<PAGE>   1
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

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

                                   FORM 10-K

(MARK ONE)

[X]      ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
         EXCHANGE ACT OF 1934

For the fiscal year ended       December 31, 1997
                          ------------------------------------------------------

                                       OR

[ ]      TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
         EXCHANGE ACT OF 1934

For the transition period from                    to
                               ------------------    ---------------------------

                    Commission file number    0-27848
                                            -----------

                                 BIOFIELD CORP.
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             (Exact Name of Registrant as Specified in Its Charter)

            Delaware                                      13-3703450
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(State or Other Jurisdiction of            (I.R.S. Employer  Identification No.)
 Incorporation or Organization)

    1225 Northmeadow Pkwy.
    Suite 120, Roswell, GA                                  30076
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(Address of Principal Executive Offices)                 (Zip Code)


Registrant's telephone number, including area code     (770) 740-8180
                                                   -----------------------------


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

       Title of Each Class             Name of Each Exchange on Which Registered
       -------------------             -----------------------------------------


              None                                        None
-----------------------------------   ------------------------------------------


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

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

                          Common Stock, $.001 par value
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                                (Title of Class)


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                                (Title of Class)

<PAGE>   2
         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
filings 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 outstanding Common Stock on March 20,
1998 held by non-affiliates of the Registrant was approximately $21.8 million.

         The number of shares of the Registrant's Common Stock, $.001 par value,
outstanding as of March 20, 1998 was 10,029,609 shares.

                       DOCUMENTS INCORPORATED BY REFERENCE

         Items 10, 11, 12 and 13 of Part III are incorporated by reference from
a portion of the Registrant's definitive proxy statement to be furnished to
stockholders in connection with the 1998 Annual Meeting of Stockholders.

<PAGE>   3
                                 BIOFIELD CORP.
                          (A Development Stage Company)
                          1997 FORM 10-K ANNUAL REPORT

                                TABLE OF CONTENTS


<TABLE>
<CAPTION>
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<S>               <C>                                                                             <C>
                                                PART I

Item 1.           Business.......................................................................... 1
Item 2.           Properties....................................................................... 11
Item 3.           Legal Proceedings................................................................ 11
Item 4.           Submission of Matters to a Vote of Security Holders.............................. 11

                                               PART II

Item 5.           Market for Registrant's Common Equity and Related Stockholder Matters............ 11
Item 6.           Selected Financial Data.......................................................... 12
Item 7.           Management's Discussion and Analysis of Financial Condition
                    and Results of Operations...................................................... 14
Item 8.           Financial Statements and Supplementary Data...................................... 24
Item 9.           Changes in and Disagreements With Accountants on Accounting
                    and Financial Disclosure....................................................... 24

                                               PART III

Item 10.          Directors and Executive Officers of the Registrant............................... 24
Item 11.          Executive Compensation........................................................... 24
Item 12.          Security Ownership of Certain Beneficial Owners and Management................... 24
Item 13.          Certain Relationships and Related Transactions................................... 24

                                               PART IV

Item 14.          Exhibits, Financial Statement Schedules, and Reports on Form 8-K................. 24
</TABLE>

<PAGE>   4
                                     PART I

THIS ANNUAL REPORT ON FORM 10-K CONTAINS FORWARD LOOKING STATEMENTS THAT INVOLVE
CERTAIN RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS COULD DIFFER
MATERIALLY FROM THE RESULTS DISCUSSED IN THE FORWARD LOOKING STATEMENTS. SEE
"CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING STATEMENTS" CONTAINED IN PART
II, ITEM 7 OF THIS REPORT.

ITEM 1. BUSINESS

         Biofield Corp. is a medical technology company that has developed an
innovative system for detecting breast cancer in a non-invasive and objective
procedure. The Company's breast cancer diagnostic device, the Biofield
Diagnostic System, employs unique, single-use sensors and a measurement device
to detect and analyze changes associated with the development of epithelial
cancers, such as breast cancer. The Biofield Diagnostic System is intended to
provide physicians and patients with immediate and objective information
concerning the probability that a previously identified lesion is malignant or
benign. The Company believes that the Biofield Diagnostic System, together with
other available clinical information, could reduce diagnostic uncertainty and
decrease the number of diagnostic procedures, including surgical biopsies,
performed on suspicious lesions. In clinical studies to date, the Biofield
Diagnostic System performed better in the clinically difficult subgroup of
younger women, for whom certain diagnostic imaging modalities are generally
considered less effective.

         The Biofield Diagnostic System is not available for commercial
distribution in the United States at this time and will not be available until
U.S. Food and Drug Administration ("FDA") premarket approval is received. On
December 30, 1996, the Company submitted a premarket approval application
("PMA") to the FDA for the Biofield Diagnostic System. On February 27, 1997, the
FDA informed the Company that its PMA had not been accepted for filing and
requested that the Company address deficiencies in the PMA before further
consideration of such PMA. Subsequently, the Company has been in discussions
with the FDA regarding the protocol for a proposed additional clinical trial in
support of a resubmission of the PMA for the Biofield Diagnostic System. The
Company has voluntarily withdrawn the original submission and intends to
resubmit its PMA upon completion of additional testing and data analysis.
Discussions with the FDA aimed at establishing the design and protocol for the
proposed additional clinical trial are ongoing. The clinical trial design and
protocol may have a significant impact on the time required to complete the
clinical trial. Following these discussions with the FDA, the Company will
evaluate its options and finalize its plans for proceeding. The Company
currently anticipates starting the enrollment phase of an additional clinical
trial in support of a resubmission of the PMA during the first half of 1998. The
enrollment phase of the clinical trial is expected to take several months or
longer, followed by data analysis. Resubmission of the PMA is expected to
follow. The PMA, if and when accepted for filing by the FDA, is currently
designated for review under the FDA's Expedited Review policy. There can be no
assurance, however, that such Expedited Review status will be maintained or
result in a more expeditious approval, or approval at all. See "Government
Regulation" and "Cautionary Statements Regarding Forward-Looking Statements --
Uncertainty of FDA Approval for the Biofield Diagnostic System" and
"--Government Regulation; No Assurance of Regulatory Approvals."

         The laws of certain European countries may permit the Company to begin
marketing the Biofield Diagnostic System in Europe before marketing would be
permitted in the United States. The Company currently anticipates a European
product launch of the Biofield Diagnostic System during the second half of 1998.
There can be no assurance that the Company's proposed marketing schedules or
plans can or will be met. See "Government Regulation" and "Cautionary Statements
Regarding Forward-Looking Statements -- Uncertainty of FDA Approval for the
Biofield Diagnostic System" and "--Government Regulation; No Assurance of
Regulatory Approvals."

BREAST CANCER

       Background

         Breast cancer is one of the most common cancers among women and,
notwithstanding the currently available detection modalities, is the leading
cause of death among women aged 35 to 54. According to the American Cancer
Society ("ACS"), approximately one in nine women in the United States will
develop breast cancer during her lifetime. In the United States in


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<PAGE>   5
1996, the ACS estimated that approximately 184,000 women would be diagnosed
with, and approximately 44,000 women would die as a result of, breast cancer. In
Europe in 1990, approximately 170,000 cases of breast cancer were discovered,
with an estimated 73,000 deaths.

         Early detection of breast cancer is critical. There is widespread
agreement that screening for breast cancer, when combined with appropriate
follow-up, will reduce mortality from the disease. According to the National
Cancer Institute ("NCI"), the five-year survival rate decreases from more than
90% to 72% after the cancer has spread to the lymph nodes, and to 18% after it
has spread to other organs such as the lung, liver or brain.

         There are over 90 million women in the United States over the age of 20
for whom breast cancer screening (in the form of physical examination or
mammography screening) is generally recommended as a routine part of
preventative healthcare. For these women, the ACS has published guidelines for
breast cancer screening including: (i) monthly breast self-examinations for all
women over the age of 20; and (ii) an annual mammogram for women age 40 and
older. As a result of family medical histories and other factors, certain women
are at "high-risk" of developing breast cancer during their lifetimes. For these
women, physicians often recommend close monitoring, particularly if a
potentially pre-cancerous condition has been detected.

         Each year approximately eight million women in the United States
require diagnostic testing for breast cancer because of a physical symptom, such
as a palpable lesion, pain or nipple discharge, discovered through self or
physician examination (approximately seven million) or a nonpalpable lesion
detected by screening x-ray mammography (approximately one million). Once a
physician has identified a suspicious lesion in a woman's breast, the physician
may recommend further diagnostic procedures, including diagnostic mammography,
ultrasound or fine needle aspiration. In each case, the potential benefits of
additional diagnostic testing must be balanced against the costs, risks, anxiety
and discomfort to the patient associated with undergoing the additional
procedures. Each of the currently available non-surgical modalities for breast
cancer detection has various clinical limitations.

         Screening and Diagnostic Modalities

         Physical examinations may be conducted by a physician as part of a
medical examination, or by a woman performing a breast self-examination;
however, a physical examination of the breast can only detect relatively large
lesions, which may be advanced cancers. Furthermore, physical examination of the
breast does not reliably distinguish between malignant and benign tissue. More
than half the women who menstruate will have a lump in a breast at some point,
but fewer than 10% of such lumps will be malignant.

         Mammography is an x-ray modality commonly used for both routine breast
cancer screening and as a diagnostic tool. A mammogram produces an image of the
internal structure of the breast which is intended to display lesions as blurry
white spots against normal tissue. In a screening mammogram, radiologists seek
to detect the presence of suspicious lesions, while in a diagnostic mammogram
radiologists seek to characterize suspicious lesions. Mammograms require
subjective interpretation by a radiologist and are often uncomfortable for the
patient. Because x-ray mammography exposes the patient to radiation, the ACS
recommends that mammograms be limited to one per year. In addition, x-ray
mammography is considered to be less effective for women under the age of 50 who
generally have radiographically dense breast tissue. The average cost of a
diagnostic mammogram is approximately $120 to $180 per procedure, and requires
the use of capital equipment ranging in cost from approximately $75,000 to
$225,000. Due to the high capital costs associated with mammography equipment
and the specialized training necessary to operate the equipment and to read the
x-ray images, mammography is usually available only at specialty clinics or
hospitals.

         Ultrasound uses high frequency sound waves to create an image of soft
tissues in the body. Like a mammogram, this image requires interpretation by a
physician. Ultrasound's principal role in breast cancer diagnosis has been to
assist the physician in determining whether a palpable lesion is likely to be a
cyst (usually benign) or a solid mass (potentially cancerous). The average cost
of an ultrasound of the breast is approximately $75 to $300 per procedure and
requires the use of capital equipment ranging in cost from approximately $60,000
to $200,000. Like mammography, ultrasound is generally performed at specialty
clinics or hospitals.

         Other currently available non-surgical diagnostic techniques include
fine needle aspiration, core needle biopsy and stereotactic needle biopsy. In
each of these procedures a physician seeks to obtain cell samples from a
suspicious lesion through a needle for analysis by a cytopathologist. Inadequate
sampling often renders these tests invalid. These procedures are invasive,
require follow-up and range in cost from approximately $370 to $1,000 per
procedure.


                                       2
<PAGE>   6
         Due in part to the limitations of the currently available modalities to
identify malignant lesions, a large number of patients with suspicious lesions
proceed to additional diagnostic procedures, including surgical biopsy, an
invasive and expensive procedure. Approximately 750,000 surgical biopsies are
performed each year in the United States, of which approximately 500,000 result
in the surgical removal of benign breast tissue. The average cost of a surgical
biopsy ranges from approximately $1,000 to $5,000 per procedure. In addition,
surgical biopsy can result in pain, scarring and anxiety to patients. Patients
who are referred to biopsy usually are required to schedule the procedure in
advance and generally must wait several days to receive their biopsy results.

THE BIOFIELD DIAGNOSTIC SYSTEM

         The Biofield Diagnostic System is intended to provide physicians and
patients with immediate and objective information concerning the probability
that an identified lesion is malignant or benign. A breast exam utilizing the
Biofield Diagnostic System, called the Biofield Test, is non-invasive and can be
performed in a physician's office by a physician or a medical technician in less
than 20 minutes. Single-use Biofield Diagnostic Sensors are arranged on the skin
surface in and around the quadrant of the breast where a suspicious lesion has
been identified and in corresponding locations on the asymptomatic breast.
Sensor readings are measured and analyzed using a pre-programmed algorithm. The
Company anticipates that the output from a Biofield Test will be a written
report that includes an objective reading on a number scale. The higher the
number, the greater the probability the patient has proliferative disease or
cancer in the area examined. Such information, together with other available
clinical information, can be used by the physician to make further treatment
decisions, including whether to proceed to surgical biopsy.

         The Company believes the Biofield Diagnostic System will offer patients
and physicians several advantages compared with currently available modalities
used in breast cancer diagnosis, including the following:

         -        Provides the patient and physician with immediate, objective
                  test results that indicate the probability that a suspicious
                  lesion is malignant or benign.

         -        Non-invasive-- all measurements are taken from sensors placed
                  on the skin surface.

         -        Unlike x-ray mammography, no exposure to radiation or breast
                  compression. This will allow physicians to repeat the test as
                  often as needed, which is especially important for women at
                  high risk for developing breast cancer and other patients
                  requiring follow-up examination.

         -        In clinical studies to date, the Biofield Diagnostic System
                  has performed better in the clinically difficult subgroup of
                  younger women for whom diagnostic imaging modalities are
                  generally considered less effective.

         -        Diagnostic exam can be performed by a physician or medical
                  technician in less than 20 minutes in a physician's office.

         -        The estimated capital cost of the device, approximately
                  $25,000 - $30,000 in the United States, is expected to be
                  significantly less than the cost of purchasing and installing
                  diagnostic x-ray mammography or other diagnostic imaging
                  equipment. The estimated cost of one set of single-use
                  Biofield Diagnostic Sensors is expected to be approximately
                  $100 in the United States. The Company believes that the per
                  procedure costs of a Biofield Test will be competitive with
                  current costs of diagnostic mammography and ultrasound.

         The Company believes that the Biofield Diagnostic System will be
appreciated by physicians and patients for its accuracy and convenience, and by
third party payors of health care costs for the cost containment potential of
reducing the number of diagnostic tests, including surgical biopsies, performed
on suspicious lesions.

         The Biofield Diagnostic System is not available for commercial
distribution in the United States at this time and will not be available until
the Company obtains FDA pre-market approval, the receipt and timing of which are
uncertain.

CLINICAL STUDIES

         The Company has conducted clinical trials in the United States, Europe
and Japan with the Biofield Diagnostic System involving over 3,000 women with
suspicious breast lesions. The basic protocol for the Company's clinical
studies, provided for women with suspicious lesions detected either by x-ray
mammography screening or a physical examination (self or by physician) to be
tested with the Biofield Diagnostic System prior to open surgical biopsy. Women
who participated in these studies had


                                       3
<PAGE>   7
undergone diagnostic work-ups, which often included a series of tests, prior to
proceeding to biopsy. In each of these studies the results obtained using the
Biofield Diagnostic System were compared to the biopsy results. Based on
clinical studies to date, the Company believes that the Biofield Diagnostic
System, together with other available information, could reduce diagnostic
uncertainty and decrease the number of diagnostic procedures, including surgical
biopsies, performed on suspicious lesions. See "Government Regulation" and "
Cautionary Statements Regarding Forward-Looking Statements - Uncertainty of FDA
Approval for the Biofield Diagnostic System" and "Government Regulation; No
Assurance of Regulatory Approvals."

         The Biofield Diagnostic System is not available for commercial
distribution in the United States at this time and will not be available until
U.S. Food and Drug Administration ("FDA") premarket approval is received. On
December 30, 1996, the Company submitted a premarket approval application
("PMA") to the FDA for the Biofield Diagnostic System. The initial PMA for the
Biofield Diagnostic System was based principally upon the results of the
Company's U.S. Multi-center Study. The PMA as submitted to the FDA included data
from clinical trials on over 1,200 women tested at six medical institutions
under the direction of physicians involved in breast cancer diagnosis and
treatment. On February 27, 1997, the FDA informed the Company that its PMA had
not been accepted for filing and requested that the Company address deficiencies
in the PMA before further consideration of such PMA. Specifically, the FDA has
not accepted the findings from the Company's U.S. Multi-center Study as
submitted in the PMA. Subsequently, the Company has been in discussions with the
FDA regarding the protocol for a proposed additional clinical trial in support
of resubmission of the PMA for the Biofield Diagnostic System. The Company has
voluntarily withdrawn the original submission and intends to resubmit its PMA
upon completion of additional testing and data analysis. Discussions with the
FDA aimed at establishing the design and protocol for the proposed additional
clinical trial are ongoing. The clinical trial design and protocol may have a
significant impact on the time required to complete the clinical trial.
Following these discussions with the FDA, the Company will evaluate its options
and finalize its plans for proceeding. The Company currently anticipates
starting the enrollment phase of an additional clinical trial in support of a
resubmission of the PMA during the first half of 1998. The enrollment phase of
the clinical trial is expected to take several months or longer, followed by
data analysis. Resubmission of the PMA is expected to follow. The PMA, if and
when accepted for filing by the FDA, is currently designated for review under
the FDA's Expedited Review policy. There can be no assurance, however, that such
Expedited Review status will be maintained or result in a more expeditious
approval, or approval at all. See "Cautionary Statements Regarding
Forward-Looking Statements -- Uncertainty of FDA Approval for the Biofield
Diagnostic System" and "--Government Regulation; No Assurance of Regulatory
Approvals."

THE BIOFIELD SCREENING SYSTEM

         Based on its clinical experience with the Biofield Diagnostic System
for testing symptomatic women and its belief that the electrophysiological
characteristics of cancer are similar for both palpable or nonpalpable lesions,
the Company believes that its technology can be adapted for breast cancer
screening in asymptomatic women. The proposed Biofield screening system, an
enhanced version of the Biofield Diagnostic System with additional data channels
and a dedicated algorithm, is currently under development by the Company. The
proposed Biofield screening system has been designed to screen all quadrants of
each breast by using additional Biofield Diagnostic Sensors arranged in a
pre-determined pattern. Screening examinations utilizing the Company's prototype
Biofield screening system take less than 30 minutes to complete. The Company has
completed the prototype design and development work necessary for clinical
testing of the Biofield screening system, although the Company's design and
development of the final sensor configuration has not yet been completed.

         While the Company believes that the results of a 1993 pilot breast
cancer screening study support further clinical trials of the proposed Biofield
screening system, the Company has focused its efforts on first completing the
development and clinical testing of the Biofield Diagnostic System for use as a
diagnostic tool. The Company believes that the protocol for a full-scale
clinical trial of the proposed screening device would require enrollment of a
large number of women at multiple clinical sites and would require significant
follow-up procedures. There can be no assurance that Biofield's technology can
be adapted for breast cancer screening, or, if adapted, that the proposed
Biofield screening system will be approved by the FDA or be commercially
accepted.

OTHER MARKETS

         The Company believes that the need exists for products that will
provide early and accurate detection of types of epithelial cancers other than
breast cancer. Ongoing preclinical research has been designed to obtain
additional scientific knowledge of the fundamentals underlying Biofield's core
technology and identify new applications for Biofield's technology. The
Company's preclinical research is intended to support the development of devices
and procedures based on Biofield's technology for the detection of other
cancers, including cancer of the ovaries, skin, prostate and colon. There can be
no assurance that Biofield's technology can be adapted for breast cancer
screening or for the detection of other cancers, and, if adapted, that any such
products developed by the Company will be approved by the FDA or will be
accepted commercially.


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<PAGE>   8
BIOFIELD TECHNOLOGY

         Biofield's technology is based on the principle that epithelial
cancers, such as cancer of the breast, ovaries, skin, prostate and colon, are
characterized by electrical changes. These changes result in a disruption, or
depolarization, of the charge distribution found in normal epithelial tissue
which lines many solid organs, including the stomach, colon, prostate,
endometrium, lung and breast. Moreover, this depolarization appears to be
progressive as cell transformation and carcinogenesis occur.

         This depolarization is measurable at the skin surface in the form of
electrophysiological differentials. The Biofield Diagnostic System takes
multiple readings from an array of test points on the skin surface of the
symptomatic breast and asymptomatic breast to measure differentials which may
exist between test points. The Company believes that the analysis of these
differentials, using a pre-programmed algorithm, provides useful diagnostic
information.

MARKETING AND SALES

         Because of the large number of diagnostic procedures that are performed
on suspicious breast tissue in the United States, the Company intends to focus
its U.S. marketing efforts on the clinical ability of the Biofield Diagnostic
System to reduce diagnostic uncertainty and decrease the number of diagnostic
tests performed on these suspicious lesions. The Company believes that the
market for the Biofield Diagnostic System will include physicians involved in
the detection and management of breast cancer, including radiologists,
gynecologists, general surgeons, breast surgeons and general practitioners, as
well as hospitals and clinics. The Company currently anticipates that, if the
Biofield Diagnostic System is approved by the FDA, the Company will market this
product in the United States together with one or more distribution partners, or
through a dedicated internal sales force in order to maximize product sales and
market penetration.

         In the United States, the Company currently anticipates that the
capital cost of purchasing the Biofield Diagnostic System will be approximately
$25,000 - $30,000. Such estimated capital cost is substantially less than the
cost of diagnostic mammography equipment or ultrasound systems, which range in
price from approximately $60,000 to $225,000. The Company currently estimates
that the cost of a set of single-use Biofield Diagnostic Sensors is expected to
be approximately $100 in the United States. The Company believes that the per
procedure costs of a Biofield Test will be competitive with the current costs of
diagnostic mammography and ultrasound.

         The laws of certain European countries may permit the Company to begin
marketing the Biofield Diagnostic System in Europe before marketing would be
permitted in the United States. In addition, the European Union requires that by
mid-1998 all companies conducting sales in member countries must obtain
certifications necessary to enable the "CE" mark to be affixed to their
products. The Company is in the final stages of obtaining such certifications.
There can be no assurance that the Company will be able to obtain such final
approvals in a timely manner, or at all.

         The Company currently anticipates commencing its foreign marketing
efforts during the second half of 1998 with a European market launch, and is
considering potential distribution arrangements with strategic marketing
partners in the United States, Europe and Asia. The Company believes that a
distribution arrangement with one or more strategic partners could assist in the
marketing and servicing of the Biofield Diagnostic System. There can be no
assurance that the Company will be able to enter into any such strategic
alliance or that any of the Company's proposed marketing schedules or plans can
or will be met.

         The timing of initial commercialization of any other potential products
utilizing the Company's technology, including the proposed Biofield screening
system, will depend on the progress of the Company's product development and
manufacturing programs, the results of future clinical trials and available
financing. Any such products will require pre-market approval from the FDA prior
to commercialization in the United States.

MANUFACTURING

         The Company has used certain contract manufacturers to produce the
initial quantities of the Biofield Diagnostic Device and disposable Biofield
Diagnostic Sensors and intends to continue to do so to satisfy its needs for
future clinical studies and for commercial quantities. Electronic components and
raw materials used in the Biofield Diagnostic Device and Biofield Diagnostic
Sensors are available from numerous suppliers. Some components are stock items,
while others are designed and manufactured to Biofield's specifications. The
Company owns certain of the specifications, molds and other equipment used to
manufacture components of its proposed products.


