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

                                    FORM 10-K

                Annual Report Pursuant to Section 13 or 15(d) of
                       The Securities Exchange Act of 1934

For the fiscal year ended December 31, 2001          Commission File No. 0-26206

                          NORLAND MEDICAL SYSTEMS, INC.
             (Exact name of registrant as specified in its charter)

Delaware                                                        06-1387931
(State or other jurisdiction                                  (I.R.S. Employer
of incorporation or organization)                            Identification No.)

106 Corporate Park Drive, Suite 106, White Plains, NY                10604
         (Address of principal executive offices)                  (Zip Code)

Registrant's telephone number, including area code:  (914) 694-2285

Securities registered pursuant to Section 12(b) of the Act:

                                      None

Securities registered pursuant to Section 12(g) of the Act:

                    Common Stock, par value $0.0005 per share

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

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

              The aggregate market value of the registrant's Common Stock, par
value $0.0005 per share, held by non-affiliates of the registrant as of March 8,
2002 was $2,282,550 based on the price of the last reported sale on the OTC
Bulletin Board.

              As of March 8, 2002 there were 29,544,621 shares of the
registrant's Common Stock, par value $0.0005 per share, outstanding.

                       Documents Incorporated By Reference

              Items 10, 11, 12 and 13 of Part III of this Form 10-K are
incorporated by reference to the Norland Medical Systems, Inc. Proxy Statement
for the 2002 Annual Meeting of Stockholders and this Form 10-K is an enclosure
to such Proxy Statement. A definitive proxy statement will be filed with the
Securities and Exchange Commission within 120 days after the close of the fiscal
year covered by this Form 10-K.
<PAGE>


                                TABLE OF CONTENTS
                                                                           Page

INTRODUCTION.................................................................3

ITEM 1.     BUSINESS.........................................................3

ITEM 2.     PROPERTIES......................................................17

ITEM 3.     LEGAL PROCEEDINGS...............................................17

ITEM 4.     SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.............17

ITEM 5.     MARKET FOR REGISTRANT'S COMMON EQUITY AND
            RELATED STOCKHOLDER MATTERS.....................................18

ITEM 6.     SELECTED FINANCIAL DATA.........................................18

ITEM 7.     MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
            CONDITION AND RESULTS OF OPERATIONS.............................20

ITEM 7A.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
            MARKET RISKS....................................................28

ITEM 8.     FINANCIAL STATEMENTS ...........................................29

ITEM 9.     CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
            ACCOUNTING AND FINANCIAL DISCLOSURE.............................53

ITEMS 10, 11, 12 and 13.....................................................53

ITEM 14.    EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
            FORM 8-K........................................................54

<PAGE>

INTRODUCTION

         The statements included in this Report regarding future financial
performance and results and other statements that are not historical facts
constitute forward-looking statements. The words "believes," "intends,"
"expects," "anticipates," "projects," "estimates," "predicts," and similar
expressions are also intended to identify forward-looking statements. These
forward-looking statements are based on current expectations and are subject to
risks and uncertainties. In connection with the "safe harbor" provisions of the
Private Securities Litigation Reform Act of 1995, Norland Medical Systems, Inc.
"the Company" cautions the reader that actual results or events could differ
materially from those set forth or implied by such forward-looking statements
and related assumptions due to certain important factors, including, without
limitation, the following: (i) the effect of product diversification efforts on
future financial results; (ii) the availability of new products and product
enhancements that can be marketed by the Company; (iii) the importance to the
Company's sales growth that the efficacy of new therapies for the treatment of
osteoporosis and other bone disorders be demonstrated and that regulatory
approval of such therapies be granted, particularly in the United States; (iv)
the acceptance and adoption by primary care providers of new osteoporosis
therapies and the Company's ability to expand sales of its products to these
physicians; (v) adverse affect resulting from changes in the reimbursement
policies of governmental programs (e.g., Medicare and Medicaid) and private
third party payors, including private insurance plans and managed care plans;
(vi) the high level of competition in the bone densitometry market; (vii)
changes in bone densitometry technology; (viii) the Company's ability to
continue to maintain and expand acceptable relationships with third party
dealers and distributors; (ix) the Company's ability to provide attractive
financing options to its customers and to provide customers with fast and
efficient service for the Company's products; (x) changes that may result from
health care reform in the United States may adversely affect the Company; (xi)
the Company's cash flow and the results of its ongoing financing efforts; (xii)
the effect of regulation by the United States Food and Drug Administration
("FDA") and other government agencies; (xiii) the effect of the Company's
accounting policies; (xiv) the outcome of pending litigation; and (xv) other
risks described elsewhere in this Report and in other documents filed by the
Company with the Securities and Exchange Commission. The Company is also subject
to general business risks, including adverse state, federal or foreign
legislation and regulation, adverse publicity or news coverage, changes in
general economic factors and the Company's ability to retain and attract key
employees. Any forward-looking statements included in this Report are made as of
the date hereof, based on information available to the Company as of the date
hereof, and the Company assumes no obligation to update any forward-looking
statements.

                                     PART I

ITEM 1.  BUSINESS.

         Norland Medical Systems, Inc. and its subsidiaries (collectively,
"Norland" or the "Company" or "NMS") develop, manufacture, sell and service a
wide range of bone densitometers used to assess bone mineral content and
density, one of several factors used by physicians to aid in the diagnosis and
monitoring of bone disorders, particularly osteoporosis. Osteoporosis progresses
as a symptomless disease characterized by bone loss and deterioration of the
skeleton, leading to bone fragility and increased risk of fracture. According to
the National Osteoporosis Foundation ("NOF"), 28 million Americans, 80% of whom
are women, are affected by osteoporosis, and left unchecked, that number is
predicted to increase to 41 million by 2015. Driven by the availability of new
treatments for bone-related disorders, the Company has been focusing on bringing
affordable, state-of-the-art diagnostic technology directly into the physician's
office in order to address a number of bone health issues.
<PAGE>

         During the past three years, the Company has experienced aggregate
losses of approximately $17,091,554 and has incurred a total negative cash flow
of approximately $1,088,938 for the same three-year period. The Company does not
currently have an operating line of credit. These matters raise doubt about the
Company's ability to continue as a going concern. The Company has been pursuing
an aggressive strategy of cost reduction and containment to make a profit on
reduced sales. Operating expenses for example, for fiscal year 2001, have been
reduced by approximately $4,900,000 or 48% from the amount incurred in fiscal
year 1999. The Company is pursuing initiatives to increase liquidity, including
external investments and obtaining a line of credit. The Company does not have a
commitment for such financing, and there can be no guarantee that the Company
will be able to obtain such financing.

         In November 1999, the Company announced a product diversification
program into musculoskeletal development and pain management which was extended
to urology in February 2000. To penetrate these potentially large markets,
Norland is launching the sale of new lines of products used in sports medicine,
musculoskeletal development, pain management and urology. The Company has
obtained exclusive distribution rights for certain products that are used to
provide aid in musculoskeletal development, the management of pain associated
with soft tissue and the treatment of kidney stones.

         On September 11, 1997, the Company purchased all of the outstanding
stock of Norland Corporation ("Norland Corp.") from Norland Medical Systems B.V.
("NMS BV"). Norland Corp. develops and manufactures bone densitometry systems
based on dual-energy x-ray absorptiometry ("DXA") technology, which, since 1987,
has been a standard for measuring bone mass reduction, one of the primary
indicators of osteoporosis. Prior to September 11, 1997, Norland had exclusive
worldwide distribution rights to all products developed and manufactured by
Norland Corp. and Stratec Medizintechnik GmbH ("Stratec"), a former subsidiary
of NMS BV which develops and manufactures bone densitometry systems based on
peripheral quantitative computed tomography ("pQCT") technology. This agreement
was limited to the North American market on December 31, 2000 and was terminated
on August 1, 2001.

         The Company's bone diagnostic product line has five types of bone
measurement devices comprised of eight models utilizing several different
technologies. The Company manufactures and markets a line of traditional full
size DXA-based bone densitometry products. The Excell, the Excell plus and the
XR46 are highly effective and offer essential features at competitive prices.
Because of the cost, space requirements and training required, these systems are
generally found in hospitals, large clinics and research institutions, as
opposed to physician's offices, where patients would benefit from timely and
easy access to bone density testing and monitoring.

         The Company's peripheral x-ray line of bone densitometers consists of
the Apollo DXA, the pDEXA and the Discovery systems, which are lower priced high
performance portable systems based on DXA technology. The pDEXA, which scans the
forearm, was the first desktop DXA-based system to receive FDA marketing
clearance and the first system to receive FDA marketing clearance for use in
fracture risk assessment. Sales of the pDEXA were discontinued as of January 1,
2001 as a result of the Company's development efforts and replaced with the
Discovery. The Discovery is the forearm-scanning successor to the pDEXA, and was
introduced as a prototype in September 1999. The Apollo DXA, which performs
scans of the heel in fifteen seconds, was introduced in May 1998.

         In June 1999, the Company acquired certain distribution rights for the
C.U.B.A.Clinical ultrasound based bone measurement system that was developed by
McCue Plc (the "C.U.B.A.Clinical") (Contact Ultrasound Bone Analyzer). The
C.U.B.A.Clinical uses technology to gently apply pressurized water-filled
membranes to the patient's heel through which the velocity of sound and broad
band ultrasound attenuation readings are measured and analyzed to assess the
patient's calcaneus (heel bone). In January 2000, the FDA approved the
C.U.B.A.Clinical for sale in the United States. The Company has been selling the
C.U.B.A. Clinical in North America, first on an exclusive basis, then on a
non-exclusive basis starting January 7, 2002.

<PAGE>

         In 1999, the Company announced a product diversification program into
musculoskeletal development and pain management. The Company is also seeking
additional new diversified products to distribute through its existing network
of independent dealers, sales representatives and Company sales personnel.
Pursuant to an October 1, 1999 sub-distribution agreement between the Company
and Bionix L.L.C. (U.S.) ("Bionix") which runs through September 30, 2003, the
Company obtained the right to exclusively distribute the Galileo exercise
systems in U.S. hospitals, clinics, group practices and private medical offices
involved in sports medicine and physical therapy. The Galileo system features an
efficient method of muscle strength development through mechanical stimulation.
Pursuant to a separate sub-distribution agreement between the Company and Bionix
dated October 1, 1999 which runs through September 30, 2003, the Company
obtained the right to exclusively distribute the Orbasone system within the
U.S., subject to FDA market clearance. The Orbasone system which provides relief
to patients from minor pain in soft tissue is targeted toward orthopedic
surgeons, podiatrists, and pain management specialists.

         During 2000, the Company decided to expand its diversification program
into urology. Pursuant to a sub-distribution agreement dated February 17, 2000
between the Company and Bionix, which runs through February 28, 2004, the
Company obtained the right to exclusively distribute the Genestone 190 within
the U.S. The Genestone 190 is a novel lithotripter used to treat kidney stones,
which has received premarket approval from the FDA. In late 2001, the Genestone
190 was introduced to VA hospitals, community hospitals and mobile services of
the Health Care Products division of Philips Medical Systems, Inc. the Company's
exclusive distributor. The Company's Chairman controls Bionix.

Recent Developments

         On February 27, 2002, the Company agreed to sell its bone measurement
business to CooperSurgical Acquisition Corp. Inc., the women's health care
business of the Cooper Companies, Inc. (NYSE: COO) and the Company's exclusive
distributor to U.S. physicians and group practices specializing in Obstetrics
and Gynecology. In consideration for the sale of substantially all its assets
(the "Proposed Asset Sale"), the Company is to receive up to a maximum of $12
million comprised of $3.5 million at closing (subject to post-closing
adjustment), a holdback of $1.5 million (to be released to the Company upon
specified conditions) and certain potential earn-out payments based on the net
sales of certain products over a three-year period. If the Proposed Asset Sale
is consummated, after paying transaction-related expenses, the Company intends
to use the net proceeds (i) to fund its research and development programs
(including the development of non-invasive musculoskeletal devices); (ii) for
general corporate purposes; (iii) to meet its working capital needs; and (iv) to
satisfy certain indebtedness of the Company, including an aggregate of
approximately $463,888 (including accrued and unpaid interest) to repurchase
promissory notes previously issued to Nissho Iwai Corporation and Nissho Iwai
American Corporation. None of the proceeds from the Proposed Asset Sale will be
distributed to any shareholders of the Company. The transaction is subject to
customary closing conditions, including the Company's shareholders' approval as
well as satisfactory completion of due diligence by CooperSurgical Acquisition
Corp. Inc.

         If the Proposed Asset Sale is consummated, the Company intends to
market, sell and service a wide range of proprietary non-invasive
musculoskeletal and other devices through two divisions, a healthcare division
and a sports division. The healthcare division will market, sell and service (1)
peripheral quantitative computed tomography bone measurement systems, (2)
extracorporal shock wave treatment systems and (3) patented exercise systems,
all of which are used for diagnosis and physical therapy in sports medicine,
rehabilitative medicine, pain management and urology. The sports division will
market, sell and service patented exercise systems to fitness centers, gyms,
sports clubs and associations and to the general public.

<PAGE>

Background

         Osteoporosis
         Osteoporosis is a disease generally associated with aging and
characterized by excessive loss of bone mineral and deterioration of the
skeleton over time. Bone is a dynamic organ which can be separated into two
basic structural components, outer cortical bone and inner trabecular bone. This
combination of a solid outer bone surrounding the inner bone is constantly
broken down and regenerated through a process known as bone remodeling, which
consists of bone resorption (removal) followed by bone formation. When
remodeling does not function properly, the result is a net loss of bone mass,
often causing the amount of bone to become deficient in meeting the body's
needs. Factors contributing to this condition include age, low calcium intake,
excessive alcohol consumption and certain drug therapies.

         Osteoporosis is a "silent disease" and typically has no overt symptoms
in its early stages. The first sign of osteoporosis is often bone fracture.
Osteoporosis leads to increased risk of fracture, chronic pain and immobility,
usually at the hip, forearm or spine. The NOF estimates that osteoporosis
affects more than 28 million people in the United States (80% of whom are
women), a number which, if unchecked, is predicted to increase to 41 million by
2015. The post-menopausal female population has the highest incidence of
osteoporosis and the highest rate of morbidity (loss of quality of life) and
mortality due to osteoporosis. Hip fractures produce the most serious
consequences. According to the NOF, there are more than 300,000 hip fractures
per year in the United States and 50% of hip fracture patients never walk
independently again. The NOF estimates that in the United States osteoporosis
contributes to more than 1.5 million fractures annually, a majority of which are
of the spine and hip, and that annual direct medical expenditures for
osteoporosis and associated fractures is $13.8 billion, a figure that is
expected by the NOF to increase to $62 billion by the year 2020.

         Until recently, osteoporosis was thought to be an inevitable and
untreatable consequence of aging. The Company believes that the recent
availability of more effective drug therapies, the aging of the population and
an increased focus on women's health issues and preventive medical practices
have created a growing awareness among patients and physicians that osteoporosis
is in many cases a disease which can be treated.

         Therapies
         The Company believes that the historic limitations of treatment options
in the United States contributed to a low level of demand for the diagnosis of
osteoporosis and other bone disorders. Until 1995, available therapies for
osteoporosis were limited. Most were classified as anti-resorptive and were
designed to maintain bone mass by decreasing the effective rate of bone
resorption. There was no scientific proof that they promoted bone formation.
Such therapies included the taking of drugs such as calcitonin and
first-generation bisphosphonates, or a hormone replacement regime using estrogen
supplements. In the United States, available therapies were limited to
calcitonin, estrogen and over-the-counter calcium and vitamin D supplements; and
only two therapies, calcitonin and estrogen, were approved specifically as
therapies for bone disorders. However, women's concerns regarding possible
complications relating to the prolonged use of hormone replacement therapy using
estrogen and the availability of calcitonin only in injectable form contributed
to low patient acceptance of these drugs.

         In September 1995, the FDA approved the drug Fosamax for the treatment
of established osteoporosis in post-menopausal women. Fosamax, developed by
Merck & Co., Inc. ("Merck"), is a second-generation bisphosphonate that acts by
coating the bone surface and inhibiting bone resorption. Fosamax was shown in
clinical trials to increase bone density without significant adverse side
effects. Other therapies approved by the FDA in 1995 to treat osteoporosis
include Miacalcin, an intra-nasal formulation of calcitonin developed by
Novartis, and Premarin MPA, a one-tablet hormone replacement therapy combining
estrogen and progestin developed by Wyeth-Ayerst Laboratories.
<PAGE>

         Merck's Fosamax was originally approved only for the treatment of
patients with established osteoporosis. In April 1997, the FDA expanded the
permitted use of Fosamax to include the prevention of osteoporosis. In December
1997, Eli Lilly & Company received FDA approval for its new osteoporosis drug,
Evista, a selective estrogen receptor modulator. Drugs of this type are
currently being studied for their selective ability to act like estrogen in
certain tissues but not in others. Actonel (risedronate), a new generation of
bisphosphonate developed by Proctor & Gamble, was approved by the FDA in March
2000.

         The Company believes that worldwide there are more than 50
pharmaceutical and biotechnology companies with programs to develop new
therapies for osteoporosis, some of which are in late-stage clinical trials.
Therapeutic products under development include new anti-resorptive agents and
bone-formation stimulators.

         The Company believes that advances in treatment options for
osteoporosis will increase the demand for the diagnosis and monitoring of
osteoporosis and other bone disorders. Merck and other pharmaceutical companies
have launched extensive educational and marketing campaigns targeting
gynecologists and family practice physicians to promote education and awareness
of the fact that osteoporosis is now a treatable disease. Patients and
physicians will become increasingly aware of the importance of early diagnosis
and treatment of osteoporosis. The Company believes that as this awareness
increases, more people will be tested for osteoporosis and that primary care
providers such as gynecologists and family practice physicians will play a key
role in providing such tests.

         Diagnosis and Monitoring of Osteoporosis
Typically, there are no overt symptoms of early stage osteoporosis. Diagnostic
efforts have focused on an individual's propensity for fracture by determining
bone mass and comparing it to normal healthy and age-related reference
populations, as well as monitoring bone mass over time for changes.
Absorptiometry is the primary technique for measuring bone mass and is based on
the principle that bone absorbs radiation at a different rate than does soft
tissue. The inner trabecular region, which is a lattice-like structure crucial
to the maintenance of bone strength, absorbs radiation at a rate different from
the cortical region of the bone, enabling systems capable of separately
measuring cortical and trabecular bone to more effectively assess biomechanical
soundness.

