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                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION

                             Washington, D.C. 20549

                                    FORM 10-K

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

For the fiscal year ended December 31, 1997         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 20, 1998
was $17,829,172 based on the price of the last reported sale on the NASDAQ
National Market.

         As of March 20, 1998 there were 7,162,531 shares of the registrant's
Common Stock, par value $0.0005 per share, outstanding.

                       Documents Incorporated By Reference

         Items 10, 11, 12 and 13 Part III of this Form 10-K are incorporated by
reference to the Norland Medical Systems, Inc. Proxy Statement for the 1998
Annual Meeting of Stockholders. A definitive proxy statement will be filed with
the Securities and Exchange Commission within 120 days after the close of the
fiscal year covered by this Form 10-K.

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                            TABLE OF CONTENTS

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INTRODUCTION................................................................1

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

ITEM 2.  PROPERTIES........................................................14

ITEM 3.  LEGAL PROCEEDINGS.................................................15

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS...............16

ITEM 5.  MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
             STOCKHOLDER MATTERS...........................................17

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

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

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.......................27

ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
             ACCOUNTING AND FINANCIAL DISCLOSURE...........................50

ITEMS 10, 11, 12 AND 13....................................................50

ITEM 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
             FORM 8-K......................................................51
    
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INTRODUCTION
   
         The statements included in this Report regarding future financial
performance and results and the other statements that are not historical facts
are forward-looking statements. The words "believes," "intends," "expects,"
"anticipates," "projects," "estimates," "predicts," and similar expressions are
also intended to identify forward-looking statements. These forward-looking
statements are based on current expectations and are subject to risks and
uncertainties. In connection with the "safe harbor" provisions of the Private
Securities Litigation Reform Act of 1995, the Company cautions the reader that
actual results or events could differ materially from those set forth or implied
by the forward-looking statements and related assumptions due to certain
important factors, including, without limitation, the following: (i) the
continued development of new products and product enhancements that can be
marketed by the Company; (ii) the importance to the Company's sales growth that
the efficacy of new therapies for the treatment of osteoporosis and other bone
disorders be demonstrated and that regulatory approval of such therapies be
granted, particularly in the United States; (iii) the acceptance and adoption by
primary care providers of new osteoporosis therapies and the Company's ability
to expand sales of its products to these physicians; (iv) the Company may be
adversely affected by changes in the reimbursement policies of governmental
programs (e.g., Medicare and Medicaid) and private third party payors, including
private insurance plans and managed care plans; (v) the high level of
competition in the bone densitometry market; (vi) changes in bone densitometry
technology; (vii) the Company's ability to continue to maintain and expand
acceptable relationships with third party dealers and distributors; (viii) the
Company's ability to provide attractive financing options to its customers and
to provide customers with fast and efficient service for the Company's products;
(ix) changes that may result from health care reform in the United States may
adversely affect the Company; and (x) other risks described elsewhere in this
Report and in other documents filed by the Company with the Commission. The
Company is also subject to general business risks, including adverse state,
federal or foreign legislation and regulation, adverse publicity or news
coverage, changes in general economic factors and the Company's ability to
retain and attract key employees.
    
         On March 16, 1998, the Company announced that it would restate its
revenues downward for the fourth quarter of 1996 and for the first, second and
third quarters of 1997. Financial statements and related disclosures contained
in this Report with respect to the year ended December 31, 1996 reflect the
restated financial statements for such year (see Note 15 to the Consolidated
Financial Statements in Item 8 of this Report). The financial statements and
related disclosures with respect to the year ended December 31, 1997 reflect the
restated consolidated financial statements for the first three quarters of the
year.

                                   PART I

ITEM 1.  BUSINESS.

         Norland Medical Systems, Inc. ("Norland" or the "Company") develops,
manufactures, markets, sells and distributes a broad range of bone densitometry
systems used to aid in diagnosing and monitoring bone disorders, particularly
osteoporosis, a disease that affects more than 28 million people in the United
States and 200 million worldwide. Driven by the availability of new FDA-approved
therapies for bone disorders, the Company is focusing on bringing affordable,
state-of-the-art diagnostic products directly into physician offices. The
Company offers proprietary, lower priced, easy to operate and compact products
designed to address the diagnostic needs of gynecologists and family practice

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physicians. Estimates are that there are approximately 35,000 gynecologists and
170,000 primary care physicians in the United States alone.

         On September 11, 1997 Norland purchased all of the outstanding stock of
Norland Corporation ("Norland Corp.") from Norland Medical Systems B.V. ("NMS
BV"). Norland Corp. develops and manufacturers bone densitometry systems based
on dual-energy x-ray absorptiometry ("DXA") technology, which, since 1987, has
been a standard for measuring bone mass reduction, one of the primary indicators
of osteoporosis. Prior to September 11, 1997, Norland had exclusive worldwide
distribution rights to all products developed and manufactured by Norland Corp.
and Stratec Medizintechnik GmbH ("Stratec"), another subsidiary of NMS BV which
develops and manufacturers bone densitometry systems based on peripheral
quantitative computed tomography ("pQCT") technology. Upon the acquisition of
Norland Corp., Norland entered into a new exclusive Distribution Agreement with
Stratec.

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

         The Company has five product lines utilizing several different types of
technology. The Company manufactures and markets a line of traditional full size
DXA-based bone densitometry products. The Eclipse and the XR36 are highly
effective and offer essential features at competitive prices. Because of the
cost, space requirements and training required, these systems are generally
found in hospitals, large clinics and research institutions, as opposed to
physician offices, where patients would benefit from timely and easy access to
bone density testing.

         The Company's peripheral x-ray line includes the pDEXA system, a lower
priced, high performance desktop system based on DXA technology. It was the
first desktop DXA-based system to receive FDA marketing clearance. The pDEXA is
the only system to receive FDA marketing clearance for use in fracture risk
assessment. The Company also markets the DXA-based accuDEXA, which is
manufactured by Schick Technologies, Inc. ("Schick").

         The Company recently introduced its peripheral ultrasound line. The
Paris Ultrasound bone measurement system (the "Paris") was developed and
patented by IMRO, Inc. ("IMRO") of Canada and measures the velocity of sound and
broad bend ultrasound attenuation at the heel. Sales to date have been made in
Europe and the Pacific Rim. The Paris system is not yet approved for sale in the
United States.

         The Company also markets a line of products based on pQCT technology.
Systems using pQCT technology can make separate, three-dimensional measurements
of the cortical and trabecular bone, allowing a more detailed assessment of the
biomechanical soundness of the bone. In addition, pQCT permits the detection of
minute changes within bone that occur over short periods of time.

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

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Background

         Osteoporosis
         Osteoporosis is a disease generally associated with aging and
characterized by excessive loss of bone mineral, resulting in decreased bone
density over time. Bone is a dynamic organ which can be separated into two basic
structural components, outer cortical bone and inner trabecular bone. This
combination of a solid outer bone surrounding the inner bone is constantly
broken down and regenerated through a process known as bone remodeling, which
consists of bone resorption (removal) followed by bone formation. When
remodeling does not function properly, the result is a net loss of bone mass,
often causing the amount of bone to become deficient in meeting the body's
needs. Factors contributing to this condition include low calcium intake,
excessive alcohol consumption and certain drug therapies.
   
         Osteoporosis is a "silent disease" and typically has no overt symptoms
in its early stages. The first sign of osteoporosis is often bone fracture.
Osteoporosis leads to increased risk of fracture, chronic pain and immobility,
usually at the hip, forearm or spine. According to the National Osteoporosis
Foundation ("NOF"), osteoporosis affects more than 28 million people in the
United States, 80% of whom are women. The post-menopausal female population has
the highest incidence of osteoporosis and the highest rate of morbidity (loss of
quality of life) and mortality due to osteoporosis. Hip fractures produce the 
most serious consequences. According to the NOF, there are more than 300,000 
hip fractures per year in the United States and 50% of hip fracture patients 
never walk independently again. The NOF estimates that in the United States
osteoporosis contributes to more than 1.5 million fractures annually, a majority
of which were of the spine and hip, and that annual direct medical expenditures
for osteoporosis and associated fractures is $13.8 billion, a figure that is
expected to increase to $62 billion by the year 2020.
    
         Until recently, osteoporosis was thought to be an inevitable and
untreatable consequence of aging. The Company believes that recent availability
of more effective drug therapies, the aging of the population and an increased
focus on women's health issues and preventive medical practices have created a
growing awareness among patients and physicians that osteoporosis is in many
cases a disease which can be treated.

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

         In September 1995, the FDA approved the drug Fosamax for the treatment
of established osteoporosis in post-menopausal women. Fosamax, developed by
Merck & Co., Inc. ("Merck"), is a second generation bisphosphonate that acts by
coating the bone surface and inhibiting bone resorption. 

                                       3
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Fosamax was shown in clinical trials to increase bone density without
significant adverse side effects. Other therapies approved by the FDA in 1995 to
treat osteoporosis include Miacalcin, an intra-nasal formulation of calcitonin
developed by Novartis, and Premarin MPA, a one-tablet hormone replacement
therapy combining estrogen and progestin developed by Wyeth-Ayerst Laboratories.

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

         The Company believes that worldwide there are more than 50
pharmaceutical and biotechnology companies with programs to develop new
therapies for osteoporosis, some of which are in late-stage clinical trials.
Therapeutic products under development include new anti-resorptive agents and
bone-formation stimulators. New generations of bisphosphonates are being
developed by Procter & Gamble (risedronate), Sanofi Winthrop (tiludronate) and
Boehringer-Mannheim (ibandronate), while antiestrogens (estrogen analogs) are
being developed by Pfizer (draloxifene). While these therapies are all in Phase
III clinical trials, others are in the New Drug Application review stage. These
include Alora (estradiol matrix transdermal system - Procter & Gamble), Calcimar
Intranasal (calcitonin - Rhone Poulenc Rorer) and Neosten (slow release fluoride
- Mission Pharmacal).

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

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

         There are a number of different types of technologies that can be used
to assess bone mineral status. Single photon absorptiometry (SPA) uses a single
energy radioactive source and has limited ability to measure bone in complex
body regions. Dual photon absorptiometry (DPA) reduces measurement error through
complex body regions by using a dual-energy radioactive source. X-ray-based
systems provide improved precision, faster scan times and lower operating costs
as compared to single and dual photon absorptiometry and have largely replaced
SPA and DPA technology. Single-energy x-ray absorptiometry ("SXA") technology
replaces the radioactive source with a single energy X-

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ray source. DXA, which has become the standard for bone mass analysis, uses a
dual-energy X-ray source. Radiographic absorptiometry ("RA") measures bone
density from two X-ray images of the hand. Although it does not require a
dedicated bone densitometry system since it uses traditional X-ray equipment, RA
does not provide point of care measurement of bone density, as the radiographs
have to be sent out to a laboratory for interpretation. All of these
technologies produce only two-dimensional (planar) measurements. Quantitative
computed tomography (QCT) is capable of separate, three-dimensional measurement
of cortical and trabecular bone, providing volumetric density and allowing more
precise assessment of the biomechanical soundness of the bone.
    
         Ultrasound technology measures the velocity of sound and broad band
attenuation. Ultrasound has recently been improved to the point that it has
gained acceptance as a viable technology to assess bone at peripheral sites. In
vitro diagnostic testing (biochemical markers) measures the level of certain
byproducts in body fluids to determine the rate of bone resorption and bone
formation. However, these tests do not provide information about bone mass or
bone structure and cannot be used independently to diagnose osteoporosis or
assess fracture risk. The Company believes that biochemical marker testing may
complement bone densitometry in monitoring the effectiveness of drug therapies.

Products

         Product Lines
         The Company believes it markets the broadest line of bone densitometers
available today with a wide range of price points and capabilities to satisfy
diverse customer needs. The Company currently offers five product lines and 12
models. The following is a description of each of the Company's product lines.

         1.  Peripheral X-ray Systems
         The Company's pDEXA brings DXA-based technology to the desktop in an
affordable, easy-to-use model that is designed for physician offices, small
clinics and other settings beyond large hospitals and clinics. Like the much
larger traditional DXA systems, the pDEXA measures bone mass and compares it to
a normal reference population. However, the pDEXA measures only the forearm,
enabling it to be more compact, and therefore, more affordable than traditional
DXA systems. The pDEXA measures the forearm at a site that is mostly cortical
bone and at another site that is mostly trabecular bone. The pDEXA utilizes a
miniaturized X-ray source using a dental X-ray tube which does not require a
cooling system. The software used in the pDEXA systems provides quantitative
analysis of bone mass, including bone mineral density (BMD) and bone mineral
content (BMC) as well as comparisons to normal reference populations and to the
patient's prior examinations. It also provides skeletal images of the region of
interest as well as graphical presentation of the results. In January 1998, the
pDEXA became the first bone densitometry system to receive FDA approval of a
Fracture Risk Assessment Option, which allows the bone density estimates from
the pDEXA to be used as an aid to physicians in determining fracture risk.

         The Company also markets the DXA-based accuDEXA. The accuDEXA is
manufactured by Schick and measures bone mass at the finger. The Company has not
yet made any accuDEXA sales. The Company's Dove Medical Systems, Inc. ("Dove")
subsidiary manufactured the OsteoAnalyzer SXA 3000, a system that is based on
SXA-technology and measures bone mass at the heel.

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         2.  Peripheral Ultrasound Systems
         The Paris system was developed and patented by IMRO. The Company has
exclusive worldwide distribution rights for the Paris. The Paris measures the
velocity of sound and broad band ultrasound attenuation at the heel. Although
the Paris is a dry system as far as the patient is concerned, it has the
precision and accuracy of a wet system. To date sales have been made only in
Europe and the Pacific Rim. The Paris system is not yet approved for sale in the
United States. The Company anticipates that it will apply with the FDA for
pre-market approval in the first half of 1998. As with peripheral x-ray systems,
the target market for the Paris is physician offices.

         3.  Traditional DXA Systems
         The traditional DXA-based bone densitometers marketed by the Company
are the compact Eclipse and the full size XR36. The target market for these
systems is hospitals, clinics and group practices. Both systems are capable of
performing axial (hip and spine) and peripheral scans. The XR36 also performs
full body scans. Both systems measure BMD and BMC and make comparisons to
reference populations and to the patient's prior examination. Price and service
are the primary competitive factors among DXA products offering similar basic
capabilities. These systems have been sold in over forty countries.

         4.  pQCT - Clinical Systems
         The XCT line of systems brings a unique type of bone densitometer based
on pQCT technology to the market. Unlike DXA-based densitometers, pQCT systems
permit separate, three-dimensional measurement of cortical and trabecular bone
by taking multiple images in a 360-degree rotation around the scanned limb,
providing true volumetric density and allowing more precise assessment of
biomechanical soundness of the bone. The ability to measure trabecular bone
precisely also permits detection over short periods of time of minute changes in
bone, indicating changes in metabolic status. The pQCT systems use the same
miniaturized low-radiation X-ray source as the pDEXA. The XCT2000 scans the
forearm and is marketed to hospitals, clinics and private practices. The XCT3000
can also scan the tibia, the femur and is capable of three-dimensional
measurement of the entire femoral neck, providing more precise assessment of hip
fractures and monitoring of implants following hip replacements. The XCT3000 is
not yet approved for sale in the United States.

