<PAGE>   1
                                                           FINANCIAL INFORMATION


                                                               TABLE OF CONTENTS

<TABLE>
<S>                                                                      <C>
                       Five Year Financial Summary ..................    Page 20

                       Management's Discussion & Analysis ...........    Page 21

                       Consolidated Financial Statements ............    Page 25

                       Notes to Consolidated Financial Statements ...    Page 29

                       Independent Auditors' Report .................    Page 37
</TABLE>




                                                                       [GRAPHIC]



                                               REVENUE   
                                            (IN MILLIONS)


                                            [LINE GRAPH]


<TABLE>
<S>                                                                         <C>
                                            1994 .......................    $ 98
                                            1995 .......................    $102
                                            1996 .......................    $128
</TABLE>




                                       19
<PAGE>   2
FIVE YEAR SUMMARY

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,                             1996          1995         1994          1993         1992 
(In thousands, except per share amounts)
<S>                                             <C>           <C>           <C>          <C>           <C>     
INCOME STATEMENT DATA
NET SALES
     Product                                    $ 111,383     $  86,415     $ 85,206     $  89,215     $ 88,225
     Service                                       16,602        15,121       12,952        10,799        8,653
                                                ---------     ---------     --------     ---------     --------
         Total net sales                          127,985       101,536       98,158       100,014       96,878
                                                ---------     ---------     --------     ---------     --------

COST OF SALES
Product                                            65,334        51,408       52,734        50,290       49,443
Service                                            11,372         8,922        7,942         8,278        5,023
                                                ---------     ---------     --------     ---------     --------
         Total cost of sales                       76,706        60,330       60,676        58,568       54,466
                                                ---------     ---------     --------     ---------     --------
Gross margin                                       51,279        41,206       37,482        41,446       42,412
                                                ---------     ---------     --------     ---------     --------

OPERATING EXPENSES
     Research and development                       8,854         7,728        8,416         8,689        7,067
     Marketing and sales                           21,494        17,668       16,487        17,001       15,524
     Administrative, general and other              7,260         5,498        5,776         8,149        5,337
     Litigation judgment                               --            --           --            --        3,100
                                                ---------     ---------     --------     ---------     --------
         Total operating expenses                  37,608        30,894       30,679        33,839       31,028
                                                ---------     ---------     --------     ---------     --------

Operating income                                   13,671        10,312        6,803         7,607       11,384

Interest income                                       786           676          346           529          743
Interest expense                                       (9)          (11)        (257)         (105)         (19)
                                                ---------     ---------     --------     ---------     --------
Income from continuing operations
     before income taxes                           14,448        10,977        6,892         8,031       12,108
Income tax benefit (expense)                       (1,536)          856        1,816         1,776         (362)
                                                ---------     ---------     --------     ---------     --------

Income from continuing operations                  12,912        11,833        8,708         9,807       11,746
Loss from discontinued operations                      --            --           --       (13,060)     (30,793)
                                                ---------     ---------     --------     ---------     --------
Net income (loss)                                  12,912     $  11,833     $  8,708     $  (3,253)    $(19,047)
                                                =========     =========     ========     =========     ========

Income (loss) per common and common
     equivalent share:
     Income from continuing operations          $    1.01     $    0.94     $   0.69     $    0.80     $   0.96
     Loss from discontinued operations                 --            --           --         (1.06)       (2.52)
                                                ---------     ---------     --------     ---------     --------
     Net income (loss)                          $    1.01     $    0.94     $   0.69     $   (0.26)    $  (1.56)
                                                ---------     ---------     --------     ---------     --------
Common and common equivalent shares                12,797        12,585       12,552        12,281       12,182
                                                =========     =========     ========     =========     ========

BALANCE SHEET DATA FOR CONTINUING OPERATIONS
Cash and short term investments                 $  17,103     $  16,584     $  7,608     $   5,383     $  1,924
Working capital                                    53,847        43,900       31,199        16,949       18,172
Total assets                                      111,946        91,462       81,555        77,134       64,214
Long-term debt                                         --            --           --            --           55
Stockholders' equity                               82,174        69,070       58,913        43,298       40,680
                                                ---------     ---------     --------     ---------     --------
</TABLE>

Note: The Company has never paid a dividend on its common stock.

                                       20
<PAGE>   3
MANAGEMENT'S DISCUSSION AND ANALYSIS


RESULTS OF OPERATIONS

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

NET SALES 

Net sales for the year ended December 31,1996 were $128.0 million compared to
$101.5 million in 1995.

Product sales in 1996 were $111.4 million compared to $86.4 million in 1995, an
increase of 28.9%. The increase was due to a broadened product line and
increased market penetration of existing products. The company introduced two
new products in 1996, the Mini 6600 and the Compact 7600, in addition, the
company's urology product sales increased substantially over 1995. This increase
in urology sales was due to an increase in market share and built up demand from
prior years due in part to healthcare reform. International sales were up 22.2%
as compared to 1995.

Domestic bookings for all products in 1996 were approximately $92.0 million,
compared to $75.1 million in 1995, an increase of 22.5%. International bookings
increased approximately 44.4% from $16.8 million in 1995 to $24.4 million in
1996. The geographic difference in growth rates reflects expanding market
penetration in the international markets. Worldwide, the Company's urology
product bookings increased 18.2% from the prior year while mobile C-Arm bookings
increased approximately 28.8%, due to the new C-arm product introductions and
increases in international bookings.

Total bookings increased 26.6% to approximately $116.4 million from $91.9
million the prior year. As a result, at December 31,1996, OEC's backlog had
improved to approximately $24.1 million compared with $16.8 million at the prior
year end. OEC includes in backlog only firm orders deliverable within 12 months.
Backlog also includes service contract revenue which will be earned over the
next twelve months.

OEC service revenue increased 9.9%, from $15.1 million to $16.6 million in 1996.
The percentage growth increase has slowed compared to prior years. The slower
growth was the result of improved product reliability and increased competition
from third party service organizations. The Company has adopted an aggressive
service pricing strategy designed to regain market share through higher contract
capture rates and is developing partnerships with third party groups in a
proactive manner.

