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                                                  This document consists of 39 
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                       SECURITIES AND EXCHANGE COMMISSION
                            Washington, D.C.  20549

                                  FORM 10-KSB

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

       For the transition period from March 2, 1996 to December 31, 1996.

                                                             COMMISSION FILE NO.
                                                                         0-12850
                                                                         -------
                    DENTAL/MEDICAL DIAGNOSTIC SYSTEMS, INC.
                    ---------------------------------------
                 (NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)

<TABLE>
<S>                                                                          <C>
DELAWARE                                                                       13-3152648
----------------------------                                                -----------------
(State or other jurisdiction of                                              (I.R.S. Employer
incorporation or organization)                                              Identification No.)
</TABLE>

   200 N. Westlake Boulevard, Suite 202, Westlake Village, California, 91362
   -------------------------------------------------------------------------
              (Address of principal executive offices) (Zip Code)

        Issuer's telephone number, including area code:  (805) 381-2700

      Securities registered pursuant to Section 12(b) of the Exchange Act:
                                      None

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

                         Common Stock, $0.01 par value
                         -----------------------------
                                (Title of class)

===============================================================================

Check whether the Issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.  Yes  X   No  
                                                               ---     ---
Check if there is no disclosure of delinquent filers in response to Item 405 of
regulation S-B is not contained in this form, and no disclosure will 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-KSB or any amendment to this Form 10-KSB.  [ X ]

The issuer's revenues for the fiscal period ended December 31, 1996 were
$11,673,102.

At March 18, 1997, the issuer had 3,980,716 shares of Common Stock, $0.01 par
value, issued and outstanding.

At March 18, 1997, the aggregate market value of the outstanding shares of
voting stock held by non-affiliates of the issuer was $6,996,248.

===============================================================================

                      DOCUMENTS INCORPORATED BY REFERENCE

Items 9-12 of Part III of this Report incorporate by reference certain
information regarding the directors, executives and management of the
Registrant.


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                                     PART I

ITEM 1.  DESCRIPTION OF BUSINESS.

         Dental Medical Diagnostic Systems, Inc. ("Company") designs, develops,
manufactures and sells high technology dental equipment.  Currently, the
Company's primary emphasis is on the manufacture and sale of an intraoral
camera system, known as the TeliCam System, and a dental office networking
system, known as InTELInet, for use in connection with the TeliCam System.  The
TeliCam System displays close-up color video images of dental patients' teeth
and gums.  These TeliCam images assist dentists in displaying dental health and
hygiene problems to patients and, as a result of such display, promote patient
acceptance of treatment plans.  The TeliCam System offers dentists the ability
to capture and display multiple video images without an expensive external
capture device such as a video cassette recorder or color printer, thereby
providing a low-cost alternative to the more expensive traditional intraoral
dental camera systems.  For this reason, the Company believes that the TeliCam
System should be particularly attractive to the overseas market because printed
copies of dental images are not generally required by foreign insurance
companies.  The Company commenced shipments of TeliCam Systems to customers in
February 1996.  Through December 31, 1996, the Company had sold 2,070 TeliCam
Systems to dentists throughout the United States, as well as to several dental
schools, and 940 TeliCam Systems internationally.  The Company is in the
process of finalizing the development of an enhanced version of the TeliCam
System, the TeliCam II, which it anticipates introducing in the current
quarter.

         In November 1996, the Company introduced its InTELInet Networking
System ("InTELInet") for use with the TeliCam System. InTELInet creates a
video-electronic information link between the different operatories of the
dental office. InTELInet is different from other intra-office networking
systems known to the Company in that it enables simultaneous use of two or more
intraoral cameras, which allows dentists and their staffs to conduct more than
one patient examination at a time using two or more intraoral cameras
simultaneously. In addition, the TeliCam, unlike other intraoral cameras on
the market today has its own microprocessor video capture device (or "frame 
grabber") built in, facilitating the need for only one central video printer
regardless of the number of cameras being used at the same time. Competing
systems require a separate color video printer or other image storage device to
capture the video images from each intraoral camera that is in use. The color
printer or other image storage device is typically the second most expensive
element of an intraoral camera system. The TeliCam System and InTELInet
presently enable the Company to offer its customers more efficient and
cost-efficient networking of multiple operatories. From the time of its first
introduction in late November 1996, through March 25, 1997, 145 InTELInet
multiple operatory networking systems have been sold by the Company.

         In addition to its work on the TeliCam II and the InTELInet
system, the Company is currently working with third parties in the
development of a teeth whitening system.  This system would utilize a high
energy, high pressure ionized gas in the presence of an electrical current to
create a laser-type light to effect teeth whitening.  The Company believes that
the teeth whitening system can produce faster results at lower cost than
currently available teeth whitening systems. Currently, the leading system for
teeth whitening in the dental office requires more than two hours of the
dentist's time.  The Company is currently testing technologies for whitening
teeth that have the potential to whiten teeth in a dentist's office in
substantially less time and by a dental hygienist instead of the dentist.  The
testing involves the compatibility of the light source and catalytic chemicals
to produce effective and rapid teeth whitening.  The technology also functions
as a curing system for curing composites, adhesives and sealants used in dental
bonding and repair.  Currently available light curing systems can achieve
similar results to those anticipated to be produced by the system currently
being tested by the Company.  However, the Company believes the curing system
it is testing can be sold at a price point significantly below that of
functionally competitive systems.  If the teeth whitening system is
successfully developed, the Company may be required to enter into contractual
arrangements with the third party developers retained by the Company prior to
marketing the system.  The Company is also negotiating a joint venture to
develop digital x-ray technology for the dental market.  This technology, if
successfully developed, would provide a more user-friendly digital x-ray system
comparable to functionally competing systems at a significantly lower price
point.  Digital x-ray systems, including those currently on the market, reduce
radiation exposure compared to conventional x-ray systems and allow dentists to
view x-ray images in real-time without the time-consuming process of





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film development and eliminate the need to use and dispose of chemicals
required to develop conventional x-ray film.  This technology also will allow
database storage and recall of images for comparison purposes.

         The Company was organized in New York in 1981 under the name Edudata
Corporation and reincorporated in Delaware in 1983 by Sun Equities Corporation
("Sun") which owned approximately 81 percent of the Company's outstanding
common stock until August 11, 1995.  At that time, Sun distributed the shares
of the Company that it owned to its stockholders in the form of a dividend.

         The Company was initially organized to provide education in the use of
personal computers, to market software programs developed by others, and to
provide a broad range of advisory services to businesses in conjunction with
both computer and non-computer related management issues.  The Company's
original concept was modified, however, and until 1987, the Company was engaged
in the ownership and operation of technical schools through its subsidiaries,
Betty Owen Secretarial Systems, Inc. and Taylor Business Institute, Inc., and
in the development, construction and sale of single-family homes and commercial
buildings through its majority-owned subsidiary, Lytton & Tolley, Inc.  In 1988
the Company disposed of its subsidiaries and their operations and determined to
use the proceeds to acquire another business.  From 1988 to early 1996, the
Company's operations were limited to exploring opportunities to acquire or to
become an operating business.

         On March 1, 1996, the Company acquired all the outstanding securities
of Dental\Medical Diagnostic Systems LLC, a California limited liability
company ("DMD"), and Bavarian Dental Instruments, Inc., a California close
corporation ("BDI"), in exchange for the issuance by the Company of a total of
1,706,626 restricted shares of its Common Stock.  As a result of these
transactions, the former members of DMD and former stockholders of BDI gained a
majority of the Company's voting securities and the management control of the
Company was transferred to the former management of DMD and BDI.  For
accounting purposes these transactions were treated as a recapitalization of
DMD and BDI, with DMD and BDI combined as the acquiror (reverse acquisition).
As a result, the combined historical financial statements of DMD and BDI became
the financial statements of the Company.  Further, since the Company's assets
at February 29, 1996 consisted solely of approximately $660,000 in cash and
cash equivalents and the Company had no operations in the seven years prior to
the transactions, for accounting purposes these transactions were recorded by
the Company as the issuance of Common Stock for cash held by the Company.

         BDI, a subsidiary of the Company, distributes and markets reusable
diamond dental burs pursuant to certain agreements with Russian manufacturers.
On July 9, 1996, the Company determined to focus future strategic development
primarily upon high value added dental/medical products and technology and,
accordingly, decided to discontinue the dental bur product line, comprised of
low-margin low-technology products, as extrinsic to the Company's strategic
goals.  The Company thereafter commenced an orderly liquidation of its
inventory of dental burs, and expects the liquidation to be completed in 1997
without significant adverse effect on operations.

         On November 27, 1996, the Company raised $1,314,766, net of issuance
costs of $285,234, through a private placement of 32 Units to certain
accredited investors. Each Unit consisted of a secured promissory note in the
principal amount of $50,000 (a "Bridge Note") and a warrant (a "Bridge
Warrant") to purchase 18,750 shares of Common Stock at a purchase price of
$2.67 per share. The Bridge Notes bear interest at a rate of 10% per annum and
the principal and all accrued interest are payable upon the earliest to occur
of: (a) May 27, 1998; (b) certain change in control events effecting the
Company; (c) a public offering of the Company's securities; or (d) the sale by
the Company's Chief Executive Officer of all or substantially all of his
holdings of Common Stock. Upon the happening of certain events the holders of
the Bridge Notes will have the right to convert the outstanding balances of
their Bridge Notes into shares of Common Stock at a rate of $2.67 per share.
The Warrants are first exercisable on November 27, 1997 and expire on November
27, 2002. As a result of the warrant issuance, the Bridge Notes have been
discounted by $259,103, which amount is being amortized over the term of the
Bridge Notes.

         On February 28, 1997, the Company filed with the Securities and
Exchange Commission a registration statement on Form SB-2 relating to a proposed
public offering by the Company (the "Proposed Offering") of an aggregate of
1,500,000 shares of Common Stock and 1,500,000 Redeemable Stock Purchase
Warrants at a proposed offering price of $4.50 and $0.50, respectively.  Upon
the effectiveness of the Proposed Offering all of the Bridge Notes are required
to be repaid and all of the Bridge Warrants are required to be exchanged for
1,600,000 new warrants. Assuming the Public Offering closes in April 1997, the
Company will repay the Bridge Notes in the principal amount of $1,600,000
together with accrued interest of $100,000; and 1,600,000 warrants will be
issued to the holders of the Bridge Warrants in exchange therefore.  There can
be no assurance that the Proposed Offering will be successful, and if the
Proposed Offering is not successful, the Bridge Notes and Bridge Warrants will
remain outstanding.

INDUSTRY OVERVIEW

         The results of a recent study commissioned by the American Dental
Association ("ADA") indicate that the number of U.S. dental visits has grown,
from 360 million in 1975, to 534 million in 1995; and that the total
expenditure for dental care in the U.S. in 1995 was approximately $43.2
billion.  According to industry estimates, during 1995 there were approximately
130,000 active dentists serving the United States marketplace in about 100,000
dental practices.

         In 1994, the U.S. dental medical/surgical equipment market was
estimated by the ADA to be a $2.5 billion annual industry, with a projected
annual growth rate of between 6% and 8%, reaching $3.5 billion annually by the
year 2000.  The ADA reports that the average annual purchase of dental supplies
and equipment in 1995 was approximately $19,000 per dentist.  Factors
contributing to this growth include the general aging of the population,
technological advances, increasing regulatory requirements relating to infection
control, and the proliferation of dental insurance coverage.  In addition to the
domestic market for dental supplies and equipment, the ADA findings indicate
that there is a multi-billion dollar annual market for such items in Europe and
Asia.

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<PAGE>   4
GROWTH STRATEGY

         The Company's goal is to be a leading manufacturer and distributor of
high technology dental products.  The Company believes that its focus on the
following business strategies will help it to achieve this goal:

          Delivery of Innovative, Value-Oriented Products.  The Company seeks
         to provide innovative products that offer a strong price-value
         relationship to its customers.  The Company endeavors to deliver
         products that offer, or will offer, greater or differentiated
         operating features at competitive prices.

          Commitment to Product Development.  From inception (October 23, 1995)
         through December 31, 1996, the Company has devoted over $850,000 to
         product development activities.  The Company believes that its focus
         on new and improved technologies is essential if the Company is to
         establish and maintain a competitive position in the marketplace.

          Growth Through Acquisitions and Joint Ventures.  The Company
         anticipates that it will complement its internal growth, both in
         number of products and sales, through acquisitions and joint ventures
         and a focus on developing and marketing new technologies for the
         dental practice.  The Company believes that acquisitions and joint
         ventures present an effective means of obtaining technical personnel
         and obtaining or expanding technologies, products and markets.  The
         Company continually evaluates opportunities for acquisitions and joint
         ventures, although it is not currently party to any commitment,
         understanding or agreement related to such endeavors.

          Expansion of Domestic and International Sales.  Although both the
         domestic and international dental supply markets are highly
         competitive, the Company believes that the size of these markets
         provides an excellent opportunity for growth.  The Company intends to
         increase its domestic sales through the introduction of new high
         technology products and to increase its international sales through
         entry into additional distribution agreements with foreign
         distributors. The Company intends to capitalize on its experienced
         management and sales team to increase its domestic and international
         sales.

TELICAM SYSTEM

         Currently, the Company's primary product is an intraoral dental camera
known as the TeliCam System. Management believes that the TeliCam System, a
video memory, full color intraoral dental camera system is unlike any other
system currently available on the market. Traditional intraoral dental cameras
consist of: (i) a handpiece, the end of which contains the camera lens and
light source; (ii) a camera chip ("CCD chip"), with a camera chip processing
unit ("CCU processor"), which interprets the camera's video signals; (iii)
video and light source cables which connect the handpiece to the CCU processor,
and (iv) an external capture device, such as a video recorder or printer so
that the dentist and patient can view the video image. The primary
distinguishing feature of the TeliCam System is its ability to capture and
"freeze" video images and display multiple images simultaneously without an
external capture device. The heart of the TeliCam System's image capture
capabilities is the Teli CCU processor which is incorporated therein. The Teli
CCU processor, which was designed specifically for intraoral dental camera use,
has a built-in image capturing mechanism or "frame grabber" computer chip. This
gives the dental professional the ability to capture from one to four images
with the touch of a button on the handpiece or the use of a foot pedal, and
eliminates the need for network installation and the hardwiring of external
capture devices. Additionally, the Teli CCU processor's frame grabber
incorporates an automatic light intensity control which eliminates reflection
and glare from the fiberoptic illumination for clearer video images. The
Company has exclusive world-wide rights to market the Teli CCU processor to the
dental market.