         There are a number of different types of technologies that can be used
to assess bone mineral status. Single photon absorptiometry ("SPA") uses a
single energy radioactive source and has limited ability to measure bone in
complex body regions. Dual photon absorptiometry ("DPA") reduces measurement
error through complex body regions by using a dual-energy radioactive source.
X-ray-based systems provide improved precision, faster scan times and lower
operating costs as compared to single and dual photon absorptiometry and have
largely replaced SPA and DPA technology. Single-energy x-ray absorptiometry
("SXA") technology replaces the radioactive source with a single energy X-ray
source. DXA, which has become the standard for bone mass analysis, uses a
dual-energy X-ray source. Radiographic absorptiometry ("RA") measures bone
density from two X-ray images of the hand. Although it does not require a
dedicated bone densitometry system since it uses traditional X-ray equipment, RA
does not provide point of care measurement of bone density, as the radiographs
have to be sent out to a laboratory for interpretation. All of these
technologies produce only two-dimensional (planar) measurements. Quantitative
computed tomography ("QCT") is capable of separate, three-dimensional
measurement of cortical and trabecular bone, providing volumetric density and
allowing more precise assessment of the biomechanical soundness of the bone.
Ultrasound technology measures the velocity of sound and broad band attenuation.
Ultrasound has recently been improved to the point that it has gained acceptance
as a viable technology to assess bone at peripheral sites. In vitro diagnostic
testing (biochemical markers) measures the level of certain byproducts in body
fluids to determine the rate of bone resorption and bone formation. However,
these tests do not provide information about bone mass or bone structure and
cannot be used independently to diagnose osteoporosis or assess fracture risk.
Nevertheless, the Company believes that biochemical marker testing may
complement bone densitometry in monitoring the effectiveness of drug therapies.

<PAGE>

Products

Bone Densitometry Products
         The Company believes it markets the broadest line of bone densitometers
available today with a wide range of price points and capabilities to satisfy
diverse customer needs. The Company currently offers five product types
comprised of 17 models. The following is a description of each of the Company's
product types and primary models.

         1.   Peripheral DXA-Based Systems
         The Apollo DXA, the pDEXA and the Discovery are the Company's
peripheral DXA-based systems. These affordable, easy-to-use systems are designed
for physician's offices, small clinics and other settings beyond large hospitals
and clinics, including pharmacies and other consumer environments. Like the much
larger traditional DXA systems, they measure bone mass and compare it to a
normal reference population. However, the peripheral systems measure only
specific bone sites such as the heel and forearm that correlate well to hip and
spine measurements, enabling them to be more compact, and, therefore, more
affordable than traditional DXA systems.

        The Apollo DXA introduced in May of 1998, measures weight-bearing
trabecular bone in the heel in just 15 seconds. It provides quantitative
analysis of bone mass, including bone mineral density ("BMD") as well as
comparisons to normal reference populations, from an easy-to-use hand held
control console. The Apollo DXA's Fracture Risk Assessment Option allows the
bone density measurements from the Apollo DXA to be used as an aid to physicians
in determining fracture risk.

        The Discovery, developed as a prototype in September 1999, is based on
the pDEXA, which was the first system to bring DXA-based technology to the
desktop. The Discovery and the pDEXA measure the forearm at a site that is
mostly cortical bone and at another site that is mostly trabecular bone. The
software used in the devices measures bone mineral content ("BMC") and BMD as
well as make comparisons to normal reference populations and to the patient's
prior examinations. They also provide skeletal images of the region of interest
as well as graphical presentations of the results. In January 1998, the pDEXA
became the first bone densitometry system to receive FDA approval of a Fracture
Risk Assessment Option.

        2.   Traditional DXA Systems
        The traditional DXA-based bone densitometers marketed by the Company are
the compact Excell and Excell Plus and the full size XR46. The target market for
these systems is hospitals, clinics and large physician group practices. With
its low price relative to other traditional systems, the Excell and Excell Plus
can also be attractive to primary care physicians. Each system is capable of
performing axial (hip and spine) and peripheral scans. The XR46 also performs
full body scans. All three systems measure BMD and BMC and make comparisons to
reference populations and to the patient's prior examination. Price and service
are the primary competitive factors among DXA products offering similar basic
capabilities.

         3.   Peripheral Ultrasound Systems
         The Company has distribution rights in North America and certain other
countries for the C.U.B.A.Clinical dry ultrasound system, pursuant to an
agreement with McCue Plc the company that developed the system. The
C.U.B.A.Clinical measures the velocity of sound and broadband ultrasound
attenuation at the heel. In January 2000, the FDA approved the C.U.B.A. Clinical
system for sale in the United States. As with peripheral x-ray systems, the
target market for the C.U.B.A.Clinical is physician's offices.
<PAGE>

Other Uses For Bone Densitometry Products
         The Company has received FDA approval of a Body Composition Option for
its pDEXA and traditional DXA-based systems. This option assesses the non-bone
tissue determined during the bone density scans and estimates such items as soft
tissue mass, fat mass, lean mass, and ratio of total bone mineral content to
lean body mass. These measurements are useful to physicians in their management
of diseases such as chronic renal failure, anorexia nervosa, excessive obesity,
AIDS/HIV and cystic fibrosis. It is also a convenient alternative to hydrostatic
weighing and skin fold measurements.

Musculoskeletal Development Products
         In 1999, the Company announced a product diversification program into
musculoskeletal development that started generating modest sales in fiscal year
2000. Pursuant to an October 1, 1999 distribution agreement between the Company
and Bionix, the Company obtained the right to exclusively distribute the Galileo
series of products to U.S. hospitals, clinics, group practices and private
medical offices involved in sports medicine and physical therapy for a four-year
period. The products are made by Novotec and sold to Bionix according to a
distribution agreement. The Company's Chairman controls Bionix and a Company
shareholder controls Novotec.

         The Galileo 2000, 900, XS and 100 systems are devices that feature an
efficient method of muscle strength development. The systems mechanically
stimulate targeted muscles at a specific frequency, typically 20 to 25 impulses
per second, causing the muscles to respond by contracting and relaxing by
natural reflex 20 to 25 times per second. The Galileo systems target the leg and
lower back (Galileo 2000, XS and 900), the arm and shoulder muscles (Galileo
100). Based on its larger size, the Galileo 2000 has the potential for a more
robust exercise routine, than the Galileo 900 and XS systems.

Pain Management Systems

         In 1999, the Company announced a product diversification program into
pain management systems that began generating modest sales of such products in
fiscal year 2000. Pursuant to an October 1, 1999 distribution agreement between
the Company and Bionix, the Company obtained the right to exclusively distribute
the Orbasone system within the U.S. for a four-year period. The Orbasone is made
by MIP GmbH, a Swiss Corporation ("MIP") and exclusively sold to Bionix
according to a distribution agreement. The Orbasone was classified in August
1998 by the FDA as a Class I therapeutic vibrator (21 CFR ss.890.5975) exempt
from the 510(k) requirements of the Federal Food, Drug and Cosmetic Act. The
Orbasone delivers energy waves that provide relief to patients from minor pain
in soft tissues at the treatment site, which is typically, the foot, ankle,
elbow or shoulder. The 30 to 40 minute treatment sessions are delivered to
patients under the supervision and care of a physician such as an orthopedic
surgeon or podiatrist. On June 21, 2000, the FDA informed MIP that the FDA erred
in its 1998 decision and rescinded its determination that the Orbasone was an
exempt product. As a result, the Company suspended sales of the Orbasone pending
FDA review of the product. The FDA recently determined that the Orbasone is a
Class III device requiring premarket approval, but MIP is seeking
reconsideration of this determination and discussions between the FDA and MIP
are continuing.

Lithotripsy Systems

         In fiscal year 2000, the Company further expanded its product
diversification program into urology. Pursuant to a February 17, 2000
distribution agreement between the Company and Bionix, the Company obtained the
right to exclusively distribute the Genestone 190 System within the U.S. for a
four-year period. The Genestone 190 is made by Genemed GmbH, a Swiss Corporation
("Genemed") and exclusively sold to Bionix according to a distribution
agreement. The Genestone 190 has obtained premarket approval from the FDA and
therefore, may be sold in the U.S. It is a compact lithotripter used by
urologists to treat kidney stones. It uses shock wave technology to fragment
upper urinary tract stones such as renal calyceal stones, renal pelvic stones
and upper ureteral stones. Its relative low cost and transportability makes it
suitable for private urology practices, community hospitals and mobile services.
The Company did not sell any Genestone systems during fiscal year 2001. In late
2001, the Genestone 190 was introduced to VA hospitals, community hospitals and
mobile services of the Health Care Products division of Philips, the Company's
exclusive distributor.

<PAGE>

Product Development

        The Company focuses its product development on DXA-based bone
densitometry systems. At March 31, 2001, the Company had 3 persons engaged in
research and development who were all devoted to software development. Product
development work with respect to other bone densitometry systems,
musculoskeletal development products and pain management systems are performed
by the companies (Bionix LLC, McCue Plc, Stratec, Novotec, Genemed and MIP) that
supply the Company with their respective products.

Sales and Marketing

         The Company currently employs five regional sales managers, two of whom
cover the United States and three of whom cover Europe, the Middle East and Asia
(other than the Pacific Rim), Latin America and the Pacific Rim, respectively.
The Company's customers are primarily third party dealers and distributors. The
Company also sells directly to end-users in those markets where the Company does
not have third party dealers or distributors. The Company typically uses an
exclusive dealer, independent representative or distributor to cover one or more
states, a single country or portions thereof. Each Company regional sales
manager is responsible for the support and supervision of several dealers,
distributors and independent representatives within their geographic region.
Support includes participation in trade shows, symposiums, customer visits,
product demonstrations, ongoing distribution of literature and publications,
sales training and presentations of financing programs. In 1997, the Company
opened small sales offices in London, from which the regional manager for
Europe, Africa and the Middle East operates, and Singapore, where the regional
manager for the Pacific Rim operates. The Company intends to expand its network
of U.S. third party dealers, distributors and independent representatives to
exploit the country's large market of gynecologists and primary care physicians,
and to expand its sales in hospitals, imaging and mammography center markets. As
part of such expansion, distribution agreements were signed with CooperSurgical,
Inc. in November 2000 and with the Health Care Products Division of Philips
Medical System, Inc. in January 2001.

         In 1999, the Company reorganized its marketing department, which
presently consists of three employees. Marketing efforts are focused primarily
on supporting the Vice Presidents for Sales in their management of dealers and
distributors, developing and maintaining relationships and joint programs with
pharmaceutical companies, managing sales lead generation programs, managing
product introductions and new product financing programs.

        The Company sold products in 33 countries in fiscal year 2001. For a
more detailed breakdown of the Company's 2001 sales by geographic territory, see
Note 14 to the Company's consolidated financial statements included in Item 8 of
this Report.
<PAGE>

Manufacturing

Bone densitometry products
         Manufacturing consists primarily of testing of components, final
assembly and systems testing. The Company manufactures its DXA-based systems, at
its ISO 9001 certified facility in Fort Atkinson, Wisconsin for sale worldwide.
McCue Plc manufactures the C.U.B.A.Clinical ultrasound system. All
establishments, whether foreign or domestic, manufacturing medical devices for
sale in the United States are subject to periodic inspections by or under the
authority of the FDA to determine whether the manufacturing establishment is
operating in compliance with FDA Quality System Regulation ("QSR") requirements.

         Some components are manufactured in accordance with custom
specifications and require substantial lead times. While efforts are made to
purchase components from more than one source and to use generally available
parts, certain components, including X-ray tubes and detectors, are available
from only one or a limited number of sources. In the past, there have been
delays in the receipt of certain components, although to date no such delays
have had a material adverse effect on the Company. The Company believes that the
Company and McCue Plc have sufficient manufacturing capacity to supply the
Company's product needs for at least the next twelve months.

         Manufacturing processes for the products marketed by the Company are
subject to stringent federal, state and local laws and regulations governing the
use, generation, manufacture, storage, handling and disposal of certain
materials and wastes. In the United States, such laws and regulations include
the Occupational Safety and Health Act, the Environmental Protection Act, the
Toxic Substances Control Act, and the Resource Conservation and Recovery Act.
The Company believes that it has complied in all material respects with such
laws and regulations. There can be no assurance that the Company will not be
required to incur significant costs in the future with respect to compliance
with such laws and regulations.

Musculoskeletal Development Products
        The Galileo products marketed by the Company were developed and
manufactured by Novotec at its facilities located in Pforzheim, Germany.
Manufacturing consists primarily of testing components, forming and painting of
plastic covers, final assembly and quality assurance testing. The Company is
dependent on Novotec to manufacture the Galileo products that the Company and
others market in amounts and at levels of quality necessary to meet demand. The
Company has no ownership interest in Novotec.

        Some components are manufactured in accordance with specifications that
are specific to the Galileo products and require substantial lead times. Until
such time as production quantities increase to a level that provides for
opportunities to realize economies of scale and dual sourcing of components,
each component is generally purchased from a limited number of sources and is
subject to the risk that its availability could become delayed. To date there
have been no delays in production which have had a material adverse effect on
the Company. The Company believes that Novotec has sufficient capacity to supply
the Company's need for Galileo products for at least the next 12 months.

Pain Management Systems
        The Orbasone system was developed by MIP and is manufactured for MIP
under a contractual arrangement by Nippon Infrared Industries Co., Ltd. (Japan),
which has its manufacturing facilities in Tokyo, Japan. Manufacturing consists
primarily of testing components, final assembly and quality assurance testing.
If and when the Orbasone receives market clearance, the Company will be
dependent on MIP to provide manufactured Orbasone systems in amounts and at
levels of quality necessary to meet demand and be competitive. The Company has
no ownership interest in MIP or Nippon Infrared Industries Co., Ltd.

        Some components are manufactured in accordance with specifications that
are specific to the Orbasone and require substantial lead times. Until such time
as production quantities increase to a level that provides for opportunities to
realize economies of scale and dual sourcing of components, each component is
generally purchased from a limited number of sources and is subject to the risk
that its availability could become delayed. The Orbasone has not yet been
approved by the FDA for sale in the U.S. market.

<PAGE>

Lithotripsy Systems
         The Genestone 190 System was developed by Genemed and manufactured for
Genemed under a contractual agreement by Kimchuk, Inc. which has its
manufacturing facilities in Connecticut. Manufacturing consists of primarily
testing of components, final assembly and quality assurance testing. The Company
depends upon Genemed to provide manufactured Genestone 190 systems in amounts
and at levels of quality necessary to meet demand and be competitive. The
Company has no ownership interest in Genemed or Kimchuk, Inc.

        Some components are manufactured in accordance with specifications that
are specific to the Genestone 190 and require substantial lead times. Until such
time as production quantities increase to a level that provides for
opportunities to realize economies of scale and dual sourcing of components,
each component is generally purchased from a limited number of sources and is
subject to the risk that its availability could become delayed. The Company
believes that Genemed has sufficient manufacturing capacity to supply the
Company's product needs for at least the next twelve months.

Customer Support Services

        The Company offers one-year warranties on both the hardware and software
included in its systems, as well as extended warranty contracts. The Company and
third party service representatives provide warranty services to its customers.
Any costs incurred by the Company in connection with a warranty of a system not
manufactured by the Company are borne by such manufacturer pursuant to the
applicable distribution agreement.

        The Company has no obligation to provide any other services to its third
party dealers or distributors or other customers. However, the Company does
offer non-warranty services and a range of other product support services in
cooperation with its third-party dealers, including a telephone hotline for
customer inquiries, product installation, product enhancements and maintenance
releases. On April 1, 2000, the Company signed a service agreement with Philips
Medical Systems, Inc. ("Philips"). Under the agreement, Philips will augment the
Company's network servicing its traditional DXA systems which consists of the
Company's service employees and third party service representatives. The Company
also offers training at customer locations and the Company's facilities to
end-user customers, third-party dealers and service technicians.

Distribution Agreements

McCue
        The Company and McCue entered into a distribution agreement dated June
17, 1999 granting the Company the right to exclusively distribute the
C.U.B.A.Clinical ultrasound system in North America and certain countries in
Europe, the Pacific Rim and the Middle East. Under terms of the five-year
agreement, there are non-binding sales targets. In addition, in the event that
the Company does not purchase a specified minimum number of C.U.B.A.Clinical
devices in any twelve-month period starting in January 2001, McCue has the right
to make the Company's distribution rights in North America non-exclusive. McCue
exercised such right on January 7, 2002.

Bionix
        The Company and Bionix entered into an exclusive sub-distribution
agreement with respect to the sale of Stratec pQCT products in North and Latin
America through September 30, 2003. Under terms of the sub-distribution
agreement, the Company has the right to purchase products at a fixed percentage
discount from the product's actual sales price to the customer. As a result of a
lack of sales of pQCT systems in Latin America, the sub-distribution agreement
was limited to North America on December 31, 2000 and terminated on August 1,
2001.
<PAGE>

        The Company and Bionix also entered into two exclusive sub-distribution
agreements dated October 1, 1999 with respect to the Orbasone and Galileo
systems/products and into an exclusive sub-distributor agreement dated February
17, 2000 with respect to the Genestone 190, each of which products are sold
through Bionix pursuant to its distribution agreements with the third party
manufacturers. Under the terms of the four-year sub-distribution agreements, the
Company may purchase products from Bionix at a fixed percentage discount from
contractually stated selling prices with a mechanism to periodically adjust the
contractual selling prices. The Orbasone has not yet been approved by the FDA
for sale in the U.S. market.

Competition

Bone densitometry products
        The bone densitometry systems market is highly competitive. Several
companies have developed or are developing bone densitometers or other devices
that compete or will compete with products marketed by the Company. Many of the
Company's existing and potential competitors have substantially greater
financial, marketing and technological resources, as well as established
reputations for success in developing, selling and servicing products. The
Company's primary competitors for the sale of bone densitometry systems are
General Electric, Hologic, Inc. ("Hologic"), Aloka, Diagnostic Medical Systems
and OSI Systems. These companies have products that compete directly with the
products marketed by the Company. The Company expects existing and new
competitors will continue to introduce products that are directly or indirectly
competitive with those marketed by the Company, including alternatives to
absorptiometry such as ultrasound and in vitro diagnostics. Such competitors may
succeed in developing products that are more functional or less costly than
those sold by the Company and may be more successful in marketing such products.
There can be no assurance that the Company will be able to continue to compete
successfully in this or any other market.