The following table sets forth OEC's operating results as a percentage of net
sales:

<TABLE>
<CAPTION>
                                                     1996       1995       1994 
<S>                                                 <C>        <C>        <C>  
Net sales
     Product                                         87.0%      85.1%      86.8%
     Service                                         13.0       14.9       13.2
                                                    -----      -----      -----
     Total net sales                                100.0      100.0      100.0
                                                    -----      -----      -----
Cost of sales
     Product                                         51.1       50.6       53.7
     Service                                          8.9        8.8        8.1
                                                    -----      -----      -----
     Total cost of sales                             60.0       59.4       61.8
                                                    -----      -----      -----
     Gross margin                                    40.0       40.6       38.2
                                                    -----      -----      -----
Operating expenses
     Research and development                         6.9        7.6        8.6
     Marketing and sales                             16.8       17.4       16.8
     Administrative, general and other                5.7        5.4        5.9
                                                    -----      -----      -----
     Total operating expenses                        29.4       30.4       31.3
                                                    -----      -----      -----
Operating income                                     10.6       10.2        6.9
Net income                                           10.0       11.7        8.9
</TABLE>



                                       21
<PAGE>   4
MARGIN ANALYSIS

The Company's gross margin decreased slightly in 1996 to 40.0% of sales compared
with 40.6% in 1995. The main reason for the slight decline was due to increased
pricing pressures world wide. The Company's continued focus in 1995 and 1996 on
manufacturing costs and efficiencies helped offset most of these pricing
effects.

The Company's net service costs increased 27.5% or $2.5 million from 1995.
Although actual service expense increased in line with revenues at 10.3%,
warranty utilization credits declined significantly due to the increased
reliability of the Company's products.

R&D EXPENSE 

R & D expense increased 14.6% in 1996 to $8.9 million, versus $7.7 million in
1995. The increase reflects the costs associated with the development of two new
products in 1996, along with the increase in continuing engineering expense
associated with a broadened product offering. As a percent of net sales, R & D
expense declined 0.7% from the prior year. The company anticipates that R & D
expense will grow proportionally with increasing revenue.

MARKETING & SALES EXPENSE 

Marketing and sales expense increased in 1996 by $3.8 million to $21.5 million,
or 21.6% above 1995. The largest part of the increase in expense is due to the
increase in commission expense in direct relation to the increase in revenue.
The other factor is the continuing increase in investment in both U.S. and
international sales and marketing for coverage due to the broadened product
lines. As a percentage of net sales, marketing and sales expense declined 0.6%
to 16.8%.

ADMINISTRATIVE, GENERAL & OTHER EXPENSE

Administrative, general and other expenses increased 32.1% in 1996 to $7.3
million, versus $5.5 million in 1995. But as a percentage of net sales, expenses
were up 0.3%. Part of the increase resulted from costs associated with the
implementation of a new companywide computer system that the company purchased
in the second quarter of 1996 and the ongoing training involved with its
conversion. The installation of this system is scheduled for completion by the
middle of 1997.

INCOME TAXES 

During 1996, the Company recorded current tax expense of $4.7 million. However,
due to the recognition of the deferred benefit of $3.2 million, the net tax
expense was $1.5 million for 1996 compared to a net tax benefit of $0.9 million
in 1995. Included in the 1996 deferred benefit was the reversal of the remaining
$4.3 million of valuation allowance which was completed by the end of the third
quarter as the Company recognized the likelihood of fully utilizing the deferred
tax assets. The Company also recorded $0.9 million of tax benefit directly to
stockholder's equity for the benefit derived from stock options exercised.


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

NET SALES 

Net sales for the year ended December 31, 1995 were $101.5 million compared to
$98.2 million in 1994.

Product sales in 1995 were $86.4 million compared with $85.2 million in 1994, an
increase of 1.4%. The increase was primarily due to a large increase in
international sales. Domestic sales declined by 10.5%, a factor of backlog
erosion in 1994.

Total OEC bookings increased 14% to approximately $91.9 million from $80.5 the
prior year. As a result, at December 31, 1995, OEC's backlog had improved to
approximately $16.8 million, compared with $11.2 million 1994 year end.

OEC service revenue increased 16.7%, from $13.0 million to $15.1 million in
1995. These results were attained from an increased contract capture rate
despite very aggressive competition from third-party service organizations.



                                       22
<PAGE>   5
MARGIN ANALYSIS 

The Company's gross margin increased in 1995 to 40.6% of sales compared with
38.2% in 1994. Management's focus on manufacturing efficiencies starting in the
latter part of 1994 and continuing through 1995 has enabled the Company to
reduce its cost of sales.

OEC's service costs increased approximately $1.0 million from 1994 or 12.3%
while service revenue grew by 16.8%.

R&D EXPENSE 

R&D expense declined 8.2% in 1995 to $7.7 million, versus $8.4 million in 1994.
The decline reflects the completion of the Series 9600 project in mid-1994.

MARKETING & SALES EXPENSE

Marketing and sales expense increased in 1995 by $1.2 million to $17.7 million,
or 7.2% above 1994. The increase reflects the continuing investment in
international sales and the cost increase in the domestic market due to
competitive pressures.

ADMINISTRATIVE, GENERAL & OTHER EXPENSE

Administrative, general and other expense was basically flat from 1994. As a
percentage of net sales it was down .5%.

INCOME TAXES 

During 1995, the reversal of reserves against deferred tax assets resulted in a
deferred tax benefit of $1.6 million. This benefit was offset by $0.7 million of
current tax provision for various state income taxes and federal alternative
minimum tax. In addition, $1.0 million of tax benefit was recorded directly to
stockholders' equity for the tax benefit derived from stock option exercises.

GENERAL INFORMATION

INFLATION

To date, the Company has not experienced any significant effects from inflation.

LIQUIDITY & CAPITAL RESOURCES

Cash provided by operating activities from the Company's operations was $6.3
million in 1996 compared with $12.8 million in 1995 and $9.3 million in 1994.
The reduction in 1996 is a reflection of the Company's decision to utilize its
cash position to assist the sales force through extended credit terms and more
demonstration equipment. The $8.3 million increase in accounts receivable
reflects these extended credit terms and the Company's increased sales. The $5.8
million increase in inventory reflects the additions to demonstration equipment
and finished goods.

The Company's capital expenditures totalled $4.5 million in 1996 compared with
$1.1 million in 1995 and $3.4 in 1994. The purchase and implementation of a new
core computer system as well as investments in manufacturing equipment were the
primary capital expenditures designed to position the Company to meet its growth
expectations. At December 31, 1996, the Company had no significant commitments
for capital expenditures.

Cash and temporary cash investments increased to $17.1 million at December 31,
1996 from $16.6 million at December 31, 1995.

A stock repurchase program of 750,000 shares of its outstanding common stock was
announced in December 1994 and the authorized amount was increased to 1,250,000
shares in January 1996. As of December 31, 1996, 888,483 shares have been
repurchased at a cost of $7,366,126, of which 87,983 shares were retired and
800,500 shares were recorded as treasury stock.

OEC believes that it has sufficient liquidity and anticipated cash flow to meet
its obligations in 1997. In addition, OEC continues to carry an unused $10
million line of credit.




                                       23
<PAGE>   6
FACTORS THAT MAY AFFECT FUTURE RESULTS 

Except for historical information, this discussion contains forward looking
statements that involve risks and uncertainties that could cause actual results
to differ materially from those projected. Such risks and uncertainties include:
Product demand and market acceptance; the effect of general economic conditions
and foreign currency fluctuations; the impact of competitive products and
pricing; new product development and commercialization; the effect of the
continuing shift in growth from domestic to international healthcare customers,
and the impact of managed care initiatives in the United States and the ability
to increase operating margins on higher sales.

