. The issuance was deemed by the Company to be
exempt from registration under the Act by virtue of section 4(2) thereof.
The recipient represented to the Company that he was an accredited investor.
A legend setting forth the restrictions on transfer without compliance with
applicable securities laws was placed on each certificate representing the
shares issued in this transaction.

On February 15, 1995 the Company issued 2,105 shares of Common Stock to
Louis Wertman. The shares were issued pursuant to an agreement between the
Company and the recipient in partial payment of a loan from the recipient to
Pharmetics Incorporated, which loan remained unpaid at the time the Company
acquired Pharmetics Incorporated. For purposes of the transaction the issue
price was agreed to be $7.125 per share. The Company deemed the issuance to
be exempt from registration under the Act by virtue of section 4(2) thereof
as a transaction not involving any public offering. The recipient
represented his intention to acquire the shares for his own account for long
term investment and not with a view to the distribution thereof and that he
has such knowledge and experience in financial and business matters to be
capable of evaluating the merits and risks of the investment. The
certificate representing the shares issued to the recipient contained a
legend restricting transfer of the shares without compliance with applicable
securities laws. The recipient acknowledged receipt of adequate information
regarding the Company prior to entering in the agreement pursuant to which
the shares were issued.

On February 15, 1995 the Company issued 71,429 shares of Common Stock to
an offshore investor, Planate Business, S.A. at an issue price of $4.50 per
share. The shares were issued pursuant to the exercise by a recipient of
Class A Common Stock Purchase Warrants received as part of the units issued
on April 20, 1994, as described above. The Company had reduced the exercise
price of the warrants from $6.00 to $4.50 for a period of 30 days to induce
warrant holders to exercise their warrants. The Company deemed the issuance
to be exempt from registration under the Act by virtue of Regulation S
promulgated thereunder. The recipient provided written certification that it
is not a U.S. person and that the warrants were not being exercised on behalf
of a U.S. person.

On June 28, 1995 the Company issued 10,268 shares of Common Stock to Dr.
Eric L. Steiner, a director of the Company, in repayment of a loan from Dr.
Steiner to the Company. For purposes of the repayment the shares were valued
at $4.375 per share. The Company deemed the issuance to be exempt from
registration under the Act by virtue of section 4(2) thereof as a transaction
not involving any public offering. The recipient represented his intention
to acquire the shares for his own account for long term investment and not
with a view to the distribution thereof and that he has such knowledge and
experience in financial and business matters, and knowledge and access to
information regarding the Company, to be capable of evaluating the merits and
risks of the investment. The certificate representing the shares issued to
the recipient contained a legend restricting transfer of the shares without
compliance with applicable securities laws.

II-3

<PAGE>

On August 30, 1995 the Company issued a total of 1,148,000 shares of
Common Stock to a group of six accredited investors at an issue price of
$3.50 per share. The sales and issuances of securities in these transactions
were deemed by the Company to be exempt from registration under the Act by
virtue of Regulation D under the Act. The recipients represented and
warranted that: (i) they were acquiring the shares for investment for their
own account and not with a view to, or for resale in connection with, a
distribution or other disposition thereof; (ii) they have been given the
opportunity to obtain any information or documents relating to, and to ask
questions and receive answers about, the Company and the business and
prospects of the Company which they deemed necessary to evaluate the merits
and risks related to their investment in the securities and to verify the
information received; (iii) their financial condition is such that they can
afford to bear the economic risk of holding the securities for an indefinite
period of time and have adequate means for providing for their current needs
and contingencies; (iv) they can afford to suffer a complete loss of their
investment; (v) their knowledge and experience in financial and business
matters are such that they are capable of evaluating the merits and risks of
their acquisition of the securities; and (vi) they are accredited investors
as that term is defined in Rule 501 of Regulation D.

