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                                  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, 1999          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 16, 2000
was $16,222,674 based on the price of the last reported sale on the OTC Bulletin
Board on such date.

         As of March 16, 2000 there were 25,956,278 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 1999
Annual Meeting of Stockholders. 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.

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                                TABLE OF CONTENTS

                                                                            PAGE

INTRODUCTION                                                                  1

ITEM 1.       BUSINESS                                                        1

ITEM 2.       PROPERTIES                                                     17

ITEM 3.       LEGAL PROCEEDINGS                                              17

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

ITEM 4A       EXECUTIVE OFFICERS                                             18

ITEM 5.       MARKET FOR REGISTRANT'S COMMON EQUITY AND
              RELATED STOCKHOLDER MATTERS.                                   19

ITEM 6.       SELECTED FINANCIAL DATA                                        19

ITEM 7.       MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
              CONDITION AND RESULTS OF OPERATIONS                            21

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

ITEM 8.      FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA                     29

ITEM 9.      CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
                   ACCOUNTING AND FINANCIAL DISCLOSURE                       52

ITEMS 10, 11, 12 and 13                                                      52

ITEM 14.     EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
              REPORTS ON FORM 8-K                                            53



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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, 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; (ix) 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. ("Norland" or the "Company" or "NMS")
develops, manufactures, sells and services 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 by the NOF to
increase to 41 million by 2015. Driven by the availability of new treatments for
bone-related disorders, the Company is 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.

         In November 1999 the Company announced a product diversification
program into musculoskeletal development products. To penetrate this potentially
large market, Norland is launching the sale of a new line of products used in
the sports medicine, musculoskeletal development, and pain management. Norland
has obtained exclusive distribution rights for certain products that are used to
provide therapy, aid in musculoskeletal development and the management of pain
associated with joints, muscles, and ligaments.


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         On September 11, 1997 Norland 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 manufacturers bone densitometry systems based on peripheral
quantitative computed tomography ("pQCT") technology. Upon the acquisition of
Norland Corp., Norland entered into a new exclusive Distribution Agreement with
Stratec.

         As used herein, the term "Company" includes Norland and all of its
wholly-owned subsidiaries, including Norland Corp.

         The Company's bone diagnostic product line has five types of bone
densitometers comprised of seventeen 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 offices, where patients would benefit from timely and easy
access to bone density testing and monitoring.

         The Company's peripheral x-ray line consists of the Apollo DXA and the
pDEXA 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. It was also the first
system to receive FDA marketing clearance for use in fracture risk assessment.
The Discovery, which is the forearm scanning planned successor to the pDEXA 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 also markets a line of products based on pQCT technology.
Systems using pQCT technology can make separate, three-dimensional measurements
of the bone, allowing a more detailed assessment of the biomechanical soundness
of the bone. In addition, pQCT permits the detection of minute changes within
bone that occur over short periods of time.

         The Company's research line includes versions of its pQCT products that
have been purchased by large pharmaceutical companies, including Eli Lilly &
Company, Novartis, Procter & Gamble and Glaxo Wellcome, and several universities
to assist in monitoring the effectiveness of potential new therapies for the
treatment of osteoporosis and related bone disorders. The Company also offers a
DXA-based research product.

         In 1999 the Company announced a product diversification program into
musculoskeletal development and pain management that is expected to generate
sales in 2000. 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


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and Bionix L.L.C. (U.S.) ("Bionix"), the Company obtained the right to
exclusively distribute the Galileo systems within the U.S. The Galileo products
are targeted toward the sports and physical fitness markets. Pursuant to a
separate sub-distribution agreement between the Company and Bionix dated October
1, 1999, the Company obtained the right to exclusively distribute the Orbasone
system within the U.S. The Orbasone is targeted toward orthopedic surgeons,
podiatrists, and pain management specialists.

The Company's Chairman controls Bionix. A Company shareholder controls Novotec
Machinen GmbH (Germany) ("Novotec"), the manufacturer of the Galileo products,
and Stratec.

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 by the body 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 a bone fracture.
Osteoporosis leads to increased risk of fracture, chronic pain and immobility,
usually at the hip, forearm or spine. As indicated above, 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 by the NOF 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 were 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 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.

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<PAGE>

         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.

         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 being
studied for their selective ability to act like estrogen in certain tissues but
not in others.

         The Company believes that there are more than 50 pharmaceutical and
biotechnology companies worldwide 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. New generations of bisphosphonates are being developed by Procter &
Gamble (Actonel), Sanofi Winthrop (tiludronate) and Boehringer-Mannheim
(ibandronate), while anti-estrogens (estrogen analogs) are being developed by
Pfizer (draloxifene). While these therapies are all in Phase III clinical
trials, others are in the New Drug Application review stage. These include Alora
(estradiol matrix transdermal system - Procter & Gamble), Calcimar Intranasal
(calcitonin - Rhone Poulenc Rorer) and Neosten (slow release fluoride - Mission
Pharmacal).

         The Company believes that advances in treatment options for
osteoporosis will increase the demand for the early detection, diagnosis and
monitoring of osteoporosis and other bone disorders. Merck and other
pharmaceutical companies have undertaken extensive educational and marketing
campaigns targeting gynecologists and family practice physicians to promote
education and awareness that osteoporosis is now a treatable disease. Patients
and physicians have become increasingly aware of the importance of early
detection, 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 of the bone, which is a lattice-like
structure crucial to the maintenance of bone strength, absorbs radiation at a
rate different from the outside 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


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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. The Company
believes that biochemical marker testing may complement bone densitometry in
monitoring the effectiveness of drug therapies.

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 Discovery and the pDEXA 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 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 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 measure 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 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.


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         3.   PQCT - CLINICAL SYSTEMS

         The XCT line of systems brings a unique type of bone densitometer based
on pQCT technology to the market. Unlike DXA-based densitometers, pQCT systems
permit separate, three-dimensional measurement of cortical and trabecular bone
by taking multiple images in a 360-degree rotation around the scanned limb,
providing true volumetric density and allowing more precise assessment of
biomechanical soundness of the bone. The ability to measure trabecular bone
precisely also permits detection over short periods of time of minute changes in
bone, indicating changes in metabolic status. The pQCT systems use the same
miniaturized low-radiation X-ray source as the pDEXA. The pQCT-based XCT2000
scans the forearm and is marketed to hospitals, including pediatric care
hospitals that require a device capable of measuring changes in smaller bones,
clinics and private practices. The pQCT-based XCT3000 can also scan the tibia,
the femur and is capable of three-dimensional measurement of the entire femoral
neck, providing more precise assessment of hip fractures and monitoring of
implants following hip replacements.

         4.   RESEARCH SYSTEMS

         The Company markets a series of pQCT-based research scanners: the XCT
Research SA, the XCT Research M and the XCT3000A, for research involving
laboratory animals, and the XCT Microscope, for research IN VITRO at a maximum
resolution of 20 microns. The Company also markets the Sabre, a DXA- based
system for research with small laboratory animals.

         5.   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 broad band ultrasound
attenuation at the heel. In January 2000, the FDA system approved the
C.U.B.A.Clinical 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.

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 the Company expects to begin generating sales
sometime in 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 within the U.S. for a four-year period. The
products are made by Novotech and sold to Bionix according to a distribution
agreement. The Company's Chairman controls Bionix and a Company shareholder
controls Novotech.

         The Galileo 2000, 900 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,
causing the muscles to respond by contracting and relaxing by natural reflex 20
to 25 times per second. The Galileo 2000, 900 and 100 systems both target the
leg and lower back (Galileo 2000 and 900), 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.


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PAIN MANAGEMENT SYSTEMS

         In 1999 the Company announced a product diversification program into
pain management systems that the Company expects to begin generating sales
sometime in 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 and sold to Bionix according to a distribution agreement. The Orbasone is
classified by the U.S. Food and Drug Administration as a Class I therapeutic
vibrator and makes use of extracorporeal shock wave technology to create and
deliver energy waves that provide relief to patients from minor pain in muscles,
ligaments or tendons. The energy waves are targeted to penetrate deeply within
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.

PRODUCT DEVELOPMENT

         The Company focuses its product development on DXA-based bone
densitometry systems. At March 9, 2000, the Company had 8 persons engaged in
research and development, 5 of whom were 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 (McCue Plc, Stratec, Novotec and MIP) that supply NMS with
their respective products.

SALES AND MARKETING

         The Company currently employs four regional Vice Presidents for Sales
who cover (1) the United States; (2) Europe, Africa and the Middle East; (3)
Latin America; and (4) 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, or a
single country or portions thereof. Each Company regional Vice President for
Sales 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 a small sales office in London, from which the regional manager for
Europe, Africa and the Middle East operates, and in Singapore, where the
regional manager for the Pacific Rim operates. The Company intends to expand its
network of third party dealers, distributors and independent representatives to
exploit the large market of gynecologists and primary care physicians.

         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 46 countries in 1999. For a more detailed
breakdown of the Company's 1999 sales by geographic territory, see Note 14 to
the Company's financial statements included in Item 8 of this Report.

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,


                                       9
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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. The
Company's manufacturing facility is located in Fort Atkinson, Wisconsin. Stratec
manufactures pQCT systems for sale worldwide. Stratec's manufacturing facilities
are located in Pforzheim, Germany.

         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 Stratec have sufficient manufacturing capacity to supply the
Company's product needs for at least the next 12 months.

         Manufacturing processes for the products made 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 of primarily testing of components, forming and painting
of plastic covers, final assembly and quality assurance testing. The Company is
dependent on Novotech 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 Novotech.

         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 Novotech 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 marketed by the Company 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 of primarily testing of components, final assembly
and quality assurance testing. The Company is dependent on MIP to provide
manufactured Orbasone systems that the Company and others market 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. To date there have been no delays in
production which have had a material adverse effect on the Company. The Company
believes that MIP and Nippon Infrared Industries Co., Ltd. have sufficient
capacity to supply the Company's need for Orbasone systems for at least the next
12 months.


                                       10
<PAGE>

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 distribution agreements.

         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. The Company is currently negotiating an agreement with Marconi Medical
Systems, Inc. ("Marconi") that management expects to consummate. Under the
agreement, Marconi would augment the Company's service network 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 AGREEMENT

STRATEC

         The Company's Distribution Agreement with Stratec grants the Company
exclusive distribution rights for all devices currently produced by Stratec. The
distribution rights are worldwide, except that Germany is currently excluded.
The Company has the option to become the exclusive distributor for Stratec in
Germany at any time on 90 days' notice to Stratec. The term of the Distribution
Agreement extends until December 31, 2015. At the end of such term or any
renewal term, either party may renew the Distribution Agreement for an
additional term of five years, provided that the party electing to renew is not
in material breach of the Distribution Agreement at the time of renewal. Stratec
has the right to terminate the Company's distribution rights with respect to all
Stratec devices other than the pDEXA upon a change in control of the Company
(defined as either (i) majority ownership of the Company by a single person or
entity other than Reynald G. Bonmati, Hans Schiessl or an entity controlled by
them or (ii) Mr. Bonmati no longer being the chief executive officer of the
Company).