         The ultrasound market is particularly competitive. There are
approximately 20 other companies, including General Electric and Hologic, that
are marketing ultrasound bone assessment systems outside the United States. In
addition, General Electric and Hologic have FDA approval to market their
ultrasound systems in the United States.

         The Company believes the products it markets compete primarily on the
basis of price/performance characteristics, accuracy and precision of results,
ease and convenience of use, features and functions, quality of service and
price. In the small clinic and physician's office market, price, ease of use and
convenience are of particular importance. In the hospital and large clinic
market, traditional DXA systems are predominant and price is the primary
competitive factor among products that provide similar basic capabilities. The
Company believes that its DXA-based systems are competitive. In the research
market, the range, accuracy and precision of measurements are the principal
competitive factors. The Company believes the pQCT-based products it markets
provide measurement capabilities, such as three-dimensional measurements and
separate measurement of cortical and trabecular bone, not available with
traditional DXA-based technology, at prices competitive with systems using that
technology.

Musculoskeletal Development Products
         The Galileo products offer a novel approach to muscle strength
development. The owner of Novotec has applied for patents regarding the Galileo
products. Despite the absence of directly similar products, there are a number
of competing approaches and products that develop muscle strength. Many of the
Company's existing competitors and potential competitors have substantially
greater financial, marketing and technological resources, as well as established
reputations for success in developing, selling and servicing products. The
Company expects existing and new competitors will continue to introduce products
that are directly or indirectly competitive with the Galileo products. Such
competitors may be more successful in marketing such products. There can be no
assurance that the Company will be able to compete successfully in this market.
<PAGE>

         The Company's primary competitors for the sale of musculoskeletal
development products are marketers of exercise equipment such as OMNI Fitness
and Stairmaster. These companies have products that compete directly with the
products marketed by the Company in certain segments of the market. The Company
believes that the present design of the Galileo products should be enhanced to
better suit the requirements of the U.S. market. There can be no assurance that
Novotec can or will improve the product design, nor that the Company's
competitors will fail to develop and market products that make use of the
Galileo's novel approach or that are lower priced or better performing as
compared to the Galileo products. In addition, there is a risk that the patents
that have been applied for by the owner of Novotec regarding Galileo products
will not be issued.

         The Company believes that the products it markets compete primarily on
the basis of price/performance characteristics, perceived efficacy of results,
ease, convenience and safeness of use, quality of service and price. The Company
is using its initial product marketing efforts to assess the competitiveness of
the Galileo products, which the Company recently introduced to the U.S. market.

Pain Management Systems
         The pain management systems market is highly competitive. Several
companies have developed or are developing devices that compete or will compete
with the Orbasone. Many of the Company's competitors existing and potential
competitors have substantially greater financial, marketing and technological
resources, as well as established reputations for success in developing, selling
and servicing products. The Company expects existing and new competitors will
continue to introduce products that are directly or indirectly competitive with
the Orbasone. Such competitors may be more successful in marketing such
products. There can be no assurance that the Company will be able to compete
successfully in this market.

         The Company's primary competitors for the sales of pain management
systems are HealthTronics, Inc., Domier MedTech, Storz Medical, Siemens AG and
MTS Medical Technologies & Services GmbH. These companies have or potentially
plan to have products that are in various stages of the FDA review process for
the purpose of obtaining premarket approval. The Orbasone was classified in
August 1998 as a Class I therapeutic vibrator (21CFR ss.890.5975) exempt from
the 510 (k) requirements of the Federal Food, Drug and Cosmetic Act. However, on
June 21, 2000, the FDA informed MIP that it erred in its 1998 decision and
rescinded its determination that the Orbasone was an exempt product. As a result
the Company suspended sales of the Orbasone pending FDA review of the product.
The FDA recently determined that the Orbasone is a Class III device requiring
premarket approval, but MIP is seeking reconsideration of this determination and
discussions between the FDA and MIP are continuing.

Third Party Reimbursement

Bone densitometry products and pain management systems
        The bone densitometry products marketed by the Company are purchased
principally by hospitals, managed care organizations, including independent
practice associations and physician practice organizations or independent
physicians or physician groups, who are regulated in the United States by
federal and state authorities and who typically bill and are dependent upon
various third party payors, such as federal and state governmental programs
(e.g., Medicare and Medicaid), private insurance plans and managed care plans,
for reimbursement for use of the Company's products. The Health Care Financing
Administration ("HCFA") establishes new reimbursement codes and recommended
reimbursement rates effective January 1 of each calendar year. On several
occasions, HCFA has effected increases and decreases in its recommended
reimbursement rates for bone densitometry examinations and has made changes in
the types of examinations eligible for reimbursement. There can be no assurance
that HCFA will not continue to make changes from time to time. The Company could
be materially and adversely affected by such changes.
<PAGE>

        In August 1997, President Clinton signed into law the Medicare Bone Mass
Measurement Coverage Standardization Act as a provision in the Balanced Budget
Act. The provision sets forth a national mandate that requires Medicare, under
certain specified conditions, to cover bone density diagnostic tests utilizing
radiologic, radioisotopic, or other procedures approved by the FDA for the
purpose of identifying bone mass or detecting bone loss deterioration. This
mandate became effective July 1, 1998.

        In a number of European countries, Japan and several other countries,
third party payors provide reimbursement for bone densitometry scans.

        Postoperative pain management is reimbursed under limited circumstances.
There can be no assurance that HCFA or other third party payors will reimburse
patients for pain management systems and pain treatment sessions involving the
Orbasone system.

Musculoskeletal development products
        As with general exercise equipment which requires no professional
supervision, the Galileo series of musculoskeletal development products are not
covered under federal or state health care insurance programs or by third party
health insurance payors.

Government Regulation

        The development, testing, manufacturing and marketing of the bone
densitometry and pain management products marketed by the Company are regulated
by the FDA in the United States and by various foreign regulatory agencies. The
testing for, preparation of, and subsequent FDA review of required applications
is expensive, lengthy and uncertain. Moreover, regulatory approval or clearance,
if granted, can include significant limitations on the indicated uses for which
a product may be marketed. Failure to comply with applicable regulations can
result in warning letters, civil penalties, refusal to approve or clear new
applications or notifications, withdrawal of existing product approvals or
clearances, product seizures, injunctions, recalls, operating restrictions, and
criminal prosecutions. Delays in receipt of or failure to receive clearances or
approvals for new products would adversely affect the marketing of such products
and the results of future operations.

        Medical devices are classified as either Class I, II, or III based on
the risk presented by the device. Class I devices generally do not require
review and approval or clearance by the FDA prior to marketing in the U.S. Class
II devices generally require premarket clearance through the Section 510(k)
premarket notification process, and Class III devices generally require
premarket approval through the lengthier premarket approval application ("PMA")
process. Norland markets Class I, II, and III devices. Section 510(k)
submissions may be filed only for those devices that are "substantially
equivalent" to a legally marketed Class I or Class II device or to a Class III
device for which the FDA has not called for PMAs. A Section 510(k) submission
generally requires less data than a PMA. The FDA must determine whether or not
to clear a Section 510(k) submission within 90 days of its receipt. The FDA may
extend this time period, however, if additional data or information is needed to
demonstrate substantial equivalence. If a device is not "substantially
equivalent" to a legally marketed Class I or Class II device or to a Class III
device for which the FDA has not previously called for PMAs, a PMA is required.
The premarket approval procedure involves a more complex and lengthy testing and
FDA review process than the Section 510(k) premarket notification process. There
can be no assurances that clearances or approvals will be obtained on a timely
basis, if at all. Modifications or enhancements to products that are either
cleared through the Section 510(k) process or approved through the PMA process
that could effect a major change in the intended use, or affect the safety or
effectiveness, of the device may require further FDA review and clearance or
approval through new Section 510(k) or PMA submissions.
<PAGE>

         The Company has received Section 510(k) clearance for all its bone
densitometers marketed in the U.S. for use in humans, except for the
C.U.B.A.Clinical ultrasound densitometer for which the manufacturer, McCue Plc,
has received FDA premarket approval. The pain management devices (Orbasone)
marketed by the Company in the U.S. was classified by the FDA in August 1998 as
Class I devices exempt from Section 510(k) premarket notification requirements.
On June 21, 2000, the FDA determined that it erred in its classification of the
Orbasone and the Company suspended marketing of the Orbasone. The FDA recently
determined that the Orbasone is a Class III device requiring premarket approval,
but MIP is seeking reconsideration of this determination and discussions between
the FDA and MIP are continuing. The Galileo musculoskeletal development products
are not medical devices subject to FDA regulation but are consumer products
subject to regulation under the Consumer Product Safety Act. The manufacturer of
the Genestone 190 lithotripter, Genemed, has received FDA pre-market approval
for the Genestone 190.

        All entities, whether foreign or domestic, manufacturing medical devices
for sale in the United States are subject to periodic inspections by or under
authority of the FDA to determine whether the manufacturing establishment is
operating in compliance with QSR requirements. Manufacturers must continue to
expend time, money and effort to ensure compliance with QSR requirements. The
FDA also requires that medical device manufacturers undertake post-market
reporting for serious injuries, deaths, or malfunctions associated with their
products. If safety or efficacy problems occur after the product reaches the
market, the FDA may take steps to prevent or limit further marketing of the
product. Additionally, the FDA actively enforces regulations concerning
marketing of devices for indications or uses that have not been cleared or
approved by the FDA.

        The Company's products also are subject to regulatory requirements for
electronic products under the Radiation Control for Health and Safety Act of
1968. The FDA requires that manufacturers of diagnostic x-ray systems comply
with certain performance standards, and record keeping, reporting, and labeling
requirements.

        The Company may export a medical device not approved in the United
States to any country without obtaining FDA approval, provided that the device
(i) complies with the laws of that country and (ii) has valid marketing
authorization or the equivalent from the appropriate authority in a "listed
country." The listed countries are Australia, Canada, Israel, Japan, New
Zealand, Switzerland, South Africa and countries in the European Union and the
European Economic Area. Export of unapproved devices that would be subject to
PMA requirements if marketed in the United States and that do not have marketing
authorization in a listed country generally continue to require prior FDA export
approval.

Proprietary Rights

         The Company believes that its sales are dependent in part on certain
proprietary features of the products it manufactures and/or markets. The Company
relies primarily on know-how, trade secrets and trademarks to protect those
intellectual property rights and has not sought patent protection for such
products. There can be no assurance that these measures will be adequate to
protect the rights of the Company. To the extent that intellectual property
rights are not adequately protected, the Company may be vulnerable to
competitors who attempt to copy the Company's products or gain access to the
trade secrets and know-how related to such products. Further, there can be no
assurance that the Company's competitors will not independently develop
substantially equivalent or superior technology. The Company is not the subject
of any litigation regarding proprietary rights, and the Company believes that
the technologies used in its products were developed independently. In addition,
the Company's business depends on proprietary information regarding customers
and marketing, and there can be no assurance that the Company will be able to
protect such information.

<PAGE>

Backlog

         Backlog consists of signed purchase orders received by the Company from
its customers. Backlog as of December 31, 2001 and 2000 totaled approximately
$755,000 and $835,000, respectively. The Company's ability to ship products
depends on its production capacity and that of the other manufacturers whose
products are distributed by the Company. Purchase orders are generally
cancelable. The Company believes that its backlog as of any date is not a
meaningful indicator of future operations or net revenues for any future period.

Product Liability Insurance

         The Company's business involves the inherent risk of product liability
claims. If such claims arise in the future they could have a material adverse
impact on the Company. The Company maintains product liability insurance on a
"claims made" basis with respect to its products in the aggregate amount of $4.0
million, subject to certain deductibles and exclusions. The Company's agreements
with the manufacturers of other products distributed by the Company require that
such manufacturers maintain product liability insurance that covers the Company
as an additional named insured. There is no assurance that existing coverage
will be sufficient to protect the Company from risks to which it may be subject,
including product liability claims, or that product liability insurance will be
available to the Company at a reasonable cost, if at all, in the future or that
insurance maintained by the other manufacturers will cover the Company.

Employees

         At March 12, 2002, the Company had 42 employees, of whom 7 were engaged
in direct sales and marketing activities and 8 were engaged in manufacturing
activities. The remaining employees are in finance, administration, product
development and customer service. No employees of the Company are covered by any
collective bargaining agreements, and management considers its employee
relations generally to be good.

<PAGE>


ITEM 2.  PROPERTIES

         The Company leases its principal executive offices, which are located
at 106 Corporate Park Drive, Suite 106, White Plains, New York 10604. The lease
expires on July 31, 2003. The Company also leases approximately 28,500 square
feet of space in Fort Atkinson, Wisconsin pursuant to two separate leases. One
lease with respect to 18,000 square feet expires on August 31, 2006, and the
second lease with respect to the remaining 10,500 square feet expires on June
30, 2002. The Company uses this space for manufacturing, research and
development, sales and marketing, customer services, administration and
warehousing and considers the facilities to be well maintained and adequate for
the Company's present needs.
<PAGE>

ITEM 3.  LEGAL PROCEEDINGS

         During 2000 a shareholders' class action lawsuit was settled for
$1,700,000. The settlement was funded through the Company's directors and
officers insurance carrier without any additional liability to the Company. Upon
settlement of this case in 2000, the Company reduced to $0 the $150,000
liability which was recorded to cover any additional loss with respect to this
matter. This adjustment is reflected in general and administrative expenses
within the Company's 2000 statement of operations.

         In the normal course of business, the Company is named as defendant in
lawsuits in which claims are asserted against the Company. In the opinion of
management, the liabilities if any, which may ultimately result from such
lawsuits, are not expected to have a material adverse effect on the financial
position, results of operations or cash flows of the Company.


<PAGE>

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

         No matters were submitted to a vote to the Company's security holders
during the fourth quarter of the fiscal year ended December 31, 2001.


<PAGE>

                                     PART II

ITEM 5.  MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
         STOCKHOLDER MATTERS

         The Company's Common Stock is traded on the Over-The-Counter Bulletin
Board under the symbol "NRLD". Prior to September 23, 1998, the Company's Common
Stock was traded on the NASDAQ National Market. The following table sets forth,
for the periods indicated, the high and low sales prices per share of Common
Stock, as reported by the Over-The-Counter Bulletin Board for the respective
periods.

PERIOD FROM JANUARY 1, 2000 THROUGH DECEMBER 31, 2000:

                                   High           Low
                                   ----           ---
First Quarter                      $1.03        $0.41
Second Quarter                      0.69         0.38
Third Quarter                       0.50         0.22
Fourth Quarter                      0.31         0.09

PERIOD FROM JANUARY 1, 2001 THROUGH DECEMBER 31, 2001:

                                    High          Low
                                    ----          ---
First Quarter                       0.22         0.09
Second Quarter                      0.20         0.07
Third Quarter                       0.18         0.08
Fourth Quarter                      0.09         0.04

         As of March 8, 2002, the sales price per share of Common Stock, as
reported by the Over-The-Counter Bulletin Board, was $0.075.

         As of March 8, 2002 there were approximately 75 outstanding
stockholders of record of the Company's Common Stock. This number excludes
persons whose shares were held of record by a bank, broker or clearing agency.

         The Company has not paid any cash dividends on its shares of Common
Stock and does not expect to pay any cash dividends in the foreseeable future.
The Company's policy has been to reinvest any earnings in the continued
development and operations of its business.
<PAGE>

ITEM 6.  SELECTED FINANCIAL DATA.

         The Company began operations in January 1994 as the exclusive
distributor throughout much of the world for the bone densitometry products
developed and manufactured by Norland Corp. and Stratec. The Company acquired
Norland Corp. from NMS BV on September 11, 1997. A Company stockholder controls
Stratec. Certain of the Company's stockholders control NMS BV. The Company has
no ownership interest in NMS BV or Stratec.

         The financial data as of December 31, 2001 and 2000 and for the periods
ended December 31, 2001, 2000 and 1999 has been derived from the consolidated
financial statements of the Company for the periods indicated and should be read
in conjunction with such financial statements and notes thereto, which are
included at Item 8 of this Report, and with "Management's Discussion and
Analysis of Financial Condition and Results of Operations", included in Item 7
of this Report.

<TABLE>
<CAPTION>



                                                                         Norland Medical Systems, Inc.
                                                                        For the Years Ended December 31,
------------------------------------------------------------------------------------------------------------------------------------
                                                   1997(1)          1998             1999              2000              2001

Statement of Operations Data:
<S>                                              <C>             <C>               <C>               <C>               <C>
Revenue....................................      $20,530,376     $14,384,491       $17,798,035       $13,402,823       $9,190,880
Cost of revenue............................       15,568,876       8,888,947         9,549,677         7,596,306        5,371,209
                                                ------------ ---------------       -----------       -----------       ----------
  Gross profit.............................        4,961,500       5,495,544         8,248,358         5,806,517        3,819,671

Sales and marketing expense................        5,635,469       6,711,653         5,482,817         4,231,221        2,692,384
General and administrative expense.........        4,688,132       5,690,071         3,377,520         2,701,889        2,279,430
Research and development expense...........          749,847       1,889,583         1,325,116           564,771          336,072
In-process research and development charge.        7,900,000               0                 0                 0                0
Non-recurring charges......................        7,228,287         400,000                 0         7,258,036                0
                                                ------------ ---------------       -----------       -----------       ----------
  Loss from operations                           (21,240,235)     (9,195,763)       (1,937,095)       (8,949,400)      (1,488,215)

Loss on investment in Vitel, Inc...........                0        (260,000)                0                 0                0
Interest expense...........................         (383,962)     (1,289,665)         (273,005)         (216,619)        (148,457)
Interest income............................          345,745          86,168            34,453             5,704                0
                                                ------------ ---------------       -----------       -----------       ----------
  Loss before income taxes (benefit).......      (21,278,452)    (10,659,260)       (2,175,647)       (9,160,315)      (1,636,672)
Income taxes (benefit).....................       (2,694,447)       (946,000)                0         4,118,920                0
                                                ------------ ---------------       -----------       -----------       ----------
  Net loss ................................     $(18,584,005)    $(9,713,260)      $(2,175,647)    $ (13,279,235)    $ (1,636,672)
                                                ============ ===============       ===========       ===========       ==========

Loss per share:
  Basic                                               $(2.60)         $(1.35)           $(0.10)           $(0.49)          $(0.05)
  Diluted                                              (2.60)          (1.35)            (0.10)            (0.49)           (0.05)

Weighted average number of
  Common shares outstanding:...............
   Basic...................................        7,145,465       7,183,032        21,616,010        27,029,566       30,383,098
   Diluted.................................        7,145,465       7,183,032        21,616,010        27,029,566       30,383,098

------------------------------------------------------------------------------------------------------------------------------------
                                                   1997             1998             1999              2000              2001

Balance Sheet Data:
Working capital............................      $11,624,860     $ 2,407,993        $1,124,033       $(2,082,688)     $(3,160,856)
Total assets...............................       29,378,525      19,057,907        17,732,288         3,644,736        2,354,958
Long-term debt.............................       14,439,756       4,685,690         1,106,562                 0                0
Stockholders' equity (deficit).............        7,610,985       8,791,883        11,028,068        (1,287,403)      (2,744,075)

(1)  The results of operations of Norland Corp. have been included from the September 11, 1997 date of acquisition.
</TABLE>


<PAGE>


ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
         CONDITION AND RESULTS OF OPERATIONS.