OEC's future operating results are dependent on its ability to develop,
manufacture and market innovative products that meet customers' needs. The
process of developing new high technology medical products is complex and
uncertain and requires innovative designs that anticipate customer needs,
technological trends and healthcare shifts. There can be no assurance that the
Company will be able to develop and market new products on a cost-effective and
timely basis, that such products will compete favorably with products developed
by others or that existing technology will not be superseded by new discoveries
or breakthroughs, for example, the delay in introduction of the Series 9600 in
1994 which negatively impacted revenue and earnings for the year.

Because of the substantial length of time and expense associated with bringing
new products through development and regulatory approval to the marketplace, the
medical device industry places considerable importance on obtaining patent,
trademark, copyright and trade secret protection for new technologies, products
and processes. The loss of protection could have a material adverse effect on
the Company's business.

OEC depends on some significant and single-source vendors for certain important
component parts for certain products. While the Company believes any of these
single-source items could be replaced over time, abrupt disruption in the supply
of a part for a product could have a material adverse effect on the Company's
production and on its financial condition and results of operations in cases
where the existing inventory of the components is not adequate to meet the
Company's demand for the component during such disruption.

The testing, marketing and sale of human healthcare products entails an inherent
risk of product liability, and there can be no assurance that product liability
claims will not be asserted against OEC. Although OEC has product liability
insurance coverage, there can be no assurance that such coverage will provide
adequate coverage against all potential claims.

As a manufacturer of medical devices, OEC is subject to extensive and rigorous
governmental regulation, principally by the FDA and corresponding state and
foreign agencies. Failure to comply with FDA regulations could result in
sanctions being imposed, including restrictions on the marketing of or recall of
the affected products. OEC's facilities and manufacturing processes have been
periodically inspected by the FDA and other agencies, but remain subject to
further inspections from time to time. OEC continues to devote substantial human
and financial resources to regulatory compliance and believes that it remains in
substantial compliance with all applicable federal and state regulations.
Nevertheless, there can be no assurance that the FDA or a state agency will
agree with OEC's positions, or that its GMP or ISO compliance will not be
challenged at some subsequent point in time.

A portion of the Company's research and development activities, its corporate
headquarters and other critical business operations are located near a major
earthquake fault. The ultimate impact on the Company, significant suppliers and
the general infrastructure is unknown, but operating results could be materially
affected in the event of a major earthquake.

Although OEC believes that it has the product offerings and resources needed for
continuing success, future revenue and margin trends cannot be reliably
predicted and may cause the Company to adjust its operations. Factors external
to the Company can result in volatility of the Company's common stock price.




                                       24
<PAGE>   7
CONSOLIDATED STATEMENTS OF OPERATIONS




<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,                         1996          1995         1994 
(In thousands)
<S>                                         <C>           <C>           <C>     
NET SALES
     Product                                $ 111,383     $  86,415     $ 85,206
     Service                                   16,602        15,121       12,952
                                            ---------     ---------     --------
          Total net sales                     127,985       101,536       98,158
                                            ---------     ---------     --------

COST OF SALES
     Product                                   65,334        51,408       52,734
     Service                                   11,372         8,922        7,942
                                            ---------     ---------     --------
          Total cost of sales                  76,706        60,330       60,676
                                            ---------     ---------     --------
          Gross margin                         51,279        41,206       37,482
                                            ---------     ---------     --------

OPERATING EXPENSES
     Research and development                   8,854         7,728        8,416
     Marketing and sales                       21,494        17,668       16,487
     Administrative, general and other          7,260         5,498        5,776
                                            ---------     ---------     --------
          Total operating expenses             37,608        30,894       30,679
                                            ---------     ---------     --------

     Operating income                          13,671        10,312        6,803

     Interest income                              786           676          346
     Interest expense                              (9)          (11)        (257)
                                            ---------     ---------     --------

     Income before income taxes                14,448        10,977        6,892
     Income tax (expense) benefit              (1,536)          856        1,816

                                            ---------     ---------     --------
Net income                                  $  12,912     $  11,833     $  8,708
                                            =========     =========     ========
Net income per common and common
     equivalent share                       $    1.01     $    0.94     $   0.69

                                            ---------     ---------     --------
     Common and common equivalent shares       12,797        12,585       12,552
                                            =========     =========     ========
</TABLE>




See accompanying notes to consolidated financial statements.




                                       25
<PAGE>   8
CONSOLIDATED BALANCE SHEETS



<TABLE>
<CAPTION>
DECEMBER 31,                                                                              1996         1995 
(In thousands)
<S>                                                                                  <C>           <C>     
ASSETS
Current assets:
     Cash and short-term cash investments                                            $  17,103     $ 16,584
     Accounts and notes receivable, net of allowances
          of $853 and $577, respectively                                                33,191       24,982
     Inventories                                                                        23,868       18,031
     Prepaid expenses and other current assets                                           1,451          885
     Deferred income taxes                                                               8,006        5,810
                                                                                     ---------     --------
          Total current assets                                                          83,619       66,292

     Long-term receivables                                                               1,627        1,002
     Property and equipment, net                                                        11,903        9,868
     Cost in excess of net assets acquired, net of accumulated
          amortization of $8,183 and $7,542, respectively                               10,213       10,854
     Deferred income taxes                                                               3,879        2,898
     Other assets, net                                                                     705          548
                                                                                     ---------     --------
          Total                                                                      $ 111,946     $ 91,462
                                                                                     =========     ========

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
     Accounts payable                                                                $   7,358     $  4,673
     Accrued salaries and benefits                                                       4,127        2,920
     Accrued warranty and installation costs                                             1,748        1,259
     Deferred income and customer deposits                                               5,462        5,511
     Income taxes payable                                                                  509          412
     Accrued legal fees and litigation settlements                                       4,062        3,793
     Accrued distributor commissions                                                     2,891        1,892
     Other accrued liabilities                                                           3,615        1,932
                                                                                     ---------     --------
          Total current liabilities                                                     29,772       22,392
                                                                                     =========     ========

Stockholders' equity:
     Preferred stock, $.01 par value; Authorized -- 2,000 shares,
          including 1,100 shares of convertible preferred stock, none outstanding
     Common stock, $.01 par value; Authorized -- 30,000 shares
          Issued -- 13,158 and 12,789 shares, respectively                                 132          128
     Capital in excess of par value                                                     79,341       76,344
     Stock subscription receivable                                                          --         (210)
     Retained earnings (accumulated deficit)                                             9,786       (3,126)
     Treasury stock, 801 and 560 shares at cost, respectively                           (6,850)      (4,056)
     Foreign currency translation adjustment                                              (235)         (10)
                                                                                     ---------     --------
          Total stockholders' equity                                                    82,174       69,070
                                                                                     ---------     --------
          Total                                                                      $ 111,946     $ 91,462
                                                                                     =========     ========
</TABLE>


See accompanying notes to consolidated financial statements.

