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

                                   FORM 10-K/A

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

For the fiscal year ended December 31, 1996          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 21, 1997
was $23,555,584 based on the price of the last reported sale on the NASDAQ
National Market.

      As of March 21, 1997 there were 7,148,531 shares of the registrant's
Common Stock, par value $0.0005 per share, outstanding.
<PAGE>

     This Form 10-K/A Report amends the Form 10-K Report filed by the
Registrant with the Securities and Exchange Commission on March 31, 1997 (the
"Original Report"), as amended by Forms 10-K/A filed on April 30, 1997, May 6,
1997 and June 18, 1997 respectively. Items 7 and 8 of the Original Report are
amended and restated in their entirety to read as set forth below.


                                        2
<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 Financial
Statements and the related Notes thereto included elsewhere in 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.

General

     Revenues and costs of revenues for systems and spare parts purchased by the
Company from the Manufacturers for immediate resale and for systems manufactured
by the Company are recognized at the time of shipment from the Manufacturers.
Service revenue is recognized at the time the service is performed. Both
purchases from the Manufacturers and sales to customers are generally made in
U.S. dollars.

     Prior to recent amendments to the Distribution Agreement, the Company's
cost of revenues on systems purchased for immediate resale was generally equal
to (a) the Manufacturer's Device Cost as defined in the Distribution Agreement
plus (b) 50% of the difference between the prices at which the Company sells
systems and the Manufacturer's Device Cost. Cost of revenues on systems
purchased for the Company's short-term rental and pay-per-scan programs or as
demonstration systems was generally equal to 150% of Manufacturer's Device Cost.
The Manufacturer's Device Cost is set semi-annually, based on the average cost
of system components and parts purchased by the Manufacturers during the
preceding six-month period plus an allowance for other direct manufacturing
costs. The Amended Pricing Provisions described in Item 1 of this Report became
applicable to purchases from Norland Corp. on October 1, 1996 and to purchases
from Stratec on December 1, 1996. The Company's customers outside the U.S. are
predominantly third-party distributors. Distributors often seek, and the Company
may be willing to give, discounts or extended payment terms based on volume.

     On April 2, 1996, the Company acquired Dove, which manufactured and sold
the OsteoAnalyzer line of bone densitometers based on single X-ray
absorptiometry technology, at a cost of approximately $6.9 million, consisting
of $3.6 million in cash and 161,538 shares of the Company's Common Stock valued
at approximately $3.3 million. The audited consolidated financial statements for
the year ended December 31, 1996, included in Item 8 of this Report, reflect the
Company's acquisition of Dove under the purchase method of accounting.


                                        3
<PAGE>

Result of Operations

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

                                                     Years Ended December 31,
                                                  1994        1995        1996
                                                  ----        ----        ----

Revenue.....................................     100.0%       100.0%      100.0%
Cost of revenue.............................      64.9         68.6        64.2
One-time distribution agreement costs.......      19.1          0.0         0.0
                                                -----------             -------
  Gross profit..............................      16.0         31.4        35.8
Sales and marketing expense.................       9.7          9.1        13.9
General and administrative expense..........       5.2          5.3        10.1
                                               -------      -------      ------
  Income (loss) from operations.............       1.1         17.0        11.8
Liquidation loss - net......................       0.0          0.0         0.0
Other income (expense)......................      (0.1)         2.3         2.8
                                               -------      -------     -------
                                                   1.0         19.3        14.6
Provision for income taxes..................       0.3          7.8         5.9
                                               -------      -------     -------
  Net income (loss).........................       0.7         11.5         8.7
                                              ========       ======     =======

     The Company's Year Ended December 31, 1996 Compared to Its Year Ended
December 31, 1995.

     Revenue for 1996 increased $7,066,169 (38.7%) to $25,309,977 from
$18,243,808 for 1995. The increase was largely a result of increased sales of
pDEXA systems in the United States following its introduction in the fourth
quarter of 1995, increased sales of the Company's other products and sales by
Dove (which was acquired by the Company on April 2, 1996). Sales of pDEXA
systems in Japan declined due in part to increased competition, reductions in
reimbursement for certain densitometry tests in Japan and operational
difficulties experienced earlier in 1996 with pDEXA units installed in Japan and
the southeastern United States related to the effects of humidity on one
component. The Company believes that these operational difficulties have been
addressed. Sales in Japan and the United States represented 22% and 54%,
respectively, of total revenue for 1996 and 68% and 6% respectively, of total
revenue for 1995. Sales of complete bone densitometry systems represented 94%
and 95% of total revenue for 1996 and 1995, respectively. Sales of parts and
services and rental income comprised the balance of revenues for such periods.
Revenues were adversely affected in the fourth quarter of 1996 by the reduction
in the Medicare reimbursement rate for peripheral bone densitometry tests
announced in November 1996. The mix of products sold changed in that the
majority of the Company's revenues for such quarter were derived from sales of
the larger Eclipse and XR36 systems that scan the hip and spine and for which
the Medicare reimbursement rate was not significatly decreased, as compared to
the pDEXA system that performs peripheral bone densitometry tests. Revenues and
the mix of products sold are expected to continue to be influenced by the degree
of difference in Medicare reimbursement rate levels for peripheral and larger
systems. They will also be influenced by the Company's ability to bring to the
market lower cost peripheral systems that can be operated more profitably by end
users at the lower reimbursement levels.

     Cost of revenue as a percentage of revenue was 64.2% and 68.6% for 1996 and
1995, respectively, resulting in a gross margin of 35.8% for 1996 compared to
31.4% for 1995. The increase in gross margin is attributed to the product mix in
1996 which consisted of a relatively greater proportion of revenues from higher
margin products such as the pDEXA when sold directly by the Company to customers
in the United States. In an effort to further increase system sales volume in
the United States, the Company has established a network of third party
distributors. Most sales of pDEXA and traditional DXA systems are now made
through such distributors. Such sales are at lower gross margins than sales that
were made directly by the Company to customers. Sales of OsteoAnalyzer systems
manufactured by Dove, for which 


                                        4
<PAGE>

the Company receives the entire margin between the manufacturer's cost and the
Company's sale price, also contributed to the increase in the Company's gross
margins. A portion of the margins on the Company's other products is paid to the
Manufacturers. As indicated above, the Company and the Manufacturer implemented
the Amended Pricing Provisions under the Distribution Agreement during the
fourth quarter of 1996, which had the effect of decreasing the cost of
purchasing systems and increasing gross margins.

     Sales and marketing expense increased $1,854,541 (112.3%) to $3,505,666 for
1996 from $1,651,125 for 1995, and increased as a percentage of revenue to 13.9%
from 9.1%. The increases were primarily due to increased salaries and
commissions related to increased sales staff and sales volume, increased
expenses related to customer service, marketing expenses related to penetration
of the United States market, and inclusion of the sales and marketing expenses
of Dove for the last three quarters of 1996.