         The following discussion of the financial condition and results of
operations of the Company should be read in conjunction with the Consolidated
Financial Statements and the related Notes thereto included in Item 8 of this
Report. The following discussion contains forward-looking statements which
involve risks and uncertainties, some of which are described in the Introduction
to this Report. The Company's actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain factors,
including those discussed in the Introduction.

Critical Accounting Policies And Estimates

         The Consolidated Financial Statements and Notes to Consolidated
Financial Statements contain information that is pertinent to management's
discussion and analysis. 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.

         The Company believes the following critical accounting policies involve
additional management judgement due to the sensitivity of the methods,
assumptions and estimates necessary in determining the related asset and
liability amounts. The Company recognizes revenues in accordance with invoice
terms, typically when products are shipped and accruals for warranty reserves
are provided at the time of shipment based upon past experience. If actual
future warranty expense differs from past experience, additional allowances may
be required. The Company provides estimated inventory allowances for slow-moving
and obsolete inventory based on current assessments about future demands, market
conditions and related management initiatives. If market conditions are less
favorable than those projected by management, additional inventory allowances
may be required. The Company has recorded a valuation allowance to reduce its
deferred tax assets. The Company limited the amount of tax benefits recognizable
from these assets based on an evaluation of the amount of the assets that are
expected to be ultimately realized. An adjustment to income could be required if
the Company determined it could realize these deferred tax assets in excess of
the net recorded amount or it would not be able to realize all or part of its
net deferred tax assets.

General

         Revenues and costs of revenues for systems and spare parts are
generally recognized at the time products are shipped and title passes to the
customer. Service revenue is recognized at the time the service is performed.
Sales to customers are generally made in U.S. dollars.

         Prior to September 11, 1997, the Company had exclusive worldwide
distribution rights to all products developed and manufactured by Norland Corp.
and Stratec. Under the arrangements with Norland Corp. and Stratec, the margins
between their costs of manufacturing the products and the amounts for which the
Company sold the products were divided between the Company and the manufacturers
as provided in the Company's Distribution Agreement with Norland Corp. and
Stratec. On September 11, 1997, the Company acquired Norland Corp. from NMS BV.
The $17,500,000 purchase price was paid at closing, $1,250,000 in cash and
$16,250,000 by the Company's 7% promissory note issued to NMS BV (the "Purchase
Note"). A $1,250,000 principal payment on the Purchase Note was originally
payable on March 11, 1998. The Purchase Note was amended to provide that such
payment would not be due until such time as the Company receives at least
$2,000,000 in proceeds from a debt or equity financing. The balance was payable
on September 11, 2002 with a right on the part of the Company to extend the
maturity for up to an additional two years. If the maturity was so extended, the
applicable interest rate would be subject to increases during the extension
period. The Purchase Note provided that it could be repaid at any time and that,
except for the $1,250,000 payment referred to above, the Company could make
payments of principal by delivering shares of its Common Stock, valued at the
average closing price for the five trading days preceding the delivery.

<PAGE>

         On December 31, 1998, in connection with the settlement of previously
disclosed litigation, the terms of the Norland Corp. acquisition were amended.
Effective as of December 31, 1998, the original $17,500,000 purchase price was
reduced to $8,700,000 by reducing the principal amount of the Purchase Note from
$16,250,000 to $7,450,000. The interest rate on the Purchase Note was reduced to
6 1/2 %. In addition, $1,890,000 of principal of the reduced Purchase Note was
paid on December 31, 1998 by delivering 7,000,000 shares of the Company's Common
Stock to NMS BV priced at $0.27 per share, the average closing price for the
prior five trading days. On March 28, 1999, the Company exercised its right to
pay $4,310,000 of the remaining $5,560,000 of the Purchase Note principal by
delivering 11,122,580 additional shares of Common Stock priced at $0.3875 per
share, the average closing price for the prior five trading days.

As a result of the acquisition of Norland Corp., the Company now receives the
entire margin between the cost of Norland Corp. products manufactured after the
date of acquisition and the amount for which the Company sells such products.
The distribution agreement with Stratec was terminated August 1, 2001.

Result of Operations

          The following table sets forth for the periods indicated certain items
from the Company's Statements of Operations as a percentage of revenue:

<TABLE>
<CAPTION>


----------------------------------------------------------------------------------------------------------------
                                                                              Years Ended December 31,

                                                                           2001           2000             1999
                                                                           ----           ----             ----
<S>                                                                        <C>           <C>             <C>
Revenue..................................................                  100.0%        100.0%          100.0%
Cost of revenue..........................................                   58.4          56.7            53.7
                                                                           -----         -----           ------
  Gross profit...........................................                   41.6          43.3            46.3

Sales and marketing expense..............................                   29.3          31.6            30.8
General and administrative expense.......................                   24.8          20.2            19.0
Research and development expense.........................                    3.7           4.2             7.4
Non-recurring charges....................................                    0.0          54.2             0.0
                                                                           -----         -----           ------
  Loss from operations...................................                  (16.2)        (66.9)          (10.9)
Interest income..........................................                    0.0           0.0            (0.2)
Interest expense.........................................                    1.6           1.6             1.5
                                                                           -----         -----           ------
  Loss before income taxes...............................                  (17.8)        (68.5)          (12.2)
  Income taxes expense...................................                    0.0         (30.7)            0.0
                                                                           -----         -----           ------
  Net loss...............................................                  (17.8)        (99.2)          (12.2)
                                                                           =====         =====           ======
----------------------------------------------------------------------------------------------------------------
</TABLE>

<PAGE>

The Company's Year Ended December 31, 2001 Compared to Its Year Ended December
31, 2000.

              Revenue for fiscal year 2001 decreased $4,211,943 (31.4%) from
$13,402,823 for fiscal year 2000. The decline in sales is primarily due to lower
DXA-based central system sales in the United States and the Pacific Rim region.
Sales in the United States, Europe/Middle East and Pacific Rim represented
67.9%, 20.8% and 7.7%, respectively, of total revenue of fiscal year 2001 and
60.6%, 22.0% and 12.5%, respectively, of total revenue for fiscal year 2000. A
majority of the Company's revenue for fiscal years 2001 and 2000 was derived
from sales of the Excell, Eclipse and XR36 central systems. Sales of complete
bone densitometry systems represented 76.3% and 78.1% of total revenue for
fiscal years 2001 and 2000, respectively. Sales of new musculoskeletal products
accounted for less than 1% of sales in fiscal year 2001 compared to 4.4% in
fiscal year 2000. Sales of parts and services and rental income comprised the
balance of revenue for such periods.

         Sales in the United States have been negatively affected by changes in
the Medicare reimbursement rates for bone densitometry tests. In November 1996
the Health Care Financing Administration ("HCFA") announced changes for 1997
that significantly reduced the reimbursement rate for peripheral bone
densitometry tests. In June 1997 HCFA published proposed changes for 1998 that
would have increased the reimbursement rate for peripheral systems and
significantly reduced the rate for central systems. These proposed reimbursement
rates for 1998 were not adopted by HCFA. Instead, the 1998 rates for both
peripheral and central systems, as finally adopted, were increased slightly over
their applicable rates for 1997. Such reimbursement rates are subject to further
changes. Several regional Medicare carriers did not allow any reimbursement for
peripheral bone densitometry tests. However, effective July 1, 1998, the HCFA's
national policy mandates Medicare coverage of bone density diagnostic tests for
qualified individuals. Revenues and the mix of products sold are expected to
continue to be influenced by the relative degree of difference in reimbursement
rate levels for peripheral and central systems. They will also be influenced by
the Company's ability to bring systems to the market that can be operated more
profitably by end users at the applicable reimbursement levels. There can be no
assurance that the Company will be able to bring such systems to the market.

              With the osteoporosis market remaining flat, especially in the
U.S., and management's expectation that conditions in the osteoporosis market
might not change in the short-term, the Company announced in November 1999 a
product diversification program into musculoskeletal development and pain
management. In 2000, the Company decided to expand its diversification program
into urology. The Company is launching the distribution of new lines of products
in several musculoskeletal market segments, including sports medicine, pain
management and physical therapy, and in urology for the treatment of kidney
stones. The Company is also exploring other opportunities to distribute new
products as part of its sales diversification program. There can be no assurance
that the Company will be able to successfully distribute such products.

              Norland's new musculoskeletal products include four models of the
Galileo, a patent-pending exercise system designed for use in sports medicine to
improve muscle strength and in physical therapy to improve mobility through the
rebuilding of muscles. The diversification program includes another product, the
Orbasone, a new device designed for use in pain management. The Orbasone was
classified in August 1998 by FDA as a Class I therapeutic vibrator (21CFR
ss.890.5975) exempt from the 510(k) requirements of the Federal Food, Drug and
Cosmetic Act. On June 21, 2000, the FDA informed MIP GmbH, the manufacturer of
the Orbasone, that it erred in its 1998 decision and rescinded its determination
that the Orbasone was an exempt product. As a result, the Company suspended
sales of the Orbasone pending FDA review of the product. The FDA recently
determined that the Orbasone is a Class III device requiring premarket approval,
but MIP is seeking reconsideration of this determination and discussions between
the FDA and MIP are continuing. Norland's new urological product, the Genestone
190, has obtained premarket approval from the FDA and therefore, may be sold in
the U.S. It is a compact lithotripter used by Urologists to treat kidney stones.
The distribution rights for these products were made available to Norland by
Bionix L.L.C., in an effort to bolster sales through product diversification.
Bionix is a limited liability company controlled by Norland's Chairman. Sales of
these new products were less than 1% of sales in fiscal year 2001 and 4.4% of
sales in fiscal year 2000, and there can be no assurance that the Company will
sell a material quantity of such products.
<PAGE>

        Cost of revenue as a percentage of revenue was 58.4% and 56.7% for
fiscal years 2001 and 2000, respectively, resulting in a gross margin of 41.6%
in fiscal year 2001 compared to 43.3% for fiscal year 2000. The fiscal year 2001
gross margin is 1.7% lower than fiscal year 2000. Selling prices of product
remained stable, however, the Company experienced cost increases as inventory
was purchased in smaller quantities at a higher price. The lower sales volume
meant overhead was spread over fewer units thereby reducing the gross margin.

         Sales and marketing expense decreased $1,538,837 (36.4%) to $2,692,384
for fiscal year 2001from $4,231,221 for fiscal year 2000, and also decreased as
a percentage of revenue to 29.3% from 31.6% .The categories that were lower
included advertising expenses, labor costs and travel related expenses incurred
by sales personnel and third party customer service representatives. The expense
reductions are attributed to improvements in the cost-effectiveness of the
sales, marketing and service functions and are not expected to adversely affect
future sales.

         General and administrative expense decreased $422.459 (15.6%) to
$2,279,430 for fiscal year 2001 from $2,701,889 for fiscal year 2000. The dollar
decrease was primarily due to decreased consulting fees and lower labor
expenses. The Company expects general and administrative expenses to remain at
or slightly below the 2001 level in the foreseeable future.

         Research and development expense decreased $228,699 (40.5%) to $336,072
for fiscal year 2001 from $564,771 for fiscal year 2000, and also decreased as a
percentage of revenue to 3.7% from 4.2%. The lower 2000 costs reflects the trend
started in 1999 and the completion of several projects around mid year. The
Company expects the research and development costs to continue at the 2001
levels for the foreseeable future. Personnel reduction implemented late in 2001
reduced costs and will carryover into 2002. Research and development has focused
its efforts on software projects that will favorably impact sales in the short
term. Product development work with other bone densitometry systems,
musculoskeletal development products and pain management systems are performed
by the companies that supply the Company with their respective products.

         The Company recognized a non-recurring charge of, $7,258,036 in 2000,
and none in 2001. Management evaluated its financial position in 2000 and
determined to charge to operations the remaining unamortized cost of goodwill
and related tax benefits.

         Interest expense of $148,457 and $216,619 for fiscal years 2001 and
2000, respectively, primarily represents interest on the Purchase Note issued by
the Company in connection with the acquisition of Norland Corp. The decrease is
attributable to repayment of a line of credit in August 2000.

         The income tax charge as a percentage of loss before income taxes was
0% and 49.2% for the years ended December 31, 2001 and 2000, respectively. The
fiscal 2000 charge was due to the management's decision to charge operations for
the unrealized deferred taxes carried on its books. Accordingly, net deferred
tax assets decreased $3,969,841 to $0 at December 31, 2000. No tax benefit was
recorded in 2001.

         The Company had a net loss of $1,636,672 ($0.5 per share) for fiscal
year 2001 compared to a net loss of $13,279,235 ($0.49 per share) for 2000.
<PAGE>

         The Company has significant relationships with related parties and the
amount of transactions with these related parties is expected to increase. The
Company believes that its related party transactions have been made at arms'
length terms, have been fair to the Company and that the terms of the
transactions could have been received from third parties.

The Company's Year Ended December 31, 2000 Compared to Its Year Ended December
31, 1999.

        Revenue for fiscal year 2000 decreased $4,395,212 (24.7%) to $13,402,823
from $17,798,035 for fiscal year 1999. The decline in sales is primarily due to
lower DXA-based central system sales in the United States and the Pacific Rim
region. Sales in the United States, Europe / Middle East and Pacific Rim
represented 60.6%, 22.0% and 12.5%, respectively, of total revenue for 2000 and
62.6%, 18.6% and 12%, respectively, of total revenue for 1999. A majority of the
Company's revenue for fiscal years 2000 and 1999 was derived from sales of the
Excell, Eclipse and XR36 central systems. Sales of complete bone densitometry
systems represented 78.1% and 86.8% of total revenue for fiscal years 2000 and
1999, respectively. Sales of new musculoskeletal products accounted for 4.4% of
sales in 2000 compared to none in 1999. Sales of parts and services and rental
income comprised the balance of revenue for such periods.

         Sales in the United States have been negatively affected by changes in
the Medicare reimbursement rates for bone densitometry tests. In November 1996,
the Health Care Financing Administration ("HCFA") announced changes for 1997
that significantly reduced the reimbursement rate for peripheral bone
densitometry tests. In June 1997 HCFA published proposed changes for 1998 that
would have increased the reimbursement rate for peripheral systems and
significantly reduced the rate for central systems. These proposed reimbursement
rates for 1998 were not adopted by HCFA. Instead, the 1998 rates for both
peripheral and central systems, as finally adopted, were increased slightly over
their applicable rates for 1997. Such reimbursement rates are subject to further
changes. Several regional Medicare carriers did not allow any reimbursement for
peripheral bone densitometry tests. However, effective July 1, 1998, the HCFA's
national policy mandates Medicare coverage of bone density diagnostic tests for
qualified individuals. Revenues and the mix of products sold are expected to
continue to be influenced by the relative degree of difference in reimbursement
rate levels for peripheral and central systems. They will also be influenced by
the Company's ability to bring systems to the market that can be operated more
profitably by end users at the applicable reimbursement levels. There can be no
assurance that the Company will be able to bring such systems to the market.

        With the osteoporosis market remaining flat, especially in the U.S., and
management's expectation that conditions in the osteoporosis market might not
change in the short-term, the Company announced in November 1999 a product
diversification program into musculoskeletal development and pain management. In
2000, the Company decided to expand its diversification program into urology.
The Company is launching the distribution of new lines of products in several
musculoskeletal market segments, including sports medicine, pain management and
physical therapy, and in urology for the treatment of kidney stones. The Company
is also exploring other opportunities to distribute new products as part of its
sales diversification program. There can be no assurance that the Company will
be able to successfully distribute such products.

         Norland's new musculoskeletal products include four models of the
Galileo, a patent-pending exercise system designed for use in sports medicine to
improve muscle strength and in physical therapy to improve mobility through the
rebuilding of muscles. The diversification program includes another product, the
Orbasone, a novel device designed for use in pain management. The Orbasone was
classified in August 1998 by FDA as a Class I therapeutic vibrator (21CFR
ss.890.5975) exempt from the 510(k) requirements of the Federal Food, Drug and
Cosmetic Act. On June 21, 2000, the FDA informed MIP GmbH, the manufacturer of
the Orbasone, that it erred in its 1998 decision and rescinded its determination
that the Orbasone was an exempt product. As a result, the Company suspended
sales of the Orbasone pending FDA review of the product. The FDA recently
determined that the Orbasone is a Class III device requiring premarket approval,
but MIP is seeking reconsideration of this determination and discussions between
the FDA and MIP are continuing. Norland's new urological product, the Genestone
190, has obtained premarket approval from the FDA and therefore may be sold in
the U.S. It is a compact lithotripter used by Urologists to treat kidney stones.
The distribution rights for these products were made available to Norland by
Bionix L.L.C., in an effort to bolster sales through product diversification.
Bionix is a limited liability company controlled by Norland's Chairman. Sales of
these new products were 4.4% of sales in 2000, and there can be no assurance
that the Company will sell a material quantity of such products.
<PAGE>

        Cost of revenue as a percentage of revenue was 56.7% and 53.7% for 2000
and 1999, respectively, resulting in a gross margin of 43.3% in 2000 compared to
46.3% for 1999. The 2000 gross margin is 3% lower than 1999 as there were very
few sales of previously reserved inventory items in fiscal year 2000 relative to
fiscal year 1999. The increase in gross margin for 1999 as compared to 1998 was
primarily the result of the benefits derived in fiscal year 1999 from sale of
inventory previously partially reserved for as obsolete (the reserve on such
items was $676,439). Such amounts equaled $379,000 in 1999 from sales of
relatively low carrying cost refurbished demonstration systems and by the
$117,000 of repossessed new bone densitometry systems that were previously
written off from the Company's inventory held by a former dealer and repossessed
in the third quarter of 1999.