                                       26
<PAGE>   9
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
                                                    CAPITAL    RETAINED 
                                   COMMON STOCK    IN EXCESS   EARNINGS/    TREASURY STOCK      FOREIGN       STOCK 
                                   ------------     OF PAR    ACCUMULATED   --------------     CURRENCY    SUBSCRIPTION 
                                 SHARES    AMOUNT    VALUE      DEFICIT     SHARES   AMOUNT   TRANSLATION   RECEIVABLE       TOTAL  
<S>                              <C>       <C>     <C>        <C>           <C>     <C>       <C>          <C>             <C>     
                                 ------    -----   --------    --------     ----    -------     -----         -----        --------
Balance, January 1, 1994         12,411    $ 124   $ 66,858    $(23,667)      --         --     $ (17)           --        $ 43,298
                                 ------    -----   --------    --------     ----    -------     -----         -----        --------
                                                                                                           
Issuance of stock under                                                                                    
     employee/consultant                                                                                   
     benefit plans                   71        1        359          --       --         --        --            --             360
Tax benefit attributable to                                                                                
     appreciation of common                                                                                
     stock options exercised         --       --      2,091          --       --         --        --            --           2,091
Cancellation of note payable                                                                               
     originally issued in                                                                                  
     connection with the 1993                                                                              
     corporate restructuring         --       --      4,475          --       --         --        --            --           4,475
Foreign currency translation         --       --         --          --       --         --       (19)           --             (19)
Net income                           --       --         --       8,708       --         --        --            --           8,708
                                                                                                           
                                 ------    -----   --------    --------     ----    -------     -----         -----        --------
Balance, December 31, 1994       12,482      125     73,783     (14,959)      --         --       (36)           --          58,913
                                 ------    -----   --------    --------     ----    -------     -----         -----        --------
                                                                                                           
Issuance of stock under                                                                                    
     employee/consultant                                                                                   
     benefit plans                  355        4      1,919          --       --         --        --            --           1,923
Tax benefit attributable to                                                                                
     appreciation of common                                                                                
     stock options exercised         --       --        950          --       --         --        --            --             950
Purchase of treasury shares          --       --         --          --     (648)   $(4,575)       --            --          (4,575)
Retirement of treasury shares       (88)      (1)      (518)         --       88        519        --            --              -- 
Issuance of stock subscription                                                                             
     receivable                      40       --        210          --       --         --        --         $(210)             -- 
Foreign currency translation         --       --         --          --       --         --        26            --              26
Net income                           --       --         --      11,833       --         --        --            --          11,833
                                                                                                           
                                 ------    -----   --------    --------     ----    -------     -----         -----        --------
Balance, December 31, 1995       12,789      128     76,344      (3,126)    (560)    (4,056)      (10)         (210)         69,070
                                 ------    -----   --------    --------     ----    -------     -----         -----        --------
                                                                                                           
Issuance of stock under                                                                                    
     employee/consultant                                                                                   
     benefit plans                  369        4      2,115          --       --         --        --            --           2,119
Tax benefit attributable to                                                                                
     appreciation of common                                                                                
     stock options exercised         --       --        882          --       --         --        --            --             882
Purchase of treasury shares          --       --         --          --     (241)    (2,794)       --            --          (2,794)
Receipt of stock subscription                                                                              
     receivable                      --       --         --          --       --         --        --           210             210
Foreign currency translation         --       --         --          --       --         --      (225)           --            (225)
Net income                           --       --         --      12,912       --         --        --            --          12,912
                                                                                                           
                                 ------    -----   --------    --------     ----    -------     -----         -----        --------
Balance, December 31, 1996       13,158    $ 132   $ 79,341    $  9,786     (801)   $(6,850)    $(235)           --        $ 82,174
                                 ======    =====   ========    ========     ====    =======     =====         =====        ========
</TABLE>


See accompanying notes to consolidated financial statements.




                                       27
<PAGE>   10
CONSOLIDATED STATEMENTS OF CASH FLOW

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,                                                                 1996         1995        1994 
(In thousands)
<S>                                                                                  <C>          <C>          <C>    
OPERATING ACTIVITIES
Net income                                                                           $ 12,912     $ 11,833     $ 8,708
Adjustments to reconcile net income
     to net cash provided by operating activities:
          Depreciation and amortization                                                 3,117        3,272       3,546
          Bad debt expense                                                                 45           20         245
          Legal settlement recorded as reduction of note payable to related party          --           --        (750)
          Deferred income tax benefit                                                  (3,177)      (1,611)     (2,280)
          Current tax benefit attributable to stock options exercised                     882          175          49
          Changes in current assets and liabilities:
               Accounts and notes receivable, net                                      (8,254)        (713)        650
               Inventories                                                             (5,837)         432         657
               Prepaid expenses and other current assets                                 (566)         (50)        263
               Other assets, net                                                         (157)        (296)       (252)
               Accounts payable                                                         2,685         (485)        916
               Accrued salaries and benefits                                            1,207          400         179
               Accrued warranty and installation costs                                    489          144        (248)
               Deferred income and customer deposits                                      (49)         283         412
               Income taxes payable                                                        97           (3)       (401)
               Accrued legal fees and litigation settlements                              269         (526)        244
               Accrued restructuring costs                                                 --           --      (3,259)
               Accrued distributor commissions                                            999         (368)       (162)
               Other accrued liabilities                                                1,683          305         825
                                                                                     --------     --------     -------
                    Net cash provided by operating activities                           6,345       12,812       9,342
                                                                                     --------     --------     -------

INVESTING ACTIVITIES
Reduction (increase) in long-term receivables                                            (625)         (99)        458
Additions to property and equipment                                                    (4,511)      (1,111)     (3,441)
Other                                                                                    (225)          26         (19)
                                                                                     --------     --------     -------
     Net cash used in investing activities                                             (5,361)      (1,184)     (3,002)
                                                                                     --------     --------     -------

FINANCING ACTIVITIES
Common stock issued under benefit plans                                                 2,329        1,923         360
Purchases of treasury stock                                                            (2,794)      (4,575)         -- 
Payments on notes payable                                                                  --           --      (4,475)
                                                                                     --------     --------     -------
     Net cash used in financing activities                                               (465)      (2,652)     (4,115)
                                                                                     --------     --------     -------

Net increase in cash and short-term cash investments                                      519        8,976       2,225
Cash and short-term cash investments at beginning of year                              16,584        7,608       5,383
                                                                                     --------     --------     -------
Cash and short-term cash investments at end of year                                  $ 17,103     $ 16,584     $ 7,608
                                                                                     ========     ========     =======

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for interest                                               $      9     $     11     $   257
Cash paid during the year for income taxes                                           $  3,734     $    583     $   357
</TABLE>

SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES: 

During 1994, the remaining balance of the note payable to related party, in the
amount of $4,475 was cancelled with the corresponding benefit credited to
capital in excess of par value. During the years ended December 31, 1995 and
1994, the tax benefits in the amount of $775 and $2,042, respectively,
attributable to the appreciation of common stock options exercised were credited
directly to capital in excess of par value. During the year ended December 31,
1995, the Company sold 40 shares of its common stock in exchange for a note
receivable in the amount of $210, which was repaid to the company during the
year ended December 31, 1996.