     General and administrative expense (before the stock offering charge
referred to below) increased $1,212,147 (126.2%) to $2,172,515 for 1996 from
$960,368 for 1995 and increased as a percentage of revenue to 8.6% from 5.3%.
These increases were primarily due to increased expenses of new and existing
personnel; to legal, accounting and other expenses attributable to the Company
having been a public company for all of 1996 and to increased levels of
business; and to the inclusion of Dove's operations for the last three quarters
of 1996, including $267,127 of amortization expense related to the acquisition.
In the quarter ended September 30, 1996, the Company also recognized a $397,697
charge for the expenses incurred in connection with the Company's stock offering
that was withdrawn in August 1996 as a result of the general stock market
decline and the decline in the price of the Company's Common Stock.

     Other income in 1996 and 1995 consisted primarily of interest earned on the
proceeds of the Company's initial public offering and on other cash balances,
reduced by other expenses consisting primarily of bank charges and other fees
related to bank transfers.

     The provision for taxes for 1996 increased by $62,000 (4.3%) to $1,498,000
from $1,436,000 for 1995. The Company has provided for income taxes at its
current effective tax rate of 40.6% for both 1996 and 1995. The increases in the
provision for income taxes were entirely due to the relative changes in income
before taxes.

     The Company had net income of $2,191,374 for 1996 compared to net income of
$2,100,489 for 1995, an increase of $90,885 (4.3%). The increase was due
primarily to the factors discussed above. The stock offering charge of $397,697
recognized in the quarter ended September 30, 1996 reduced net income on an
after tax basis by $236,094. Excluding the after tax effect of this charge, net
income for 1996 would be $2,427,468 representing an increase of $326,979 (15.6%)
over 1995. The charge on an after tax basis reduced 1996 earnings per share by
$.03.

     The Company's Year Ended December 31, 1995 Compared to Its Year Ended
December 31, 1994.

     Revenue for 1995 increased $8.2 million (82%) to $18.2 million from $10.0
million for 1994. The increase was due primarily to the increased sales of the
pDEXA system. The pDEXA was introduced in Japan in the third quarter of 1994.
The increase in revenue for 1995 reflects the fact that the pDEXA was sold in
Japan during the entire year, as well as the fact that there were significant
increases in the level of pDEXA sales in each quarter of 1995 over the
corresponding period in 1994. Sales in the United States and Canada increased
53% to $1.2 million in 1995 from $750,739 in 1994, reflecting the effects of the
introduction of the pDEXA in the United States in the fourth quarter of 1995 and
increased customer interest


                                        5
<PAGE>

in the Company's other products. Sales of complete bone densitometry systems
represented 95% and 91% of total revenue for 1995 and 1994, respectively. Sales
of parts and services and, in 1995, rental income, comprised virtually all of
the other revenues for such periods.

     Cost of revenue as a percentage of revenue was 69% and 65% for 1995 and
1994 (before one-time distribution agreement costs), respectively, resulting in
a gross margin of 31% for 1995 compared to 35% for the comparable period of
1994. This decline in gross margin (before one-time distribution agreement to
higher component costs and the relatively higher volume of pDEXA product that is
subject to volume discounts granted to the Company's Japanese distributor. Under
the terms of the distribution agreement in effect with Norland Corp. for 1994,
the Company was required to purchase $5.2 million of products from Norland Corp.
to satisfy a minimum requirement for the year ended December 31, 1994. At the
prices that would have applied in the absence of such minimum requirement,
purchases from Norland Corp. during that period to fill customer orders totaled
$3.3 million. The $1.9 million difference between that amount and the Company's
minimum purchase requirement is reflected as "one-time distribution agreement
costs" for 1994. After giving effect to this payment, the Company's gross margin
for 1994 was 16%.

     Sales and marketing expense increased $677,917 (70%) to $1.7 million for
1995 from $973,208 for 1994, and decreased as a percentage of revenue to 9.1%
from 9.7%. The dollar increase was primarily due to increased sales commissions
and incentive payments related to increased sales, increased expenses related to
customer service and marketing expenses related to market introduction in the
United States of pDEXA. The decrease as a percentage of revenue was due to the
fact that revenues increased at a greater rate than selling expenses.

     General and administrative expense increased $434,004 (82%) to $960,368 for
1995 from $526,364 for 1994 and increased as a percentage of revenue to 5.3%
from 5.2%. The increases were primarily due to the establishment of a $150,000
allowance for doubtful accounts, increased expenses of new and existing
personnel and increased legal, accounting and other expenses attributable to the
Company being a public company starting in August 1995.

     Other income in 1995 consisted of interest earned on the initial public
offering proceeds and other cash balances, reduced by other expenses, consisting
primarily of bank charges and other fees related to bank transfers. Other
expense in 1994 consisted primarily of bank charges and other fees related to
bank transfers.

     The provision for taxes for 1995 increased to $1.4 million from $27,000 for
1994. The increase was due to the relative increase in income before taxes. The
Company provided for income taxes at its effective tax rates of 40.6% for 1995
and 28.4% for 1994. The increase in the effective rate is attributable to the
diminished impact of graduated federal income tax rates on 1995 income relative
to 1994 income.

     The Company had net income of $2.1 million for 1995 compared to net income
of $68,000 for 1994 ($1.2 million, without giving effect to the one-time
distribution agreement costs). The increase was due primarily to increased
revenues from sales of the Company's pDEXA system and interest earned on cash
balances.


                                        6
<PAGE>

     Liquidity and Capital Resources

     Since its inception in December 1993, the Company's operations have been
financed primarily by loans from stockholders, cash flow from operations and
proceeds of its initial public offering. The Company has no bank credit line
and, other than $800,000 in stockholder loans and advances to fund the Company's
first year of operations, has incurred no indebtedness. All stockholder loans
and advances have been paid in full by the Company.

     On August 2, 1995, the Company issued 3,000,000 shares in an initial public
offering that raised net proceeds of $18.4 million. The Company used a portion
of such net proceeds for general corporate purposes and the acquisition of Dove.

     The Company's accounts receivable increased 101% to $9.2 million at
December 31, 1996 from $4.5 million at December 31, 1995. The increase in
accounts receivable reflects both higher sales volume and less prompt payment by
the Company's customers. At December 31, 1996, the largest balance, 18% of total
outstanding trade receivables, was owed by Nissho Iwai, the Company's
distributor in Japan.

     Cash decreased $11.1 million to $8.1 million at December 31, 1996. The
decrease in cash was primarily the result of the Company acquiring Dove and
certain intangible assets used by Dove in exchange for shares of Company Common
Stock and $3.6 million in cash, increased accounts receivable relative to
accounts payable, the payment of $3.1 million in corporate income taxes, and the
purchase of a $1.9 million U.S. Treasury Bill. The Company also made a
$1,000,000 loan to Reynald G. Bonmati, President, and an $80,000 loan to Kurt W.
Streams, Chief Financial Officer. The outstanding balance of the loan to Mr.
Bonmati was reduced to $500,000 at year end. The loan is payable on demand and
bears interest at 6% per annum. The loan to Mr. Streams is due in September 1997
and bears interest at 6% per annum. The outstanding amount of these loans,
including accrued interest, at December 31, 1996 was $581,704.