         5.  Research Systems
         The Company markets a series of pQCT-based research scanners: the XCT
Research SA, the XCT Research A and the XCT3000A, for research involving
laboratory animals, and the XCT Microscope, for research in vitro at a maximum
resolution of 20 microns. The Company also markets the Sabre, a DXA-based system
for research with laboratory animals. The XR36 and the Eclipse can also be used
in research to scan animals.

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

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Product Development

         The Company focuses its product development on DXA-based bone
densitometry systems. At March 25, 1998, the Company had 14 persons engaged in
research and development, six of whom were devoted to software development.
Product development work with respect to pQCT-based systems is performed by
Stratec.

         The Company has worldwide rights to manufacture and distribute products
that may be developed by Vitel, Inc. of Dallas, Texas. Vitel, Inc. has been
developing an advanced ultrasound device that uses patented technology. There
can be no assurance that it will succeed in producing a commercial unit.

Sales and Marketing
   
         The Company currently employs eight regional sales managers, including
five who cover the United States and three who cover Europe, the Middle East and
Asia (other than the Pacific Rim), Latin America and the Pacific Rim. The
Company's customers are primarily third party dealers and distributors. The
Company also sells directly to end-users in those markets where the Company does
not have third party dealers or distributors. The Company typically uses an
exclusive dealer or distributor to cover one or more states or a single country.
Each Company regional sales manager is responsible for the support and 
supervision of several dealers and distributors within their geographic region. 
Support includes participation in trade shows, symposiums, customer visits, 
product demonstrations, ongoing distribution of literature and publications, 
sales training and presentations of financing programs. In 1997, the Company 
opened small sales offices in London, from which the regional manager for 
Europe, the Middle East and Asia operates, and Singapore, where the regional
manager for the Pacific Rim operates. The Company intends to increase its direct
U.S. sales force and expand its network of third party dealers and distributors
to exploit the large market of gynecologists and primary care physicians.
    
   
         In 1997, the Company expanded its marketing department, which presently
consists of ten employees. Marketing efforts are focused primarily on supporting
the regional sales managers in their management of dealers and distributors, 
developing and maintaining relationships and joint programs with pharmaceutical
companies, managing sales lead generation programs, managing product 
introductions and new product financing programs.
    
         The Company sold products in 40 countries in 1997. For a more detailed
breakdown of the Company's 1997 sales by geographic territory, see Note 14 to
the Company's financial statements included in Item 8 of this Report.

         The Company's peripheral bone densitometers have been used in several
programs in conjunction with major pharmaceutical companies, including Merck's
National Osteoporosis Risk Assessment (N.O.R.A.) program. Through N.O.R.A.,
valuable patient demographic and risk factor data from postmenopausal women, age
50 and over, is being collected to gain better understanding of the progression
of osteoporosis and associated patient outcomes. The program is expected to
include up to 500,000 postmenopausal women and 5,000 physicians within two
years. Approximately 50 of the Company's systems were sold to Merck and are
being used to provide bone density measurements for women in the program.

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         The Company, Metra Biosystems, Inc. and Berlex Laboratories, Inc. are
parties to a joint marketing program. Under this program, a family of products
for post-menopausal women, including the Company's peripheral bone
densitometers, Metra's bone resorption biochemical markers and Berlex's hormone
replacement therapy, are being promoted to obstetricians and gynecologists by
Berlex's 180 female healthcare sales representatives.

         In 1997, the Company and Wyeth-Ayerst Laboratories conducted a joint
marketing program under which the Company supplied pDEXA systems to OB/GYN
physician specialists identified by Wyeth-Ayerst. The purpose of the program was
to raise awareness of osteoporosis as a treatable and preventable disease and to
demonstrate in the physician's office the tools necessary to assess bone mass,
monitor bone loss and prescribe proper therapies to treat bone loss. The pDEXA
systems were loaned to the physicians for short periods and then moved to other
identified physicians.

Manufacturing
   
         Manufacturing consists primarily of testing of components, final
assembly and systems testing. The Company manufactures traditional DXA-based
systems for sale worldwide and the pDEXA for sale in North America and Latin
America. The Company also manufactures certain pQCT systems for sale in the
United States and Canada. All establishments, whether foreign or domestic,
manufacturing medical devices for sale in the United States are subject to
periodic inspections by or under the authority of the FDA to determine whether
the manufacturing establishment is operating in compliance with FDA Quality
System Regulation ("QSR") requirements . The Company's manufacturing facility is
located in Fort Atkinson, Wisconsin. Stratec manufactures pDEXA systems for sale
outside North America and Latin America and pQCT systems for sale outside the
United States and Canada. Stratec's manufacturing facilities are located in
Pforzheim, Germany.
    
         Some components are manufactured in accordance with custom
specifications and require substantial lead times. While efforts are made to
purchase components from more than one source and to use generally available
parts, certain components, including X-ray tubes and detectors, are available
from only one or a limited number of sources. In the past, there have been
delays in the receipt of certain components, although to date no such delays
have had a material adverse effect on the Company. The Company believes that the
Company, Stratec and IMRO have sufficient capacity to supply the Company's
product needs for at least the next twelve months.

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

                                       8
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Customer Support Services

         The Company offers one-year warranties on both the hardware and
software included in its systems. The Company provides warranty services to its
customers. Any costs incurred by the Company in connection with a Stratec or
IMRO warranty are borne by Stratec and IMRO.

         The Company has no obligation to provide any other services to its
third party dealers or distributors or other customers. However, the Company
does offer non-warranty services and a range of other product support services
in cooperation with its third-party dealers, including a telephone hotline for
customer inquiries, product installation, product enhancements and maintenance
releases. The Company recently entered into an agreement with OEC Medical
Systems, Inc. ("OEC"), pursuant to which OEC will service the Company's
DXA-based systems installed in the United States. The Company also offers
training at customer locations and the Company's facilities to both end-user
customers and third-party dealers.

Distribution Agreements

         Stratec Agreement
         Upon the acquisition of Norland Corp. on September 11, 1997, the
Distribution Agreement with Norland Corp. and Stratec was terminated, and the
Company entered into a new Distribution Agreement with Stratec containing
essentially the same provisions as the prior Distribution Agreement did with
respect to Stratec. The Company's Distribution Agreement with Stratec grants the
Company exclusive distribution rights for all medical diagnostic devices
developed by Stratec. The distribution rights are worldwide, except that Germany
is currently excluded. The Company has the option to become the exclusive
distributor for Stratec in Germany at any time on 90 days' notice to Stratec.
The term of the Distribution Agreement extends until December 31, 2015. At the
end of such term or any renewal term, either party may renew the Distribution
Agreement for an additional term of five years, provided that the party electing
to renew is not in material breach of the Distribution Agreement at the time of
renewal.

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

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

                                       9
<PAGE>

the standard costs of the components and parts used in such system plus an
allowance for other direct manufacturing costs.
   
         During December of 1996 and for all of 1997, special pricing provisions
were in effect under the Stratec Distribution Agreement and the predecessor
Distribution Agreement. The Company paid Stratec an amount equal to the
Distributor's Device Cost as defined in the Distribution Agreement. The
Distributor's Device Cost of a system is the aggregate of the standard costs of
the components and parts used in the system plus the actual labor costs incurred
by Stratec in producing the system (subject to a cap) plus an agreed upon markup
on the standard costs of all non-computer components used in the system. Stratec
was also entitled to receive royalties equal to 5% of the price for which the
Company sold any pQCT system manufactured by Stratec. Stratec had the right to
terminate these special pricing provisions and reinstate the general pricing
provisions described above effective December 31, 1997. Stratec exercised this
termination right, and as a result, the general pricing provisions became
effective again as of January 1, 1998. The Company has been negotiating with
Stratec with respect to possible alternative pricing provisions. However, no new
agreement has been reached, and there can be no assurance that the general
pricing provisions now in effect will be changed.
    
         IMRO Distribution Agreement
         The Distribution Agreement with IMRO grants the Company exclusive
worldwide distribution rights for all ultrasound devices for bone application
developed by IMRO. The Company has the exclusive right to manufacture all such
devices to be sold in the United States. The Paris system is not yet approved
for sale in the United States. The term of the Distribution Agreement extends
until December 31, 2002 or, at the Company's option, the fifth anniversary of
the receipt of FDA approval of the Paris for sale in the United States. The term
will be automatically renewed for an indefinite number of successive one-year
terms unless either party elects to terminate at the end of any such term.

         IMRO will receive a royalty on all devices manufactured and sold by the
Company. The price at which the Company purchases a system from IMRO for resale
outside the United States is IMRO's Device Cost as defined in the Distribution
Agreement plus a percentage of the amount for which the Company sells such
system. IMRO's Device Cost of a system is the aggregate of the standard costs of
the components and parts used in the system plus the actual labor costs incurred
by IMRO in producing the system plus an agreed upon markup on the standard costs
of all non-computer components used in the system.

         Schick Agreement
         The Company's Sales Agreement with Schick gives the Company the
nonexclusive right to purchase and resell the accuDEXA on an OEM basis. The
Sales Agreement has a one-year term commencing December 2, 1997 and will be
automatically renewed for successive one-year terms unless either party elects
to terminate at the end of any such one-year term.

Competition

         The bone densitometry systems market is highly competitive. Several
companies have developed or are developing bone densitometers or other devices
that compete or will compete with products marketed by the Company. Many of the
Company's existing and potential competitors have substantially greater
financial, marketing and technological resources, as well as established
reputations for success in developing, selling and servicing products. The
Company expects existing and new 

                                       10
<PAGE>

competitors will continue to introduce products that are directly or indirectly
competitive with those marketed by the Company, including alternatives to
absorptiometry such as ultrasound and in vitro diagnostics. Such competitors may
succeed in developing products that are more functional or less costly than
those sold by the Company and may be more successful in marketing such products.
There can be no assurance that the Company will be able to continue to compete
successfully in this market.

         The Company's primary competitors for the sale of bone densitometry
systems are Hologic, Inc. and Lunar Corporation. These companies have products
that compete directly with the products marketed by the Company and have their
own manufacturing and research capabilities. There can be no assurance that the
Company's competitors will not succeed in continuing to develop and market lower
priced or better performing devices comparable to the Company's lines.

         The ultrasound market is particularly competitive. There are
approximately 20 other companies, including Hologic and Lunar, that are
marketing ultrasound bone assessment systems outside the United States. In
addition, Hologic has received FDA approval to market its system in the United
States, and one or more of the other companies may also receive FDA approval
before the Company receives FDA approval for the Paris system.

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

Third Party Reimbursement
   
         The products marketed by the Company are purchased principally by
hospitals, managed care organizations, including independent practice
associations and physician practice organizations or independent physicians or
physician groups, who are regulated in the United States by Federal and state
authorities and who typically bill and are dependent upon various third party
payers, such as federal and state governmental programs (e.g., Medicare and
Medicaid), private insurance plans and managed care plans, for reimbursement for
use of the Company's products. The Health Care Financing Administration ("HCFA")
established new reimbursement codes and recommended reimbursement rates
effective January 1, 1998. The average recommended reimbursement rates
established by HCFA and currently in effect for central and peripheral DXA bone
density examinations are approximately $131 and $41, respectively. Currently,
there are no specific reimbursement codes for ultrasound or SXA bone density
examinations. There can be no assurance that specific reimbursement codes for
these examinations will be established by HCFA. On several occasions, HCFA has
effected increases and decreases in its recommended reimbursement rates for bone
densitometry examinations and has made changes in the types of examinations
eligible for reimbursement. There can be no assurance that HCFA will not
continue to make changes from time to time. The Company could be materially and
adversely affected by such changes.
    
                                       11
<PAGE>

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

         In a number of European countries, Japan and several other countries,
third party payors provide reimbursement for bone densitometry scans. In Japan,
Taiwan and Europe, third party reimbursement for certain procedures has been
reduced.

Government Regulation

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

         Before any new medical device may be introduced in the United States
market, the manufacturer must obtain either premarket clearance through the
Section 510(k) premarket notification process or premarket approval through the
lengthier premarket approval application ("PMA") process. All products currently
marketed commercially by the Company in the United States are considered Class
II medical devices subject to FDA clearance pursuant to the Section 510(k)
premarket notification process. Section 510(k) submissions may be filed only for
those devices that are "substantially equivalent" to a legally marketed Class I
or Class II device or to a Class III device for which the FDA has not called for
PMAs. A Section 510(k) submission generally requires less data than a PMA.
Pursuant to recently enacted changes in the Federal Food, Drug and Cosmetic Act,
the FDA must make a determination whether or not to clear a Section 510(k)
submission within 90 days of its receipt. The FDA may extend this time period,
however, if additional data or information are needed to demonstrate substantial
equivalence. If a device is not "substantially equivalent" to a legally marketed
Class I or Class II device or to a Class III device for which the FDA has not
called for PMAs, a PMA is required. The premarket approval procedure involves a
more complex and lengthy testing and FDA review process than the Section 510(k)
premarket notification process. Modifications or enhancements to products that
are either cleared through the Section 510(k) process or approved through the
PMA process that could effect a major change in the intended use, or affect the
safety or effectiveness, of the device may require further FDA review and
clearance or approval through new Section 510(k) or PMA submissions.

         All establishments, whether foreign or domestic, manufacturing medical
devices for sale in the United States are subject to periodic inspections by or
under authority of the FDA to determine whether the manufacturing establishment
is operating in compliance with QSR requirements. The FDA also requires that
medical device manufacturers undertake postmarket reporting for serious
injuries, deaths, or malfunctions associated with their products. If safety or
efficacy problems occur after the product reaches the market, the FDA may take
steps to prevent or limit further marketing of the product. Additionally, the
FDA actively enforces regulations prohibiting marketing of devices for
indications or 

                                       12
<PAGE>

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

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

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

         Whether or not FDA approval has been obtained, in some foreign
countries marketing authorization must be obtained from regulatory authorities
(or third parties authorized by such regulatory authorities) prior to the
commencement of marketing of the product in each such country. Requirements
governing the conduct of clinical trials and product approvals may vary
significantly from country to country. The time required for approval may be
longer or shorter than that required for FDA approval. The Company generally
relies on its local distributors to obtain any required clearances or undergo
any conformity assessment procedures in the countries in which they sell
products marketed by the Company. There can be no assurance that the Company
will not be required to incur significant costs in the future with respect to
compliance with laws and regulations of such countries.
   
         Effective in June of 1998, bone densitometry systems imported into the
European Community must be manufactured in ISO-9001 certified facilities. The
Company is in the process of taking the steps required to obtain such
certification for its Fort Atkinson facility.
    
         In addition to the regulatory framework for product approvals, the
Company is, and may be subject to, regulation under local, state, federal and
foreign law, including requirements regarding occupational safety, clinical and
laboratory practices, the use, handling and disposition of radiological
materials, environmental protection and hazardous substance control, and may be
subject to other present and possible future local, state, federal and foreign
regulation. There can be no assurance that the Company will not be required to
incur significant costs in the future with respect to compliance with such laws
and regulations.