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<PAGE>   9
         The Company has engaged SeaMED Corporation of Seattle, Washington to
design and manufacture quantities of the commercial production model of the
Biofield Diagnostic Device for use in connection with clinical studies. The
Company has entered into an agreement with SeaMED Corporation which grants
SeaMED Corporation the right to manufacture at least 50% of the Company's
worldwide requirements for the Biofield Diagnostic Device, other than devices to
be manufactured and sold in Asia, for a period of five years commencing May
1996. The Company has arranged for other third parties to supply its Biofield
Diagnostic Sensors and sensor components for its clinical studies and does not
anticipate any difficulties in arranging for the commercial production of these
items. There can be no assurance that any of the suppliers can meet current or
future Good Manufacturing Practices ("GMP") requirements.

PATENTS AND PROPRIETARY INFORMATION

         The Company has eleven issued U.S. patents relating to its products and
technology. Biofield devices, single-use sensors, methods, device design and
certain device and sensor components are the subject of either issued U.S.
patents or pending U.S. and foreign patent applications. In addition, the
Company has a non-exclusive license under a U.S. patent entitled "Device and
Method of Detecting the Potential Level of the Electromagnetic Field of a Living
Organism."

         There can be no assurance that the United States Patent and Trademark
Office ("PTO") or foreign jurisdictions will grant the Company's pending patent
applications or that the Company will obtain any patents or other protection for
which it has applied. No assurance can be given that patents issued to or
licensed by or to the Company will not be challenged, invalidated or
circumvented, or that the rights granted thereunder will provide any competitive
advantage. The Company could incur substantial costs in defending any patent
infringement suits or in asserting any patent rights, including those granted by
third parties. Any adverse outcome could subject the Company to significant
liabilities to third parties, require disputed rights to be licensed from third
parties or require the Company to cease selling its products.

         The Company also relies upon trade secrets and other unpatented
proprietary information in its product development activities which it seeks to
protect, in part, through assignment agreements and confidentiality agreements
with employees, consultants and other parties. There can be no assurance that
these agreements will not be breached, that the Company will have adequate
remedies for any such breach or that the Company's trade secrets will not
otherwise become known to, or independently developed by, competitors.

GOVERNMENT REGULATION

         The manufacture and sale of medical devices intended for commercial
distribution are subject to extensive governmental regulation in the United
States. Medical devices are regulated in the United States by the FDA under the
Federal, Food, Drug and Cosmetic Act ("FDC Act") and generally require
pre-market clearance or pre-market approval prior to commercial distribution. In
addition, certain material changes or modifications to medical devices also are
subject to FDA review and clearance or approval. Pursuant to the FDC Act, the
FDA regulates the research, testing, manufacture, safety, labeling, storage,
record keeping, advertising, distribution and production of medical devices in
the United States. Noncompliance with applicable requirements can result in
failure of the government to grant pre-market clearance or approval for devices,
withdrawal of approval, total or partial suspension of production, fines,
injunctions, civil penalties, recall or seizure of products, and criminal
prosecution.

         Medical devices are classified into one of three classes, Class I, II
or III, on the basis of the controls deemed by the FDA to be necessary to
reasonably ensure their safety and effectiveness. Class I devices are subject to
general controls (e.g., labeling and adherence to GMPs). Class II devices are
subject to general controls and to special controls (e.g., performance
standards, postmarket surveillance, patient registries, and FDA guidelines).
Generally, Class III devices are those that must receive pre-market approval by
the FDA to ensure their safety and effectiveness (e.g., life-sustaining,
life-supporting and implantable devices, or new devices such as the Biofield
Diagnostic System and the proposed Biofield screening system, which have not
been found to be substantially equivalent to legally marketed Class I or II
devices), and require clinical testing to ensure safety and effectiveness and
must receive FDA approval prior to marketing and distribution. The FDA also has
the authority to require clinical testing of Class I and Class II devices. A PMA
must be filed if a proposed device is not substantially equivalent to a legally
marketed predicate device or if it is a Class III device for which the FDA has
called for such applications.

         If human clinical trials of a device are required and if the device
presents a "significant risk," the manufacturer or distributor of the device is
required to file an investigational device exemption ("IDE") application with
the FDA prior to commencing human clinical trials. The IDE application must be
supported by data, typically the results of animal and, possibly, mechanical
testing. If the IDE application is approved by the FDA, human clinical trials
may begin at a specific number of investigational sites with a maximum number of
patients, as approved by the agency. Sponsors of clinical trials are permitted
to sell those devices distributed in the course of the study provided such costs
do not exceed recovery of the costs of manufacture, research, development and


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handling. The clinical trials must be conducted under the auspices of an
independent institutional review board ("IRB") established pursuant to FDA
regulations. If one or more IRBs determine that a clinical trial involves a
"nonsignificant risk" device, the sponsor of the study is not required to obtain
FDA approval of an IDE application before beginning the study. However, prior
IRB approval of the study is required and the study must be conducted in
compliance with the applicable FDA regulations, including, but not limited to,
FDA's regulations regarding the protection of human subjects.

         Generally, before a new device can be introduced into the market in the
United States, the manufacturer or distributor must obtain FDA clearance of a
pre-market notification ("510(k) notification") or approval of a PMA. If a
medical device manufacturer or distributor can establish that a device is
"substantially equivalent" to a legally marketed Class I or Class II device, or
to a preamendment Class III device for which the FDA has not called for PMAs,
the manufacturer or distributor may seek clearance from the FDA to market the
device by filing a 510(k) notification. The 510(k) notification may need to be
supported by appropriate data establishing the claim of substantial equivalence
to the satisfaction of the FDA. The FDA recently has been requiring a more
rigorous demonstration of substantial equivalence.

         Following submission of the 510(k) notification, the manufacturer or
distributor may not place the device into commercial distribution until an order
is issued by the FDA. At this time, the FDA typically responds to the submission
of a 510(k) notification within 90 to 200 days. An FDA order may declare that
the device is substantially equivalent to a legally marketed device and allow
the proposed device to be marketed in the United States. The FDA, however, may
determine that the proposed device is not substantially equivalent or require
further information, including clinical data, to make a determination regarding
substantial equivalence. Such determination or request for additional
information could delay market introduction of the product that is the subject
of the 510(k) notification. After extensive discussions with the FDA, it was
determined that the pre-market notification clearance path would not be
available for the Biofield Diagnostic System and therefore the Company proceeded
with clinical trials necessary to support a PMA application.

         If a manufacturer or distributor of medical devices cannot establish
that a proposed device is substantially equivalent to a legally marketed device,
as is the case with the Biofield Diagnostic System, the manufacturer or
distributor must seek pre-market approval of the proposed device through
submission of a PMA. A PMA must be supported by extensive data, including
preclinical and clinical trial data, as well as extensive literature to prove
the safety and effectiveness of the device. Following receipt of a PMA, if the
FDA determines that the application is sufficiently complete to permit a
substantive review, the agency will "file" the application. Under the FDC Act,
the FDA has 180 days to review a PMA, although the review of an application more
often occurs over a protracted time period, and generally takes approximately
two years or more from the filing date to complete.

         On November 8, 1994, the Biofield Diagnostic System was granted
Expedited Review status by the FDA. Expedited Review is a policy of the FDA
available to medical devices which satisfy one or more of the following
criteria:

         -        The device addresses a condition which is serious or
                  life-threatening or presents a risk of serious injury for
                  which no alternative legally marketed diagnostic/therapeutic
                  modality exists.

         -        The device addresses a condition which is life-threatening or
                  irreversibly debilitating, and provides for clinically
                  important earlier diagnosis or significant advances in safety
                  and/or effectiveness over existing alternatives.

         -        The device represents a clear clinically meaningful advantage
                  over existing technology, defined as having major (not
                  incremental) increased effectiveness or reduced risk compared
                  to existing technology.

         -        The availability of the device is otherwise in the best
                  interest of the public health.

         Those devices proceeding through the Expedited Review process may
receive a more timely approval, possibly as early as one year after filing.
However, there can be no assurance that the Expedited Review status that has
been granted for any medical device will be maintained or result in a more
expeditious approval, or approval at all. The FDA can revoke an Expedited Review
status at anytime that it determines that the criteria for such status are no
longer satisfied. Accordingly, although the FDA has advised the Company that,
upon resubmission, its PMA for the Biofield Diagnostic System will be reviewed
under the FDA's Expedited Review policy, there can be no assurance that such
Expedited Review status will be maintained or result in a more expeditious
approval, or approval at all.

         The PMA approval process can be expensive, uncertain and lengthy. A
number of devices for which pre-market approval has been sought have never been
approved for marketing. The review time is often significantly extended by the
FDA, which may require more information or clarification of information already
provided in the submission. During the review period, an advisory committee
likely will be convened by FDA to review and evaluate the application and
provide recommendations to the agency as


                                       7
<PAGE>   11
to whether the device should be approved. The FDA typically accords substantial
weight to the advisory committee's recommendation although the agency is not
bound by it. In addition, the FDA will inspect the manufacturing facility to
ensure compliance with the GMP regulations for medical devices prior to approval
of the PMA. If granted, the approval may include significant limitations on the
indicated uses for which a product may be marketed.

         On December 30, 1996, the Company submitted its PMA to the FDA for the
Biofield Diagnostic System. The initial PMA for the Biofield Diagnostic System
was based principally upon the results of the Company's U.S. Multi-center Study.
The PMA as submitted to the FDA included data from clinical trials on over 1,200
women tested at six medical institutions under the direction of physicians
involved in breast cancer diagnosis and treatment. On February 27, 1997, the FDA
informed the Company that its PMA had not been accepted for filing and requested
that the Company address deficiencies in the PMA before further consideration of
such PMA. Specifically, the FDA has not accepted the findings from the Company's
U.S. Multi-center Study as submitted in the PMA. The FDA stated that it had
concerns about the study design and, in particular, the selection of the
algorithm used on the supporting data set. The FDA advised the Company that it
must first select a final algorithm and then test it with an independent data
set. Further, the FDA stated that the design of the clinical trial must provide
data that supports the indications for use of the Biofield Diagnostic System
which should include the impact on patient management.

         Subsequent to the FDA's initial review, the Company has been in
discussions with the FDA regarding the design and protocol for an additional
clinical trial in support of a resubmission of the PMA. The Company has
voluntarily withdrawn the original submission and intends to resubmit its PMA
upon completion of additional testing and data analysis. Discussions with the
FDA aimed at establishing the design and protocol for the additional clinical
trial are ongoing. The clinical trial protocol may have a significant impact on
the time required to complete the clinical trial. Following these discussions
with the FDA, the Company will evaluate its options and finalize its plans for
proceeding. The Company currently anticipates starting the enrollment phase of
an additional clinical trial in support of a resubmission of the PMA during the
first half of 1998. The timing of patient enrollment in the additional clinical
trial will depend upon development of a clinical trial design and protocol
acceptable to the Company and the FDA, and the Company's receipt of approval to
conduct the additional clinical trial from the Institutional Review Boards of
the proposed study sites. The enrollment phase of the clinical trial is expected
to take several months or longer, followed by data analysis. The time necessary
to complete the additional clinical trial will depend upon numerous factors,
including the number of patients to be included in the study, the criteria for
inclusion of patients in the study, the ability to recruit and enroll patients
in the study and the time required to analyze the clinical results. The PMA, if
and when accepted for filing by the FDA, is currently designated for review
under the FDA's Expedited Review policy.

         Conducting additional clinical trials will require the expenditure of
substantial additional funds. Furthermore, there can be no assurance that
results obtained in any additional trials will be consistent with the results
obtained in the U.S. Multi-center Study or that any such results, or the
resubmitted PMA, will be accepted by the FDA.

         There can be no assurance that the Company will be able to obtain the
necessary FDA approval of its PMA to market the Biofield Diagnostic System, or
any other product that the Company may develop, on a timely basis, if at all.
Delays in receipt or failure to receive such approvals, the loss of previously
received approvals, or failure to comply with existing or future regulatory
requirements could have a material adverse effect on the Company's business,
financial condition, cash flows and results of operations.

         Currently, the Company is dependent on third-party companies to
manufacture its products for use in clinical trials and commercial distribution.
These third-party companies are required to register with the FDA as medical
device manufacturers. The third-party manufacturers are inspected by the FDA for
compliance with the Quality System Regulation ("QSR") (formerly the GMP
regulation), which sets forth certain procedural and documentation requirements
with respect to design, development, manufacturing and quality assurance
activities, and other applicable regulations. In addition, the third-party
manufacturers will be specifically inspected by the FDA before the agency will
approve a PMA for the Biofield Diagnostic System. There can be no assurance that
the third-party manufacturers on which the Company depends for the manufacture
of the Biofield Diagnostic System will be in compliance with the GMP regulations
at the time of the pre-approval inspection or will maintain such compliance.
Such failure could significantly delay FDA approval of the PMA for the Biofield
Diagnostic System or prevent the Company from marketing its devices once
approved. Any such action would have a material adverse effect on the Company's
business, financial condition, cash flows and results of operations.

         While the Company does not currently manufacture any of its products,
it may choose to do so in the future. Should the Company determine to
manufacture its products, the Company's manufacturing facilities would be
required to be registered with the FDA and would be subject to the current GMP
regulations. FDA approval would be required before the Company could begin
commercial distribution of medical devices from its own manufacturing
facilities.


                                       8
<PAGE>   12
         Any products manufactured or distributed by the Company pursuant to an
approved PMA are subject to pervasive and continuing regulation by the FDA
including record keeping requirements, reporting of adverse experience with the
use of the device, postmarket surveillance, postmarket registry and other
actions deemed necessary by the FDA. The FDA's regulations require agency
approval of a PMA supplement for certain changes if they affect the safety and
effectiveness of the device, including, but not limited to, new indications for
use; labeling changes; the use of a different facility to manufacture, process,
or package the device; changes in manufacturing methods or quality control
systems; and changes in performance or design specifications. Failure by the
Company to receive approval of a PMA supplement regarding the use of a different
manufacturing facility or any other change affecting the safety or effectiveness
of an approved device on a timely basis, or at all, would have a material
adverse effect on the Company's business, financial condition, cash flows and
results of operations.

         The Company is required to provide information to the FDA on deaths or
serious injuries alleged to have been associated with the use of its medical
devices, as well as product malfunctions that would likely cause or contribute
to death or serious injury if the malfunction were to recur in a similar device
marketed by the manufacturer. In addition, the FDA prohibits an approved device
from being marketed or promoted for unapproved uses. If the FDA believes that a
company is not in compliance with the law, it can initiate proceedings to detain
or seize products, issue a recall, enjoin future violations and assess civil and
criminal penalties against such company, its officers and its employees. Failure
to comply with the regulatory requirements could have a material adverse effect
on the Company's business, financial condition, cash flows and results of
operations.

         The advertising of most FDA-regulated products is subject to both FDA
and Federal Trade Commission jurisdiction. The Company also is subject to
regulation by the Occupational Safety and Health Administration and by other
governmental entities.

         Unapproved products subject to the PMA requirements must receive prior
FDA export approval in order to be marketed outside of the United States unless
they are approved for use by any member country of the European Union or certain
other countries, including Australia, Canada, Israel, Japan, New Zealand,
Switzerland and South Africa, in which case they can be exported to any country
provided that certain limited notification requirements are met. The Company has
received FDA approval to export the Biofield Diagnostic System to The
Netherlands. There can be no assurance that the Company will meet the FDA's
export requirements or receive FDA export approval to export the Biofield
Diagnostic System to other countries, in addition to The Netherlands, when such
approval is necessary, or that countries to which the devices are to be exported
will approve the devices for import. Failure of the Company to meet the FDA's
export requirements or obtain FDA export approval when required to do so, or to
obtain approval for import, could have a material adverse effect on the
Company's business, financial condition, cash flows and results of operations.

         The President recently signed into law the Food and Drug Administration
Modernization Act of 1997. This legislation makes changes to the device
provisions of the FDC Act and other provisions in the FDC Act affecting the
regulation of devices. Among other things, the changes will affect the premarket
approval process, and also will affect the FDA's investigational device
exemption process, data requirements and procedures relating to breakthrough
devices, tracking and postmarket surveillance, accredited third party review,
and the dissemination of off label information. The Company cannot predict how
or when these changes will be implemented or what effect the changes will have
on the regulation of the Company's products. There can be no assurance that the
new legislation will not impose additional costs or lengthen review times for
the Company's products.

         Sales of medical device products outside the United States are subject
to foreign regulatory requirements that vary widely from country to country. The
time required to obtain approvals required by foreign countries may be longer or
shorter than that required for FDA approval, and requirements for licensing may
differ from FDA requirements. Failure to comply with regulatory requirements
could have a material adverse effect on the Company's business, financial
condition, cash flows and results of operations.

         The current regulatory environment in Europe for medical devices
differs significantly from that in the United States. There is currently no
universally accepted definition of a medical device in Europe and there is no
common approach to medical device regulation among the various countries. There
are several different regulatory regimes operating within the different European
countries. Regulatory requirements for medical devices range from no regulations
in some countries to rigorous regulations approaching the requirements of the
FDA's regulations for Class III medical devices. Several countries require that
device safety be demonstrated prior to approval for commercialization. The
regulatory environment in certain European countries is expected to undergo
major changes as a result of the creation of medical device directives by the
European Union.


                                       9
<PAGE>   13
         In order to sell its products within the European Economic Area
following June 14, 1998, companies are required to achieve compliance with the
requirements of the Medical Devices Directive (the "MDD") and affix a "CE"
marking on their products to attest such compliance. To achieve this, the
Company's products must meet the Essential Requirements as defined under the MDD
relating to safety and performance of its products and the Company must
successfully undergo verification of its regulatory compliance ("conformity
assessment") by a Notified Body selected by the Company. The nature of such
assessment will depend on the regulatory class of the Company's products. The
Company also will have to comply with additional national requirements that are
beyond the scope of the MDD. Failure to comply with MDD requirements could have
a material adverse effect upon the Company's business, financial condition, cash
flows and results of operations.

         Regulations regarding the manufacture and sale of the Company's
products are subject to change. The Company cannot predict what impact, if any,
such changes might have on its business, financial condition, cash flows or
results of operations.

REIMBURSEMENT

         Suppliers of health care products and services are greatly affected by
Medicare, Medicaid and other government insurance programs, as well as by
private insurance reimbursement programs. Third party payors (Medicare,
Medicaid, private health insurance, health administration authorities in foreign
countries and other organizations) may affect the pricing or relative
attractiveness of the Company's products by regulating the maximum amount of
reimbursement provided for by such payors to the physicians and clinics
utilizing the Biofield Diagnostic System or the proposed Biofield screening
device or any other proposed products developed by the Company, or by taking the
position that such reimbursement is not available at all.

         The Company believes that the availability and level of third party
reimbursement may impact the decisions of physicians, clinics and hospitals to
purchase and use the Company's products and thereby affect the pricing of the
Company's products. In the United States, many patients are reimbursed for
mammograms in amounts which vary considerably from state to state. The Company's
strategy to obtain approval of payments to physicians using its products
includes (i) enlisting the assistance of its opinion leaders in making
presentations to health care administrators to inform them of the benefits of
the additional data provided by the Biofield diagnostic and screening
procedures, and of the potential pharmacoeconomic benefits resulting from the
use of the products, and (ii) working with professional organizations to foster
awareness and support for its products.

         Several states and the federal government are investigating a variety
of alternatives to reform the health care delivery system and reduce and control
health care spending. These reform efforts include proposals to limit spending
on health care items and services, limit coverage for new technology and limit
or control directly the price health care providers and drug and device
manufacturers may charge for their services and products. The scope and timing
of such reforms cannot be predicted, but if adopted and implemented, such
reforms could have a material adverse effect on the Company's business,
financial condition, cash flows and results of operations.

         Reimbursement for use of the Biofield Diagnostic System in
international markets will vary and be determined on a country-by-country basis.
The Company is pursuing efforts to obtain such reimbursement status in major
European markets. In certain countries, the Company's ability to achieve
significant market penetration may depend upon the availability of third party
governmental reimbursement.

         There can be no assurance as to either the United States or
international markets that third party reimbursement and coverage will be
available and adequate, that current reimbursement amounts for medical products
of a similar nature will not be decreased in the future or that future
legislation, regulation or reimbursement policies by third party payers will not
occur.

COMPETITION

         The medical device industry generally, and the cancer diagnostic and
screening segments in particular, are characterized by rapidly evolving
technology and intense competition. Other companies in the medical device
industry are marketing products that compete with the Biofield Diagnostic System
and may be developing, or could in the future attempt to develop, additional
products that are competitive with the Biofield Diagnostic System. Many of the
Company's competitors have substantially greater capital resources and name
recognition than the Company. Many of these companies also have substantially
greater expertise than the Company in research and development, manufacturing
and marketing and obtaining regulatory approvals. There can be no assurance that
the Company's competitors will not succeed in developing or marketing
technologies and products that are more effective than those developed or
marketed by the Company or that would render the Company's technology and
products obsolete or noncompetitive. Additionally, there can be no assurance
that the Company will be able to compete against such competitors and potential
competitors in terms of manufacturing, marketing and sales. Although the Company
believes that its products may


                                       10
<PAGE>   14
offer certain technological advantages over its competitors' currently-marketed
products, earlier entrants in the market for a diagnostic application often
obtain and maintain significant market share relative to later entrants.
Physicians using imaging equipment such as x-ray mammography equipment,
ultrasound or high frequency ultrasound systems, MRI systems, stereotactic
needle biopsy and thermography, diaphonography, electrical impedance and
transilluminational devices may not use the Biofield Diagnostic System or any
other products that the Company may develop. Currently, mammography is employed
widely and the Company's ability to sell the Biofield Diagnostic System to
medical facilities will, in part, be dependent on the Company's ability to
demonstrate the clinical utility of the Biofield Diagnostic System as an adjunct
to mammography and physical examination and its advantages over other available
diagnostic tests.

LICENSES AND OTHER AGREEMENTS

         The Company has a non-exclusive license from Biochron Corporation, a
non-affiliated corporation, under a U.S. patent entitled "Device and Method of
Detecting the Potential Level of the Electromagnetic Field of a Living
Organism." The license agreement provides for a 1% royalty on gross sales of any
covered devices until the patent expires in May 1999. The Company is party to a
royalty agreement with Teiresias, Inc. and its founder, who was formerly a
consultant to the Company. Pursuant to the agreement, Teiresias, Inc. provided
services to the Company for approximately five years in connection with the
original design and fabrication of prototype devices. This agreement obligates
the Company to pay royalties to Teiresias, Inc. on net sales, if any, of
depolarized, pre-gelled electrodes, subject to an aggregate limit of $2,500,000.
In addition, the Company has agreed to certain royalty arrangements with Mark L.
Faupel, Ph.D., its former Vice President, Research and Development. The Company
is obligated to pay certain royalties to Dr. Faupel based on sales of the
Biofield Diagnostic Device and sales of Biofield Diagnostic Sensors through 2005
or until such royalties reach $8,000,000, whichever comes first. The Company
also has agreed to certain royalty arrangements with David M. Long, Jr., M.D.,
Ph.D. and Abel Laboratories, Inc. The Company, Dr. Long and Abel Laboratories
have entered into a Patent Royalty Agreement obligating Abel Laboratories and
Dr. Long to assign to the Company all of their rights and interests in all
inventions and/or technology conceived and/or developed by either of them in
connection with performing services under a Laboratory Services Agreement. As
consideration therefor, the Company has agreed to pay Abel Laboratories
royalties on the net sales of products resulting from inventions, if any, that
become covered by a U.S. or foreign patent to up to a maximum of $2,000,000 per
invention. See Notes 4, 7 and 9 of Notes to Consolidated Financial Statements.