         Another feature of the TeliCam System is its 1/3 inch camera with
near-focus capabilities as close as two millimeters and magnification
capabilities of up to 120 times the actual image, all available without the
necessity of changing lenses. The Company believes that this functionality is
only available in significantly more expensive competing models. Additionally,
the TeliCam System features an ergonomically designed, easy-to-use monocoil
cable, which connects the camera's handpiece to the CCU processor. To the
extent permanent images may be required by insurance companies, auxiliary
printing systems are available from the Company.






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        The Company is currently completing the development of its TeliCam II
intraoral camera. This system, designed for the medium-priced dental market, is
distinguished from the Company's current TeliCam I by its increased fiber optic
illumination, rotary focus capability which increases ease of use,  and
increased image clarity. The TeliCam II may also be used with the InTELInet
network. The Company will introduce the TeliCam II in the second quarter of
1997. No assurances can be given that, after its introduction the TeliCam II
will achieve market success. Following introduction of the TeliCam II, the
Company will continue to market the TeliCam I because the TeliCam I will
continue to offer certain functions not available in the TeliCam II. Among
these functions is a button mechanism on the TeliCam I camera handpiece which
can be used to initiate image capture while the TeliCam II requires a foot
pedal to initiate image capture. However, the Company expects that in future
periods, sales of the TeliCam II will generally exceed same period sales of the
TeliCam I.

INTELINET VIDEO MONITORING SYSTEM

        The Company has commenced marketing of its InTELInet Video Monitoring
System ("InTELInet") which generally includes two TeliCam systems, a printer, a
video-cassette monitor, cabling and installation. InTELInet is designed to be a
cost-effective solution to the problems generally associated with standard
networking of various intraoral cameras in multiple operatories within a single
dental practice. With traditional intraoral camera networks, each camera must
be wired to a centralized printer in order to capture and store the desired
image, which must then be relayed back to the camera's monitor for viewing the
image, and back to the printer for ultimate printout. These requirements result
in substantial and expensive wiring. Also, competing intraoral cameras require
networking implementations which do not permit the simultaneous use of multiple
cameras unless a costly printer is attached to each camera. Consequently, this
type of network requires the dental practice to make a significant expenditure
for cabling and installation and on-site printers in every operatory. The
InTELInet requires significantly less cabling and eliminates the need for
purchasing multiple printers because of the built-in image capture capabilities
of the TeliCam System. The Company emphasizes the savings to dental practices
and the ease of use of the InTELInet in its marketing campaigns. The InTELInet
is being marketed by the Company only in the U.S. due to the general absence of
multiple operatory practices outside of the United States. The InTELInet
facilitates simple network expansion and is only compatible with intraoral
dental cameras marketed by the Company.

        From November 1996 through March 25, 1997, the Company has sold 145
InTELInet systems. Currently, the average sales price for a two operatory
installation is approximately $9,100 plus an additional $2,000 for each
additional operatory networked.

PRODUCT DEVELOPMENT ACTIVITIES

        The Company expended $322,467 and $528,426 for research and development
of its products for the ten months ended December 31, 1996 and from Inception to
March 2, 1996, respectively. In addition to its work on the TeliCam II, the
Company is currently working with third parties in the development of a teeth
whitening system product. This system would utilize a high energy, high pressure
ionized gas in the presence of an electrical current to create a laser type
light to effect teeth whitening. The Company believes that the teeth whitening
system can produce faster results at a lower cost than currently available teeth
whitening systems. Currently, the leading system for teeth whitening in the
dental office requires more than two hours of the dentist's time. The Company is
currently testing technologies for whitening teeth that have the potential to
whiten teeth in a dentist's office in substantially less time and by a dental
hygienist instead of the dentist. The testing involves the compatibility of the
light source and catalytic chemicals to produce effective and rapid teeth
whitening. The technology also functions as a curing system for curing
composites, adhesives, and sealants used in dental bonding and repair. Currently
available light curing systems can achieve similar results to those anticipated
to be produced by the system currently being tested by the Company. However, the
Company believes the curing system it is testing can be marketed at a price
point significantly below that of functionally competitive systems. If the teeth
whitening system is successfully developed, the Company may be required to enter
into contractual arrangements with the third party developers retained by the
Company prior to marketing the system. There can be no assurance that the
development of the teeth whitening system will be successful or commercially
viable, or that, if required, the Company will be able to enter into marketing
agreements with third parties on terms acceptable to the Company.




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         The Company is also negotiating to obtain marketing rights to digital
dental x-ray technology through a possible joint venture or through an exclusive
worldwide distribution agreement. This technology, if successfully developed or
obtained through a marketing agreement, would enable the Company to provide a
more user-friendly digital x-ray system comparable to functionally competitive
systems at a significantly lower price point. Digital x-ray systems, including
those currently on the market, reduce radiation exposure compared to
conventional x-ray systems and allow dentists to view x-ray images in real-time
without the time-consuming process of film development and eliminate the need to
use and dispose of chemicals required to develop conventional x-ray film. This
technology will allow database storage and recall of images for comparison
purposes. No assurance can be given that the Company will be able to acquire the
digital x-ray technology, or if the technology is acquired, that the Company
will be able to commercially exploit it. Additionally, the Company believes that
the teeth whitening and digital x-ray systems being considered by the Company
will require FDA approval prior to marketing, and as a consequence, the timing
of the domestic introduction of such products is uncertain. The Company will
determine whether or not to proceed with the marketing of such products based
upon the results of the development of the teeth whitening process and the
Company's negotiations with respect to the digital x-ray system.

MANUFACTURING AND COMPONENT PARTS

         The Company assembles and tests the TeliCam System, as well as develops
new products, at its facility located in Irvine, California.  With the exception
of the camera's CCU processor, the Company believes that there are multiple
sources from which it may purchase the components of the TeliCam System.  The
Company, however, anticipates that it will obtain certain of the components of
the TeliCam System from a single, in the case of the CCU processor, or limited
number of sources of supply.  Although the Company believes it will be able to
negotiate satisfactory alternative supply arrangements, failure to do so may
have a material adverse effect on the Company.  Furthermore, there can be no
assurance that suppliers will dedicate sufficient production capacity to satisfy
the Company's requirements within scheduled delivery times or at all.  Failure
or delay by the Company's suppliers in fulfilling its anticipated needs may
adversely affect the Company's ability to market the TeliCam System.

         Effective October 1, 1996, the Company amended its distribution
agreement ("BMC Distribution Agreement") with Boston Marketing, a licensed
distributor of the Teli manufactured CCD chip which includes the Teli CCU
processor.  Pursuant to the BMC Distribution Agreement, the Company has the
exclusive right (i) to market certain Teli manufactured CCD chip assemblies with
CCU processors (model numbers CS6110 S/B with Frame Grabber, CS6110 P S/B with
Frame Grabber and the CS6110 S/B without Frame Grabber (each a "Teli Unit" and
collectively the "Teli Units")) to the dental market, and (ii) to use the
"TeliCam" trademark.  The Teli Units are key components of the Company's
intraoral digital cameras.  The BMC Distribution Agreement has a five-year
initial term.  The Company has agreed to purchase a minimum of 2,500 Teli Units
per year for each of the five years, at an initial price of $750 per Teli Unit,
subject to increase after October 1, 1998.  The Company has the option to cancel
the BMC Distribution Agreement if any price increase is unacceptable. The Boston
Market Distribution Agreement is terminable by Boston Marketing if the Company
fails to meet its annual minimum purchase obligation.  The term of the BMC
Distribution Agreement may be extended by mutual agreement of the Company and
Boston Marketing for an additional five year term.  Management believes that, if
necessary, other CCD chips, CCU processors and frame grabbers could be obtained
from third-party suppliers on comparable terms, although a disruption in
supplies of components could extend for up to six months, which would materially
adversely affect the Company's operating results.

BACKLOG

         The Company generally does not operate with significant order backlog
and a substantial portion of its revenues in any quarter is derived from orders
booked in that quarter.

MARKETING AND SALES





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         U.S. Sales and Distribution.  The Company's domestic sales are made by
four full-time employees who are based at corporate headquarters, and a
national field force of independent sales representatives under the supervision
of 16 independent Regional Managers.  The Company's full time sales employees
are generally experienced in the business of marketing and distribution of
intraoral cameras to the dental industry.  The Company markets its products
through direct mail solicitations, professional publications advertising, and
attendance at dental conferences.  During 1996, the Company ran advertisements
in "Dental Products Report" and attended in excess of 70 dental conferences and
trade shows.  In addition, the Company has sold TeliCam Systems to five dental
schools including the University of Chicago, Tufts University and the
University of Louisville.  The Company believes that these and anticipated
future dental school sales will generate additional interest in, as well as
familiarity with, the Company's products at the initial stages of a dental
professional's career.  In the U.S. dental marketplace, the Company's marketing
campaign has focused on the advantages of the intra-office networking
capabilities and the significantly lower price of the TeliCam System.

         International Sales and Distribution.  In the international market,
the Company sells the TeliCam System through independent dealers and
distributors.  Presently, the Company has six contracts with independent
distributors, which agreements cover key international markets including
Northern and Western Europe, the Middle East, the Far East, Russia, Australia,
Canada and South America.  These distributors provide important support,
including customer support and product service, to customers in each of their
respective countries.  The Company had an agreement with Hiroki Umezaki, a
former officer, director and principal stockholder of the Company, pursuant to
which he was to receive a 15% commission on all sales made by the Company in
Asia, except Japan, in which his commission was to be 12%. This agreement
resulted in Mr. Umezaki earning $15,000 in commissions through December 31,
1996.  This agreement has been orally amended to provide that Mr. Umezaki shall
receive a 12% commission on sales made in Japan only.  This oral agreement is
currently being documented with these changed terms and the Company believes
that the new agreement will be signed with the new terms as described above.
Furthermore, Olympus Camera Company of Japan ("Olympus") has commenced
purchases and has recently signed a letter of intent with the Company relating
to Olympus becoming the exclusive distributor of the TeliCam System in Japan;
however, no assurance can be given that the parties will enter into a
distribution agreement.  The Company's international sales, which commenced in
April 1996, aggregated approximately $2,200,000 through December 31, 1996.
Since printed copies of dental images are not generally required by foreign
insurance companies, the Company believes that the TeliCam System Frame-grabber
image capturing mechanism, which enables dental professionals to avoid the
costs of external capture devices, and their requisite networking demands,
makes the TeliCam System particularly attractive in international markets.  The
Company currently does not intend to market the InTELInet network outside the 
United States.

TRAINING, CUSTOMER SUPPORT AND PRODUCT SERVICE

         Management believes that operating the TeliCam System requires very
little training.  Nevertheless, as part of the Company's customer service
program, the sales representative or international distributor responsible for
the sale of the TeliCam System schedules an installation and training
appointment when the system is delivered.  In addition, the Company provides a
TeliCam System operating manual to its customers which provides answers to
frequently asked questions about the product's operations.  The Company's
technical support personnel, and internationally, the support personnel of the
Company's distributors, are also available to answer customers telephone
inquiries during normal business hours.  All TeliCam Systems come with a
one-year complete parts and labor warranty and extended warranties are also
available.  InTELInet installation and maintenance is provided through
independent installers retained by the Company.

PATENTS AND PROPRIETARY RIGHTS

         The patents pertaining to the various components of the TeliCam System
are all owned by third parties.  Pursuant to an agreement with Boston Marketing
Company, Ltd. ("Boston Marketing") the Company has the exclusive right to
market TeliCam's CCD processor unit ("Teli Units") to the dental market
("Boston Marketing Distribution Agreement").  Also pursuant to this agreement,
the Company has the rights to use the "TeliCam" trademark.





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         The Company's success and ability to compete is dependent in part upon
its proprietary technology.  The Company's proprietary technology is not
protected by any patents.  Consequently, the Company relies primarily on
trademark, trade secret and copyright laws to protect its technology.  Also,
the Company is implementing a policy that all employees and third-party
developers sign nondisclosure agreements.  However, there can be no assurance
that such precautions will provide meaningful protection from competition or
that competitors will not be able to develop similar or superior technology
independently.  Also, the Company has no license agreements with the end users
of its products, so it may be possible for unauthorized third parties to copy
the Company's products or to reverse engineer or otherwise obtain and use
information that the Company regards as proprietary.  If litigation is
necessary in the future to enforce the Company's intellectual property rights,
to protect the Company's trade secrets or to determine the validity and scope
of the proprietary rights of others, such litigation could result in
substantial costs and diversion of resources and could have a material adverse
effect on the Company's business, operating results and financial condition.
Ultimately, the Company may be unable, for financial or other reasons, to
enforce its rights under intellectual property laws.  In addition, the laws of
certain countries in which the Company's products are or may be distributed
may not protect the Company's products and intellectual property rights to the 
same extent as the laws of the United States.

         The Company believes that its products do not infringe upon any valid
existing proprietary rights of third parties.  Although the Company has
received no communication from third parties alleging the infringement of
proprietary rights of such parties, there can be no assurance that third
parties will not assert infringement claims in the future.  Any such third
party claims, whether or not meritorious, could result in costly litigation or
require the Company to enter into royalty or licensing agreements.  There can
be no assurance that the Company would prevail in any such litigation or that
any such licenses would be available on acceptable terms, if at all.  If the
Company were found to have infringed upon the proprietary rights of third
parties, it could be required to pay damages, cease sales of the infringing
products and redesign or discontinue such products, any of which alternatives,
individually or collectively could have a material adverse effect on the
Company's business, operating results and financial condition.

GOVERNMENT REGULATION

         The products which the Company sells are considered to be medical
devices and the Company is considered to be a medical device manufacturer and
is subject to control by, among other governmental entities, the FDA and the
corresponding agencies of the states and foreign countries in which the Company
sells its products.  These regulations govern the introduction of new medical
devices, the observance of certain standards with respect to the manufacture
and labeling of medical devices, the maintenance of certain records and the
reporting of potential product problems and other matters.  A failure to comply
with such regulations could have material adverse effects on the Company.

         The Federal Food, Drug and Cosmetic Act ("FDC Act") regulates medical
devices in the United States by classifying them into one of three classes
based on the extent of regulation believed necessary to ensure safety and
effectiveness.  Class I devices are those devices for which safety and
effectiveness can reasonably be ensured through general controls, such as
device listing, adequate labeling, premarket notification and adherence to good
manufacturing practices ("GMP") as well as medical device reporting ("MDR")
labeling and other regulatory requirements.  Class II devices are those devices
for which safety and effectiveness can reasonably be ensured through the use of
special controls, such as performance standards, post-market surveillance and
patient registries, as well as adherence to the general controls provisions
applicable to Class I devices.  Class III devices are devices which generally
must receive premarket approval by the FDA pursuant to a premarket approval
("PMA") application to ensure their safety and effectiveness.  Generally, Class
III devices are limited to life sustaining, life supporting or implantable
devices; however, this classification can also apply to novel technology or new
intended uses or applications for existing devices.