         The pDEXA was developed jointly by Norland Corp. and Stratec. The
Stratec Distribution Agreement gives the Company the right to manufacture pDEXA
systems to be sold in North America and Latin America, while Stratec has the
right to manufacture the pDEXA for sale outside North America and Latin America.
The Company has the right to purchase from Stratec components and parts (other
than computer components) used to manufacture the pDEXA. It may also purchase
such components and parts from other sources. The Company is also the exclusive
manufacturer of all pQCT systems (other than research systems) to be sold in
North America, and the Company purchases components and parts (other than
computer components) for such systems from Stratec.

         The general pricing provisions of the Stratec Distribution Agreement
are as follows. The price at which the Company purchases a system from Stratec
for immediate resale is Stratec's Device Cost as defined in the Distribution
Agreement plus 50% of the difference between the amount for which the Company
sells such system and the Stratec Device Cost. Thus, the gross margin between
the Company's selling price and the Stratec Device Cost is allocated 50% to the
Company and 50% to Stratec. The Company has certain programs in which certain
customers are offered short-term rentals of systems or the ability to use
systems on a pay-per-scan basis, in each case with an option to purchase the
system. Systems subject to these programs, as well as demonstration systems, are
purchased by the Company from Stratec for 150% of Stratec Device Cost. The
Stratec Device Cost of a system is the aggregate of the standard costs of the
components and parts used in such system plus an allowance for other direct
manufacturing costs.


                                       11
<PAGE>

         During December of 1996 and for all of 1997, special pricing provisions
were in effect under the Stratec Distribution Agreement and the predecessor
Distribution Agreement. The Company paid Stratec an amount equal to the
Distributor's Device Cost as defined in the Distribution Agreement. The
Distributor's Device Cost of a system is the aggregate of the standard costs of
the components and parts used in the system plus the actual labor costs incurred
by Stratec in producing the system (subject to a cap) plus an agreed upon markup
on the standard costs of all non-computer components used in the system. Stratec
was also entitled to receive royalties equal to 5% of the price for which the
Company sold any pQCT system manufactured by Stratec. Stratec had the right to
terminate these special pricing provisions and reinstate the general pricing
provisions described above effective December 31, 1997. Stratec exercised this
termination right, and as a result, the general pricing provisions became
effective again as of January 1, 1998.

       On October 1, 1999 the Company and Stratec agreed to terminate their
September 11, 1997 distribution agreement and enter into a new arrangement.
Stratec and Bionix entered into a distribution agreement dated October 1, 1999
with respect to the right to exclusively distribute Stratec products in North
and Latin America. Bionix and NMS also entered into an exclusive
sub-distribution agreement with respect to the sale of Stratec products in North
and Latin America through September 30, 2003. Under terms of the
sub-distribution agreement, NMS may purchase Stratec products at a fixed
percentage discount from the product's actual sales price to the customer.

MCCUE

         NMS and McCue entered into a distribution agreement dated June 17, 1999
with respect to the right for NMS 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 NMS does not purchase
a specified minimum number of C.U.B.A.Clinical devices in any year, McCue has
the right to make NMS's distribution rights in North America non-exclusive.

BIONIX

         NMS and Bionix also entered into two exclusive sub-distribution
agreements dated October 1, 1999 with respect to the Orbasone and Galileo which
are non-bone densitometry products sold through Bionix according to its
distribution agreements with the third party companies. Under terms of the
four-year sub-distribution agreements, NMS 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.

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
Hologic, Inc. and Lunar Corporation. 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 Hologic and Lunar, that are
marketing ultrasound bone assessment systems outside the United States.


                                       12
<PAGE>

In addition, Hologic, and Lunar 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 similar products, there are a number of
competing approaches and products that develop muscle strength. 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 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.

         The Company's primary competitors for the sales 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 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 product marketed by the Company. 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., Dornier MedTech, Storz Medical, Siemans 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 Class III status. The Orbasone is a Class I product
that does not compete


                                       13
<PAGE>

directly with such products. There can be no assurance that the Company's
competitors will not succeed in developing and marketing lower priced or better
performing Class I products as compared to the Orbasone or that the availability
of FDA approved Class III devices would not adversely affect Orbasone sales.

The Company believes that the Orbasone competes primarily on the basis of
price/performance characteristics, perceived efficacy of results, ease,
convenience safeness of use, quality of service and price. The Company believes
that the Orbasone product is competitive.

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.

         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 payers
will reimburse patients for pain management systems and pain treatment sessions
involving the Orbasone system.

MUSCULOSKELETAL DEVELOPMENT PRODUCTS

         As 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


                                       14
<PAGE>

of future operations.

         Medical devices are classified as 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 make a determination 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 are 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.

The company has received Section 510(k) clearance for all 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 marketed the company in the U.S.
are Class I devices exempt from Section 510 (k) premarket notification
requirements. The musculoskeletal development products are not medical devices
subject to FDA regulation but are consumer products subject to regulation under
the Consumer Product Safety Act.

         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 postmarket
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 prohibiting
marketing of devices for indications or uses that have not been cleared or
approved by the FDA, unless such promotion is undertaken pursuant to the
recently enacted provisions of the Food and Drug Administration Modernization
Act of 1997.

         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 recordkeeping, 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.


                                       15
<PAGE>

         Whether or not FDA approval has been obtained, in some foreign
countries marketing authorization must be obtained from regulatory authorities
(or third parties authorized by such regulatory authorities) prior to the
commencement of marketing of the product in each such country. Requirements
governing the conduct of clinical trials and product approvals may vary
significantly from country to country. The time required for approval may be
longer or shorter than that required for FDA approval. The Company generally
relies on its local distributors to obtain any required clearances or undergo
any conformity assessment procedures in the countries in which they sell
products marketed by the Company. There can be no assurance that the Company

will not be required to incur significant costs in the future with respect to
compliance with laws and regulations of such countries.

         In addition to the regulatory framework for product approvals, the
Company is, and may be subject to, regulation under local, state, federal and
foreign law, including requirements regarding occupational safety, clinical and
laboratory practices, the use, handling and disposition of radiological
materials, environmental protection and hazardous substance control, and may be
subject to other present and possible future local, state, federal and foreign
regulation. 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.

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.

BACKLOG

         Backlog consists of signed purchase orders received by the Company from
its customers. Backlog as of December 31, 1999 and 1998 totaled approximately
$980,000 and $845,000, 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


                                       16
<PAGE>

or that insurance maintained by the other manufacturers will cover the Company.

EMPLOYEES

         At March 16, 2000, the Company had 73 employees, of whom 18 were
engaged in direct sales and marketing activities and 18 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.

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
which expires on August 31, 2000 is expected to be renewed. 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. The Company is in the
process of negotiating the lease of approximately 4,000 additional square feet
of space in its Fort Atkinson facility.

ITEM 3.  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 seek 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. A
hearing in the United States District Court to determine whether this
Stipulation of Settlement should be approved is scheduled for March 30, 2000.

              In addition, 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.

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, 1999.


                                       17
<PAGE>

ITEM 4A.  EXECUTIVE OFFICERS

         The Company's current executive officers are as follows:

<TABLE>
<CAPTION>
                            Age as of
       Name               March 16, 2000                     Position
       ----               --------------                     --------
<S>                             <C>            <C>
Reynald G. Bonmati              52             Chairman of the Board; President; and Treasurer

Kurt W. Streams                 38             Vice President-Finance; and Secretary

Terry  A. Pope                  47             Vice President, General Manager--Ft. Atkinson
                                               Facility; and Assistant Secretary

Ralph J. Cozzolino              53             Vice President-Sales and Marketing
</TABLE>

         MR. BONMATI has served as a Director of the Company since its formation
in December 1993 and has served as Chairman of the Board, President and
Treasurer of the Company since January 1994. Mr. Bonmati is President of Bionix,
a private distributor of medical devices. Mr. Bonmati has served since January
1992 as a Managing Director of NMS BV, the holding company that formerly owned
Stratec. He has also served as President of Novatech Resource Corporation, a
private investment firm, since 1981, as President of Novatech Management
Corporation, a private investment firm, since 1990, and as Managing Partner of
Bones L.L.C., a private investment firm, since 1998. Mr. Bonmati received BS and
MS degrees from the Institut National Superieur de Chimie Industrielle, an MS
degree from the Ecole Nationale Superieure du Petrole et des Moteurs and an MBA
from the University of Paris.

         MR. STREAMS joined the Company in September 1995 and has served as Vice
President-Finance and Secretary of the Company since February 1996. Mr. Streams
has resigned from his position effective March 24, 2000. From 1989 to 1995, Mr.
Streams was an Audit Manager and a Senior Audit Manager with Deloitte & Touche
LLP in the United States and Deloitte & Touche Registeraccountants in the
Netherlands. Mr. Streams holds a BA degree in economics from the University of
Massachusetts.

         MR. POPE joined the Company in February 1999 and has served as Vice
President, General Manager--Ft. Atkinson Facility, since October 1999. From 1996
until he joined Norland, Mr. Pope was Service Manager for Dynapro Thin Films, a
manufacturer and servicer of touch screen systems and electronic controls. From
1991 to 1996 he was also Service Manager for Source 7, a service and maintenance
provider for nuclear medicine and other medical systems. Mr. Pope holds a BA in
business from Lakeland College.

         MR. COZZOLINO has served as Vice President-Sales and Marketing since
October 1998. From May 1996 to September 1998, Mr. Cozzolino was the Company's
Regional Sales Manager for the eastern United States and Canada. From January
1995 to April 1996, Mr. Cozzolino was Vice President, Operations and Sales, of
World Technologies, Inc., a manufacturer of PC-based imaging equipment. Prior to
1995, he was National Sales Manager of Luxor Corporation, a manufacturer of
surgical lasers.


                                       18
<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 and the NASDAQ
National Market for the respective periods.


PERIOD FROM JANUARY 1, 1998 THROUGH DECEMBER 31, 1998:

                                   High          Low
                                   -----        -----

First Quarter                      $9.88        $3.25

Second Quarter                      3.63         1.00

Third Quarter                       1.81         0.41

Fourth Quarter                      0.80         0.19

PERIOD FROM JANUARY 1, 1999 THROUGH DECEMBER 31, 1999:

                                    HIGH         LOW
                                   -----        -----

First Quarter                      $0.50        $0.19

Second Quarter                      0.66         0.31

Third Quarter                       0.88         0.41

Fourth Quarter                      0.69         0.31

         As of March 6, 2000, there were approximately 61 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.