EMPLOYEES

         As of March 20, 1998, the Company had 35 employees. The Company
believes that its employee relations are good. None of the Company's employees
are covered by a collective bargaining agreement.

ITEM 2. PROPERTIES

         The Company's principal offices are located at 1225 Northmeadow
Parkway, Suite 120, Roswell, Georgia. Such offices are leased by the Company
under a forty month lease commencing December 1, 1997 for approximately 16,500
square feet of office space. Annual rent payments under the lease currently are
approximately $180,000, subject to certain annual escalations in each year
thereafter.

ITEM 3. LEGAL PROCEEDINGS

         The Company has no material pending legal proceedings.

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

         None

                                     PART II

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

         The Company's Common Stock, par value $.001 per share (the "Common
Stock"), commenced trading on the Nasdaq National Market tier of The Nasdaq
Stock Market on March 19, 1996 under the symbol BZET.

         The following table sets forth, for the periods indicated, the high and
low daily selling prices for the Company's Common Stock based on transaction
data as reported by the Nasdaq National Market:


                                       11
<PAGE>   15
<TABLE>
<CAPTION>
                  Year ended December 31, 1996                          High             Low
                  ----------------------------                          ----             ---
                  <S>                                                  <C>             <C>
                  First Quarter
                    (commencing March 19, 1996)..................      $11.125         $ 9.938
                  Second Quarter.................................       18.500          10.000
                  Third Quarter..................................       15.625           7.250
                  Fourth Quarter.................................       16.250           7.375

<CAPTION>
                  Year ended December 31, 1997                           High             Low
                  ----------------------------                           ----             ---
                  <S>                                                  <C>             <C>
                  First Quarter..................................      $17.500         $ 3.750
                  Second Quarter.................................        6.375           3.000
                  Third Quarter..................................        6.125           2.938
                  Fourth Quarter.................................        5.500           2.500
</TABLE>

         On March 20, 1998, the last reported closing sale price for the
Company's Common Stock, as reported by the Nasdaq National Market, was $3.25 per
share.

         As of March 20, 1998, there were approximately 191 holders of record of
the Common Stock. This number excludes individual stockholders holding stock
under nominee security position listings.

         The Company has not declared or paid any dividends since its inception,
and does not intend to pay any cash dividends in the foreseeable future. The
Company currently anticipates that it will retain all its earnings for use in
the operation and expansion of its business and, therefore, does not anticipate
that it will pay any cash dividends in the foreseeable future.

         On December 17, 1997, the Company consummated a private placement (the
"1997 Private Placement") of 2,867,670 shares of Common Stock to accredited
investors, yielding aggregate gross proceeds to the Company of $9,033,160. The
1997 Private Placement was made pursuant to the exemption from the registration
requirements of the Securities Act provided by Section 4(2) thereof and
Regulation D thereunder.

         Concurrent with the closing of the 1997 Private Placement, the Company
issued an aggregate of 643,639 shares of Common Stock in exchange for
outstanding warrants to purchase an aggregate of 1,574,930 shares of Common
Stock (the "Warrant Exchange"). Such warrants were issued in connection with the
Company's 1995 private placement of securities units. In order to participate in
the Warrant Exchange, warrant holders were required to invest in the 1997
Private Placement.

         In September 1997, the Company issued 25,000 shares of Common Stock to
a nonaffiliated third party as consideration for consulting services rendered to
the Company.  These shares were issued pursuant to the exemption from the
registration requirements of the Securities Act provided by Section 4(2)
thereof.

ITEM 6. SELECTED FINANCIAL DATA

         The following information has been summarized from the financial
statements included elsewhere herein and should be read in conjunction with such
financial statements, related notes thereto, and "Management's Discussion and
Analysis of Financial Condition and Results of Operations."




                                       12
<PAGE>   16
<TABLE>
<CAPTION>
                                                                                           Nine-Month
                                                                                          Period Ended    Year Ended
                                                      Years Ended December 31,            December 31,     March 31,
                                                      ------------------------            ------------    ----------
                                                 1997           1996           1995          1994(1)         1994
                                               --------       --------       --------       --------       --------
                                                               (In thousands, except per share data)
<S>                                            <C>            <C>            <C>            <C>            <C>
STATEMENT OF OPERATIONS DATA:
  Operating expenses:
    Research and development ..............    $  7,080       $  7,732       $  6,188       $  3,833       $  5,088
    Selling, general and administrative ...       3,565          3,135          2,920          1,230          1,885
                                               --------       --------       --------       --------       --------
       Total operating expenses ...........      10,645         10,867          9,108          5,063          6,973
                                               --------       --------       --------       --------       --------
    Interest income .......................         518            840            379            105             90
    Interest expense ......................          (4)            (9)           (11)            (1)           (17)
                                               --------       --------       --------       --------       --------
    Net other income ......................         514            831            368            104             73
                                               --------       --------       --------       --------       --------
  Loss before income taxes ................     (10,131)       (10,036)        (8,740)        (4,949)        (6,900)
  Provision for income taxes ..............         (20)            --             --             --             --
                                               --------       --------       --------       --------       --------
  Net loss ................................    $(10,151)      $(10,036)      $ (8,740)      $ (4,959)      $ (6,900)
                                               ========       ========       ========       ========       ========

  Net loss per share:
    Basic and diluted(2) ...................   $  (1.53)      $  (1.66)      $  (2.09)
                                               ========       ========       ========
  Weighted average shares
          outstanding:
    Basic and diluted(2) ...................      6,631          6,044          4,180
                                               ========       ========       ========
</TABLE>


<TABLE>
<CAPTION>
                                                                               December 31,
                                                          -----------------------------------------------------        March,
                                                                                                                      --------
                                                            1997           1996           1995           1994           1994
                                                          --------       --------       --------       --------       --------
                                                                                      (In thousands)
                                                                                      --------------
<S>                                                       <C>            <C>            <C>            <C>            <C>
BALANCE SHEET DATA:
   Cash, cash equivalents and short-term investments      $ 12,598       $ 13,939       $  6,271       $  1,966       $  5,700
   Working capital .................................        11,514         12,869          4,667          1,250          5,109
   Total assets ....................................        14,103         15,486          7,776          3,394          6,455
   Long-term liabilities ...........................            --             --             --             --             --
   Capital lease obligations less current portion ..            --              4             34             16             --
   Accumulated deficit .............................       (45,520)       (35,369)       (25,333)       (16,593)       (11,634)
   Total stockholders' equity ......................        12,747         14,092          6,053          2,617          5,613
</TABLE>


(1)      Effective December 31, 1994, the Company changed its fiscal year end
         from March 31 to December 31. Accordingly, the statement of operations
         data is presented for the transition period from April 1, 1994 to
         December 31, 1994.

(2)      In 1997, the Financial Accounting Standards Board issued Statement No.
         128, Earnings per Share. Statement 128 replaced the calculation of
         primary and fully diluted loss per share with basic and diluted loss
         per share. Unlike primary loss per share, basic loss per share excludes
         any dilutive effects of options, warrants and convertible securities.
         Diluted loss per share is very similar to the previously reported fully
         diluted loss per share. Additionally, in 1998 the Securities and
         Exchange Commission issued Staff Accounting Bulletin No. 98 ("SAB 98").
         SAB 98 removes the Company's need to consider common stock issued and
         stock options and warrants granted during the twelve month period
         preceding an initial public offering. All loss per share amounts for
         all periods have been presented and, where appropriate, restated to
         conform to the provisions of Statement No. 128 and SAB 98. See Note 2
         to Consolidated Financial Statements for an explanation of the method
         used to determine the number of shares to compute net loss per share.


                                       13
<PAGE>   17
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS

         The following discussion and analysis should be read in conjunction
with "Selected Financial Data" and the Company's Financial Statements, and Notes
thereto appearing elsewhere in this document.

OVERVIEW

         As a development stage company, the Company has incurred net losses
since inception through December 31, 1997 of approximately $45.5 million. The
Company expects operating losses will increase for at least the next several
years as total costs and expenses increase due principally to the FDA premarket
approval process for the Biofield Diagnostic System, marketing and manufacturing
expenses associated with the anticipated commercialization of the Biofield
Diagnostic System, as well as development of, and clinical trials for, the
proposed Biofield screening system and other research and development
activities.

         To date, the Company has not marketed, or generated revenues from the
commercialization of, any products. The Company's results may vary significantly
from period to period depending on several factors, such as the timing of
certain expenses and the progress of the premarket approval process for the
Biofield Diagnostic System, and the Company's research and development and
commercialization programs, all of which may be affected by the availability of
funds.

     RESULTS OF OPERATIONS

     COMPARISON OF TWELVE MONTHS ENDED DECEMBER 31, 1997 AND 1996.

         Research and development. Research and development expenses include the
costs of engineering, manufacturing and clinical trials and related activities
conducted in connection with required governmental and regulatory approvals for
the Biofield Diagnostic System, which consists of the Biofield Diagnostic Device
and Biofield Diagnostic Sensors, as well as expenses for the development of the
proposed Biofield screening system and preclinical research related to the
enhancement of the technology and its development for use in the detection of
other cancers. Research and development expenses decreased by 8% to $7,080,060
during 1997, compared to $7,732,249 during 1996. This decrease is primarily
attributable to a decrease in expenses incurred for product engineering services
related to the Biofield Diagnostic System and clinical development activities.
The decrease in research and development expenses during 1997 were partially
offset by increases in compensation and recruiting and relocation expenses
associated with hiring several new employees of the Company in the areas of
operations, research and development, regulatory and clinical affairs and
quality assurance, and consulting services related to regulatory and quality
assurance and product development activities. The Company expects research and
development expenses to increase in the future as the Company conducts
additional clinical trials and continues to allocate resources to implement and
maintain regulatory programs.

         Selling, general and administrative expenses increased by 14% to
$3,565,397 during 1997, compared to $3,135,219 during 1996. This increase was
primarily attributable to an increase in expenses incurred in connection with
the Company's European marketing activities and increased costs associated with
being a public company, such as public/investor relations, legal and accounting
fees and additional premiums for directors' and officers' liability insurance.
The increase in selling, general and administrative expenses during 1997 were
partially offset by decreases in expenses incurred for compensation, recruiting
and relocation expenses associated with the Company's former President and Chief
Executive Officer and former U.S. sales and marketing employees. The Company
expects selling, general and administrative expenses to increase in the future
as the Company prepares for commercialization of the Biofield Diagnostic System
in Europe and other international markets.

         The Company's interest income decreased by 38% to $517,690 during 1997,
compared to $840,104 during 1996. The decrease in interest income during 1997
was primarily due to lower average invested cash, cash equivalent and short-term
investment balances compared to those during 1996.

         As a result of the foregoing, net loss was $10,151,040, or $1.53 per
share during 1997, compared to $10,036,090, or $1.66 per share during 1996. As a
result of the issuance of shares in connection with the Company's private
placement and concurrent warrant exchange in December 1997 and its initial
public offering in March 1996, the Company had an average of 6.6 million shares
outstanding for the year ended December 31, 1997 compared to 6.0 million shares
outstanding for the year ended December 31, 1996.

     COMPARISON OF TWELVE MONTHS ENDED DECEMBER 31, 1996 AND 1995.

         Research and development. Research and development expenses increased
by 25% to $7,732,249 during 1996, compared to $6,188,255 during 1995. This
increase was primarily attributable to an increase in compensation, recruiting
and relocation


                                       14
<PAGE>   18
expenses due to an increase in research and development personnel from an
average of 18 full-time equivalent employees in 1995 to an average of 26
full-time equivalent employees in 1996, consulting expenses related to
third-party reimbursement issues, and preclinical research and clinical
development activities.

         Selling, general and administrative. Selling, general and
administrative expenses increased by 7% to $3,135,219 during 1996, compared to
$2,919,775 during 1995. This increase was primarily attributable to an increase
in compensation and recruiting and relocation expenses due to the hiring of a
new President and Chief Executive Officer in December 1995, a new Vice President
of Marketing and Sales in June 1996 and a new Director of Marketing and Sales in
August 1996, and increases in expenses incurred in connection with marketing
activities, investor relations and additional premiums for directors' and
officers' liability insurance. The increase in selling, general and
administrative expenses during 1996, as discussed above, was partially offset by
a charge in 1995 for severance benefits pursuant to an agreement between the
Company and its former President and a charge in 1995 for a contractual
settlement between the Company and its current Vice Chairman and Chief Executive
Officer. See Note 7 of Notes to Consolidated Financial Statements.

         Interest income. The Company's interest income increased by 122% to
$840,104 during 1996, compared to $378,996 during 1995. This increase was
primarily due to higher average invested cash, cash equivalent and short-term
investment balances compared to those of the previous period.

         As a result of the foregoing, net loss was $10,036,090, or $1.66 per
share during 1996, compared to $8,739,860, or $2.09 per share during 1995. As a
result of the issuance of shares in connection with the Company's initial public
offering in March 1996, the Company had an average of 6.0 million shares
outstanding for the year ended December 31, 1996 compared to 4.2 million shares
outstanding for the year ended December 31, 1995.

     LIQUIDITY AND CAPITAL RESOURCES

         The Company has financed its operations since inception primarily by
the issuance of equity securities with aggregate net proceeds of approximately
$55,519,000 and interest income of approximately $1,998,000 from investments.
The Company received net proceeds of approximately $4.3 million from the private
placement offering of Common Stock and approximately $9.4 million in net
proceeds from a private placement offering of Series A Convertible Preferred
Stock, $.001 par value per share, during fiscal years ended March 31, 1993 and
1994, respectively. In September 1994, the Company received net proceeds of
approximately $1.9 million from a private placement offering of Series B
Convertible Preferred Stock, $.001 par value per share. During the year ended
December 31, 1995, the Company received net proceeds of approximately $12.0
million from a private placement offering of securities units including Series C
Convertible Preferred Stock, $.001 par value per share. In March 1996, the
Company received net proceeds of approximately $18.0 million from the sale of
1,819,000 shares of the Company's Common Stock in its initial public offering.
In December 1997, the Company received net proceeds of approximately $8.4
million from the sale of 2,867,670 shares of the Company's Common Stock in the
1997 Private Placement. Concurrent with the Closing of the 1997 Private
Placement, the Company issued an aggregate of 643,639 shares of Common Stock in
exchange for outstanding warrants to purchase an aggregate of 1,574,930 shares
of Common Stock. Such warrants were issued in connection with the Company's 1995
private placement of securities units. See Note 8 of Notes to Consolidated
Financial Statements.

         As of December 31, 1997, the Company had total cash, cash equivalents
and short-term investments of $12,597,960, of which $12,050,344 was invested in
investment grade corporate obligations, money market funds, shares of liquid
(auction-market) preferred stock and bonds, and certificates of deposit. As of
December 31, 1997, the Company had working capital of $11,513,773 compared to
$12,868,842 at December 31, 1996. The decrease in working capital was the result
of approximately $9.9 million of cash used primarily to finance the Company's
operations and capital requirements during 1997 offset by approximately $8.4
million in net proceeds from the Company's 1997 Private Placement and
approximately $262,000 in proceeds received upon the exercise of stock options
and warrants. The Company does not expect to generate a positive internal cash
flow for at least several years due to the expected increase in spending related
to the premarket approval process for the Biofield Diagnostic System, research
and development and the expected costs of commercializing the Biofield
Diagnostic System in Europe and, pending FDA approval, in the United States.

         From the Company's inception through December 31, 1997, the Company
purchased approximately $2.4 million of property and equipment.


                                       15
<PAGE>   19
         The Company had no outstanding bank loans as of December 31, 1997. In
July 1996, the Company obtained a commitment from an unrelated third party to
finance up to $2.0 million of capital equipment pursuant to a sale-leaseback
agreement. The Company has not utilized such lease financing commitment to date.
See Note 7 of Notes to Consolidated Financial Statements.

         The Company's fixed commitments, including salaries and fees for
current employees and consultants, rent, payments under license agreements and
other contractual commitments are substantial and are likely to increase as
additional agreements are entered into and additional personnel are retained.
The Company will require substantial additional funds for its research and
development programs, preclinical and clinical testing, operating expenses,
regulatory processes, and manufacturing and marketing programs. The Company's
future capital requirements will depend on many factors, including the
following: the progress of its research and development projects; the progress
of preclinical and clinical testing; the time and cost involved in obtaining
regulatory approvals; the cost of filing, prosecuting, defending and enforcing
any patent claims and other intellectual property rights; competing
technological and market developments; changes and developments in the Company's
existing collaborative, licensing and other relationships and the terms of any
new collaborative, licensing and other arrangements that the Company may
establish; and the development of commercialization activities and arrangements.
The Company believes that its available cash, cash equivalents and investment
securities and investment income should be sufficient to fund the Company's
operations at least through the end of calendar year 1998. The Company does not
expect to generate a positive internal cash flow for at least several years due
to expected increases in capital expenditures, working capital and ongoing
losses, including the expected cost of commercializing the Biofield Diagnostic
System. The Company will need to arrange additional equity or debt financing for
the future operation of its business. There can be no assurance that such
financing can be obtained or, if it is obtained, that the terms thereof will be
acceptable. The Company plans to continue its policy of investing excess funds
in short-term, investment grade corporate obligations, money market funds,
shares of liquid (auction-market) preferred stock and bonds, and certificates of
deposit. See "Cautionary Statements Regarding Forward-Looking
Statements--Uncertainties as to Future Profitability."

         At December 31, 1997, the Company has tax net operating loss
carryforwards of approximately $42 million which expire in years 2002 through
2011. The utilization of the federal net operating loss carryforwards of
approximately $15.6 million, included in the above amount, will be subject to an
annual limitation of approximately $1,140,000 million per year due to ownership
changes in 1992, 1995 and 1997 pursuant to the stock ownership change provision
of the Tax Reform Act of 1986. Future changes in ownership may result in
additional limitations.

         Recently Issued Accounting Standards may affect the Company's Financial
Statements in the future. See Note 2 of Notes to Consolidated Financial
Statements.

     YEAR 2000

         The Year 2000 Issue is the result of computer programs being written
using two digits rather than four to define the applicable year. Any of the
Company's computer programs that have time-sensitive software may recognize a
date using "00" as the year 1900 rather than the year 2000. This could result in
a system failure or miscalculations causing disruptions of operations,
including, among other things, a temporary inability to process transactions,
send invoices, or engage in similar normal business activities.

         Upon review of the Company's information systems, the Company has
determined based upon currently available information that the Year 2000 Issue
should not pose significant operational problems for its existing computer
systems. The Company has initiated formal communications with all of its
significant suppliers to determine the extent to which the Company's interface
systems are vulnerable to those third parties' failure to remedy their own Year
2000 Issue. There can be no guarantee that the systems of other companies on
which the Company's systems rely will be converted in a timely manner. Such
failure of suppliers to remedy potential Year 2000 isues would have an adverse
effect on the Company's systems.

CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING STATEMENTS

         Statements in this Annual Report on Form 10-K under the captions
"Business" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations," as well as in the Company's press releases or oral
statements that may be made by the Company or by officers, directors or
employees of the Company acting on the Company's behalf, that are not historical
fact constitute "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. Such forward-looking statements
involve known and unknown risks, uncertainties and other factors that could
cause the actual results of the Company to be materially different from the
historical results or from any results expressed or implied by such
forward-looking statements. Factors that might cause such a difference include,
without limitation, the information set forth below.


                                       16
<PAGE>   20
In addition to statements which explicitly describe such risks and
uncertainties, statements labeled with the terms "believes", "belief",
"expects", "plans" or "anticipates" should be considered uncertain and
forward-looking. All cautionary statements made in this Report should be read as
being applicable to all related forward-looking statements wherever they appear
in this Report.

         Uncertainty of FDA Approval for the Biofield Diagnostic System. On
December 30, 1996, the Company submitted its PMA to the FDA for the Biofield
Diagnostic System. The initial PMA for the Biofield Diagnostic System was based
principally upon the results of the Company's U.S. Multi-center Study. The PMA
as submitted to the FDA included data from clinical trials of over 1,200 women
tested at six medical institutions under the direction of physicians involved in
breast cancer diagnosis and treatment. On February 27, 1997, the FDA informed
the Company that its PMA had not been accepted for filing and requested that the
Company address deficiencies in the PMA before further consideration of such
PMA. Specifically, the FDA has not accepted the findings from the Company's U.S.
Multi-center Study as submitted in the PMA. The FDA stated that it had concerns
about the study design and, in particular, the selection of the algorithm used
on the supporting data set. The FDA advised the Company that it must first
select a final algorithm and then test it with an independent data set. Further,
the FDA stated that the design of the clinical trial must provide data that
supports the indications for use of the Biofield Diagnostic System which should
include the impact on patient management.

         Subsequent to the FDA's initial review, the Company has been in
discussions with the FDA regarding the design and protocol for an additional
clinical trial in support of a resubmission of the PMA. The Company has
voluntarily withdrawn the original submission and intends to resubmit its PMA
upon completion of proposed additional testing and data analysis. Discussions
with the FDA aimed at establishing the design and protocol for the additional
clinical trial are ongoing. The clinical trial protocol may have a significant
impact on the time required to complete the clinical trial. Following these
discussions with the FDA, the Company will evaluate its options and finalize its
plans for proceeding. The Company currently anticipates starting the enrollment
phase of an additional clinical trial in support of an amendment to or
resubmission of the PMA during the first half of 1998. The timing of patient
enrollment in the additional clinical trial will depend upon development of a
clinical trial design and protocol acceptable to the Company and the FDA, and
the Company's receipt of approval to conduct the additional clinical trial from
the Institutional Review Boards of the proposed study sites. The enrollment
phase of the clinical trial is expected to take several months or longer,
followed by data analysis. The time necessary to complete the additional
clinical trial will depend upon numerous factors, including the number of
patients to be included in the study, the criteria for inclusion of patients in
the study, the ability to recruit and enroll patients in the study and the time
required to analyze the clinical results. The PMA, if and when accepted for
filing by the FDA, is currently designated for review under the FDA's Expedited
Review policy. There can be no assurance, however, that such Expedited Review
status will be maintained or result in a more expeditious approval, or approval
at all.

         Conducting additional clinical trials will require the expenditure of
substantial additional funds. Furthermore, there can be no assurance that
results obtained in any additional trials will be consistent with the results
obtained in the U.S. Multi-center Study or that any such results, or the
resubmitted PMA, will be accepted by the FDA. There can be no assurance that the
FDA or other regulatory approvals for the Biofield Diagnostic System will be
granted on a timely basis, or at all. Failure to obtain FDA approval to market
the Biofield Diagnostic System would have a material adverse effect on the
Company's business, financial condition, cash flows and results of operations.

         Limited Operating History; Continuing Operating Losses. The Company has
a limited history of operations. Since its inception in October 1987, the
Company has engaged principally in the development of the Biofield Diagnostic
System, which has not been approved for sale in the United States. Consequently,
the Company has little experience in manufacturing, marketing and selling its
products. The Company currently has no source of operating revenue and has
incurred net operating losses since its inception. At December 31, 1997, the
Company had an accumulated deficit of $45,519,920. Such losses have resulted
principally from costs incurred in research and development and clinical trials
and from general and administrative costs associated with the Company's
operations. The Company expects operating losses to increase for at least the
next several years due principally to the anticipated expenses associated with
the premarket approval process for the Biofield Diagnostic System, the proposed
commercialization of the Biofield Diagnostic System, development of, and
clinical trials for, the proposed Biofield screening system and other research
and development activities.