         Before they can be marketed, most medical devices introduced to the
United States market are required by the FDA to secure either clearance of a
pre-market notification pursuant to Section 510(k) of the FDC Act (a "510(k)
Notification") or approval of a PMA.  Obtaining approval of a PMA application
can take several years.  In contrast, the process of obtaining 510(k)
Notification clearance generally requires a submission of substantially less
data and generally involves a shorter review period.  Most Class I and Class II
devices enter the market via the 510(k) Notification procedure, while new Class
III devices ordinarily enter the market via the more rigorous PMA procedure.
In general, clearance of a 510(k) Notification may be obtained if a
manufacturer or seller of medical devices can





                                       8
<PAGE>   9
establish that a new device is "substantially equivalent" to a predicate device
other than one that has an approved PMA.  The claim for substantial equivalence
may have to be supported by various types of information, including clinical
data, indicating that the device is as safe and effective for its intended use
as its legally marketed equivalent device.  The 510(k) Notification is required
to be filed and cleared by the FDA prior to introducing a device into
commercial distribution.  Market clearance for a 510(k) Notification submission
may take 3 to 12 months or longer. If the FDA finds that the device is not
substantially equivalent to a predicate device, the device is deemed a Class
III device, and a manufacturer or seller is required to file a PMA application.
Approval of a PMA application for a new medical device usually requires, among
other things, extensive clinical data on the safety and effectiveness of the
device.  PMA applications may take years to be approved after they are filed.
In addition to requiring clearance or approval for new medical devices, FDA
rules also require a new filing and review period prior to marketing a changed
or modified version of an existing legally marketed device if such changes or
modifications could significantly affect the safety or effectiveness of that
device.  The FDA also prohibits an approved device from being promoted or
marketed for unapproved applications.

         Over time, the FDA has adopted classification regulations for certain
medical devices and has designated some of these devices as Class I, while
exempting certain of them from the 510(k) Notification requirements.  The
dental burs currently sold by the Company's BDI subsidiary have been classified
by the FDA as Class I devices and are exempt from the 510(k) Premarket
Notification requirements.  They are not exempt from GMP, medical device
reporting, labeling and other regulatory requirements.  The FDA has not
specifically classified intraoral dental cameras.  The FDA, however, has
classified certain other devices, including a surgical camera and a fiber-optic
dental light, as Class I devices exempt from 510(k) Notification and the
Company believes that its intraoral dental camera is likely to be treated in
the same manner provided that it continues to market this device only for use
in assisting patient communications and in providing a record in order to
facilitate insurance payment or reimbursement.  While the Company believes its
position is correct, there can be no assurance that the FDA will agree with
such position.  If the FDA disagrees, the Company will be required to file a
510(k) Notification and may be required to suspend sales of the TeliCam System
until FDA clearance is granted.  The Company does not promote the TeliCam
System for diagnostic uses.  If intraoral dental cameras are marketed or
promoted for diagnostic uses or for treatment uses, the FDA generally takes the
position that a 510(k) Notification must be filed for clearance by the FDA.

         The Company believes that it will be required to obtain FDA approval
or clearance prior to introduction of any teeth whitening and digital x-ray
product lines, if such product lines are, in fact, developed.

         Pursuant to FDA requirements, the Company has registered its
manufacturing facility with the FDA as a medical device manufacturer, and
listed the medical devices it manufactures.  The Company also is subject to
inspection on a routine basis for compliance with FDA regulations.  These
regulations include those covering GMP which require that the Company
manufacture its products and maintain its documents in a prescribed manner with
respect to manufacturing, testing and control activities.  Further, the Company
is required to comply with other FDA requirements with respect to labeling, and
the MDR regulations which require that the Company provide Information to the
FDA on deaths or serious injuries alleged to have been associated with the use
of its products, as well as product malfunctions that are likely to cause or
contribute to death or serious injury if the malfunction were to recur.  The
Company believes that it is currently in material compliance with all relevant
GMP and MDR requirements.

         In addition, the Company is required to be licensed as a medical
device manufacturer by the State of California.  The Company has applied for
such a license to cover its manufacturing activities.  In general, because of
the Company's belief that its products are Class I devices and exempt from
510(k) Notification, the Company believes that the California Department of
Health Services, Food and Drug Branch ("California DHS") will permit the
Company to continue to manufacture and sell its products prior to the required
prelicensing inspection.  Approval of the license generally requires that the
Company comply with the FDA's GMP labeling and MDR regulations, as well any
other applicable regulatory requirements.  This State license is not
transferable and must be renewed annually.

         Generally, if the Company is in compliance with FDA and California
regulations, it may market its devices in other states in the United States.
International sales of medical devices are also subject to the regulatory
requirements of each country, and in Europe, the regulations of the European
Union.  The regulatory review process varies from





                                       9
<PAGE>   10
country to country.  The Company, in general, will rely upon its distributors
and sales representatives in the foreign countries in which it markets its
products to ensure that the Company compiles with the regulatory laws of such
countries.  The Company believes that its international sales to date have been
in compliance with the laws of the foreign countries in which it has made
sales. Failure to comply with the laws of such country could have a material
adverse effect on the Company's operations and, at the very least, could
prevent the Company from continuing to sell products in such countries.
Exports of Class I and Class II medical devices are also subject to certain
limited FDA regulatory controls.

PRODUCT LIABILITY AND INSURANCE

         The nature of the Company's present and planned products may expose
the Company to product liability risks.  No product liability claims have been
brought against the Company to date.  The Company maintains product liability
insurance with coverage limits of $1,000,000 per occurrence and $1,000,000 per
year.  While the Company believes that it maintains adequate insurance
coverage, there can be no assurance that the amount of such insurance will be
adequate to satisfy claims made against the Company in the future or that the
Company will be able to obtain insurance in the future at satisfactory rates or
in adequate amounts.  Product liability claims or product recalls could have a
material adverse effect on the business and financial condition of the Company.
In addition, the Company is required under certain of its licensing agreements
to indemnify its licensors against certain product liability claims by third
parties.

COMPETITION

         The distribution and manufacture of dental supplies and equipment is
intensely competitive.  For example, there are at least five companies offering
intraoral camera systems which are competitive with the TeliCam System.  Many
of the Company's competitors have greater financial and other resources than
the Company, and, consequently, such entities may be able to develop,
manufacture, market and/or distribute systems which are functionally similar or
superior to the Company's products.  Moreover, significant price reductions by
the Company's competitors could result in a similar reduction in the Company's
prices.  Any of these competitive pressures may have a material adverse effect
on operating results.

         In the United States, the Company competes with other companies that
sell dental products, distributors and several major manufacturers of dental
products, primarily on the basis of price, customer service and value-added
services and products.  The Company's principal domestic competitors are
Patterson Dental Co., Henry Schein, Inc., New Image Industries, Inc. and
Ultrak.  The Company also faces competition in its international markets, where
the Company competes on the basis of price and product quality against the same
dental product distributors and manufacturers.

EMPLOYEES

         At March 9, 1997, the Company had 46 full-time employees. Of these
employees, 25 were involved in production, 5 were in customer service, 10 were
in administration, 4 were engaged in sales and marketing, and 2 were involved
in engineering and research and development.  The Company believes it has a
good relationship with its employees and none of its employees are represented
by a collective bargaining agreement.

ITEM 2.  DESCRIPTION OF PROPERTIES.

         The corporate headquarters and principal offices of the Company are
located in Westlake Village, California, consisting of approximately 3,900
square feet space under a lease that expires on November 14, 2000 ("Office
Lease").  The Office Lease provides for aggregate minimum monthly rental
payments of approximately $5,800.  In addition, the Company, on behalf of BDI,
leases an additional 605 square feet in Westlake Village, California ("BDI
Lease"), at a rental rate of approximately $844 per month.  The BDI Lease has
been extended through April 1997 and the Company has no present intention of
renewing this lease.  Further, under a lease that expires on November 1, 1998
("Plant Lease"), the Company has approximately 5,700 square feet of space in a
building in Irvine, California, where it





                                       10
<PAGE>   11
manufactures and distributes the TeliCam System and conducts research and
development activities.  The rental payment under the Plant Lease is
approximately $5,310 per month.  Both the Office Lease and the Plant Lease
require the Company to pay taxes, maintenance fees, insurance, and periodic
rent increases based on a published price index.  The Company is currently
looking for additional facilities to replace or supplement the property which
is subject to the Plant Lease.


ITEM 3.  LEGAL PROCEEDINGS.

         The Company is not involved in any material legal proceedings.

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

        On November 29, 1996, the Company filed a Schedule 14(C) Information
Statement for a Notice of Action by Stockholders Without a Meeting pursuant to
Section 14C of the Securities Exchange Act of 1934, and Regulation 14C
promulgated thereunder (Commission File No. 000-12850). Notice was thereby
given that the holders of a majority of the outstanding shares of common stock
of the Company had adopted an Amendment and Restatement (the "Amendment and
Restatement") of the Corporation's Certificate of Incorporation, as previously
amended (the "Certificate of Incorporation") on October 23, 1996 by written
consent and without a meeting. Among other things, the Amendment and
Restatement (i) changed the name of the Company to Dental/Medical
Diagnostic Systems, Inc.; (ii) increased the number of authorized shares of
Common Stock, par value $.01 per share, from 10,000,000 to 20,000,000 shares;
(iii) authorized the creation of a new class of 1,000,000 shares of Preferred
Stock, par value $.01 per share; (iv) approved a one-for-2.197317574 reverse
stock split of the shares of Common Stock issued and outstanding on the
effective date thereof, and of the shares of Common Stock underlying options
and other rights granted by the Company on or prior to the effective date
thereof; and (v) effected a restatement of certain other provisions of the
Certificate of Incorporation, including, without limitation, the provision
concerning the indemnification of officers and directors by the Company.

        Effective as of October 23, 1996, 5,058,000 shares (or approximately
58%) of the 8,746,900 shares of Common Stock then outstanding executed and
delivered to the Company written consents to the Company's adoption of the
Amendment and Restatement. Since the Amendment and Restatement was approved by
the holders of the required majority of Common Stock no proxies were solicited
with such Information Statement.



                                       11
<PAGE>   12
                                    PART II

ITEM 5.  MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

         The Common Stock is currently quoted on the OTC Bulletin Board under
the symbol "DMDS."  The Common Stock is traded on a sporadic basis; therefore
the prices quoted below are not necessarily indicative of market value.  The
following table sets forth the range of the high and low bid quotations of the
Common Stock on the OTC Bulletin Board for the periods indicated as reported by
NASDAQ Trading and Market Services.  These quotations reflect inter-dealer
prices, without mark-up, mark-down or commission, and may not represent actual
transactions.

<TABLE>
<CAPTION>
                                            HIGH          LOW
                                            ----          ---    
 PERIOD ENDED
          <S>                               <C>          <C>
          June 30, 1996  . . . . . . .      $5.8         $ .9  
          August 31, 1996  . . . . . .       5.4          3.6 
          November 30, 1996  . . . . .       5.8          3.6 
          December 31, 1996  . . . . .       5.6          4.3 

</TABLE>
         On April 4, 1997, the high bid and low ask price of the Common Stock
were $5.50 and $5.83, respectively.  As of April 4, 1997, there were 244
stockholders of record and approximately 400 beneficial holders of the Common
Stock.

                                 DIVIDEND POLICY

         The Company has not paid any cash dividends on the Common Stock since
its inception and does not intend to pay and dividends on the Common Stock in
the foreseeable future. The payment of any dividends in the future will depend
on the evaluation by the Company's Board of Directors of such Factors as it
deems relevant at the time and restrictions imposed by the terms of the
Company's debt obligations that impose retrictions on any payment of dividends
currently, the Board of Directors believe that all the Company's earnings, if
any, should be retained for the development of the Company's business.

ITEM 6.  MANAGEMENT'S DISCUSSION AND ANALYSIS

         The following discussion and analysis should be read together with the
Consolidated Financial Statements of the Company and notes thereto incorporated
elsewhere in this Form 10KSB.

INTRODUCTION

         This discussion summarizes the significant factors affecting the
consolidated operating results, financial condition and liquidity/cash flows of
the Company for the ten-month period ended December 31, 1996, and for the
period from inception (October 23, 1995) to March 2, 1996.  Except for the
historical information contained herein, the matters discussed in this
Management's Discussion and Analysis are forward looking statements that
involve risks and uncertainties and are based upon judgments concerning various
factors that are beyond the Company's control.

         On March 1, 1996, the Company purchased all of the outstanding
membership interests of Dental/ Medical Diagnostic Systems, L.L.C. ("DMD") and
all of the outstanding capital stock of Bavarian Dental Instruments, Inc.
("BDI").  Immediately subsequent to the transaction, the former members of DMD
and stockholders of BDI owned approximately 66.6% of the Company's outstanding
common stock and management control of the Company was transferred to the
former management of DMD and BDI.  Accordingly, for accounting purposes the
acquisition was treated as a recapitalization of DMD and BDI with DMD and BDI
combined as the acquiror (reverse acquisition).  As a result, the combined
historical financial statements of DMD and BDI became the financial statements
of the Company.  From inception, on October 23, 1995, through March 2, 1996, the
Company generated net sales of only $220,623 and incurred a net loss of
$1,625,213.  Because both DMD and BDI were only formed in October and November
of 1995, incurred substantial losses in connection with the commencement of
their respective operations, and commenced sales in February 1996, a comparison
of the financial information of the Company for the ten-month period ended
December 31, 1996 to the period from inception through March 2, 1996 is not 
meaningful.

         DMD was formed in October 1995 and has been primarily involved in
designing, developing, manufacturing, and marketing intraoral dental cameras
("TeliCam Systems").  The first shipments to customers of the TeliCam System
commenced in early February 1996. BDI was formed in November 1995 and has been
primarily involved in the marketing and distribution of dental burs imported
from Russia. The first sales of burs commenced in March 1996.  On July 9, 1996,
the Company determined to focus future strategic development primarily upon
high value added





                                       12
<PAGE>   13

dental/medical products and technology and, accordingly, decided to discontinue
the dental bur product line, comprised of low-margin, low-technology products.
The Company thereafter commenced an orderly liquidation of its inventory of
dental burs, and expects the liquidation to be completed in 1997 without
significant adverse effect on operations.