Proprietary Rights

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

                                       13
<PAGE>

business depends on proprietary information regarding customers and marketing,
and there can be no assurance that the Company will be able to protect such
information.

Backlog

         Backlog consists of signed purchase orders received by the Company from
its customers. Backlog as of December 31, 1997 and 1996 totaled approximately
$3,688,859 and $1,414,348, respectively. The Company's ability to ship products
depends on its production capacity and that of Stratec and IMRO. Purchase orders
are generally cancelable. The Company believes that its backlog as of any date
is not a meaningful indicator of future operations or net revenues for any
future period.

Product Liability Insurance

         The Company's business involves the inherent risk of product liability
claims. If such claims arise in the future they could have a material adverse
impact on the Company. The Company maintains product liability insurance on a
"claims made" basis with respect to the products it manufactures in the
aggregate amount of $4.0 million, subject to certain deductibles and exclusions.
Stratec and IMRO maintain product liability insurance in the aggregate amounts
of DM6 million (approximately $3.2 million based on current exchange rates) and
Can. $4 million (approximately U.S. $2.8 million based on current exchange
rates), respectively, subject to certain deductibles and exclusions. The Company
is an additional named insured on the Stratec and IMRO policies. There is no
assurance that such coverage will be sufficient to protect the Company from
risks to which they may be subject, including product liability claims, or that
product liability insurance will be available to the Company at a reasonable
cost, if at all, in the future or that insurance maintained by Stratec and IMRO
will cover the Company.

Employees

         At March 25, 1998, the Company had 106 employees, of whom 28 were
engaged in direct sales and marketing activities and 28 were engaged in
manufacturing activities. The remaining employees are in finance,
administration, product development and customer service. No employees of the
Company are covered by any collective bargaining agreements, and management
considers its employee relations to be excellent.

ITEM 2.  PROPERTIES.

         The Company leases its principal executive offices, which are located
at 106 Corporate Park Drive, Suite 106, White Plains, New York 10604. The
Company sublets a portion of this office space to SBP Technologies, Inc.
("SBP"). Both the lease and sublease expire on August 31, 2000. The rent is
allocated between SBP and the Company on a pro rata basis (based on square
footage). Reynald G. Bonmati, President and a Director of the Company, is
President and a Director of SBP. Novatech Ventures, L.P., the general partner of
which is controlled by Mr. Bonmati, is the majority owner of SBP.

         The Company leases approximately 28,500 square feet of space in Fort
Atkinson, Wisconsin. One lease with respect to 18,000 square feet expires on
August 31, 2006, and the second lease with respect to the remaining 10,500
square feet expires on June 30, 2002. The Company uses this space for
manufacturing, research and development, sales and marketing, customer services,
administration and warehousing.

                                       14
<PAGE>

ITEM 3.  LEGAL PROCEEDINGS.
   
     Irwin I. Miller v. Reynald G. Bonmati et al., Defendants, and Norland 
Medical Systems, Inc., Nominal Defendant. This shareholder's class action and 
derivative complaint was filed in the Court of Chancery of the State of 
Delaware, New Castle County, on August 1, 1997, against four members of the 
Company's Board of Directors, Reynald G. Bonmati, Albert S. Waxman, James J. 
Baker and Michael W. Huber (the "Individual Defendants"), NMS BV and the 
Company. The action relates to the acquisition of Norland Corp. by the 
Company from the NMS BV. The complaint alleged that the Individual Defendants 
breached their fiduciary duties of loyalty, candor and care in connection 
with the pending acquisition, and that the Company's proxy statement relating 
to the stockholders' meeting to vote on the acquisition did not contain full 
and fair disclosure. Plaintiff sought among other things: to enjoin the 
consummation of the acquisition; to require that the Company make additional 
disclosures to its stockholders in connection with the acquisition; damages 
in unspecified amounts; and costs, disbursements and counsel and expert fees. 
An agreement in principle was reached to settle the action. The Company 
delayed its 1997 Annual Meeting of Stockholders and supplemented its proxy 
statement with respect to the acquisition and the plaintiff withdrew his 
application for a preliminary injunction against the acquisition. It was 
agreed that the terms of the $16,250,000 7% promissory note to be issued as 
part of the purchase price for Norland Corp. would be modified to provide 
that if the Company exercises its right to elect to extend the maturity date 
of such note from five years to up to seven years, the interest rate would be 
increased by one percentage point at the end of the fifth year and the sixth 
year rather than by one percentage point every six months as originally 
agreed. The Company also agreed to use its best efforts to nominate for 
election to the Board at the 1997 Annual Meeting one nominee with no direct 
or indirect affiliation with NMS BV, and, with respect to each succeeding 
Annual Meeting, at least two nominees with no direct or indirect affiliation 
with NMS BV. Finally, the Company agreed that it would not oppose an 
application by plaintiff's counsel for an award of counsel fees and expenses 
of up to $250,000. Such amount would be payable by the Company. The 
acquisition was approved by the Company's stockholders at the Annual Meeting 
of Stockholders held on September 8, 1997, and the acquisition was 
consummated on September 11, 1997. A definitive Stipulation of Settlement has 
been executed. Robert L. Piccioni and Joan Piccioni, plaintiffs in the action 
referred to below, have filed an objection to the settlement. A hearing in 
the Delaware Court of Chancery to determine whether the Stipulation of 
Settlement should be approved is scheduled to be held on June 2, 1998. There 
can be no assurance that the Stipulation of Settlement will be approved or 
that, if not approved, the Company's liability will be limited to $250,000.
    
   
     Robert L. Piccioni, Ph.D. and Joan Piccioni v. Norland Medical Systems, 
Inc., et al. Robert L. Piccioni, a former director of the Company, and Joan 
Piccioni, the former President of the Company's Dove subsidiary, filed suit 
against the Company and Norland Corp. in the United States District Court for
the Central District of California on October 9, 1997. The action was commenced
shortly after the Company made claims for indemnification from Dr. and 
Mrs. Piccioni and certain other former stockholders of Dove in connection with
the Company's acquisition of Dove in April of 1996. The complaint was 
subsequently amended to add Reynald G. Bonmati, the Company's President and 
Chairman of the Board, and Albert S. Waxman, a director of the Company, as 
defendants. The Piccionis allege breach of contract and fraud by the Company in
connection with the acquisition of Dove, claim they suffered damages in excess
of $2,500,000 and seek the release of the portion of the purchase price paid for
Dove that is held in escrow to be available to satisfy indemnity obligation of
the Piccionis and such other former stockholders of Dove to the Company. The 
defendants have moved to dismiss certain of the Piccionis' claims. These motions
are pending before the Court. The Company believes that the Piccionis' action
is without merit.
    
                                       15
<PAGE>

   
     In addition, in the normal course of business, the Company is named as 
defendant in lawsuits in which claims are asserted against the Company. In 
the opinion of management, the liabilities, if any, which may ultimately 
result from such lawsuits are not expected to have a material adverse effect 
on the financial position, results of operations or cash flows of the Company.
    
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

     No matters were submitted to a vote to the Company's security holders 
during the fourth quarter of the fiscal year ended December 31, 1997.

                      EXECUTIVE OFFICERS OF THE REGISTRANT

     The Company's current executive officers are as follows:

<TABLE>
<CAPTION>


         Name           Age           Position
         ----           ---           --------
<S>                     <C>   <C>

Reynald G. Bonmati      50    Chairman of the Board;
                              President; and Treasurer
                            
Kurt W. Streams         36    Vice President, Finance; and
                              Secretary
                            
Lewis N. Harrold        50    Vice President, Product
                              Development; and
                              Assistant Secretary
                            
Ralph G. Theodore       71    Vice President, Operations; and
                              Assistant Secretary
                            
Thomas P. Regan         51    Vice President, Sales
                            
James A. Sperlazza      49    Vice President, Sales
                            
</TABLE>
   
     Mr. Bonmati has served as a Director of the Company since its formation 
in December 1993 and has served as Chairman of the Board, President and 
Treasurer of the Company since January 1994. Mr. Bonmati has served since 
January 1992 as a Managing Director of NMS BV, the holding company that owns 
Stratec. He has also served as President and Chairman of the Board of Directors
of SBP, an environmental remediation company, since November 1993, as President
of Novatech Resource Corporation, a private investment firm, since 1981, and 
as President of Novatech Management Corporation, a private investment firm, 
since 1990. Mr. Bonmati received BS and MS degrees from the Institute 
National Superieur de Chimie Industrielle, an MS degree from the Ecole 
Nationale Superieure du Petrole et des Moteurs and an MBA from the University 
of Paris.
    
     Mr. Streams joined the Company in September 1995 and has served as Vice 
President, Finance and Secretary of the Company since February 1996. From 
1988 to 1995, Mr. Streams was an Audit Manager and a Senior Audit Manager 
with Deloitte & Touche LLP in the United States and Deloitte & Touche 
Registeraccountants in the Netherlands. Mr. Streams holds a BA degree in 
economics from the University of Massachusetts.

     Mr. Harrold joined the Company in November 1995 and has served as Vice 
President, Product Development since May 1996. From 1976 to 1995, Mr. Harrold 
held various positions with Waters 

                                       16
<PAGE>


Medical Systems, serving most recently as Vice President of Engineering and 
General Manager from 1992 through 1995. He holds a BSEE from Carnegie Mellon 
University.

     Mr. Theodore has served as Vice President, Operations of the Company 
since January 1994 and Assistant Secretary since May 1995. From 1980 to 1994, 
Mr. Theodore was a business consultant in Connecticut. He was Vice President 
of Kensington Management Consultants from 1981 to 1984. He then undertook a 
two year assignment as Chairman of the Board of AID3 Group, a start-up, 
multinational computer development company. Between 1972 and 1980, he held a 
succession of senior management positions with ITT Corporation in Europe and 
the U.S., including the position of Worldwide Product Line Manager for 
industrial products. Mr. Theodore holds BE and ME degrees in electrical 
engineering from Yale University.

     Mr. Regan has served as Vice President, Sales since January 1994. Prior 
to 1994, Mr. Regan served as Vice President, U.S. Sales/Marketing of Norland 
Corp. From December 1988 to January 1991, he was a Director of U.S. Sales and 
Service for Interspec, Inc., now Advanced Technology Laboratories. From 
August 1986 to November 1988, he was Vice President, Marketing and Sales of 
Ultrasonix Company. From February 1981 to December 1986, Mr. Regan was Vice 
President, Sales of Diasonics, Inc., a medical imaging company providing 
ultrasound and magnetic resonance imaging products.

     Mr. Sperlazza has served as Vice President, Sales since January 1994. 
From December 1991 to the present, Mr. Sperlazza has been a partner of 
Sansper Trading Company, which sells medical devices. From April 1992 to 
December 1993, Mr. Sperlazza was Vice President, Latin America and Pacific 
Rim Sales of Ostech B.V., and from February 1992 to March 1992, he was a Vice 
President of Norland Corp. From January 1986 to February 1992, Mr. Sperlazza 
was Vice President, Marketing and Vice President, International of Diasonics, 
Inc.


                                     PART II

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

     The Company's Common Stock is traded on the NASDAQ National Market under 
the symbol "NRLD". The following table sets forth, for the periods indicated, 
the high and low sales prices per share of Common Stock, as reported by the 
NASDAQ National Market, assuming (i) that the three-for-two stock split of 
the Common Stock in June of 1996 had been effected prior to the periods 
presented and (ii) that the sales prices would have been two-thirds of the 
actual sales prices as a consequence of such stock split.

                                       17
<PAGE>


PERIOD FROM JANUARY 1, 1996 THROUGH DECEMBER 31, 1996:

<TABLE>
<CAPTION>

                     High       Low
                     ----       ---
<S>              <C>       <C>      

First Quarter    $   19.83 $   13.33
Second Quarter       26.33     18.31
Third Quarter        21.25     12.75
Fourth Quarter       21.25      4.75


</TABLE>

PERIOD FROM JANUARY 1, 1997 THROUGH DECEMBER 31, 1997:

<TABLE>
<CAPTION>

                      High     Low
                      ----     ---
<S>              <C>       <C>     

First Quarter    $    8.75 $   5.00
Second Quarter       11.00     5.50
Third Quarter        12.38     8.75
Fourth Quarter        9.25     4.50

</TABLE>

   
     As of March 20, 1998, there were approximately 42 outstanding 
stockholders of record of the Company's Common Stock. This number excludes 
persons whose shares were held of record by a bank, broker or clearing agency.
    
     The Company has not paid any cash dividends on its shares of Common 
Stock and does not expect to pay any cash dividends in the foreseeable 
future. The Company's current policy is to reinvest earnings in the continued 
development and operations of its business.

ITEM 6. SELECTED FINANCIAL DATA.

     The Company was formed in December 1993 to market, sell and service a 
range of diagnostic products that address selected needs in women's 
healthcare. It began operations in January 1994 as the exclusive distributor 
throughout much of the world for the bone densitometry products developed and 
manufactured by Norland Corp. and Stratec. The Company acquired Norland Corp. 
from NMS BV on September 11, 1997. Stratec is a subsidiary of NMS BV. Certain 
of the Company's stockholders control NMS BV. The Company has no ownership 
interest in NMS BV.

     During 1993, Ostech B.V. ("OBV"), a subsidiary of NMS BV, served as 
exclusive distributor of Norland Corp.'s products for all locations outside 
the U.S., Canada and Switzerland and of Stratec's products for all locations 
outside Germany and Switzerland. Some of the former officers and employees of 
OBV are officers and employees of the Company. OBV's financial information 
for the period ended December 31, 1993 is presented for comparative purposes. 
OBV ceased all business activities at the end of 1993.

     The financial data as of December 31, 1997 and 1996 and for the periods 
ended December 31, 1997, 1996 and 1995 has been derived from the consolidated 
financial statements of the Company for the periods indicated and should be 
read in conjunction with such financial statements and notes thereto, which 
are included at Item 8 of this Report, and with "Management's Discussion and 
Analysis of Financial Condition and Results of Operations", included at Item 
7 of this Report.