On August 30, 1995, in connection with the sales and issuances described
in the preceding paragraph, the Company issued a total of 100 shares of
Series B Redeemable Preferred Limited Voting Stock to the same six accredited
investors at an issue price of $.10 per share. These sales and issuances
were also deemed by the Company to be exempt from registration under the Act
by virtue of Regulation D. The recipients made the same representations and
warranties with respect to their acquisition of the Series B Redeemable
Preferred Limited Voting Stock as they made with respect to their acquisition
of Common Stock, as set forth in the preceding paragraph.

Between September 8, 1995 and September 29, 1995 the Company sold an
aggregate of 1,056,020 shares of Common Stock at an issue price of $3.50 to a
group of 41 persons; of such 41 persons, 37 were accredited investors and 4
were qualified, non-accredited investors and included a director of the
Company, two relatives of officers of the Company and an employee. The
Company deemed the sales to be exempt from registration under the Act
pursuant to Rule 506 of Regulation D promulgated under the Act. Each
recipient made representations to the Company consistent with their status as
an accredited investor or qualified purchaser and were provided with
disclosures consistent with Rule 502(b)(2) of Regulation D. The Company
placed a legend restricting transfer without compliance with applicable
securities laws on each certificate representing the shares issued to these
recipients.

On April 11, 1997, the Company agreed to issue $1.5 million in 6%
Cumulative Convertible Debentures due April 11, 2002 to Dusseldorf Securities
Limited upon the closing of such transaction to be consummated by the
funding. The Debentures are convertible into shares of the Company's common
stock at the rate of lesser of (i) 77.5% of the three day average closing bid
price of the Company's common stock as reported by NASDAQ for the three
consecutive business days prior to the date of conversion and after a 41-day
restricted period, or (ii) the closing bid price of the Company's common
stock on the date of execution of the subscription agreement. In connection
with the issuance, the Company will issue warrants to the purchaser to
purchase an amount of debentures equal to 10% of the initial issuance
exercisable within 60 months from the date of issuance. The exercise price
for the warrants is the closing bid price as of the date of execution of the
subscription agreement signed by the purchaser. The expected issuances of
securities in this transaction will be deemed by the Company to be exempt
from registration under the Act by virtue of Regulation S under the Act. The
sales will occur outside of the United States in an offshore transaction and
the purchaser will sign a representation that it is not a U.S. person within
the meaning of Rule 902(o) under the Act, and that until the expiration of 41
days from the date the securities are issued, any offer or sale of the
securities shall not be made by it in the United States or to a U.S. person
or for the account of a U.S. person. The purchaser will further acknowledge
with respect to the debentures: (a) that the debentures and the common stock
to be issued upon conversion of the debentures have not been registered under
the Act; (b) the purchaser will purchase the debentures for its own account
and is qualified to purchase the debentures under the laws of its
jurisdiction of residence; (c) all offers and sales of the debentures prior
to the end of the restricted period will be made in compliance with any
applicable securities laws and Regulation S; (d) none of the debentures will
be sold to or for the account of any U.S. person or within the United States
until after the end of 41-day period commencing on the date of sale to the
purchaser; (e) the transaction has not been and will not be pre-arranged by
the purchaser with a purchaser located within the United States or a person
which is a U.S. person and was not and will not be part of a plan or scheme
to evade registration provisions of the Act; (f) the purchaser will take
reasonable steps to ensure compliance with Regulation S; (g) the purchaser
has not and shall not conduct any "directed selling efforts" as defined in
Regulation S; and (h) the purchaser is an "accredited investor" as defined in
Regulation D. All debentures to be issued to the purchaser will contain
legends restricting their transfer pursuant to the foregoing restrictions.
The Company anticipates the closing will occur in May 1997.

No underwriting discounts or commissions were paid to any party in
connection with any of the foregoing transactions except for the sales
occurring on April 20, 1994 and July 18, 1994 as set forth above.

II-4

<PAGE>

CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS

As independent public accountants, we hereby consent to the use of our report
dated April 11, 1997, and to all references to our Firm included in or made a
part of this registration statement.

ARTHUR ANDERSEN LLP

Melville, New York
May 23, 1997