         On January 13, 1997 the Company changed its name from Edudata
Corporation to Dental/Medical Diagnostic Systems, Inc.  On February 5, 1997,
the Company changed its fiscal year end from a fiscal year ending on the
nearest Saturday to February 28th to a December 31 fiscal year end.  On
February 28, 1997, the Company filed with the Securities and Exchange
Commission a registration statement on Form SB-2 relating to a proposed public
offering by the Company (the "Proposed Offering") of an aggregate of 1,500,000
shares of Common Stock and 1,500,000 Redeemable Stock Purchase Warrants at a
proposed offering price of $4.50 and $0.50, respectively.  There can be no
assurance that the Proposed Offering will be successful or that additional
financing will be available to the Company when needed or on commercially
reasonable terms.  Any inability to obtain additional financing when needed
will have a material adverse affect on the Company, including requiring the
Company to curtail expansion of its operations.

         The Company has a limited history of operations which includes results
of operations of the BDI product line, now discontinued.  Although no assurance
can be given, the Company believes that results of operations for the period
presented may not be indicative of future results because the period presented
includes the period immediately following initial introduction of the TeliCam
System, includes the results of the business of BDI which has been discontinued,
and because the Company expects to introduce the TeliCam II and other new
products in future periods.  The Company's prospects for increasing sales and
profits is subject to a number of risks, including competitive and economic
conditions, as well as the market acceptance of new technologies the Company may
seek to introduce.

RESULTS OF OPERATIONS

         For the ten-month period ended December 31, 1996, net sales totaled
$11,673,102, generating an operating profit of $304,435.  Included in these
results were sales of approximately $235,000 and an operating loss of
approximately $196,000 related to the Company's discontinued dental bur product
line.  As described above, the Company expects to complete the sale of
inventory related to this product line in fiscal 1997 without any significant
adverse impact on operating results.

         Net sales totaled $11,673,102 for the ten-month period ended December
31, 1996, and are comprised primarily of sales of TeliCam Systems and related
products.  Total sales for this period included approximately $2,200,000 in
sales to international distributors.  Sales for the period from inception
(October 23, 1995) through March 2, 1996 were not significant as the Company
spent the majority of the period developing its initial product offering with
sales commencing in February 1996.  As further described below under the
caption "Fluctuations in Quarterly Results," the Company's sales are generally
expected to be higher in the fourth quarter due to the purchasing patterns of
dentists in the United States.  During the ten month period ended December 31,
1996, the month of December alone accounted for approximately $2,100,000 in net
sales due to a combination of increasing domestic and foreign sales.  Domestic
sales in December were higher than normal primarily due to year end purchases
by dentists taking advantage of a $17,000 Federal tax credit for capital
equipment purchases, and to the introduction of the InTELInet system.  The
Company believes that the tax credit accelerated certain TeliCam System sales
that would ordinarily have occurred in January and February 1997 and may result
in reduced first quarter 1997 sales.

         Cost of sales for the ten-month period ended December 31, 1996 were
$6,685,464 or 57% of sales.  As a percentage of sales, the Company expects
costs of international sales to be higher than domestic sales due to higher
discounts being required on international sales; however, this effect should be
offset by reduced warranty and service costs as well as reduced selling costs
on international sales.

         Selling, general, and administrative expenses totaled $4,360,736 or
37% of sales for the ten-month period ended December 31, 1996.  These expenses
relate to administering the continuing design, development, manufacturing, and
marketing of the Company's TeliCam Systems.  These expenses include advertising
and promotion expenses of $1,008,879 comprised primarily of trade show fees,
trade magazine advertising and direct mail promotions.  Salaries and wages
totaled $966,745 comprised primarily of expenses for sales and production
administration, marketing, sales





                                       13
<PAGE>   14
and customer support staff and finance and accounting personnel.  Commissions
resulting from sales of TeliCam Systems and the InTELInet product introduced in
November 1996 totaled $1,223,547.  These expenses are expected to increase in
absolute dollars relative to net sales in future periods, due to the need for
additional support functions as the Company's sales increase.

         Research and development expenses totaled $322,467 or 3% of sales for
the ten-month period ended December 31, 1996, and related primarily to direct
expenses of ongoing design and development of enhancements to the Company's
TeliCam I and, to a lesser extent, the Company's TeliCam II.  These
expenses are comprised of wages and benefits for engineering personnel, design
and development fees and raw material used in the development of prototypes.
These expenses are expected to continue at relatively the same rates in future
periods for the TeliCam System.  However research and development expenses will
increase for the development of new products.  Increased expenditures on
research and development resulting from application of the proceeds of the
Proposed Offering to further research and development projects and joint
ventures and possible acquisitions, are expected to result in increased
expenses and may result in correspondingly reduced earnings in future periods.

         Amortization of debt issuance cost totaled $31,548 for the ten-month
period ended December 31, 1996, and is the result of the cost of the sale of
the Bridge Notes, issued in November 1996, being amortized over the term of the
Notes.  These costs will continue into future periods until the debt is paid.
The Company intends to pay such debt out of the proceeds of the Proposed
Offering and, accordingly, expects to take a charge of approximately $190,000
for the write-off of unamortized debt issuance costs in the second quarter of
fiscal 1997.

         Interest expense totaled $57,166 for the ten-month period ended
December 31, 1996, and consisted of interest paid on capital lease obligations
and interest accrued on the Bridge Notes and notes payable to related parties.

        Net income for the ten-month period ended December 31, 1996 totaled 
$137,151 or $.05 per share.

LIQUIDITY AND CAPITAL RESOURCES

         For the ten-month period ended December 31, 1996, the Company used net
cash of $1,631,343 in operations.  The Company financed its operating cash
requirements through the sale of 422,219 shares of Common Stock in April 1996
which generated cash proceeds of approximately $1,055,000, net of issuance
costs, and through the Bridge Financing in November 1996, which generated cash
proceeds of approximately $1,315,000, net of issuance costs.

         Accounts receivable increased by $1,188,544 to $1,305,143 at December
31, 1996 primarily due to the increasing sales volumes during the ten-month
period ended December 31, 1996 and due to the level of international sales
during December.  Sales for the period from inception (October 23, 1995)
through March 2, 1996 were only $220,000.  Accounts payable and accrued
liabilities totaling $1,720,358 at December 31, 1996 decreased slightly from
$1,806,640 at the prior year end period.  Inventory levels increased $461,812
to $1,513,075 due to increased sales and production levels for TeliCam Systems.

         Capital expenditures totaled $200,686 for the ten-month period ended
December 31, 1996, and resulted primarily from purchases of additional computer
equipment and test equipment to support the administrative and production
functions of the Company.  Book overdrafts decreased in the current period by
$49,906.  Cash on hand at the end of the period was $1,058,836.

         The Company requires additional cash to continue to pay down its
liabilities (including, without limitation, the Bridge Notes issued in the
November 1996 Bridge Financing) for working capital purposes to support
anticipated increased sales levels and to fund its research and development
activities.

         Based on its current operating plan, the Company believes that the
proceeds of the Proposed Offering, together with existing resources and cash
generated from operations, if any, will be sufficient to satisfy the Company's
contemplated working capital requirements for at least the next twelve months.
There can be no assurance that the Proposed Offering will be successful, that
the Company's working capital requirements during this period will not





                                       14
<PAGE>   15
exceed its available resources or that these funds will be sufficient to meet
the Company's longer-term cash requirements for expansion.

         On February 13, 1997, the Company received a Commitment Letter from
Comerica Bank ("Comerica") confirming Comerica's intent to extend up to a
$2,000,000 line of credit to the Company, to be secured by a first priority
security interest in the Companies assets and by an assignment of the Company's
rights under a distribution agreement with the Boston Marketing Company, Ltd.
The credit facility will bear interest monthly at the rate of the Comerica Bank
Prime plus one-quarter of one percent (0.25%), as it may change from time to
time, through June 1, 1998.  All borrowings under the facility may be subject to
a formula based, generally, on accounts receivable and inventory.  The Company
intends to use the proceeds of this credit facility for working capital and
general corporate purposes. Although the Company is in the final stages of
documentation of a definitive credit agreement, certain issues remain the
subject of negotiation. The commitment of Comerica is contingent upon the
parties' execution and delivery of a definitive credit agreement, the closing of
the Proposed Offering, the repayment of the Bridge Notes, the provision to
Comerica of a first-priority lien on the Company's assets and upon the absence
of any material adverse change in the Company's business or financial condition.
There can be no assurance that the Company will be successful in obtaining the
credit facility, and the failure of the Company to do so could have a material
adverse effect on the Company's business, operating results and financial
condition.

FLUCTUATIONS IN QUARTERLY RESULTS

        The Company's business is subject to certain quarterly influences. Net
sales and operating profits are generally higher in the fourth quarter due to
the purchasing patterns of dentists in the Unites States and are generally
lower in the first quarter due primarily to the effect upon demand of increased
purchases in the prior quarter. It is also expected that the Company's business
will experience lower sales in the summer months as a consequence of holiday
vacations and a lesser number of trade shows.

        In anticipation of the introduction of the TeliCam II, in March, 1997,
the Company offered promotional pricing on sales of the TeliCam I to reduce
inventory levels of the TeliCam I and to increase cash available to finance
increased inventories of the TeliCam II. The Company expects demand for the
TeliCam II upon its introduction to significantly supplant demand for the
TeliCam I. As a result of the TeliCam I price promotion, the Company expects
remaining inventories of the TeliCam System to be significantly reduced, cash
flow for March and April of the current year to be increased over levels which
would normally occur without the price promotion, and that gross margins for
the period of the price promotion will be reduced. Additionally, use by the
company of a portion of the proceeds of the Offering to repay the Bridge Notes
will cause the Company to incur a charge in the second quarter of 1997 of
approximately $378,000.

        Quarterly results may be adversely affected in the future by a variety
of other factors, including the timing of acquisitions and their related costs,
as well as the release of new products and promotions taking place within the
quarter. The Company plans to increase expenses to fund greater levels of
research and development and to fund investments in joint ventures and
acquisitions. To the extent that such expenses precede or are not subsequently
followed by increased revenues, the Company's business, operating results and
financial condition will be adversely affected. 

CAUTIONARY STATEMENTS AND RISK FACTORS

         Several of the matters discussed in this document contain forward
looking statements that involve risks and uncertainties.  Factors associated
with the forward looking statements which could cause actual results to differ
materially from those projected or forecast in the statements that appear
below.  In addition to other information contained in this document, readers
should carefully consider the following cautionary statements and risks
factors:

         Limited Operating History; History of Losses and Accumulated Deficit.
While the Company has been in existence since 1981, its operations between 1988
and its acquisition of DMD and BDI in March 1996, were limited to the
exploration of acquisition opportunities.  Dental\Medical Diagnostic Systems,
the division of the Company which designs and markets the Company's TeliCam
System, and BDI, a subsidiary of the Company, have only been in operation since
October 1995.  For the period from inception (October 23, 1995) to March 2,
1996, the Company incurred a net loss of $1,625,213, and for the ten month
period ended December 31, 1996, the Company had net income of $137,151.  At
December 31, 1996, the Company's accumulated deficit was $1,488,062. The ability
of the Company to sustain profitability will depend, in part, upon the
successful marketing of existing products and the successful and timely
introduction of new products. There can be no assurance that the Company will be
able to generate and sustain net sales or profitability in the future.

         Dependence Upon a Single Product.  The TeliCam I, and its enhanced
version, the TeliCam II, are currently the Company's primary product and,
together with related products such as the InTELInet system, will account for a
substantial portion of the Company's revenue for the foreseeable future. There
can be no assurance that the TeliCam System will be more effective than
competing products or technologies, or will be successfully marketed.  The
Company is still in the early stages of marketing the TeliCam System and related
products, and, consequently, the degree to which the market will accept this
product is still uncertain.  If the TeliCam System and related products cannot
be marketed successfully on a sustained basis, it is likely that the Company's
business operations would be substantially


                                       15
<PAGE>   16
and adversely impacted.

         Importance of New Product Development to Growth.  The Company's ability
to develop and introduce new products successfully on a timely basis will be a
significant factor in the Company's ability to grow and remain competitive.  New
product development often requires long-term forecasting of market trends, the
development and implementation of new designs, compliance with extensive
governmental regulatory requirements and a substantial capital commitment.  The
medical and dental device industry is characterized by rapid technological
change.  As technological changes occur in the marketplace, the Company may have
to modify its products in order to keep pace with these changes and
developments.  The introduction of products embodying new technologies, or the
emergence of new industry standards, may render existing products, or products
under development, obsolete or unmarketable.  Any failure by the Company to
anticipate or respond in a cost-effective and timely manner to government
requirements, market trends or customer requirements, or any significant delays
in product development or introduction, could have a material adverse effect on
the Company's business, operating results and financial condition.

         Possible Need for Additional Capital.  Although the Company believes
that the net proceeds of the Offering, together with existing resources and cash
generated from operations, if any, will be sufficient to satisfy the Company's
working capital requirements for the next twelve months, there can be no
assurance that this will be the case or that these funds will be sufficient to
meet the Company's longer-term cash requirements for expansion. To the extent
that the funds generated by the Proposed Offering, if any, together with
existing resources, are insufficient to fund the Company's planned activities
and, to the extent the Company is unsuccessful in concluding negotiations of an
acceptable line of credit, the Company will need to raise additional funds
through bank borrowings, public or private financings, or otherwise.  If
additional funds are raised through the issuance of equity securities,
additional dilution to stockholders may occur.  No assurance can be given that
additional financing will be available when needed or that, if available, it
will be on terms favorable to the Company or its stockholders. If needed funds
are not available, the Company may be required to curtail its operations, which
could have a material adverse effect on the Company's business, operating
results and financial condition.