        Sales and marketing expense decreased $1,251,596 (22.8%) to $4,231,221
for 2000 from $5,482,817 for 1999, but increased as a percentage of revenue to
31.6% from 30.8% .The categories that were lower included advertising expenses,
labor costs and travel related expenses incurred by sales personnel and third
party customer service representatives. The expense reductions are attributed to
improvements in the cost-effectiveness of the sales, marketing and service
functions and are not expected to adversely affect future sales.

        General and administrative expense decreased $675,631 (20.2%) to
2,701,889 for 2000 from $3,377,520 for 1999. The dollar decrease was primarily
due to decreased consulting fees, lower labor expenses and a legal reserve of
$150,000 was reserved as it was no longer needed. The Company expects general
and administrative expenses to remain at or slightly below the 2000 level in the
foreseeable future.

         Research and development expense decreased $760,345 (57.4%) to $564,771
for 2000 from $1,325,116 for 1999, and also decreased as a percentage of revenue
to 4.2% from 7.4%. The lower 2000 costs reflects the trend started in 1999 and
the completion of several projects around mid year. The Company expects the
research and development costs to continue at the 2000 levels for the
foreseeable future.

        The Company recognized a non-recurring charge of $7,258,036 in 2000 and
none in 2001. Management evaluated its financial position in 2000 and determined
to charge to operations the remaining unamortized cost of goodwill and related
tax benefits. In 1998, the Company settled certain patent infringement
litigation and, in connection with the settlement, agreed to pay a minimum of
$400,000 in patent licensing fees, the timing of such payments to be based on
future sales of certain products through August 2004. A $50,000 advance payment
was made in 1998, $168,377 was paid in 1999 and $181,623 in 2000.
<PAGE>

        Interest expense of $216,619 and $273,005 for 2000 and 1999,
respectively, represents interest on the Purchase Note issued by the Company in
connection with the acquisition of Norland Corp. The decrease in expense
reflects the fact that the principal balance on the Purchase Note was reduced
from $16,250,000 to $5,560,000 on December 31,1998 and was further reduced to
$1,250,000 on March 28, 1999. Interest income in 1999 consisted primarily of
interest earned on the Company's cash balances, reduced by other expenses
consisting primarily of bank charges and other fees related to bank transfers.
The decrease in interest income in 2000 as compared to 1999 reflects reduced
interest income resulting from the Company's reduced cash position. In 1998, the
Company also wrote off its $260,000 minority interest investment in Vitel, Inc.

         The income tax charge as a percentage of loss before income taxes was
49.2% and 0.0% for the years ended December 31, 2000 and 1999, respectively. The
charge was due to the management's decision to charge operations for the
unrealized deferred taxes carried on its books. Accordingly, net deferred tax
assets decreased $3,969,841 to $0 at December 31, 2000.

         The Company had a net loss of $13,279,235 ($0.49 per share) for 2000
compared to a net loss of $2,175,647 ($0.10 per share) for 1999.

         The Company has significant relationships with related parties and the
amount of transactions with these related parties is expected to increase. The
Company believes that its related party transactions have been made at arms'
length terms, have been fair to the Company and that the terms of the
transactions could have been received from third parties.

         Liquidity and Capital Resources

         At December 31, 2001, the Company had cash of $16,202 compared to
$53,289 at December 31, 2000. The decrease in cash was primarily the result of
the payment of operating expenses, payment of accrued expenditures, modest
capital expenditures partially offset by decreased accounts receivable,
reduction in inventory, and a slight increase in accounts payable. The Company
also raised money through the issuance of common stock.

         The Company's accounts receivable decreased $553,583 or 37.0% to
$942,871 at December 31, 2001. The reduction primarily reflects lower revenue
and strong continued collection efforts.

         Property and equipment as of December 31, 2001 consisted of computer
and telephone equipment, a management information system, demonstration systems,
office furniture, leasehold improvements, and tooling for the products
manufactured by the Company. At the present time, capital expenditures for
fiscal year 2002 are estimated to be minimal.

         In connection with the settlement of the litigation relating to the
Company's acquisition of Norland Corp., the Purchase Note issued as part of the
purchase price for Norland Corp. was amended on December 31, 1998 to, among
other things, reduce the principal amount by $8,800,000 and reduce the interest
rate from 7% to 6.5%. An additional $1,890,000 of principal was paid by
delivering 7,000,000 shares of the Company's common stock to NMS BV. On March
28, 1999, the Company paid $4,310,000 of the remaining $5,560,000 of principal
by delivering 11,122,580 shares of Company common stock. Interest payments on
the $1,250,000 principal of the Purchase Note are approximately $20,000 per
quarter. Interest on the original $16,250,000 of principal for the period from
July 1, 1998 through December 31, 1998 ($577,184) was outstanding on December
31, 1998. $455,208 was paid in 1999, and the Company and NMS BV agreed that the
remainder was paid in stock during 2000. The Company has been in default of the
interest due on the remaining balance of this note since September 30, 2000, and
accordingly the note has been classified as a current liability.
<PAGE>

         The Company has been seeking additional equity and debt financing. The
Company does not have a commitment for any bank financing or other financing at
this time, and there can be no guarantee that the Company will be able to obtain
such financing. The failure to do so could have a materially adverse effect on
the Company and its operations. In addition, the nature of the Company's
business is such that it is subject to changes in technology, government
approval and regulation, changes in third-party reimbursement in the United
States and numerous foreign markets and loss of product distribution rights.
Significant changes in one or more of these factors in a major market for the
Company's products could significantly affect the Company's cash needs.

         In order to increase its cash flow, the Company is continuing its
efforts to stimulate sales of bone densitometers and launch new products through
its diversification program. The Company is also continuing to focus its efforts
on improving the aging of its accounts receivable and reducing the level of bone
densitometer inventory. To do so, the Company has implemented higher credit
standards for its customers and is emphasizing the receipt of down payments from
customers at the time their purchase orders are received and is attempting to
more closely coordinate the timing of purchases of parts and sub-assemblies. The
Company is also continuing to be more aggressive in seeking to collect
outstanding receivables and selling its inventory of used bone densitometers.

Accounting Pronouncements

              The Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities" and SFAS No 138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities--an amendment of SFAS No.
133." These statements require companies to recognize all derivatives on the
balance sheet as assets or liabilities, measured at fair value. Gains or losses
resulting from changes in the values of those derivatives would be accounted for
depending on the use of the derivative and whether they qualify for hedge
accounting. These statements were effective for fiscal years beginning after
June 15, 2000. There was no effect from these statements on the Company's
financial statements.

         In June 2001, the FASB issued SFAS No. 141, "Business Combinations" and
SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 prohibits
pooling-of-interests method of accounting for business combinations initiated
after June 30, 2001, and applies to all business combinations completed after
June 30, 2001. There are also transition provisions that apply to purchase
combinations completed prior to June 30, 2001. SFAS 141 is effective
immediately. SFAS No. 142 is effective for the Company beginning January 1,
2002, and applies to goodwill and other intangible assets recognized in the
Company's consolidated balance sheet as of that date, regardless of when those
assets were initially recognized. The Company has evaluated SFAS No. 142 and
anticipates that SFAS No. 142 will not impact its consolidated financial
statements when adopted.
<PAGE>

         In August 2001, the FASB issued SFAS No. 143, "Accounting For Asset
Retirement Obligations". This statement addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. It applies to legal
obligations associated with the retirement of long-lived assets that result from
the acquisition, construction, development and (or) the normal operation of a
long-lived asset, except for certain obligations of lessees. This standard
requires entities to record the fair value of a liability for an asset
retirement obligation in the period incurred. When the liability is initially
recorded, the entity capitalizes a cost by increasing the carrying amount of the
related long-lived asset. Over time, the liability is accreted to its present
value each period, and the capitalized cost is depreciated over the useful life
of the related asset. Upon settlement of the liability, an entity either settles
the obligation for its recorded amount or incurs a gain or loss upon settlement.
The Company is required to adopt the provisions of SFAS No. 143 at the beginning
of fiscal 2002. The Company has not determined the impact, if any, the adoption
of this statement will have on its financial position or results of operations.

         In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". This statement addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
This statement supersedes FASB Statement No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of", and the
accounting and reporting provisions of APB Opinion No. 30, "Reporting the
Results of Operations - Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions". This Statement also amends ARB No. 51, "Consolidated Financial
Statements", to eliminate the exception to consolidation for a subsidiary for
which control is likely to be temporary. This Statement requires that one
accounting model be used for long-lived assets to be disposed of by sale,
whether previously held and used or newly acquired. This Statement also broadens
the presentation of discontinued operations to include more disposal
transactions. The provisions of this Statement are required to be adopted by the
Company at the beginning of fiscal 2002. The Company does not believe there will
be a significant impact on its financial position or results of operations.


<PAGE>


ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS.

The table below provides information about the Company's market sensitive
financial instruments and constitutes a "forward-looking statement". The
Company's major financial market risk exposure is changing interest rates,
primarily in the United States. The Company's policy has been to manage its
interest rate risks through use of a fixed rate debt. See Note 8 for a
description of the Note Payable. All items described are non-trading and are
stated in U.S. dollars.


                                       Expected Maturity Date      Fair Value
                                                2002           December 31, 2001
                                       ----------------------  -----------------

A.  Note Payable 6.5%                        $1,159,719                (1)

B.  Related Party Portion 6.5%                   80,267                (1)

C.  Related Party note payable 10%               50,000                (1)

(1)  Fair value cannot be reasonably estimated since the unique nature of
     interest rates, repayment terms, restrictions and all related conditions
     pertaining to these notes payable do not provide information that would
     yield a basis for a sound fair value. The company has defaulted with regard
     to interest payments on the note payable. Accordingly the note has been
     reclassified as currently payable. A portion of this note was purchased by
     the Chairman/CEO of the Company and reclassified as a related party note
     (B). In September 2001, a director of the company loaned the Company
     $50,000, payable in March 2002 at 10% interest (C).


<PAGE>

ITEM 8.  FINANCIAL STATEMENTS


                        CONSOLIDATED FINANCIAL STATEMENTS

                                      INDEX
                                     -------
                                                                            Page

Independent Auditors' Reports                                                 30

Financial Statements:

    Consolidated Balance Sheets as of December 31, 2001 and 2000              32

    Consolidated Statements of Operations for the years ended
       December 31, 2001, 2000 and 1999                                       33

    Consolidated Statements of Changes in Stockholders' Equity (Deficit)
       for the years ended December 31, 2001, 2000 and 1999                   34

    Consolidated Statements of Cash Flows for the years ended
       December 31, 2001, 2000 and 1999                                       35

    Notes to Consolidated Financial Statements                                37



<PAGE>



                          Independent Auditors' Report
                          ----------------------------

Stockholders and Board of Directors of
  Norland Medical Systems, Inc.:


We have audited the accompanying consolidated balance sheet of Norland Medical
Systems, Inc. and subsidiaries (the "Company") as of December 31, 2001 and the
related consolidated statements of operations, changes in stockholders' equity
(deficit), and cash flows for the year 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 audit.

We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. 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 audit provides a
reasonable basis for our opinion.

In our opinion, the 2001 financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Norland Medical
Systems, Inc. and subsidiaries as of December 31, 2001, and the consolidated
results of their operations and their cash flows for the year then ended in
conformity with accounting principles generally accepted in the United States of
America.

The accompanying financial statements for the year ended December 31, 2001 have
been prepared assuming that the Company will continue as a going concern. As
discussed in Note 1 to the financial statements, the Company's recurring losses
from operations raise substantial doubt about its ability to continue as a going
concern. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.


/s/  Imowitz Koenig & Co., LLP


New York, New York

February 8, 2002
(except for Note 15, which is dated February 27, 2002)
<PAGE>


                          INDEPENDENT AUDITORS' REPORT
                          ----------------------------

Stockholders and Board of Directors of
  Norland Medical Systems, Inc.:

We have audited the accompanying consolidated balance sheet of Norland Medical
Systems, Inc. and subsidiaries (the "Company") as of December 31, 2000, and the
related consolidated statements of operations, changes in stockholders' equity
(deficit), and cash flows for the years ended December 31, 2000 and 1999. Our
audits also included the 2000 and 1999 information included in the financial
statement schedule. These financial statements and the financial statement
schedules are the responsibility of the Company's management. Our responsibility
is to express an opinion on the financial statements and the financial statement
schedule based on our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. 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 Norland Medical Systems, Inc.
and subsidiaries as of December 31, 2000, and the results of their operations
and their cash flows for the years ended December 31, 2000 and 1999 in
conformity with accounting principles generally accepted in the United States of
America. Also, in our opinion, the 2000 and 1999 information included in such
financial statement schedule, when considered in relation to the consolidated
financial statements taken as a whole, presents fairly, in all material
respects, the information set forth therein.

The accompanying consolidated financial statements for the year ended December
31, 2000 have been prepared assuming that the Company will continue as a going
concern. As discussed in Note 1 to the financial statements, the Company's
recurring losses from operations raise substantial doubt about its ability to
continue as a going concern. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.


/s/ DELOITTE & TOUCHE LLP

Stamford, Connecticut
March 30, 2001
<PAGE>

<TABLE>
<CAPTION>


                          NORLAND MEDICAL SYSTEMS, INC.
                           CONSOLIDATED BALANCE SHEETS

                        as of December 31, 2001 and 2000

                                     ASSETS


                                                                              2001           2000
                                                                             -----           ----
 Current assets:
<S>                                                                        <C>           <C>
      Cash                                                                 $ 16,202      $  53,289
      Accounts receivable - trade, less allowance for doubtful
         accounts of $282,500 and $301,000 at December 31, 2001
         and 2000, respectively                                             942,871      1,496,454
      Inventories, net                                                      900,632      1,223,591
      Prepaid expenses and other current assets                              78,472         76,117
                                                                      -------------    -----------
          Total current assets                                            1,938,177      2,849,451
                                                                      -------------    -----------
 Property and equipment, net                                                408,973        786,777
 Other                                                                        7,808          8,508
                                                                      -------------    -----------
          Total assets                                                   $2,354,958    $ 3,644,736
                                                                      =============    ===========

                      LIABILITIES AND STOCKHOLDERS' DEFICIT

 Current liabilities:

      Notes payable related parties                                        $130,267    $        --
      Note payable - net of discount                                      1,122,529      1,159,686
      Accounts payable - related parties                                    487,981        178,338
      Accounts payable - trade                                            1,659,742      1,655,941
      Accrued expenses                                                      849,903      1,098,623
      Accrued warranty expense                                              255,000        335,000
      Unearned service revenue                                              472,505        466,965
      Accrued interest expense                                              121,106         37,586
                                                                      -------------    -----------
          Total current liabilities                                       5,099,033      4,932,139
                                                                      -------------    -----------

 Stockholders' deficit:
     Common Stock -30,433,509 and 29,233,509 shares issued
     and outstanding and  45,000,000 shares authorized
     at both December 31, 2001 and 2000.                                     15,215         14,615
 Additional paid-in capital                                              38,683,805     38,504,405
 Accumulated deficit                                                    (41,443,095)   (39,806,423)
                                                                       ------------   ------------
      Total stockholders' deficit                                        (2,744,075)    (1,287,403)
                                                                       ------------   ------------
      Total liabilities and stockholders' deficit                      $  2,354,958   $  3,644,736
                                                                       ============   ============

              See notes to the consolidated financial statements.

</TABLE>

<PAGE>


<TABLE>
<CAPTION>



                          NORLAND MEDICAL SYSTEMS, INC.
                      CONSOLIDATED STATEMENTS OF OPERATIONS

                  Years ended December 31, 2001, 2000, and 1999


                                                               2001                2000                1999
                                                               -----               -----               ----
Revenue (including sales to affiliates of
  $0, $9,449 and $92,883, in 2001, 2000 and 1999,
<S>                                                             <C>                <C>                 <C>
  respectively)                                                 $9,190,880         $13,402,823         $17,798,035
Cost of revenue                                                  5,371,209           7,596,306           9,549,677
                                                             -------------       -------------         -----------
  Gross profit                                                   3,819,671           5,806,517           8,248,358

Sales and marketing expense                                      2,692,384           4,231,221           5,482,817
 General and a General and administrative expense                2,279,430           2,701,889           3,377,520
Research and development expense                                   336,072             564,771           1,325,116
Non-recurring charges                                                   --           7,258,036                  --
                                                             -------------       -------------         -----------
Operating loss                                                 (1,488,215)         (8,949,400)         (1,937,095)

Other income (expense):
  Interest expense                                               (148,457)           (216,619)           (273,005)
  Interest income                                                      --               5,704              34,453
                                                             -------------       -------------         -----------
Loss before income taxes                                       (1,636,672)         (9,160,315)         (2,175,647)
Income tax expense                                                      --           4,118,920                 --
                                                             -------------       -------------         -----------
Net loss                                                      $(1,636,672)      $ (13,279,235)        $(2,175,647)
                                                             =============       =============         ===========

Basic and diluted weighted average shares:                      30,383,098          27,029,566          21,616,010

Basic and diluted loss per share:                                  $(0.05)             $(0.49)             $(0.10)

              See notes to the consolidated financial statements.
</TABLE>
<PAGE>


<TABLE>
<CAPTION>

                          NORLAND MEDICAL SYSTEMS, INC.
       CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS'EQUITY (DEFICIT)

                  Years ended December 31, 2001, 2000 and 1999


                                                                                          Additional
                                                                               Common     Paid-In       Accumulated
                                                      Total        Shares      Stock      Capital         Deficit
                                                      ------       -------     ------     --------        -------


<S>                                               <C>            <C>           <C>     <C>              <C>
Balance as of January 1, 1999                     $ 8,791,883    14,164,031    $7,081  $ 33,136,343     $(24,351,541)

Issuance of shares for stock options exercised              2         3,000         2            --               --

Issuance of common stock                              500,000       666,667       333       499,667               --
Issuance of shares in partial payments of note
   Payable                                          3,911,830    11,122,580     5,561     3,906,269               --
Net loss                                           (2,175,647)           --        --            --       (2,175,647)
                                                  -----------    ----------    ------  ------------     ------------

Balance as of December 31, 1999                    11,028,068    25,956,278    12,977    37,542,279      (26,527,188)

Issuance of shares for inventory                      500,500       888,888       444       500,056               --
Issuance of common stock                              300,000     1,166,666       583       299,417               --
Issuance of stock in payment of note                  163,264     1,221,677       611       162,653               --
Net loss                                          (13,279,235)           --        --            --      (13,279,235)
                                                  -----------    ----------    ------  ------------     ------------

Balance as of December 31, 2000                   (1,287,403)    29,233,509    14,615    38,504,405     (39,806,423)

Issuance of common stock                              180,000     1,200,000       600       179,400
Net loss                                          (1,636,672)            --        --            --      (1,636,672)
                                                  -----------    ----------    ------  ------------     ------------

Balance as of December 31, 2001                  $(2,744,075)    30,433,509   $15,215   $38,683,805    $(41,443,095)
                                                 ============    ==========   =======   ===========    =============


              See notes to the consolidated financial statements.