         Uncertainties as to Future Profitability. The Company's ability to
achieve profitability will depend in part on its ability to obtain regulatory
approvals for the Biofield Diagnostic System and any other proposed products,
and to develop the capacity to manufacture and market any approved products
either by itself or in collaboration with others. There can be no assurance if
or when the Company will receive required regulatory approvals for the
development and commercial manufacturing and marketing of the Biofield
Diagnostic System or any other proposed products, or achieve profitability.
Accordingly, the extent of future losses and the time required to achieve
profitability are highly uncertain.


                                       17
<PAGE>   21
         Early Stage of Product Development. The Company's proposed products,
other than the Biofield Diagnostic System, are at an early stage of development
and the Biofield Diagnostic System must be approved by the FDA before it can be
commercially marketed in the United States. There can be no assurance that any
of the Company's proposed products will be found to be safe and effective, meet
applicable regulatory standards or receive necessary regulatory clearance, or if
safe and effective, can be developed into commercial products, manufactured on a
large scale or be economical to market. Nor can there be any assurance that the
Company's proposed products will achieve or sustain market acceptance. In the
event necessary regulatory approvals are obtained for the Biofield Diagnostic
System, there can be no assurance that the Company will be successful in
establishing commercial operations, including gaining market acceptance of the
Biofield Diagnostic System and implementing commercial-scale manufacturing and
sales and marketing programs. There is, therefore, substantial risk that the
Company's product development and commercialization efforts will not prove to be
successful.

         Dependence on a Single Product. Although the Company is in the process
of developing additional products based on its core technology, including an
enhancement of the Biofield Diagnostic System for use on asymptomatic women,
none of such applications is expected to result in a commercial product for at
least several years, if at all. Consequently, pending its approval for
commercial distribution in the United States, the Biofield Diagnostic System
would account for substantially all of the Company's revenues for the
foreseeable future. Failure to gain regulatory approvals or market acceptance
for the Biofield Diagnostic System would have a material adverse effect on the
Company's business, financial condition, cash flows and results of operations.

         Dependence on Market Acceptance. There can be no assurance that
physicians or the medical community in general will accept and utilize the
Biofield Diagnostic System or any other products developed by the Company. The
extent that, and rate at which, the Biofield Diagnostic System achieves market
acceptance and penetration will depend on many variables including, but not
limited to, the establishment and demonstration in the medical community of the
clinical safety, efficacy and cost-effectiveness of the Biofield Diagnostic
System, the advantages of the Biofield Diagnostic System over existing
technology and cancer detection methods (including x-ray mammography, ultrasound
or high frequency ultrasound, MRI, stereotactic needle biopsy and thermography,
diaphonography, electrical impedance and transillumational devices), third-party
reimbursement practices and the Company's manufacturing, quality control,
marketing and sales efforts. There can be no assurance that the medical
community and third-party payors will accept the Company's unique technology.
Similar risks will confront the proposed Biofield screening system and any other
products developed by the Company in the future. Failure of the Company's
products to gain market acceptance would have a material adverse effect on the
Company's business, financial condition, cash flows and results of operations.

         Limited Marketing and Sales Experience. The Company has limited
internal marketing and sales resources and personnel. In order to market the
Biofield Diagnostic System or any other products it may develop, the Company
will have to develop a marketing and sales force with technical expertise and
distribution capabilities. There can be no assurance that the Company will be
able to establish sales and distribution capabilities or that the Company will
be successful in gaining market acceptance for any products it may develop.
There can be no assurance that the Company will be able to recruit and retain
skilled sales, marketing, service or support personnel, that agreements with
distributors will be available on terms commercially reasonable to the Company,
or at all, or that the Company's marketing and sales efforts will be successful.
Failure to successfully establish a marketing and sales organization, whether
directly or through third parties, would have a material adverse effect on the
Company's business, financial condition, cash flows and results of operations.
The Company intends to pursue one or more distribution arrangements in the
United States, Europe and Asia with strategic marketing partners who have
established marketing capabilities. There can be no assurance that the Company,
either on its own or through arrangements with others, will be able to enter
into such arrangements on acceptable terms, if at all. To the extent that the
Company arranges with third parties to market its products, the success of such
products may depend on the efforts of such third parties. There can be no
assurance that any of the Company's proposed marketing schedules or plans can or
will be met.

         Limited Manufacturing History. The Company does not have any
manufacturing or production facilities or experience in manufacturing or
contracting for the manufacturing of its proposed products in the volumes that
will be necessary for the Company to achieve significant commercial sales in the
event it obtains regulatory approval to market its products. While the Company
does not currently manufacture any of its products, it may do so in the future.
The Company has no experience in the manufacture of medical products for
clinical trials or commercial purposes. Should the Company manufacture its
products, the Company's manufacturing facilities would be subject to the full
range of current Good Manufacturing Practices ("GMP") regulations and compliance
with the QSR and similar risks of delay or difficulty in manufacturing and the
Company would require substantial additional capital to establish such
manufacturing facilities. In addition, there can be no assurance that the
Company would be able to manufacture any such products successfully or
cost-effectively.


                                       18
<PAGE>   22
         Dependence on Third Parties. The Company has used certain third parties
to manufacture and deliver the components of the Biofield Diagnostic System and
the proposed Biofield screening system used in clinical studies, and intends to
continue to use third parties to manufacture and deliver such products and any
other products which the Company may seek to develop. Such third parties must
adhere to the GMP regulations and the QSR enforced by the FDA through its
facilities inspection program and such third-parties' facilities must pass a
plant inspection before the FDA will grant premarket approval of the Company's
products. There can be no assurance that the third-party manufacturers on which
the Company depends for the manufacture of the Biofield Diagnostic System will
be in compliance with the GMP regulations and the QSR at the time of the
pre-approval inspection or will maintain such compliance. Such failure could
significantly delay FDA approval of the PMA application for the Biofield
Diagnostic System, and such delay would have a material adverse effect on the
Company's business, financial condition, cash flows and results of operations.

         The qualification of additional or replacement suppliers for certain
components of the Biofield Diagnostic System or services is a lengthy process.
For certain services and components the Company currently relies on single
suppliers. If the Company encounters delays or difficulties with its third-party
suppliers in producing, packaging or distributing components of the Biofield
Diagnostic System, market introduction and subsequent sales would be adversely
affected. The Company also may have to rely on alternative sources of supply. In
such case, there can be no assurance that the Company will be able to enter into
alternative supply arrangements at commercially acceptable rates, if at all. If
the Company is unable to obtain or retain qualified third-party manufacturers on
commercially acceptable terms, it may not be able to commercialize its products
as planned. The Company's dependence upon third parties for the manufacture of
its products may adversely affect the Company's profit margins and its ability
to develop and deliver its products on a timely and competitive basis.

         Competition. The medical device industry generally, and the cancer
diagnostic and screening segments in particular, are characterized by rapidly
evolving technology and intense competition. Other companies in the medical
device industry are marketing products that compete with the Biofield Diagnostic
System and may be developing, or could in the future attempt to develop,
additional products that are competitive with the Biofield Diagnostic System.
Many of the Company's competitors have substantially greater capital resources
and name recognition than the Company. Many of these companies also have
substantially greater expertise than the Company in research and development,
manufacturing and marketing and obtaining regulatory approvals. There can be no
assurance that the Company's competitors will not succeed in developing or
marketing technologies and products that are more effective than those developed
or marketed by the Company or that would render the Company's technology and
products obsolete or noncompetitive. Additionally, there can be no assurance
that the Company will be able to compete against such competitors and potential
competitors in terms of manufacturing, marketing and sales. Although the Company
believes that its products may offer certain technological advantages over its
competitors' currently-marketed products, earlier entrants in the market for a
diagnostic application often obtain and maintain significant market share
relative to later entrants. Physicians using imaging equipment such as x-ray
mammography equipment, ultrasound or high frequency ultrasound systems, MRI
systems, stereotactic needle biopsy and thermography, diaphonography, electrical
impedance and transilluminational devices may not use the Biofield Diagnostic
System or any other products that the Company may develop. Currently,
mammography is employed widely and the Company's ability to sell the Biofield
Diagnostic System to medical facilities will, in part, be dependent on the
Company's ability to demonstrate the clinical utility of the Biofield Diagnostic
System as an adjunct to mammography and physical examination and its advantages
over other available diagnostic tests.

         Risk of Technological Obsolescence. Methods for the detection of cancer
are subject to rapid technological innovation and there can be no assurance that
technological changes will not render the Company's proposed products obsolete.
There can be no assurance that the development of new types of diagnostic
medical equipment or technology will not have a material adverse effect on the
marketability of the Biofield Diagnostic System or any other products developed
by the Company. Commercial availability of such products could render the
Company's products obsolete, which would have a material adverse effect on the
Company's business, financial condition, cash flows and results of operations.

         Potential Reliance on International Sales. The Company intends to
commence commercial sales of the Biofield Diagnostic System in Europe prior to
commencing commercial sales in the United States, where sales cannot occur
unless and until the Company receives premarket approval from the FDA. Thus,
until the Company receives approval from the FDA to market the Biofield
Diagnostic System, as to which there can be no assurance, the Company's
revenues, if any, will be derived from international sales. A significant
portion of the Company's revenues, therefore, may be subject to the risks
associated with international sales, including economic or political
instability, shipping delays, fluctuations in foreign currency exchange rates,
foreign regulatory requirements and various trade restrictions, all of which
could have a significant impact on the Company's ability to deliver products on
a competitive and timely basis. Future imposition of, or significant increases
in the level of, customs duties, export quotas or other trade restrictions could
have a material adverse effect on the Company's business, financial
condition,cash flows and results of operations. The regulation of medical
devices, particularly in Europe, continues to develop and there can be no
assurance that new laws or regulations will not have an adverse effect on the
Company.


                                       19
<PAGE>   23
         Government Regulation; No Assurance of Regulatory Approvals. The
manufacture and sale of medical devices, including the Biofield Diagnostic
System, the proposed Biofield screening system, and any other products that may
be developed by the Company are subject to extensive regulation by numerous
governmental authorities in the United States, principally the FDA and
corresponding state agencies, and in other countries. In the United States, the
Company's products are regulated as medical devices and are subject to the FDA's
premarket clearance or approval requirements. Securing FDA clearances and
approvals may require the submission of extensive clinical data and supporting
information to the FDA. To obtain FDA approval of an application for premarket
approval, the premarket approval application must demonstrate that the subject
device has clinical utility, meaning that the device has a beneficial
therapeutic effect, or that as a diagnostic tool, it provides information that
measurably contributes to a diagnosis of a disease or condition. The results of
the Company's U.S. Multi-center Study have not been accepted by the FDA based
upon its initial review of the PMA. The Company, therefore, plans to submit data
from additional clinical testing in connection with a resubmission of the PMA.
The timing of patient enrollment in the additional clinical trial will depend
upon development of a clinical trial design and protocol acceptable to the
Company and the FDA, and the Company's receipt of approval to conduct the
additional clinical trial from the Institutional Review Boards of the proposed
study sites. As a result of this additional testing, the Company anticipates
further delays, which may be significant, in the approval process for the
Biofield Diagnostic System. The process of obtaining FDA and other required
regulatory approvals is lengthy, expensive and uncertain and frequently requires
from one to several years from the date of the FDA submission, if premarket
approval is obtained at all. Following the filing of a resubmission of the PMA
for the Biofield Diagnostic System, the FDA may require more information or
clarification of information already provided as part of the PMA. During the
review period, an advisory panel will likely be convened by the FDA to review
and evaluate the PMA and provide recommendations to the FDA as to whether the
PMA should be approved. Although the FDA has granted Expedited Review status to
the Biofield Diagnostic System, there can be no assurance that such status will
be maintained or result in timely approval of the Biofield Diagnostic System, if
at all. Furthermore, an approval, if granted, may include significant
limitations on the indicated uses for which the Biofield Diagnostic System may
be marketed. Failure to obtain FDA approval to market the Biofield Diagnostic
System would have a material adverse effect on the Company's business, financial
condition, cash flows and results of operations.

         Sales of medical devices outside of the United States are subject to
international regulatory requirements that vary from country to country. The
time required to obtain approval for sale internationally may be longer or
shorter than that required for FDA approval and the requirements may differ. In
addition, in order to sell its products within the European Economic Area
following June 14, 1998, companies are required to achieve compliance with the
requirements of the Medical Devices Directive and affix a "CE" marking on their
products to attest such compliance. The Company has not obtained such
certifications, and there can be no assurance that it will be able to do so in a
timely manner, or at all.

         In addition, unapproved products subject to the PMA requirements must
receive prior FDA export approval in order to be marketed outside of the United
States unless they are approved for use by any member country of the European
Union or certain other countries, including Australia, Canada, Israel, Japan,
New Zealand, Switzerland and South Africa, in which case they can be exported to
any country provided that certain limited notification requirements are met.
There can be no assurance that the Company will meet the FDA's export
requirements or receive FDA export approval when such approval is necessary, or
that countries to which the devices are to be exported will approve the devices
for import. Failure of the Company to meet the FDA's export requirements or
obtain FDA export approval when required to do so, or to obtain approval for
import, could have a material adverse effect on the Company's business,
financial condition, cash flows and results of operations.

         Regulatory approvals, if granted, may include significant limitations
on the indicated uses for which the product may be marketed. In addition, to
obtain such approvals, the FDA and certain foreign regulatory authorities may
impose numerous other requirements with which medical device manufacturers must
comply. FDA enforcement policy strictly prohibits the marketing of approved
medical devices for unapproved uses. Product approvals could be withdrawn for
failure to comply with regulatory standards or the occurrence of unforeseen
problems following initial marketing. The third-party manufacturers upon which
the Company depends to manufacture its products are required to adhere to
applicable FDA regulations regarding GMPs and similar regulations in other
countries, which include testing, control and documentation requirements.
Ongoing compliance with GMP regulations and other applicable regulatory
requirements will be monitored by periodic inspection by the FDA and by
comparable agencies in other countries. Failure to comply with applicable
regulatory requirements, including marketing or promoting products for
unapproved use, could result in, among other things, warning letters, fines,
injunctions, civil penalties, recall or seizure of products, total or partial
suspension of production, refusal of the government to grant premarket clearance
or approval for devices, withdrawal of approvals and criminal prosecution.
Changes in existing regulations or adoption of new governmental regulations or
policies could prevent or delay regulatory approval of the Company's products.
Certain material changes to medical devices also are subject to FDA review and
clearance or approval.


                                       20
<PAGE>   24
         The President recently signed into law the Food and Drug Administration
Modernization Act of 1997. This legislation makes changes to the device
provisions of the FDC Act and other provisions in the FDC Act affecting the
regulation of devices. Among other things, the changes will affect the premarket
approval process, and also will affect the FDA's investigational device
exemption process, data requirements and procedures relating to breakthrough
devices, tracking and postmarket surveillance, accredited third party review,
and the dissemination of off label information. The Company cannot predict how
or when these changes will be implemented or what effect the changes will have
on the regulation of the Company's products. There can be no assurance that the
new legislation will not impose additional costs or lengthen review times for
the Company's products.

         There can be no assurance that the Company will be able to obtain, on a
timely basis, or at all, FDA approval of the PMA for the Biofield Diagnostic
System, foreign marketing clearances for the Biofield Diagnostic System or
regulatory approvals or clearances for other products that the Company may
develop and delays in receipt of or failure to obtain such approvals or
clearances, the loss of previously obtained approvals, or failure to comply with
existing or future regulatory requirements would have a material adverse effect
on the Company's business, financial condition, cash flows and results of
operations.

         Limitations on Third-Party Reimbursement. In the United States,
suppliers of health care products and services are greatly affected by Medicare,
Medicaid and other government insurance programs, as well as by private
insurance reimbursement programs. Third-party payors (Medicare, Medicaid,
private health insurance companies and other organizations) may affect the
pricing or relative attractiveness of the Company's products by regulating the
level of reimbursement provided by such payors to the physicians and clinics
utilizing the Biofield Diagnostic System or any other products that the Company
may develop or by refusing reimbursement. If examinations utilizing the
Company's products were not reimbursed under these programs, the Company's
ability to sell its products may be materially adversely affected. There can be
no assurance that third-party payors will provide reimbursement for use of the
Biofield Diagnostic System or any other products that the Company may develop.

         In international markets, reimbursement by private third-party medical
insurance providers, including governmental insurers and independent providers,
varies from country to country. In addition, such third-party medical insurance
providers may require additional information or clinical data prior to providing
reimbursement for a product. In certain countries, the Company's ability to
achieve significant market penetration may depend upon the availability of
third-party and governmental reimbursement. Revenues and profitability of
medical device companies may be affected by the continuing efforts of
governmental and third-party payors to contain or reduce the costs of health
care through various means.

         Uncertainties Regarding Health Care Reform. Several states and the U.S.
government are investigating a variety of alternatives to reform the health care
delivery system and further reduce and control health care spending. These
reform efforts include proposals to limit spending on health care items and
services, limit coverage for new technology and limit or control the prices
health care providers and drug and device manufacturers may charge for their
services and products, respectively. If adopted and implemented, such reforms
could have a material adverse effect on the Company's business, financial
condition, cash flows and results of operations.

         Uncertain Ability to Protect Patents and Proprietary Technology and
Information. The Company's ability to compete effectively in the medical
products industry will depend on its success in protecting its proprietary
technology, both in the United States and abroad. The patent positions of
medical products companies generally involve complex legal and factual
questions. The Company's proprietary products and technology are the subject of
eleven U.S. patents owned by the Company, and additional applications pending
with the United States Patent and Trademark Office ("PTO"). The Company has
filed, and intends to continue to file, patent applications in certain foreign
jurisdictions covering the patent claims that are the subject of U.S. patents
and patent applications. There can be no assurance that the PTO or foreign
jurisdictions will grant the Company's pending patent applications or that the
Company will obtain any patents or other protection for which it has applied.
There can be no assurance that patents issued to or licensed by or to the
Company will not be challenged, invalidated or circumvented, or that the rights
granted thereunder will provide any competitive advantage. The Company could
incur substantial costs in defending any patent infringement suits or in
asserting any patent rights, including those granted by third parties.

         Although the Company has entered into confidentiality and invention
agreements with its employees and consultants, there can be no assurance that
such agreements will be honored or that the Company will be able to protect its
rights to its unpatented trade secrets and know-how effectively. Moreover, there
can be no assurance that others will not independently develop substantially
equivalent proprietary information and techniques or otherwise gain access to
the Company's trade secrets and know-how. In addition, the Company may be
required to obtain licenses to patents or other proprietary rights from third
parties. There can be no assurance that any licenses required under any patents
or proprietary rights would be made available on acceptable terms, if at all. If
the Company does not obtain required licenses, it could encounter delays in
product development or find that the development, manufacture or sale of
products requiring such licenses could be foreclosed. Additionally, the Company
may, from time to time, support and collaborate in research conducted by
universities and governmental research organizations. There can


                                       21
<PAGE>   25
be no assurance that the Company will have or be able to acquire exclusive
rights to the inventions or technical information derived from such
collaborations or that disputes will not arise with respect to rights in
derivative or related research programs conducted by the Company or such
collaborators.

         Uncertain Ability to Meet Capital Needs. The Company will require
substantial additional funds for its research and development programs,
preclinical and clinical testing, operating expenses, regulatory processes and
manufacturing and marketing programs. The Company's future capital requirements
will depend on many factors, including the following: the progress of its
research and development projects; the progress of preclinical and clinical
testing; the time and cost involved in obtaining regulatory approvals; the cost
of filing, prosecuting, defending and enforcing any patent claims and other
intellectual property rights; competing technological and market developments;
changes and developments in the Company's existing collaborative, licensing and
other relationships and the terms of any new collaborative, licensing and other
arrangements that the Company may establish; and the development of
commercialization activities and arrangements. Moreover, the Company's fixed
commitments, including salaries and fees for current employees and consultants,
rent, payments under license agreements and other contractual commitments are
substantial and are likely to increase as additional agreements are entered into
and additional personnel are retained. The Company does not expect to generate a
positive internal cash flow for at least several years due to expected increases
in capital expenditures, working capital needs and ongoing losses, including the
expected cost of commercializing the Biofield Diagnostic System. However, the
Company's cash requirements may vary materially from those now planned due to
the progress of research and development programs, results of clinical testing,
relationships with strategic partners, if any, changes in the focus and
direction of the Company's research and development programs, competitive and
technological advances, the FDA and foreign regulatory processes and other
factors.

         The Company will need additional capital to fund its future operations
through public or private financings or collaborative licensing or other
arrangements with corporate partners. If additional funds are raised by issuing
equity securities, further dilution to existing stockholders will result and
future investors may be granted rights superior to those of existing
stockholders. There can be no assurance, however, that additional financing will
be available when needed, or if available, will be available on acceptable
terms. Insufficient funds may prevent the Company from implementing its business
strategy or may require the Company to delay, scale back or eliminate certain of
its research and product development programs or to license to third parties
rights to commercialize products or technologies that the Company would
otherwise seek to develop itself.

         Dependence on Qualified Personnel. Due to the specialized scientific
nature of the Company's business, the Company is highly dependent upon its
ability to attract and retain qualified scientific, technical and managerial
personnel. The loss of the services of existing personnel as well as the failure
to recruit key scientific, technical and managerial personnel in a timely manner
would be detrimental to the Company's research and development programs and to
its business. The Company's anticipated growth and expansion into areas and
activities requiring additional expertise, such as marketing, will require the
addition of new management personnel. Competition for qualified personnel is
intense and there can be no assurance that the Company will be able to continue
to attract and retain qualified personnel necessary for the development of its
business.

         Potential Product Liability. The Company's business exposes it to
potential product liability risks which are inherent in the testing,
manufacturing and marketing of cancer detection products. Significant
litigation, not involving the Company, has occurred in the past based on
allegations of false negative diagnoses of cancer. While the Biofield Diagnostic
System does not purport to diagnose any patient, there can be no assurance that
the Company will not be subjected to future claims and potential liability.
While the Company maintains insurance against product liability and defense
costs, there can be no assurance that claims against the Company arising with
respect to its products will be successfully defended or that the insurance
carried by the Company will be sufficient to cover liabilities arising from such
claims. A successful claim against the Company in excess of the Company's
insurance coverage could have a material adverse effect on the Company.
Furthermore, there can be no assurance that the Company will be able to continue
to obtain or maintain product liability insurance on acceptable terms.

         Potential for Environmental Liability. A portion of the Company's
manufacturing processes involves the controlled use of potentially hazardous
materials. The Company may in the future become subject to stringent federal,
state and local laws, rules, regulations and policies governing the use,
generation, manufacture, storage, air emission, effluent discharge, handling and
disposal of such materials. There can be no assurance that the Company will not
incur significant future costs to comply with environmental laws, rules,
regulations and policies, or that the business, financial position, cash flows
or results of operations of the Company will not be materially and adversely
affected by current or future environmental laws, rules, regulations and
policies or by any releases or discharges of hazardous materials.