         Expansion through Undetermined Acquisitions and Joint Ventures.  The
Company intends to expand its product lines and domestic and international
markets, in part, through acquisitions. The Company's ability to expand
successfully through acquisitions will depend upon the availability of suitable
acquisition candidates at prices acceptable to the Company, the Company's
ability to consummate such transactions and the availability of financing on
terms acceptable to the Company. There can be no assurance that the Company
will be successful in completing acquisitions. Such transactions involve
numerous risks, including possible adverse short-term effects on the Company's
operating results or the market price of the Common Stock. As of the date of
this Report, the Company is not engaged in negotiations to acquire any
business, and has not yet identified any such business. These acquisitions and
joint ventures may not be subject to approval or review by the Company's
stockholders. The Company does not expect that it will obtain an appraisal 
by any independent appraisers with respect to any such acquisition. Certain 
of the Company's future acquisitions may also give rise to an obligation by
the Company to make contingent payments or to satisfy certain repurchase
obligations, which payments could have an adverse financial effect
on the Company. In addition, integrating acquired businesses may result in a
loss of customers or product lines of the acquired businesses and also requires
significant management attention and may place significant demands on the
Company's operations, information systems and financial resources. The failure
effectively to integrate acquired businesses with the Company's operations
could adversely affect the Company. In addition, the Company competes for
acquisition opportunities with companies which have significantly greater
financial and management resources than those of the Company. There can be no
assurance that suitable acquisition opportunities will be identified, that any
such transactions can be consummated, or that, if acquired, such new businesses
can be integrated successfully and profitably into the Company's operations.
Moreover, there can be no assurance that the Company's historic rate of growth
will continue, that the Company will continue to successfully expand, or that
growth or expansion will result in profitability.

        The Company also intends to expand its product lines and domestic and
international markets through joint ventures. The Company's ability to expand
successfully through joint ventures will depend upon the availability of
suitable joint venture candidates whose terms are acceptable to the Company, the
Company's ability to consummate such transactions and the availability of
financing on terms acceptable to the Company. There can be no assurance that
the Company will be successful in completing joint ventures. Such transactions
involve numerous risks, including possible adverse short-term effects on the
Company's operating results or the market price of the Common Stock. The
Company is currently engaged in discussions relating to product development
joint ventures. The failure effectively to integrate joint ventures with the
Company's operations could adversely affect the Company. In addition, the
Company competes for expansion opportunities with companies which have
significantly greater financial and management resources than those of the
Company. There can be no assurance that suitable investment opportunities will
be identified, that any such transactions can be consummated, or that such new
businesses can be integrated successfully and profitably into the Company's
operations. Moreover, there can be no assurance that the Company's historic
rate of growth will continue, that the Company will continue to successfully
expand, or that growth or expansion will result in profitability.

         Dependence on Third-Party Suppliers.  With the exception of the
TeliCam System's CCD processor unit, the Company believes that there are
multiple sources from which it may purchase the components of the TeliCam
System.  The Company anticipates that it will obtain certain of the components
of the TeliCam System from a single source or a limited number of sources of
supply.  Although the Company believes it will be able to negotiate
satisfactory supply





                                       16
<PAGE>   17
arrangements and relationships, the failure to do so may have a material
adverse effect on the Company.  Furthermore, there can be no assurance that
suppliers will dedicate sufficient production capacity to satisfy the Company's
requirements within scheduled delivery times or at all.  Failure or delay by
the Company's suppliers in fulfilling its anticipated needs may adversely
affect the Company's ability to market the TeliCam System.  Pursuant to the
Boston Marketing Distribution Agreement, the Company has the exclusive right to
market Teli Units to the dental market.  Boston Marketing is a licensed
distributor of the Teli Units under a separate agreement with their
manufacturer.  The agreement between Boston Marketing and the Teli Units
manufacturer obligates Boston Marketing to meet minimum purchase obligations.
If Boston Marketing fails to meet these obligations, Boston Marketing will be
terminated as a licensed distributor.  In the event of such termination, the
Company, as a sublicensee subdistributor of Boston Marketing, may lose its
right to purchase the Teli Units.  Moreover, in the event the Company is unable
to meet its minimum annual purchase obligations under the Boston Marketing
Distribution Agreement, and, as a consequence, such agreement terminates, the
Company may be required to find an alternative source for the primary component
of its TeliCam System.  The Company believes that, in the event the Company
loses its right to sell the Teli Units, replacement components could be
developed by and obtained from third parties, but that this may take more than
six months.  The potential delay associated with locating an alternative source
of supply would have a significant adverse effect on the Company's operating
results and financial condition.  In addition, there is no guarantee that an
intraoral dental camera system utilizing the replacement components will be
accepted by the dental marketplace.
        
         Fluctuations in Quarterly Results.  The Company's business is subject
to certain quarterly influences.  Management's prior experience in the industry
would indicate that net sales and operating profits are generally higher in the
fourth quarter due to the purchasing patterns of dentists and are generally
lower in the first quarter due primarily to increased purchases in the prior
quarter and during the summer months due to a reduced volume of trade shows and
increased unavailability of dentists due to summer vacations.  The Company plans
to increase expenses to fund greater levels of research and development and to
fund investments in joint ventures and acquisitions.  To the extent that such
expenses precede or are not subsequently followed by increased revenues, the
Company's business, quarterly operating results and financial condition will be
adversely affected.  Quarterly results may also be adversely affected by a
variety of other factors, including the timing of acquisitions and their related
costs, as well as the release of new products and promotions taking place within
the quarter.  Other factors that may influence the Company's quarterly operating
results include the timing of introduction or enhancement of products by the
Company's or its competitors, market acceptance of the TeliCam II, the InTELInet
System and other new products, development and promotional expenses relating to
the introduction of new products or enhancements of existing products, reviews
in the industry press concerning the products of the Company or its competitors,
changes or anticipated changes in pricing by the Company or its competitors, mix
of distribution channels through which products are sold, mix of products sold,
product returns, the timing of orders from major distributors, order
cancellations, delays in shipment and general economic conditions.  Due to all
of the foregoing factors, it is also likely that in some future periods the
Company's operating results may be below the expectations of analysts and
investors.  In such event, the price of the Company's Common Stock would likely
be materially adversely affected.

         Extensive Government Regulation.  The Company's products and its
manufacturing practices are subject to regulation by the United States Food and
Drug Administration ("FDA") pursuant to the Federal Food, Drug and Cosmetic Act
("FDC Act"), and by other state and foreign regulatory agencies. Under the FDC
Act, medical and dental devices, including those under development by the
Company must receive FDA clearance or approval before they may be sold, or be
exempted from the need to obtain such clearance or approval.  FDA regulations
also require the Company to adhere to certain "Good Manufacturing Practices"
("GMP") regulations, which include validation testing, quality control and
documentation procedures. The Company's compliance with applicable regulatory
requirements is subject to periodic inspections by the FDA.

         The process of obtaining required regulatory clearances or approvals
can be time-consuming and expensive, and compliance with the FDA's GMP
regulations and other regulatory requirements can be burdensome. Moreover,
there can be no assurance that the required regulatory clearances will be
obtained, and those obtained may include significant limitations on the uses of
the product in question. In addition, changes in existing regulations or the
adoption of new regulations could make regulatory compliance by the Company
more difficult in the future.  Although the Company believes that its products
and procedures are currently in material compliance with all relevant FDA
requirements, the





                                       17
<PAGE>   18
failure to obtain the required regulatory clearances or to comply with
applicable regulations could result in fines, delays or suspensions of
clearances, seizures or recalls of products, operating restrictions and
criminal prosecutions, and would have a material adverse effect on the Company.

         Competition.  The manufacture and distribution of medical and dental
devices is intensely competitive.  The Company competes with numerous other
companies, including several major manufacturers and distributors.  With
respect to the intraoral camera market, the Company has at least five major
competitors.  Most of the Company's competitors have greater financial and
other resources than the Company.  Consequently, such entities may begin to
develop, manufacture, market and distribute systems which are substantially
similar or superior to the Company's products.

         Rapid Expansion of the Company's Business.  From inception (October
23, 1995) through December 31, 1996, the Company has experienced rapid and
substantial growth in revenues and geographic scope of operations.  Any future
growth may place a significant strain on management and on the Company's
financial resources and information processing systems.  The failure to recruit
additional staff and key personnel, to have sufficient financial resources, to
maintain or upgrade these financial reporting systems, or to respond
effectively to difficulties encountered during expansion could have a material
adverse effect on the Company's business, operating results and financial
condition.

         Reliance on International Sales and Distributors and General Risks of
International Operations.  For the ten-month period ended December 31, 1996,
international sales have accounted for approximately 20% of the Company's net
sales, and the Company expects that international sales may increase as a
percentage of sales in the future.  Consequently, the Company is subject to the
risks of conducting business internationally, including unexpected changes in,
or impositions of, legislative or regulatory requirements; fluctuations in the
U.S. dollar which could materially adversely affect U.S. dollar revenues;
tariffs and other barriers and restrictions; potentially adverse taxes; and the
burdens of complying with a variety of international laws and communications
standards.  The Company's international sales involve potentially longer payment
cycles and the Company may experience greater difficulty collecting accounts
receivable.  The Company currently depends on third party distributors for
substantially all of its international sales. At December 31, 1996, six of the
Company's international distributors accounted for 75% of the Company's accounts
receivable, and five of these distributors accounted for approximately
$2,200,000, or 20%, of the Company's total sales for the ten-month period ended
December 31, 1996. Certain of the Company's third party distributors may also
act as resellers for competitors of the Company and could devote greater effort
and resources to marketing competitive products.  The loss of, or other
significant reduction in sales to, certain of these third party distributors
could have a material adverse effect on the Company's business and results of
operations.  The Company is also subject to general geopolitical risks, such as
political and economic instability and changes in diplomatic and trade
relationships, in connection with its international operations.  There can be no
assurance that these risks of conducting business internationally will not have
a material adverse effect on the Company's business.  Further, any failure by
the Company to predict or plan for changes in the international arena could have
a material adverse effect on the Company's business, operating results and
financial condition.

         Dependence on Key Personnel.  The Company's future performance will
depend significantly upon its Chairman of the Board and Chief Executive
Officer, Robert H. Gurevitch, and upon certain other key employees of the
Company.  The loss of service of one or more of these persons could have a
material adverse effect on the Company's business and operations.  The Company
has entered into Employment Agreements with Robert H. Gurevitch and Dewey
Perrigo, the Company's Vice President of Sales, pursuant to which they each
have agreed to render services to the Company until October 1, 1999.  The
Company has applied for "key person" life insurance on Mr. Gurevitch in the
amount of $2,000,000, of which the Company would be the sole beneficiary, but
there can be no assurance that such insurance can be obtained or that, if such
insurance is obtained, the proceeds of such insurance will be sufficient to
offset the loss to the Company in the event of his death.  The Company does not
maintain any insurance on the lives of its other senior management.  In
addition, the Company's success will be dependent upon its ability to recruit
and retain qualified personnel.  Any failure by the Company to retain and
attract key personnel could have a material adverse effect on the Company's
business, operating results, and financial condition.

         Limited Proprietary Protection.  The Company's success and ability to
compete is dependent in part upon its proprietary technology.  The Company's
proprietary technology is not protected by any patents.  Consequently, the
Company relies primarily on trademark, trade secret and copyright laws to
protect its technology.  Also, the Company





                                       18
<PAGE>   19
is currently implementing a policy that most senior and technical employees and
third-party developers sign nondisclosure agreements.  However, there can be no
assurance that such precautions will provide meaningful protection from
competition or that competitors will not be able to develop similar or superior
technology independently.  Also, the Company has no license agreements with the
end users of its products, so it may be possible for unauthorized third parties
to copy the Company's products or to reverse engineer or otherwise obtain and
use information that the Company regards as proprietary.  If litigation is
necessary in the future, to enforce the Company's intellectual property rights,
to protect the Company's trade secrets or to determine the validity and scope
of the proprietary rights of others, such litigation could result in
substantial costs and diversion of resources and could have a material adverse
effect on the Company's business, operating results and financial condition.
Ultimately, the Company may be unable, for financial or other reasons, to
enforce its rights under intellectual property laws.  In addition, the laws of
certain countries in which the Company's products are or may be distributed may
not protect the Company's products and intellectual property rights to the same
extent as the laws of the United States.

         The Company believes that its products do not infringe upon any valid
existing proprietary rights of third parties.  Although the Company has
received no communication from third parties alleging the infringement of
proprietary rights of such parties, there can be no assurance that third
parties will not assert infringement claims in the future.  Any such third
party claims, whether or not meritorious, could result in costly litigation or
require the Company to enter into royalty or licensing agreements.  There can
be no assurance that the Company would prevail in any such litigation or that
any such licenses would be available on acceptable terms, if at all.  If the
Company were found to have infringed upon the proprietary rights of third
parties, it could be required to pay damages, cease sales of the infringing
products and redesign or discontinue such products, any of which alternatives,
individually or collectively could have a material adverse effect on the
Company's business, operating results and financial condition.

         Conflict of Interests.  Robert Gurevitch, Chairman of the Company, has
loaned money to the Company ("Loan Obligations") and has guaranteed the
performance by the Company under its leases for its Irvine and Westlake,
California premises as well as the performance by the Company of its obligations
under its credit card processing agreement with Checkfree Corporation.  The
Company believes that all of these transactions were on terms no less favorable
than were available from unaffiliated third parties.  The Company intends to
attempt to relieve Mr. Gurevitch from his obligations under each of these
guarantees and it is possible that, in order to achieve the release of Mr.
Gurevitch from these guarantees, the Company will be required to post collateral
or provide other concessions to the recipients of the guarantees.  The Company
has, in the past, entered into transactions with affiliates and there can be no
assurance that the Company will not enter into transactions with affiliated
parties in the future.

         Limitation of Liability and Indemnification.  The Company's Amended
and Restated Certificate of Incorporation limits, to the maximum extent
permitted by the Delaware General Corporation Law ("Delaware Law"), the
personal liability of directors for monetary damages for breach of their
fiduciary duties as a director, and provides that the Company shall indemnify
its officers and directors and may indemnify its employees and other agents to
the fullest extent permitted by law. The Company has entered into
indemnification agreements with its directors and executive officers which may
require the Company, among other things, to indemnify such directors against
liabilities that may arise by reason of their status or service as directors or
officers (other than liabilities arising from willful misconduct of a culpable
nature), to advance their expenses incurred as a result of any proceeding
against them as to which they could be indemnified, and to obtain directors'
and officers' insurance, if available on reasonable terms.  The Company intends
to purchase directors' and officers' liability insurance after the completion
of this Offering. Section 145 of the Delaware Law provides that a corporation
may indemnify a director, officer, employee or agent made or threatened to be
made a party to an action by reason of the fact that he was a director,
officer, employee or agent of the corporation or was serving at the request of
the corporation against expenses actually and reasonably incurred in connection
with such action if he acted in good faith and in a manner he reasonably
believed to be in or not opposed to the best interests of the corporation, and,
with respect to any criminal action or proceeding, if he had no reasonable
cause to believe his conduct was unlawful. Delaware Law does not permit a
corporation to eliminate a director's duty of care, and the provisions of the
Company's Amended and Restated Certificate of Incorporation have no effect on
the availability of equitable remedies, such as injunction or rescission, for a
director's breach of the duty of case.