See accompanying notes to consolidated financial statements.


                                       28
<PAGE>   11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION

The consolidated financial statements include those of OEC Medical Systems, Inc.
and its wholly-owned subsidiaries ("the Company"). All material intercompany
balances and transactions have been eliminated in consolidation.

OPERATIONS 

The Company designs, manufactures, markets and services computer-based medical
instruments (primarily X-ray imaging systems) for use in hospitals, outpatient
clinics, and private practice surgi-centers. The manufacturing facilities are
located in Salt Lake City, Utah, Warsaw, Indiana and Wendelstein, Germany. The
systems are marketed through direct sales forces of the Company and through
independent distributors and dealers worldwide (see Note 7).

USE OF ESTIMATES IN PREPARING FINANCIAL STATEMENTS

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.

REVENUE RECOGNITION 

Sales are generally recognized at the time the products are shipped, as are
provisions for estimated installation costs, warranty costs, agents' commissions
and sales allowances. Amounts received upon the sale of service contracts are
deferred and recognized as service revenue over the life of the contract.

CASH AND SHORT-TERM INVESTMENTS AND LINE OF CREDIT 

Short-term cash investments are interest-bearing investments readily convertible
to cash with original short-term maturities less than 90 days and are stated at
cost, which approximates market. At December 31, 1996 and 1995, the Company had
a line of credit for $10 million which expires May 1998. No borrowings had been
made under this line as of December 31, 1996 and 1995.

INVENTORIES 

Inventories are stated at the lower of cost (utilizing the first-in/first-out
method) or market. Inventories consist of the following:

<TABLE>
DECEMBER 31, (In thousands)                                 1996           1995 
<S>                                                     <C>            <C>     
Purchased parts and completed
     subassemblies                                      $  8,672       $  8,190
Work-in-process                                            3,097          3,216
Finished goods                                             3,783          2,456
Demonstration equipment                                    8,203          2,691
Service and repair parts                                   4,475          4,171
                                                        --------       --------
Total                                                     28,230         20,724
Reserves for excess and obsolete inventory                (4,362)        (2,693)
                                                        --------       --------
Net                                                     $ 23,868       $ 18,031
                                                        ========       ========
</TABLE>

LONG-LIVED ASSETS 

Impairment of long-lived assets is determined in accordance with Statement of
Financial Accounting Standards (SFAS) No. 121 "Accounting for the Impairment of
Long-lived Assets and of Long-lived Assets to be Disposed Of," which was adopted
on January 1, 1996. There were no impairments as of December 31, 1996.




                                       29
<PAGE>   12
PROPERTY AND EQUIPMENT

Property and equipment are stated at cost less accumulated depreciation and
amortization. The Company uses the straight-line method to depreciate and
amortize the cost of assets over their estimated useful lives as follows:

<TABLE>
<CAPTION>
DECEMBER 31, (In thousands)                    Estimated                  1996            1995              
                                             Useful Lives                                                 
                                             ------------                                                 
<S>                                   <C>                             <C>             <C>                            
Buildings and land                             30 years               $  7,591        $  6,586                       
Machinery and equipment                      3 to 10 years              16,486          13,754                  
Leasehold improvements                Life of lease (June, 2000)           886             700                  
Furniture and fixtures                       2 to 5 years                  204             164 
                                                                      --------        -------- 
Total                                                                 $ 25,167        $ 21,204 
Less accumulated depreciation                                                                  
     and amortization                                                  (13,264)        (11,336)
                                                                      --------        -------- 
Net                                                                   $ 11,903        $  9,868 
                                                                      ========        ======== 
</TABLE>


COST IN EXCESS OF NET ASSETS ACQUIRED 
Cost in excess of net assets acquired include the following: 

<TABLE>
<CAPTION>
DECEMBER 31, (In thousands)                                1996            1995 
<S>                                                    <C>             <C>     
Cost in excess of net assets acquired                  $ 18,396        $ 18,396
Less accumulated amortization                            (8,183)         (7,542)
                                                       --------        --------
Net                                                    $ 10,213        $ 10,854
                                                       ========        ========
</TABLE>

Cost in excess of net assets acquired is being amortized on a straight-line
basis over approximately 30 years. Amortization amounted to $641,000 in each of
the three years in the period ended December 31, 1996.

OTHER ASSETS 
Other assets consist of the following: 

<TABLE>
<CAPTION>
DECEMBER 31, (In thousands)                                     1996        1995 
<S>                                                             <C>         <C> 
Deposits                                                        $531        $345
Investment in affiliate, at cost (see Note 9)                    174         203
                                                                ----        ----
Net                                                             $705        $548
                                                                ====        ====
</TABLE>


ACCRUED WARRANTY AND INSTALLATION COSTS 

The Company provides currently for the estimated cost to repair or replace
products under warranty provisions in effect at the time of sale.

CONTINGENCIES 

As a manufacturer of medical products, the Company is subject to certain
regulations of the United States Food and Drug Administration ("FDA") and
various state agencies. These regulations require review or approval of the
Company's products, facilities and manufacturing processes, including periodic
inspections of manufacturing facilities for compliance with Good Manufacturing
Practices as established by the FDA. The Company has devoted substantial human
and financial resources to regulatory compliance, and believes that it is in
substantial compliance with all applicable federal and state regulations.

NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE 

Net Income per common and common equivalent share is computed using the weighted
average number of the Company's common shares outstanding and dilutive common
equivalent shares from stock options and warrants, as calculated using the
treasury stock method.




                                       30
<PAGE>   13
FOREIGN CURRENCY TRANSLATION

The financial statements of the Company's foreign subsidiaries are measured
using local currencies as the functional currency. Assets and liabilities are
translated into US dollars at year-end rates of exchange and results of
operations are translated at average rates of exchange for the year, with the
difference accumulated in a separate component of stockholders' equity until
such time as the subsidiary's operations are discontinued, sold or substantially
liquidated.