         Availability of Preferred Stock for Issuance. In addition to its
authorized shares of Common Stock, the Company's Fourth Amended and Restated
Certificate of Incorporation, as amended, authorizes the issuance of up to
2,000,000 shares of preferred stock. The Board of Directors of the Company may
at any time determine to issue shares of preferred stock with the rights and


                                       22
<PAGE>   26
preferences to be set by the Board of Directors in its sole discretion. The
rights and preferences of any such preferred stock may be superior to those of
the Common Stock and thus may adversely affect the rights of the holders of
Common Stock.

         Possible Anti-Takeover Effects of Delaware Law. The Company is subject
to the provisions of Section 203 of the General Corporation Law of the State of
Delaware. In general, Section 203 prohibits a publicly held Delaware corporation
from engaging in a "business combination" with an "interested stockholder" for a
period of three years after the date of the transaction in which the person
becomes an interested stockholder, unless the business combination is approved
in a prescribed manner or unless the interested stockholder acquires at least
85% of the corporation's voting stock (excluding shares held by certain
designated stockholders) in the transaction in which it becomes an interested
stockholder. A "business combination" includes mergers, asset sales and other
transactions resulting in a financial benefit to the interested stockholder.
Subject to certain exceptions, an "interested stockholder" is a person who,
together with affiliates and associates, owns, or within the previous three
years did own, 15% or more of the corporation's voting stock. This provision of
the Delaware law could delay and make more difficult a business combination even
if the business combination would be beneficial, in the short term, to the
interests of the Company's stockholders and also could limit the price certain
investors might be willing to pay in the future for shares of Common Stock.

         No Dividends. The Company has never declared or paid any cash dividends
on its capital stock and does not intend to pay any cash dividends in the
foreseeable future. The Company currently anticipates that it will retain all
its earnings for use in the operation and expansion of its business and,
therefore, does not anticipate that it will pay any cash dividends in the
foreseeable future.

         Possible Volatility of Stock Price. The price of the Company's Common
Stock has fluctuated substantially since its initial public offering on March
19, 1996. See "Market Price for Common Stock." The market price of the shares of
the Common Stock, like that of the common stock of many other medical device
companies, is likely to continue to be highly volatile. Factors such as the
timing and results of clinical trials by the Company or its competitors,
governmental regulation, healthcare legislation, developments in patent or other
proprietary rights of the Company or its competitors, including litigation,
fluctuations in the Company's operating results, and market conditions for
medical device company stocks and life science stocks in general, could have a
significant impact on the future price of the Common Stock.

         Control by Management and Principal Stockholders. After giving effect
to the consummation of the 1997 Private Placement and the Warrant Exchange, at
December 31, 1997, officers and directors of the Company and stockholders owning
more than five percent of the Common Stock, together with their affiliates,
beneficially own approximately 59.9% of the outstanding Common Stock. Officers
and directors of the Company and stockholders owning more than five percent of
the Common Stock are able to elect all members of the Company's Board of
Directors and determine corporate actions. Such concentration of ownership may
have the effect of delaying, deferring or preventing a change in control of the
Company.

         Shares Eligible for Future Sale; Outstanding Registration Rights. At
December 31, 1997, the Company had 10,029,609 shares of Common Stock
outstanding, and approximately 3,430,201 of such shares were freely tradable by
the holders thereof without limitations under the Securities Act. The Company
issued 2,867,670 shares of Common Stock in the 1997 Private Placement, and has
registered for resale 2,797,829 of such shares pursuant to the Company's
registration statement on Form S-3 filed with the Securities and Exchange
Commission. The Company issued 643,639 shares of Common Stock in connection with
the Warrant Exchange, and has registered for resale 79,570 of such shares
pursuant to the Company's registration statement on Form S-3 filed with the
Securities and Exchange Commission. All such shares so registered may be resold
by the holders thereof without restriction as set forth in the Company's
registration statement on Form S-3 filed with the Securities and Exchange
Commission, subject, in the case of the Warrant Exchange shares, to "lock-up"
agreements described below. Of the other shares of Common Stock outstanding as
of December 31, 1997, 2,051,696 shares of Common Stock were held by officers,
directors and other stockholders who may be deemed to be "affiliates" of the
Company and who therefore are generally subject to the volume and other
limitations of Rule 144 promulgated under the Securities Act ("Rule 144"). The
holders of all or substantially all of such 2,051,696 shares have registration
rights with respect to their shares, and none of such shares of Common Stock
have been registered for resale pursuant to the Company's registration statement
on Form S-3 filed with the Securities and Exchange Commission. The holders of
all or substantially all of such 2,051,696 shares have signed "lock-up"
agreements pursuant to which they agreed not to sell or offer to sell any of
their shares of Common Stock without the prior written consent of the Hambrecht
& Quist, LLC, the placement agent for the 1997 Private Placement, during the
period from the closing of the 1997 Private Placement to and including 90 days
from February 9, 1998. In addition, as of December 31, 1997, 1,036,403 shares of
Common Stock were held by certain other stockholders who have signed "lock-up"
agreements as described above. Upon expiration of the 90 day "lock-up" period,
such 1,036,403 shares will be freely tradable by the holders thereof provided
that such holders do not become "affiliates" of the Company. Furthermore, the
holders of the shares issued in connection with the Warrant Exchange have signed
"lock-up" agreements pursuant to which they agreed not to sell or offer to sell
such shares without the prior written consent of the


                                       23
<PAGE>   27
Company for a period of one year from the date of issuance of such shares. In
addition to any sales of such shares which may be made pursuant to the Company's
registration statement on Form S-3 filed with the Securities and Exchange
Commission, after stockholders have held their shares for a period of one year,
they will be eligible to sell their shares pursuant to the volume and other
limitations of Rule 144, and those who are not affiliates of the Company will be
able to sell such shares without restriction under Rule 144 after they have held
such shares for two years. Sales of substantial amounts of Common Stock in the
public market, or the perception that such sales could occur, could adversely
affect the trading price of the Common Stock and could impair the Company's
future ability to raise capital through an offering of its equity securities.

         Outstanding Options, Warrants and Other Rights. At December 31, 1997,
options to purchase a total of 1,924,403 shares of Common Stock were outstanding
with a weighted average exercise price of $5.61 per share, of which options to
purchase 1,361,643 shares of Common Stock were exercisable. In addition, as of
such date, an additional 572,189 shares of Common Stock were available for
future option grants under the Company's stock option plans. As of such date,
warrants to purchase a total of 396,762 shares of Common Stock were outstanding
with a weighted average exercise price of $9.83 per share. An aggregate of
1,126,572 shares of Common Stock issuable upon the exercise of options and
warrants held by officers, directors and certain other stockholders of the
Company are subject to "lock-up agreements." To the extent that the
aforementioned options or warrants are exercised, the interests of the Company's
stockholders would be diluted. Moreover, as long as such options and warrants
are outstanding, the terms upon which the Company will be able to obtain
additional equity capital may be adversely affected since the holders of the
outstanding options and warrants and rights can be expected to exercise them, to
the extent they are able to, at a time when the Company would, in all
likelihood, be able to obtain any needed capital on terms more favorable to the
Company than those provided in the options and warrants. The Company has
registered or will register for sale under the Securities Act the shares of
Common Stock included in its stock option plans, shares of Common Stock subject
to outstanding stock options granted outside of such plans, and shares of Common
Stock issuable upon the exercise of certain warrants.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

         The information in response to this item is set forth in the Financial
Statements beginning on page F-1 of this report on Form 10-K.

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

         None.

                                    PART III

ITEM 10, 11, 12 AND 13

         The information called for by items 10, 11, 12 and 13 is hereby
incorporated by reference from the Company's definitive proxy statement to be
filed pursuant to Regulation 14A for the 1998 Annual Meeting of Shareholders.

                                    PART IV

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

(a)      Documents filed as a part of this Form 10-K:

         (1)      Financial Statements.

                  The following Financial Statements of Biofield Corp. and
                  report of independent public accountants relating thereto are
                  filed with this report on Form 10-K:

                           Consolidated Balance Sheets as of December 31, 1997
                           and 1996

                           Consolidated Statements of Operations for the years
                           ended December 31, 1997, 1996, 1995, and for the
                           period October 16, 1987 (Date of Inception) through
                           December 31, 1997

                           Consolidated Statement of Changes in Stockholders'
                           Equity for the period October 16, 1987 (Date of
                           Inception) through December 31, 1997


                                       24
<PAGE>   28
                           Consolidated Statements of Cash Flows for the years
                           ended December 31, 1997, 1996, 1995, and for the
                           period October 16, 1987 (Date of Inception) through
                           December 31, 1997

                           Notes to Consolidated Financial Statements

         (2)      Financial Statement Schedules.

                  Schedules not listed above have been omitted because the
                  information required to be set forth therein is not applicable
                  or is shown in the Financial Statements or notes thereto.

         (3)      Exhibits.

                  3.1      -- Fourth Amended and Restated Certificate of
                              Incorporation, as amended.(1)

                  3.2      -- Bylaws.(1)

                  10.1     -- Form of Warrant Purchase Agreement between the
                              Company and Certain Selected Broker/Dealers in
                              connection with the 1992 Financing.(2)

                  10.2     -- Series A Preferred Stock Purchase Agreement by and
                              among Biofield and the purchasers of Series A
                              Preferred Stock, dated as of November 5, 1993.(2)

                  10.3     -- First Amendment and Waiver to Series A Preferred
                              Stock Purchase Agreement, dated as of February 21,
                              1994.(2)

                  10.4     -- Second Amendment and Waiver to Series A Preferred
                              Stock Purchase Agreement, dated as of February 28,
                              1995.(2)

                  10.5     -- Third Amendment and Waiver to Series A Preferred
                              Stock Purchase Agreement, dated as of April 20,
                              1995.(2)

                  10.6     -- Fourth Amendment and Waiver to Series A Preferred
                              Stock Purchase Agreement, dated as of December 1,
                              1995.(2)

                  10.7     -- Form of Warrant Purchase Agreement between the
                              Company and Oppenheimer & Co., Inc., dated as of
                              November 5, 1993.(2)

                  10.8     -- Registration Rights Agreement by and among
                              Biofield and the purchasers of Series B Preferred
                              Stock, dated as of September 16, 1994.(2)

                  10.9     -- Warrant Purchase Agreement between the Company and
                              Craig & Associates, Inc., dated as of September
                              16, 1994.(2)

                  10.10    -- Preferred Stock and Warrant Purchase Agreement by
                              and among Biofield and the purchasers of
                              Securities Units, dated as of March 3, 1995.(2)

                  10.11    -- Amendment to the Preferred Stock and Warrant
                              Purchase Agreement by and among Biofield and the
                              purchasers of Securities Units, dated as of April
                              20, 1995.(2)

                  10.12    -- Registration Rights Agreement by and among
                              Biofield and the purchasers of Securities Units,
                              dated as of March 3, 1995.(2)

                  10.13    -- Amendment to Registration Rights Agreement by and
                              among Biofield and the purchasers of Securities
                              Units, dated as of April 20, 1995. (2)

                  10.14    -- Form of Warrant Purchase Agreement between the
                              Company and Musket Research Associates, Inc.,
                              dated as of March 3, 1995.(2)

                  10.15    -- Registration Rights Agreement between the Company
                              and Bruce Allen Bach, M.D., Ph.D., dated as of
                              February 21, 1993.(2)

                  10.16    -- Registration Rights Agreement between the Company
                              and Mark L. Faupel, Ph.D., dated as of April 22,
                              1993.(2)

                  10.17    -- Registration Rights Agreement between the Company
                              and Michael R. Gavenchak, dated as of April 22,
                              1993.(2)


                                       25
<PAGE>   29
                  10.18    -- Registration Rights Agreement between the Company
                              and C. Leonard Gordon, dated as of April 22,
                              1993.(2)

                  10.19    -- Registration Rights Agreement between the Company
                              and Martin H. Lindenberg, dated as of April 22,
                              1993.(2)

                  10.20    -- Registration Rights Agreement between the Company
                              and John D. Stephens, dated as of April 22,
                              1993.(2)

                  10.21    -- Registration Rights Agreement between the Company
                              and Robert E. Yocher, dated as of June 4, 1993.(2)

                  10.22    -- Registration Rights Agreement between the Company
                              and Kenneth W. Anstey, dated as of December 1,
                              1995.(2)

                  10.23    -- Form of Stock Purchase Option Agreement between
                              the Company and Abel Laboratories, Inc., dated as
                              of June 1, 1992.(2)

                  10.24    -- Patent Royalty Agreement between Company and Abel
                              Laboratories, Inc., dated as of June 1, 1992.(2)

                  10.25    -- Registration Rights Agreement by and among the
                              Company and Abel Laboratories, Inc., dated as of
                              April 22, 1993.(2)

                  10.26    -- Master Laboratory Services Agreement between the
                              Company and Abel Laboratories, Inc., dated as of
                              January 1, 1994.(2)

                  10.27    -- Settlement Agreement and Mutual Release between
                              the Company and Biochron Corporation, dated as of
                              June 30, 1990.(2)

                  10.28    -- Agreement between the Company, Teiresias Inc. and
                              Steven Hahn, dated as of December 22, 1992.(2)

                  10.29    -- Preproduction Manufacturing Agreement between the
                              Company and SeaMED Corporation, dated as of
                              October 4, 1993.(2)

                  10.30    -- Consulting Agreement between the Company and
                              Richard J. Davies, M.D., dated as of January 1,
                              1994.(2)

                  10.31    -- Employment Agreement between the Company and Mark
                              L. Faupel, Ph.D., dated as of October 1, 1992.(2)

                  10.32    -- Addendum to Employment Agreement between the
                              Company and Mark L. Faupel, Ph.D., dated as of
                              March 12, 1993.(2)

                              Addendum to Employment Agreement between the
                              Company and Mark L. Faupel, Ph.D., dated as of
                              April 22, 1993.(2)

                  10.34    -- Addendum to Employment Agreement between the
                              Company and Mark L. Faupel, Ph.D., dated as of
                              December 9, 1993.(2)

                  10.35    -- Amended and Restated Employment Agreement between
                              the Company and Michael R. Gavenchak, dated as of
                              October 1, 1992.(2)

                  10.36    -- Employment Agreement between the Company and
                              Robert Yocher, dated as of June 4, 1993.(2)

                  10.37    -- Addendum to Employment Agreement between the
                              Company and Robert Yocher, dated as of December 9,
                              1993.(2)

                  10.38    -- Employment Agreement between the Company and
                              Kenneth W. Anstey, dated as of November 10,
                              1995.(2)

                  10.39    -- Agreement between the Company and D. Carl Long,
                              dated as of December 1, 1995.(2)


                                       26
<PAGE>   30
                  10.40    -- Severance Agreement and General Release between
                              the Company and Bruce Allen Bach, M.D., Ph.D.,
                              dated as of December 20, 1995.(2)

                  10.41    -- Lease for principal office space in Roswell,
                              Georgia, between North Meadow Associates Joint
                              Venture and the Company, dated as of March 15,
                              1994.(2)

                  10.42    -- Second Amendment to Lease Agreement for principal
                              office space in Roswell, Georgia, between Weeks
                              Realty, L.P. and the Company, dated November 25,
                              1997.(*)

                  10.43    -- Biofield Corp. 1992 Stock Incentive Plan.(2)

                  10.44    -- Biofield Corp. 1996 Stock Option Plan, as
                              amended.(*)

                  10.45    -- Biofield Corp. 1996 Stock Option Plan for
                              Non-Employee Directors.(2)

                  10.46    -- Manufacturing Supply Agreement between Biofield
                              and SeaMED Corporation, dated as of October 29,
                              1996.(1)(3)

                  10.47    -- Master Equipment Lease Agreement between Biofield
                              and Financing for Science International, Inc.,
                              dated as of July 11, 1996.(1)

                  10.48    -- Form of Stock Option Agreement between the Company
                              and each of Peter D. Gadsby, Robert M. Johnson and
                              Todd J. Polk.(*)

                  10.49    -- Form of Registration Rights Agreement by and among
                              Biofield Corp. and the investors in the Company's
                              private placement of Common Stock, dated as of
                              December 17, 1997.(4)

                  10.50    -- Form of Registration Rights Agreement dated as of
                              September 4, 1997, between the Company and the
                              Compass Group International Incorporated.(4)

                  10.51    -- Letter Agreement dated August 8, 1997 between the
                              Company and Robert M. Johnson.(*)

                  21.1     -- List of Subsidiaries of the Company.(1)

                  23.1     -- Consent of Deloitte & Touche LLP.(*)

                  27       -- Financial Data Schedule (for SEC use only).(*)

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

                  (*)      Filed herewith.

                  (1)      Incorporated by reference to the Company's Annual
                           Report on Form 10-K for the fiscal year ended
                           December 31, 1996.

                  (2)      Incorporated by reference to the Company's
                           Registration Statement on Form S-1 (Registration No.
                           333-00796) declared effective on March 19, 1996.

                  (3)      Confidential material omitted and filed separately
                           with the SEC.

                  (4)      Incorporated by reference to the Company's
                           Registration Statement on Form S-3 (Registration No.
                           333-43701) declared effective on February 9, 1998.

(b)      Reports on Form 8-K

         The Company filed a Form 8-K, dated October 28, 1997, under Item 5,
Other Events. There were no financial statements filed in conjunction with such
8-K.


                                       27
<PAGE>   31
                                   SIGNATURES

         Pursuant to the requirements of Section 13 or 15(d) of the Securities
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.

BIOFIELD CORP.

By: /s/ D. Carl Long
    -----------------------------
    D. Carl Long, Chief Executive Officer,                        March 25, 1998
    President and Director
    (Principal Executive Officer)


         Pursuant to the requirements of the Securities Act of 1934, this report
has been signed by the following persons on behalf of the registrant and on the
dates indicated:

<TABLE>
<CAPTION>
     SIGNATURE                               TITLE                                  DATE
     ---------                               -----                                  ----
<S>                                 <C>                                          <C>
  /s/ D. Carl Long
------------------------------
     D. Carl Long                   Chief Executive Officer, President           March 25, 1998
                                    and Director (Principal Executive Officer)


  /s/ Timothy G. Roche
------------------------------
     Timothy G. Roche               Vice President, Finance                      March 25, 1998
                                    (Principal Financial and
                                    Accounting Officer)


  /s/ C. Leonard Gordon
------------------------------
     C. Leonard Gordon              Director                                     March 25, 1998


  /s/ Richard J. Davies, M.D.
------------------------------
     Richard J. Davies, M.D.        Director                                     March 25, 1998


  /s/ Joseph H. Gleberman
------------------------------
     Joseph H. Gleberman            Director                                     March 25, 1998


  /s/ Harvey Horowitz
------------------------------
     Harvey Horowitz                Director                                     March 25, 1998
</TABLE>




                                       28
<PAGE>   32
                                 BIOFIELD CORP.
                          (A DEVELOPMENT STAGE COMPANY)
                          INDEX TO FINANCIAL STATEMENTS


<TABLE>
<CAPTION>
                                                                                     Page
                                                                                     ----
<S>                                                                                  <C>
AUDITED FINANCIAL STATEMENTS

        Independent Auditors' Report............................................     F-2

        Consolidated Balance Sheets as of December 31, 1997 and 1996............     F-3

        Consolidated Statements of Operations for the years ended
        December 31, 1997, 1996, 1995 and for the period
        October 16, 1987 (Date of Inception) through December 31, 1997..........     F-4

        Consolidated Statements of Stockholders' Equity for the period
        October 16, 1987 (Date of Inception) through December 31, 1997..........     F-5

        Consolidated Statements of Cash Flows for the years ended
        December 31, 1997, 1996, 1995 and for the period
        October 16, 1987 (Date of Inception) through December 31, 1997..........     F-8

        Notes to Consolidated Financial Statements..............................     F-10
</TABLE>


                                      F-1

<PAGE>   33


                          INDEPENDENT AUDITORS' REPORT


Board of Directors and Shareholders
Biofield Corp.:

We have audited the accompanying consolidated balance sheets of Biofield Corp.
(a development stage company) (the "Company") as of December 31, 1997 and 1996
and the related consolidated statements of operations, stockholders' equity, and
cash flows for each of the three years in the period ended December 31, 1997 and
for the period October 16, 1987 (date of inception) through December 31, 1997.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.

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

In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company at December 31, 1997
and 1996 and the results of its operations and its cash flows for each of the
three years in the period ended December 31, 1997, and for the period October
16, 1987 (date of inception) through December 31, 1997, in conformity with
generally accepted accounting principles.


As discussed in Note 11 to the Consolidated Financial Statements, the Company is
in the development stage as of December 31, 1997.