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. Certain of the Company's
stockholders control NMS BV. The Company has no ownership interest in NMS BV.


                                       19
<PAGE>

          The financial data as of December 31, 1999 and 1998 and for the
periods ended December 31, 1999, 1998 and 1997 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 at Item
7 of this Report.

<TABLE>
<CAPTION>

                                                                             NORLAND MEDICAL SYSTEMS, INC.
                                                                                YEARS ENDED DECEMBER 31,
                                                        --------------------------------------------------------------------------
                                                            1995          1996(1)        1997(2)          1998            1999
                                                        ------------   ------------   ------------    ------------    ------------
<S>                                                     <C>            <C>            <C>             <C>             <C>
STATEMENT OF OPERATIONS DATA:
Revenue .............................................   $ 18,243,808   $ 24,326,134   $ 20,530,376    $ 14,384,491    $ 17,798,035
Cost of revenue .....................................     12,508,809     15,709,420     15,568,876       8,888,947       9,549,677
                                                        ------------   ------------   ------------    ------------    ------------
  Gross profit ......................................      5,734,999      8,616,714      4,961,500       5,495,544       8,248,358

Sales and marketing expense .........................      1,651,125      3,756,391      5,635,469       6,711,653       5,482,817
General and administrative expense ..................        960,368      1,900,598      4,688,132       5,690,071       3,377,520
Research and development expense ....................              0        271,917        749,847       1,889,583       1,325,116
In-process research and development charge ..........              0              0      7,900,000               0               0
Non-recurring charges ...............................              0        397,697      7,228,287         400,000               0
                                                        ------------   ------------   ------------    ------------    ------------
  Income (loss) from operations .....................      3,123,506      2,290,111    (21,240,235)     (9,195,763)     (1,937,095)

Loss on investment in Vitel, Inc. ...................              0              0              0        (260,000)              0
Interest expense ....................................              0              0       (383,962)     (1,289,665)       (273,005)
Interest income .....................................        412,983        703,744        345,745          86,168          34,453
                                                        ------------   ------------   ------------    ------------    ------------
  Income (loss) before income taxes .................      3,536,489      2,993,855    (21,278,452)    (10,659,260)     (2,175,647)
(benefit)
Income taxes (benefit) ..............................      1,436,000      1,216,000     (2,694,447)       (946,000)              0
                                                        ------------   ------------   ------------    ------------    ------------
  Net income (loss) .................................   $  2,100,489   $  1,777,855   $(18,584,005)   $ (9,713,260)   $ (2,175,647)
                                                        ============   ============   ============    ============    ============

Earnings (loss) per share
   Basic ............................................   $       0.43   $       0.26   $      (2.60)   $      (1.35)   $      (0.10)
   Diluted ..........................................           0.40           0.25          (2.60)          (1.35)          (0.10)

Weighted average number of common shares outstanding:
   Basic ............................................      4,832,877      6,824,590      7,145,465       7,183,032      21,616,010
   Diluted ..........................................      5,248,184      7,168,871      7,145,465       7,183,032      21,616,010

<CAPTION>

                                                                                      DECEMBER 31,
                                                        --------------------------------------------------------------------------
                                                            1995           1996           1997            1998            1999
                                                        ------------   ------------   ------------    ------------    ------------
<S>                                                     <C>            <C>            <C>             <C>             <C>
BALANCE SHEET DATA:
Working capital .....................................   $ 20,326,055   $ 17,522,404   $ 11,624,860    $  2,407,993    $  1,124,033
Total assets ........................................     24,706,377     30,115,136     29,378,525      19,057,907      17,732,288
Long-term debt ......................................              0              0     14,439,756       4,685,690       1,106,562
Stockholders' equity ................................     20,520,846     26,107,346      7,610,985       8,791,883      11,028,068
</TABLE>


(1)  The results of operations of Dove Medical Systems, Inc. have been included
     from the April 2, 1996 date of acquisition.

(2)  The results of operations of Norland Corp. have been included from the
     September 11, 1997 date of acquisition.

                                       20
<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.

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 was 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 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.

         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 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 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 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 Company entered into a new Distribution Agreement with Stratec
which is described in Item 1 of this Report.


                                       21
<PAGE>

ESULT OF OPERATIONS

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

<TABLE>
<CAPTION>
                                                      YEARS ENDED DECEMBER 31,
                                                ---------------------------------
                                                  1999         1998         1997
                                                -------      -------      -------
<S>                                               <C>          <C>          <C>
Revenue                                           100.0%       100.0%       100.0%
Cost of revenue                                    53.7         61.8         75.8
                                                -------      -------      -------
  Gross profit                                     46.3         38.2         24.2

Sales and marketing expense                        30.8         46.7         27.4
General and administrative expense                 19.0         39.5         22.8
Research and development expense                    7.4         13.1          3.7
In-process research and development charge          0.0          0.0         38.5
Non-recurring charges                               0.0          2.8         35.2
                                                -------      -------      -------
  Loss from operations                            (10.9)       (63.9)      (103.5)
Loss on investment in Vitel, Inc                    0.0          1.8          0.0
Interest income                                    (0.2)        (0.6)        (1.7)
Interest expense                                    1.5          9.0          1.9
                                                -------      -------      -------
  Loss before income taxes                        (12.2)       (74.1)      (103.7)
  Income taxes benefit                              0.0         (6.6)       (13.1)
                                                -------      -------      -------
  Net loss                                        (12.2)       (67.5)       (90.6)
                                                =======      =======      =======
</TABLE>

         THE COMPANY'S YEAR ENDED DECEMBER 31, 1999 COMPARED TO ITS YEAR ENDED
DECEMBER 31, 1998.

         Revenue for 1999 increased $3,413,544 (23.7%) to $17,798,035 from
$14,384,491 for 1998. The increase was largely the result of increased sales of
DXA based central systems, especially in the U.S. and Europe. The increase was
partially offset by decreased sales of DXA-based peripheral systems, especially
in the Pacific Rim as a result of a 1998 large single order sale of peripheral
systems in the Pacific Rim. Sales in the United States, Europe / Africa / Middle
East and Pacific Rim represented 62.6%, 18.6% and 12.0%, respectively, of total
revenue for 1999 and 66.7% , 11.7% and 14.3%, respectively, of total revenue for
1998. A majority of the Company's revenue for 1999 and 1998 was derived from
sales of the Excell, Eclipse and XR36 central systems. Sales of complete bone
densitometry systems represented 86.8% and 91.4% of total revenue for 1999 and
1998, respectively. Sales of parts and services and rental income comprised the
balance of revenue for such periods.

         Sales in the United States have been 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, 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 to the market systems 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.

                                       22
<PAGE>

         With the osteoporosis market having remained flat for the past twelve
months, especially in the U.S., and management's expectation that conditions in
the osteoporosis market may not change in the short-term, the Company announced
in November 1999 a product diversification program into musculoskeletal therapy.
The Company is launching the distribution of new lines of products in several
musculoskeletal market segments, including sports medicine, pain management and
rehabilitation. The Company is 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 three models of the
GALILEO, a patent-pending exercise system designed for use in sports medicine to
improve muscle strength and in rehabilitation to improve mobility through the
rebuilding of muscles. The diversification program includes another product, the
OSSANOL, a novel therapeutic device designed for use in pain management to treat
joints, muscles and ligaments. The first of five Ossanol flagship units was
shipped recently to a leading orthopedic clinic in California. 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
are expected shortly, however there can be no assurance that the Company will
sell a material quantity of such products.

         Cost of revenue as a percentage of revenue was 53.7% and 61.8% for 1999
and 1998, respectively, resulting in a gross margin of 46.3% for 1999 compared
to 38.2% for 1998. The increase in gross margin for 1999 as compared to 1998 was
primarily the result of the benefits derived from the 1999 sale of inventory
previously partially reserved for as obsolete (the reserve on such items was
$676,439), by $379,000 in 1999 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. In addition, the
gross margin for 1998 was adversely affected by a $443,323 charge for an
increased inventory reserve and improved by the $712,000 third quarter 1998 sale
of certain systems that had been written off in prior periods.

         Sales and marketing expense decreased $1,228,836 (18.3%) to $5,482,817
for 1999 from $6,711,653 for 1998, and decreased as a percentage of revenue to
30.8 % from 46.7%. The dollar decrease was primarily due to decreased
advertising and marketing promotion expenses, labor expenses 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. The Company does not expect to
significantly further reduce sales and marketing expenses in the foreseeable
future.

         General and administrative expense decreased $2,312,551(40.6%) to
$3,377,520 for 1999 from $5,690,071 for 1998 and decreased as a percentage of
revenue to 19.0% from 39.5%. The dollar decrease was primarily due to decreased
professional fees and $334,000 in proceeds received in August 1999 in connection
with a directors and officers liability insurance claim and decreased bad debt
expense in 1999 as a result of improved credit and collections management
beginning in 1998. The Company expects the trend of lower professional fees and
bad debt expenses to continue at the 1999 levels for the foreseeable future.

         Research and development expense decreased $564,467 (29.9%) to
$1,325,116 for 1999 from $1,889,583 for 1998, and also decreased as a percentage
of revenue to 7.4% from 13.1%. The decreases in 1999 expenses as compared to
1998 were primarily due to non-recurring expenses in connection with certain
development projects, including the Excell and Apollo DXA bone densitometers
that were introduced in December and May 1998, respectively. The Company expects
the trend of lower research and development costs to continue at the 1999 levels
for the foreseeable future.

         The decreases in expense as a percentage of revenues referred to in the
three preceding paragraphs are also attributable to the Company's increased
revenues for 1999.

         The Company recognized a non-recurring charge of $400,000 in 1998. 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
and $168,377 was paid in 1999.


                                       23
<PAGE>

         Interest expense of $273,005 and $1,289,665 for 1999 and 1998,
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 and 1998 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 1999 as compared to 1998 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 benefit as a percentage of loss before income taxes was
0.0% for the year ended December 31, 1999 as compared to a benefit percentage of
8.9% for 1998. The income tax benefit for 1999 was derived primarily from the
1999 operating loss and was fully offset by the valuation allowance referred to
below and the non-deductibility of goodwill amortization. The 1998 income tax
benefit was also derived primarily from the 1998 operating loss and was reduced
to an effective rate of 8.9% by the valuation allowance referred to below and
the non-deductibility of goodwill amortization.