                                       18
<PAGE>

<TABLE>
<CAPTION>

                                 Ostech B.V.                Norland Medical Systems, Inc.
                                -----------    -----------------------------------------------------------
                                                          Year Ended December 31,
                                --------------------------------------------------------------------------
                                      1993           1994           1995        1996(2)(3)       1997(4)
                                ------------    ------------    ------------   ------------   ------------
<S>                             <C>             <C>             <C>            <C>            <C>         
Statement of Income
  (Loss) Data:
Revenue .....................   $  5,488,095    $ 10,041,548    $ 18,243,808   $ 24,326,134   $ 20,530,376
Cost of revenue .............      4,066,539       6,517,701      12,508,809     15,709,420     12,887,283
One-time distribution
  agreement costs ...........              0       1,922,247               0              0              0
                                ------------    ------------    ------------   ------------   ------------
  Gross profit ..............      1,421,556       1,601,600       5,734,999      8,616,714      7,643,093
Sales and marketing
  expense ...................      1,068,197         973,208       1,651,125      3,756,391      5,635,469
General and administrative
  expense ...................        399,449         526,364         960,368      1,900,598      4,688,132
Research and development
expense .....................              0               0               0        271,917        749,847
In-process research and
development charge ..........              0               0               0              0      7,900,000
Non-recurring charges .......              0               0               0        397,697      9,909,880
                                ------------    ------------    ------------   ------------   ------------
(Loss) income from
  operations ................        (46,090)        102,028       3,123,506      2,290,111    (21,240,235)
Liquidation loss - net ......       (326,007)              0               0              0              0
Interest expense ............        (13,760)         (6,984)              0              0       (383,962)
Interest income .............              0               0         412,983        703,744        345,745
                                ------------    ------------    ------------   ------------   ------------
(Loss) income before taxes ..       (385,857)         95,044       3,536,489      2,993,855    (21,278,452)
Provision (benefit) for taxes             60          27,000       1,436,000      1,216,000     (2,694,447)
                                ------------    ------------    ------------   ------------   ------------
  Net (loss) income .........   $   (385,917)   $     68,044    $  2,100,489   $  1,777,855   $(18,584,005)
                                ------------    ------------    ------------   ------------   ------------
                                ------------    ------------    ------------   ------------   ------------
</TABLE>

<TABLE>
<S>                             <C>             <C>             <C>            <C>            <C>         
Earnings per share(1)
  Basic .....................             __    $       0.02   $       0.43    $       0.26         $(2.60)
  Diluted ...................             __            0.02           0.40            0.25          (2.60)

Weighted average number
  of common shares
  outstanding(1):
   Basic ....................             __       3,000,000       4,832,877       6,824,590      7,145,465
   Diluted ..................             __       4,002,000       5,248,184       7,168,871      7,145,465

<CAPTION>
                                                                      As of December 31,
                                                ----------------------------------------------------------
                                                    1994            1995           1996           1997
                                                ------------    ------------   ------------   ------------
<S>                                             <C>             <C>            <C>            <C>        
Balance Sheet Data:
Working capital .............                    $    68,044     $20,326,055    $17,522,404    $11,711,364
Total assets ................                      2,751,929      24,706,377     30,115,136     29,378,525
Long-term debt ..............                              0               0              0     14,439,756
Stockholders' equity ........                         68,044      20,520,846     26,107,346      7,610,985

</TABLE>


(1) Reflects the 2,000-for-1 split of the Common Stock in June 1995, the
three-for-two split of the Common Stock in June 1996, and restatements for the
adoption of SFAS No. 128, "Earnings per Share" (see Note 2 to the consolidated
financial statements).

(2) As restated (see Note 15 to the consolidated financial statements).

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

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


                                       19

<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, including those discussed in the Introduction.

General

         Revenues and costs of revenues for systems and spare parts are 
generally recognized at the time products are shipped and title passes to the 
customer. Service revenue is recognized at the time the service is performed. 
Sales to customers are generally made in U.S. dollars.
   
         Prior to September 11, 1997, the Company had exclusive worldwide 
distribution rights to all products developed and manufactured by Norland 
Corp. and Stratec. Under the arrangements with Norland Corp. and Stratec, the 
margins between their costs of manufacturing the products and the amounts for 
which the Company sold the products was divided between the Company and the 
manufacturers as provided in the Company's Distribution Agreement with 
Norland Corp. and Stratec. On September 11, 1997, the Company acquired 
Norland Corp. from NMS BV. The $17,500,000 purchase price was paid at 
closing, $1,250,000 in cash and $16,250,000 by the Company's 7% promissory 
note issued to NMS BV (the "Purchase Note"). A $1,250,000 principal payment 
on the Purchase Note was originally payable on March 11, 1998. The Purchase 
Note has been amended to provide that such payment will not be due until such 
time as the Company receives at least $2,000,000 in proceeds from a debt or 
equity financing. The balance is payable on September 11, 2002 with a right 
on the part of the Company to extend the maturity for up to an additional two 
years. If the maturity is so extended, the applicable interest rate will be 
subject to increases during the extension period. The Company may repay the 
Purchase Note at any time and, except for the $1,250,000 payment referred to 
above, the Company may make payments of principal by delivering shares of its 
Common Stock, valued at the average closing price for the five trading days 
preceding the delivery. The Purchase Note is collateralized by a pledge to 
NMS BV of all of the stock of Norland Corp. As a result of the acquisition, 
the Company will receive the entire margin between the cost of Norland Corp. 
products manufactured after the date of acquisition and the amount for which 
the Company sells such products. The Company entered into a new 
Distribution Agreement with Stratec containing substantially the same 
provisions with respect to Stratec as the prior Distribution Agreement.
    
         As a result of the restatement of the Company's financial statements 
for the year ended December 31, 1996, certain information contained in this 
item with respect to 1996 has been changed from that which appeared in the 
Company's Annual Report on Form 10-K for 1996. The financial statements for 
1996 have been restated to reflect the fact that a number of fourth quarter 
transactions that the Company believed to be sales and with respect to which 
it recognized revenue were determined not to constitute sales for purposes of 
revenue recognition.

                                       20

<PAGE>

Result of Operations
   
         The following table sets forth for the periods indicated certain items
from the Company's Statements of Operations as a percentage of revenue:
    
<TABLE>
<CAPTION>
   
                                               Years Ended December 31,
                                         ------------------------------------
                                         1997            1996           1995
                                         ----            ----           ----
<S>                                      <C>             <C>           <C>   
Revenue..............................    100.0%          100.0%        100.0%
Cost of revenue......................     62.8            64.6          68.6
                                        ------           -----         -----
  Gross profit.......................     37.2            35.4          31.4

Sales and marketing expense..........     27.4            15.4           9.1
General and administrative expense...     22.8             7.8           5.3
Research and development expense.....      3.7             1.1           0.0
In-process research and development 
 charge..............................     38.5             0.0           0.0
Non-recurring charges................     48.3             1.6           0.0
                                        ------         -------           ---
  (Loss) income from operations......   (103.5)            9.5          17.0
 Interest income.....................      1.7             2.9           2.3
 Interest expense....................      1.9             0.0           0.0
                                        ------         -------           ---
  (Loss) income before income
   taxes.............................   (103.7)           12.4          19.3
(Benefit) provision for income
 taxes...............................    (13.1)            5.0           7.8
                                         -----            ----          -----
  Net (loss) income..................    (90.6)            7.4          11.5
                                         -----             ---          ----
    
</TABLE>

                                         

         The Company's Year Ended December 31, 1997 Compared to Its Year Ended
December 31, 1996.
   
         Revenue for 1997 decreased $3,795,758 (15.6%) to $20,530,376 from 
$24,326,134 for 1996. The decrease was largely the result of significantly 
decreased sales in the Pacific Rim and Japan in particular, offset by 
increased sales in Europe, Latin America and the United States. Sales in 
Japan continued to decline due in part to increased competition from 
ultrasound and other systems and to reductions in reimbursement for certain 
densitometry tests in Japan. Sales in the United States and Japan represented 
71.5% and 1.1%, respectively, of total revenue for 1997 and 52.0% and 22.4% 
respectively, of total revenue for 1996. Sales of complete bone densitometry 
systems represented 89.7% and 93.8% of total revenue for 1997 and 1996, 
respectively. Sales of parts and services and rental income comprised the 
balance of revenues for both years. Sales in the United States have been 
affected by changes in the Medicare reimbursement rates for bone densitometry 
tests. In November 1996, HCFA announced changes for 1997 that significantly 
reduced the reimbursement rate for peripheral bone densitometry tests. The 
Company reduced the price of its pDEXA peripheral systems in the fourth 
quarter of 1996, and since that time, the mix of the Company's product 
revenue has changed. A majority of the Company's revenue in 1997 was derived 
from sales of the larger Eclipse and XR36 central systems for which the 
Medicare reimbursement rate was not significantly reduced, while a majority 
of the Company's 1996 revenue was derived from sales of peripheral systems. 
In June 1997, HCFA published proposed changes for 1998 that would have 
increased the reimbursement rate for peripheral systems and significantly 
reduced the rate for the central systems. The proposed reimbursement rates 
for 1998 were not adopted by HCFA. Instead, the rates for both central and 
peripheral systems were increased slightly over their applicable rates for 
1997. Such reimbursement rates are subject to further changes. Revenues and 
the mix of products sold are expected to continue to be influenced by the 
    
                                       21
<PAGE>

reimbursement amounts and by the degree of difference in reimbursement rate 
levels for peripheral and central systems. They will also be influenced by 
the Company's ability to bring to the market systems that can be operated 
more profitably by end users at the applicable reimbursement levels.

         Cost of revenue as a percentage of revenue was 62.8% and 64.6% for 
1997 and 1996, respectively, resulting in a gross margin of 37.2% for 1997 
compared to 35.4% for 1996. The increase in gross margin is primarily 
attributed to the impact of reductions in the prices at which the Company 
purchased systems from Norland Corp. and Stratec which became effective 
during the fourth quarter of 1996. As a result of the Company's acquisition 
of Norland Corp. on September 11, 1997, the Company will receive the entire 
margin on systems manufactured by Norland Corp. after the acquisition date. 
The 1997 gross margin was adversely affected by a $1,480,000 charge for an 
increased inventory reserve and write-off of demonstration inventory with no 
future value, which is included in cost of revenue.

         Sales and marketing expense increased $1,879,078 (50.0%) to 
$5,635,469 for 1997 from $3,756,391 for 1996, and increased as a percentage 
of revenue to 27.4% from 15.4%. The increases were primarily due to increased 
expenses of new sales and marketing personnel, the cost of expanded marketing 
efforts, and increased expenses related to customer service. The 
infrastructure required for the Company's sales efforts in the United States 
carries with it a relatively higher expense level than that which has been 
applicable to the Company's sales efforts in the Pacific Rim, Europe and 
Latin America.
   
         General and administrative expense increased $2,787,534 (146.7%) to 
$4,688,132 for 1997 from $1,900,598 for 1996 and increased as a percentage of 
revenue to 22.8% from 7.8%. The largest component of the increase was a 
$1,850,000 charge for doubtful accounts receivable. This charge related 
primarily to receivables of the Company's Dove subsidiary, whose facility was 
closed in 1997, and of two customers of the Company with significant 
receivables for which collection has become highly questionable. Other 
factors contributing to the increases included expenses of new personnel, 
increased expenses of existing personnel and professional fees, and general 
and administrative expenses of Norland Corp. following the Company's 
acquisition of Norland Corp. on September 11, 1997.
    
         Research and development expense increased $477,930 (175.8%) to 
$749,847 for 1997 from $271,917 for 1996, and also increased as a percentage 
of revenue to 3.7% from 1.1%. The increases are primarily the result of the 
inclusion of the research and development expenses of Norland Corp. following 
the September 11, 1997 acquisition of Norland Corp.
   
         The increases in expense as a percentage of 1997 revenues referred to
in the three preceding paragraphs are also attributable to the Company's reduced
revenues in 1997.
    
         The Company recognized non-recurring charges of $17,809,880 in 1997. 
At the time of the acquisition of Norland Corp., certain research and 
development projects acquired were not at a stage in which technological 
feasibility had been achieved and were determined to have no alternative 
future use. Accordingly, $7,900,000 of the purchase price was allocated to 
this in-process research and development and expensed. With the acquisition 
of Norland Corp., management determined that the Company's inventory of bone 
densitometers used for demonstration and customer service purposes had no 
future value and recognized a $1,460,375 non-recurring charge for their 
write-off. In response to the increasing dominance of the peripheral bone 
densitometry market by DXA technology, the Company closed the Newbury Park 
facility of its Dove subsidiary and recorded a $8,348,000 write-off related 
to the value of inventories, fixed assets, goodwill, a patent and other 
intangible assets, having concluded that expected cash 

                                       22
<PAGE>

flows will not enable the Company to recover any of the remaining carrying 
value of such assets. In August 1997, the Company acquired distribution 
rights to the ultrasound product developed by IMRO and recorded a $101,505 
non-recurring charge for costs incurred in connection with the selection of 
an ultrasound product.

         Interest expense of $383,962 for 1997 represents interest on the 
Purchase Note issued by the Company in connection with the acquisition of 
Norland Corp. on September 11, 1997. Interest income in 1997 and 1996 
consisted primarily of interest earned on the Company's cash and loan 
balances, reduced by other expenses consisting primarily of bank charges and 
other fees related to bank transfers. The decrease in interest income in 1997 
as compared to 1996 reflects reduced interest income resulting from the 
Company's reduced cash position.
   
         The income tax benefit as a percentage of loss before income taxes 
was 12.7% for the year ended December 31, 1997, as compared to a provision 
for income taxes of 40.6% for the same period in 1996. The effective rate of 
12.7% for 1997 was principally a result of the nondeductibility of both the 
write-off of in-process research and development as part of the acquisition 
of Norland Corp. and the write-off of goodwill in connection with the closing
of the Dove facility. 
    
   
         Net deferred tax assets were $3,018,293 at December 31, 1997, an 
increase of $2,736,293 from deferred tax assets at December 31, 1996, 
primarily as a result of the write off of demonstration inventory and increases
in excess inventory reserves, allowance for doubtful accounts and net operating
loss carryforwards. A portion of the deferred tax assets can be realized through
carryback and reversals of existing taxable temporary differences with the 
remainder dependent on future income. Management believes that based on the 
Company's history of operating earnings, exclusive of the nonrecurring charges 
in 1997, and its expected income, it is more likely than not that future levels
of income will be sufficient to realize the deferred tax assets, as recorded.
    
         The Company had a net loss of $18,584,005 for 1997 compared to net 
income of $1,777,855 for 1996. The decrease was due primarily to the factors 
discussed above.

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

         Revenue for 1996 increased $6,082,326 (33.3%) to $24,326,134 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. Sales in the United States and Japan represented 52.1% and 22.4%, 
respectively, of total revenue for 1996 and 6% and 68% respectively, of total 
revenue for 1995. Sales of complete bone densitometry systems represented 
93.8% 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 significantly 
decreased, as compared to the pDEXA system that performs peripheral bone 
densitometry tests.

         Cost of revenue as a percentage of revenue was 64.6% and 68.6% for 
1996 and 1995, respectively, 

                                       23
<PAGE>

resulting in a gross margin of 35.4% 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. During 1996, in an effort to further increase system sales 
volume in the United States, the Company established a network of third party 
dealers. Since then, most sales of pDEXA and traditional DXA systems have 
been made through such dealers. Such sales are at lower gross margins than 
sales made directly by the Company to end-users. Sales of OsteoAnalyzer 
systems manufactured by Dove, for which the Company received 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 was paid to Norland Corp. and 
Stratec. Amended pricing provisions were implemented during the fourth 
quarter of 1996 under the Company's Distribution Agreement with Norland Corp. 
and Stratec, which had the effect of decreasing the Company's cost of 
purchasing systems and increasing its gross margins.

         Sales and marketing expense increased $2,105,266 (127.5%) to 
$3,756,391 for 1996 from $1,651,125 for 1995, and increased as a percentage 
of revenue to 15.4% 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 $940,230 (97.9%) to $1,900,598 for 1996 from 
$960,368 for 1995 and increased as a percentage of revenue to 7.8% 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 
goodwill established in connection with 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.