         Anti-Takeover Provisions.  The Company has an authorized class of
1,000,000 shares of preferred stock which may be issued by the Board of
Directors on such terms and with such rights, preferences and designations as
the Board of Directors may determine. Issuance of such preferred stock,
depending upon the rights, preferences and designations thereof, may have the
effect of delaying, deterring or preventing a change in control of the Company.
In addition, certain "anti-takeover" provisions of the Delaware Law, among
other things, restrict the ability of stockholders to effect a merger or
business combination or obtain control of the Company, and may be considered
disadvantageous by a stockholder.

         Product Liability.  Although the Company has not experienced any
product liability claims to date, the sale and support of products by the
Company may entail the risk of such claims, and there can be no assurance that
the Company will not be subject to such claims in the future.  A successful
product liability claim or claim arising as a result of use of the Company's
products brought against the Company, or negative publicity attendant to any
such claim, could have a material adverse effect upon the Company's business,
operating results and financial condition.  The Company maintains product
liability insurance with coverage limits of $1,000,000 per occurrence and
$1,000,000 per year.  While the Company believes that it maintains adequate
insurance coverage, there can be no assurance that the amount of insurance will
be adequate to satisfy claims made against the Company in the future, or that
the Company will be able to obtain insurance in the future at satisfactory
rates or in adequate amounts.




                                       19
<PAGE>   20





ITEM 7.  FINANCIAL STATEMENTS.

                    DENTAL/MEDICAL DIAGNOSTIC SYSTEMS, INC.

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
                                                                                                                        PAGE
                                                                                                                        ----
<S>                                                                                                                      <C>
Report of Independent Accountants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    21
Consolidated Balance Sheets as of December 31, 1996 and March 2, 1996 . . . . . . . . . . . . . . . . . . . . . . . .    22
Consolidated Statements of Operations for the Ten-month period ended December 31, 1996 and for the Period from           23
   Inception (October 23, 1995) to March 2, 1996  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Stockholders' Equity for the Ten-month period ended December 31, 1996 and for the Period      24
   from Inception (October 23, 1995) to March 2, 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Cash Flows for the Ten-month period ended December 31, 1996 and for the Period from           25
   Inception (October 23, 1995) to March 2, 1996  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Notes to Consolidated Financial Statements  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    26





</TABLE>
                                       20
<PAGE>   21
                       REPORT OF INDEPENDENT ACCOUNTANTS

The Board of Directors and Shareholders of
Dental/Medical Diagnostic Systems, Inc.


         We have audited the accompanying consolidated financial statements of
Dental/Medical Diagnostic Systems, Inc. and Subsidiaries ("the Company") listed
in Item 7 of this Form 10KSB. 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 audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

         In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Dental/Medical Diagnostic Systems, Inc. and Subsidiaries as of December 31,
1996 and March 2, 1996 and the consolidated results of their operations and
their cash flows for the ten-month period ended December 31, 1996 and for the
period from inception (October 23, 1995) to March 2, 1996 in conformity with
generally accepted accounting principles.




/s/ Coopers & Lybrand L.L.P.

Los Angeles, California
January 31, 1997, except for the effects of the stock split
described in Note 2, as to which the date is March 24, 1997.





                                       21
<PAGE>   22
            DENTAL/MEDICAL DIAGNOSTIC SYSTEMS, INC. AND SUBSIDIARIES
                          CONSOLIDATED BALANCE SHEETS
                   AS OF DECEMBER 31, 1996 AND MARCH 2, 1996



<TABLE>
<CAPTION>
                                                                                                     
                                                                                              DECEMBER 31,        MARCH 2 
                                                                                                 1996               1996
                                                                                                 ----               ----
                                                                                              <C>               <C>
                                                         ASSETS
Current assets
  Cash and cash equivalents  . . . . . . . . . . . . . . . . . . . . . . . . . . . . .         $1,058,836        $  666,611
  Accounts receivable, less allowance for returns and doubtful accounts of $146,699                                         
    and $28,280 at December 31, 1996 and March 2, 1996   . . . . . . . . . . . . . . .          1,158,444            49,023
  Inventories  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .          1,513,075         1,072,085
  Deferred tax asset . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .             90,000                 -
  Prepaid expenses and other current assets  . . . . . . . . . . . . . . . . . . . . .            208,552           152,985
                                                                                               ----------        ----------

    Total current assets   . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .          4,028,907         1,940,704
  Property and equipment, net of accumulated depreciation  . . . . . . . . . . . . . .            393,578           249,000
  Debt issuance costs, net of accumulated amortization . . . . . . . . . . . . . . . .            253,686                 -
  Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .             42,270            36,040
                                                                                               ----------        ----------
    Total assets   . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .         $4,718,441        $2,225,744
                                                                                               ==========        ==========



                                     LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
  Book overdraft . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .         $        -           $49,906
  Current portion of capital lease obligations . . . . . . . . . . . . . . . . . . . .             18,468            15,505
  Notes payable to related parties . . . . . . . . . . . . . . . . . . . . . . . . . .                  -           277,015
  Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .          1,089,332         1,616,866
  Accrued liabilities  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .            462,456           189,974
  Income taxes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .            168,570                 -
  Customer deposits  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .             33,607           249,345
                                                                                               ----------        ----------
    Total current liabilities  . . . . . . . . . . . . . . . . . . . . . . . . . . . .          1,772,433         2,398,611
  Notes payable  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .          1,355,291                 -
  Notes payable to related parties . . . . . . . . . . . . . . . . . . . . . . . . . .            272,966                 -
  Capital lease obligations  . . . . . . . . . . . . . . . . . . . . . . . . . . . . .             66,028            74,836
  Other long term liabilities  . . . . . . . . . . . . . . . . . . . . . . . . . . . .             14,098            12,629
                                                                                               ----------        ----------
    Total liabilities  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .          3,480,816         2,486,076
                                                                                               ----------        ----------

Commitments and contingencies
Stockholders' equity (deficit)
  Preferred stock, par value $.01 per share; 1,000,000 shares authorized; none issued                                     
     and outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                    -                 -
  Common stock, par value $.01 per share; 20,000,000 shares authorized; 
     2,985,537 and 2,563,318 shares issued and outstanding at December 31, 1996 
     and March 2, 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .               29,855            25,633
  Additional paid in capital   . . . . . . . . . . . . . . . . . . . . . . . . . . .            2,695,832         1,339,248
  Accumulated deficit  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .           (1,488,062)       (1,625,213)
                                                                                               ----------        ----------
  Total stockholders' equity (deficit)   . . . . . . . . . . . . . . . . . . . . . .            1,237,625          (260,332)
                                                                                               ----------        ----------
  Total liabilities and stockholders' equity (deficit)   . . . . . . . . . . . . . .           $4,718,441        $2,225,744
                                                                                               ==========        ========== 


</TABLE>

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





                                       22
<PAGE>   23
            DENTAL/MEDICAL DIAGNOSTIC SYSTEMS, INC. AND SUBSIDIARIES
                     CONSOLIDATED STATEMENTS OF OPERATIONS
                FOR THE TEN-MONTH PERIOD ENDED DECEMBER 31, 1996
    AND FOR THE PERIOD FROM INCEPTION (OCTOBER 23, 1995) TO MARCH 2, 1996


<TABLE>
<CAPTION>
                                                                                      TEN MONTHS ENDED    INCEPTION TO
                                                                                      DECEMBER 31, 1996   MARCH 2, 1996
                                                                                      -----------------   -------------
 <S>                                                                                      <C>              <C>
 Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .        $11,673,102      $   220,623
 Cost of sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .          6,685,464          202,115
                                                                                          -----------      -----------        
    Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .          4,987,638           18,508
 Selling, general and administrative expense . . . . . . . . . . . . . . . . . . .          4,360,736        1,111,391
 Research and development expense  . . . . . . . . . . . . . . . . . . . . . . . .            322,467          528,426
                                                                                          -----------      ------------        
    Operating income (loss)  . . . . . . . . . . . . . . . . . . . . . . . . . . .            304,435       (1,621,309)
 Interest expense  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .             57,166            3,904
 Amortization of debt issuance costs . . . . . . . . . . . . . . . . . . . . . . .             31,548                _

                                                                                          -----------      -----------        
    Income (loss) before income taxes  . . . . . . . . . . . . . . . . . . . . . .            215,721       (1,625,213)
 Provision for income taxes  . . . . . . . . . . . . . . . . . . . . . . . . . . .             78,570                _
                                                                                          -----------      -----------        
    Net income (loss)  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .           $137,151      $(1,625,213)
                                                                                          ===========      ===========
                                                                                                       
 Net income (loss) per share . . . . . . . . . . . . . . . . . . . . . . . . . . .               $.05           $(1.57)
                                                                                          ===========      ===========
 Number of shares used in computing per share amounts  . . . . . . . . . . . . . .          3,019,213        1,035,778            
                                                                                          ===========      ===========
                                                                                                    



</TABLE>

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





                                       23
<PAGE>   24
            DENTAL/MEDICAL DIAGNOSTIC SYSTEMS, INC. AND SUBSIDIARIES
                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                FOR THE TEN-MONTH PERIOD ENDED DECEMBER 31, 1996
   AND FOR THE PERIOD FROM INCEPTION (OCTOBER 23, 1995) TO DECEMBER 31, 1996


<TABLE>
<CAPTION>
                                               COMMON STOCK              ADDITIONAL     
                                           --------------------           PAID IN        ACCUMULATED   
                                           SHARES        AMOUNT           CAPITAL          DEFICIT              TOTAL
                                           ------        ------           -------        -----------            -----

 <S>                                       <C>           <C>              <C>                 <C>                <C>
 Balance, October 23, 1995 (date of                -     $-              $        -         $         -       $         -
    inception) . . . . . . . . . . .
 Issuance of common stock for cash .       1,416,500      14,165            617,070                   -           631,235
 Issuance of common stock for                290,126       2,901            125,216                   -           128,117
    services . . . . . . . . . . . .
 Issuance of common stock for cash,          856,692       8,567            596,962                   -           605,529
    net of issuance costs  . . . . .
 Net loss  . . . . . . . . . . . . .               -           -                  -          (1,625,213)       (1,625,213)
                                           ---------     -------         ----------         -----------       -----------     
 Balance, March 2, 1996  . . . . . .       2,563,318      25,633          1,339,248          (1,625,213)         (260,332)
 Issuance of common stock for cash,          422,219       4,222          1,050,281                   -         1,054,503
    net of issuance costs  . . . . .
 Issuance of warrants for cash . . .               -           -            259,103                   -           259,103
 Issuance of stock options to                      -           -             47,200                   -            47,200
    nonemployees . . . . . . . . . .
 Net income  . . . . . . . . . . . .               -           -                  -             137,151           137,151
                                           ---------     -------         ----------         -----------       -----------
 Balance, December 31, 1996  . . . .       2,985,537     $29,855         $2,695,832         $(1,488,062)      $ 1,237,625
                                           =========     =======         ==========         ===========       ===========
   


</TABLE>

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





                                       24
<PAGE>   25
            DENTAL/MEDICAL DIAGNOSTIC SYSTEMS, INC. AND SUBSIDIARIES
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                FOR THE TEN-MONTH PERIOD ENDED DECEMBER 31, 1996
     AND FOR THE PERIOD FROM INCEPTION (OCTOBER 23, 1995) TO MARCH 2, 1996


<TABLE>
<CAPTION>
                                                                                TEN MONTHS ENDED      INCEPTION TO 
                                                                               DECEMBER 31, 1996      MARCH 2, 1996
                                                                               -----------------      --------------
<S>                                                                              <C>                  <C>
Cash flows from operating activities:
Net income (loss)  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    $   137,151          $(1,625,213)
  Adjustments to reconcile net income (loss) to net cash used by operating
    activities:
  Depreciation and amortization  . . . . . . . . . . . . . . . . . . . . . . .        108,047                9,219
  Allowance for returns and doubtful accounts  . . . . . . . . . . . . . . . .         79,123               28,280
  Inventory write down . . . . . . . . . . . . . . . . . . . . . . . . . . . .         20,822               91,556
  Deferred taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .        (90,000)                   -
  Deferred rent  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .          1,469               12,629
  Common stock and stock options issued for services . . . . . . . . . . . . .         47,200              128,117
  Changes in operating assets and liabilities:
    Accounts receivable  . . . . . . . . . . . . . . . . . . . . . . . . . . .     (1,188,544)             (77,303)
    Inventories  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .       (461,812)          (1,163,641)
    Prepaid expenses and other current assets  . . . . . . . . . . . . . . . .        (55,567)            (152,985)
    Other assets   . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .         (6,230)             (36,040)
    Accounts payable   . . . . . . . . . . . . . . . . . . . . . . . . . . . .       (448,316)           1,524,470
    Accrued liabilities  . . . . . . . . . . . . . . . . . . . . . . . . . . .        272,482              131,991
    Income taxes payable   . . . . . . . . . . . . . . . . . . . . . . . . . .        168,570                    -
    Customer deposits  . . . . . . . . . . . . . . . . . . . . . . . . . . . .       (215,738)             249,345
                                                                                  -----------          -----------    
       Net cash used by operating activities . . . . . . . . . . . . . . . . .     (1,631,343)            (879,575)
                                                                                  -----------          -----------    
Cash flows from investing activities:
  Purchase of property and equipment . . . . . . . . . . . . . . . . . . . . .       (200,686)            (144,537)
                                                                                  -----------          -----------    
       Net cash used in investing activities . . . . . . . . . . . . . . . . .       (200,686)            (144,537)
                                                                                  -----------          -----------    
Cash flows from financing activities:
  (Decrease) increase in book overdraft  . . . . . . . . . . . . . . . . . . .        (49,906)              49,906
  Accounts payable to related party in excess of terms . . . . . . . . . . . .        (79,218)              79,218
  Net proceeds from issuance of common stock . . . . . . . . . . . . . . . . .      1,054,503            1,291,113
  Net proceeds from issuance of notes payable  . . . . . . . . . . . . . . . .      1,314,766                    -
  Proceeds from borrowings from related parties  . . . . . . . . . . . . . . .         25,000              377,015
  Payments on borrowings from related parties  . . . . . . . . . . . . . . . .        (29,049)            (100,000)
  Principal payments on capital lease obligations  . . . . . . . . . . . . . .        (11,842)              (6,529)
                                                                                  -----------          -----------    
       Net cash provided by financing activities . . . . . . . . . . . . . . .      2,224,254            1,690,723
                                                                                  -----------          -----------    
       Net increase in cash and cash equivalents . . . . . . . . . . . . . . .        392,225              666,611
Cash and cash equivalents, beginning of period . . . . . . . . . . . . . . . .        666,611                    _
                                                                                  -----------          -----------    
Cash and cash equivalents, end of period . . . . . . . . . . . . . . . . . . .    $ 1,058,836             $666,611
                                                                                  ===========          ===========

Supplemental cash flow information:
Capital lease obligations incurred  . . . . . . . . . . . . . . . . . . . . . .   $     5,997          $    96,870
Property and equipment not paid for at period end . . . . . . . . . . . . . . .             -               16,812
Common stock issuance costs not paid for at period end  . . . . . . . . . . . .             -               54,349
Interest paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .         8,219                    -
Income Taxes paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .             -                    -

</TABLE>

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





                                       25
<PAGE>   26
            DENTAL/MEDICAL DIAGNOSTIC SYSTEMS, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. GENERAL

         The Company was organized in New York in 1981 under the name Edudata
Corporation and reincorporated in Delaware in 1983 by Sun Equities Corporation
("Sun") which owned approximately 81 percent of the Company's outstanding
common stock until August 11, 1995. At that time, Sun distributed the shares of
the Company that it owned to its stockholders in the form of a dividend.