         Net deferred tax assets increased $577,000 to $3,969,841 at December
31, 1999 from $3,392,841 at December 31, 1998, primarily as a result of an
additional asset recognized for 1999 changes in liabilities having differences
between book and tax treatment which was reduced by a $2,262,434 valuation
allowance. The deferred tax assets can be realized primarily through future
taxable income. Management believes that based on the Company's history of
operating earnings, exclusive of the nonrecurring and other charges, and its
expected income, it is more likely than not that future levels of income will be
sufficient to realize the deferred tax assets, as recorded.

            The Company had a net loss of $2,175,647 ($0.10 per share) for 1999
compared to net loss of $9,713,260 ($1.35 per share) for 1998. Excluding the
after tax effect of these charges, the net loss for 1998 would be $9,475,660
($1.32 per share). 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, 1998 COMPARED TO ITS YEAR ENDED
DECEMBER 31, 1997.

         Revenue for 1998 decreased $6,145,885 (29.9%) to $14,384,491 from
$20,530,376 for 1997. The decrease was largely the result of lower sales of
densitometry systems, especially in the United States, and lower revenue from
sales of parts and services. The decrease in U.S. sales was partially offset by
a large third quarter single order sale of peripheral systems in the Pacific
Rim. Sales in the United States and Pacific Rim represented 66.7% and 14.3%,
respectively, of total revenue for 1998 and 71.5% and 1.1%, respectively, of
total revenue for 1997. A majority of the Company's revenue for 1998 and 1997
was derived from sales of the Eclipse and XR36 central systems. Sales of
complete bone densitometry systems represented 91.4% and 89.7% of total revenue
for 1998 and 1997, respectively. Sales of parts and services and rental income
comprised the balance of revenue for such periods.

         Sales in the United States have been 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, 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 to the market systems that can be operated more
profitably by end users at the applicable reimbursement levels.


                                       24
<PAGE>

         Cost of revenue as a percentage of revenue was 61.8% and 75.8% for 1998
and 1997, respectively, resulting in a gross margin of 38.2% for 1998 compared
to 24.2% for 1997. The increase in gross margin for 1998 is primarily
attributable to the significantly greater inventory reserve charge taken in 1997
($4,161,953 in 1997 compared to $443,323 in 1998) and to the $712,000 third
quarter 1998 sale of certain systems that had been written off in prior periods.
Norland Corp. was a subsidiary of the Company for all of 1998. Because Norland
Corp. has certain fixed manufacturing costs, to the extent that revenues are
lower for any particular period, such fixed costs have a more negative impact on
gross margin.

         Sales and marketing expense increased $1,076,184 (19.1%) to $6,711,653
for 1998 from $5,635,469 for 1997, and increased as a percentage of revenue to
46.7% from 27.4%. The dollar increase was primarily due to increased expenses of
the Company's customer service department required to support the expanding
installed base of systems in the United States, expenses of sales and marketing
personnel hired during the second half of 1997, and the continuing cost of
marketing efforts that were expanded during the second half of 1997.

         General and administrative expense increased $1,001,939 (21.4%) to
$5,690,071 for 1998 from $4,688,132 for 1997 and increased as a percentage of
revenue to 39.5% from 22.8%. The largest component of the increase was an
increase in professional fees of approximately $800,000 (primarily due to
litigations and to matters directly and indirectly related to the restatement of
the Company's financial statements for 1996 and the first three quarters of
1997). In addition, the inclusion of general and administrative expenses of
Norland Corp. for a full year, including an annual goodwill amortization expense
of $595,000 related to the Company's acquisition of Norland Corp. on September
11, 1997, contributed to the increase. The increased expenses were partially
offset by a lower allowance for doubtful accounts in 1998 and the elimination of
expenses for the Company's Dove Medical Systems subsidiary, whose Newbury Park,
California facility was closed in September 1997.

         Research and development expense increased $1,139,736 (152.0%) to
$1,889,583 for 1998 from $749,847 for 1997, and also increased as a percentage
of revenue to 13.1% from 3.7%. The dollar increase was primarily the result of
the inclusion of research and development expenses of Norland Corp. for a full
year, which expenses were partially offset by the elimination of expenses of
Dove Medical Systems.

         The increases in expense as a percentage of revenues referred to in the
three preceding paragraphs are also attributable to the Company's reduced
revenues for 1998.

         The Company recognized non-recurring charges of $400,000 and
$15,128,287 in 1998 and 1997, respectively. In 1998 the Company settled certain
patent infringement litigation and, in connection with the settlement, agreed to
pay $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. The 1997 charge consisted of an in-process research
and development charge ($7,900,000) in connection with the acquisition of
Norland Corp., the closing of the Company's Dove Medical Systems subsidiary
facility and related asset write-offs ($7,126,782) and the acquisition of
certain distribution rights for an ultrasound product ($101,505). With respect
to the 1997 in-process research and development charge and the two projects to
which it related, one such project was later completed and resulted in the May
1998 introduction of the Apollo DXA. The second project is ongoing and is not
expected to have a significant effect on the Company for the foreseeable future.

         Interest expense of $1,289,665 and $383,962 for 1998 and 1997,
respectively, represents interest on the $16,250,000 Purchase Note issued by the
Company in connection with the acquisition of Norland Corp. The increase in
expense reflects the fact that the Purchase Note was issued on September 11,
1997 and was outstanding for all of 1998. Interest income in 1998 and 1997
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 1998 as compared to 1997
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 benefit as a percentage of loss before income taxes was
8.9% for the year ended December 31, 1998 as compared to a benefit percentage of
12.7% for 1997. The income tax benefit for 1998 was derived primarily from the
operating loss and was reduced to an effective rate of 8.9% by the valuation
allowance referred to below and the non-deductibility of goodwill amortization.
The 1997 income tax benefit also derived primarily from the 1997 operating loss


                                       25
<PAGE>

and was reduced to an effective rate of 12.7% by the non-deductibility of the
write-offs of both in-process research and development and goodwill.

         Net deferred tax assets increased $374,548 to $3,392,841 at December
31, 1998 from $3,018,293 at December 31, 1997, primarily as a result of an
additional asset recognized for 1998 net operating losses which was reduced by a
$2,421,338 valuation allowance. The deferred tax assets can be realized
primarily through future taxable income. Management believes that based on the
Company's history of operating earnings, exclusive of the nonrecurring and other
charges in 1998 and 1997, and its expected income, it is more likely than not
that future levels of income will be sufficient to realize the deferred tax
assets, as recorded.

         The Company had a net loss of $9,713,260 ($1.35 per share) for 1998
compared to net loss of $18,584,005 ($2.60 per share) for 1997. The
non-recurring charges of $400,000 ($0.06 per share) and $15,128,287 ($2.12 per
share) recognized in 1998 and 1997, respectively, increased the net losses for
such years on an after-tax basis by $364,400 and $13,439,907 respectively.
Excluding the after tax effect of these charges, the net losses for 1998 and
1997 would be $9,475,660 ($1.32 per share) and $5,144,098 ($0.72 per share),
respectively.

         LIQUIDITY AND CAPITAL RESOURCES

         At December 31, 1998, the Company had cash of $1,105,140. At December
31, 1999, the Company had cash of $67,666. The decrease in cash was primarily
the result of the payment of operating expenses, increased accounts receivable
and capital expenditures partially offset by increased accounts payable, the
$500,000 proceeds from a common stock issuance and $312,000 in net bank
borrowings.

         The Company's accounts receivable increased $640,312 (34.1%) to
$2,517,583 at December 31, 1999 from $1,877,271 at December 31, 1998, primarily
reflecting higher revenues for the year.

         Property and equipment as of December 31, 1999 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 2000
are estimated to be $250,000, and include additional C.U.B.A.Clinical
demonstration systems and tooling for certain components of bone densitometry
products.

         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 1/2%. 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 will be 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 have agreed that
the remainder will be paid in installments during 2000.

         The Company believes that its current cash position, together with cash
flow from operations, will be adequate to fund the Company's operations for at
least the next twelve months. 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
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.


                                       26
<PAGE>

         The Company has been seeking additional equity and debt financing. With
respect to bank financing, the Company is presently negotiating with its bank to
obtain an additional $500,000 credit facility in connection with its accounts
receivable concerning customers outside of the U.S. The Company does not have a
commitment for such bank financing or other financing, and there can be no
guarantee that the Company will be able to obtain such financing. The failure to
do so could materially adversely affect 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.

YEAR 2000 ISSUE

         Year 2000 issues exist when dates in computer systems are recorded
using two digits (rather than four) and are then used for arithmetic operations,
comparisons or sorting. A two-digit date recording may recognize a date using
"00" as 1900 rather than 2000, which could cause the Company's computer systems
to perform inaccurate computations.

         During 1999, the Company completed a detailed assessment of its
information systems and other hardware and software at each of the Company's
business units. Based upon these assessments, non-compliant software or hardware
were either upgraded to Year 2000 versions, remediated to become Year 2000
compliant or replaced by other hardware or software which provided Year 2000
compliance and other benefits. As a result of the Company's Year 2000 readiness
efforts, the Company's mission critical systems successfully distinguished
between the year 1900 and 2000 without any critical system failures. In
addition, the Company has not experienced an adverse impact due to Year 2000
issues at any of its significant suppliers. The Company will continue to monitor
its mission critical applications and equipment through the normal course of its
business operations to ensure that any Year 2000 matters that do arise are
addressed promptly.

         With regard to financial cost, implementation of the Year 2000
readiness programs resulted in significant time expenditure by Company personnel
and outside software and equipment providers and some expenditures for equipment
and software upgrades and replacements. Because many of these efforts have been
designed to achieve other functional or systems improvements, in addition to
Year 2000 compliance, and were carried out by operational personnel within each
business unit, it is difficult to allocate particular funding levels solely to
the Year 2000 compliance activities. However, the Company estimates it has
incurred $75,000 in operating expenses and $25,000 in capital expenditures on
Year 2000 activities through December 31, 1999.

ACCOUNTING PRONOUNCEMENTS

       SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activity", becomes effective for the Company beginning January 1, 2001. The
Company does not expect the adoption of this statement to have a material impact
on the Company's financial statements.


                                       27
<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 long-term and variable rate
short-term debt. See Note 8 for a description of the Note Payable. All items
described are non-trading and are stated in U.S. dollars.

<TABLE>
<CAPTION>
                                                   Expected Maturity Dates                      Fair Value
                                        -----------------------------------------------     -------------------
                                           2000             2002             Total           December 31,1999
                                        ------------    --------------    -------------     -------------------
<S>                                       <C>           <C>               <C>                      <C>
CASH AND CASH EQUIVALENTS

Money Market Mutual Fund Shares
and Bank deposits-non interest bearing    $  67,666                       $     67,666             $   67,666

Average interest rate-4.8%

BANK BORROWINGS

Variable interest rate-9.75%              $ 311,816                         $  311,816             $  311,816

NOTE PAYABLE

Fixed interest rate-6.5%                                 $1,250,000         $1,250,000             $1,106,562

</TABLE>


                                       28
<PAGE>

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.