     At December 31, 1995, the Company employed no fixed assets other than
leased computers and office furniture. Property and equipment as of December 31,
1996 consisted of computer and telephone equipment, a management information
system, office furniture and improvements to leased facilities. At the present
time, no significant expenditures for additional equipment or systems are
planned for 1997.

     Should the proposed acquisition of Norland Corp. be approved by the
Company's stockholders, the Company's cash requirements with respect to the
transaction will consist of a $1,250,000 cash payment at close, a second
$1,250,000 cash payment six months thereafter, plus interest payments on the
Purchase Note and the Additional Note which will range from approximately
$250,000 to $300,000 per quarter, depending upon the final amount of the
purchase price. Following the acquisition, the Company will receive the entire
margin on systems manufactured by Norland Corp. and will become responsible for
financing manufacturing and research and development on the Norland Corp.
product line. Any sales growth of the OsteoAnalyzer product line will also be
financed by the Company.

     The Company believes that its current cash position, together with cash
flow from operations, will be adequate to fund the Company's operations,
including the proposed acquisition of Norland Corp., for at least the next
twelve months. However, the nature of the Company's business is such that it is
subject to changes in technology, government approval and regulation, and
changes in third-party reimbursement in the United States and numerous foreign
markets. Significant changes in one or more of these factors in a


                                        7
<PAGE>

major market for the Company's products could significantly affect the Company's
ability to meet its cash needs through internal sources.


                                        8
<PAGE>

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

                        CONSOLIDATED FINANCIAL STATEMENTS

                                      INDEX

                                     -------

                                                                        Page
                                                                        ----

Report of Independent Accountants                                         10

Financial Statements:

     Consolidated Balance Sheets as of December 31, 1996 and 1995         11

     Consolidated Statements of Income for the years ended

         December 31, 1996, 1995 and 1994                                 12

     Consolidated Statements of Changes in Stockholders' Equity

         for the years ended December 31, 1996, 1995 and 1994             13

     Consolidated Statements of Cash Flows for the years ended

         December 31, 1996, 1995 and 1994                                 14

     Notes to Consolidated Financial Statements                        16-28

Financial Statement Schedule:

     Valuation and Qualifying Accounts                                    29


                                        9
<PAGE>

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

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

We have audited the accompanying consolidated financial statements and the
financial statement schedule of Norland Medical Systems, Inc. (formerly Ostech,
Inc.) listed in the index on page 29 of this Form 10-K. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

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

The Company, as disclosed in the financial statements, has extensive
transactions and relationships with related parties. Because of these
relationships, it is possible that the terms of these transactions are not the
same as those that would result from transactions among wholly unrelated
parties.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Norland Medical Systems, Inc.
as of December 31, 1996 and 1995, and the results of its operations and its cash
flows for the years ended December 31, 1996, 1995 and 1994 in conformity with
generally accepted accounting principles. In addition, in our opinion, the
financial statement schedule referred to above, when considered in relation to
the basic financial statements taken as a whole, presents fairly, in all
material respects, the information required to be included therein.


COOPERS & LYBRAND L.L.P.

Hartford, Connecticut
March 5, 1997


                                       10
<PAGE>

                          NORLAND MEDICAL SYSTEMS, INC.

                           CONSOLIDATED BALANCE SHEETS

                           December 31, 1996 and 1995

                                     ------

                                     ASSETS

<TABLE>
<CAPTION>
                                                                   1996                   1995
                                                              ------------           ------------
<S>                                                           <C>                    <C>         
Current assets:
      Cash and cash equivalents                               $  8,133,468           $ 19,218,865
      Investment (Note 3)                                        1,949,039                     --
      Accounts receivable, net (Note 4)                          9,182,488              4,571,520
      Income taxes recoverable                                     794,285                     --
      Inventories (Note 5)                                       1,851,713                798,484
      Officers' loans receivable (Note 6)                          581,704                     --
      Current portion of product development loan
         receivable-- affiliate (Note 7)                            38,685                     --
      Prepaid expenses and other current assets                    361,902                 68,989
                                                              ------------           ------------
Total current assets                                            22,893,284             24,657,858
                                                              ------------           ------------

Investment in Vitel, Inc. (Note 1)                                 260,000                     --
Property and equipment, net (Note 8)                               406,375                     --
Product development loan receivable - affiliate (Note 7)           251,100                 48,519
Goodwill, net (Notes 9 and 10)                                   3,183,961                     --
Other intangible assets, net (Notes 9 and 10)                    3,248,658                     --
                                                              ------------           ------------
Total assets                                                  $ 30,243,378           $ 24,706,377
                                                              ============           ============

                      LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:

Accounts payable - Norland (Note 11)                          $  2,220,816           $    493,424
Accounts payable - Stratec (Note 11)                               714,127              1,959,403
Accounts payable - trade                                            81,416                 32,000
Accrued expenses                                                   658,304                361,003
Income taxes payable                                                    --              1,305,037
Customer deposits                                                   47,850                 34,664
                                                              ------------           ------------
Total current liabilities                                        3,722,513              4,185,531
                                                              ------------           ------------

Stockholders' equity (Note 12):
Common stock, par value of $0.0005 per share -
 10,000,000 shares authorized, 6,904,781
       shares issued and outstanding                                 3,452                  3,000
Additional paid-in capital                                      22,158,170             18,349,813
Retained earnings                                                4,359,243              2,168,033
                                                              ------------           ------------
Total stockholders' equity                                      26,520,865             20,520,846
                                                              ------------           ------------

Total liabilities and stockholders' equity                    $ 30,243,378           $ 24,706,377
                                                              ============           ============
</TABLE>

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


                                       11
<PAGE>

                          NORLAND MEDICAL SYSTEMS, INC.

                        CONSOLIDATED STATEMENTS OF INCOME

              for the years ended December 31, 1996, 1995 and 1994

<TABLE>
<CAPTION>
                                                                                            1996            1995            1994
                                                                                       ------------    ------------    ------------

<S>                                                                                    <C>             <C>             <C>         
Revenue (including sales to affiliates
      of $562,108, $889,982 and $631,523 in 1996, 1995 and 1994,
      respectively)                                                                    $ 25,309,977    $ 18,243,808    $ 10,041,548
Cost of revenue                                                                          16,248,469      12,508,809       6,517,701
One-time distribution agreement costs
      (Note 2)                                                                                 --              --         1,922,247
                                                                                       ------------    ------------    ------------
      Gross profit                                                                        9,061,508       5,734,999       1,601,600

Sales and marketing expense                                                               3,505,666       1,651,125         973,208

General and administrative expense
      (including an overhead charge from an affiliate of $33,136,                         2,570,212         960,368         526,364
      $22,360 and $150,000 in 1996, 1995 and 1994, respectively)                       ------------    ------------    ------------

      Operating income                                                                    2,985,630       3,123,506         102,028

Other income (expense):
      Interest income                                                                       720,851         443,653            --
      Other expense                                                                         (17,107)        (30,670)         (6,984)
                                                                                       ------------    ------------    ------------
                                                                                            703,744         412,983          (6,984)
                                                                                       ------------    ------------    ------------
      Income before income taxes                                                          3,689,374       3,536,489          95,044

Provision for income taxes (Note 14)                                                      1,498,000       1,436,000          27,000
                                                                                       ------------    ------------    ------------

      Net income                                                                       $  2,191,374    $  2,100,489    $     68,044
                                                                                       ============    ============    ============

Net income per common share                                                            $       0.31    $       0.40    $       0.02
                                                                                       ============    ============    ============
</TABLE>


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


                                       12
<PAGE>

                          NORLAND MEDICAL SYSTEMS, INC.

           CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
              for the years ended December 31, 1996, 1995 and 1994

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

<TABLE>
<CAPTION>
                                                                                                       Common       Paid-In   
                                                                          Total         Shares          Stock       Capital   
                                                                          -----         ------          -----       -------   
<S>                                                                 <C>               <C>         <C>           <C>           
Issuance of 1,000 shares of  common stock                           $          -          1,000   $         10  $        990  
2,000-for -1 stock split on  June 2, 1995 (Note 12)                            -      1,999,000            990          (990) 
3-for-2 stock split on June 14, 1996 (Note 12)                                 -      1,000,000            500             -  
Net income                                                                68,044              -              -             -  
                                                                    ------------   ------------   ------------  ------------  
Balance as of December 31, 1994                                           68,044      3,000,000          1,500             -  

Proceeds from common stock subscription                                    1,000              -              -             -  
Issuance of 2,000,000 shares of common stock
    on August 2, 1995, net of cost                                                                                            
    and  expenses directly related
    to the offering (Note 12)                                         18,351,313      2,000,000          1,000    18,350,313  
3-for-2 stock split on June 14, 1996 (Note 12)                                 -      1,000,000            500          (500) 
Net income                                                             2,100,489              -              -             -  
                                                                    ------------   ------------   ------------  ------------  
Balance as of December 31, 1995                                     $ 20,520,846      6,000,000   $      3,000  $ 18,349,813  

Issuance of shares for stock options exercised                               292        743,250            371           (79) 
Issuance of shares to acquire Dove Medical Systems                     3,311,519        161,538             81     3,311,438  
Cost and expenses directly related to stock offering                      (3,002)             -              -        (3,002) 

Cash paid in lieu of fractional shares on 3-for-2
 split on June 14, 1996                                                     (164)            (7)             -             -  
Tax benefit related to stock options (Note 1)                            500,000              -              -       500,000  
Net income                                                             2,191,374              -              -             -  
                                                                    ------------   ------------   ------------  ------------  
Balance as of December 31, 1996                                     $ 26,520,865      6,904,781   $      3,452  $ 22,158,170
                                                                    ============   ============   ============  ============  

<CAPTION>
                                                                 Stock           Retained  
                                                              Subscriptions      Earnings  
                                                              -------------      --------  
<S>                                                           <C>           <C>            
Issuance of 1,000 shares of  common stock                     $     (1,000) $           -  
2,000-for -1 stock split on  June 2, 1995 (Note 12)                      -              -  
3-for-2 stock split on June 14, 1996 (Note 12)                           -           (500) 
Net income                                                               -         68,044  
                                                              ------------   ------------  
Balance as of December 31, 1994                                     (1,000)        67,544  
                                                                                           
Proceeds from common stock subscription                              1,000              -  
Issuance of 2,000,000 shares of common stock                                               
    on August 2, 1995, net of cost                                            
    and  expenses directly related                                                         
    to the offering (Note 12)                                            -              -  
3-for-2 stock split on June 14, 1996 (Note 12)                           -              -  
Net income                                                               -      2,100,489  
                                                              ------------   ------------  
Balance as of December 31, 1995                               $          -   $  2,168,033  
                                                                                           
Issuance of shares for stock options exercised                           -              -  
Issuance of shares to acquire Dove Medical Systems                       -              -  
Cost and expenses directly related to stock offering                     -              -  
                                                                                           
                                                                                           
Cash paid in lieu of fractional shares on 3-for-2                                          
 split on June 14, 1996                                                  -           (164) 
Tax benefit related to stock options (Note 1)                            -              -  
Net income                                                               -      2,191,374  
                                                              ------------   ------------  
Balance as of December 31, 1996                               $          -   $  4,359,243  
                                                              ============   ============  
</TABLE>

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


                                       13
<PAGE>

                          NORLAND MEDICAL SYSTEMS, INC.

                      CONSOLIDATED STATEMENTS OF CASH FLOWS

              for the years ended December 31, 1996, 1995 and 1994

                                      -----

<TABLE>
<CAPTION>
                                                                                     1996               1995               1994
                                                                                 ------------       ------------       ------------
<S>                                                                              <C>                <C>                <C>         
Cash flows from operating activities:
  Net income                                                                     $  2,191,374       $  2,100,489       $     68,044
                                                                                 ------------       ------------       ------------
  Adjustments to reconcile net income to net cash used
  in operating activities:

       Provision for doubtful accounts                                                 70,000            150,000                  -
       Amortization expense                                                           343,666             17,415                  -
       Depreciation expense                                                            59,276                  -                  -
       Changes in:

          Accounts receivable                                                      (4,546,794)        (2,849,826)        (1,872,494)
          Inventories                                                                (946,088)          (815,899)                 -
          Prepaid expenses and other current assets                                  (275,699)           (47,639)           (21,350)
          Accounts payable                                                            373,589          1,096,022          1,388,805
          Accrued expenses                                                            148,968            314,276             46,727
          Income taxes                                                             (1,599,322)         1,278,037             27,000
          Customer deposits                                                            (6,314)           (83,336)           118,000
                                                                                 ------------       ------------       ------------
            Total adjustments                                                      (6,378,718)          (940,150)          (313,312)
                                                                                 ------------       ------------       ------------

            Net cash (used in) provided by
              operating activities                                                 (4,187,344)         1,160,339           (245,268)
                                                                                 ------------       ------------       ------------

Cash flows from investing activities:
  Payment for purchase of stock and certain intangible assets
     of Dove Medical Systems, net of cash acquired                                 (3,432,937)                 -                  -
  Investment in Vitel, Inc.                                                          (260,000)                 -                  -
  Purchases of property and equipment                                                (430,233)                 -                  -
  Loans to officers                                                                (1,099,211)                 -                  -
  Repayment of loans to officers                                                      517,507                  -                  -
  Purchase of investment                                                           (1,949,039)                 -                  -
  Product development loan to affiliate                                              (241,266)           (48,519)                 -
                                                                                 ------------       ------------       ------------
     Net cash used in investing activities                                         (6,895,179)           (48,519)                 -
                                                                                 ------------       ------------       ------------

Cash flows from financing activities:
  Proceeds from stock options exercised                                                   292                  -                  -
  Costs and expenses of issuing common stock                                           (3,002)                 -                  -
  Cash paid for fractional shares                                                        (164)                 -                  -
  Proceeds from issuance of common stock, net                                               -         18,351,313                  -
  Proceeds from common stock subscriptions                                                  -              1,000                  -
  Notes payable to stockholders                                                             -           (750,000)           750,000
  Stockholder advances                                                                      -            (50,000)            50,000
                                                                                 ------------       ------------       ------------
     Net cash (used in) provided by financing activities                               (2,874)        17,552,313            800,000
                                                                                 ------------       ------------       ------------

Net (decrease) increase in cash                                                   (11,085,397)        18,664,133            554,732

Cash and cash equivalents at beginning of year                                     19,218,865            554,732                  -
                                                                                 ------------       ------------       ------------

Cash and cash equivalents at end of year                                         $  8,133,468       $ 19,218,865       $    554,732
                                                                                 ============       ============       ============
</TABLE>


                                       14
<PAGE>

                          NORLAND MEDICAL SYSTEMS, INC.