         Research and development expense was $271,917 in 1996. The Company 
had no direct research and development expense in 1995, since all research 
and development work was performed by Norland Corp. and Stratec, the 
developers and manufacturers of the products marketed by the Company. In 
1996, the Company began to develop an internal research and development 
capability headed by a Vice President for Product Development. The 1996 
figure also includes research and development expenses at Dove for the period 
following its acquisition by the Company in April of that year.

         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 decreased by $220,000 (15.3%) to 
$1,216,000 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 
decrease in the provision for income taxes was entirely due to the relative 
change in income before taxes. The Company recorded deferred tax assets of 
$282,000 for the year ended December 31, 1996 as a result of recognizing 
certain revenue for tax purposes prior to recognition in the financial 
statements. Management expects that it is more likely than not that the 
deferred tax asset will be realized.

                                       24
<PAGE>

         The Company had net income of $1,777,855 for 1996 compared to net 
income of $2,100,489 for 1995, a decrease of $322,634 (15.4%). The decrease 
was due primarily to the factors discussed above.

         Liquidity and Capital Resources
   
         At December 31, 1997, the Company had cash of $3,082,202. At 
December 31, 1996, the Company had cash of $8,133,458 and a $1,949,039 
investment in U.S. Treasury bills. The Treasury bills were reduced to cash in 
1997. The decrease in cash in 1997 is attributable to several factors. The 
Company paid for significant amounts of inventory in 1997, and at year end, a 
significant amount of the Company's products were either held in finished 
goods inventory or had been sold to customers but not paid for by the 
customers. The amounts held in finished goods inventory include products 
subject to a number of transactions that the Company treated as sales that 
were determined not to constitute sales for revenue recognition purposes. 
Finished goods subject to such transactions having an aggregate cost of 
$3,392,373 had not been sold by December 31, 1997 and are carried in 
inventory. Accounts receivable at December 31, 1997 were $6.2 million as 
compared to $8.2 million at December 31, 1996. However, taking into account 
the $1,850,000 charge for doubtful accounts receivable taken in 1997, gross 
accounts receivable at December 31, 1997 and 1996 were virtually identical. 
In light of the reduced sales in 1997, accounts receivable were relatively 
higher at the end of 1997 than at the end of 1996. The decrease in cash in 
1997 is also attributable to the costs related to the Norland Corp. 
acquisition, including the $1,250,000 payment made at closing.
    
         Property and equipment as of December 31, 1997 consisted of 
leasehold improvements, computer and telephone equipment, a management 
information system, office furniture and tooling for the products 
manufactured by the Company. At the present time, except for additional 
tooling, no significant expenditures for additional equipment or systems are 
planned for 1998.

         As indicated above, the Purchase Note issued as part of the purchase 
price for Norland Corp. has been amended to provide that the $1,250,000 
principal payment originally due on March 11, 1998 will not be payable until 
such time as the Company receives at least $2,000,000 from a debt or equity 
financing. Depending on when such principal payment is made, interest 
payments on the Purchase Note will range from approximately $285,000 to 
$265,000 per quarter. As a result of the acquisition, the Company will 
receive the entire margin on systems manufactured by Norland Corp. after the 
acquisition and is responsible for financing manufacturing and research and 
development on the Norland Corp. product lines.

         The Company had an income tax receivable at December 31, 1997 of 
$1,774,314 that is collectible in 1998.

         The Company plans to fund its ongoing operations from its cash 
position and cash flow from operations. In order to increase its cash flow, 
the Company will seek to stimulate sales and reduce its inventory levels. 
Since the Company has already paid suppliers for most of its inventory, the 
bulk of the sale proceeds will be retained by the Company, thereby increasing 
liquidity. The Company is also focusing its efforts improving the aging of 
its accounts receivable. To do so, the Company plans to implement higher 
credit standards for its customers and to emphasize the receipt of down 
payments from customers at the time their purchase orders are received. The 
Company also plans to be more aggressive in seeking to collect outstanding 
receivables.

         The Company also plans to seek one or more debt or equity financings 
to increase its working capital and net tangible assets. The Company does not 
have a commitment for any such financing, and there can 

                                       25
<PAGE>

be no guarantee that the Company will be able to obtain such financing. The 
failure to do so could materially adversely affect the Company and its 
operations. In addition, the nature of the Company's business is such that it 
is subject to changes in technology, government approval and regulation, 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 
major market for the Company's products could significantly affect the 
Company's cash needs.

         Readiness for Year 2000

         The Company has completed an assessment of its systems to determine 
the extent of the work needed to ensure Year 2000 compliance. A plan has been 
developed and is being implemented to test and verify Year 2000 compliance, 
including making necessary modifications, for all systems and processes. 
While these efforts involve additional costs, the Company believes, based on 
available information, that these costs will not be material to its results 
of operations.





                                       26
<PAGE>

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

                       CONSOLIDATED FINANCIAL STATEMENTS

                                     INDEX
                                    -------


<TABLE>
<CAPTION>

                                                                  Page
                                                                  ----
<S>                                                                <C>
Report of Independent Accountants                                  28

Financial Statements:

    Consolidated Balance Sheets as of December 31, 1997 and 
       1996                                                        29

    Consolidated Statements of Operations for the years ended
       December 31, 1997, 1996 and 1995                            30

    Consolidated Statements of Changes in Stockholders' Equity
       for the years ended December 31, 1997, 1996 and 1995        31

    Consolidated Statements of Cash Flows for the years ended
       December 31, 1997, 1996 and 1995                            32

    Notes to Consolidated Financial Statements                     34

Financial Statement Schedule:

    Valuation and Qualifying Accounts                              49

</TABLE>

                                       27
<PAGE>

                        REPORT OF INDEPENDENT ACCOUNTANTS

To the Stockholders and 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 27 of this Form 10-K (which 
consolidated financial statements for 1996 have been restated, as described 
in Note 15). 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 consolidated financial position of Norland Medical 
Systems, Inc. as of December 31, 1997 and 1996, and the consolidated results 
of its operations and its cash flows for each of the years in the three year 
period ended December 31, 1997 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.


New York, New York
March 31, 1998

                                       28
<PAGE>




                          NORLAND MEDICAL SYSTEMS, INC.
                           CONSOLIDATED BALANCE SHEETS

                           December 31, 1997 and 1996
                                    ------------

                                     ASSETS
<TABLE>
<CAPTION>
   
                                                       1997            1996
                                                   -----------     -----------
<S>                                               <C>             <C>
Current assets:
 Cash and cash equivalents                          $3,082,202      $8,133,468
 Investment                                                 --       1,949,039
 Accounts receivable - trade, less
  allowance for doubtful
  accounts of $2,200,000 and $221,000 at
  December 31, 1997 and 1996, 
  respectively                                       6,165,467       8,187,097
 Income taxes receivable                             1,774,314         794,285
 Inventories, net                                    5,163,682       1,202,014
 Officers' loans receivable                             86,504         581,704
 Current portion of loan
 receivable -- affiliate                                    --          38,685
 Prepaid expenses and other current assets             207,221         361,902
 Deferred income taxes                               2,559,758         282,000
                                                   -----------     -----------
     Total current assets                           19,039,148      21,530,194
                                                   -----------     -----------

Demonstration systems inventory, net                    67,594       1,234,848
Investment in Vitel, Inc.                              260,000         260,000
Property and equipment, net                            807,572         406,375
Loan receivable - affiliate                                 --         251,100
Deferred income taxes                                  458,535              --
Intangible assets,  net                              8,745,676       6,432,619
                                                   -----------     -----------
     Total assets                                  $29,378,525     $30,115,136
                                                   -----------     -----------
                                                   -----------     -----------

                     LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
 Current portion of note payable                    $1,122,788     $        --
 Accounts payable - related parties                    584,779       2,934,943
 Accounts payable - trade                            2,021,904          81,416
 Accrued expenses                                    2,208,313         943,581
 Accrued warranty expense                              890,000              --
 Customer deposits                                     500,000          47,850
                                                   -----------     -----------
     Total current liabilities                       7,327,784       4,007,790
                                                   -----------     -----------

Note payable, net of discount                       14,439,756              --

Commitments and contingencies                               --              --

Stockholders' equity
Common stock, par value of $0.0005 per share -
  20,000,000 shares authorized, 7,162,531 
  and 6,904,781 shares issued 
  and outstanding at the respective dates                3,580           3,452
Additional paid-in capital                          22,245,686      22,158,170
Retained earnings (accumulated deficit)            (14,638,281)      3,945,724
                                                   -----------     -----------
Total stockholders' equity                           7,610,985      26,107,346
                                                   -----------     -----------

Total liabilities and stockholders' equity         $29,378,525     $30,115,136
                                                   -----------     -----------
                                                   -----------     -----------
    
</TABLE>

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


                                       29
<PAGE>

                         NORLAND MEDICAL SYSTEMS, INC.

                     CONSOLIDATED STATEMENTS OF OPERATIONS

             for the years ended December 31, 1997, 1996 and 1995

                                   ----------

<TABLE>
<CAPTION>
   
                                                                      1997            1996           1995
                                                                  ------------    ------------   ------------
<S>                                                               <C>             <C>            <C> 
Revenue (including sales to affiliates of $349,483,
  $562,108 and $889,982 in 1997, 1996 and 1995,
  respectively) ...............................................   $ 20,530,376    $ 24,326,134   $ 18,243,808
Cost of revenue ...............................................     12,887,283      15,709,420     12,508,809
                                                                  ------------    ------------   ------------
  Gross profit ................................................      7,643,093       8,616,714      5,734,999


Sales and marketing expense ...................................      5,635,469       3,756,391      1,651,125
General and administrative expense (including an
  overhead charge from an affiliate of $7,800, $33,136 
  and $22,360 in 1997, 1996 and, 1995, respectively) ..........      4,688,132       1,900,598        960,368
Research and development expense ..............................        749,847         271,917           --
In-process research and development charge ....................      7,900,000            --             --
Non-recurring charges .........................................      9,909,880         397,697           --
                                                                  ------------    ------------   ------------
  Operating (loss) income .....................................    (21,240,235)      2,290,111      3,123,506

Other income (expense):
  Interest income .............................................        345,745         703,744        412,983
  Interest expense ............................................       (383,962)           --             --
                                                                  ------------    ------------   ------------
                                                                       (38,217)        703,744        412,983
                                                                  ------------    ------------   ------------
  (Loss) income before income taxes ...........................    (21,278,452)      2,993,855      3,536,489


(Benefit) provision  for income taxes .........................     (2,694,447)      1,216,000      1,436,000
                                                                  ------------    ------------   ------------

  Net (loss) income ...........................................   $(18,584,005)   $  1,777,855   $  2,100,489
                                                                  ------------    ------------   ------------
                                                                  ------------    ------------   ------------

Weighted average number of common and 
  common equivalent shares:
  Basic .......................................................      7,145,465       6,824,590      4,832,877
  Diluted .....................................................      7,145,465       7,168,871      5,248,184

(Loss) earnings per share:
  Basic .......................................................         $(2.60)          $0.26          $0.43
  Diluted .....................................................          (2.60)           0.25           0.40
    
</TABLE>

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


                                       30
<PAGE>

                         NORLAND MEDICAL SYSTEMS, INC.

           CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
             for the years ended December 31, 1997, 1996 and 1995

                                   ----------



<TABLE>
<CAPTION>
   
                                                                                                                           Retained
                                                                                           Additional                      Earnings
                                                                                 Common    Paid-In          Stock       (Accumulated
                                                          Total      Shares      Stock     Capital       Subscriptions     Deficit)

                                                        ------------ ---------  --------  ------------   -------------  ------------
<S>                                                     <C>          <C>         <C>       <C>           <C>            <C>   
Issuance of 1,000 shares of  common stock               $          -     1,000   $    10    $      990     $    (1,000) $         -
2,000-for-1 stock split on  June 2, 1995                           - 1,999,000       990          (990)              -            -
3-for-2 stock split on June 14, 1996                               - 1,000,000       500             -               -         (500)
Net income                                                    68,044         -         -             -               -       68,044
                                                        ------------ ---------  --------  ------------   -------------  ------------
Balance as of December 31, 1994                               68,044 3,000,000     1,500             -          (1,000)      67,544
                                                                                                                            
Proceeds from common stock subscription                        1,000         -         -             -           1,000            -
Issuance of 2,000,000 shares of common stock on                                                                             
    August 2, 1995, net of costs and expenses directly                                                                      
    related to the offering                               18,351,313 2,000,000     1,000    18,350,313               -            -
3-for-2 stock split on June 14, 1996                               - 1,000,000       500          (500)              -            -
Net income                                                 2,100,489         -         -             -               -    2,100,489
                                                        ------------ ---------  --------  ------------   -------------  ------------
Balance as of December 31, 1995                          $20,520,846 6,000,000    $3,000   $18,349,813      $        -  $ 2,168,033
                                                                                                                            
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)        -             -               -         (164)
Tax benefit related to stock options                         500,000         -         -       500,000               -            -
Net income                                                 1,777,855         -         -             -               -    1,777,855
                                                        ------------ ---------  --------  ------------   -------------  ------------
Balance as of December 31, 1996                          $26,107,346 6,904,781    $3,452   $22,158,170      $        -  $ 3,945,724
                                                                                                                            
Issuance of shares for stock options exercised                37,644   257,750       128        37,516               -            -
Tax benefit related to stock options                          50,000         -         -        50,000               -            -
Net loss                                                 (18,584,005)        -         -             -               -  (18,584,005)
                                                        ------------ ---------  --------  ------------   -------------  ------------
Balance as of December 31, 1997                         $  7,610,985 7,162,531    $3,580   $22,245,686     $         - $(14,638,281)
                                                        ------------ ---------  --------  ------------   -------------  ------------
                                                        ------------ ---------  --------  ------------   -------------  ------------
    
</TABLE>



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

                                       31
<PAGE>


                         NORLAND MEDICAL SYSTEMS, INC.