                        CONSOLIDATED FINANCIAL STATEMENTS

                                      INDEX
                                      -----

                                                                            PAGE

Independent Auditors' Report                                                 30

Report of Independent Accountants                                            31

Financial Statements:

    Consolidated Balance Sheets as of December 31, 1999 and 1998             32

    Consolidated Statements of Operations for the years ended
       December 31, 1999, 1998 and 1997                                      33

    Consolidated Statements of Changes in Stockholders' Equity
       for the years ended December 31, 1999, 1998 and 1997                  34

    Consolidated Statements of Cash Flows for the years ended
       December 31, 1999, 1998 and 1997                                      35

    Notes to Consolidated Financial Statements                               37

Financial Statement Schedule:

    Valuation and Qualifying Accounts                                        51



                                       29
<PAGE>

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


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

We have audited the accompanying consolidated balance sheets and the
financial statement schedule of Norland Medical Systems, Inc. and
subsidiaries (the "Company") as of December 31, 1999 and 1998 and the related
consolidated statements of operations, changes in stockholders' equity and
cash flow, for each of the two years in the period ended December 31, 1999.
These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these 1999 and
1998 financial statements and financial statement schedule based on our
audits.

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

In our opinion, the 1999 and 1998 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, 1999 and 1998, and the
consolidated results of their operations and their cash flows for the years then
ended in conformity with generally accepted accounting principles. In addition,
in our opinion, the 1999 and 1998 financial statement schedule referred to
above, when considered in relation to the basic 1999 and 1998 consolidated
financial statements taken as a whole, presents fairly, in all material
respects, the information set forth therein.


DELOITTE & TOUCHE LLP

Hartford, Connecticut
February 23, 2000


                                       30
<PAGE>

                        REPORT OF INDEPENDENT ACCOUNTANTS
                        ---------------------------------


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

In our opinion, the consolidated statements of operations, of changes in
stockholders' equity and of cash flows for the year ended December 31, 1997
present fairly, in all material respects, the results of operations and cash
flows of Norland Medical Systems, Inc. and its subsidiaries for the year ended
December 31, 1997, in conformity with accounting principles generally accepted
in the United States. In addition, in our opinion, the financial statement
schedule listed in the index appearing on page 29 presents fairly, in all
material respects, the information set forth therein when read in conjunction
with the related consolidated financial statements. These financial statements
and financial statement schedule are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements and financial statement schedule based on our audit. We conducted our
audit of these statements in accordance with auditing standards generally
accepted in the United States, which require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for the opinion expressed above. We have not
audited the consolidated financial statements of Norland Medical Systems, Inc.
for any period subsequent to December 31, 1997.


                                                        COOPERS & LYBRAND L.L.P.

New York, New York
March 31, 1998


                                       31
<PAGE>

                          NORLAND MEDICAL SYSTEMS, INC.
                           CONSOLIDATED BALANCE SHEETS

                           December 31, 1999 and 1998

                                     ASSETS

<TABLE>
<CAPTION>
                                                                                  1999               1998
                                                                              ------------       ------------
<S>                                                                           <C>                <C>
Current assets:
  Cash and cash equivalents                                                   $     67,666       $  1,105,140
  Accounts receivable - trade, less an allowance for doubtful accounts
    of $351,000 and $300,000 at December 31, 1999 and 1998, respectively         2,517,583          1,877,271
  Income taxes receivable                                                               --            340,000
  Inventories, net                                                               2,244,317          2,521,345
  Prepaid expenses and other current assets                                        201,370            187,354
  Deferred income taxes                                                          1,690,755          1,817,217
                                                                              ------------       ------------
          Total current assets                                                   6,721,691          7,848,327
                                                                              ------------       ------------
Officer's loan receivable                                                               --             91,304
Property and equipment, net                                                      1,175,947          1,392,032
Deferred income taxes, net                                                       2,279,086          1,575,624
Goodwill, net                                                                    7,555,564          8,150,620
                                                                              ------------       ------------
         Total assets                                                         $ 17,732,288       $ 19,057,907
                                                                              ============       ============


                      LIABILITIES AND STOCKHOLDERS' EQUITY


Current liabilities:
   Bank borrowings                                                            $    311,816       $         --
   Accounts payable - related parties                                              372,244            292,315

   Accounts payable - trade                                                      2,218,639          1,435,616

   Accrued expenses                                                              1,633,641          2,011,396
   Accrued warranty expenses                                                       530,000            920,000
   Unearned service revenue                                                        387,598            203,823
   Accrued interest expense                                                        143,720            577,184
                                                                              ------------       ------------
          Total current liabilities                                              5,597,658          5,440,334
                                                                              ------------       ------------

Note payable, net of discount                                                    1,106,562          4,685,690
Other                                                                                   --            140,000

Stockholders' equity:
  Common stock - 25,956,278 and 14,164,031
   shares issued and outstanding and 45,000,000
   and 20,000,000 shares authorized at December 31,
   1999 and 1998, respectively                                                      12,977              7,081
  Additional paid-in capital                                                    37,542,279         33,136,343
  Accumulated deficit                                                          (26,527,188)       (24,351,541)
          Total stockholders' equity                                            11,028,068          8,791,883
                                                                              ------------       ------------

          Total liabilities and stockholders' equity                          $ 17,732,288       $ 19,057,907
                                                                              ============       ============
</TABLE>

          See accompanying notes to consolidated financial statements.

                                       32
<PAGE>

                          NORLAND MEDICAL SYSTEMS, INC.
                      CONSOLIDATED STATEMENTS OF OPERATIONS

                  Years ended December 31, 1999, 1998 and 1997

<TABLE>
<CAPTION>
                                                            1999              1998               1997
                                                        ------------       ------------       ------------
<S>                                                     <C>                <C>                <C>
Revenue (including sales to affiliates of $92,883,
   $9,803 and $349,483 in 1999, 1998 and 1997,

   respectively)                                        $ 17,798,035       $ 14,384,491       $ 20,530,376
Cost of revenue                                            9,549,677          8,888,947         15,568,876
                                                        ------------       ------------       ------------
   Gross profit                                            8,248,358          5,495,544          4,961,500

Sales and marketing expense                                5,482,817          6,711,653          5,635,469


General and administrative expense (including
  an overhead charge from an affiliate of
  $7,800 in 1997)                                          3,377,520          5,690,071          4,688,132
Research and development expense                           1,325,116          1,889,583            749,847
In-process research and development charge                        --                 --          7,900,000
Non-recurring charges                                             --            400,000          7,228,287
                                                        ------------       ------------       ------------
Operating loss                                            (1,937,095)        (9,195,763)       (21,240,235)

Other income (expense):
  Interest expense                                          (273,005)        (1,289,665)          (383,962)
  Interest income                                             34,453             86,168            345,745

  Loss on investment in Vitel, Inc.                               --           (260,000)                --
                                                        ------------       ------------       ------------

Loss before income tax benefit                            (2,175,647)       (10,659,260)       (21,278,452)

Income tax benefit                                                --           (946,000)        (2,694,447)
                                                        ------------       ------------       ------------

Net loss                                                $ (2,175,647)      $ (9,713,260)      $(18,584,005)
                                                        ============       ============       ============


Basic and diluted weighted average shares                 21,616,010          7,183,032          7,145,465


Basic and diluted loss per share                        $      (0.10)      $      (1.35)      $      (2.60)

</TABLE>

               See notes to the consolidated financial statements.


                                       33
<PAGE>

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

                  Years ended December 31, 1999, 1998 and 1997

<TABLE>
<CAPTION>
                                                                                                                      Retained
                                                                                                     Additional        Earnings
                                                                                       Common          Paid-in       (Accumulated
                                                       Total            Shares         Stock           Capital         Deficit)
                                                   ------------      ------------   ------------     ------------     ------------
<S>                                                <C>                  <C>         <C>              <C>              <C>
Balance as of January 1, 1997                      $ 26,107,346         6,904,781   $      3,452     $ 22,158,170     $  3,945,724

Issuance of shares for stock options exercised           37,644           257,750            128           37,516               --
Tax benefit related to stock options                     50,000                --             --           50,000               --
Net loss                                            (18,584,005)               --             --               --      (18,584,005)
                                                   ------------      ------------   ------------     ------------     ------------
Balance as of December 31, 1997                       7,610,985         7,162,531          3,580       22,245,686      (14,638,281)

Issuance of shares for stock options exercised                1             1,500              1               --               --
Reduction in Norland Corp. acquisition
  price by reduction of principal of Note
  Payable, net of discount                            9,004,157                --             --        9,004,157               --

Issuance of shares in partial payment of
  Note Payable                                        1,890,000         7,000,000          3,500        1,886,500               --
Net loss                                             (9,713,260)               --             --               --       (9,713,260)
                                                   ------------      ------------   ------------     ------------     ------------
Balance as of December 31, 1998                       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)
                                                   ============      ============   ============     ============     ============
</TABLE>


               See notes to the consolidated financial statements.