         The Company was initially organized to provide education in the use of
personal computers, to market software programs developed by others, and to
provide a broad range of advisory services to businesses in conjunction with
both computer and non-computer related management issues. The Company's
original concept was modified, however, and until 1987, the Company was engaged
in the ownership and operation of technical schools through its subsidiaries,
Betty Owen Secretarial Systems, Inc. and Taylor Business Institute, Inc., and
in the development, construction and sale of single-family homes and commercial
buildings through its majority-owned subsidiary, Lytton & Tolly, Inc. In 1988
the Company disposed of its subsidiaries and their operations and determined to
use the proceeds to acquire another business. From 1988 to early 1996, the
Company's operations were limited to exploring opportunities to acquire or to
become an operating business.

         On March 1, 1996, the Company acquired all the outstanding securities
of Dental/Medical Diagnostic Systems LLC, a California limited liability
company ("DMD"), and Bavarian Dental Instruments, Inc., a California closed
corporation ("BDI"), in exchange for the issuance by the Company of a total of
1,706,626 restricted shares of its Common Stock. DMD and BDI were initially
formed in October 1995 and November 1995, respectively. As a result of these
transactions, the former members of DMD and former stockholders of BDI gained a
majority of the Company's voting securities and management control of the
Company was transferred to the former management of DMD and BDI. For accounting
purposes these transactions were treated as a recapitalization of DMD and BDI,
with DMD and BDI combined as the acquiror (reverse acquisition). As a result,
the combined historical financial statements of DMD and BDI became the
financial statements of the Company.

         On January 28, 1997 the Company changed its name to Dental/Medical
Diagnostic Systems, Inc. ("DMDS") from Edudata Corporation.  Collectively, DMDS
and its wholly owned subsidiaries are referred to as the Company.

         The Company designs, develops, manufactures and sells high technology
dental equipment.  Currently, the Company's primary emphasis is on the
manufacture and sale of an intraoral camera system known as the TeliCam System
and a dental office networking system, known as InTELInet, for use in
connection with the TeliCam System. The Company commenced shipments of TeliCam
Systems to customers in February 1996 and, in November 1996, introduced the
InTELInet networking system for the TeliCam System.

         BDI was formed to import from Russia, distribute and market dental burs
in the United States and elsewhere.  The first sales of the burs commenced in
early March 1996. On July 9, 1996, the Company decided to discontinue the dental
bur product line.

2. BASIS OF PRESENTATION

         On October 23, 1996, the Company authorized an increase in the
authorized number of shares of Common Stock from 10,000,000 shares to
20,000,000 shares.  The Board of Directors also authorized a new class of
1,000,000 shares of Preferred Stock with a par value of $.01 per share.

         On January 13, 1997, the Company effected a reverse stock split of 1
share for 2.197317574 shares of its issued and outstanding Common Stock.  In
addition, on March 24, 1997 the Company's Stockholders approved a reverse





                                       26
<PAGE>   27
            DENTAL/MEDICAL DIAGNOSTIC SYSTEMS, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

2. BASIS OF PRESENTATION (CONTINUED)


                                             
                                                 

stock split of 1 share for 1.33333333 shares of its issued and outstanding
Common Stock.  All share and per share amounts have been retroactively restated
to reflect these reverse splits.


         On February 5, 1997 the Company changed its fiscal year-end from a
fiscal year ending on the nearest Saturday to February 28th to a December 31
fiscal year-end. The accompanying consolidated financial statements reflect the
operating results of the Company for the ten-month period from March 3, 1996
through December 31, 1996 and for the period from inception (October 23, 1995)
through March 2, 1996.


3. ACQUISITION OF DMD AND BDI

         On March 1, 1996, DMDS (formerly Edudata) completed the acquisition of
BDI and DMD. The acquisition was affected pursuant to the terms of the two
Contribution Agreements dated February 29, 1996 ("Contribution Agreements")
between DMDS and BDI and between DMDS and DMD. Pursuant to the Contribution
Agreements the former shareholders of BDI and members of DMD received a total
of 1,706,626 shares of newly issued DMDS restricted common stock, then
constituting approximately 66.6% of DMDS' outstanding common stock, taking into
consideration the newly issued shares. As part of the transaction, DMDS' prior
Board of Directors resigned and were replaced by Robert H. Gurevitch, Chief
Executive Officer, director and member/shareholder of DMD and BDI, Hiroki
Umezaki, President of DMD's International Operations, director and member of
DMD and two outside directors.  In addition, existing management and security
holders of both DMD and BDI assumed management control of DMDS.

         Accordingly, for accounting purposes the acquisition was treated as a
recapitalization of DMD and BDI with DMD and BDI combined as the acquiror
(reverse acquisition). As a result, the combined historical financial
statements of DMD and BDI became the financial statements of DMDS.

         Further, since DMDS' assets consisted solely of approximately $660,000
in cash and cash equivalents and had no operations in the seven years prior to
the acquisition, for accounting purposes this transaction was recorded by the
Company as the issuance of common stock for cash held by DMDS.  Therefore no
proforma information has been presented.

4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES


Principles of Consolidation

         The consolidated financial statements include the accounts of DMDS and
its wholly owned subsidiaries as of December 31, 1996 and March 2, 1996 and for
the ten-month period ended December 31, 1996 and for the period from inception
(October 23, 1995) to March 2, 1996. All intercompany balances and transactions
have been eliminated.

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 the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. The significant estimates made in the preparation of the
consolidated financial statements relate to the assessment of the carrying
value of accounts receivable, inventories, and estimated provision for warranty
costs. Actual results could differ from those estimates.





                                       27
<PAGE>   28





            DENTAL/MEDICAL DIAGNOSTIC SYSTEMS, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Risks and Uncertainties

         The Company buys certain key components from one supplier or from a
limited number of suppliers. Although there are a limited number of suppliers
of the key components, management believes that other suppliers could provide
similar components on comparable terms. Changes in key suppliers could cause
delays in manufacturing and distribution of products and a possible loss in
sales, which could adversely affect operating results.

         The Company has derived substantially all of its revenues from the
sale of one product family. The Company believes that the inability to attract
new customers, the loss of one or more of its major customers, a significant
reduction in business from such customers, or the uncollectibility of amounts
due from any of its larger customers, could have a material adverse affect on
the Company.

Revenue Recognition

         The Company recognizes revenue from the sales of systems and supplies
at the time of shipment and satisfaction of significant vendor obligations, if
any, net of an allowance for estimated sales returns. The Company generally
warrants its systems for one year. A provision for estimated future costs
relating to warranty is recorded when systems are shipped.

Cash and Cash Equivalents

         For purposes of the statement of cash flows, the Company considers all
highly liquid investments purchased with an original maturity of three months
or less to be cash equivalents.

Inventories

         Inventories are carried at standard costs which approximate the lower
of actual cost (first-in; first-out) or market. Such amounts include the cost
of materials and, when applicable, labor and overhead.

Property and Equipment

         Property and equipment are stated at cost, less accumulated
depreciation. Capitalized leases are recorded at the lower of fair market value
or the present value of future minimum lease payments, less accumulated
amortization. Maintenance and repairs are expensed as incurred.  The cost and
related accumulated depreciation and amortization of property and equipment
sold or retired are removed from the accounts and the resulting gains or
losses are included in current operations. Depreciation and amortization are
provided on a straight line basis over the estimated useful lives of the
related asset, or with respect to leasehold improvements and capital leases by
the primary term of the lease, whichever is less, as follows:

<TABLE>
<S>                                                               <C>
Equipment and software, including capitalized leases  . . . .     5 years
Furniture and fixtures  . . . . . . . . . . . . . . . . . . .     7 years
</TABLE>





                                       28
<PAGE>   29
<TABLE>
<S>                                                                    <C>
Leasehold improvements  . . . . . . . . . . . . . . . . . . . . . .     3 years
</TABLE>




            DENTAL/MEDICAL DIAGNOSTIC SYSTEMS, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

4.      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Long-Lived Assets

         In March 1995, Statement of Financial Accounting Standards (SFAS) No.
121, "Accounting for the Impairment of Long-Lived Assets to be Disposed of,"
was issued. SFAS No. 121 requires that long-lived assets and certain
identifiable intangibles to be held and used or disposed of by an entity be
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. SFAS No. 121 was
effective for fiscal years beginning after December 15, 1995. The impact of the
adoption of SFAS No. 121 was not material to the Company's consolidated
financial statements.

Advertising and Promotion Costs

         Production costs of future media advertising and costs of dental
industry trade shows are deferred until the advertising or trade show occurs.
All other advertising and promotion costs are expensed as incurred. Total
advertising and promotion expenses incurred for the ten-month period ended 
December 31, 1996 were $1,008,879 and for the period from inception 
(October 23, 1995) through March 2, 1996 were $437,590.

Research and Development Costs

         Costs related to research and development are expensed as incurred.

Income Taxes

         The Company accounts for income taxes under the liability method.
Under this method, deferred tax assets and liabilities are determined based on
the differences between the financial statement and tax bases of assets and
liabilities, using enacted tax rates in effect for the year in which the
differences are expected to reverse. Valuation allowances are established when
necessary to reduce deferred tax assets to the amount expected to be realized.
Income tax expense is the tax payable for the period and the change during the
period in deferred tax assets and liabilities.

Stock-Based Employee Compensation Awards

         Statement of Financial Accounting Standards No. 123, "Accounting for
the Awards of Stock-Based Compensation to Employees" ("SFAS No. 123")
encourages, but does not require companies to record compensation cost for
stock-based compensation plans at fair value. The Company has adopted the
disclosure requirements of SFAS No. 123, which involves proforma disclosure of
net income under SFAS No. 123, detailed descriptions of plan terms and
assumptions used in valuing stock option grants. The Company has chosen to
continue to account for stock-based employee compensation awards in accordance
with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued
to Employees".

Concentration of Credit Risk and Major Customers

         Financial instruments that potentially subject the Company to
significant concentrations of credit risk consist principally of cash deposits
and trade accounts receivable. The Company's cash deposits are placed with
various financial institutions and, from time to time, may exceed the Federal
Deposit Insurance Corporation limit.

         For the ten month period ended December 31, 1996, five of the
Company's customers accounted for approximately 21% of sales and as of
December 31, 1996, six of the Company's customers, primarily international
distributors, accounted for approximately 75% of trade accounts receivable.
For the ten-month period ended December 31, 1996 the Company had export sales
of approximately $2,200,000 ($1,200,000 Europe; $400,000 Australia; $310,000
Canada and $290,000 other). No customer accounted for more than 10% of revenues
and there were no export sales in the period ended March 2, 1996.

         The Company extends credit based on an ongoing credit evaluation of
its customers' financial condition and generally does not require collateral.
Estimated credit losses and returns have been provided for in the financial
statements and, to date, have been within management's expectations.

         The majority of the Company's current customers consist of dental
professionals. Certain of the dental professionals lease the Company's products
through third party leasing companies. Under the terms of the sales, the
leasing companies have no recourse against the Company.





                                       29
<PAGE>   30

            DENTAL/MEDICAL DIAGNOSTIC SYSTEMS, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

4.      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)


Fair Value of Financial Instruments

        Statement of Financial Accounting Standards No. 107, "Disclosure About
Fair Value of Financial Instruments", requires disclosure of fair value 
information about all financial instruments held by a company except for certain
excluded instruments and instruments for which it is not practical to estimate 
fair value. The carrying value of the Company's financial instruments 
approximates their fair value.

Earnings (Loss) Per Share

         Earnings (loss) per share is computed based on the weighted average
number of common and common equivalent shares outstanding during the periods
presented, using the treasury stock method.  Common stock equivalents related
to warrants and stock options are excluded from the computation when their
effect is antidilutive.

5. RELATED PARTY TRANSACTIONS

         In October 1996, the Company entered into an agreement with Boston
Marketing pursuant to which the Company obtained worldwide marketing rights in
the dental market for the Teli Units as well as the right to use the "TeliCam"
trademark. At the time the Company entered into this agreement, Hiroki Umezaki
was an officer, director and principal shareholder of the Company and is a
substantial shareholder and the President of Boston Marketing.  At December 31,
1996 and March 2, 1996 the Company owed Boston Marketing approximately $247,500
and $674,218, respectively, in connection with Teli Units purchased by the
Company.  For the ten-month period ended December 31, 1996, the Company
purchased 2,509 Teli Units at an aggregate cost of $1,881,750 and from
inception (October 23, 1995) through March 2, 1996, the Company purchased 905
Teli Units at an aggregate cost of $674,218 from Boston Marketing. In addition,
the Company had an agreement with Mr. Umezaki pursuant to which he was to
receive a 15% commission on all sales made by the Company in Asia, except Japan
for which his commission was to be 12%. This agreement resulted in Mr. Umezaki
earning $15,000 in commissions for the ten-month period ended December 31,
1996.

         From December 1995 through February 1996, Robert H. Gurevitch,
Chairman of the Board and Chief Executive Officer of the Company, and Boston
Marketing, an affiliate of Mr. Umezaki, loaned the Company an aggregate of
$377,015.  The promissory notes evidencing such loans bear interest at 6% per
annum and were originally payable within six months.  On February 26, 1996, the
Company repaid $50,000 to each of Mr. Gurevitch and Boston Marketing.  No
interest has been paid on the remaining principal balance of these notes
although interest has been accrued in the Company's financial statements.  In
November 1996, Mr. Gurevitch and Boston Marketing each agreed to extend the
term of their respective notes until the earlier to occur of:  (i) twenty-four
months following the closing of the Bridge Financing (see Note 11); (ii) at
such time as the Company receives proceeds from the sale of the Common Stock in
connection with a public offering; and (iii) the repayment of the Bridge Notes
in full. In addition, on April 11, 1996, Boston Marketing loaned the Company an
additional $25,000 under similar terms ("April Loan"). The April Loan was 
repaid in full on August 26, 1996.