                     CONSOLIDATED STATEMENTS OF CASH FLOWS
             for the years ended December 31, 1997, 1996 and 1995

                                   ----------


<TABLE>
<CAPTION>
   

                                                     1997            1996            1995
                                                 ------------    ------------    ------------
<S>                                              <C>             <C>             <C>         
Cash flows from operating activities:
 Net (loss) income ...........................   $(18,584,005)   $  1,777,855    $  2,100,489
                                                 ------------    ------------    ------------
 Adjustments to reconcile net income to net
 cash used in operating activities:
   In-process research and development
    charge ...................................      7,900,000              --              --
   Non-recurring charges .....................      9,909,880         397,697              --
   Provision for doubtful accounts ...........      1,979,000          70,000         150,000
   Deferred income taxes .....................     (2,136,878)       (282,000)             --
   Amortization expense ......................        654,449         343,666          17,415
   Depreciation expense ......................        158,307          59,276              --
   Gain on sale of investment ................        (47,365)             --              --
   Inventory write-off/obsolescence expense ..      1,480,000          30,000              --
   Changes in assets and liabilities, net
    of businesses acquired:
     Accounts receivable .....................         42,630      (3,551,403)     (2,849,826)
     Inventories .............................     (3,215,564)     (1,561,237)       (815,899)
     Prepaid expenses and other current 
      assets .................................        182,443        (673,396)        (47,639)
     Accounts payable ........................     (1,416,163)        373,589       1,096,022
     Accrued expenses ........................        339,556         434,245         314,276
     Income taxes ............................       (663,593)     (1,599,322)      1,278,037
     Customer deposits .......................        452,150          (6,314)        (83,336)
                                                 ------------    ------------    ------------
       Total adjustments......................     15,618,852      (5,965,199)       (940,150)
                                                 ------------    ------------    ------------
       Net cash (used in) provided by
        operating activities .................     (2,965,153)     (4,187,344)      1,160,339
                                                 ------------    ------------    ------------

Cash flows from investing activities:
 Purchase of Norland Corporation, net of cash
  acquired ...................................     (1,852,510)             --              --
 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 .........       (284,917)       (430,233)             --
 Loans to officers ...........................     (1,909,573)     (1,099,211)             --
 Repayment of loans to officers ..............      2,404,773         517,507              --
 Purchase of investment ......................             --      (1,949,039)             --
 Sale of investment ..........................      1,996,403              --              --
 Loans and advances to affiliate .............     (2,509,979)       (241,266)        (48,519)
 Repayment of loan to affiliate ..............         32,046              --              --
                                                 ------------    ------------    ------------
       Net cash used in investing 
        activities ...........................     (2,123,757)     (6,895,179)        (48,519)
                                                 ------------    ------------    ------------

Cash flows from financing activities:
 Proceeds from stock options exercised .......         37,644             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)
 Stockholder advances ........................             --              --         (50,000)
                                                 ------------    ------------    ------------
       Net cash provided by (used in) 
         financing activities ................         37,644          (2,874)     17,552,313
                                                 ------------    ------------    ------------

Net (decrease) increase in cash ..............     (5,051,266)    (11,085,397)     18,664,133

Cash and cash equivalents at beginning of year      8,133,468      19,218,865         554,732
                                                 ------------    ------------    ------------
Cash and cash equivalents at end of year .....   $  3,082,202    $  8,133,468    $ 19,218,865
                                                 ------------    ------------    ------------
                                                 ------------    ------------    ------------
    
</TABLE>


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

                                       32
<PAGE>

                         NORLAND MEDICAL SYSTEMS, INC.

                     CONSOLIDATED STATEMENTS OF CASH FLOWS
             for the years ended December 31, 1997, 1996 and 1995

                                   ----------




Noncash investing and financing activities:

On April 2, 1996, 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 (see Note 8).

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

Cash paid for:

<TABLE>
<CAPTION>


                  1997         1996         1995
               ----------   ----------   ----------
<S>           <C>          <C>          <C> 
Income taxes   $  201,830   $3,097,332   $  157,963
               ----------   ----------   ----------
               ----------   ----------   ----------

Interest       $   90,880   $        0   $   10,342
               ----------   ----------   ----------
               ----------   ----------   ----------

</TABLE>



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


                                      33


<PAGE>

                         NORLAND MEDICAL SYSTEMS, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



1. The Company:

Norland Medical Systems, Inc. ("NMS" or the "Company") develops, 
manufactures, markets, sells, distributes and services a broad range of bone 
densitometry systems which aid in the detection and monitoring of bone 
diseases, and in the assessment of the effect of existing and potential 
therapies for the treatment of such diseases throughout the world to 
individual practitioners, hospitals, clinics, research institutions and 
pharmaceutical companies.

NMS 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").

Stratec is a wholly-owned subsidiary of Norland Medical Systems B.V. 
(Netherlands) ("NMS BV"). Certain shareholders of NMS are direct or indirect 
shareholders of NMS BV and own more than 90% of that company.

On September 11, 1997, the Company acquired Norland Corp. from NMS BV. On 
April 2, 1996, the Company acquired Dove Medical Systems (U.S.) ("Dove"), a 
manufacturer of low-cost bone densitometry systems. The Company's other 
subsidiary, IMRO Medical Systems, Inc. (U.S.) ("IMRO"), holds certain 
manufacturing and worldwide distribution rights with respect to certain 
ultrasound devices for bone applications.

2. Summary of Significant Accounting Policies:

Principals of Consolidation

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

Revenue and Cost Recognition

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

Prior to the acquisition of Norland Corp., NMS purchased products from 
Norland Corp. and Stratec (the "manufacturers") on the basis of sales orders 
in hand. NMS was invoiced by the manufacturers when the product was shipped. 
After the acquisition, these arrangements have been continued with respect to 
Stratec. Management believes the gross profit recognized by NMS on products 
purchased from the manufacturers materially approximates that which would 
have been realized had the Company used unaffiliated suppliers.

The Company offers one-year warranties on both hardware and software. The 
provision for product warranties represents an estimate for future claims 
arising under the terms of the Company's various product warranties. The 
estimated future claims are accrued at the time of sale. Stratec offers the 
same warranties with respect to its products. The Company provides warranty 
services on behalf of Stratec. The Company invoices Stratec for the costs of 
performing such warranty services.

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

                                       34
<PAGE>



Cash and Cash Equivalents

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

Long-lived Assets
   
Long-lived assets are reviewed for impairment whenever events or changes in 
circumstances indicate that the carrying amount may not be recoverable in 
accordance with Statement of Financial Accounting Standards ("SFAS") No. 121, 
"Accounting for Impairment of Long-lived Assets and for Long-lived Assets to 
be Disposed of". If the sum of the expected future cash flows (undiscounted 
and without interest) is less than the carrying amount of the asset, a loss 
is recognized for the difference between the fair value and carrying value of 
the asset.
    
Stock-based Compensation

Stock-based compensation related to employees is accounted for in accordance 
with Accounting Principles Board ("APB") Opinion No. 25, "Accounting for 
Stock Issued to Employees". Stock-based compensation related to non-employees 
is not material. Pro forma net (loss) income and related share data as 
required under SFAS No. 123, "Accounting for Stock-Based Compensation", has 
been presented in Note 10.

Investments
   
Investments at December 31, 1996 consisted of a short-term debt security 
issued by the U.S. Treasury Department. The Company classified such debt 
security as held-to-maturity. Held-to-maturity securities are those 
securities which the Company has the ability and intent to hold until 
maturity.
    
Held-to-maturity securities are recorded at amortized cost, adjusted for the 
amortization or 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 also has a minority interest in Vitel, Inc. (U.S.) that is 
accounted for as a long-term investment according to the cost method.

Inventory

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

Systems used in the Company's short-term rental program are carried in 
inventory at the lower of cost or net realizable value until the time of sale.

Demonstration Systems Inventory

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

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.

                                       35

<PAGE>


Intangible Assets

Intangible assets primarily includes goodwill, net which amounted to 
$8,745,676 and $3,183,961 at December 31, 1997 and 1996, respectively, and is 
being amortized on a straight-line basis over 15 years. Accumulated 
amortization of goodwill was $180,169 and $124,050 at December 31, 1997 and 
1996, respectively. Also included in intangible assets at December 31, 1996 
was a patent and other assets of Dove amounting to $3,248,658 net of 
accumulated amortization of $143,077. All intangible assets relating to Dove 
were written off in 1997 (see Note 4).

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 exist, management assesses several factors, including a 
significant change in the extent or manner in which the assets are used, a 
significant adverse change in legal factors or in the business climate that 
could affect the value of the assets, an adverse action or assessment of a 
regulator, and a current period operating or cash flow loss combined with a 
history of operating or cash flow losses or a projection or forecast that 
demonstrates continuing losses associated with such assets.

Income Taxes

The Company accounts for income taxes under SFAS No. 109, "Accounting for 
Income Taxes". 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 additional paid in capital.

Research and Development and Software Development Costs

Research and development costs are charged to operations as incurred. SFAS 
No. 86, "Accounting for the Costs of Computer Software To Be Sold, Leased or 
Otherwise Marketed," requires the capitalization of certain computer software 
development costs incurred after technological feasibility is established. 
The Company believes that once technological feasibility of a software 
product has been established, the additional development costs incurred to 
bring the product to a commercially acceptable level are not significant.

Earnings (Loss) per Share

Effective December 31, 1997, the Company adopted the provisions of SFAS No. 
128, "Earnings per Share". Under SFAS No. 128, basic and diluted earnings per 
share replaces primary and fully diluted earnings per share, respectively. 
Basic per share figures are computed using the weighted average number of 
common shares outstanding. Diluted per share figures are computed using the 
weighted average number of common shares outstanding, after giving effect to 
dilutive options, using the treasury stock method. Per share figures have 
been restated to reflect the provisions of SFAS No. 128 for all periods 
presented.

                                       36

<PAGE>



The calculations of per share results for the years ended December 31, 1997, 
1996 and 1995 are as follows:

<TABLE>
<CAPTION>

                                                      1997            1996            1995
                                                  ------------     -----------    -----------
<S>                                              <C>              <C>            <C> 
Numerator:
(Loss) income available to common 
 stockholders .................................   $(18,584,005)    $ 1,777,855    $ 2,100,489

Denominator:
Basic weighted average shares outstanding .....      7,145,465       6,824,590      4,832,877
Effect of dilutive stock options...............             --         344,281        415,307
Diluted weighted average shares outstanding ...      7,145,465       7,168,875      5,248,184

Basic (loss) earnings per share ...............         $(2.60)          $0.26          $0.43
Diluted (loss) earnings per share .............          (2.60)           0.25           0.40

</TABLE>



Options to purchase 485,356 and 202,500 shares of common stock were 
outstanding at December 31, 1997 and 1996, respectively, but were not 
included in the computation of diluted loss per share because the options' 
exercise prices were greater than the average market price of the common 
shares.

Concentration of Credit Risk

The Company generally sells on credit terms ranging from thirty to ninety 
days or against irrevocable letters of credit. Any financing of the end user 
is the decision of, and dependent on, the distributor in each country. At 
December 31, 1997, two customers represented 15% and 10%, respectively, of 
the total outstanding trade receivables, and at December 31, 1996, one 
customer represented 18% of the total outstanding accounts receivable.

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. 
Estimates are used when accounting for the allowance for doubtful accounts, 
potentially excess and obsolete inventory, depreciation and amortization, 
warranty reserves, income tax valuation allowances and contingencies, among 
others. Actual results could differ significantly from those estimates.

Management is currently in the process of seeking one or more equity or debt 
financing arrangements to improve its financial flexibility. The Company 
estimates that through enhanced accounts receivable and inventory management, 
such financing arrangements will not be required to fund its operating 
activities in the near term.

Foreign Exchange Exposure

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

Reclassification

Certain information in 1996 and 1995 has been reclassified to conform to the 
current year presentation.

                                       37

<PAGE>


Recently Issued Accounting Pronouncements

SFAS No. 130 "Reporting Comprehensive Income" requires that comprehensive 
income and its components be reported in the financial statements. The 
Company is required to adopt this standard in 1998 and is currently 
evaluating this standard.

SFAS No. 131 "Disclosures About Segments of an Enterprise and Related 
Information" requires that publicly traded companies report financial and 
descriptive information about its reportable operating segments. The Company 
is required to adopt this standard in 1998 and is currently evaluating the 
impact of this standard.

3.  Distribution Agreement:

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

The distribution agreement was amended in 1996 to change the pricing formula. 
The amended pricing formula became effective as of October 1, 1996 with 
respect to Norland Corp. products and as of December 1, 1996 with respect to 
Stratec products. Under the amended pricing formula, NMS paid Norland Corp. 
and Stratec an amount for each system equal to the aggregate costs of the 
components and parts used in the system plus the actual labor costs plus an 
agreed upon markup on the costs of all non-computer components. The 
manufacturers were also entitled to receive royalties equal to 5% of the 
price for which NMS sold certain devices. In the case of Norland Corp., the 
royalty applied to all new systems manufactured by Norland Corp. (i.e., any 
system other than the pDEXA, the Eclipse and the XR-36). In the case of 
Stratec, the royalty applied to any system manufactured by Stratec which uses 
pQCT technology. If the aggregate amount payable by NMS to the manufacturers 
for a year under the amended pricing formula would exceed the aggregate 
amount payable under the original pricing formula, then the original pricing 
formula would apply. The amended pricing formula was to be in effect until 
December 31, 1997, subject to automatic renewal with respect to each 
manufacturer for successive one year periods, unless such manufacturer 
elected to terminate the amended pricing formula effective on December 31 of 
any year by notice given to NMS not less than 90 nor more than 180 days prior 
to the end of such year.

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

4.    Non-Recurring and Other Charges:

The Company recognized non-recurring charges of $17,809,880 and $397,697 in 
1997 and 1996, respectively. At the time of the acquisition of Norland Corp., 
certain research and development projects acquired were not at a stage in 
which technological feasibility had been achieved and were determined to have 
no alternative future use. Accordingly, $7,900,000 of the purchase price was 
allocated to this in-process research and development and expensed (see Note 
8). With the acquisition of Norland Corp., including its ongoing research and 
development projects, management determined that the Company's inventory of 
certain bone densitometers used for demonstration and customer service 
purposes had no future value and recognized a $1,460,375 non-recurring charge 
($1,080,801 was reflected in long-term demonstration systems inventory and 
$379,934 was reflected in inventories at December 31, 1996) for their 
write-off. In response to the increasing dominance of the peripheral bone 
densitometry market by DXA technology, the Company closed the Newbury Park 
facility of its Dove subsidiary and recorded a $8,348,000 write-off related 
to the value of 

                                       38

<PAGE>



inventories, fixed assets, goodwill, a patent and other intangible assets, 
having concluded that expected cash flows will not enable the Company to 
recover any of the remaining carrying value of such assets. In August 1997, 
the Company acquired distribution rights to an ultrasound product developed 
by IMRO, Inc. and recorded a $101,505 non-recurring charge for costs incurred 
in connection with the selection of an ultrasound product.

In addition to these 1997 non-recurring charges, the Company recognized (i) 
additional provisions for doubtful accounts of $1,850,000, which is reflected 
in general and administrative expense, related to its decision to close the 
Dove facility ($400,000) and for certain other customers for which collection 
is no longer expected ($1,450,000); and (ii) a $1,480,000 charge to cost of 
revenue related to an additional write-off of demonstration inventory 
($705,000) and reserves for excess inventory ($775,000).

During the year ended December 31, 1996, the Company recognized a $397,697 
charge for 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.