</TABLE>
<PAGE>


<TABLE>
<CAPTION>

                          NORLAND MEDICAL SYSTEMS, INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS

                  Years ended December 31, 2001, 2000 and 1999

                                                                         2001            2000           1999
                                                                        -----           -----         --------
Cash flows from operating activities:
<S>                                                                 <C>            <C>              <C>
  Net loss                                                          ($1,636,672)   ($13,279,235)    $(2,175,647)
                                                                   -------------  --------------    ------------
  Adjustments to reconcile net loss to net cash used in
  operating activities:
      Non-recurring charges                                                  --       7,258,036              --
      Provision for doubtful accounts                                   (18,500)        (50,000)         45,249
      Deferred income taxes                                                  --       3,969,841        (340,000)
      Amortization expense                                               53,124         648,180         705,455
      Depreciation expense                                              236,252         302,639         574,072
      Inventory recovery                                                     --              --        (676,439)
      Other                                                                  --              --          92,746
      Changes in assets and liabilities:
         Accounts receivable                                            572,083       1,071,129        (685,561)
         Inventories                                                    322,959       1,223,698         953,467
         Prepaid expenses and other current assets                       (1,655)        116,745         (28,713)
         Accounts payable                                               313,444        (756,604)        862,952
         Accrued expenses                                              (239,660)       (643,521)     (1,157,444)
         Income taxes receivable                                             --              --         340,000
                                                                   -------------  --------------    ------------
           Total adjustments                                          1,238,047      13,140,143         685,784
                                                                   -------------  --------------    ------------
                      Net cash used in operating activities            (398,625)       (139,092)     (1,489,863)
                                                                   -------------  --------------    ------------

Cash flows from investing activities:
  Purchases of property and equipment                                    (6,934)        (44,401)       (355,733)
  Sale of demonstration equipment                                       148,486         130,932              --
  Loans to officers                                                          --              --          (3,696)
                                                                   -------------  --------------    ------------
    Net cash provided by (used in) investing activities                 141,552          86,531        (359,429)
                                                                   -------------  --------------    ------------

Cash flows from financing activities:
  Proceeds from issuance of common stock                                180,000         300,000         500,000
  Net bank borrowings (repayments)                                           --        (311,816)        311,816
  Proceeds from stock options exercised                                      --              --               2
  Payments on notes                                                     (10,014)             --              --
  Proceeds from borrowings                                               50,000          50,000              --
                                                                   -------------  --------------    ------------
    Net cash provided by financing activities                           219,986          38,184         811,818
                                                                   -------------  --------------    ------------

Net decrease in cash and cash equivalents                               (37,087)        (14,377)     (1,037,474)

Cash at beginning of year                                                53,289          67,666       1,105,140
                                                                   -------------  --------------    ------------

Cash at end of year                                                   $  16,202       $  53,289        $ 67,666
                                                                   =============  ==============    ===========

              See notes to the consolidated financial statements.

</TABLE>
<PAGE>


                         NORLAND MEDICAL SYSTEMS, INC.
                     CONSOLIDATED STATEMENTS OF CASH FLOWS

                  Years ended December 31, 2001, 2000 and 1999

Noncash investing and financing activities:

On December 31, 1998, March 28, 1999 and June 16, 1999 the Company issued 7000,
4,588,469 and 6,534,111 of shares of common stock, respectively, in satisfaction
of portions of the Note Payable. In addition, the principal amount of the Note
Payable was reduced on December 31, 1998 by $8,800,000 in connection with the
reduction of the purchase price for Norland Corporation.

In the year ended December 31, 1999, the Company reclassified $340,000 of income
taxes receivable to deferred income taxes.

On February 17, 2000, the Company exchanged 888,888 shares of its common stock
(market value $500,000) for a marketing credit of $500,000. The credit was
utilized by the Company to purchase inventory through an affiliate, Bionix LLC.

On December 2, 2000, the Company elected to pay $163,264 of outstanding debt by
the issuance of 1,221,677 shares of its common stock.

On July 1, 2001, a portion of the Note Payable (described in Note 8) was
purchased by the Chairman of the Company. The Company has made payments totaling
$10,014 on the note and the balance at December 31, 2001 is $80,267 Cash paid
for:
                                2001         2000           1999
                                ----        ------         ------
Income taxes                 $120,000      $  9,079      $    376
Interest expense             $ 11,826      $216,619      $596,069

              See notes to the consolidated financial statements.
<PAGE>


                          NORLAND MEDICAL SYSTEMS, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                  Years ended December 31, 2001, 2000 and 1999

1.     The Company:

Norland Medical Systems, Inc. ("NMS" or the "Company") develops, manufactures,
markets, sells, distributes and services bone densitometry systems which aid in
the detection and monitoring of bone diseases, and in the assessment of the
effect of existing and potential therapies for the treatment of such diseases
throughout the world to individual practitioners, hospitals, clinics, research
institutions and pharmaceutical companies. NMS also markets and services devices
used in sports medicine, rehabilitative medicine, in pain management and
urology. NMS has been the distributor of certain medical products and
technologies of Bionix L.L.C. (U.S.) ("Bionix") and McCue Plc (U.K.) ("McCue").
Bionix is controlled by the Chairman of NMS and has certain exclusive
distribution rights to certain products that it makes available to NMS through
exclusive sub-distribution agreements.

During the past three years, the Company has experienced aggregate losses of
approximately $17,091,554 and has incurred a total negative cash flow of
approximately $1,088,938 for the same three-year period. The Company does not
currently have an operating line of credit. These matters raise doubt about the
Company's ability to continue as a going concern. The Company's continued
existence is dependent upon several factors including the ability to return to
profitability on the sale of some of the Company's significant product lines.

The Company has been pursuing an aggressive strategy of cost reduction and
containment to make a profit on reduced sales. Operating expenses in fiscal 2001
were reduced by approximately $4,900,000 or 48% from the amount incurred in
fiscal year 1999. The Company is pursuing initiatives to increase liquidity,
including external investments and obtaining a line of credit. The Company does
not have a commitment for such financing, and there can be no guarantee that the
Company will be able to attain such financing.

In order to increase its cash flow, the Company is continuing its efforts to
stimulate sales of bone densitometers and new product offerings through its
diversification program. The Company is also continuing to focus its efforts on
improving the aging of its accounts receivable and reducing the level of bone
densitometer inventory. To do so, the Company has implemented higher credit
standards for its customers and is emphasizing the receipt of down payments from
customers at the time their purchase orders are received and attempting to more
closely coordinate the timing of purchases of parts and sub-assemblies.

2.     Summary of Significant Accounting Policies:

Principles of Consolidation
---------------------------

The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries. Intercompany transactions and balances are
eliminated in consolidation.
<PAGE>

Fair Value of Financial Statements
----------------------------------

Statement of Financial Accounting Standards (SFAS) No. 107, as amended by SFAS
No. 119, "Disclosures about Fair Value of Financial Instruments", requires that
the Company disclose estimated fair values for its financial instruments. Fair
value estimates are made at a specific point in time, based on relevant market
information and information about the financial instrument. Because no market
exists for a significant portion of the Company's financial instruments, fair
values are based on judgments regarding future expected loss experience, current
economic conditions, risk characteristics of various financial instruments and
other factors. These estimates are subjective in nature and involve
uncertainties and matters of significant judgement and therefore cannot be
determined with precision.

Management of the Company estimates that all financial instruments of NMS,
except notes payable have a fair value equal to the carrying value. Regarding
the fair value of the notes payable, it has been determined that fair value
cannot be reasonably estimated since the unique nature of interest rates,
repayment terms, restrictions and all related conditions pertaining to these
instruments do not provide information that would yield a basis for a sound fair
value in accordance with guidelines in SFAS 107 and 119.

Revenue and Cost Recognition
----------------------------

The Company primarily sells its products through third party dealers and
distributors. Revenue is generally recognized at the time products are shipped
and title passes to the customer. The Company estimates and records provisions
for product installation and user training in the period that the sale is
recorded.

The Company purchases certain products from Stratec through a company owned by
CEO of the Company. Management believes the gross profit recognized by NMS on
products purchased from the manufacturers materially approximates that which
would have been realized had the Company used unaffiliated suppliers.

The Company offers one-year warranties on both hardware and software components
of its bone densitometry systems. The provision for product warranties
represents an estimate for future claims arising under the terms of the
Company's various product warranties. The estimated future claims are accrued at
the time of sale. To the extent that the Company provides warranty services for
products that it does not manufacture the Company invoices the manufacturer for
the costs of performing such warranty services.

The Company has no obligations to provide any other services to any of its third
party dealers or distributors or their customers.

Stock-based Compensation
------------------------

Stock-based compensation related to employees and directors is accounted for in
accordance with Accounting Principles Board Opinion Number 25 "Accounting for
Stock Issued to Employees".

Inventory
---------

Inventories are stated at the lower of cost or market; cost is determined
principally by the first-in, first-out method. Systems used in the Company's
short-term rental program are carried in inventory at the lower of cost or net
realizable value until the time of sale.
<PAGE>

Property and Equipment
----------------------

Machinery, equipment, management information systems, furniture and fixtures are
recorded at cost and are depreciated using the straight-line method over three
to seven years. Leasehold improvements are amortized over the lesser of the
remaining life of the lease or ten years.

The Company's demonstration systems used for marketing and customer service
purposes are carried at the lower of cost or net realizable value until the time
of sale. From time to time, the Company may judge it desirable for marketing
purposes to provide a device to a prominent scientist or research institution.
In such cases, the Company will carry the device at cost less amortization, with
amortization calculated on a straight-line basis over thirty-six months.

Long-lived Assets
-----------------

Management evaluates on an ongoing basis whether events or changes in
circumstances exist that would indicate that the carrying value of the Company's
long-lived assets may not be recoverable. Should there be an indication of
impairment in the value of its long-lived assets, management would estimate the
future cash flows expected to result from the use of the assets and their
eventual disposition and recognize a specific provision against such assets if
the aggregate nominal estimated future undiscounted cash flows are less than the
carrying value of the assets. In considering whether events or changes in
circumstances exist, management assesses several factors, including a
significant change in the extent or manner in which the assets are used, a
significant adverse change in legal factors or in the business climate that
could affect the value of the assets, an adverse action or assessment of a
regulator, and a current period operating or cash flow loss combined with a
history of operating or cash flow losses or a projection or forecast that
demonstrates continuing losses associated with such assets.

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

The Company accounts for deferred income taxes by recognizing the tax
consequences of "temporary differences" by applying enacted statutory tax rates
applicable to future years to differences between the financial statement
carrying amounts and the tax basis of existing assets and liabilities. The
effect of a change in tax rates on deferred taxes is recognized in income in the
period that includes the enactment date. The Company realizes an income tax
benefit from the exercise of certain stock options or the early disposition of
stock acquired upon exercise of certain options. This benefit results in an
increase in additional paid in capital.

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

Research and development costs are charged to operations as incurred.

Loss per Share
--------------

Basic per share amounts are computed using the weighted average number of common
shares outstanding. Diluted per share amounts are computed using the weighted
average number of common shares outstanding, after giving effect to dilutive
options, using the treasury stock method.
<PAGE>

Options to purchase 2,319,500, 1,804,500 and 952,000 shares of common stock were
outstanding at December 31, 2001, 2000 and 1999, respectively, but were not
included in the computation of diluted loss per share because their effect was
anti-dilutive.

Concentration of Credit Risk
----------------------------

The Company generally sells on credit terms ranging from thirty to ninety days
or against irrevocable letters of credit. Any financing of the end user is the
decision of, and dependent on, the distributor in each territory. At December
31, 2001, 2000 and 1999, and for the years then ended, no customer had
outstanding trade receivables in excess of 10% of total outstanding trade
receivables nor accounted for more than 10% of revenues. The Company sells to
customers in various geographic territories worldwide (see Note 14).

Management Estimates
--------------------

The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America, 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
financial statements and the reported amounts of revenue and expenses during the
reporting period. Estimates are used when accounting for the allowance for
doubtful accounts, potentially excess and obsolete inventory, depreciation and
amortization, warranty reserves, income tax valuation allowances and
contingencies, among others. Actual results could differ significantly from
those estimates.

Foreign Exchange Exposure
-------------------------

The Company's purchases and sales of products and services are made primarily in
U.S. dollars. As a result, the Company has minimal exposure to foreign exchange
risk in the short-term. However, a portion of the Company's products are
supplied by Stratec and sold along with the Company's products into foreign
markets. Any significant and lasting change in the exchange rates between the
U.S. dollar and the currencies of those countries could have a material effect
on both the costs and sales of those products and services.

Accounting Pronouncements
-------------------------

The Financial Accounting Standards Board ("FASB") issued Statements of Financial
Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments
and Hedging Activities" and SFAS No 138, "Accounting for Certain Derivative
Instruments and Certain Hedging Activities--an amendment of SFAS No. 133." These
statements require companies to recognize all derivatives on the balance sheet
as assets or liabilities, measured at fair value. Gains or losses resulting from
changes in the values of those derivatives would be accounted for depending on
the use of the derivative and whether they qualify for hedge accounting. These
statements were effective for fiscal years beginning after June 15, 2000. There
was no effect from these statements on the Company's financial statements.

In June 2001, the FASB issued SFAS No. 141, "Business Combinations" and SFAS No.
142, "Goodwill and Other Intangible Assets." SFAS No. 141 prohibits
pooling-of-interests method of accounting for business combinations initiated
after June 30, 2001, and applies to all business combinations completed after
June 30, 2001. There are also transition provisions that apply to purchase
combinations completed prior to June 30, 2001. SFAS 141 is effective
immediately. SFAS No. 142 is effective for the Company beginning January 1,
2002, and applies to goodwill and other intangible assets recognized in the
Company's consolidated balance sheet as of that date, regardless of when those
assets were initially recognized. The Company has evaluated SFAS No. 142 and
anticipates that SFAS No. 142 will not impact its consolidated financial
statements when adopted.
<PAGE>

In August 2001, the FASB issued SFAS No. 143, "Accounting For Asset Retirement
Obligations". This statement addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. It applies to legal obligations associated
with the retirement of long-lived assets that result from the acquisition,
construction, development and (or) the normal operation of a long-lived asset,
except for certain obligations of lessees. This standard requires entities to
record the fair value of a liability for an asset retirement obligation in the
period incurred. When the liability is initially recorded, the entity
capitalizes a cost by increasing the carrying amount of the related long-lived
asset. Over time, the liability is accreted to its present value each period,
and the capitalized cost is depreciated over the useful life of the related
asset. Upon settlement of the liability, an entity either settles the obligation
for its recorded amount or incurs a gain or loss upon settlement. The Company is
required to adopt the provisions of SFAS No. 143 at the beginning of fiscal
2002. The Company does not believe there will be a significant impact on its
financial position or results of operations.

In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets". This statement addresses financial accounting
and reporting for the impairment or disposal of long-lived assets. This
statement supersedes FASB Statement No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of", and the
accounting and reporting provisions of APB Opinion No. 30, "Reporting the
Results of Operations - Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions". This Statement also amends ARB No. 51, "Consolidated Financial
Statements", to eliminate the exception to consolidation for a subsidiary for
which control is likely to be temporary. This Statement requires that one
accounting model be used for long-lived assets to be disposed of by sale,
whether previously held and used or newly acquired. This Statement also broadens
the presentation of discontinued operations to include more disposal
transactions. The provisions of this Statement are required to be adopted by the
Company at the beginning of fiscal 2002. The Company does not believe there will
be a significant impact on its financial position or results of operations.

3.     Distribution Agreements:

The Company and McCue entered into a distribution agreement dated June 17, 1999
granting the Company the right to exclusively distribute the C.U.B.A.Clinical
ultrasound system in North America and certain countries in Europe, the Pacific
Rim and the Middle East. Under terms of the five-year agreement, there are
non-binding sales targets. In addition, in the event that the Company does not
purchase a specified minimum number of C.U.B.A.Clinical devices in any
twelve-month period starting in January 2001, McCue has the right to make the
Company's distribution rights in North America non-exclusive. McCue exercised
such right on January 7, 2002.

The Company and Bionix, a company of which Reynald G. Bonmati, the President and
Chairman of the Board of the Company is President, are parties to three
exclusive four-year sub-distribution agreements pursuant to which the Company
has the right to purchase and sell certain systems and products from Bionix at a
fixed percentage discount from contractually-stated selling prices. Under two
separate sub-distribution agreements, dated October 1, 1999, the Company has the
right to purchase and sell the Orbasone and Galileo systems and products. Under
the third sub-distribution agreement, dated February 17, 2000, the Company has
the right to purchase and sell the Genestone 190 systems and products. The
Orbasone systems and products have not yet been approved by the U.S. Food and
Drug Administration for sale in the U.S.
<PAGE>

4.     Non-Recurring and Other Charges:

The Company did not recognize any non-recurring charges in fiscal year 2001. The
Company recognized non-recurring charges of $7,258,036 in fiscal year 2000. The
Company has incurred operating losses for fifteen consecutive quarters. Although
the losses have declined substantially as a result of cost containment measures
taken by the Company, gross revenue has continued to decline. Sales of new
products associated with the Company's diversification program have not met
Company expectations and have not offset the decline in the Company's bone
densitometry equipment lines. Further, sales of the Company's Orbasone product
(less than 1% of gross sales) have been impacted by the FDA review of the
product.

As a result of the above, in the second quarter of fiscal year 2000, the
Company's management evaluated its financial position and determined that it
would be appropriate to charge to operations the remaining unamortized costs of
goodwill due to impairment. In addition, the Company determined that it was more
likely than not that the remaining deferred tax assets would not be realized and
accordingly increased the valuation allowance to fully provide for the deferred
tax assets. (See Note 11). Such second quarter charges aggregated $11,367,877;
$7,258,036 for goodwill and $4,109,841 for deferred taxes. The impairment was
based on the excess carrying value of the assets over the assets fair value. The
fair value of the assets was generally determined as the estimates of future
discounted cash flows from operations necessary to realize those assets.