                      CONSOLIDATED STATEMENTS OF CASH FLOWS

              for the years ended December 31, 1996, 1995 and 1994

                                      -----
Noncash investing and financing activities:

The $18,351,313 net proceeds of the initial public offering in 1995 represents
the $21,000,000 of gross proceeds less the costs and expenses directly related
to the offering of $2,648,687.

During 1994, the Company issued common stock having an aggregate par value of
$1,000 in return for stock subscriptions receivable of $1,000.

Cash paid for:

                                     1996              1995              1994
                                  ----------        ----------        ----------

Income taxes                      $3,097,322        $  157,963        $        0
                                  ==========        ==========        ==========

Interest                          $        0        $   10,342        $        0
                                  ==========        ==========        ==========

The Company purchased all of the outstanding shares of Dove Medical Systems and
certain intangible assets for $3,600,000 in cash and 161,538 shares of Company
Common Stock valued at $3,311,529. In conjunction with the acquisition, the
Company assumed $325,774 in liabilities.

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


                                       15
<PAGE>

                          NORLAND MEDICAL SYSTEMS, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

I. Summary of Significant Accounting Policies:

Company's Activities

Norland Medical Systems, Inc. ("NMS" or the "Company") distributes devices 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 hospitals, clinics, research institutions,
pharmaceutical companies and individual practitioners. The Company primarily
sells through medical product distributors.

Corporate Structure

NMS was incorporated on December 21, 1993 as Ostech, Inc. and commenced
operations January 1, 1994 as the exclusive marketer and distributor of certain
medical products and technologies of Norland Corporation (U.S.) ("Norland
Corp.") and Stratec Medizintechnik GmbH (Germany) ("Stratec"). On April 2, 1996,
the Company acquired Dove Medical Systems (U.S.) ("Dove"), a manufacturer of
low-cost bone densitometry systems. Dove is a wholly-owned subsidiary, and as a
result, all intercompany activities have been eliminated in consolidation.

Both Norland Corp. and Stratec are wholly-owned subsidiaries of Norland Medical
Systems B.V. (Netherlands). Certain shareholders of NMS are shareholders of
Norland Medical Systems B.V. and own 91.2% of that company. Nissho Iwai
Corporation ("Nissho Iwai"), a major customer of NMS, and its affiliate own the
remaining 8.8% of Norland Medical Systems B.V.

Revenue and Cost Recognition

NMS purchases merchandise and services from Norland Corp. and Stratec (the
"manufacturers") on the basis of sales orders in hand. NMS invoices customers
and is invoiced by the manufacturers when the product is shipped. Revenue is
recognized at the time of shipment. Management believes the gross profit
recognized by NMS materially approximates that which would have been realized
had the Company used unaffiliated suppliers.

Costs for returns and exchanges are borne by the respective manufacturer. The
manufacturers offer one-year warranties on both the hardware and software
included in their systems. The Company provides warranty services on behalf of
Norland Corp. and Stratec. The Company invoices Norland Corp. and Stratec for
the costs of performing such warranty services.

The Company has no obligations to provide any other services to any of its
sub-distributors or their customers.


                                       16
<PAGE>

Cash and Cash Equivalents

For purposes of the statements of cash flows, the Company considers all highly
liquid debt instruments purchased with a maturity of three months or less at the
date of purchase to be cash equivalents. The Company had no such instruments at
year end and the cash balances reflect only cash in the Company's bank accounts,
a short-term time deposit and investments in money market mutual funds.

Investments

Investments consist of a debt security issued by the U.S. Treasury Department.
The Company classifies such debt security as held-to-maturity. Held-to-maturity
securities are those securities in which the Company has the ability and intent
to hold the security until maturity.

Held-to-maturity securities are recorded at amortized cost, adjusted for the
amortization of accretion of premiums or discounts. Premiums and discounts are
amortized or accredited over the life of the related security as an adjustment
to yield using the straight-line method, which approximates the effective
interest method. Interest income is recognized when earned.

The Company has a minority interest in Vitel, Inc. (Texas) that is accounted for
according to the cost method.

Inventory

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.

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

Inventories are stated at the lower of cost or market; cost is determined
principally by the first-in, first-out method.

Property and Equipment

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


                                       17
<PAGE>

Intangible Assets

Intangible assets consist of a patent and the excess of cost over the fair value
of net assets acquired in connection with the purchase of Dove and certain
assets that were licensed to Dove. The patent is being amortized using the
straight-line method over the remaining patent period which is ten years as of
the date of its acquisition. The excess of cost over the fair value of net
assets acquired and other intangible assets are being amortized using the
straight-line method over twenty years.

Management evaluates on an ongoing basis whether events or changes in 
circumstances exist that would indicate the carrying value of the Company's
intangible assets may not be recoverable. Should there be an indication
of impairment in the value of its intangible 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 cash flows are less than the 
carrying value of the assets. In considering whether events or changes in
circumstances exit, 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 income taxes under Statement of Financial Accounting
Standards (SFAS) No. 109. Under SFAS No. 109, deferred income taxes are
recognized for 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 bases 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 income taxes recoverable and an increase in
additional paid in capital.

Net Income Per Common Share

Primary income per share is calculated by dividing net income by the average
shares of common stock and common stock equivalents outstanding during the
period. Common stock equivalents are stock options, which have been included
using the treasury stock method only when their effect is dilutive. Fully
diluted income per share is not presented as it is not materially different from
primary income per share.

The average common and common equivalent shares issued and under option was
7,168,871 shares, 5,248,184 shares and 4,002,000 shares for the years ended
December 31, 1996, 1995 and 1994, respectively.

In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings Per Share" (SFAS 128), which
is effective for the Company's year ending December 31, 1997. The Company is
currently evaluating the expected impact of this statement on its financial
statements.

Concentration of Credit Risk

The Company generally sells on either sixty day terms or against irrevocable
letters of credit. Any financing of the end user is the decision of, and
dependent on, the distributor in each country. At December 31, 1996, 1995 and
1994, the largest balance, 18%, 58% and 42%, respectively, of the total
outstanding trade receivables, was owed by a single distributor.


                                       18
<PAGE>

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 financial statements and the
reported amounts of revenue and expenses during the reporting period. Actual
results could differ from those estimates.

Foreign Exchange Exposure

All of the Company's purchases and sales of products and services are made in
U.S. dollars. As a result, the Company has minimal exposure to foreign exchange
risk in the short-term. However, a significant portion of the Company's products
are supplied by Stratec and sold along with Norland Corp. 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.