                                       34
<PAGE>

                          NORLAND MEDICAL SYSTEMS, INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOW

                  Years ended December 31, 1999, 1998 and 1997

<TABLE>
<CAPTION>
                                                                                    1999              1998              1997
                                                                                ------------      ------------      ------------
<S>                                                                             <C>               <C>               <C>
Cash flows from operating activities:
                                                                                $ (2,175,647)     $ (9,713,260)     $(18,584,005)
                                                                                ------------      ------------      ------------
Net loss
Adjustments to reconcile net loss to net cash used in operating activities:
      Non-recurring charges                                                               --           350,000         7,228,287
      Provision for doubtful accounts                                                 45,249         1,357,769         1,979,000
      Deferred income taxes                                                         (340,000)         (496,000)       (2,136,878)
      Amortization expense                                                           705,455           733,811           654,449
      Depreciation expense                                                           574,072           408,535           158,307
      Gain on sale of investment                                                          --                --           (47,365)
      Loss on investment in Vitel, Inc.                                                   --           260,000                --
      Inventory write-off (recovery)                                                (676,439)          443,323         4,161,593
      In-process research and development charge                                          --                --         7,900,000
      Other                                                                           92,746                --                --
      Changes in assets and liabilities, net of business acquired:
          Accounts receivable                                                       (685,561)        2,930,427            42,630
          Inventories                                                                953,467         2,199,014        (3,215,564)
          Prepaid expenses and other current assets                                  (28,713)           19,867           182,443
          Accounts payable                                                           862,952          (878,752)       (1,416,163)
          Accrued expenses                                                        (1,157,444)          404,090           339,556
          Income taxes receivable                                                    340,000         1,434,314          (663,593)
          Customer deposits                                                               --          (500,000)          452,150
                                                                                ------------      ------------      ------------
            Total adjustments                                                        685,784         8,666,398        15,618,852
                                                                                ------------      ------------      ------------
                        Net cash used in operating activities                     (1,489,863)       (1,046,862)       (2,965,153)
                                                                                ------------      ------------      ------------

Cash flows from investing activities:
      Purchase of property and equipment                                            (355,733)         (925,401)         (284,917)
      Loans to officers                                                               (3,696)           (4,800)       (1,909,573)
      Repayment of loans to officers                                                      --                --         2,404,773
      Purchase of Norland Corporation, net of cash acquired                               --                --        (1,852,510)
      Sale of investment available for sale                                               --                --         1,996,403
      Loans and advances to affiliates                                                    --                --        (2,509,979)
      Repayment of loan to affiliate                                                      --                --            32,046
                                                                                ------------      ------------      ------------
                Net cash used in investing activities                               (359,429)         (930,201)       (2,123,757)
                                                                                ------------      ------------      ------------

Cash flows from financing activities:
      Proceeds from issuance of common stock                                         500,000                --                --
      Net bank borrowings                                                            311,816                --                --
      Proceeds from stock options exercised                                                2                 1            37,644
                                                                                ------------      ------------      ------------
                Net cash provided by  financing activities                           811,818                 1            37,644
                                                                                ------------      ------------      ------------

Net decrease in cash and cash equivalents                                         (1,037,474)       (1,977,062)       (5,051,266)

Cash and cash equivalents at beginning of year                                     1,105,140         3,082,202         8,133,468
                                                                                ------------      ------------      ------------

Cash and cash equivalents at end of year                                        $     67,666      $  1,105,140      $  3,082,202
                                                                                ============      ============      ============
</TABLE>

               See notes to the consolidated financial statements.


                                       35
<PAGE>

                          NORLAND MEDICAL SYSTEMS, INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOW

            Years ended December 31, 1999, 1998 and 1997 (Concluded)

Noncash operating, investing and financing activities:

In the year ended December 31, 1997, the Company's tax benefit related to stock
options increased additional paid-in capital by $50,000.

On September 11, 1997, the Company issued a $15,522,461 Note Payable (net of
discount) as part of the purchase price for Norland Corporation (Note 8).

On December 31, 1998, March 28, 1999 and June 16, 1999 the Company issued
7,000,000, 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.

Cash paid for:

                            1999             1998             1997
                          --------         --------         --------

Income taxes              $    376         $ 23,915         $201,830
                          ========         ========         ========

Interest expense          $596,069         $858,102         $ 90,880
                          ========         ========         ========



               See notes to the consolidated financial statements.


                                       36
<PAGE>

                          NORLAND MEDICAL SYSTEMS, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                  Years ended December 31, 1999, 1998 and 1997


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
therapeutic devices used in sports medicine, rehabilitative medicine and in pain
management to treat joints, muscles, and ligaments. NMS is the exclusive
marketer, distributor and sub-distributor of certain medical products of Bionix
L.L.C. (U.S.) ("Bionix"), McCue Plc (U.K.) and Stratec Medizintechnik GmbH
(Germany) ("Stratec"). 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.
Stratec is wholly-owned by a NMS shareholder.

On September 11, 1997, the Company acquired Norland Corporation (U.S.) ("Norland
Corp.") from Norland Medical Systems B.V. (Netherlands) ("NMS BV"). On April 2,
1996, the Company acquired Dove Medical Systems (U.S.) ("Dove"), a manufacturer
of low-cost bone densitometry systems.

The Company believes that its current cash position, together with cash flow
from operations, will be adequate to fund the Company's operations at least
through December 31, 2000. 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. The Company is also continuing to be more aggressive in seeking
to collect outstanding receivables and selling its inventory of used bone
densitometers. The Company has been seeking additional equity and debt
financing. 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.

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.


                                       37
<PAGE>

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.

Prior to the September 1997 acquisition of Norland Corp., NMS purchased products
from Norland Corp. and Stratec (the "manufacturers") on the basis of sales
orders in hand. NMS was invoiced by the manufacturers when the product was
shipped. After the acquisition, these arrangements have been continued with
respect to Stratec. 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 the 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.

CASH AND CASH EQUIVALENTS

Cash and cash equivalents include highly liquid short-term investments purchased
with initial maturities of three months or less.

STOCK-BASED COMPENSATION

Stock-based compensation related to employees is accounted for in accordance
with the intrinsic method.

INVESTMENTS

The Company had a minority interest in Vitel, Inc. (U.S.) that was accounted for
as a long-term investment according to the cost method. In 1998 the investment
was written off reflecting management's estimate that its carrying value was
other than temporarily impaired.

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.


                                       38
<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 system to a prominent scientist or research institution.
In such cases, the Company will carry the device at cost less accumulated
amortization, with amortization calculated on a straight-line basis over
thirty-six months.

GOODWILL

Goodwill, net of amortization, was $7,555,564 and $8,150,620 at December 31,
1999 and 1998, respectively, and is being amortized on a straight-line basis
over 15 years. Accumulated amortization of goodwill was $1,370,281 and $775,225
at December 31, 1999 and 1998, respectively.

LONG-LIVED ASSETS

Management evaluates on an ongoing basis whether events or changes in
circumstances exist that would indicate 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.

Options to purchase 952,000, 867,500 and 751,750 shares of common stock were
outstanding at December 31, 1999, 1998 and 1997, respectively, but were not
included in the computation of diluted loss per share because their effect
was anti-dilutive.


                                       39
<PAGE>

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, 1999 and 1998 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 (Note 14).

MANAGEMENT ESTIMATES

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

RECLASSIFICATION

Certain information in 1997 and 1998 has been reclassified to conform to the
current year presentation.

ACCOUNTING PRONOUNCEMENTS

SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activity",
becomes effective for the Company beginning January 1, 2001. The Company does
not expect the adoption of this statement to have a material impact on the
Company's financial statements.

3.     DISTRIBUTION AGREEMENTS:

Prior to the September 1997 acquisition of Norland Corp., the Company was party
to an exclusive distribution agreement with Norland Corp. and Stratec which
extended until December 31, 2015. The original pricing formula in the agreement
was such that the margin retained by NMS was equal to one-half of the difference
between the price at which the product was sold to the distributor or end user
and the direct cost of material, parts and labor of Norland Corp. or Stratec.
This agreement was subject to renewal for an indefinite number of successive
five-year terms and contained no purchase obligation on the part of NMS. Under
this agreement, the Company could not distribute devices manufactured by any
non-affiliate of the Company which competed directly with the devices obtained
from the manufacturers (except for devices using ultrasound technology).

The distribution agreement was amended in 1996 to change the pricing formula.
The amended pricing formula became effective as of October 1, 1996 with respect
to Norland Corp. products and as of December 1, 1996 with respect to Stratec
products. Under the amended pricing formula, NMS paid Norland Corp. and Stratec
an amount for each system equal to the aggregate costs of the components and
parts used in the system plus the actual labor costs plus an agreed upon markup
on the costs of all non-computer components. The manufacturers were also
entitled to receive royalties equal to 5% of the price for which NMS sold
certain devices. In the case of Norland Corp., the royalty applied to all new
systems manufactured by Norland Corp. (I.E., any system other than the pDEXA,
the


                                       40
<PAGE>

Eclipse and the XR-36). In the case of Stratec, the royalty applied to any
system manufactured by Stratec which uses pQCT technology. If the aggregate
amount payable by NMS to the manufacturers for a year under the amended pricing
formula would exceed the aggregate amount payable under the original pricing
formula, then the original pricing formula would apply. The amended pricing
formula was to be in effect until December 31, 1997, subject to automatic
renewal with respect to each manufacturer for successive one year periods,
unless such manufacturer elected to terminate the amended pricing formula
effective on December 31 of any year by notice given to NMS not less than 90 nor
more than 180 days prior to the end of such year.

Upon the completion of the acquisition of Norland Corp. by NMS on September 11,
1997, the distribution agreement with Norland Corp. and Stratec was terminated,
and NMS entered into a new distribution agreement with Stratec containing
essentially the same provisions (including pricing and term of the agreement) as
the prior distribution agreement did with respect to Stratec and Stratec
products. Stratec has exercised its right to terminate the amended pricing
formula as of December 31, 1997 and reinstate the original pricing formula.

On October 1, 1999, the Company and Stratec agreed to terminate their September
11, 1997 distribution agreement and enter into a new arrangement. Stratec and
Bionix entered into a distribution agreement dated October 1, 1999 with respect
to the right to exclusively distribute Stratec products in North and Latin
America. Concurrently, Bionix and NMS entered into an exclusive sub-distribution
agreement with respect to the sale of Stratec products in North and Latin
America through September 30, 2003. Under terms of the sub-distribution
agreement, NMS may purchase Stratec products at a fixed percentage discount from
the products' actual selling prices to the customers.

NMS and Bionix also entered into two exclusive sub-distribution agreements dated
October 1, 1999 with respect to certain non-bone densitometry products sold
through Bionix according to its distribution agreements with the third party
companies. Under terms of the four-year sub-distribution agreements, NMS may
purchase products from Bionix at a fixed percentage discount from contractually
stated selling prices subject to a mechanism to periodically adjust the
contractual selling prices.

4.     NON-RECURRING AND OTHER CHARGES:

The Company recognized non-recurring charges of $400,000, and $15,128,287 in
1998 and 1997, respectively. 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. A $50,000 advance
payment was made in 1998 and an additional $168,377 was paid in 1999.

At the time of the acquisition of Norland Corp. in September 1997, certain
research and development projects acquired were not at a stage in which
technological feasibility had been achieved and were determined to have no
alternative future use. Accordingly, $7,900,000 of the purchase price was
allocated to this in-process research and development and expensed (Note 7).
Also in 1997, in response to the increasing dominance of the peripheral bone
densitometry market by DXA technology, the Company closed the Newbury Park
facility of its Dove subsidiary and recorded a $7,126,782 write-off related to
the value of fixed assets, goodwill, a patent and other intangible assets,
having concluded that expected cash flows will not enable the Company to recover
any of the remaining carrying value of such assets. In August 1997, the Company
acquired distribution rights to an ultrasound product and recorded a $101,505
non-recurring charge for costs incurred in connection with the selection of an
ultrasound product. In addition to these 1997 non-recurring charges, the Company
recognized (i) additional provisions for doubtful accounts of $1,850,000, which
is reflected in general and administrative expense, related to its decision to
close the Dove facility ($400,000) and for certain other customers for which
collection was no longer expected ($1,450,000); and (ii) a $4,161,593 charge to
cost of revenue related to a write-off of demonstration systems ($2,165,375) and
reserves for excess inventory ($1,996,218, including $1,221,218 of inventory at
its Dove subsidiary).