In November 1998, the Company settled certain patent infringement litigation
and, in connection with the settlement, agreed to pay a minimum of $400,000 in
patent licensing fees, the timing of such payments to be based on future sales
of certain products through August 2004. The company paid $117,014, $181,623 and
$168,377 in fiscal years 2001, 2000 and 1999, respectively, associated with this
settlement.

5.     Inventories:

Inventories consist of the following as of December 31:



                                                     2001                 2000
                                                    -----                 ----

         Raw materials, product kits,
          Spare parts and sub-assemblies           $ 768,436           $966,652
         Work in progress                            192,638            334,090
         Finished goods                              671,028            734,619
         Inventory reserve                          (731,470)          (811,770)
                                                   ---------         ----------
                                                   $ 900,632         $1,223,591
                                                   =========         ==========
<PAGE>

6.   Property and Equipment:

Property and equipment consisted of the following as of December 31:

                                                      2001              2000
                                                     -----             -----
         Machinery and equipment                  $1,620,720        $1,628,710
         Demonstration systems                       130,094           278,581
         Tooling                                     712,345           712,345
         Furniture and fixtures                      436,592           436,592
         Leasehold improvements                      116,896           116,896
                                                  ----------        ----------
                                                   3,016,647         3,173,124

         Accumulated depreciation
              And amortization                    (2,607,674)       (2,386,347)
                                                  ----------        ----------
                                                   $ 408,973        $  786,777
                                                  ==========        ==========

7.   Acquisitions:

On September 11, 1997, the Company acquired Norland Corp. in a transaction
accounted for under the purchase method of accounting. The consolidated
financial statements reflect the acquisition of all of the issued and
outstanding stock of Norland Corp. for $17,500,000 from the date of acquisition.
The $17,500,000 consideration consisted of a $1,250,000 cash payment made on
September 11, 1997 and a $16,250,000 Purchase Note (the "Note") (see Note 8).

On December 31, 1998, in connection with the settlement of certain litigation
(see Note 12), the terms of the Norland Corp. acquisition were amended.
Effective as of December 31, 1998, the original $17,500,000 purchase price was
reduced to $8,700,000 by reducing the principal amount of the Note from
$16,250,000 to $7,450,000 and the annual interest rate was reduced to 6 1/2%
from 7%.

8.  Bank Borrowings and Note Payable:

On August 10, 1999, the Company entered into a $2 million bank line of credit
agreement in which the Company could make borrowings according to an accounts
receivable based formula. Interest on any outstanding borrowings accrued at a
variable rate based on prime plus 1.25%. Borrowings under the agreement were
collateralized by the Company's assets. In connection with such agreement, the
Company had granted to the bank warrants to purchase 20,000 shares of Company
common stock at $0.01 per share. As of December 31, 1999, the Company had
outstanding borrowings of $311,816 with interest accruing at 9.75%. The line of
credit expired on August 11, 2000, the loan was repaid in full and there was no
outstanding liability as of December 31, 2000.

In connection with the acquisition of Norland Corp. (See Note 7), consideration
included a $16,250,000 Note bearing interest at the rate of 7% per annum
beginning September 30, 1997. A $1,250,000 portion of the Note was originally
payable in cash on March 11, 1998. The Note was amended to provide that such
payment was due until such time as the Company received at least $2,000,000 in
proceeds from a debt or equity financing. The remaining principal is due and
payable on September 11, 2002. The Company could prepay the Note at any time,
pay the principal (except for the $1,250,000 payment referred to above) with
shares of Company common stock valued at the time of payment and extend the
September 11, 2002 maturity date by up to two years (at increasing interest
rates). The Note was collateralized by a pledge of the shares of Norland Corp.
<PAGE>

Effective as of December 31, 1998, in connection with the amendment of the terms
of the Norland Corp. acquisition, the Note principal was reduced from
$16,250,000 to $7,450,000 and the annual interest rate was reduced from 7% to 6
1/2%. The other payment terms, including those with respect to maturity,
prepayment and the ability to pay principal by delivering shares of common
stock, were not changed. Also on December 31, 1998, the Company paid $1,890,000
in Note principal by delivering 7,000,000 shares of the Company's common stock
to NMS BV priced at $0.27 per share, the average closing price for the five
trading days prior to December 31, 1998. The fair value of the Note was
determined as of the December 31, 1998 amendment date using a market rate of
interest of 10.75%, which resulted in the establishment of an $874,310 note
discount.

On March 28, 1999, the Company exercised its right to pay $4,310,000 of the
remaining $5,560,000 of Note principal by delivering 11,122,580 additional
shares of Common Stock priced at $0.3875 per share, the average closing price
for the prior five trading days. With the $4,310,000 reduction in Note
principal, the Note discount was reduced by $635,170 and the remaining $239,140
of Note discount being amortized using the effective interest method over the
Note's remaining term. The fair value of the Note approximates its carrying
value. The Company is in default of the interest due on this note since
September 30, 2000, and accordingly the note has been classified as a current
liability.

During 2001, $90,281 of the Note held by Bones L.L.C., a private investment firm
controlled by the Chairman of NMS was transferred to the Chairman (Note 13).
Interest on the note remained at 6.5%. Included in notes payable related parties
at December 31, 2001 is $80,267 due to the Chairman on the Note (the Company
paid $10,014 on the note). The remainder of the Note was held by a third party
distributor of NMS products in Japan.


The Note activity described above may be summarized as follows as of December
31, 2001:


  Note principal as of September 11, 1998 acquisition date          $16,250,000
  Reduction in Note principal from reduced purchase price            (8,800,000)
  Payment of Note principal by delivering 18,122,580 shares          (6,200,000)
  Note discount for market rate of interest                             (37,190)
  Part of note Transferred to related Party                             (80,267)
  Payments on Note                                                      (10,014)
                                                                    -----------
  Note payable, net of discount                                     $ 1,122,529
                                                                    ===========

During January 2002, the Company entered into an option agreement to purchase
the Note, under certain conditions, from the third party distributor at a
discounted amount of $463,888 including accrued and unpaid interest. The option
agreement expires on April 30, 2002.

9.  Stockholders' Equity (Deficit):

Effective with stockholder approval received on June 2, 1999, the Company
amended its Certificate of Incorporation increasing the number of authorized
shares of Common Stock from 20,000,000 to 45,000,000. The Company has authorized
1,000,000 shares of preferred stock, par value $0.0005 per share, issuable in
series with such rights, powers and preferences as may be fixed by the Board of
Directors. At December 31, 2001 and 2000, there was no preferred stock
outstanding.
<PAGE>

10.  Compensation Programs:

Stock Option Plan
-----------------

The Company has a stock-based compensation plan whereby stock options may be
granted to officers, employees and non-employee consultants to purchase a
specified number of shares of Common Stock. All outstanding options granted have
an exercise price not less than 100% of the market value of the Company's Common
Stock at the date of grant, are for a term not to exceed 10 years, and vest over
a four year period at 25% per year.

Under the 2000 Non-Employee Directors' Stock Option Plan, each non-employee
director receives options to acquire shares of Common Stock, vesting in four
equal annual installments, commencing on the first anniversary of the date of
grant, at an exercise price per share not lower than the market value on the
date of grant. A grant to acquire 50,000 shares is effective on the date of the
director's first election to the Board of Directors and a grant to acquire 5,000
shares is effective on the date of the director's reelection to the Board of
Directors. For each of Mr. Allen, Mr. Baker, Dr. Neusy, Mr. Huber and Dr.
Waxman, 50,000 options were granted on June 2, 1999 at an exercise price of
$0.67 per share, and 5,000 options were granted on June 1, 2000 at an exercise
price of $0.531 per share. Each member of the Board of Directors received 5,000
options on June 13, 2001 at an exercise price of $0.085. Directors who are
employees of the Company do not receive additional compensation for serving as
directors. No member of the Board of Directors was paid compensation during
fiscal year 2001 for his service as a director of the Company other than
pursuant to the standard compensation arrangement described above.

On October 6, 1998 and December 14, 1998, the Board of Directors approved the
repricing of certain employee stock options. Approximately 673,750 shares were
repriced to $0.67 per share on October 6, 1998 and December 14, 1998,
representing a price that was not less than the market value at such dates. On
December 14, 2000 the Board of Directors approved the repricing of certain
options and accordingly, 1,524,500 shares were repriced to $.15 per share.
Subsequent to the option repricing on December 14, 2000, the company measured
compensation expense using variable plan accounting. Compensation cost continues
to be adjusted for increases or decreases in the intrinsic value over the term
of the options or until they are exercised or forfeited, or expire. The effect
of this change was not material in fiscal year 2001 or 2000.

<PAGE>

  The following is a summary of options related to the 1994 Stock Option Plan
  and the Board Plan as of December 31:

<TABLE>
<CAPTION>


                                          Range of                          Range of                        Range of
                                        Option Prices                     Option Prices                   Option Prices
                            2001          Per Share          2000           per Share         1999          per Share
                         ------------  ----------------  --------------  ----------------  -----------   ----------------

Options outstanding
<S>                        <C>              <C>                <C>         <C>                <C>          <C>
at beginning of year       1,804,500        $0.15-0.67         952,000     $0.0005-15.00      867,500      $0.0005-15.00

Cancellations                (31,250)       $0.15-0.67        (283,500)            $0.15      (70,500)        $0.53-6.38

Granted                      546,250        $0.06-0.15       1,137,500        $0.15-0.67      158,000         $0.35-0.67

Exercised                                                       (1,500)          $0.0005       (3,000)           $0.0005
                                                             ---------                       --------

Options outstanding
at end of year             2,319,500                         1,804,500        $0.15-0.67      952,000      $0.0005-15.00
                           =========                         =========                      =========

Options exercisable
at end of year               899,938                           487,438                        430,250
                             =======                         =========                      =========

Additions to
incentive stock
option plan                                                  1,400,000
                                                             =========

Options available
for grant at end of
year                       1,680,500                         2,195,500                        665,000
                           =========                       ===========                       ========
</TABLE>
<PAGE>


The following table summarizes information about significant groups of stock
options outstanding at December 31, 2001:

<TABLE>
<CAPTION>

                           Options Outstanding                          Options Exercisable
                           -------------------                          -------------------


                                            Weighted                                    Weighted
                                             Average                                     Average
                               Weighted     Remaining                     Weighted     Remaining
                               Average      Contractual                    Average    Contractual
 Exercise       Options        Exercise      Life in         Options      Exercise      Life in
  Prices      Outstanding        Price       Years         Exercisable      Price        Years

<C>             <C>            <C>              <C>           <C>           <C>           <C>
$0.06-0.13      472,000        $0.075           9              --            --           --

$0.15         1,572,500        $0.150           7           768,688       $0.15            5

$0.53            25,000        $0.530           8             6,250       $0.53            9

$0.67           250,000        $0.670           7           125,000       $0.67            8

Had compensation expense for the Company's 2001, 2000 and 1999 grants for the
stock-based compensation plan been determined based on the fair value of the
options at their grant dates consistent with SFAS 123 "Accounting for
Stock-Based Compensation", the Company's net loss and loss per common share for
2001, 2000 and 1999 would approximate the pro forma amounts below:

</TABLE>


                                           2001          2000         1999
                                           -----        -----         ----

Net loss:
   As reported                        $(1,636,672) $(13,279,235) $(2,175,647)
   Pro forma                          $(1,773,346) $(13,389,074) $(2,707,945)
Loss per share:
   As reported - Basic and diluted         $(0.05)       $(0.49)      $(0.10)
   Pro forma - Basic and diluted           $(0.06)       $(0.49)      $(0.13)

The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following assumptions used for
grants during each of the years ended December 31, 2001, 2000, and 1999:
dividend yield of 0%, risk-free weighted average interest rate of 4.4%, 5.2% and
6.5%, expected volatility factor of 116%, 128%, and 146%, respectively and an
expected option term of 4 years. The weighted average fair value at date of
grant for options granted during 2001, 2000 and 1999 was $0.22, $0.27and $2.31
per option, respectively.

401(k) Plan
-----------

Pursuant to the Norland Medical Systems, Inc. and Norland Corporation Retirement
Savings Plans, eligible employees may elect to contribute a portion of their
salary on a pre-tax basis. With respect to employee contributions of up to 7% of
salary, the Company makes a contribution at the rate of 25 cents on the dollar.
Contributions are subject to applicable limitations contained in the Internal
Revenue Code. Employees are at all times vested in their own contributions;
Company matching contributions vest gradually over six years of service. The
Company's policy is to fund plan contributions as they accrue. Contribution
expense was $28,107, $30,403 and $42,703 for the years ended December 31, 2001,
2000 and 1999, respectively.

<PAGE>

11.  Income Taxes:

The components of income tax expense (benefit) for the years ended December 31
were as follows:


                                      2001            2000            1999
                                     ------           -----           -----

Current:
Federal                             $    --         $    --       $ 340,000
State                                    --         149,079              --
                                     ------      ----------       ---------
                                         --         149,079         340,000
                                     ------      ----------       ---------

Deferred:
Federal                                  --       3,437,882        (340,000)
State                                    --         531,959              --
                                     ------      ----------       ---------
                                         --       3,969,841        (340,000)
                                     ------      ----------       ---------
Total                                $   --      $4,118,920       $      --
                                     ======      ==========       =========


Income tax expense (benefit) differs from the statutory federal income tax rate
of 34% for the years ended December 31 as follows:


                                       2001           2000             1999
                                      -----           -----            ----

Statutory income tax rate             (34.0%)         (34.0%)         (34.0%)
Valuation allowance                    39.0%           49.9%           23.1%
State income taxes, net of
 Federal benefit                       (5.0%)           1.6%             --
Non-deductible goodwill                  --            26.5%            9.9%
Other                                    --             0.2%            1.0%
                                      -----           -----            ----
Effective income tax rate               0.0%           44.2%            0.0%
                                      =====           =====            ====

Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial statement
purposes and the amounts used for income tax purposes and net operating loss
carryforwards. Significant components of the Company's deferred tax assets and
liabilities as of December 31 are summarized below:


                                                       2001           2000
                                                       ----           ----
Deferred tax assets and liabilities:

    Inventory                                   $ 1,099,343        $ 1,141,343
    Allowance for doubtful accounts                 105,373            112,273
    Accrued liabilities                              81,491             74,640
    Other                                             5,177             97,384
    Valuation allowance                          (1,291,384)        (1,425,640)
                                                 -----------        -----------
        Net current deferred tax assets                  --                 --
                                                 -----------        -----------
    Net operating loss carryforwards              4,667,187          5,567,889
    Discount on note payable                        (11,485)           (33,687)
    Other                                            30,286             27,152
    Valuation allowance                          (4,685,988)        (5,561,354)
                                                 -----------        -----------
         Net noncurrent deferred tax assets              --                 --
                                                 -----------        -----------
             Total deferred tax assets           $       --         $       --
                                                 ===========        ===========

Realization of the deferred tax asset is dependent on the Company's ability to
generate sufficient taxable income in future periods. Based on the historical
operating losses and the Company's existing financial condition, in 2001 and
2000, the Company determined that it was more likely than not that the deferred
tax assets would not be realized. Accordingly, the Company recorded a valuation
allowance to reduce the deferred tax assets.

<PAGE>

The Company has utilizable federal and state net operating loss carryforwards of
approximately $14,100,000 at December 31, 2001 for income tax purposes, which
expire in 2008 through 2021.

12. Commitments and Contingencies:

Legal Proceedings

Wesley D. Johnson and Pamela S. T. Johnson v. Reynald G. Bonmati, Kurt W.
Streams and Norland Medical Systems, Inc. This shareholder's class action was
filed in the United States District Court for the Southern District of New York
on April 12, 1998 against the Company, Reynald G. Bonmati, its Chief Executive
Officer, and Kurt W. Streams, its Chief Financial Officer. The complaint made
claims under Sections 10(b) and 20 of the Securities Exchange Act of 1934,
arising from the Company's announcement on March 16, 1998 that it would be
restating its financial statements with respect to the fourth quarter of 1996,
and the first three quarters of 1997. The claims were made on behalf of a
purported class of certain persons who purchased the Company's Common Stock from
February 25, 1997 through March 16, 1998. Plaintiffs sought compensatory damages
in an unspecified amount, together with prejudgement interest, costs and
expenses (including attorneys' fees and disbursements). On August 10, 1998,
prior to the expiration of the defendants' time to respond to the complaint, the
lead plaintiff filed an amended complaint purporting to expand the class period
through March 31, 1998. On or about December 23, 1999 the parties executed a
Stipulation of Settlement, which provides for a settlement of $1.7 million, to
be funded solely by the Company's directors and officer's insurance carrier. The
United States District Court approved this Stipulation of Settlement at a March
30, 2000 hearing and this case is now settled without any additional liability
to the Company. Upon settlement of this case in 2000, the Company reduced to $0
the $150,000 liability, which was recorded to cover any additional loss with
respect to this matter. This adjustment is reflected in general and
administrative expenses within the Company's 2000 statement of operations.

In addition, in the normal course of business, the Company is named in lawsuits
in which claims are asserted against the Company. In the opinion of management,
the liabilities if any, which may ultimately result from such lawsuits are not
expected to have a material adverse effect on the financial position, results of
operations or cash flows of the Company.

Leases

Total rent expense incurred in 2001 and 2000 was $234,339 and $220,532
respectively. The following is a schedule of future minimum lease payments as of
December 31, 2001:


                2002                                          201,506
                2003                                          154,184
                2004                                          114,480
                2005                                          114,480
                2006                                           76,320


<PAGE>

13.  Related Party Transactions:

Transactions with Certain Directors and Officers

At December 31, 2001, notes payable--related parties consist of the following:

   Bonmati                       $  80,267 (a)
   Huber note                       50,000 (b)
                                 --------------
   Total                          $130,267
                                 =========

(a) In connection with the acquisition of Norland Corp. (Note 7), consideration
included a Note Payable (Note 8) issued to the seller, NMS BV. As of December
31, 2001, $80,267 of the Note payable was held by the Chairman of NMS, who
purchased the Note from Bones L.L.C., a private investment firm controlled by
him. The Company made a payment of $10,014 on the Note when the Chairman
purchased the Note. Interest is payable at 6.5%.

(b) The Company has borrowed $50,000 (together with interest at a rate of 10%
per annum) from Mr. Huber pursuant to a Note dated September 20, 2001, due by
March 31, 2002. The Company is obligated to prepay the principal amount within
10 days upon the occurrence of two events if it: (i) receives at least
$2,000,000 from an equity financing or (ii) sells substantially all its assets.