2. Distribution Agreement:

In 1994, the Company entered into exclusive distribution agreements with Norland
Corp. and Stratec. The invoice prices from Norland Corp. and Stratec to NMS were
determined by using a pricing formula whereby 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.

The agreement with Norland Corp. provided that in 1994 the Company would
purchase a minimum of $5,200,000 of products and services during the first year
of the agreement, irrespective of the pricing formula described above. If the
minimum purchase requirement had not been in effect for the first year of this
distribution agreement, the total purchases by the Company of products and
services from Norland Corp. would have been $3,277,753. The excess of $1,922,247
paid by the Company over the pricing formula was, based on its materiality,
charged to operations as a separate line item for fiscal 1994.

Effective April 1, 1995, the Company entered into a new distribution agreement
with Norland Corp. and Stratec which expires December 31, 2015. The pricing
formula in the new agreement was essentially the same as in the 1994 agreement.
This agreement may be renewed for an indefinite number of successive five-year
terms and contains no purchase obligation on the part of NMS. Under this
agreement, the Company may not distribute devices manufactured by any
non-affiliate of the Company which compete 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 pays 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 are also entitled
to receive royalties equal to 5% of the price for which NMS sells certain
devices. In the case of Norland Corp., the royalty will apply to all new systems
manufactured by Norland Corp. (i.e., any system other than the pDEXA, the
Eclipse and the XR-36). In the case of Stratec, the royalty applies 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 will apply. The amended pricing
formula will be in effect until December 31, 1997. It will be automatically
renewed


                                       19
<PAGE>

with respect to each manufacturer for successive one year periods, unless such
manufacturer elects 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.

3. Investment:

At December 31, 1996, the Company's investment in a U.S. Treasury bill, which
matures on June 19, 1997, had an amortized cost of $1,949,039 and a fair value
of $1,952,727, with a resulting unrealized gain of $3,688.

4. Accounts Receivable:

Accounts receivable at December 31 were as follows:

                                    1996                           1995
                                    ----                           ----

Accounts receivable            $9,403,488                      $4,721,520
Less allowance for
  doubtful accounts               221,000                         150,000
                             ------------                     -----------
                               $9,182,488                      $4,571,520
                               ==========                      ==========

NMS does not currently distribute Stratec products in Germany. Those products
are distributed directly by Stratec through its own sales organization. Prior to
June 1, 1996, Stratec acted as NMS' subdistributor for Norland Corp. products in
Europe and the Middle East. The amounts owed by Stratec to NMS for Norland Corp.
products at December 31, 1996 and 1995 were $62,689 and $180,253, respectively
(See Note 11).

During 1996, 1995 and 1994, the Company sold $210,785, $889,982 and $631,523,
respectively, of products and services to Stratec and $351,323, $0 and $0,
respectively, of products and services to Norland Corp.

5. Inventories:

Inventories consist of the following as of December 31:

<TABLE>
<CAPTION>
                                                             1996            1995
                                                             ----            ----
<S>                                                       <C>               <C>     
Raw materials, product kits,
      spare parts and sub-assemblies                        $377,373        $583,262
Work in progress                                              18,044               -
Demonstration systems, net of
      $83,839 and $17,415 accumulated amortization at
      December 31, 1996 and 1995, respectively             1,234,848         146,272
Rental systems                                               155,174          68,948
Finished goods                                               108,169               -
Obsolescence reserve                                        (41,895)               -
                                                          ---------         --------
                                                          $1,851,713        $798,484
                                                          ==========        ========
</TABLE>


                                       20
<PAGE>

6. Officers' Loans Receivable:

In September 1996, the Company loaned $80,000 to its Chief Financial Officer
(CFO) to assist with relocation of his residence. The loan to the CFO is payable
in full in September 1997, including interest which accrues at 6% per annum. The
balance of the loan, including interest, was $81,704 at December 31, 1996.

In August 1996, the Company agreed to lend up to $2,500,000 to its President
until December 31, 1997 at an annual interest rate of 6% to assist with tax
liabilities in connection with stock option exercises. In September of 1996, the
Company loaned $1,000,000 to the President which was reduced by principal and
interest payments to a balance of $500,000 at December 31, 1996. The borrowings
are payable on demand.

7. Product Development Loan Receivable - Affiliate:

In accordance with the terms of a Product Development Loan Agreement dated June
1, 1995 between NMS and the manufacturers, the Company advanced $289,785 and
$48,519 to Norland Corp. as of December 31, 1996 and 1995, respectively. The
loan accrues interest at 10% per annum payable quarterly. Principal payments are
due in twenty equal quarterly installments beginning September 30, 1997, with
the current portion of the loan consisting of principal payments due in 1997
plus accrued interest as of December 31, 1996.

8. Property and Equipment:

At December 31, 1996, property and equipment consisted of the following:

                                                 1996
                                                 ----

Machinery and equipment                        $303,087
Furniture and fixtures                          130,773
Leasehold improvements                           47,561
Less accumulated depreciation
      and amortization                          (75,046)
                                               --------
                                               $406,375
                                               ========

9. Acquisition of Dove Medical Systems:

On April 2, 1996, the Company acquired all of the outstanding shares of Dove and
a certain patent and other intangible assets owned by the Dove 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.


                                       21
<PAGE>

The acquisition has been accounted for using the purchase method of accounting,
and, accordingly, the purchase price has been allocated to the assets purchased
and the liabilities assumed based on the fair values at the date of acquisition.
The excess purchase price over the fair values of the net assets was $3,308,011
and has been recorded as goodwill.

The net purchase price was allocated as follows:

Working capital                                           $  170,169
Property and equipment                                        35,418
Other non-current assets                                       6,196
Patent                                                       407,200
Other intangible assets                                    2,984,535
Goodwill                                                   3,308,011
                                                          ----------

Purchase price                                            $6,911,529
                                                          ==========

The operating results of Dove have been included in the accompanying 1996
consolidated statement of income from the date of acquisition. Pro forma
unaudited consolidated operating results of the Company and Dove for the years
ended December 31, 1996 and 1995, assuming the acquisition had been made as of
January 1, 1995, are summarized below:

                                  1996         1995
                              -----------  -----------
                              (unaudited)   (unaudited)
               
Net sales                     $25,982,668  $20,104,737
Net income                      2,177,620    2,177,545
Earnings per share                   0.30         0.40

These unaudited pro forma results have been prepared for comparative purposes
only and include certain adjustments to give effect to amortization of the
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, 1995 or that may occur in
the future.


                                       22
<PAGE>

10. Goodwill and Other Intangible Assets:

At December 31, 1996, intangible assets consisted of the following:

<TABLE>
<CAPTION>
                                                     1996
                            --------------------------------------------------------
                                                   Accumulated
                               Gross               Amortization               Net
                            ----------             ------------           ----------

<S>                         <C>                       <C>                 <C>       
Goodwill                    $3,308,011                $124,050            $3,183,961
                            ==========                ========            ==========

Other intangible assets      2,984,535                 112,537             2,871,998
Patent                         407,200                  30,540               376,660
                            ----------                --------            ----------
                            $3,391,735                $143,077            $3,248,658
                            ==========                ========            ==========
</TABLE>

11. Trade Accounts Payable:

During 1996, 1995 and 1994, the Company purchased $13,138,280, $4,012,468 and
$5,200,000, respectively, of products and services from Norland Corp. and
$3,163,964, $9,294,825 and $3,239,948, respectively, from Stratec. The amounts
owed at December 31, 1996 and 1995 by NMS to these two companies for such
purchases were $2,220,816 and $493,424 and $714,127 and $1,959,403,
respectively. The amounts payable to Stratec at December 31, 1996 and 1995 are
net of receivables from Stratec in the amounts of $62,689 and $180,253,
respectively.