DELOITTE & TOUCHE LLP

Atlanta, Georgia
March 18, 1998


                                       F-2


<PAGE>   34

                                 BIOFIELD CORP.
                          (A DEVELOPMENT STAGE COMPANY)
                           CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                            December 31, 1997    December 31, 1996
                                                                            -----------------    -----------------
<S>                                                                            <C>                  <C>
ASSETS
CURRENT ASSETS:
    Cash and cash equivalents .............................................    $  8,768,699         $  7,369,973
    Short-term investments ................................................       3,829,261            6,569,406
    Other current assets ..................................................         271,324              319,370
                                                                               ------------         ------------
      Total current assets ................................................      12,869,284           14,258,749
PROPERTY AND EQUIPMENT - Net ..............................................         503,118              604,246
OTHER ASSETS ..............................................................         101,585              124,361
PATENT AND PATENT APPLICATION COSTS - Net .................................         628,634              498,837
                                                                               ------------         ------------
TOTAL .....................................................................    $ 14,102,621         $ 15,486,193
                                                                               ============         ============

LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
    Accounts payable ......................................................    $    626,750         $    450,917
    Due to affiliate ......................................................         179,815                   --
    Accrued expenses ......................................................         546,288              909,741
    Capitalized lease obligations .........................................           2,658               29,249
                                                                               ------------         ------------
      Total current liabilities ...........................................       1,355,511            1,389,907
CAPITALIZED LEASE OBLIGATIONS .............................................              --                4,399
                                                                               ------------         ------------
      Total liabilities ...................................................       1,355,511            1,394,306
                                                                               ------------         ------------

COMMITMENTS AND CONTINGENCIES (Note 7)

STOCKHOLDERS' EQUITY:
  Preferred stock, $.001 par value; authorized 2,000,000 shares;
      no shares issued ....................................................              --                   --
  Series A Convertible preferred stock, $.001 par value; authorized
      2,350,000 shares; no shares outstanding .............................              --                   --
  Series B Convertible preferred stock, $.001 par value; authorized
      500,000 shares; no shares outstanding ...............................              --                   --
  Series C Convertible preferred stock, $.001 par value; authorized
      4,450,000 securities units; no shares outstanding ...................              --
  Series D Convertible preferred stock, $.001 par value; authorized
      3,000,000 shares; no shares issued ..................................              --                   --
  Common Stock, $.001 par value; authorized 25,000,000 shares;
      outstanding 10,029,609 and 6,433,095 shares, respectively ...........          10,030                6,433
  Additional paid-in capital ..............................................      58,255,667           49,454,334
  Accumulated deficit during development stage ............................     (45,519,920)         (35,368,880)
  Foreign currency translation adjustment .................................           1,333                   --
                                                                               ------------         ------------
      Total stockholders' equity ..........................................      12,747,110           14,091,887
                                                                               ------------         ------------
TOTAL .....................................................................    $ 14,102,621         $ 15,486,193
                                                                               ============         ============
</TABLE>


                 See notes to consolidated financial statements


                                      F-3

<PAGE>   35


                                 BIOFIELD CORP.
                          (A DEVELOPMENT STAGE COMPANY)
                     CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>

                                                                                                                Period October 16,
                                                                     For the years ended December 31,              1987 (Date of
                                                      ---------------------------------------------------       Inception) through
                                                                                                                   December 31,
                                                           1997                1996               1995                 1997
                                                      ------------        ------------        -----------         -------------
<S>                                                   <C>                 <C>                 <C>                 <C>
OPERATING EXPENSES:
   Research and development ......................    $  7,080,060        $  7,732,249        $ 6,188,255         $  32,786,746
   Selling, general and administrative ...........       3,565,397           3,135,219          2,919,775            14,263,578
                                                      ------------        ------------        -----------         -------------
       Total operating expenses ..................      10,645,457          10,867,468          9,108,030            47,050,324
                                                      ------------        ------------        -----------         -------------

OTHER INCOME (EXPENSE):
   Interest income ...............................         517,690             840,104            378,996             1,997,718
   Interest expense ..............................          (3,524)             (8,726)           (10,826)             (447,565)
                                                      ------------        ------------        -----------         -------------
       Net other income ..........................         514,166             831,378            368,170             1,550,153
                                                      ------------        ------------        -----------         -------------
LOSS BEFORE INCOME TAXES .........................     (10,131,291)        (10,036,090)        (8,739,860)          (45,500,171)
PROVISION FOR INCOME TAXES .......................         (19,749)                 --                 --               (19,749)
                                                      ------------        ------------        -----------         -------------
NET LOSS .........................................    $(10,151,040)       $(10,036,090)       $(8,739,860)        $ (45,519,920)
                                                      ============        ============        ===========         =============
NET LOSS PER SHARE:
   Basic and Diluted .............................    $      (1.53)       $      (1.66)       $     (2.09)
                                                      ============        ============        ===========

WEIGHTED AVERAGE SHARES
OUTSTANDING:
   Basic and Diluted .............................       6,630,787           6,044,233          4,180,249
                                                      ============        ============        ===========

</TABLE>


                 See notes to consolidated financial statements

                                      F-4


<PAGE>   36
                                 BIOFIELD CORP.
                         (A DEVELOPMENT STAGE COMPANY)
                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
         OCTOBER 16, 1987 (DATE OF INCEPTION) THROUGH DECEMBER 31, 1997
<TABLE>
<CAPTION>

                                                             Series A                   Series B                Series C
                                                          Preferred Stock            Preferred Stock       Preferred Units
                                                       ---------------------        -----------------      ---------------
                                                       Shares         Amount        Shares     Amount      Units    Amount
                                                       ------         ------        ------     ------      -----    ------
<S>                                                    <C>            <C>           <C>        <C>         <C>      <C>
Issuance of stock, October 16, 1987
   (date of inception) ($.16 per share, net)                -         $    -             -     $    -          -    $    -
Issuance of stock in connection with
   patent acquisition ($.001 per share).....                -              -             -          -          -         -
Net loss, October 16, 1987 to
   March 31, 1988...........................                -              -             -          -          -         -
                                                       ------         ------        ------     ------      -----    ------
BALANCE AT MARCH 31, 1988                                   -              -             -          -          -         -
Net loss....................................                -              -             -          -          -         -
                                                       ------         ------        ------     ------      -----    ------
BALANCE AT MARCH 31, 1989                                   -              -             -          -          -         -
Net loss....................................                -              -             -          -          -         -
                                                       ------         ------        ------     ------       ----    ------
BALANCE AT MARCH 31, 1990                                   -              -             -          -          -         -
Acquisition of 235,294 shares of
   treasury stock ($.001 per share).........                -              -             -          -          -         -
Net loss....................................                -              -             -          -          -         -
                                                       ------         ------        ------     ------       ----    ------
BALANCE AT MARCH 31, 1991                                   -              -             -          -          -         -
Retirement of treasury stock................                -              -             -          -          -         -
Issuance of stock in exchange for
   stockholder debt ($2.90 per share).......                -              -             -          -          -         -
Sale of stock ($.82 per share, net).........                -              -             -          -          -         -
Amortization of deferred compensation ......                -              -             -          -          -         -
Net loss....................................                -              -             -          -          -         -
                                                       ------         ------        ------     ------      -----    ------
BALANCE AT MARCH 31, 1992                                   -              -             -          -          -         -
Sale of stock in connection with private
   placement ($7.67 per share, net).........                -              -             -          -          -         -
Exercise of stock options...................                -              -             -          -          -         -
Amortization of deferred compensation.......                -              -             -          -          -         -
Change in par value of common stock
   from $.0001 to $.001.....................                -              -             -          -          -         -
Net loss....................................                -              -             -          -          -         -
                                                       ------         ------        ------     ------      -----    ------
BALANCE AT MARCH 31, 1993
   (carried forward)........................                -         $    -             -     $    -          -    $    -
                                                       ------         ------        ------     ------      -----    ------


<CAPTION>
                                                                 Additional                 Foreign Currency
                                                 Common Stock     Paid-In     Accumulated     Translation     Treasury
                                                Shares   Amount   Capital       Deficit       Adjustment       Stock      Total
                                              ---------- ------  ----------   -----------   ----------------  -------- ------------
<S>                                           <C>        <C>     <C>          <C>           <C>               <C>      <C>
Issuance of stock, October 16, 1987
   (date of inception) ($.16 per share, net)   549,020   $   55  $   91,898   $         -   $              -  $      - $     91,953
Issuance of stock in connection with
   patent acquisition ($.001 per share).....   235,294       24         276             -                  -         -          300
Net loss, October 16, 1987 to
   March 31, 1988...........................         -        -           -      (159,359)                 -         -     (159,359)
                                             ---------   ------  ----------   -----------   ----------------  -------- ------------
BALANCE AT MARCH 31, 1988                      784,314       79      92,174      (159,359)                 -         -      (67,106)
Net loss....................................         -        -           -      (495,520)                 -         -     (495,520)
                                             ---------   ------  ----------   -----------   ----------------  -------- ------------

BALANCE AT MARCH 31, 1989                      784,314       79      92,174      (654,879)                 -         -     (562,626)
Net loss....................................         -        -           -      (233,347)                 -         -     (233,347)
                                             ---------   ------  ----------   -----------   ----------------  -------- ------------

BALANCE AT MARCH 31, 1990                      784,314       79      92,174      (888,226)                 -         -     (795,973)
Acquisition of 235,294 shares of
   treasury stock ($.001 per share).........         -        -           -             -                  -      (300)        (300)
Net loss....................................         -        -           -      (285,179)                 -         -     (285,179)
                                             ---------   ------  ----------   -----------   ----------------  -------- ------------

BALANCE AT MARCH 31, 1991                      784,314       79      92,174    (1,173,405)                 -      (300)  (1,081,452)
Retirement of treasury stock................  (235,294)     (24)       (276)            -                  -       300            -
Issuance of stock in exchange for
   stockholder debt ($2.90 per share).......   431,372       43   1,248,638             -                  -         -    1,248,681
Sale of stock ($.82 per share, net).........    24,510        2      19,998             -                  -         -       20,000
Amortization of deferred compensation.......         -        -     136,880             -                  -         -      136,880
Net loss....................................         -        -           -      (461,061)                 -         -     (461,061)
                                             ---------   ------  ----------   -----------   ----------------  -------- ------------

BALANCE AT MARCH 31, 1992                    1,004,902      100   1,497,414    (1,634,466)                 -         -     (136,952)
Sale of stock in connection with private
   placement ($7.67 per share, net).........   557,475       55   4,275,223             -                  -         -    4,275,278
Exercise of stock options...................     2,451        1         624             -                  -         -          625
Amortization of deferred compensation.......         -        -     477,453             -                  -         -      477,453
Change in par value of common stock
   from $.0001 to $.001.....................         -    1,408      (1,408)            -                  -         -            -
Net loss....................................         -        -           -    (3,099,637)                 -         -   (3,099,637)
                                             ---------   ------  ----------   -----------   ----------------  -------- ------------


BALANCE AT MARCH 31, 1993
   (carried forward)........................ 1,564,828   $1,564  $6,249,306   $(4,734,103)  $              -  $      - $  1,516,767
                                             ---------   ------  ----------   -----------   ----------------  -------- ------------
</TABLE>
                                                                     (Continued)

                                      F-5
<PAGE>   37
                                 BIOFIELD CORP.
                         (A DEVELOPMENT STAGE COMPANY)
                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
         OCTOBER 16, 1987 (DATE OF INCEPTION) THROUGH DECEMBER 31, 1997

<TABLE>
<CAPTION>
                                                              Series A                   Series B                 Series C
                                                          Preferred Stock            Preferred Stock           Preferred Units
                                                        --------------------        ------------------      -----------------------
                                                        Shares        Amount        Shares      Amount      Units            Amount
                                                        ----------   -------        --------    ------      -----------    --------
<S>                                                     <C>          <C>            <C>         <C>         <C>            <C>
BALANCE AT MARCH 31, 1993
   (brought forward)........................                    --   $    --              --    $   --               --    $     --
Exercise of stock options...................                    --        --              --        --               --          --
Sale of Series A Preferred Stock
   ($3.97 per share, net)...................             2,119,896     2,120              --        --               --          --
Issuance of Series A Preferred Stock in
   exchange for notes payable to related
   parties ($4.50 per share)................               222,222       222              --        --               --          --
Issuance of warrants........................                    --        --              --        --               --          --
Amortization of deferred compensation.......                    --        --              --        --               --          --
Net loss....................................                    --        --              --        --               --          --

                                                        ----------   -------        --------    ------      -----------    --------
BALANCE AT MARCH 31, 1994                                2,342,118     2,342              --        --               --          --
Sale of Series B Preferred Stock ($4.04
   per share, net)..........................                    --        --         481,644       482               --          --
Issuance of warrants........................                    --        --              --        --               --          --
Amortization of deferred compensation.......                    --        --              --        --               --          --
Net loss....................................                    --        --              --        --               --          --

                                                        ----------    ------        --------    ------      -----------    --------
BALANCE AT DECEMBER 31, 1994................             2,342,118     2,342         481,644       482               --          --
 Sale of Series C Preferred Stock ($4.11
   per unit, net)...........................                    --        --              --        --        2,914,771       2,915
Issuance of warrants........................                    --        --              --        --               --          --
Amortization of deferred compensation.......                    --        --              --        --               --          --
Net loss....................................                    --        --              --        --               --          --

                                                        ----------   -------        --------    ------      -----------    --------
BALANCE AT DECEMBER 31, 1995................             2,342,118     2,342         481,644       482        2,914,771       2,915
Sale of stock in connection with public
   offering ($9.91 per share, net)..........                    --        --              --        --               --          --
Conversion of Series A, Series B
   and Series C Preferred Stock to
   Common Stock.............................            (2,342,118)   (2,342)       (481,644)     (482)      (2,914,771)     (2,915)
Exercise of warrants........................                    --        --              --        --               --          --
Amortization of deferred compensation.......                    --        --              --        --               --          --
Net loss....................................                    --        --              --        --               --          --

                                                        ----------   -------        --------    ------      -----------    --------
BALANCE AT DECEMBER 31, 1996................                    --   $    --              --    $   --               --    $     --
                                                        ----------   -------        --------    ------      -----------    --------
(carried forward)


<CAPTION>


                                                            Common Stock           Additional                       Foreign Currency
                                                        -------------------         Paid-In        Accumulated        Translation
                                                        Shares       Amount         Capital          Deficit           Adjustment
                                                        ---------    ------       -----------     -------------     ----------------
<S>                                                     <C>          <C>          <C>             <C>               <C>
BALANCE AT MARCH 31, 1993
   (brought forward)........................            1,564,828    $1,564       $ 6,249,306     $  (4,734,103)    $             --
Exercise of stock options...................                  735         1               187                --                   --
Sale of Series A Preferred Stock
   ($3.97 per share, net)...................                   --        --         8,411,370                --                   --
Issuance of Series A Preferred Stock in
   exchange for notes payable to related
   parties ($4.50 per share)................                   --        --           999,778                --                   --
Issuance of warrants........................                   --        --             2,119                --                   --
Amortization of deferred compensation.......                   --        --         1,580,320                --                   --
Net loss....................................                   --        --                --        (6,899,515)                  --

                                                        ---------    ------       -----------     -------------     ----------------
BALANCE AT MARCH 31, 1994                               1,565,563     1,565        17,243,080       (11,633,618)                  --
Sale of Series B Preferred Stock ($4.04
   per share, net)..........................                   --        --         1,947,149                --                   --
Issuance of warrants........................                   --        --                 6                --                   --
Amortization of deferred compensation.......                   --        --            14,859                --                   --
Net loss....................................                   --        --                --        (4,959,312)                  --

                                                        ---------    ------       -----------     -------------     ----------------
BALANCE AT DECEMBER 31, 1994................            1,565,563     1,565        19,205,094       (16,592,930)                  --
 Sale of Series C Preferred Stock ($4.11
   per unit, net)...........................                   --        --        11,977,856                --                   --
Issuance of warrants........................                   --        --               161                --                   --
Amortization of deferred compensation.......                   --        --           195,874                --                   --
Net loss....................................                   --        --                --        (8,739,860)                  --

                                                        ---------    ------       -----------     -------------     ----------------
BALANCE AT DECEMBER 31, 1995................            1,565,563     1,565        31,378,985       (25,332,790)                  --
Sale of stock in connection with public
   offering ($9.91 per share, net)..........            1,819,000     1,819        18,026,419                --                   --
Conversion of Series A, Series B
   and Series C Preferred Stock to
   Common Stock.............................            3,046,474     3,047             2,692                --                   --
Exercise of warrants........................                2,058         2            20,145                --                   --
Amortization of deferred compensation.......                   --        --            26,093                --                   --
Net loss....................................                   --        --                --       (10,036,090)                  --

                                                        ---------    ------       -----------     -------------     ----------------
BALANCE AT DECEMBER 31, 1996................            6,433,095    $6,433       $49,454,334     $ (35,368,880)    $             --
                                                        ---------    ------       -----------     -------------     ----------------
(carried forward)


<CAPTION>
                                                        Treasury
                                                         Stock                     Total
                                                        --------                ------------
<S>                                                     <C>                     <C>
BALANCE AT MARCH 31, 1993
   (brought forward)........................            $     --                $  1,516,767
Exercise of stock options...................                  --                         188
Sale of Series A Preferred Stock
   ($3.97 per share, net)...................                  --                   8,413,490
Issuance of Series A Preferred Stock in
   exchange for notes payable to related
   parties ($4.50 per share)................                  --                   1,000,000
Issuance of warrants........................                  --                       2,119
Amortization of deferred compensation.......                  --                   1,580,320
Net loss....................................                  --                  (6,899,515)

                                                        --------                ------------
BALANCE AT MARCH 31, 1994                                     --                   5,613,369
Sale of Series B Preferred Stock ($4.04
   per share, net)..........................                  --                   1,947,631
Issuance of warrants........................                  --                           6
Amortization of deferred compensation.......                  --                      14,859
Net loss....................................                  --                  (4,959,312)

                                                        --------                ------------
BALANCE AT DECEMBER 31, 1994................                  --                   2,616,553
 Sale of Series C Preferred Stock ($4.11
   per unit, net)...........................                  --                  11,980,771
Issuance of warrants........................                  --                         161
Amortization of deferred compensation ......                  --                     195,874
Net loss....................................                  --                  (8,739,860)

                                                        --------                ------------
BALANCE AT DECEMBER 31, 1995................                  --                   6,053,499
Sale of stock in connection with public
   offering ($9.91 per share, net)..........                  --                  18,028,238
Conversion of Series A, Series B
   and Series C Preferred Stock to
   Common Stock.............................                  --                          --
Exercise of warrants........................                  --                      20,147
Amortization of deferred compensation.......                  --                      26,093
Net loss....................................                  --                 (10,036,090)

                                                       ---------                ------------
BALANCE AT DECEMBER 31, 1996................           $      --                $ 14,091,887
                                                       ---------                ------------
(carried forward)
</TABLE>

                                                                     (continued)


                                      F-6
<PAGE>   38
                                 BIOFIELD CORP.
                          (A DEVELOPMENT STAGE COMPANY)
                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
         OCTOBER 16, 1987 (DATE OF INCEPTION) THROUGH DECEMBER 31, 1997



<TABLE>
<CAPTION>
                                                 Series A         Series B         Series C
                                             Preferred Stock  Preferred Stock  Preferred Units      Common Stock       Additional
                                             ---------------  ---------------  ---------------   ------------------      Paid-In
                                             Shares   Amount  Shares   Amount   Units   Amount    Shares     Amount      Capital
                                             ------   ------  ------   ------   -----   ------   ---------  -------   ------------
<S>                                          <C>      <C>     <C>      <C>      <C>     <C>      <C>        <C>       <C>
BALANCE AT DECEMBER 31, 1996...............     --    $  --      --    $  --      --    $  --    6,433,095  $ 6,433   $ 49,454,334
   (brought forward)
Sale of stock in connection with
    private placement
    ($2.92 per share, net).................     --       --      --       --      --       --    2,867,670    2,868      8,377,583
Warrants exchanged for Common Stock........     --       --      --       --      --       --      643,639      644           (644)
Exercise of stock options .................     --       --      --       --      --       --       50,674       50        168,541
Exercise of warrants.......................     --       --      --       --      --       --        9,531       10         93,299
Issuance of stock as consideration for
     consulting services rendered
     ($4.00 per share, net) ...............     --       --      --       --      --       --       25,000       25         99,975
Amortization of deferred compensation......     --       --      --       --      --       --           --       --         62,579
Net loss ..................................     --       --      --       --      --       --           --       --             --
Change in foreign currency translation
     adjustment............................     --       --      --       --      --       --           --       --             --
                                              ----    -----    ----    -----    ----    -----   ----------  -------   ------------
BALANCE AT DECEMBER 31, 1997...............     --    $  --      --    $  --      --    $  --   10,029,609  $10,030   $ 58,255,667
                                              ====    =====    ====    =====    ====    =====   ==========  =======   ============


<CAPTION>
                                                            Foreign Currency
                                              Accumulated      Translation     Treasury
                                                Deficit        Adjustment        Stock       Total
                                              -----------   ----------------   --------  ------------
<S>                                          <C>            <C>                <C>       <C>
BALANCE AT DECEMBER 31, 1996...............  $(35,368,880)        $   --         $  --    $ 14,091,887
   (brought forward)
Sale of stock in connection with
    private placement
    ($2.92 per share, net).................            --             --            --       8,380,451
Warrants exchanged for Common Stock........            --             --            --              --
     Exercise of stock options ............            --             --            --         168,591
Exercise of warrants.......................            --             --            --          93,309
Issuance of stock as consideration for
     consulting services rendered
     ($4.00 per share, net) ...............            --             --            --         100,000
Amortization of deferred compensation......            --             --            --          62,579
Net loss ..................................   (10,151,040)            --            --     (10,151,040)
Change in foreign currency translation
     adjustment............................            --          1,333            --           1,333
                                             ------------         ------         -----    ------------
BALANCE AT DECEMBER 31, 1997...............  $(45,519,920)        $1,333         $  --    $ 12,747,110
                                             ============         ======         =====    ============
</TABLE>


                                                                     (Concluded)




                 See notes to consolidated financial statements




                                      F-7
<PAGE>   39
                                 BIOFIELD CORP.
                          (A DEVELOPMENT STAGE COMPANY)
                      CONSOLIDATED STATEMENTS OF CASH FLOWS


<TABLE>
<CAPTION>
                                                                                                                      Period
                                                                                                                 October 16, 1987
                                                                                                                    (Date of
                                                                                                                    Inception)
                                                                              For the years ended December 31,        through
                                                                              --------------------------------     December 31,
                                                                   1997             1996             1995              1997
                                                               ------------     ------------     ------------    ----------------
<S>                                                            <C>              <C>              <C>             <C>
OPERATING ACTIVITIES:
     Net loss .............................................    $(10,151,040)    $(10,036,090)    $ (8,739,860)    $(45,519,920)
     Adjustments to reconcile net loss to net cash used
         in operating activities:
         Depreciation and amortization ....................         413,099          625,052          528,935        2,090,489
     Amortization of premiums / (discounts) on short-term
              investments .................................          44,308           64,784               --          109,092
         Loss on disposal of property and equipment .......              --            2,177               --           42,713
         Loss on license and settlement agreement .........              --               --               --           49,026
         Noncash compensation .............................         162,579           26,093          195,874        2,594,058
         Interest paid in Common Stock ....................              --               --               --          297,148
         Changes in assets and liabilities:
              Other current assets ........................          48,030         (235,547)         (38,425)        (271,340)
              Other assets ................................           9,856          (26,299)         (21,798)        (117,735)
              Due to affiliate ............................         179,815          (87,270)          67,046          179,815
              Contractual settlement ......................              --         (776,623)         776,623               --
              Accounts payable and accrued expenses .......        (187,510)         562,888           64,390        1,060,716
                                                               ------------     ------------     ------------     ------------
               Net cash used in operating activities ......      (9,480,863)      (9,880,835)      (7,167,215)     (39,485,938)
                                                               ------------     ------------     ------------     ------------

INVESTING ACTIVITIES:
     Acquisition of property and equipment ................        (285,698)        (275,932)        (361,191)      (2,415,490)
     Costs incurred for patents and patent applications ...        (143,924)        (131,982)        (127,579)        (691,866)
     Proceeds from sale of property and equipment .........              --               --               --            3,418
     Purchases of short-term investments ..................      (9,468,509)     (11,134,190)      (3,000,000)     (24,322,699)
     Proceeds from sales and maturities of short-term
         investments ......................................      12,164,346        7,500,000               --       20,384,346
                                                               ------------     ------------     ------------     ------------
               Net cash provided by (used in)
               investing activities .......................       2,266,215       (4,042,104)      (3,488,770)      (7,042,291)
                                                               ------------     ------------     ------------     ------------

FINANCING ACTIVITIES:
     Repayments of capitalized lease obligations ..........         (30,990)         (26,814)         (19,619)         (79,576)
     Proceeds from issuance of Series A Preferred
         Stock - net ......................................              --               --               --        8,413,490
     Proceeds from issuance of Series B Preferred
         Stock - net ......................................              --               --               --        1,947,631
     Proceeds from issuance of Series C Preferred
         Stock - net ......................................              --               --       11,980,771       11,980,771
     Proceeds from issuance of Common Stock and
         warrants - net ...................................       8,380,451       18,028,238              161       30,798,206
     Proceeds from exercise of stock options and
         warrants .........................................         261,900           20,147               --          282,860
     Proceeds from bank borrowings ........................              --               --               --          520,000
     Payment on bank borrowings ...........................              --               --               --         (520,000)
     Repayment of advances from stockholder ...............              --               --               --         (145,000)
     Proceeds from notes payable issued to
         stockholder and related party ....................              --               --               --        2,096,533
                                                               ------------     ------------     ------------     ------------
               Net cash provided by financing activities ..       8,611,361       18,021,571       11,961,313       55,294,915
                                                               ------------     ------------     ------------     ------------
NET INCREASE/(DECREASE) IN CASH
     AND CASH EQUIVALENTS .................................       1,396,713        4,098,632        1,305,328        8,766,686
EFFECT OF EXCHANGE RATE CHANGES
   ON CASH AND CASH EQUIVALENTS ...........................           2,013               --               --            2,013
CASH AND CASH EQUIVALENTS,
     BEGINNING OF PERIOD ..................................       7,369,973        3,217,341        1,966,013               --
                                                               ------------     ------------     ------------     ------------
CASH AND CASH EQUIVALENTS, END OF
     PERIOD ...............................................    $  8,768,699     $  7,369,973     $  3,271,341     $  8,768,699
                                                               ============     ============     ============     ============
</TABLE>
                                                                     (continued)