5.  Inventories:

Inventories consist of the following as of December 31:

<TABLE>
<CAPTION>

                                                       1997           1996
                                                    ----------      --------
<S>                                                 <C>             <C>     
Raw materials, product kits,           
 spare parts and sub-assemblies ........            $2,201,268      $377,373
Work in progress ...........                           191,069        18,044
Rental systems .....................                    32,251       155,174
Finished goods ...........                           4,014,094       693,318
Inventory reserve ..................                (1,275,000)      (41,895)
                                                    ----------       ------- 

                                                    $5,163,682      $1,202,014
                                                    ----------      ----------
                                                    ----------      ----------
</TABLE>



6.  Demonstration Systems Inventory:
   
Demonstration systems inventory consisted of the following as of
December 31:
    
<TABLE>
<CAPTION>

                                                   1997           1996
                                               -----------    -----------
<S>                                            <C>            <C>        

Demonstration systems inventory ...........    $    93,591    $ 1,318,687
Less accumulated depreciation .............        (25,997)       (83,839)
                                               -----------    -----------
                                               $    67,594    $ 1,234,848
                                               -----------    -----------
                                               -----------    -----------


</TABLE>

7.  Property and Equipment:

At December 31, 1997 and 1996, property and equipment consisted of the
following:

<TABLE>
<CAPTION>

                                                1997        1996
                                             ----------   ---------
<S>                                         <C>           <C>     
Machinery and equipment .................    $1,271,309    $303,087
Tooling .................................       467,284          --
Furniture and fixtures ..................       396,380     130,773
Leasehold improvements ..................       104,577      47,561
Construction in progress.................        80,511          --
Less accumulated depreciation                      
 and amortization .......................    (1,512,489)    (75,046)
                                             ----------   ---------
                                               $807,572    $406,375
                                             ----------   ---------
                                             ----------   ---------
</TABLE>

                                       39
<PAGE>

8.  Acquisitions:

Norland Corp.

On September 11, 1997, the Company acquired Norland Corp. in a transaction
accounted for under the purchase method of accounting. The consolidated
financial statements reflect the acquisition of all of the issued and
outstanding stock of Norland Corp. for $17,500,000 from the date of acquisition.
The $17,500,000 consideration consisted of a $1,250,000 cash payment made on
September 11, 1997 and a $16,250,000 Purchase Note (the "Note") bearing interest
at the rate of 7% per annum which is payable quarterly beginning September 30,
1997. A $1,250,000 portion of the Note principal was originally payable in cash
on March 11, 1998. The Note has been amended to provide that such payment will
not be due until such time as the Company receives at least $2,000,000 in
proceeds from a debt or equity financing. The remaining principal is due and
payable on September 11, 2002. The Company may prepay the Note at any time, pay
the principal (except for the $1,250,000 payment referred to above) with shares
of Company common stock valued at the time of payment and extend the September
11, 2002 maturity date by up to two years (at increasing interest rates). The
Note is collateralized by a pledge of the shares of Norland Corp.

In accordance with APB Opinion No. 21, "Interest on Receivables and Payables",
the Note has been fair valued as of September 11, 1997 using a market interest
rate of 8.18%, which resulted in the establishment of a $727,539 note discount
that is being amortized using the effective interest method over the Note's five
year term. The cost of acquisition (including acquisition costs) has been
allocated based on the fair value of assets acquired and liabilities assumed as
follows:


<TABLE>
   
<S>                                                     <C>
Purchase Price, net of Note discount of $728,000 .....   $ 16,772,000
Loans and advances to Norland Corp. ..................      2,757,000
Current assets .......................................     (4,467,000)
Noncurrent assets ....................................       (368,000)
Deferred tax assets, net .............................       (609,000)
Current liabilities assumed ..........................      2,739,000
Noncurrent liabilities assumed .......................          2,000
In-process research and development charge ...........     (7,900,000)
                                                         ------------ 
Goodwill .............................................   $  8,926,000
                                                         ------------ 
                                                         ------------ 

    
</TABLE>


Acquisition costs are primarily legal, accounting and investment banking fees,
as well as certain settlement costs in connection with stockholder litigation
stemming from the acquisition (see Note 12), all of which are directly related
to the transaction. Certain research and development projects acquired were not
at a stage in which technological feasibility had been achieved and were
determined to have no alternative future use. Accordingly, $7,900,000 of the
purchase price was allocated to this in-process research and development and
expensed in 1997. The goodwill is being amortized using the straight-line method
over fifteen years. The purchase agreement required an additional contingent
payment if certain financial targets were met for the year ended December 31,
1997. The targets were not met and no additional payment was required.

 Dove Medical Systems

On April 2, 1996, the Company acquired all of the outstanding shares of Dove and
a patent and other intangible assets owned by 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. The operating results of Dove have been included in the
accompanying consolidated statements of operations from the date of acquisition.
The acquisition was accounted for using the purchase method of accounting, and,
accordingly, the purchase price was allocated to the assets purchased and the
liabilities assumed based on the fair values at the date of acquisition. The
amount allocated to the patent and other intangible assets was $3,391,735. The
excess purchase price over the fair values of the net assets was $3,308,011 and
was recorded as goodwill. In connection with the closing of the Dove facility,
the Company has taken a $8,348,000 non-recurring charge in 1997 (see Note 4).

                                       40
<PAGE>


Pro forma unaudited consolidated operating results and related per share amounts
of the Company for the years ended December 31, 1997 and 1996, assuming both
acquisitions had been made as of January 1, 1996, are summarized below:

<TABLE>
<CAPTION>

                                         1997           1996
                                      -----------    ----------
                                      (unaudited)    (unaudited)
<S>                                  <C>            <C>        

Net sales .........................   $20,289,740    $23,974,811
Net (loss) income .................   (14,842,044)     2,361,476
(Loss ) earnings per share
  Basic ...........................        $(2.08)         $0.35
  Diluted .........................         (2.08)          0.33

</TABLE>

These unaudited pro forma results have been prepared for comparative purposes
only and include certain adjustments to give effect to amortization of goodwill,
patent and other intangible assets and certain other adjustments, together with
related income tax effects. The unaudited pro forma information is not
necessarily indicative of either the results of operations that would have
occurred had the acquisition been made on January 1, 1996 or that may occur in
the future.

9.  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 were $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.

The Company has authorized 1,000,000 shares of preferred stock, par value
$0.0005 per share, issuable in series with such rights, powers and preferences
as may be fixed by the Board of Directors. At December 31, 1997 and 1996, there
was no preferred stock outstanding.

10.  Compensation Programs:

Stock Option Plan

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

The stockholders authorized on September 8, 1997 an amended and restated 1994
Stock Option Plan. The amended plan includes an increase of common stock
reserved for issuance to 2,250,000 shares and establishes an automatic option
grant. The automatic option grant program grants options to new non-employee
Board members to purchase 30,000 shares of common stock at an exercise price
equal to the fair market value at the grant date for a maximum term of ten years
and is subject to 25% vesting each year and early termination upon the
optionee's leaving the Board.

                                       41

<PAGE>

  On July 28, 1997, the Board of Directors approved the repricing of certain
  employee stock options. Approximately, 232,250 shares were repriced to $9.75
  per share, representing the market value at the date of repricing.

  The following is a summary of options related to the plan as of December 31:
<TABLE>
<CAPTION>

                                              Option price                       Option price                      Option price 
                               1997              per share       1996              per share         1995             per share  
                               --------------------------------------------------------------------------------------------------

<S>                           <C>             <C>              <C>              <C>                <C>             <C>   
  Options
  outstanding at                                                                                                     $0.0005-
  beginning of year             674,250       $0.0005-22.17     1,117,500       $0.0005-13.83      1,002,000          0.0006

  Cancellations               (138,750)        $7.50-22.17             --             --                  --            --

  Granted                       458,000        $6.38-11.50        300,000        $15.00-22.17        115,500       $10.67-13.83
                                                                                   $0.0005-                             
  Exercised                   (257,750)       $0.0005-7.50      (743,250)           0.0006                --          
                              ---------                         ---------                          ---------
  Options
  outstanding at end
  of year                       735,750      $0.0005-15.00        674,250        $0.0005-22.17     1,117,500      $0.0005-13.83
                                =======                           ========                         =========      
                                                                                                                               
  Options exercisable
  at end of year                114,188                            46,125                            501,000              
                                =======                            ======                            =======              
                          
  Options available
  for grant at end of
  year                          513,250                           382,500                            82,500
                                =======                           =======                            ======
</TABLE>

  The following table summarizes information about significant groups of stock
  options outstanding at December 31, 1997:


<TABLE>
<CAPTION>
   
                                Options Outstanding                               Options Exercisable
                         -------------------------------------------------------------------------------------------
                                                         Weighted                                         Weighted
                                           Weighted      Average                         Weighted          Average
                                           Average      Remaining                        Average          Remaining
  Range of Exercise         Options        Exercise    Contractual          Options      Exercise       Contractual
  Prices                  Outstanding       Price     Life in Years        Exercisable     Price       Life in Years
  -----------------    ----------------  ---------- ----------------     -----------   -----------   -------------
<S>                      <C>               <C>        <C>                  <C>           <C>           <C>         
  $0.0005                         6,000      $0.0005         6                 6,000       $0.0005         6
  $6.38 to 11.50                639,750        $8.46         9                85,688         $9.80         8
  $15.00                         90,000       $15.00         8                22,500        $15.00         8
                                 ------                                       ------        


                                735,750                                      114,188
                                =======                                      =======
    
</TABLE>
                                      42

<PAGE>




  Had compensation expense for the Company's 1997, 1996 and 1995 grants for the
  stock-based compensation plan been determined based on the fair value of the
  options at their grant dates consistent with SFAS 123, the Company's net
  income (loss) and earnings (loss) per common share for 1997, 1996 and 1995
  would approximate the pro forma amounts below:
<TABLE>
<CAPTION>
   
                                                            1997               1996                1995
                                                            ----               ----                ----
<S>                                                      <C>                    <C>                 <C>       
  Net (loss) income :
     As reported                                         $(18,584,005)          $1,777,855          $2,100,489
     Pro forma under SFAS 123                             (19,734,360)             796,334           2,063,901

  (Loss) earnings per share:

     As reported

       Basic                                                  $(2.60)              $0.26               $0.43
       Diluted                                                 (2.60)               0.25                0.40

      Pro forma under SFAS 123

       Basic                                                  $(2.76)              $0.12               $0.43
       Diluted                                                 (2.76)               0.11                0.39
    
</TABLE>
   
  The fair value of each option grant is estimated on the date of grant using
  the Black-Scholes option pricing model with the following assumptions used for
  grants during each of the applicable periods presented: dividend yield of 0%,
  risk-free weighted average interest rate of 5.7%, expected volatility factor
  of 89%, and an expected option term of 4 years. The weighted average fair
  value at date of grant for options granted during 1997, 1996 and 1995 was
  $5.13, $11.85 and $8.12 per option, respectively.
    
  401(k) Plan

  Pursuant to the Norland Medical Systems, Inc. and Norland Corporation
  Retirement Savings Plans, eligible employees may elect to contribute a portion
  of their salary on a pre-tax basis. With respect to employee contributions of
  up to 7% of salary, the Company makes a contribution at the rate of 25 cents
  on the dollar. Contributions are subject to applicable limitations contained
  in the Internal Revenue Code. Employees are at all times vested in their own
  contributions; Company matching contributions vest gradually over six years of
  service. The Company's policy is to fund plan contributions as they accrue.
  Contribution expense was $14,570, $13,342 and $1,776 for the years ended
  December 31, 1997, 1996 and 1995, respectively.

  11.  Income Tax:

  The components of the (benefit) provision for income taxes for the years ended
December 31 were as follows:
<TABLE>
<CAPTION>

                                                         1997                 1996                 1995

                                                         ----                 ----                 ----
<S>                                                    <C>                     <C>                 <C>       
                    Current

                       Federal                         $   (557,569)           $1,254,387          $1,202,406
                       State                                     --               243,613             233,594
                                                      --------------          ------------         ----------
                                                           (557,569)            1,498,000           1,436,000
                                                       -------------           -----------         ----------
                    Deferred:

                       Federal                            (2,030,830)            (282,000)                 --
                       State                                (106,048)                  --                  --
                                                       -------------          -----------       -------------
                                                          (2,136,878)            (282,000)                 --
                                                        ------------          -----------       -------------
                            Total                        $(2,694,447)           $1,216,000         $1,436,000
                                                         ===========            ==========         ==========


</TABLE>

                                       43

<PAGE>




  The (benefit) provision for income taxes differs from the statutory Federal
  income tax rate of 34% for the years ended December 31 as follows:
<TABLE>
<CAPTION>

                                       1997     1996    1995
                                       ---------------------


<S>                                   <C>       <C>     <C>  
Statutory income tax rate             (34.0%)   34.0%   34.0%
State income taxes, net of Federal
  benefit                              (1.3%)    6.6%    6.6%
In-process research and
  development                          12.6%     --      --
Amortization of goodwill                1.5%     --      --
Write-off of goodwill                   8.5%     --      --
                                        ---     ---      ---   
Effective income tax rate             (12.7%)   40.6%   40.6%
                                      =====     ====    ==== 
</TABLE>


  For 1997 and 1996, deferred income taxes reflect the net tax effects of
  temporary differences between the carrying amounts of assets and liabilities
  for financial statement purposes and the amounts used for income tax purposes
  and net operating loss carryforwards. Significant components of the Company's
  deferred tax assets and liabilities as of December 31, 1997 and 1996 are
  summarized below. There were no deferred tax assets or liabilities at December
  31, 1995.
<TABLE>
<CAPTION>

                                            1997           1996
                                          -------------------------
<S>                                       <C>          <C>     
Deferred tax assets and liabilities:
  Inventory                                 $1,331,179   $     --
  Allowance for doubtful accounts              820,600         --
  Accrued liabilities                          345,065         --
  Alternative minimum tax credits               62,914         --
  Deferred revenue                                --        282,000
                                               -------   ----------        
    Net current deferred tax assets          2,559,758      282,000
                                               -------   ----------        
  Net operating loss carryforwards             714,956         --
  Discount on note payable                  ( 256,421)         --
                                               -------   ----------        
     Net noncurrent deferred tax assets        458,535         --
                                               -------   ----------        

          Total deferred tax assets         $3,018,293    $282,000
                                            ==========   ==========
</TABLE>


  A portion of the deferred tax assets can be realized through carryback and
  reversals of existing temporary differences with the remainder dependent on
  future taxable income. Management believes that based on the Company's history
  of operating earnings (exclusive of the 1997 non-recurring and other charges)
  and its expected income, that it is more likely than not that future levels of
  income will be sufficient to realize the deferred tax assets, as recorded.

  The Company has utilizable Federal and State net operating loss carryforwards
  of approximately $2,042,346 and $622,982, respectively, at December 31, 1997
  for income tax purposes which expire in 2012.