                                       41
<PAGE>

5.   INVENTORIES:

Inventories consist of the following as of December 31:

                                        1999              1998
                                     -----------      -----------

Raw materials, product kits,
  Spare parts and sub-assemblies     $ 2,093,351      $ 2,322,744
Work in progress                         380,511          380,835
Finished goods                           420,455        1,151,302
Rental systems                                --           66,464
Inventory reserve                       (650,000)      (1,400,000)
                                     -----------      -----------
                                     $ 2,244,317      $ 2,521,345
                                     ===========      ===========

6. PROPERTY AND EQUIPMENT:

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

                                        1999              1998
                                     -----------      -----------

Machinery and equipment              $ 1,482,475      $ 1,386,972
Demonstration systems                    664,640          713,096
Tooling                                  659,674          641,202
Furniture and fixtures                   436,629          433,877
Leasehold improvements                   116,896          116,896
Construction in progress                 154,470           47,011
                                     -----------      -----------
                                       3,514,784        3,339,054

Accumulated depreciation
  and amortization                    (2,338,837)      (1,947,022)
                                     -----------      -----------

                                     $ 1,175,947      $ 1,392,032
                                     ===========      ===========

7.   ACQUISITIONS:

NORLAND CORP.

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") (Note 8).


                                       42
<PAGE>

The cost of acquisition (including acquisition costs and a discount applied to
the Note to reflect a market rate of interest) has been allocated based on the
fair value of assets acquired and liabilities assumed as follows:


    Purchase price, net of Note discount of $728,000             $16,772,000
    Loans and advances to Norland Corp.                            2,757,000
    Current assets                                               (4,467,000)
    Noncurrent assets                                              (368,000)
    Deferred tax assets, net                                       (609,000)
    Current liabilities assumed                                    2,739,000
    Noncurrent liabilities assumed                                     2,000
    In-process research and development charge                   (7,900,000)
                                                               ------------

    Goodwill                                                   $  8,926,000
                                                               ============

Acquisition costs are primarily legal, accounting and investment banking fees,
all of which are directly related to the transaction. Certain research and
development projects acquired were not at a stage in which technological
feasibility had been achieved and were determined to have no alternative future
use. Accordingly, $7,900,000 of the purchase price was allocated to this
in-process research and development and expensed in 1997. The goodwill is being
amortized using the straight-line method over fifteen years. The purchase
agreement required an additional contingent payment if certain financial targets
were met for the year ended December 31, 1997. The targets were not met and no
additional payment was required.

On December 31, 1998, in connection with the settlement of certain 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 Note from $16,250,000 to
$7,450,000 and the annual interest rate was reduced to 6 1/2% from 7%.

Pro forma unaudited consolidated operating results and related per share amount
of the Company for the year ended December 31, 1997, assuming the acquisition
had been made as of January 1, 1997, are summarized below. These unaudited pro
forma results have been prepared for comparative purposes only and include
certain adjustments to give effect to amortization of goodwill, patent and other
intangible assets and certain other adjustments, together with related income
tax effects. The unaudited pro forma information is not necessarily indicative
of either the results of operations that would have occurred had the acquisition
been made on January 1, 1997 or that may occur in the future.

                                                           1997
                                                       ------------
                                                        (unaudited)

         Net sales                                    $  20,289,740
         Net loss                                      (14,842,044)
         Basic and diluted loss per share                   $(2.08)

DOVE MEDICAL SYSTEMS

On April 2, 1996, the Company acquired all of the outstanding shares of Dove and
a patent and other intangible assets owned by Dove's majority shareholder and
certain other investors. The Company paid consideration of $6,911,529,
consisting of $3,600,000 in cash and 161,538 shares of the Company Common Stock
valued at $3,311,529. The operating results of Dove have been included in the
accompanying consolidated statements of operations from the date of acquisition.
The acquisition was accounted for using the purchase method of accounting, and,
accordingly, the purchase price was allocated to the assets purchased and the
liabilities assumed based on the fair values at the date of acquisition. The
amount allocated to the patent and other intangible assets was $3,391,735. The
excess purchase price over the fair values of the net assets was $3,308,011 and
was recorded as goodwill. In connection with the closing of the Dove facility,
NMS took a $7,126,782 non-recurring charge in 1997 (Note 4).


                                       43
<PAGE>

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 may make borrowings according to an accounts
receivable based formula. Interest on any outstanding borrowings accrues at a
variable rate based on prime plus 1.25%. Borrowings under the agreement are
collateralized by the Company's assets. In connection with such agreement, the
Company has 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%.

In connection with the acquisition of Norland Corp. (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 is not due until such time as the Company receives at least $2,000,000
in proceeds from an equity financing transaction. The remaining principal was
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 is uncollateralized.

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 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 a $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 Note activity described above may be summarized as follows as of December
31, 1999:


Note principal as of September 11, 1998 acquisition date           $16,250,000
Reduction in Note principal from reduced purchase price             (8,800,000)
Payments of Note principal by delivering 18,122,580 shares          (6,200,000)
Note discount for market rate of interest                             (143,438)
                                                                   -----------
Note payable, net of discount                                      $ 1,106,562
                                                                   ===========


                                       44
<PAGE>

9.  STOCKHOLDERS' EQUITY:

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, 1999 and 1998, there
was no Preferred Stock outstanding.

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.

The amended and restated 1994 Stock Option Plan includes 2,250,000 shares of
Common Stock reserved for issuance. On June 2, 1999, the Company established a
new Board of Directors Stock Option Plan (the "Board Plan"). Under the Board
Plan, 350,000 shares of Common Stock are reserved for issuance to non-employee
Board members, including the automatic option grant program grants options to
new non-employee Board members to purchase 30,000 shares of Common Stock at an
exercise price equal to the fair market value at the grant date for a maximum
term of ten years and is subject to 25% vesting each year and early termination
upon the optionee's leaving the Board. In addition, Board members are granted
20,000 options as compensation for attending Board meetings.

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.

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

<TABLE>
<CAPTION>
                                          Range of                          Range of                        Range of
                                        Option Prices                     Option Prices                   Option Prices
                            1999          Per Share          1998           Per Share         1997          Per Share
                         ------------  ----------------  --------------  ----------------  -----------   ----------------
<S>                          <C>         <C>                   <C>         <C>                <C>          <C>
Options outstanding
At beginning of year         867,500     $0.0005-15.00         751,750     $0.0005-15.00      674,250      $0.0005-22.17

Cancellations               (70,500)        $0.53-6.38       (115,500)       $6.38-20.00    (138,750)        $7.50-22.17

Granted                      158,000        $0.35-0.67         232,750             $0.67      474,000        $6.38-11.50


Exercised                    (3,000)           $0.0005         (1,500)           $0.0005    (257,750)       $0.0005-7.50
                          ---------                         ---------                      ---------

Options outstanding
  at end of year            952,000      $0.0005-15.00        867,500      $0.0005-15.00     751,750        $0.0005-15.00
                          =========                         =========                      =========

Options exercisable
at end of year             430,250                            251,313                        114,188
                          =========                         =========                      =========

Options available
for grant at end of year    665,000                           752,500                        869,750
                          =========                         =========                      =========
</TABLE>


                                       45
<PAGE>

The following table summarizes information about significant groups of stock
options outstanding at December 31, 1999:

<TABLE>
<CAPTION>
                         Options Outstanding                       Options Exercisable
                  -------------------------------------   ---------------------------------------
                                            Weighted                                  Weighted
                                Weighted     Average                     Weighted      Average
                                Average     Remaining                     Average     Remaining
     Exercise       Options     Exercise   Contractual      Options      Exercise    Contractual
      Prices      Outstanding    Price    Life In Years   Exercisable      Price    Life In Years
      ------      -----------    -----    -------------   -----------      -----    -------------
<S>                  <C>        <C>            <C>            <C>         <C>             <C>
      $0.0005        1,500      $0.0005        4              1,500       $0.0005         4
  $0.35-$0.67      829,000        $0.63        8            344,750         $0.67         7
        $9.75        1,500        $9.75        6              1,500         $9.75         6
       $11.50       30,000       $11.50        8             15,000        $11.50         8
       $15.00       90,000       $15.00        6             67,500        $15.00         6
                   -------                                  -------
                   952,000                                  430,250
                   =======                                  =======
</TABLE>

Had compensation expense for the Company's 1999, 1998 and 1997 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, the Company's net loss
and loss per common share for 1999, 1998 and 1997 would approximate the pro
forma amounts below:

<TABLE>
<CAPTION>
                                               1999              1998            1997
                                               ----              ----            ----
<S>                                        <C>              <C>              <C>
   Net loss:
      As reported                          $(2,175,647)     $ (9,713,260)    $(18,584,005)
      Pro forma                            $(2,707,945)      (10,168,139)     (19,734,360)
   Loss per share:
      As reported - Basic and diluted           $(0.10)           $(1.35)          $(2.60)
      Pro forma - Basic and diluted             $(0.13)           $(1.41)          $(2.76)
</TABLE>

The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following assumptions used
for grants during each of the years ended December 31, 1999, 1998 and 1997:
dividend yield of 0%, risk-free weighted average interest rates of 6.5%, 5%
and 5.7%, respectively, expected volatility factors of 146%, 117% and 89%,
respectively, and an expected option term of 4 years. The weighted average
fair value at date of grant for options granted during 1999, 1998 and 1997
was $2.31, $0.49 and $5.13 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 $42,703, $42,710 and $14,570 for the years ended December 31, 1999,
1998 and 1997, respectively.


                                       46
<PAGE>

11.  INCOME TAXES:

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


                          1999                1998                   1997
                      -----------          -----------           -----------
Current:
   Federal            $   340,000          $  (463,000)          $  (557,569)
   State                       --               13,000                    --
                      -----------          -----------           -----------
                          340,000             (450,000)             (557,569)
                      -----------          -----------           -----------

Deferred:
   Federal               (340,000)            (452,000)           (2,030,830)
   State                       --              (44,000)             (106,048)
                      -----------          -----------           -----------
                         (340,000)            (496,000)           (2,136,878)
                      -----------          -----------           -----------
Total                 $        --          $  (946,000)          $(2,694,447)
                      ===========          ===========           ===========


The benefits from income taxes differ from the statutory federal income tax
rate of 34% for the years ended December 31 as follows:

                                   1999              1998              1997
                                  ------            ------            ------


Statutory income tax rate         (34.0%)           (34.0%)           (34.0%)
Valuation allowance                23.1%             23.0%             --
State income taxes, net of
    federal benefit                  --              (0.3%)            (1.3%)
Amortization of goodwill            9.9%              1.9%              1.5%
In-process research and
    Development charge               --                --              12.6%
Write-off of goodwill                --                --               8.5%
Other                               1.0%              0.5%               --
                                 ------            ------            ------
Effective income tax rate           0.0%             (8.9%)           (12.7%)
                                 ======            ======            ======

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.