2. INCOME TAXES 

Income tax (expense) benefit consists of the following:

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, (In thousands)                 1996        1995        1994 
<S>                                                  <C>         <C>         <C>     
Current Expense:
     State                                           $  (719)    $  (598)    $  (351)
                                                     -------     -------     -------
     Federal                                          (6,507)     (3,771)     (2,033)
     Less utilization of operating loss
          carryforwards and tax credits                2,513       3,614       1,920
                                                     -------     -------     -------
     Net Federal                                      (3,994)       (157)       (113)
                                                     -------     -------     -------
     Total Current                                    (4,713)       (755)       (464)
                                                     -------     -------     -------

Deferred Benefit:
     Reversal of valuation allowance                   4,306       5,394     $ 5,125
     Net operating loss utilized currently            (2,513)     (3,614)     (1,920)
     Other deferred tax assets created (utilized)      1,384        (169)       (925)
                                                     -------     -------     -------
     Total Deferred                                    3,177       1,611       2,280
                                                     -------     -------     -------
     Net                                             $(1,536)    $   856     $ 1,816
                                                     =======     =======     =======
</TABLE>

Income tax (expense) benefit differs from the amount computed by applying the
statutory federal tax rate to income from continuing operations for the
following reasons:

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, (In thousands)                     1996        1995        1994
<S>                                                      <C>         <C>         <C>    
Computed federal income tax expense at
     statutory rate of 35%                               $(5,057)    $(3,842)    $(2,412)
State income taxes                                          (719)       (598)       (351)
Effects of foreign subsidiaries on U.S. tax rates             58          16        (314)
Change in valuation allowance for deferred tax assets      4,306       5,394       5,125
Permanent differences                                       (124)       (114)       (232)
                                                         -------     -------     -------
Income tax (expense) benefit                             $(1,536)    $   856     $ 1,816
                                                         =======     =======     =======
</TABLE>

The Company has investment and research and experimental tax credit
carryforwards of approximately $3,476,000 expiring in the period 1997 through
2009, plus alternative minimum tax credit carryforwards of approximately
$2,236,000. The Company also has foreign net operating losses in Germany and
France and various states in the U.S. which expire in the period from 2007
through 2011.

Deferred income taxes reflect the net tax effects of: (a) temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes; and (b) operating loss
and tax credit carryforwards. The tax effects of significant items comprising
the Company's deferred taxes are as follows:




                                       31
<PAGE>   14
<TABLE>
<CAPTION>
DECEMBER 31, (In thousands)                               1996        1995
<S>                                                   <C>        <C>     
DEFERRED TAX ASSETS:
Reserves not currently deductible for tax purposes:
     Allowance for bad debt                            $   570    $    525
     Inventory                                           1,546       1,277
     Litigation                                          1,543       1,451
     Warranty                                              598         449
     Deferred income                                       392         396
     Vacation accrual                                      452         389
     Other                                                 368        (161)
Foreign & state net operating loss carryforwards           704          -- 
Tax credit carryforwards                                 5,712       8,688
                                                       -------    --------
     Total deferred taxes                               11,885      13,014
Valuation allowance                                         --      (4,306)
                                                       -------    --------
     Net deferred taxes                                $11,885    $  8,708
                                                       =======    ========
</TABLE>

3. COMMITMENTS 

The Company leases certain of its manufacturing facilities and certain equipment
under operating leases. Future minimum annual rental payments under the
Company's operating leases are as follows:

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, (In thousands) 
<S>                                                                      <C>                
1997                                                                      $  831
1998                                                                         217
1999                                                                         158
2000                                                                          82
                                                                          ------
Total                                                                     $1,288
                                                                          ======
</TABLE>

Total rent expense in 1996, 1995, and 1994, was $1,296,000, $1,076,000, and
$1,028,000, respectively. 

The Company sponsors a 401(k) savings plan in which most domestic salaried
employees of the Company are eligible to participate. Contributions made to the
plan by the Company are based on a percentage of employee contributions, and
totaled $766,000, $690,000, and $436,000, in 1996, 1995, and 1994,
respectively. 


4. COMMON STOCK 

The Company's 1990 Stock Plan (which incorporates active options under
predecessor plans) permits officers, directors, employees and independent
contractors to acquire options or other rights to purchase Company common stock.
The purchase price for the shares is their fair market value on the date the
option or purchase right is granted. Options and purchase rights generally vest
over a five-year period. During 1996, the stockholders approved an increase of
500,000 shares to the 1990 Stock Plan.

The Company also maintains an Incentive Stock Acquisition Plan (ISAP) in which
only employees may participate. Under the ISAP, the purchase price is 85 percent
of the fair market value of the shares on the trading day before the six-month
participation period begins or the last trading day of the participation period,
whichever is less. During 1996, the stockholders approved an increase of 100,000
shares to the ISAP.




                                       32
<PAGE>   15
A summary of stock plan activities is as follows:

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,                                    1996                       1995                       1994
(In thousands, except average prices)                NUMBER      WEIGHTED       Number      Weighted       Number      Weighted
                                                       OF          AVG.           of          Avg.           of          Avg. 
                                                     SHARES      EXERCISE       Shares      Exercise       Shares      Exercise 
                                                                  PRICE                      Price                      Price
<S>                                                  <C>          <C>           <C>          <C>           <C>          <C>   
OPTIONS:
Outstanding beginning of year                        1,740        $ 6.02        1,952        $ 6.27        2,006        $ 6.30
Granted                                                579         11.84          714          5.87           85          5.45
Cancelled                                               (8)         6.09         (600)         6.96          (95)         6.46
Exercised                                             (311)         5.43         (326)         5.46          (44)         5.27
                                                     -----        ------        -----        ------        -----        ------
Outstanding end of year                              2,000        $ 7.80        1,740        $ 6.02        1,952        $ 6.27
                                                     -----        ------        -----        ------        -----        ------
Weighted average fair market value of options
     granted during year                                          $ 5.39                     $ 2.31
Shares purchased under ISAP                             58                         69                         27
Weighted average fair market value of shares
     purchased under ISAP                                         $ 1.28                     $ 0.90
</TABLE>

The following table summarizes information about stock options outstanding at
December 31, 1996 (in thousands, except price information).

<TABLE>
<CAPTION>
                    OPTIONS OUTSTANDING                           OPTIONS EXERCISABLE 
------------------------------------------------------------    ------------------------
                                   Weighted 
                                    Average         Weighted                    Weighted 
   Range of                        Remaining        Average                     Average 
   Exercise            Number     Contractual       Exercise      Number        Exercise 
    Prices          Outstanding      Life            Price      Exercisable      Price 
<S>                 <C>           <C>              <C>          <C>            <C>      
$ 5.25 -  8.00         1,396       6.5 years       $    6.05       1,183       $    6.04
  8.01 - 12.00           486       9.6 years           11.48          37           11.14
 12.01 - 14.38           118       7.5 years           13.40          28           12.26
--------------         -----       ---             ---------       -----       ---------
$ 5.25 - 14.38         2,000       7.5 years       $    7.80       1,248       $    6.34
--------------         -----       ---             ---------       -----       ---------
</TABLE>

The Company accounts for stock options granted using Accounting Principles Board
(APB) Opinion 25. Accordingly, no compensation cost has been recognized for its
fixed stock option plans. Had compensation cost for the Company's stock-based
compensation plans been determined based on the fair value at the grant dates
for awards under those plans consistent with Statement of Financial Accounting
Standards (SFAS) No. 123, the Company's net income and net income per common and
common equivalent share would have changed to the pro forma amounts indicated
below. 