  12.  Commitments and Contingencies:

  Legal Proceedings

  Irwin I. Miller v. Reynald G. Bonmati et al., Defendants, and Norland Medical
  Systems, Inc., Nominal Defendant. This shareholder's class action and
  derivative complaint was filed in the Court of Chancery of the State of
  Delaware, New Castle County, on August 1, 1997, against four members of the
  Company's Board of Directors, Reynald G. Bonmati, Albert S. Waxman, James J.
  Baker and Michael W. Huber (the "Individual Defendants"), NMS BV and the
  Company. The action relates to the acquisition of Norland Corp. by the Company
  from the NMS BV. The complaint alleged that the Individual Defendants breached
  their fiduciary duties of loyalty, candor and care in connection with the
  pending acquisition, and that the Company's proxy statement relating to the
  stockholders' meeting to vote on the acquisition did not contain full and fair
  disclosure. Plaintiff sought among other things: to enjoin the consummation of
  the acquisition; to require that the Company make additional disclosures to
  its stockholders in connection with the

                                       44

<PAGE>




  acquisition; damages in unspecified amounts; and costs, disbursements and
  counsel and expert fees. An agreement in principle was reached to settle the
  action. The Company delayed its Annual Meeting of Stockholders and
  supplemented its proxy statement with respect to the acquisition and the
  plaintiff withdrew his application for a preliminary injunction against the
  acquisition. It was agreed that the terms of the $16,250,000, 7% promissory
  note to be issued as part of the purchase price for Norland Corp. would be
  modified to provide that if the Company exercises its right to elect to extend
  the maturity date of such note from five years to up to seven years, the
  interest rate would be increased by one percentage point at the end of the
  fifth year and the sixth year rather than by one percentage point every six
  months as originally agreed. The Company also agreed to use its best efforts
  to nominate for election to the Board at the 1997 Annual Meeting one nominee
  with no direct or indirect affiliation with NMS BV, and, with respect to each
  succeeding Annual Meeting, at least two nominees with no direct or indirect
  affiliation with NMS BV. Finally, the Company agreed that it would not oppose
  an application by plaintiff's counsel for an award of counsel fees and
  expenses of up to $250,000. Such amount would be payable by the Company. The
  acquisition was approved by the Company's stockholders at the Annual Meeting
  of Stockholders held on September 8, 1997, and the acquisition was consummated
  on September 11, 1997. A definitive Stipulation of Settlement has been
  executed. Robert L. Piccioni and Joan Piccioni, plaintiffs in the action
  referred to below, have filed an objection to the settlement. The hearing in
  the Delaware Court of Chancery to determine whether the Stipulation of
  Settlement should be approved has been postponed and is in the process of
  being rescheduled. Included within accrued expenses at December 31, 1997 is
  $250,000 related to the settlement of this action. There can be no assurances
  that the Stipulation of Settlement will be approved by the Court, or that, if
  not approved, the Company's liability will be limited to $250,000.

  Robert L. Piccioni, Ph.D. and Joan Piccioni v. Norland Medical Systems, Inc.,
  et al. Robert L. Piccioni, a former director of the Company, and Joan
  Piccioni, the former President of the Company's Dove subsidiary, filed suit
  against the Company and Norland Corp. in the United States District Court for
  the Central District of California on October 9, 1997. The action was
  commenced shortly after the Company made claims for indemnification from Dr.
  and Mrs. Piccioni and certain other former stockholders of Dove in connection
  with the Company's acquisition of Dove in April of 1996. The complaint was
  subsequently amended to add Reynald G. Bonmati, the Company's President and
  Chairman of the Board, and Albert S. Waxman, a director of the Company, as
  defendants. The Piccionis allege breach of contract and fraud by the Company
  in connection with the acquisition of Dove, claim they suffered damages in
  excess of $2,500,000 and seek the release of the portion of the purchase price
  paid for Dove that is held in escrow to be available to satisfy indemnity
  obligation of the Piccionis and such other former stockholders of Dove to the
  Company. The defendants have moved to dismiss certain of the Piccionis'
  claims. These motions are pending before the Court. The Company believes that
  the Piccionis' action is without merit.

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

  Leases

  In 1996, the Company entered into operating leases for its manufacturing and
  office facilities and established subleases for portions of certain facilities
  with Norland Corp. and another company in which certain stockholders of NMS
  are also stockholders. Rent is prorated on a square footage basis. For the
  year ended December 31, 1997, lease expense was approximately $183,566 and
  sublease income was $61,827 and $39,614 with respect to Norland Corp. (through
  the September 11 acquisition date with respect to 1997) and the other company.
  Rent expense for the years ended December 31, 1996 and 1995 was $93,258 and
  $12,000, respectively. Sublease income for the year ended December 31, 1996
  was $67,326.
                                      45


<PAGE>




  The following is a schedule of future minimum lease payments and future
sublease receipts as of December 31, 1997:

<TABLE>
<CAPTION>

                             Rental Payments             Sublease Receipts
                             ---------------             -----------------
<S>                          <C>                                  <C>    
  1998                       $   203,352                          $37,500
  1999                           203,352                           37,500
  2000                           174,638                           18,750
  2001                           145,923                               --
  2002                           126,962                               --
  Thereafter                     396,000                               --
                             -----------                    -------------
                              $1,250,227                          $93,750
                              ==========                          =======
</TABLE>

  13.  Related Party Transactions:

  Sales and Purchases

  During 1997, 1996 and 1995, the Company sold $108,845, $210,785 and $889,982,
  respectively, of products and services to Stratec and $240,638, $351,323 and
  $0, respectively, of products and services to Norland Corp. (through the
  acquisition date with respect to 1997).

  During 1997, 1996 and 1995, the Company purchased $7,826,914, $13,138,280 and
  $4,012,468, respectively, of products and services from Norland Corp. (through
  the acquisition date with respect to 1997) and $1,424,474, $3,163,964 and
  $9,294,825, respectively, from Stratec. The amounts owed at December 31, 1997
  and 1996 by NMS to Stratec for such purchases were $584,779 and $714,127,
  respectively. The amounts payable to Stratec at December 31, 1997 and 1996 are
  net of receivables from Stratec in the amounts of $7,700 and $62,689,
  respectively. The amount owed by the Company to Norland Corp. at December 31,
  1996 was $2,220.816.

  Loan Receivable

  In accordance with the terms of a Loan Agreement dated June 1, 1995, the
  Company advanced $289,785 to Norland Corp. as of December 31, 1996. During
  1997, the Company advanced $2,144,382 to Norland Corp. Following the
  acquisition of Norland Corp. on September 11, 1997, the loan and interest,
  which accrued at 10% per annum, and the advance were eliminated in
  consolidation.

  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 March 1999, including interest which accrues at 6% per annum. The
  balance of the loan, including interest, was $86,504 and $81,704 at December
  31, 1997 and 1996, respectively.

  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. The balance of the
  loan, including interest, was $0 and $500,000 at December 31, 1997 and 1996,
  respectively.

  Other

  The Company rented space in 1996 and 1995 on a month to month basis, and has
  been purchasing administrative support services, from another company in which
  certain beneficial stockholders of NMS are also beneficial stockholders. The
  cost of the services and space to NMS for the years ended December 31, 1997,
  1996 and 1995 was $7,800, $33,136 and $22,360, respectively. As of December
  31, 1997, 1996 and 1995, no amount was due by the Company for these costs.


                                       46
<PAGE>


  14.  Supplemental Sales and Customer Information:

  For the year ended December 31, 1997, no customer accounted for more than 10%
  of revenues. The Company's largest customers are medical device distributors.
  For the years ended December 31, 1996 and 1995, respectively, two Pacific Rim
  distributors accounted for 22%, and 6% and 68% and 9% of revenues,
  respectively.

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


<TABLE>
<CAPTION>


                                     1997                        1996                                1995
                          --------------------------    ------------------------    ----------------------------
<S>                       <C>                  <C>   <C>                 <C>        <C>                  <C>  
  Pacific Rim             $  2,066,024         10.1%    $10,338,350        42.5%      $15,998,238           87.7%
  Latin America              1,556,441          7.6         747,498          3.1          203,542            1.1
  Europe/Middle East         2,224,178         10.8         578,081          2.4          889,982            4.9
                         -------------         ----  --------------      -------   --------------        -------
  Export Sales               5,846,643         28.5      11,663,929         48.0       17,091,762           93.7
  Domestic Sales            14,683,733         71.5      12,662,205         52.0        1,152,046            6.3
                          ------------         ----    ------------                 -------------        -------
                           $20,530,376        100.0%    $24.326,134       100.0%      $18,243,808          100.0%
                           ===========        =====     ===========       =====       ===========          =====

</TABLE>

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

  15.   Restatement of Financial Information

  The Company has restated its financial statements for the year ended December
  31, 1996. A review of sales transactions recorded in 1996 revealed that
  certain fourth quarter transactions that the Company treated as sales and with
  respect to which it recognized revenue should not have been treated as sales
  for purposes of revenue recognition. As a result, the 1996 financial
  statements were restated to eliminate the transactions that should not have
  been treated as sales.

  All material adjustments necessary to correct the financial statements have
  been recorded. The impact of these adjustments on the Company's 1996 financial
  results as originally reported is summarized as follows:
<TABLE>
<CAPTION>

                                                     As Reported       As Restated
                                                     ------------------------------
<S>                                                  <C>                <C>        
  Net revenue                                        $25,309,977        $24,326,134
  Gross profit                                         9,061,508          8,616.714
  Operating income                                     2,985,630          2,290,111
  Net income                                           2,191,374          1,777,855
  Earnings per share - diluted                              0.31               0.25
  Total assets                                        30,243,378         30,115,136
  Total current liabilities                            3,722,513          4,007,790
  Retained earnings at end of year                     4,359,243          3,945,724

</TABLE>

                                       47
<PAGE>


  16.  Quarterly Financial Data:  (Unaudited)


<TABLE>
<CAPTION>
                                                                  1997 Quarters
                                  --------------------------------------------------------------------------------
                                  First(1)        Second(1)          Third(1)          Fourth            Total
                                  ----------      -----------      ------------     -----------       ------------
<S>                              <C>              <C>                <C>             <C>               <C>        
  Revenue                        $4,337,203       $5,132,024         $5,338,508      $5,722,641        $20,530,376
  Gross profit                    1,854,329        2,310,318          2,215,289       1,263,157          7,643,093
  Operating income (loss)            37,722          214,179       (18,456,195)     (3,035,941)       (21,240,235)
  Net income (loss)                 103,616          194,759       (16,103,818)     (2,778,562)       (18,584,005)

  Weighted average number of 
   common and common 
   equivalent shares:
       Basic                      7,115,831        7,149,800          7,154,161       7,161,471          7,145,465
       Diluted                    7,166,878        7,188,847          7,154,161       7,161,471          7,145,465

  Earnings (loss) per share:
   Basic                              $0.01            $0.03            $(2.25)         $(0.39)            $(2.60)
   Diluted                             0.01             0.03             (2.25)          (0.39)             (2.60)

</TABLE>

<TABLE>
<CAPTION>

                                                                              1996 Quarters
                                  --------------------------------------------------------------------------------
                                    First           Second            Third          Fourth(1)            Total
                                  ----------      -----------      ------------     -----------       ------------
<S>                              <C>              <C>                <C>             <C>               <C>        
  Revenue                        $5,218,290       $6,949,116         $8,066,882      $4,091,846        $24,326,134
  Gross profit                    1,802,379        2,568,986          2,652,295       1,593,054          8,616,714
  Operating income (loss)           921,315        1,091,758            720,553       (443,515)          2,290,111
  Net income (loss)                 691,256          750,057            515,335       (178,793)          1,777,855

  Weighted average number of 
   common and common 
   equivalent shares:
        Basic                     6,624,420        6,873,198          6,895,781       6,903,314           6,824,590
        Diluted                   7,057,009        7,263,912          7,214,920       6,903,314           7,168,871

  Earnings (loss) per share:


      Basic                           $0.10            $0.11              $0.07          $(0.03)              $0.26
      Diluted                          0.10             0.10               0.07           (0.03)               0.25
</TABLE>

  The per share figures for all periods presented reflect the stock splits and
  the application of SFAS 128, "Earnings Per Share" described in Notes 9 and 2,
  respectively.



(1)      The Company has restated its financial statements for the fourth
         quarter of 1996 and for each of the first three quarters of 1997 to
         eliminate certain transactions with respect to which revenue should not
         have been recognized. The financial information presented reflects the
         restatement of revenue downward by $1,022,029, $2,052,600, $1,609,082
         and $983,843 for the periods ended September 30, 1997, June 30, 1997,
         March 31, 1997 and December 31, 1996, respectively. Operating income
         has been restated downward by $808,467, $801,622, $901,273 and $695,519
         for respective periods. Net income has been restated downward by
         $637,676, $436,899, $369,482 and $413,519 for the respective periods.


                                       48
<PAGE>


                          NORLAND MEDICAL SYSTEMS, INC.

                                   SCHEDULE II


                        VALUATION AND QUALIFYING ACCOUNTS
              for the years ended December 31, 1997, 1996 and 1995


<TABLE>
<CAPTION>


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

<S>                             <C>           <C>               <C>           <C>                   <C>       
  1997
  Allowance for Doubtful
  Accounts                      $221,000      $1,979,000           $0              $0                $2,200,000
                                =========     ===========          ===             ===               ==========

  Obsolescence reserve          $ 41,895      $1,859,934        $600,000      $(1,226,829)          $1,275,000
                                ========      ===========       =========     =============         ==========
  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
                                   ==          ========            ==              ==                 ========

</TABLE>



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

                                      49

<PAGE>


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

None.


                                       PART III


ITEMS 10, 11, 12 AND 13.

     The information required under these items is contained in the Company's 
Proxy Statement relating to its 1998 Annual Meeting of Stockholders, which 
will be filed with the Securities and Exchange Commission within 120 days 
after the close of the Company's fiscal year end.  This information is 
incorporated herein by reference.





                                          50
<PAGE>


                                       PART IV

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

     (a)  Financial Statement and Financial Statement Schedules.

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

     (b)  Exhibits.

          Exhibit
          Number                       Description                     
          -------                      -----------

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

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

          2.3  Stock Purchase Agreement between Norland Medical Systems, Inc.
               and Norland Medical Systems B.V. (G)
     
          3.1  Restated Certificate of Incorporation of Norland Medical Systems,
               Inc. (H)

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

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

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

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

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

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

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

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


                                          51
<PAGE>



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

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

         27.1  Financial Data Schedule

         27.2  Financial Data Schedule
    
     (c)  Reports on Form 8-K.

          The Company filed a Current Report on Form 8-K on March 7, 1997
          describing the agreement to acquire Norland Corp.

          The Company filed a Current Report on Form 8-K on August 8, 1997
          describing the commencement of certain litigation in connection with
          the proposed acquisition of Norland Corp.

          The Company filed a Current Report on Form 8-K on September 24, 1997
          reporting that the acquisition of Norland Corp. had been consummated.


________________________

+    Confidentiality requested as to certain provisions

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

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

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

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

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

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

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

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



                                          52
<PAGE>


                                      SIGNATURES

     Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Annual Report to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of White Plains, New York, on the 6th day of April, 1998.

                    NORLAND MEDICAL SYSTEMS, INC.


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


                                  POWER OF ATTORNEY

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

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


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


/s/ Reynald G. Bonmati        Chairman of the Board and          April 6, 1998
-----------------------       President (Principal Executive
    Reynald G. Bonmati        Officer); and Director        

/s/ Kurt W. Streams           Vice President, Finance            April 6, 1998
-----------------------       (Principal Financial Officer and
    Kurt W. Streams           Principal Accounting Officer)


                                          53
<PAGE>


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


/s/  Jeremy Allen              Director                          April 6, 1998
-----------------------
     Jeremy Allen



/s/ James J. Baker             Director                          April 6, 1998
-----------------------
    James J. Baker



/s/ Michael W. Huber           Director                          April 6, 1998
-----------------------
    Michael W. Huber 



/s/ Andre-Jacques Neusy        Director                          April 6, 1998
-----------------------
    Andre-Jacques Neusy



/s/ Albert S. Waxman           Director                          April 6, 1998
-----------------------
    Albert S. Waxman     


                                          54