                                      F-8
<PAGE>   40
                                 BIOFIELD CORP.
                          (A DEVELOPMENT STAGE COMPANY)
                      CONSOLIDATED STATEMENTS OF CASH FLOWS


<TABLE>
<CAPTION>
                                                                                                                      Period
                                                                                                                 October 16, 1987
                                                                                                                    (Date of
                                                                                                                    Inception)
                                                                       For the years ended December 31,               through
                                                                       --------------------------------            December 31,
                                                                   1997             1996             1995              1997
                                                               ------------     ------------     ------------    ----------------
<S>                                                            <C>              <C>              <C>             <C>
SUPPLEMENTAL DISCLOSURES OF CASH
     FLOW INFORMATION:
     Cash paid during the period for interest..............    $      3,524     $      8,726     $     10,826     $     59,409
                                                               ============     ============     ============     ============

SUPPLEMENTAL SCHEDULE FOR NONCASH
     INVESTING AND FINANCING ACTIVITIES:
     Acquisition of property and equipment under
       capitalized lease transactions......................    $         --     $         --     $     55,874     $     82,234
                                                               ============     ============     ============     ============

     During the year ended March 31, 1994 the Company
       issued 222,222 shares of Series A Preferred Stock
       in exchange for an aggregate of $1 million in notes
       payable to a principal stockholder and a former
       Director:

     Notes payable.........................................                                                       $  1,000,000
                                                                                                                  ============
     Issuance of Series A Preferred Stock..................                                                       $  1,000,000
                                                                                                                  ============

     At inception, the Company acquired the rights to a
       patent and assumption of liabilities in exchange
       for 235,294 shares of Common Stock, as follows:

     Fair value of patent acquired.........................                                                       $    112,732
     Liabilities assumed...................................                                                            112,432
                                                                                                                  ------------
     Issuance of Common Stock..............................                                                       $        300
                                                                                                                  ============

     Pursuant to a license and settlement agreement with
       respect to the patent acquired (above), the
       Company received its 235,294 shares of Common
       Stock during fiscal year 1991, which was retired:

     Remaining carrying value of patent on date of license
       and settlement agreement............................                                                       $     49,326
     Common Stock returned to the Company..................                                                                300
                                                                                                                  ------------
     Loss on Settlement....................................                                                       $     49,026
                                                                                                                  ============

     During fiscal 1992, the Company exchanged 431,372
       shares of Common Stock for $96,660 in notes and
       $1,152,021 in debt and accrued interest, payable to
       a principal stockholder:

     Notes payable.........................................                                                       $     96,660
     Debt..................................................                                                            854,873
     Accrued interest......................................                                                            297,148
                                                                                                                  ------------
     Issuance of Common Stock..............................                                                       $  1,248,681
                                                                                                                  ============
</TABLE>

                                                                     (Concluded)


                 See notes to consolidated financial statements


                                       F-9
<PAGE>   41
                                 BIOFIELD CORP.
                          (A DEVELOPMENT STAGE COMPANY)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. COMPANY

         Biofield Corp. (the "Company") is a development stage company which has
developed an innovative system for detecting breast cancer in a non-invasive and
objective procedure. The Company's breast cancer diagnostic device, the Biofield
Diagnostic System, employs unique, single-use sensors and a measurement device
to detect and analyze changes in cellular electrical charge distributions
associated with the development of epithelial cancers, such as breast cancer.
Principal activities to date include the following: product development;
conducting clinical trials; recruitment of scientific, regulatory,
manufacturing, marketing and administrative personnel; and raising capital.

         In December 1997, the Company received net proceeds of approximately
$8.4 million from the sale of 2,867,670 shares of the Company's Common Stock in
a private placement (the "1997 Private Placement"). Concurrent with the Closing
of the 1997 Private Placement, the Company issued an aggregate of 643,639 shares
of Common Stock in exchange for outstanding warrants to purchase an aggregate of
1,574,930 shares of Common Stock (the "Warrant Exchange"). Such warrants were
issued in connection with the Company's 1995 private placement of securities
units (See Note 8).

         During the first half of 1997, the Company formed a wholly owned
Delaware corporation named Biofield International, Inc. ("Biofield
International"). In addition, Biofield International formed a U.S. branch
located in Switzerland ("Branch"), organized to expand the Company's European
marketing and sales efforts.

         On March 22, 1996, the Company completed its Initial Public Offering
("IPO") of 1,819,000 shares of Common Stock at a purchase price of $11.00 per
share, for aggregate proceeds of $18,028,238 (net of related expenses of
$1,980,762).

2. SIGNIFICANT ACCOUNTING POLICIES

         Cash and Cash Equivalents and Short-Term Investments--The Company
invests its excess cash in short-term, investment grade corporate obligations,
money market funds, shares of liquid (auction-market) preferred stock and bonds
and certificates of deposit. For purposes of financial reporting, the Company
considers highly liquid investments with a maturity of three months or less to
be cash equivalents.

         Effective April 1, 1994, the Company adopted Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt and
Equity Securities." The Company's short-term investments are sold if cash is
needed and, therefore, are considered "available-for-sale." At December 31,
1997, the cost of short-term investments approximated market value. Realized
gains and losses on short-term investments were immaterial for the years ended
December 31, 1997, 1996 and 1995.

         Property and Equipment--Property and equipment is stated at cost less
accumulated depreciation and amortization. Depreciation and amortization are
computed using straight-line methods over the estimated useful lives of the
assets, principally three to five years, or the term of the lease, if shorter,
for leasehold improvements.

         Patents--The costs of the patents are being amortized on a
straight-line basis over their estimated economic life, not to exceed 17 years.

         Research and Development--Research and development costs are charged to
operations as incurred.

         Reverse Stock-Split--On February 26, 1996, the Company effected a
2.04-for-one reverse stock split of the Company's issued and outstanding Common
Stock. The accompanying financial statements and related notes to the financial
statements have been restated to reflect these changes for all periods
presented.

         Basic and Diluted Loss Per Share--In 1997 the Financial Accounting
Standards Board issued Statement No. 128, Earnings per Share. Statement 128
replaced the calculation of primary and fully diluted loss per share with basic
and diluted loss per share. Unlike primary loss per share, basic loss per share
excludes any dilutive effects of options, warrants and convertible securities.
Diluted loss per share is very similar to the previously reported fully diluted
loss per share. Additionally,


                                      F-10
<PAGE>   42
                                 BIOFIELD CORP.
                          (A DEVELOPMENT STAGE COMPANY)
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED


2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

in 1998 the Securities and Exchange Commission issued Staff Accounting Bulletin
No. 98 ("SAB 98"). SAB 98 removes the effect on earnings per share of common
stock issued and stock options and warrants granted during the twelve month
period preceding an initial public offering.

         All loss per share amounts for all periods have been presented, and
where appropriate, restated to conform to the provisions of Statement 128 and
SAB 98. The basic and diluted loss per share is computed based on the weighted
average number of common shares outstanding. Common equivalent shares are not
included in the per share calculations where the effect of their inclusion would
be antidilutive. Options to purchase 1,924,403 shares of Common Stock with a
weighted average exercise price of $5.61 and warrants to purchase 396,762 shares
of Common Stock with a weighted average exercise price of $9.83 were outstanding
as of December 31, 1997 but were not included in the computation of diluted loss
per share since the effect would be antidilutive.

         Upon the closing date of the Company's IPO, March 22, 1996, all shares
of Series A, Series B and Series C Convertible Preferred Stock automatically
converted into shares of Common Stock (see Note 8). The 1996 and 1995 basic and
diluted net loss per share assumes conversion of the convertible preferred stock
as of January 1, 1996 and 1995, respectively.

         Use of Estimates--The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of income and expenses during
the reporting period. Actual results could differ from those estimates.

         Nonmonetary Transaction--Common or Preferred Stock issued for goods or
services is recorded at estimated market value of the Common and Preferred Stock
issued.

         Income Taxes--Effective April 1, 1993, the Company adopted Statement of
Financial Accounting Standards No. 109 ("SFAS 109"), "Accounting for Income
Taxes." Under SFAS 109, the liability method is used in accounting for income
taxes. Under this method, deferred tax assets and liabilities are determined
based on differences between financial reporting and tax bases of assets and
liabilities and are measured using the enacted tax rates and laws that will be
in effect when the differences are expected to reverse.

         Stock Options--Accounting for stock options issued to employees and
nonemployee directors is based upon the "intrinsic value" method set forth in
Accounting Principles Board Opinion No. 25 ("APB 25"), "Accounting for Stock
Issued to Employees." Accounting for stock options issued to nonemployees prior
to December 16, 1995 is also based upon APB 25. Accounting for stock options
issued to nonemployees (excluding nonemployee directors) after December 15, 1995
is based upon the "fair value" method set forth in Statement of Financial
Accounting Standards No. 123 ("SFAS 123"), "Accounting for Stock-Based
Compensation." See "Recent Pronouncements" below for a further discussion of
SFAS 123.

         Recent Pronouncements--In March 1995, the Financial Accounting
Standards Board ("FASB") issued Statement of Financial Accounting Standards No.
121 ("SFAS 121"), "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of," which is effective for the Company's 1996
financial statements. SFAS 121 requires that long-lived assets and certain
identifiable intangible assets held and used by a company be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amounts of the assets might not be recoverable. The Company has
determined that, as of December 31, 1997, no assets covered by SFAS 121 have
been impaired.


                                      F-11
<PAGE>   43
                                 BIOFIELD CORP.
                          (A DEVELOPMENT STAGE COMPANY)
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED


2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

         In October 1995, the FASB issued SFAS 123, which is effective for the
Company's 1996 financial statements. SFAS 123 allows companies to account for
stock-based compensation to employees under either (i) the new provisions of
SFAS 123 or (ii) the provisions of APB 25 with pro forma disclosure in the
footnotes to the financial statements as if the measurement provisions of SFAS
123 had been adopted. The reporting requirements of SFAS 123 are required for
options issued to nonemployees (excluding nonemployee directors). At this time,
the Company intends to continue accounting for its stock-based compensation to
employees in accordance with the provisions of APB 25 (see Note 10).

         In accounting for options issued to nonemployees, the implementation of
SFAS 123 did not materially impact the financial position or results of
operations of the Company, and had no effect on its cash flows.

         In February 1997, the FASB issued SFAS 128, which is effective for the
Company's 1997 financial statements. This Statement replaces the presentation of
primary and fully diluted EPS, pursuant to Opinion 15, Earnings per Share, with
a presentation of basic EPS and diluted EPS. Basic EPS excludes dilution and is
computed by dividing income available to common stockholders by the
weighted-average number of common shares outstanding for the period. Diluted EPS
is computed similarly to fully diluted EPS pursuant to Opinion 15. This
Statement requires restatement of all prior-period EPS data presented.
Accordingly, the accompanying consolidated financial statement and related notes
to the consolidated financial statements have been restated to reflect these
changes for all periods presented.

         New Accounting Pronouncements: In June 1997, the FASB issued SFAS 130,
"Reporting Comprehensive Income" and 131, "Disclosures about Segments of an
Enterprise and Related Information." SFAS 130 establishes standards for
reporting and display of comprehensive income and its components (revenues,
expenses, gains, and losses) in a full set of general purpose financial
statements. SFAS 131 establishes standards for, among other things, reporting
information about operating segments in annual financial statements and requires
that those enterprises report selected information about operating segments in
interim financial reports issued to shareholders. SFAS 130 and 131 are effective
for financial statements issued for periods beginning after December 15, 1997.
Management believes that the adoption of these statements will not have a
material adverse effect on the Company's consolidated financial statements.

         Reclassifications--Certain prior period amounts have been reclassified
to conform with the current period presentation.

3. PROPERTY AND EQUIPMENT

         Property and equipment at December 31, 1997 and 1996 consisted of the
following:

<TABLE>
<CAPTION>
                                                                               1997          1996
                                                                            ----------    ----------
         <S>                                                                <C>           <C>
         Furniture and office equipment ................................    $  929,407    $  783,876
         Leasehold improvements ........................................       107,938       106,153
         Production equipment, tooling and clinical testing equipment ..       820,036       699,414
                                                                            ----------    ----------
                                                                             1,857,381     1,589,443
         Less accumulated depreciation and amortization ................     1,354,263       985,197
                                                                            ----------    ----------
                                                                            $  503,118    $  604,246
                                                                            ==========    ==========
</TABLE>

         Depreciation expense for the years ended December 31, 1997, 1996, 1995
and for the period from inception through December 31, 1997 was $386,051,
$608,879, $516,421 and $1,947,700, respectively.


                                      F-12
<PAGE>   44
                                 BIOFIELD CORP.
                          (A DEVELOPMENT STAGE COMPANY)
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED


4. PATENT AND PATENT APPLICATION COSTS

         The Company entered into an agreement dated December 22, 1992 with a
consultant and inventor for the assignment of certain patent rights. The Company
paid the consultant $100,000 for such assignment, and agreed to pay royalties of
five percent of the net sales price of covered inventions, if any, (as defined),
subject to an aggregate limit of $2,500,000. The term of the agreement is for 15
years. No royalties have been paid as of December 31, 1997.

         The Company has a patent royalty agreement with a former director and
his corporation which would assign all rights to the Company for patented
inventions, if any, resulting from performance under a laboratory service
agreement. As of December 31, 1997, the Company has been issued a United States
Patent of which the former director is a named co-inventor. No royalties have
been paid as of December 31, 1997 (See Note 9).

         Accumulated amortization for patents was $63,222 and $49,095 at
December 31, 1997 and 1996, respectively. Patent amortization expense for the
years ended December 31, 1997, 1996,1995 and for the period from inception
through December 31, 1997 was $14,127, $12,943, $12,514 and $126,638,
respectively.

5. ACCRUED EXPENSES

         Accrued expenses at December 31, 1997 and 1996 consisted of the
following:

<TABLE>
<CAPTION>
                                                               1997          1996
                                                             --------      --------
         <S>                                                 <C>           <C>
         Professional fees ............................      $120,000      $ 98,488
         Accrued payroll and bonuses ..................       244,710       600,510
         Other ........................................       181,578       210,743
                                                             --------      --------
                                                             $546,288      $909,741
                                                             ========      ========
</TABLE>

6. INCOME TAXES

         Due to the Company's operating losses, there was no provision for U.S.
income taxes for the years ended December 31, 1997, 1996, 1995, and for the
period from inception through December 31, 1997. The tax provision in 1997 of
approximately $20,000 reflects foreign tax liability related to the Branch
office of Biofield International.

         At December 31, 1997, the Company has available, for federal and state
income tax purposes, net operating loss ("NOL") carryforwards of approximately
$42,000,000, which expire in years 2002 through 2011. These losses may be offset
against future taxable income, if any, during the carryforward period. The
utilization of the federal net operating loss carryforwards of approximately
$15,600,000, included in the above amount will be subject to an annual
limitation of approximately $1,140,000 per year due to ownership changes in
1992, 1995 and 1997 pursuant to the stock ownership change provision of the Tax
Reform Act of 1986. Future changes in ownership may result in additional
limitations.

         The tax effects of temporary differences that give rise to deferred tax
assets at December 31, 1997 and 1996 are as follows:

<TABLE>
<CAPTION>
                                                         1997           1996
                                                     -----------    -----------
         <S>                                         <C>            <C>
         Deferred tax assets:
           Deferred compensation ................    $   779,000    $   714,000
           Net operating loss carryforwards .....     16,763,000     12,781,000
           Research and development credits .....         95,000         48,000
           Other ................................        197,000        207,000
                                                     -----------    -----------
             Total gross deferred tax assets ....     17,834,000     13,750,000
         Less valuation allowance ...............     17,834,000     13,750,000
                                                     -----------    -----------
             Net deferred tax assets ............    $        --    $        --
                                                     ===========    ===========
</TABLE>

         The valuation allowances are equal to the deferred tax assets because
of the uncertainty of the future realization of the assets.


                                      F-13
<PAGE>   45
                                 BIOFIELD CORP.
                          (A DEVELOPMENT STAGE COMPANY)
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED


7. COMMITMENTS AND CONTINGENCIES

         Lease Commitment--In July 1996, the Company obtained a commitment from
an unrelated third party to enter into a $2 million sale-leaseback agreement.
The agreement will allow the Company to finance certain equipment purchases in
amounts up to an aggregate of $2 million for a period of two years ending
September 30, 1998. The lease term will be 36 months from the date specific
equipment is leased with monthly rent expense, payable in advance, equal to
3.07% of the equipment leased. The Company will have the option to purchase the
leased equipment at the end of the lease term for an amount equal to 15% of the
equipment cost. The Company may not enter into any such sale-leaseback
transactions unless and until definitive documentation is entered into and
certain other specified conditions are satisfied.

         Total rental expense relating to operating leases for the years ended
December 31, 1997, 1996, 1995 and for the period from inception through December
31, 1997 was $121,403, $118,832, $117,062, and $778,383, respectively.

         Included in property and equipment at December 31, 1996 and 1995 is
furniture and office equipment held under capitalized leases as follows:

<TABLE>
<CAPTION>
                                                                       1997                1996
                                                                     --------            --------
         <S>                                                         <C>                 <C>
         Furniture and office equipment (gross)................      $ 65,263            $ 82,234
         Less accumulated depreciation.........................        61,843              53,810
                                                                     --------            --------
                                                                     $  3,420            $ 28,424
                                                                     ========            ========
</TABLE>

         In December 1997, the Company entered into an amendment to its office
lease agreement whereby the Company will, for a period of forty months
commencing December 1, 1997, occupy and lease approximately 16,500 square feet
of office space. Future committed minimum payments under the lease are $171,000,
$186,000, $193,000 and $49,000 for 1998, 1999, 2000 and 2001, respectively. The
annual rent on the lease will be increased by a pro rata portion of the increase
in real estate taxes and common area maintenance.

         Employment Agreements--The Company has entered into an oral agreement
with a principal stockholder to provide executive services in exchange for
compensation not to exceed $80,000 per annum until the Company has commercially
marketed the Biofield Diagnostic System or the proposed Biofield screening
system.

         The Company has an employment contract with one of its executive
officers through March 1999. The annual base compensation for this executive
officer is approximately $158,000 per year, and provides for five percent annual
cost of living adjustments. Aggregate minimum payments of annual base
compensation under this contract is approximately $159,000 and $41,000 during
1998 and 1999, respectively. In addition, the Company intends to enter into a
new employment agreement with the current President and Chief Executive Officer
of the Company. The term of the agreement is expected to be three years,
commencing April 1, 1997. Pursuant to the Agreement, the current President and
Chief Executive Officer would receive a minimum annual base salary of $250,000
and would be eligible to receive an annual bonus. The Company has also granted
the current President and Chief Executive Officer stock options to purchase
200,000 shares of Common Stock at $2.94 per share pursuant to the Biofield Corp.
1996 Option Plan. Such options vest in equal monthly installments over a two
year period.

         On March 17, 1997, the former President and Chief Executive Officer
(the "Former President") resigned as President, Chief Executive Officer and a
Director of the Company. The Former President was employed pursuant to an
employment agreement, dated November 10, 1995 (the "Former President
Agreement"), pursuant to which the Former President received a base salary of
$250,000, and was eligible to receive an annual bonus of up to $350,000 upon the
achievement by the Company of certain specified goals. That portion of the
annual bonus, if any, up to $100,000 was payable in cash and the Company's
obligations with respect to payment of any additional annual bonus amount may
have been satisfied, at the Former President's election, by delivery to the
Former President of shares of Common Stock or options to purchase shares of
Common Stock. Pursuant to the Former President Agreement, the Former President
received salary and benefits earned to the date of his resignation and a payment
in respect of his annual bonus for the preceding performance year. Pursuant to
the Former President's Agreement, all of the Former President's options expired
upon his resignation and he was obligated not to compete with the Company for a
period of six months following termination of his employment with the Company.


                                      F-14
<PAGE>   46
                                 BIOFIELD CORP.
                          (A DEVELOPMENT STAGE COMPANY)
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED


7. COMMITMENTS AND CONTINGENCIES (CONTINUED)

         The Company entered into an agreement effective as of December 1, 1995,
with the Company's current President and Chief Executive Officer pursuant to
which the current President and Chief Executive Officer would continue to serve
as the Vice Chairman. The Company also agreed to make a payment of $752,144,
together with interest thereon, payable in 12 monthly installments commencing
January 1, 1996 and certain other miscellaneous amounts, in full satisfaction of
the Company's obligations to the Vice Chairman/current President and Chief
Executive Officer arising out of cessation of his employment as Chief Executive
Officer under a prior employment agreement. As a result of the Company's
obligations to the Vice Chairman/current President and Chief Executive Officer
pursuant to the above agreement the Company charged approximately $777,000 to
selling, general and administrative costs in the accompanying statement of
operations for the year ended December 31, 1995.

         The employment contract with the former Vice President, Research and
Development obligates the Company to pay royalties to the former Vice President
for two inventions, for which he is the inventor and co-inventor, of two percent
and one percent, respectively, as defined. The royalties will continue through
December 31, 2005 or until such royalties reach $8 million, whichever occurs
first. The Company was also obligated to pay the former Vice President a bonus
in an amount equal to 10 percent of any monies received in the form of research
grants where he is the principal investigator for the research. No such amounts
have been paid as of December 31, 1997.

         License Agreements--The Company has a "nonexclusive" license from an
unaffiliated company which allows the Company to "make, use and sell" products
covered by the unaffiliated company's patent, within the field of "detection of
cancer." The license agreement provides for a one percent royalty on gross sales
of any covered devices until the patent expires in May 1999. No royalties have
been paid as of December 31, 1997.

         Profit Sharing Plan--In November 1993, the Company adopted a 401(k)
Profit Sharing Plan & Trust (the "401(k) Plan"), a tax-qualified plan covering
all of its employees. The 401(k) Plan provides that the Company may, as
determined from time to time by the Board of Directors, provide a matching
contribution or an additional amount at its discretion. As of December 31, 1997,
the Company had made no contributions to the 401(k) Plan.

8. STOCKHOLDERS' EQUITY

         On December 17, 1997, the Company completed the 1997 Private Placement
of 2,867,670 shares of Common Stock at a purchase price of $3.15 per share, for
aggregate proceeds of $8,380,451 (net of related expenses of $652,710). The 1997
Private Placement was made pursuant to an exemption from the registration
requirements of the Securities Act of 1933, as amended, and Regulation D
thereunder.

         Concurrent with the closing of the 1997 Private Placement, the Company
issued an aggregate of 643,639 shares of Common Stock in exchange for
outstanding warrants to purchase an aggregate of 1,574,930 shares of Common
Stock. Such warrants were issued in connection with the Company's 1995 private
placement of securities units. In order to participate in the Warrant Exchange,
warrant holders were required to invest in the 1997 Private Placement.