12. Stockholders' Equity:

On August 2, 1995, NMS sold 3,000,000 shares of common stock, having an
aggregate par value of $1,000, at the initial public offering price of $7.00 per
share. Deducted from the resulting gross proceeds of $21,000,000 are $2,651,689
in costs and expenses directly related to the offering, resulting in net
proceeds of $18,348,311.

On June 2, 1995, the Board authorized a 2,000-for-1 stock split which decreased
par value to $0.0005 per share and increased authorized and issued shares to
10,000,000 and 2,000,000, respectively.

The Board subsequently authorized a 3-for-2 stock split (in the nature of a
stock dividend) effective June 14, 1996 which increased the issued and
outstanding shares accordingly.

The financial statements and net income per common share for all periods
presented reflect the stock splits described above.


                                       23
<PAGE>

13.  Compensation Programs:

Stock Option Plan

The Company has a Stock Option Plan covering officers, key employees and
consultants of the Company. The Company has authorized 1,800,000 shares for
options under the plan.

The outstanding options at December 31, 1995 have an exercise price not less
than the market value on January 3, 1994, the date on which such options were
granted. Fifty percent of the options became exercisable in 1995. On January 1,
1996, an additional twenty-five percent became exercisable and the remaining
twenty-five percent became exercisable on January 1, 1997. Of the 258,750 of
remaining unexercised options granted in 1994, the term for 71,250 options is
ten years and the term for 187,500 options is five years. Options granted in
1996 and 1995 vest over a four year period and expire ten years from the
granting date, or upon termination of employment except for 7,500 options which
became fully vested in 1996. The option price was based on 100% of market value
of the Company's Common Stock on the dates the options were granted.

     The following is a summary of options related to the plan as of December
31:

<TABLE>
<CAPTION>
                                               Option Price                    Option price                Option price
                                       1996      per share          1995        per share          1994      per share
                                       ----      ---------          ----        ---------          ----      ---------
<S>                                 <C>         <C>                 <C>        <C>               <C>         <C>           
Options outstanding at
beginning of year                 1,117,500     $0.0005-13.83     1,002,000   $0.0005-0.0006             -           -

Granted                             300,000     $15.00-22.17        115,500    $10.67-13.83      1,002,000   $0.0005-0.0006
Exercised                          (743,250)   $0.0005-0.0006             -                              -           -
                                  ---------                       ---------                      ---------
Options outstanding at
end of year                         674,250     $0.0005-22.17     1,117,500    $0.0005-13.83     1,002,000   $0.0005-0.0006
                                  =========                       =========                      =========



                                      Options      Exercise    Contractual         Options                
Range of Exercise Prices            Outstanding     Price     Life in Years     Exercisable      Price       Life in Years





Options exercisable at
end of year                          46,125                         501,000                              -
                                  =========                       =========                      =========
Options available for               382,500                          82,500                        198,000
grant at end of year              =========                       =========                      =========
</TABLE>

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

<TABLE>
<CAPTION>
                                      Options Outstanding                                 Options Exercisable
                              -------------------------------------           ----------------------------------------
                                                        Weighted                                          Weighted
                                           Weighted      Average                             Weighted      Average
                                           Average      Remaining                            Average      Remaining
                              Options      Exercise    Contractual              Options      Exercise    Contractual
Range of Exercise Prices    Outstanding     Price     Life in Years           Exercisable      Price    Life in Years
------------------------    -----------     -----     -------------           -----------      -----    -------------
<S>                           <C>            <C>           <C>                 <C>             <C>            <C>
0.0005 to 0.0006              258,750        0.0006        3                   9,750           0.0005         7
10.00 to 15.00                243,000         13.67        9                  36,375            12.77         9
18.00 to 22.17                172,500         19.84        9                       0                0         0
                              -------                                         ------
                              674,250                                         46,125
                              =======                                         ======
</TABLE>

The Company applies Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees", and related interpretations in accounting for its
plan and did not recognize compensation expense. Had compensation expense been
recognized based on the fair value of the options at their grant dates, as
prescribed in Statement of Financial Accounting Standards No. 123, "Accounting
for Stock-Based Compensation" (SFAS 123), the Company's net income and earnings
per share for the years ended December 31, 1996 and 1995 would have been as
follows:


                                       24
<PAGE>

                                     1996                             1995
                                     ----                             ----
Net income:
   As reported                    $2,191,374                      $2,100,489
    Pro forma under SFAS 123       1,209,853                       2,063,901

Earnings per share:
   As reported                         $0.31                           $0.40
    Pro forma under SFAS 123            0.17                            0.39

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 the applicable periods: dividend yield of 0% for both periods,
risk-free weighted average interest rate of 5.7% during both periods, expected
volatility factor of 89% for both periods, and an expected option term of 4
years for both periods. The weighted average fair value at date of grant for
options granted during 1996 and 1995 was $11.85 and $8.12 per option,
respectively.

401(k) Plan

Pursuant to the Norland Medical Systems, Inc. Retirement Savings Plan, 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. The Company may also make
additional discretionary contributions for any year. 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 $13,342, $1,776 and $0
for the years ended December 31, 1996, 1995 and 1994, respectively.

14. Income Tax:

The components of the provision for income taxes as of December 31 were as
follows:

                       1996                  1995                 1994
                       ----                  ----                 ----
Current
   Federal          $1,254,387            $1,202,406              $17,500
   State               243,613               233,594                9,500
                  ------------          ------------            ---------
                    $1,498,000            $1,436,000              $27,000
                  ============          ============            =========

As of December 31, 1996, 1995 and 1994, the Company did not have any significant
temporary differences between the financial statement carrying amounts and the
tax bases of existing assets and liabilities.


                                       25
<PAGE>

A reconciliation of the difference between the statutory federal income tax rate
and the effective income tax rate for the years ended December 31 as follows:

<TABLE>
<CAPTION>
                                                           1996                  1995                 1994
                                                           ----                  ----                 ----
<S>                                                        <C>                   <C>                  <C>  
Statutory income tax rate                                  34.0%                 34.0%                34.0%
State income taxes, net of federal tax effect               6.6                   6.6                  6.6
Impact of graduated federal income tax rates                 -                     -                 (12.2)
                                                           ----                  ----                -----
Effective income tax rate                                  40.6%                 40.6%                28.4%
                                                           ====                  ====                =====
</TABLE>

15. Lease Commitments:

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 year
ended December 31, 1996, lease expense was approximately $93,258 and sublease
income was $29,688 and $37,638 with respect to Norland Corp. and the other
company.