                                                    1999              1998
                                                 -----------       -----------
Deferred tax assets and liabilities:
    Inventory                                    $ 1,143,706       $ 1,440,759
    Allowance for doubtful accounts                  130,923           111,900
    Accrued liabilities                              318,743           343,160
    Other                                             97,383           (78,602)
        Net current deferred tax assets            1,690,755         1,817,217
                                                 -----------       -----------
    Net operating loss carryforwards               4,564,726         4,240,809
    Discount on note payable                         (53,502)         (244,518)
    Alternative minimum tax                               --            49,797
    Other                                             30,296           (49,126)
    Valuation allowance                           (2,262,434)       (2,421,338)
                                                 -----------       -----------
         Net noncurrent deferred tax assets        2,279,086         1,575,624
                                                 -----------       -----------
              Total net deferred tax assets      $ 3,969,841       $ 3,392,841
                                                 ===========       ===========

                                       47
<PAGE>

The net deferred tax assets can be realized through future taxable income.
Management believes that based on the Company's history of operating earnings
and its expected income, that it is more likely than not that future levels of
income will be sufficient to realize the deferred tax assets, as recorded.

The Company has utilizable federal and state net operating loss carryforwards of
approximately $11,300,000 at December 31, 1999 for income tax purposes which
expire in 2008 through 2019.

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 seek 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. A
hearing in the United States District Court to determine whether this
Stipulation of Settlement should be approved is scheduled for March 30, 2000.

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

In 1996, the Company entered into operating leases for its manufacturing and
office facilities and established subleases for portions of certain facilities
with Norland Corp. and another company in which certain stockholders of NMS are
also stockholders. Rent is prorated on a square footage basis. For the years
ended December 31, 1999, 1998 and 1997, lease expense was $214,230, $213,949 and
$183,556 and sublease income was $0, $6,250 and $101,441, respectively.

The following is a schedule of future minimum lease payments as of December 31,
1999:

                   2000                        $187,436
                   2001                         158,722
                   2002                         137,627
                   2003                         108,000
                   2004                         108,000
                   Thereafter                   180,000
                                               --------
                                               $879,785
                                               ========


                                       48
<PAGE>

13.  RELATED PARTY TRANSACTIONS:

SALES AND PURCHASES

During 1999, 1998 and 1997, the Company sold $92,883, $9,803, and $108,845,
respectively, of products and services to Stratec. During 1997 the Company sold
$240,638 of products and services to Norland Corp. (through the acquisition
date).

During 1997, the Company purchased $7,826,914 of products and services from
Norland Corp. (through the acquisition date). During 1999, 1998 and 1997, the
Company purchased $972,679, $1,244,766 and $1,424,474, respectively, from
Stratec. The amounts owed at December 31, 1999 and 1998 by NMS to Stratec
for such purchases were $372,244 and $292,315, respectively. The
amounts payable to Stratec at December 31, 1999 and 1998 are net of
receivables from Stratec in the amounts of $0 and $23,803, respectively.

During 1999, the Company purchased $243,404 of products from Bionix. The amount
owed at December 31, 1999 by NMS to Bionix for such purchases was $135,375.

OTHER

In the year ended December 31, 1997, the Company rented space on a month to
month basis and purchased administrative support services from another company
in which certain beneficial stockholders of the Company were also beneficial
stockholders. The cost of the services and space to the Company was $7,800.

NOTE PAYABLE

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, 1999, $90,281 of the Note Payable was held by Bones L.L.C., a private
investment firm that is controlled by the Chairman of NMS, and the remainder is
held by a third party distributor of NMS products in Japan.

OFFICER'S LOAN RECEIVABLE

The balance of an officer loan, including interest, was $0 and $91,304 at
December 31, 1999 and 1998.

14.  SUPPLEMENTAL SALES AND CUSTOMER INFORMATION:

For the years ended December 31, 1999, 1998 and 1997, 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:

<TABLE>
<CAPTION>
                                                1999                      1998                          1997
                                      -----------------------    -----------------------      -----------------------
<S>                                   <C>                <C>     <C>                <C>       <C>                <C>
   Pacific Rim                        $ 2,135,821        12.0%   $ 2,053,356        14.3%     $ 2,066,024        10.1%
   Europe/Middle East/Africa            3,305,159        18.6      1,688,945        11.7        2,224,178        10.8
   Latin America                        1,214,493         6.8      1,043,031         7.3        1,556,441         7.6
                                      -----------       -----    -----------       -----      -----------      ------
   Export Sales                         6,655,473        37.4      4,785,332        33.3        5,846,643        28.5
   Domestic Sales                      11,142,562        62.6      9,599,159        66.7       14,683,733        71.5
                                      -----------       -----    -----------       -----      -----------      ------
                                      $17,798,035       100.0%   $14,384,491       100.0%     $20,530,376       100.0%
                                      ===========       =====    ===========       =====      ===========      ======
</TABLE>


                                       49
<PAGE>

15. QUARTERLY FINANCIAL DATA (UNAUDITED):

<TABLE>
<CAPTION>
                                                                       1999 Quarters
                                     --------------------------------------------------------------------------------
                                         FIRST           SECOND           THIRD            FOURTH           TOTAL
                                     ------------     ------------     ------------     ------------     ------------
<S>                                  <C>              <C>              <C>              <C>              <C>
Revenue                              $  4,825,934     $  4,357,201     $  4,383,712     $  4,231,188     $ 17,798,035
Gross profit                            2,294,036        2,351,061        1,903,432        1,699,829        8,248,358
Operating loss                           (479,908)        (375,414)        (329,521)        (752,252)      (1,937,005)
Net loss                                 (614,884)        (406,372)        (363,153)        (791,238)      (2,175,647)

Weighted average shares basic and      14,265,997       20,332.175       25,735,887       25,956,278       21,616,010
diluted
Basic and diluted loss per share     $      (0.04)    $      (0.02)    $      (0.01)    $      (0.03)    $      (0.10)

<CAPTION>
                                                                       1998 Quarters
                                     --------------------------------------------------------------------------------
                                         FIRST           SECOND           THIRD            FOURTH           TOTAL
                                     ------------     ------------     ------------     ------------     ------------
<S>                                  <C>              <C>              <C>              <C>              <C>
Revenue                              $  2,062,707     $  4,846,356     $  4,130,592     $  3,344,836     $ 14,384,491
Gross profit                              256,793        2,127,589        2,064,089        1,047,073        5,495,544
Operating  loss                        (2,865,433)      (2,202,352)      (1,434,978)      (2,693,000)      (9,195,763)
Net loss                               (1,889,582)      (1,504,721)      (2,006,272)      (4,312,685)      (9,713,260)

Weighted average shares basic and       7,163,314        7,164,031        7,163,531        7,240,118        7,183,032
diluted

Basic and diluted loss per share     $      (0.26)    $      (0.21)    $      (0.28)    $      (0.60)    $      (1.35)

</TABLE>



                                       50
<PAGE>

                          NORLAND MEDICAL SYSTEMS, INC.

                                   SCHEDULE II


                        VALUATION AND QUALIFYING ACCOUNTS
                  YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997

<TABLE>
<CAPTION>
                              Balance at         Charged to
                               Beginning            Costs               Other                           End of
                                of Year          And Expenses         Accounts(A)    Deductions(B)       Year
                                -------          ------------         -----------    -------------       ----
<S>                              <C>               <C>                  <C>          <C>               <C>
1999

Allowance for                    $300,000          $45,249                 $0        $   5,751         $351,000
                                 ========          =========               ==        ============      ========
Doubtful Accounts

Obsolescence Reserve           $1,400,000         $(676,439)               $0           $(73,561)      $650,000
                               ==========         ==========               ==           =========      ========


1998

Allowance for
Doubtful Accounts              $2,200,000         $1,357,769               $0        $(3,257,769)      $300,000
                               ==========         ==========               ==        ============      ========

Obsolescence Reserve           $1,275,000           $443,323               $0          $(318,323)    $1,400,000
                               ==========           ========               ==          ==========    ==========


1997

Allowance for
Doubtful Accounts                $221,000         $1,979,000               $0               $0       $2,200,000
                                 ========         ==========               ==               ==       ==========

Obsolescence Reserve            $  41,895         $1,480,000         $600,000          $(846,895)    $1,275,000
                                =========         ==========         ========          ==========    ==========
</TABLE>


(A) Assumed in acquisition.
(B) Amounts (written off) recovered against the reserve.


                                       51
<PAGE>

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

         None.


                                    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 1999 Annual Meeting of Stockholders,
        which will be 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.











                                       52
<PAGE>

                                     PART IV

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

          (a)  Financial Statements and Financial Statement Schedule. 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.(I)

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)



                                       53
<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.

21       Subsidiaries

27.1     Financial Data Schedule


(c)  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.

                                       54
<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 24th day of March, 2000.

                                      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 Kurt W. Streams, 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.

<TABLE>
<CAPTION>
       Signature                  Capacity In Which Signed                   Date
       ---------                  ------------------------                   ----
<S>                          <C>                                         <C>
/s/ Reynald G. Bonmati       Chairman of the Board and President         March 24, 2000
---------------------------  (Principal Executive Officer); and
    Reynald G. Bonmati                    Director



/s/ Kurt W. Streams           Vice President, Finance (Principal         March 24, 2000
---------------------------    Financial Officer and Principal
    Kurt W. Streams                  Accounting Officer)

</TABLE>


<PAGE>

           Signature           Capacity In Which Signed              Date


/s/ Jeremy Allen                       Director                  March 24, 2000
--------------------------
    Jeremy Allen



/s/ James J. Baker                     Director                  March 24, 2000
--------------------------
    James J. Baker



/s/ Michael W. Huber                   Director                  March 24, 2000
--------------------------
    Michael W. Huber



/s/ Andre-Jacques Neusy                Director                  March 24, 2000
--------------------------
    Andre-Jacques Neusy



/s/ Albert S. Waxman                   Director                  March 24, 2000
--------------------------
    Albert S. Waxman