<TABLE>
<CAPTION>
DECEMBER 31, (In thousands)                                   1996          1995 
<S>                                                     <C>           <C>       
Net income
     As reported                                        $   12,912    $   11,833
     Pro forma                                          $   11,899    $   10,824

Net income per common and common equivalent share:
     As reported                                        $     1.01    $     0.94
     Pro forma                                          $     0.93    $     0.86
</TABLE>

The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 1996 and 1995: dividend yield of 0.00%; expected
volatility of 40.29%; risk-free interest rates ranging from 5.76% to 6.45%, and
expected lives of 2.5 years subsequent to vesting date.




                                       33
<PAGE>   16
WARRANTS

In connection with the signing of a product development agreement in 1990, the
Company, through its predecessor, issued warrants to purchase 200,000 shares of
its common stock. The warrants are exercisable at a price of $12.70 per share
over the period August 31, 1994 through August 31, 1997. On January 26, 1997,
the Company repurchased the warrants for $1.0 million. During 1996, the Company
issued warrants to purchase 38,000 shares to independent distributors which are
exercisable at a price of $11.75 per share during the period of October 1, 1999
to December 31, 1999.

STOCK REPURCHASE

A stock repurchase program of 750,000 shares of the Company's outstanding common
stock was announced in December 1994 and an additional 500,000 shares in January
1996. The manner and timing of the repurchase will depend on market conditions
and the company's cash reserves. As of December 31, 1996, 888,483 shares have
been repurchased, of which 87,983 were retired and 800,500 are recorded as
treasury stock.

5. LITIGATION

Litigation was instituted against the Company by a terminated distributor in
1986. An unfavorable decision in the amount of $3.1 million was rendered by the
trial court in 1992. As a result of that decision, the Company established a
reserve for the judgment. The Company appealed the trial court decision on a
number of grounds, and in November, 1993, the appellate court reversed the trial
court and held for the Company on the ground that the distributor had released
his claims against the Company in the settlement of other litigation, and did
not reach the other issues raised on appeal. The distributor filed a petition in
the Indiana Supreme Court requesting that the court vacate the appellate court
ruling and remand the case to the appellate court for consideration of the other
issues raised on appeal. On December 31,1996, the Indiana Supreme Court reversed
the ruling of the appellate court and held that the trial court correctly
determined that the release executed by the distributor did not release the
Company. The case has been remanded back to the Indiana Circuit Court of Appeals
for consideration of the remaining issues raised on the appeal. While the
Company believes that it will ultimately prevail, no determination can be made
as to whether some or all of the reserve should be reversed. As of December 31,
1996 and 1995, the reserve with accrued interest totaled approximately $4.1
million and $3.7 million, respectively.

All but one of the pending lawsuits relating to the former MRI Division have
been favorably resolved by dismissals, summary judgment or directed verdicts in
favor of the Company. With respect to the sole exception, an action filed by
Lenox Hills Leasing Associates, Toshiba America Medical Systems, Inc.
("Toshiba") has agreed to defend and indemnify the Company. All of the pending
actions, and any future actions related to the MRI Division, are the subject of
an arbitration award in favor of the Company and against Toshiba. That
arbitration award holds that, with certain limited exceptions not applicable to
any of the pending actions, Toshiba is obligated to indemnify the Company for
compensatory and punitive damages, if any, awarded against the Company in any
action related to the former MRI Division and to reimburse the Company for its
attorney's fees and expenses incurred in defending such actions, regardless of
whether such actions allege intentional misconduct or fraud. This arbitration
award was affirmed by a California trial court. Toshiba appealed, and the
California Court of Appeals affirmed the ruling of the trial court in 1996. The
California Supreme Court has declined to hear Toshiba's appeal of the favorable
Court of Appeal's ruling.

The Company is also a defendant in other ordinary commercial litigation. In
light of available insurance and reserves, management believes that such
litigation will not have a material effect on its financial position or results
of operations.

6. PREFERRED SHARE PURCHASE RIGHTS

In July 1988, the Company through its predecessor, Diasonics Inc., declared a
dividend distribution of one Preferred Share Purchase Right (a "Right") on each
outstanding share of common stock. Prior to the acquisition by a person or group
of beneficial ownership of 25% or more of the Company's common stock, the Rights
are redeemable for two and one-half cents per Right at the option of the Board
of Directors.



                                       34
<PAGE>   17
The Rights will trade together with the common stock until they become
exercisable. The Rights will be exercisable only if a person or group acquires
25% or more of the Company's common stock or announces a tender offer, the
consummation of which would result in ownership by a person or group of 25% or
more of the common stock. Each right will entitle stockholders to buy five
one-hundredths of a share of a new series of junior participating preferred
stock at an exercise price of $10. At December 31, 1996 and 1995, the Company
had 2,000,000 shares of such preferred stock authorized with none outstanding.
The preferred stock generally carries rights equivalent to one hundred times
those of common stock rights and is subject to certain non-dilutive and
repurchase options.

If the Company is acquired in a merger or engages in certain other acquisition
transactions with a person or group that holds 25% or more of the Company's
common stock, each Right will entitle its holder to purchase, at the Right's
then-current exercise price, a number of the acquiring company's common shares
having a market value at the time of twice the Right's exercise price. In
addition, if a person or group acquires 25% or more of the Company's outstanding
common stock, each Right will entitle its holder (other than such person or
members of such group) to purchase, at the Right's then-current exercise price,
a number of the Company's common shares having a market value of twice the
Right's exercise price. This ability to purchase common shares does not operate
if the acquisition of 25% occurs pursuant to a cash tender offer for all shares
in which such person or group increases its stake from below 25% to 80% or more
of the outstanding shares of common stock.

Following the acquisition by a person or group of beneficial ownership of 25% or
more of the Company's common stock and prior to an acquisition of 50% or more of
the common stock, the Board of Directors may exchange the Rights (other than
Rights owned by such person or group), in whole or in part, at an exchange ratio
of one share of common stock (or one-hundredth for a share of the new series of
junior participating preferred stock) per Right.