The Company has also borrowed $75,000 (together with interest at a rate of 10%
per annum) from Mr. Huber pursuant to a Note dated January 8, 2002, due by June
30, 2002. The Company is obligated to prepay the principal amount within 10 days
upon the occurrence of two events if it: (i) receives at least $2,000,000 from
an equity financing or (ii) sells substantially all its assets.

The Company has also borrowed $25,000 (together with interest at a rate of 10%
per annum) from Mr. Allen pursuant to a Note dated January 9, 2002, due by June
30, 2002. Similarly, the Company is obligated to prepay the principal amount
within 10 days upon the occurrence of two events if it (i) receives at least
$2,000,000 from an equity financing or (ii) sells substantially all its assets.

Mr. Allen, a director of the Company, provided limited consulting services to
the Company during fiscal year 2001. Mr. Allen was not paid cash for his
services. Instead, certain options that he was granted in 1997 under the
Company's 1994 Plan were repriced from $0.67 to $0.15 in December 2000.

Starting in August of 2001, the Chairman of the Company elected to have his
salary deferred. The Company has recorded this as salary expense and as a
deferred liability. At December 31, 2001 the amount deferred totaled $190,523
and is included in accounts payable related parties.

Transactions with Bionix

The Company and Bionix, a company of which Reynald G. Bonmati, the President and
Chairman of the Board of the Company is President, are parties to three
exclusive four-year sub-distribution agreements pursuant to which the Company
has the right to purchase and sell certain systems and products from Bionix at a
fixed percentage discount from contractually-stated selling prices. Under two
separate sub-distribution agreements, dated October 1, 1999, the Company has the
right to purchase and sell the Orbasone and Galileo systems and products. Under
the third sub-distribution agreement, dated February 17, 2000, the Company has
the right to purchase and sell the Genestone 190 systems and products. The
Orbasone systems and products have not yet been approved by the U.S. Food and
Drug Administration for sale in the U.S. During fiscal year 2001, the Company
purchased from Bionix systems and products equal to approximately $488,000.

<PAGE>

Transaction with Stratec

During 2001, a NMS shareholder, who is the sole owner of, Stratec Medizintechnik
GmbH (Germany) ("Stratec"), sold all of his interest in NMS. During 2001, 2000
and 1999, the Company sold, $0, $9,449 and $92,883, respectively, of products
and services to Stratec.

During 2001, 2000 and 1999, the Company purchased, $0, $799,588 and $1,244,766,
respectively, from Stratec. The amounts were paid in full at both December 31,
2001 and 2000.

14. Supplemental Sales and Customer Information:

For the years ended December 31, 2001, 2000 and 1999, no customer accounted for
more than 10% of revenues. The Company's largest customers are medical device
distributors.

The Company's sales consisted of domestic sales to customers and export sales to
customers in the following geographic territories:

                           2001                  2000                  1999
                    ----------------   -------------------    ------------------

Pacific Rim         $ 711,973   7.8%   $ 1,670,201   12.5%    $ 2,135,821  12.0%
Europe/Middle East  1,912,485  20.8        661,560    4.9       3,305,159  18.6
Latin America         325,489   3.5      2,945,601   22.0       1,214,493   6.8
                    ---------  ----      ---------   ----       ---------  ----
Export Sales        2,949,947  32.1      5,277,362   39.4       6,655,473  37.4
Domestic Sales      6,240,933  67.9      8,125,461   60.6      11,142,562  62.6
                    ---------  ----      ---------   ----       ---------  ----
                   $9,190,880 100.0%   $13,402,823  100.0%    $17,798,035 100.0%
                   ========== =====    ===========  =====     =========== =====

15. Subsequent Event:
---------------------

On February 27, 2002, the Company agreed to sell its bone measurement business
to CooperSurgical Acquisition Corp. Inc., the women's health care business of
the Cooper Companies, Inc. (NYSE: COO) and the Company's exclusive distributor
to U.S. physicians and group practices specializing in Obstetrics and
Gynecology. In consideration for the sale of substantially all its assets (the
"Proposed Asset Sale"), the Company is to receive up to a maximum of $12 million
comprised of $3.5 million at closing (subject to post-closing adjustment), a
holdback of $1.5 million (to be released to the Company upon specified
conditions) and certain potential earn-out payments based on the net sales of
certain products over a three-year period. If the Proposed Asset Sale is
consummated, after paying transaction-related expenses, the Company intends to
use the net proceeds (i) to fund its research and development programs
(including the development of non-invasive musculoskeletal devices); (ii) for
general corporate purposes; (iii) to meet its working capital needs; and (iv) to
satisfy certain indebtedness of the Company, including an aggregate of
approximately $463,888 (including accrued and unpaid interest) to repurchase
promissory notes previously issued to Nissho Iwai Corporation and Nissho Iwai
American Corporation. None of the proceeds from the Proposed Asset Sale will be
distributed to any shareholders of the Company. The transaction is subject to
customary closing conditions, including the Company's shareholders' approval as
well as satisfactory completion of due diligence by CooperSurgical Acquisition
Corp. Inc.

<PAGE>

If the Proposed Asset Sale is consummated, the Company intends to market, sell
and service a wide range of proprietary non-invasive musculoskeletal and other
devices through two divisions, a healthcare division and a sports division. The
healthcare division will market, sell and service (1) peripheral quantitative
computed tomography bone measurement systems, (2) extracorporal shock wave
treatment systems and (3) patented exercise systems, all of which are used for
diagnosis and physical therapy in sports medicine, rehabilitative medicine, pain
management and urology. The sports division will market, sell and service
patented exercise systems to fitness centers, gyms, sports clubs and
associations and to the general public.


16. Quarterly Financial Data (Unaudited):
-----------------------------------------
<TABLE>
<CAPTION>

                                                                       2001 Quarters
                                    -----------------------------------------------------------------------------------

                                         First          Second           Third           Fourth            Total
                                         ------         -------          ------          -------           -----
<S>                                      <C>             <C>               <C>            <C>                <C>
Revenue                                  $2,878,640      $2,183,872        $2,024,522     $2,103,846         $9,190,880
Gross profit                              1,260,427         880,350           810,075        868,819          3,819,671
Operating loss                              (61,028)       (569,441)         (476,177)      (381,569)        (1,488,215)
Net loss                                    (94,692)       (603,786)         (510,939)      (427,255)        (1,636,672)

Weighted average shares:
     Basic and diluted                   30,229,065      30,433,509        30,433,509     30,433,509         30,383,098


 Basic and diluted loss per share             $(0.0)         $(0.02)           $(0.02)        $(0.01)            $(0.05)

</TABLE>

<TABLE>
<CAPTION>


                                                                       2000 Quarters
                                    -----------------------------------------------------------------------------------

                                         First          Second           Third           Fourth            Total
                                         ------         -------          ------          -------           -----

<S>                                     <C>             <C>               <C>            <C>               <C>
Revenue                                 $ 3,979,286     $ 3,846,585       $ 2,824,507    $ 2,752,445       $ 13,402,823
Gross profit                              1,775,739       1,726,690         1,244,405      1,059,683          5,806,517
Operating loss                             (502,433)     (7,718,578)         (600,431)      (127,958)        (8,949,400)
Net loss                                   (579,190)    (11,884,531)         (658,007)      (157,507)       (13,279,235)

Weighted average shares:
     Basic and diluted                   26,005,118      26,979,232        27,045,166     27,648,283         27,029,566


 Basic and diluted loss per share            $(0.02)         $(0.44)           $(0.02)        $(0.00)            $(0.49)

</TABLE>


<PAGE>

<TABLE>
<CAPTION>

                                                NORLAND MEDICAL SYSTEMS, INC.

                                                       SCHEDULE II


                                        VALUATION AND QUALIFYING ACCOUNTS
                               for the years ended December 31, 2001, 2000 and 1999


                                   Balance at         Charged to
                                    Beginning           Costs                          Balance at End
                                   of Period         and Expenses     Deductions          of Period
                                   ----------        ------------     ----------       --------------

2001
----
Allowance for Doubtful
<S>                                 <C>                 <C>            <C>                 <C>
Accounts                            $ 301,000           $(18,500)             --           $282,500
                                   ==========           =========      =========           ========

Obsolescence Reserve                $ 811,771           $(80,301)             --           $731,470
                                   ==========          ==========      =========           ========

2000
----
Allowance for Doubtful
Accounts                            $ 351,000           $(50,000)             --           $301,000
                                    =========           =========      =========           ========

Obsolescence Reserve                $ 650,000           $ 203,923      $(42,152)           $811,771
                                    =========           =========      =========           ========

1999
----
Allowance for Doubtful
Accounts                             $ 300.00            $ 45,249      $   5,751           $351,000
                                     ========           =========      =========           ========

Obsolescence Reserve               $1,400,000          $(676,439)      $ (73,561)          $650,000
                                   ==========          ==========      =========           ========


</TABLE>


<PAGE>

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
        FINANCIAL DISCLOSURE.


On January 29, 2002, the Company decided not to reappoint Deloitte & Touche LLP
("Deloitte") as its independent accountants and Deloitte was dismissed. The
decision to dismiss Deloitte and change accountants was solely dictated by cash
flow considerations and was approved by the Audit Committee of the Company's
Board of Directors.

No report by Deloitte on the Company's financial statements for either of the
past two fiscal years contained an adverse opinion or a disclaimer of opinion,
or was qualified or modified as to uncertainty, audit scope, or accounting
principles, except for the year ended December 31, 2000 which contained an
explanatory paragraph regarding the Company's ability to continue as a going
concern.

During the Company's two most recent fiscal years and the interim period
preceding the date of Deloitte's dismissal, the Company had no disagreements
with Deloitte on any matter of accounting principles or practices, financial
statement disclosure, or auditing scope or procedure, which disagreements, if
not resolved to the satisfaction of Deloitte, would have caused Deloitte to make
a reference thereto in Deloitte's report on the consolidated financial
statements for such periods.

Deloitte has not advised the Company of any reportable event as defined in
paragraphs (A) through (D) of Regulation S-K Item 304 (a)(1)(v).

The Company, contemporaneously with the filing of the Form 8-K, shall provide
Deloitte with a copy of this disclosure and request that Deloitte furnish a
letter to the Company, addressed to the Securities and Exchange Commission,
stating that it agrees with the statements made by the Company herein or stating
the respects in which it does not agree. Promptly, upon (but in no event later
than two business days after) receipt of such letter, the Company shall file an
amendment containing such letter to the Form 8-K.

On February 4, 2002, the Company engaged Imowitz Koenig & Co. LLP as its
independent certified accountants with the approval of the Audit Committee of
the Company's Board of Directors.





                                    PART III

ITEMS 10, 11, 12 AND 13.

The information required under these items is contained in the Company's Proxy
Statement relating to its 2002 Annual Meeting of Stockholders, which Proxy
Statement enclosed this Form 10-K and is being filed with the Securities and
Exchange Commission within 120 days after the close of the Company's fiscal year
end. This information is incorporated herein by reference.


<PAGE>



                                     PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

         (a)  Financial Statement and Financial Statement Schedules.

              See Index to Financial Statements at Item 8 of this Report.

         (b)  Exhibits.

     Exhibit
     Number                      Description

     2.1  Agreement and Plan of Merger by and among Dove Medical Systems, DMS
          Acquisition Corp. and Norland Medical Systems, Inc., (C)

     2.2  Purchase Agreement by and among Robert L. Piccioni and Joan Piccioni,
          CHC, Inc., Mirella Monte Belshe and Norland Medical Systems, Inc. (C)

     2.3  Stock Purchase Agreement between Norland Medical Systems, Inc. and
          Norland Medical Systems B.V. (G)

     2.4  Amendment to Stock Purchase Agreement dated as of December 31, 1998
          between Norland Medical Systems, B.V. and Norland Medical Systems,
          Inc.

     3.1  Restated Certificate of Incorporation of Norland Medical Systems, Inc.
          (H)

     3.2  By-laws of Norland Medical Systems, Inc., as amended (A)

   +10.1  Distribution Agreement dated as of April 1, 1995 by and among Norland
          Corporation, Stratec Medizintechnik GmbH and Norland Medical Systems,
          Inc. (A)

   +10.2  Product Development Loan Agreement dated as of June 1, 1995 by and
          among Stratec Medizintechnik GmbH, Norland Corporation and Norland
          Medical Systems, Inc. (A)

    10.3  Amended and Restated 1994 Stock Option and Incentive Plan (G)

    10.4  Exclusive Distributor Agreement dated as of July 1, 1996 among Norland
          Medical Systems, Inc., Nissho Iwai Corporation and Nissho Iwai
          American Corporation (E)

    10.5  Exclusive Distributor Agreement dated as of June 2, 1995 between
          Norland Medical Systems, Inc. and Meditec Co., Ltd. (A)

    10.6  Amendment No. 1 to Distribution Agreement by and among Norland
          Corporation, Stratec Medizintechnik GmbH and Norland Medical Systems,
          Inc. (B)

    10.7  Amendment No. 2 to Distribution Agreement by and among Norland
          Corporation, Stratec Medizintechnik GmbH and Norland Medical Systems,
          Inc. (D)


<PAGE>

   +10.8  Amendment No. 3 to Distribution Agreement by and among Norland
          Corporation, Stratec Medizintechnik GmbH and Norland Medical Systems,
          Inc. (F)

   +10.9  Amended Distribution Agreement dated as of September 11, 1997
          among Stratec Medizintechnik GmbH, Norland Medical Systems, Inc. and
          Norland Corporation (G)

   10.10  Amendment No. 1 to Amended Distribution Agreement dated as of
          December 7, 1998 by and among Stratec Medizintechnik GmbH, Norland
          Medical Systems, Inc. and Norland Corporation. (J)

   10.11  Distribution Agreement dated as of January 1, 2001, between Marconi
          Medical Systems, Inc. and Norland Medical Systems, Inc.

   10.12  Amendment, dated April 1, 2000, to Distribution Agreement between
          Marconi Medical Systems, Inc. and Norland Medical Systems, Inc.

   10.13  Note Repurchase Agreement, dated December 28, 2001 between Norland
          Medical Systems, Inc. and Nissho Iwai American Corporation

      21  Subsidiaries

     (b)  Reports on Form 8-K.


                    None

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

  + Confidentiality requested as to certain provisions

(A)  This Exhibit was previously filed as an Exhibit to the Company's
     Registration Statement on Form S-1 (Registration No. 33-93220), effective
     August 1, 1995, and is incorporated herein by reference.

(B)  This Exhibit was previously filed as an Exhibit to the Company's Report on
     Form 10-K dated March 27, 1996 and is incorporated herein by reference.

(C)  This Exhibit was previously filed as an Exhibit to the Company's Report on
     Form 8-K dated April 15, 1996 and is incorporated herein by reference.

(D)  This Exhibit was previously filed as an Exhibit to the Company's
     Registration Statement on Form S-1 (Registration No. 333-05303) and is
     incorporated herein by reference.

(E)  This Exhibit was previously filed as an Exhibit to the Company's Report on
     Form 10-Q dated August 13, 1996 and is incorporated herein by reference.

(F)  This Exhibit was previously filed as an Exhibit to the Company's report on
     Form 10-K dated March 28, 1997 and is incorporated herein by reference.

(G)  This Exhibit was previously filed as an Exhibit to the Company's Proxy
     Statement dated July 25, 1997 and is incorporated herein by reference.

(H)  This Exhibit was previously filed as an Exhibit to the Company's report on
     Form 10-Q dated November 13, 1997 and is incorporated herein by reference.

(I)  This Exhibit was previously filed as an Exhibit to the Company's report on
     Form 10-K dated March 31, 1999 and is incorporated herein by reference.

(J)  This Exhibit was previously filed as an Exhibit to the Company's report on
     Form 10-K dated April 16, 2001 and is incorporated herein by reference.


<PAGE>

                                   SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this Annual Report to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of White
Plains, New York, on the 11th day of March, 2002.

                                                NORLAND MEDICAL SYSTEMS, INC.


                                                By:/s/  Reynald G. Bonmati
                                                  ------------------------------
                                                  Name:   Reynald G. Bonmati
                                                  Title:  President


                                POWER OF ATTORNEY

Each person whose signature appears below hereby constitutes and appoints
Reynald G. Bonmati and Richard Rahn, or either of them, the true and lawful
attorney-in-fact and agent of the undersigned, with full power of substitution
and resubstitution, for and in the name, place and stead of the undersigned, in
any and all capacities, to sign any and all amendments to this Annual Report and
to file the same, with all exhibits thereto, and other documents in connection
therewith, with the Commission, and hereby grants to such attorneys-in-fact and
agents full power and authority to do and perform each and every act and thing
requisite or desirable to be done, as fully to all intents and purposes as the
undersigned might or could do in person, hereby ratifying and confirming all
that said attorneys-in-fact and agents, or their substitutes, may lawfully do or
cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual
Report has been signed below by the following persons on behalf of the
Registrant, Norland Medical Systems, Inc., in the capacities and on the dates
indicated.


     Signature              Capacity In Which Signed              Date
     ---------              ------------------------              ----


/s/  Reynald G. Bonmati     Chairman of the Board and President   March 11, 2002
-------------------------    (Principal Executive Officer); and
     Reynald G. Bonmati      Director


/s/  Richard L. Rahn        Vice President, Finance (Principal    March 11, 2002
----------------------       Financial Officer and Principal
     Richard L. Rahn         Accounting Officer)


<PAGE>


     Signature              Capacity In Which Signed              Date
     ---------              ------------------------              ----


/s/  Jeremy Allen           Director                              March 11, 2002
--------------------
     Jeremy Allen



/s/  James J. Baker         Director                              March 11, 2002
--------------------
     James J. Baker


/s/  Michael W. Huber       Director                              March 11, 2002
---------------------
     Michael W. Huber


/s/  Andre-Jacques Neusy    Director                              March 11, 2002
------------------------
     Andre-Jacques Neusy


/s/  Albert S. Waxman       Director                              March 11, 2002
---------------------
     Albert S. Waxman


<PAGE>


EXHIBIT 21



                          NORLAND MEDICAL SYSTEMS INC.
                                  Subsidiaries


Name of Subsidiary                                 State of Incorporation
------------------                                 ----------------------

Norland Corporation                                Wisconsin

IMRO Medical Systems, Inc.                         Delaware

Dove Medical Systems, Inc.                         Delaware