         Subsequent to the closing of the 1997 Private Placement and Warrant
Exchange, the Company registered for resale 2,797,829 of the 3,511,309 shares
issued, pursuant to the Company's registration statement on Form S-3 filed with
the Securities and Exchange Commission.

         In September 1997, the Company issued 25,000 shares of Common Stock to
a nonaffiliated third party as consideration for consulting services rendered to
the Company.

         On March 22, 1996, the Company completed its IPO of 1,819,000 shares of
Common Stock at a purchase price of $11.00 per share, for aggregate proceeds of
$18,028,238 (net of related expenses of $1,980,762).

         In March 1995, the Company amended its certificate of incorporation to
authorize the issuance of the following shares: 25,000,000 shares of Common
Stock ("Common Stock"), 2,350,000 shares of Series A Convertible Preferred Stock
(the "Series A Preferred Stock"), 500,000 shares of Series B Convertible
Preferred Stock (the "Series B Preferred Stock"), 4,450,000 shares of Series C
Convertible Preferred Stock (the "Series C Preferred Stock"), 3,000,000 shares
of Series D Convertible Preferred Stock (the "Series D Preferred Stock") and
2,000,000 shares of Preferred Stock to be designated by the Board of Directors.
All of the above mentioned authorized shares have a stated par value of $.001
per share.


                                      F-15
<PAGE>   47
                                 BIOFIELD CORP.
                          (A DEVELOPMENT STAGE COMPANY)
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED


8. STOCKHOLDERS' EQUITY (CONTINUED)

         During 1995, the Company, pursuant to an offering through a private
placement of securities units (the "Securities Units offering"), offered and
issued 2,914,771 securities units at $4.50 each, for aggregate proceeds of
$11,980,771 (net of related expenses of $1,135,699). Each Securities Unit
included (i) one share of Series C Preferred Stock (initially convertible into
one share of Common Stock), (ii) one-half of a warrant to purchase a share of
Series D Preferred Stock at $6.00 per share, or upon the occurrence of certain
events, a share of Series C Preferred Stock at $4.50 per share (which events
have subsequently occured), (iii) one-half of a warrant to purchase a share of
Series D Preferred Stock at $6.00 per share, and (iv) the right, upon the
occurrence of certain events, to receive an aggregate of 357,192 warrants to
purchase an aggregate of 357,192 shares of Common Stock at an exercise price of
$9.18 per share. On June 30, 1996, the Company issued warrants to purchase an
aggregate of 357,192 shares of Common Stock at an exercise price of $9.18 per
share to purchasers of the Securities Units. These warrants expire on March 3,
2000. Certain Securities Units were sold to purchasers who were introduced to
the Company by a selected broker-dealer, who received (i) selling commissions
(in cash and Securities Units), equal to seven percent of the aggregate proceeds
from the sale of the Securities Units, and (ii) 78,976 warrants were sold to the
broker-dealer for $161. These warrants are exercisable for five years from the
date of issuance, at $9.18 per share to purchase an equal amount of Common
Stock.

         Upon the completion of the IPO: (i) each share of Series C Preferred
Stock outstanding automatically converted into .4902 shares of Common Stock;
(ii) each warrant to purchase a share of Series D Preferred Stock automatically
became exercisable for .4902 shares of Common Stock, and (iii) each warrant to
purchase a share of Series C Preferred Stock automatically became exercisable
for .4902 shares of Common Stock.

         Pursuant to an offering of its Series B Preferred Stock through a
private placement which was completed in September 1994 (the "Series B Preferred
Stock offering"), the Company raised $1,947,631 (net of related expenses of
$219,761) through the sale of 481,644 shares of Series B Preferred Stock. Each
share of Series B Preferred Stock was initially convertible on a share-for-share
basis into Common Stock, subject to a proportional adjustment based on
achievement by the Company of a Target Value per share upon the occurrence of a
Liquidity Event (i.e. initial public offering, sale, liquidation). Target Value
per share is defined as the amount which would be realized if the holder of a
share of Series B Preferred Stock had invested $4.50 at a 40 percent compounded
annual rate of return, subject to a maximum adjustment of a reduction in the
Conversion Price which results in the number of shares of Common Stock issuable
upon conversion of one share of Series B Preferred Stock increasing by .16875
shares.

         Upon the completion of the IPO, each outstanding share of Series B
Preferred Stock automatically converted into approximately .5729 shares of
Common Stock.

         In connection with the Series B Preferred Stock offering, the Company
sold 2,843 warrants to purchase shares of Common Stock for $6.00 to a selected
dealer of the Series B Preferred Stock offering. The warrants are exercisable at
a price of $9.18 per share for five years ending September 15, 1999.

         Pursuant to an offering of its Series A Preferred Stock through a
private placement which was completed in December 1993 (the "Series A Preferred
offering"), the Company raised $9,413,490 of which $1 million was exchanged for
related party loans (see Note 9) (net of related expenses of $1,126,041) through
the sale of 2,342,118 shares of Series A Preferred Stock. The conversion
features and anti-dilution provisions of the Series A Preferred were
substantially equivalent to those of the Series B Preferred Stock described
above.

         Upon the completion of the IPO, each outstanding share of Series A
Preferred Stock automatically converted into approximately .5729 shares of
Common Stock.


                                      F-16
<PAGE>   48
                                 BIOFIELD CORP.
                          (A DEVELOPMENT STAGE COMPANY)
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED


8. STOCKHOLDERS' EQUITY (CONTINUED)

         In connection with the Series A Preferred Stock offering, the Company
sold 103,879 warrants to purchase shares of Common Stock for $2,119 to the
Placement Agent for the Series A Preferred Stock offering. The warrants are
exercisable at a price of $9.18 per share for five years ending November 5,
1998.

         In connection with a private placement of Common Stock offering in 1992
(the "1992 Financing"), the Company issued 22,849 redeemable stock purchase
warrants, of which 2,058 have been exercised. The warrants were exercisable at a
price of $9.79 per share commencing January 31, 1993 and ending January 31,
1997.

         The Company has reserved approximately 2.9 million shares of Common
Stock for future issuance upon the exercise and purchase of options and warrants
outstanding as of December 31, 1997.

9. RELATED PARTY TRANSACTIONS

         Chairman/Major Stockholder--During the fiscal year ended March 31,
1994, the Chairman/Major Stockholder loaned the Company $500,000, bearing
interest at 10 percent per annum, pursuant to a series of demand promissory
notes. The principal of such notes was exchanged for 111,111 shares of Series A
Preferred Stock in connection with the Series A Preferred Stock offering (see
Note 8), and the accrued interest thereon was paid during the year ended March
31, 1994.

         Former Director/Parent of Chief Executive Officer--In June 1992, the
Company entered into a series of agreements with a then director of the Company,
also father of the Vice Chairman/Chief Executive Officer, and the director's
wholly owned corporation, Abel Laboratories, Inc. ("Abel"). The first agreement,
called the Laboratory Services Agreement (the "Laboratory Agreement"), engaged
Abel to provide specified pre-clinical research in connection with the Company's
products. The Company spent $750,000 in total for such specified research. The
Company also retained Abel to conduct other research which aggregated
approximately $215,000. The Laboratory Agreement expired on December 31, 1993;
however, the Company and Abel have agreed that any research conducted by Abel
after expiration of the Laboratory Agreement will be pursuant to substantially
the same terms as the original agreement and will be approved and invoiced on a
case-by-case basis. The Company has retained Abel to conduct additional
preclinical research which aggregated approximately $595,000, $576,000, and
$157,000, during the years ended December 31, 1997, 1996 and 1995, respectively.
Amounts owed to Abel at December 31, 1997 and 1996 are recorded as due to
affiliate in the accompanying balance sheets. The director resigned from his
position on the Board of Directors on April 7, 1993.

         In connection with the Laboratory Agreement, the Company granted Abel
the option to purchase 61,275 shares of Common Stock at $8.16 per share.
Following the completion of the Company's Series A Preferred Stock offering, the
exercise price of $8.16 was reduced to $2.04 per share based on the market
capitalization of the Company after completion of such offering. In addition,
during 1995 the Company granted to the former director 24,510 stock options at
$10.20 per share for the purchase of the Company's Common Stock, which vested
immediately upon grant. The options are included in the outstanding options as
of December 31, 1996 (see Note 10).

         The Company has also entered into a patent royalty agreement with the
former director and Abel which would assign all rights to the Company for any
patented inventions resulting from performance under the services agreement and
used by the Company. The Company will pay royalties calculated by multiplying
specified percentages (ranging from five to 20 percent) times either future net
sales or net license fees collected from such patented inventions, if any, up to
a maximum of $2,000,000 per invention. As of December 31, 1997, the Company has
been issued a United States Patent of which the former director is a named
co-inventor. (See Note 4).

         During the fiscal year ended March 31, 1994, the former director loaned
the Company $500,000, bearing interest at 10 percent per annum, pursuant to a
series of demand promissory notes. The principal of such notes was exchanged for
111,111 shares of Series A Preferred Stock in connection with the Series A
Preferred Stock offering (see Note 8), and the accrued interest thereon was paid
during the year ended March 31, 1994.


                                      F-17
<PAGE>   49
                                 BIOFIELD CORP.
                          (A DEVELOPMENT STAGE COMPANY)
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED


9.  RELATED PARTY TRANSACTIONS (CONTINUED)

         Chairman of the Scientific and Clinical Advisory Boards--The Company
commenced formation of its Scientific and Clinical Advisory Boards
(collectively, the "Advisory Boards") during 1994. As a result, the Company
entered into a one-year consulting agreement dated January 1, 1994, subject to
an annual renewal option, with the Chairman of the Advisory Boards which
provides for compensation of $150,000 per year, as amended, and options to
purchase 58,823 shares of Common Stock at $10.20 per share. As of December 31,
1997 such options are fully vested. In June 1997, the Chairman of the Advisory
Boards was granted options to purchase 50,000 shares of Common Stock at $4.69
per share pursuant to the Biofield Corp. 1996 Option Plan. Such options vest
ratably over a two year period commencing on June 4, 1997. The Chairman of the
Advisory Boards also served as a member of the Company's Board of Directors
since June 1997.

         The Company has also entered into a separate one-year agreement dated
January 1, 1995, (subsequently renewed), with the Chairman of the Advisory
Boards' corporation to provide services in conducting certain research projects.
In consideration for the performance of such research projects, the Company paid
approximately $300,000, $300,000 and $200,000 during the years ended December
31, 1997, 1996 and 1995, respectively.

10. STOCK OPTIONS

         At December 31, 1997, the Company has three fixed option plans, which
are described below. The Company applies APB 25 and related interpretations in
accounting for its plans. SFAS 123 was issued by the FASB in 1995 and, if fully
adopted, will change the methods for recognition of cost on plans similar to
those of the Company. The reporting requirements of SFAS 123 are required for
options issued to nonemployees (excluding nonemployee directors) after December
15, 1995. Adoption of SFAS 123 for options issued to employees is optional;
however, proforma disclosures as if the Company adopted the cost recognition
requirements under SFAS 123 in 1996 and 1995 are presented below.

 (a)     The Company's 1992 Employee Stock Incentive Plan (the "1992 Plan")
         provides for the grant of stock options, stock appreciation rights
         ("Rights"), and stock bonus awards ("Awards") to acquire a maximum of
         147,060 shares of the Company's Common Stock. The 1992 Plan permits the
         granting of incentive stock options ("ISOs") or non-qualified stock
         options ("NSOs") at the discretion of the Stock Option Committee (the
         "Committee"). The 1992 Plan provides that the Committee must establish
         an exercise price for ISOs and Rights which is not less than the fair
         market value per share at the date of grant and an exercise price of
         NSOs as shall be determined. Each ISO or Right must expire within 10
         years of the date of grant. However, if ISOs are granted to persons
         owning more than 10% of the voting stock of the Company, the 1992 Plan
         states that the exercise price shall not be less than 110% of the fair
         market value per share at the date of grant and that the term of such
         ISOs shall not exceed five years. Vesting of options granted under the
         1992 Plan is determined by the Committee, and has generally been set at
         the end of two or three years.

 (b)     The Biofield Corp. 1996 Option Plan, as amended (the "1996 Plan"),
         provides for the grant of options to acquire a maximum of 1,000,000
         shares of Common Stock. The 1996 Plan permits the granting of ISOs or
         NSOs. ISOs may be granted to individuals who, at the time of grant, are
         employees of the Company or its affiliates. NSOs may be granted to
         directors, employees, consultants and other agents of the Company or
         its affiliates. The 1996 Plan provides that the exercise price for ISOs
         is not less than the fair market value per share of the Common Stock at
         the date of grant and an exercise price for NSOs of not less than 85%
         of such fair market value. Each ISO must expire within ten years of the
         date of grant. However, if ISOs are granted to persons owning more than
         10% of the voting stock of the Company, the 1996 Plan provides that the
         exercise price may not be less than 110% of the fair market value per
         share at the date of grant and that the term of such ISOs may not
         exceed five years. Unless otherwise provided by the 1996 Plan
         Administrator, options granted under the 1996 Plan vest at a rate of
         25% per year over a four-year period.

 (c)     The Biofield Corp. 1996 Stock Option Plan for Non-Employee Directors
         (the "1996 Directors' Stock Plan") provides for the automatic grant of
         nonstatutory stock options to nonemployee directors of the Company's
         Common Stock. Options under the 1996 Directors' Stock Plan may be
         granted only to directors of the Company who are not employees of the
         Company. Under the 1996 Directors' Stock Plan, 150,000 shares of Common
         Stock have been reserved for issuance upon exercise of the options. The
         1996 Directors' Stock Plan provides for the automatic grant of options
         to eligible directors.


                                      F-18
<PAGE>   50
                                 BIOFIELD CORP.
                          (A DEVELOPMENT STAGE COMPANY)
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED


10. STOCK OPTIONS (CONTINUED)

         Pursuant to the 1996 Directors' Stock Plan, each eligible director
         serving on the Board on the effective date of the 1996 Directors' Stock
         Plan automatically received an option to purchase 10,000 shares of
         Common Stock, subject to vesting in three equal annual installments.
         Subsequently, whenever a new director joins the Board, such director
         shall automatically receive options to purchase 10,000 shares of Common
         Stock on the date of his or her election to the Board, subject to
         vesting in three equal annual installments. In each year other than the
         year in which an initial grant of options is received by a director,
         such director shall automatically receive options to purchase 2,500
         shares of Common Stock. The term of each option granted under the 1996
         Directors' Stock Plan is 10 years. The exercise price of each option
         under the 1996 Directors' Stock Plan must be equal to the fair market
         value of the Common Stock subject to the option on the date of the
         grant.

         A summary of the status of the Company's three fixed option plans as of
December 31, 1997, 1996 and 1995 and the changes during the years ended December
31, 1997, 1996 and 1995 is presented below:

<TABLE>
<CAPTION>
                                                            1997                 1996                   1995
                                                   -------------------   --------------------   -------------------
                                                                 Wgtd.                 Wgtd.                  Wgtd.
                                                                  Avg.                  Avg.                   Avg.
                                                                 Exer.                  Exer.                 Exer.
                                                    Shares       Price    Shares       Price     Shares       Price
                                                   --------     ------   --------     ------    --------     ------
         <S>                                       <C>          <C>      <C>          <C>       <C>          <C>
         Outstanding at beginning of period ...     251,071     $ 9.30    103,914     $ 9.18      27,693     $ 9.18
         Granted ..............................     692,700       4.52    205,000      11.18      78,426       9.18
         Exercised ............................      (1,632)      9.18         --         --          --         --
         Canceled .............................    (217,269)      8.32    (57,843)     15.72      (2,205)      9.18
                                                   --------              --------               --------
         Outstanding at end of year ...........     724,870       5.02    251,071       9.30     103,914       9.18
                                                   ========              ========               ========
         Options exercisable at year end ......     415,837       5.30     64,036       9.18      34,632       9.18
                                                   ========              ========               ========
         Options available for future grant....     572,189               545,989                 43,146
                                                   ========              ========               ========
         Weighted average fair value of
           options granted during the
           period..............................    $   3.61              $   6.42               $   2.50
                                                   ========              ========               ========
</TABLE>

         All options granted under the Company's three fixed option plans have
an exercise price equal to the market price of the stock on the grant date. The
Company has also granted NSOs outside of the Company's three fixed option plans
to certain officers, directors and consultants of the Company which are
exercisable over various periods through December 1, 2005. Certain of these NSOs
are performance based options and become exercisable solely upon the achievement
of certain milestones as described in the option agreements, and certain NSOs
granted become exercisable immediately in the event of a merger or sale of all
or substantially all of the assets of the Company. A summary of the status of
the Company's NSOs granted outside of the three plans as of December 31, 1997,
1996, and 1995 and the changes during the years ended December 31, 1997, 1996
and 1995, is presented below:




                                      F-19
<PAGE>   51
                                 BIOFIELD CORP.
                          (A DEVELOPMENT STAGE COMPANY)
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED


10. STOCK OPTIONS (CONTINUED)


<TABLE>
<CAPTION>
                                                            1997                 1996                    1995
                                                   --------------------   -------------------   --------------------
                                                                  Wgtd.                 Wgtd.                  Wgtd.
                                                                  Avg.                  Avg.                   Avg.
                                                                  Exer.                 Exer.                  Exer.
                                                      Shares      Price     Shares      Price      Shares      Price
                                                   ----------     -----   ----------    -----   ----------    ------
         <S>                                       <C>            <C>     <C>           <C>     <C>           <C>
           Outstanding at beginning of period       1,362,015     $7.03    1,362,015    $7.03    1,023,778    $ 6.17
           Granted.............................       230,000      4.83           --       --      389,708      9.69
           Exercised...........................       (49,048)     3.13           --       --           --        --
           Canceled............................      (343,434)     9.85           --       --      (51,471)    10.20
                                                   ----------             ----------            ----------
         Outstanding at end of year ...........     1,199,533      5.96    1,362,015     7.03    1,362,015      7.03
                                                   ==========             ==========            ==========
         Options exercisable at year end              945,806      6.04    1,105,966     6.35      951,716      5.87
                                                   ==========             ==========            ==========
         Weighted average fair value of
           options granted during the
                    period.....................    $     3.05             $       --            $     3.76
                                                   ==========             ==========            ==========
</TABLE>

         The exercise prices of some NSOs granted during 1995 outside of the
Company's three fixed option plans differ from the market price of the stock on
the grant date, and a summary of the weighted-average prices and
weighted-average fair values of the NSOs granted during 1995 outside of the
Company's three fixed option plans is presented below:

<TABLE>
<CAPTION>
                                                              Wgtd. Avg.    Wgtd. Avg.
                                                               Exercise       Fair
                                                                 Price        Value
                                                              ----------    ----------
         <S>                                                  <C>           <C>
         Exercise price is less than the market price .....     $ 5.10       $ 6.56
         Exercise price is equal to the market price ......       9.18         3.86
         Exercise price exceeds the market price ..........      11.90         2.69
</TABLE>

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

<TABLE>
<CAPTION>
                                                  Options Outstanding             Options Exercisable
                                        --------------------------------------  -------------------------
                                                       Wgtd. Avg.
         Range of                          Number      Remaining    Wgtd. Avg.     Number      Wgtd. Avg.
         Exercise                       Outstanding   Contractual    Exercise   Exercisable    Exercise
         Prices                         at 12/31/97       Life         Price    at 12/31/97      Price
         ------                         -----------       ----         -----    -----------      -----
         <S>                            <C>           <C>           <C>         <C>            <C>
         $0.25...................          63,480          4.2         $0.25       63,480        $0.25
          1.02...................          61,275          4.9          1.02       61,275         1.02
          2.04...................         245,099          4.7          2.04      245,099         2.04
          2.94...................         200,000          9.5          2.94      120,834         2.94
          4.50 to 4.88...........         555,700          9.4          4.71      167,500         4.70
          5.10...................          49,020          7.1          5.10       49,020         5.10
          6.62...................          60,000          9.1          6.62       50,000         6.62
          8.16 to 11.00..........         689,829          3.9          9.22      604,435         9.29
</TABLE>


                                      F-20
<PAGE>   52
                                 BIOFIELD CORP.
                          (A DEVELOPMENT STAGE COMPANY)
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED


10. STOCK OPTIONS (CONTINUED)

         As provided by SFAS 123, the fair value of each option grant before the
Company's IPO is estimated on the date of grant using the minimum value method,
and the fair value of each option grant after the Company's IPO is estimated on
the date of grant using the Black-Scholes option pricing model. The following
weighted average assumptions were used for option grants in 1995: (i) dividend
yield of 0%; (ii) risk-free interest rate of 6.56%; and (iii) option term of 8.3
years. The following weighted average assumptions were used for option grants
during 1996 before the IPO: (i) dividend yield of 0%; (ii) risk-free interest
rate of 6.65%; and (iii) option term of 10 years. The following weighted average
assumptions were used for option grants during 1996 after the IPO: (i) dividend
yield of 0%; (ii) expected volatility of 72.5%; (iii) risk-free interest rate of
6.26%; and (iv) expected life of 4 years. The following weighted average
assumptions were used for option grants during 1997 with an expected life of 4
years: (i) dividend yield of 0%; (ii) expected volatility of 82.2%; and (iii)
risk-free interest rate of 6.19%. The following weighted average assumptions
were used for option grants during 1997 with an expected life of 2 years: (i)
dividend yield of 0%; (ii) expected volatility of 107.84%; and (iii) risk-free
interest rate of 6.00%.

         Had compensation cost for the Company's stock option plans been
determined based on the fair value at the grant dates for awards under those
plans consistent with the method of SFAS 123, the Company's net loss and net
loss per common and common equivalent share for the years ended December 31,
1997, 1996 and 1995 would have been increased to the pro forma amounts indicated
below:

<TABLE>
<CAPTION>
                                                          1997              1996              1995
                                                      ------------      ------------      ------------
         <S>                                          <C>               <C>               <C>
         Net loss
           As reported                                $(10,151,040)     $(10,036,090)     $ (8,739,860)
           Pro forma                                  $(11,834,028)     $(10,635,339)     $ (9,111,884)

           Basic and Diluted net loss per share
            As reported                               $      (1.53)     $      (1.66)     $      (2.09)
            Pro forma                                 $      (1.78)     $      (1.76)     $      (2.18)
</TABLE>


         The effects of applying SFAS 123 in this proforma disclosure are not
indicative of future amounts. SFAS 123 does not apply to awards prior to 1995,
and additional awards in future years are anticipated.

11. DEVELOPMENT STAGE COMPANY

         The Company is in the development stage and, to date, has generated no
revenues, has incurred expenses and has sustained losses. Consequently, its
operations are subject to all of the risks inherent in the establishment of a
new business enterprise. For the period from inception through December 31,
1997, the Company has accumulated a deficit of $45,519,920. There can be no
assurance that the Company will have sufficient funds available to complete its
research and development programs or be able to commercially manufacture or
market any products in the future; that future revenues will be significant; or
that any sales will be profitable. The Company expects operating losses to
increase for at least the next several years due principally to the anticipated
expenses associated with the proposed commercialization of the Biofield
Diagnostic System, development of, and clinical trials for, the proposed
Biofield screening system, and other research and development activities.

         The Company had approximately $12,597,960 of cash, cash equivalents and
short-term investments at December 31, 1997. The Company believes that its
available cash, cash equivalents and investment securities, and investment
income should be sufficient to fund the Company operations at least through the
end of calendar year 1998.


                                      F-21