7. FOREIGN SALES 

The Company markets its products internationally through subsidiaries in
Switzerland, Germany, France and Italy as well as dealers and distributors in
all other countries where applicable. The following table summarizes approximate
foreign product sales:

<TABLE>
<CAPTION>
                                             1996            1995           1994 
<S>                                       <C>             <C>             <C>   
Europe                                    $11,892         $ 8,770         $2,294
Other                                       8,689           8,078          5,201
                                          -------         -------         ------
Total foreign sales                       $20,581         $16,848         $7,495
                                          =======         =======         ======
</TABLE>

8. QUARTERLY FINANCIAL DATA (UNAUDITED)

Summarized quarterly financial data for 1996 and 1995 is as follows (in
thousands, except per share data):

<TABLE>
<CAPTION>
QUARTER                          FIRST        SECOND         THIRD        FOURTH 
<S>                            <C>           <C>           <C>           <C>    
1996
Net sales                      $26,183       $30,594       $34,027       $37,181
Gross margin                    10,538        12,245        13,623        14,873
Net income                       2,739         3,336         3,875         2,962
Income per share                   .22           .26           .30           .23

1995
Net sales                      $22,802       $26,129       $25,470       $27,135
Gross margin                     9,221        10,695        10,426        10,864
Net income                       2,492         2,762         3,141         3,438
Income per share                   .20           .22           .25           .27
</TABLE>




                                       35
<PAGE>   18
9. RELATED PARTIES

At December 31, 1993, the Company had a note payable to Diasonics Ultrasound,
Inc., its former subsidiary for $9,700,000, due in two equal installments, plus
interest at 3% per annum, on June 30, 1994 and December 31, 1994. The note was
cancellable under certain conditions, including a merger, acquisition or other
transaction resulting in a change in control of Diasonics Ultrasound, Inc. The
note was offset by $750,000 in the second quarter of 1994, which was the
Company's portion of a litigation settlement paid by Acuson, Inc., to Diasonics
Ultrasound, Inc. This reduction of $750,000 has been reflected in the Company's
accompanying consolidated statement of operations for the year ended December
31, 1994 as a reduction of administrative, general and other expenses. The first
installment of principal in the amount of $4,475,000 was made in the third
quarter of 1994. The second installment in the remaining amount of $4,475,000
was not required to be paid under the terms of the note, due to a change in
control of Diasonics Ultrasound, Inc. Upon cancellation, the $4,475,000 was
credited to capital in excess of par value. Sales to Diasonics, Ultrasound, Inc.
were $5.2 million during 1994.

During 1995, the Company purchased a 19.8% ownership position in Barwig
Medizinische Systeme GmbH (BMS), a German manufacturer of medical equipment. The
Company was granted exclusive worldwide distribution rights for a ten year
period for the 7600 C-Arm manufactured by BMS. During 1995 and 1996, the Company
provided long-term working capital loans to BMS of approximately $1.1 million.
Effective January 1, 1997, the Company increased its ownership of BMS to 100% in
exchange for cash payments of approximately $193,000, stock options valued at
approximately $274,000, and cancellation of loans to BMS of approximately
$615,000. The Company will account for the acquisition using the purchase method
which will result in the recording of approximately $1.6 million of goodwill.




                                       36
<PAGE>   19
INDEPENDENT AUDITORS' REPORT




THE BOARD OF DIRECTORS AND STOCKHOLDERS OF OEC MEDICAL SYSTEMS, INC.:

We have audited the accompanying consolidated balance sheets of OEC Medical
Systems, Inc. and subsidiaries as of December 31, 1996 and 1995, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the three years in the period ended December 31, 1996. 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, such consolidated financial statements present fairly, in all
material respects, the financial position of OEC Medical Systems, Inc. and
subsidiaries as of December 31, 1996 and 1995, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1996 in conformity with generally accepted accounting principles.




/s/ DELOITTE & TOUCHE LLP 
------------------------- 
    DELOITTE & TOUCHE LLP 




Salt Lake City, Utah 
January 21, 1997




                                       37
<PAGE>   20
CORPORATE INFORMATION


OFFICERS

RUEDIGER NAUMANN-ETIENNE 
Chairman, President & Chief Executive Officer

RANDY W. ZUNDEL 
Executive Vice President, Chief Operating & Chief Financial Officer

HEINZ GLOOR 
Vice President, International 

GARY GLOWE 
Vice President, Manufacturing

BARRY K. HANOVER 
Executive Vice President, Engineering & Chief Technical Officer

LARRY E. HARRAWOOD 
Vice President, Marketing & Business Development 

GARY N. KILMAN 
Vice President, Sales

ROY ORPHEY 
Vice President, Service

TED PARROT 
Vice President, Regulatory Affairs & Quality Assurance 

CLARENCE VERHOEF 
Vice President, Finance & Treasurer 


DIRECTORS 

RUEDIGER NAUMANN-ETIENNE 
Chairman of the Board 

GREGORY K. HINCKLEY *+ 
Executive Vice President, Chief Operating Officer & Chief Financial Officer
Mentor Graphics Corporation

BENNO P. LOTZ * 
Former President & CEO 
OEC Medical Systems, retired 

ALLAN W. MAY *++ 
Secretary 
Vice Chairman & CEO, MAST Immuno Systems, Inc. 

CHASE N. PETERSON *+++ 
President Emeritus & Professor (Clinical) Departments of Internal Medicine and 
Family & Preventive Medicine 
University of Utah 


*  Audit Committee 

+  Compensation Committee 

++ Nominations Committee 



INVESTOR INFORMATION 

Reports on sales, earnings and activities of the Company can be accessed through
our News-On-Call service by calling 1-800-758-5804 Ext. 630450. A copy (without
exhibits) of the Company's report to the Securities and Exchange Commission on
Form 10-K may be obtained from the Company without charge. Other
publications--news releases, 10-Qs, etc., are also available. Direct your
written request to:

          INVESTOR RELATIONS 
          Linda M. Etzel 
          OEC Medical Systems, Inc.
          384 Wright Brothers Drive 
          Salt Lake City, Utah 84116 
          (801) 536-4806 
          e-mail address: investor@oecmed.com 
          Home Page: http://www.oecmed.com 


INDEPENDENT AUDITORS 
Deloitte and Touche LLP 
Salt Lake City, Utah 

TRANSFER AGENT & REGISTRAR
Chase Mellon Shareholder Services 
50 California Street, 10th Floor 
San Francisco, CA 94111 

ANNUAL MEETING 
Notice of the Annual Meeting of Shareholders of OEC Medical Systems, Inc., and
proxy statements will be mailed to shareholders of record in advance of the
meeting.

STOCK PRICE 
<TABLE>
<CAPTION>
                                        High              Low             Close
                                        ----              ---             -----
<S>                                     <C>               <C>             <C>    
March 31, 1996                          13 3/4             9 1/2          11 3/4 
June 30, 1996                           13 5/8            11 1/4          13 5/8 
September 30, 1996                      13 1/2            10 3/4          12 1/2 
December 31, 1996                       16 7/8            12 1/4          15
</TABLE>




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