The following is a schedule of future minimum lease payments and future sublease
receipts as of December 31, 1996:

                         Rental Payments                 Sublease Receipts
                         ---------------                 -----------------
1997                        $  196,356                      $134,184
1998                           173,784                       134,184
1999                           171,732                       134,184
2000                           139,866                       109,092
2001                           108,000                        84,000
Thereafter                     504,000                       392,000
                            ----------                      --------
                            $1,293,738                      $987,644
                            ==========                      ========

16.  Other Related Party Transactions:

The Company also rents space and purchases administrative support services on a
month to month basis from another company in which certain beneficial
stockholders of NMS are also stockholders. The cost of the space and services to
NMS for the years ended December 31, 1996, 1995 and 1994 was $33,136, $22,360
and $150,000, respectively.

As of December 31, 1996, 1995 and 1994, no amount was due by the Company for
these costs.


                                       26
<PAGE>

17. Supplemental Sales and Customer Information:

The Company's largest customers are medical distributors in countries with high
incidence of bone disease, available therapies and significant third party
reimbursement. Two such distributors accounted for 22% and 6%, 68% and 9%, and
34% and 30% of revenues, respectively, for the years ended December 31, 1996,
1995 and 1994, respectively.

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

<TABLE>
<CAPTION>
                                                      1996                          1995                             1994
                                        ---------------------------    -----------------------------    ---------------------------

<S>                                     <C>                  <C>         <C>                   <C>        <C>                   <C> 
Pacific Rim                             $10,338,350          40.8%       $15,998,238          87.7%       $ 7,737,897          77.0%
Latin America                               747,498           3.0            203,542           1.1            921,389           9.2
Europe/Middle East                          578,081           2.3            889,982           4.9            631,523           6.3
                                        -----------        ------        -----------        ------        -----------        ------
Export sales                             11,663,929          46.1         17,091,762          93.7          9,290,809          92.5
Domestic sales                           13,646,048          53.9          1,152,046           6.3            750,739           7.5 
                                        -----------        ------        -----------        ------        -----------        ------
                                        $25,309,977         100.0%       $18,243,808         100.0%       $10,041,548         100.0%
                                        ===========        ======        ===========        ======        ===========        ======
</TABLE>

Certain products sold to customers in the United States were purchased
from Stratec and are included in domestic sales.

18.  Quarterly Financial Data:  (Unaudited)

<TABLE>
<CAPTION>
                                                                   1995 Quarters
                                 -------------------------------------------------------------------------------------------------
                                 First                 Second                 Third                 Fourth                 Total
                                 -----                 ------                 -----                 ------                 -----
<S>                           <C>                   <C>                    <C>                   <C>                   <C>        
Revenue                       $3,895,921            $4,003,310             $5,230,527            $5,114,050            $18,243,808
Gross profit                   1,295,390             1,254,162              1,519,420             1,666,027              5,734,999
Operating income                 735,384               796,134                719,811               872,177              3,123,506
Net income                       438,312               475,666                505,364               681,148              2,100,490
Net income per Common share        $0.11                 $0.12                  $0.08                 $0.10                  $0.40

<CAPTION>
                                                                   1996 Quarters
                                 -------------------------------------------------------------------------------------------------
                                 First                 Second                 Third                 Fourth                  Total
                                 -----                 ------                 -----                 ------                  -----
Revenue                       $5,218,290            $6,949,116             $8,066,882            $5,075,689            $25,309,977
Gross profit                   1,802,379             2,568,986              2,652,295             2,037,848              9,061,508
Operating income                 921,315             1,091,758                720,553               252,004              2,985,630
Net income                       691,256               750,057                515,335               234,726              2,191,374
Net income per Common share        $0.10                 $0.10                  $0.07                 $0.03                  $0.31
</TABLE>

The net income per Common share for all periods presented reflects the stock
splits described in Note 12.


                                       27
<PAGE>

19.  Subsequent Events:

     On February 26, 1997, the Company signed an agreement to acquire all of the
issued and outstanding stock of Norland Corp. for $17.5 million with a possible
additional purchase price of up to $2.5 million based on the level of the
Company's 1997 revenues. For each full $1,000,000 of 1997 revenues above
$32,000,000, the purchase price will be increased by $312,500 (up to the maximum
increase of $2.5 million). The $17.5 million will be payable at closing as
follows: $1,250,000 in cash and a $16,250,000 note. The note will bear interest
at the rate of 7% per annum. A $1,250,000 portion of the principal will be
payable six months after closing, and the remaining principal will be due and
payable on the fifth anniversary of the closing. The Company may prepay the note
at any time. The amount of any additional purchase price will be determined
following the completion of the audit of the Company's financial statements for
the year ending December 31, 1997. This amount will be paid by another 7% note
due five years after the closing. The transaction is subject to approval by the
Company's stockholders at its Annual Meeting.


                                       28
<PAGE>

                          NORLAND MEDICAL SYSTEMS, INC.

                                   SCHEDULE II

                        VALUATION AND QUALIFYING ACCOUNTS

              for the years ended December 31, 1996, 1995 and 1994

<TABLE>
<CAPTION>
                                                          Balance at    Charged to Costs    Other                     Balance at End
                                                          Beginning of    and Expenses    Accounts(A)   Deductions(B)      of Period
                                                          ------------    ------------    -----------   -------------      ---------

<S>                                                        <C>              <C>              <C>                 <C>        <C>     
1996
----
Allowance for Doubtful Accounts                            $150,000         $70,000          $1,000              $0         $221,000
                                                           ========         =======          ======              ==         ========

Obsolescence reserve                                             $0              $0         $50,000         $(8,105)         $41,895
                                                                 ==              ==         =======        ========          =======

1995
----
Allowance for Doubtful Accounts                                  $0        $150,000              $0              $0         $150,000
                                                                 ==        ========              ==              ==         ========

1994
----
Allowance for Doubtful Accounts                                  $0              $0              $0              $0               $0
                                                                 ==              ==              ==              ==               ==
</TABLE>

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


                                       29
<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 Amendment to its
Annual Report to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of White Plains, New York, on the 7th day of July,
1997.


                                  NORLAND MEDICAL SYSTEMS, INC.


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

      Pursuant to the requirements of the Securities Exchange Act of 1934, this
Amendment to 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.

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

/s/ Reynald G. Bonmati    Chairman of the Board and            July 7, 1997
----------------------    President (Principal Executive
Reynald G. Bonmati        Officer); and Director
                          

/s/ Kurt W. Streams       Vice President, Finance              July 7, 1997
----------------------   (Principal Financial Officer and
Kurt W. Streams           Principal Accounting Officer)


        *                 Director                             July 7, 1997
----------------------    
James J. Baker            
                          

        *                 Director                             July 7, 1997
----------------------    
 Michael W. Huber         
                          

        *                 Director                             July 7, 1997
----------------------    
 Robert L. Piccioni       
                          

        *                 Director                             July 7, 1997
----------------------    
 Albert S. Waxman             


* By: /s/ Kurt W. Streams
      ----------------------
      Kurt W. Streams
      Attorney-in-Fact


                                       30