         Mr. Gurevitch and Mr. Umezaki have guaranteed the performance by the
Company under the Company's leases for its Irvine and Westlake premises, and
Mr. Gurevitch has also personally guaranteed the Company's credit card
processing agreement with the Checkfree Corporation.





                                       30
<PAGE>   31

            DENTAL/MEDICAL DIAGNOSTIC SYSTEMS, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

6. INVENTORIES


         Inventories consisted of the following:

<TABLE>
<CAPTION>
                                                                              DECEMBER 31,       MARCH 2,
                                                                                 1996              1996
                                                                              ------------       --------
 <S>                                                                          <C>             <C>
 Raw materials . . . . . . . . . . . . . . . . . . . . . . . . . . .          $  789,464      $  754,946
 Work in process . . . . . . . . . . . . . . . . . . . . . . . . . .             136,786          49,164
 Finished goods  . . . . . . . . . . . . . . . . . . . . . . . . . .             586,825         267,975
                                                                              ----------      ---------- 
                                                                              $1,513,075      $1,072,085
                                                                              ==========      ==========        
</TABLE>

7. PREPAID EXPENSES AND OTHER CURRENT ASSETS

         Prepaid expenses and other current assets consisted of the following:

<TABLE>
<CAPTION>
                                                                         DECEMBER 31,      MARCH 2,
                                                                            1996             1996
                                                                         ------------      --------
<S>                                                                       <C>             <C>
Prepaid advertising and industry trade show fees  . . . . . . . . .        $178,281        $117,495
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .          30,271          35,490
                                                                           --------        --------      
                                                                           $208,552        $152,985
                                                                           ========        ========  



</TABLE>

8. PROPERTY AND EQUIPMENT

         Property and equipment consisted of the following:

<TABLE>
<CAPTION>
                                                                        DECEMBER 31,    MARCH 2,
                                                                            1996          1996
                                                                        ------------    --------
<S>                                                                       <C>          <C>
Equipment and software, including $102,867 and $96,870 of capitalized     
leases at December 31, 1996 and March 2, 1996   . . . . . . . . . . . .   $342,989     $191,705
Furniture and fixtures  . . . . . . . . . . . . . . . . . . . . . . . .    116,152       61,352
Leasehold improvements  . . . . . . . . . . . . . . . . . . . . . . . .      5,761        5,162
                                                                          --------     --------     
                                                                           464,902      258,219
Less accumulated depreciation and amortization, including $20,341 and
  $3,368 relating to capitalized leases at December 31, 1996 and at
  March 2, 1996   . . . . . . . . . . . . . . . . . . . . . . . . . . .    (71,324)      (9,219)
                                                                          --------     --------
                                                                          $393,578     $249,000
                                                                          ========     ========   



</TABLE>

9. ACCRUED LIABILITIES

         Accrued liabilities consisted of the following:

<TABLE>
<CAPTION>
                                                                                DECEMBER 31,    MARCH 2,
                                                                                ------------    --------
                                                                                   1996           1996
                                                                                   ----           ----
<S>                                                                              <C>          <C>
Accrued commissions . . . . . . . . . . . . . . . . . . . . . . . . . .           $257,341    $  32,516
Accrued warranty  . . . . . . . . . . . . . . . . . . . . . . . . . . .             56,515       38,444
Accrued salaries and wages  . . . . . . . . . . . . . . . . . . . . . .             42,159       45,432
Accrued interest  . . . . . . . . . . . . . . . . . . . . . . . . . . .             34,552        1,822
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .             71,889       71,760
                                                                                  --------     --------  
                                                                                  $462,456     $189,974
                                                                                  ========     ======== 



</TABLE>

                                       31
<PAGE>   32


            DENTAL/MEDICAL DIAGNOSTIC SYSTEMS, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


10. COMMITMENTS AND CONTINGENCIES

Leases

         The Company leases two facilities under various operating leases which
expire in 1998 and 2000. The leases require the Company to pay taxes,
maintenance fees, and insurance and provide for periodic fixed rent increases
based on a published price index. The Company also leases certain equipment
under capital leases which expire in 2000 and has the right to purchase the
underlying equipment at the termination of the leases for its fair market
value. Rent expense for all operating leases was approximately $102,000 and
$38,000 for the ten-month period ended December 31, 1996 and for the period
from inception (October 23, 1995) to March 2, 1996, respectively. All
non-cancelable leases are guaranteed by Robert H. Gurevitch, Chief Executive
Officer and Chairman of the Board of the Company. The other facility lease is
co-guaranteed by Hiroki Umezaki, former Executive Vice President, director,
Secretary, and stockholder of the Company.

         The aggregate liability for future rentals under these lease
agreements as of December 31, 1996, is summarized as follows:

<TABLE>
<CAPTION>
   YEAR ENDED DECEMBER 31                         CAPITAL     OPERATING 
                                                  LEASES       LEASES
                                                  ------       ------
   <S>                                           <C>           <C>
   1997  . . . . . . . . . . . . . . . . .      $ 29,795       $116,359
   1998  . . . . . . . . . . . . . . . . .        28,077        109,026
   1999  . . . . . . . . . . . . . . . . .        25,672         70,008
   2000  . . . . . . . . . . . . . . . . .        22,539         61,257
                                                --------       --------
                                                 106,083       $356,650
                                                               ========   



   Less amounts representing:
     Interest  . . . . . . . . . . . . . .        21,587
     Current portion   . . . . . . . . . .        18,468
                                                --------
   Long term portion . . . . . . . . . . .      $ 66,028
                                                ========



</TABLE>

11. CAPITAL TRANSACTIONS

         As previously described in Note 3, for accounting purposes, the
acquisition of DMD and BDI was treated as a recapitalization of DMD and BDI,
whereby the previously outstanding shares and interests of DMD and BDI were
exchanged for 1,706,626 shares of DMDS (formerly Edudata) restricted common
stock and 856,692 shares of common stock were issued for the approximately
$660,000 in cash and cash equivalents held by DMDS ($606,000 net of issuance
costs of approximately $54,000). Accordingly, DMD's and BDI's historical
shareholder's equity and members' interest activity prior to the acquisition
has been retroactively restated for the equivalent number of DMDS' common
shares received in the transaction.

         The capital transactions of DMD and BDI prior to the acquisition of
DMD and BDI by the Company have been restated as if (i) the Company issued
870,379 shares of its common stock to Robert Gurevitch, Chief Executive Officer
and Chairman of the Board for cash payments totaling approximately $388,235 or
$.44 per share; (ii) the Company issued 546,121 shares of its common stock to
Hiroki Umezaki, Executive Vice-president, director, and Secretary of the
Company for cash payments totaling approximately $243,000, or $.44 per share;
and (iii) in exchange for services, 290,126 shares of the Company's common
stock were issued to three employees and valued at approximately $128,000, or
$.44 per share for which compensation expense was included in the consolidated
statements of operations.





                                       32
<PAGE>   33
            DENTAL/MEDICAL DIAGNOSTIC SYSTEMS, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

11. CAPITAL TRANSACTIONS (CONTINUED)

         On May 30, 1996, the Company completed the sale of a total of 422,219
shares of its common stock to six foreign investors.  Each share was sold at a
price of $2.58 per share and, consequently, the Company raised approximately
$1,055,000 from the sale, net of related expenses of approximately $34,000.

         On November 27, 1996, the Company raised $1,314,766, net of issuance
costs of $285,234, through a private placement of 32 Units to certain
accredited investors. Each Unit consisted of a secured promissory note in the
principal amount of $50,000 ("Note") and a warrant ("Bridge Warrant") to
purchase 18,750 shares of Common Stock at a purchase price of $2.67 per share.
The Notes bear interest at a rate of 10% per annum and the principal and all
accrued interest are payable upon the earliest to occur of: (a) May 27, 1998;
(b) certain change in control events effecting the Company; (c) a public
offering of the Company's securities; or (d) the sale by the Company's Chief
Executive Officer of all or substantially all of his holdings of Common Stock.
Upon the happening of certain events the holders of the Notes will have the
right to convert the outstanding balances of their Notes into shares of Common
Stock at a rate of $2.67 per share.  The Warrants are first exercisable on
November 27, 1997 and expire on November 27, 2002.  As a result of the warrant
issuance, these Notes have been discounted by $259,103, which amount is being
amortized over the term of the Notes.

12. STOCK OPTIONS

         During the ten-month period ended December 31, 1996, the Company
granted stock options to certain executives, key employees and directors.  The
options were granted with an exercise price equal to the fair value of the
common stock at the date of grant, are fully vested and are exercisable over a
period of five years.

         The fair value of each option granted is estimated on the date of
grant using the Black-Scholes option pricing model with the following
assumptions (i) risk-free interest rate of 6.85%, (ii) expected option life of
5 years, (iii) forfeiture rate of 0, (iv) expected volatility of 143% and (v)
no expected dividends.

         A summary of  stock option activity with executives, key employees and
outside directors is as follows:

<TABLE>
<CAPTION>
                                             NUMBER OF        WEIGHTED AVERAGE          WEIGHTED AVERAGE
                                              SHARES        OPTION EXERCISE PRICE     GRANT DATE FAIR VALUE
                                             ---------      ---------------------     ---------------------
<S>                                           <C>                   <C>                      <C>
Options outstanding at March 2, 1996  . . .         -               $   -                    $   -
Granted . . . . . . . . . . . . . . . . . .   139,943                2.63                     2.11
Exercised . . . . . . . . . . . . . . . . .         -                   -                        -
                                              -------               -----                    -----    
Options outstanding at December 31, 1996  .   139,943               $2.63                    $2.11
                                              -------               -----                    =====
Options exercisable at December 31, 1996  .   139,943               $2.63
                                              =======               =====


</TABLE>
         The following table summarizes information about stock options
outstanding at December 31, 1996:

<TABLE>
<S>                                                                                         <C>
Range of exercise prices  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .     $.88-2.93
Weighted average remaining contractual life . . . . . . . . . . . . . . . . . . . . . .     51 months

</TABLE>

         The Company has adopted the disclosure only provisions of SFAS No. 123
and accordingly, no compensation expense has been recognized for stock options
granted to executives, key employees, and outside directors. Had compensation
expense for such grants been determined based on the fair value of the award at
the grant date, consistent with the provisions of SFAS No. 123, the Company's
net income and  income per share would have been reduced to the pro forma
amounts indicated below:





                                       33
<PAGE>   34

            DENTAL/MEDICAL DIAGNOSTIC SYSTEMS, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

12. STOCK OPTIONS (CONTINUED)


<TABLE>
<S>                                                                                     <C>
Net income-as reported  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 137,151
                                                                                        =========  
Net loss-pro forma  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(158,129)
                                                                                        =========
Income per share-as reported  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $    0.05
                                                                                        =========
Loss per share-pro forma  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $   (0.06)
                                                                                        =========



</TABLE>

         Under SFAS No. 123 stock options granted to other than employees have
been excluded from the tables above as such grants are accounted for based on
the fair value of the consideration received or the fair value of the equity
instrument issued, whichever is more reliably measured, similar to the
treatment described below.

         In addition to the stock options granted to executives, key employees
and directors, the Company also issued stock options to various non-employees
for past or future services. As of December 31, 1996 options to purchase 80,211
shares of common stock were held by non-employees with an exercise price of
$.88-$2.93 per share, exercisable over five to ten years. Certain of these
options vest 20% per year over five years.  Compensation expense of $47,200 was
recognized during the ten-month period ended December 31, 1996 in connection
with the issuance of these options.

13. INCOME TAXES

         The income tax expense (benefit) for the ten-month period ended
December 31, 1996 is as follows:

<TABLE>
 <S>                                                                                            <C>
 Current:
   Federal   . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .     $132,570
   State   . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .       36,000
                                                                                                -------
                                                                                                168,570
                                                                                                -------
 Deferred:
   Federal   . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .      (67,000)
   State   . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .      (23,000)
                                                                                                -------
                                                                                                (90,000)
                                                                                                -------    
                     Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .      $78,570
                                                                                                =======      



</TABLE>

         The Company's effective tax rate for the ten-month period ended
December 31, 1996 differs from the statutory federal income tax rate as
follows:

<TABLE>
<S>                                                                                        <C>
Tax provision at the statutory rate . . . . . . . . . . . . . . . . . . . . . . . . . . .   34%
Nondeductible expenses  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   10
State taxes, net of federal benefit . . . . . . . . . . . . . . . . . . . . . . . . . . .   14
Reduction in deferred asset valuation allowance . . . . . . . . . . . . . . . . . . . . .  (27)
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    5
                                                                                            --     
                                                                                            36%
                                                                                            ==



</TABLE>

         There was no tax expense for the period from inception (October 23,
1995) through March 2, 1996 due principally to DMD being formed as a limited
liability company and, prior to the acquisition by DMDS, having elected to be
taxed as a partnership. Due to the net operating loss incurred, however,
treatment as a C corporation would not have resulted in tax expense for the
period from inception through March 2, 1996.





                                       34
<PAGE>   35
            DENTAL/MEDICAL DIAGNOSTIC SYSTEMS, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

13. INCOME TAXES (CONTINUED)

         The components of the net deferred taxes are as follows:

<TABLE>
<CAPTION>
                                                                     DECEMBER 31,   MARCH 2,
                                                                         1996         1996
                                                                     ------------   --------
<S>                                                                   <C>            <C>
Deferred Tax Assets:
  Inventory reserves  . . . . . . . . . . . . . . . . . . . . . . . . $28,300       $ 26,900
  Warranty accrual  . . . . . . . . . . . . . . . . . . . . . . . . .  22,600         15,400
  Allowance for returns and doubtful accounts   . . . . . . . . . . .  37,900         11,000
  Other   . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   1,200          4,300
  Valuation allowance   . . . . . . . . . . . . . . . . . . . . . . .       -        (57,600)
                                                                      -------       --------                
                                                                      $90,000       $      -
                                                                      =======       ========



</TABLE>
         Based on the level of taxable income generated by the Company in the
current period, management believes it is more likely than not that the Company
will realize the benefit of its recorded net deferred tax asset.

14. SUBSEQUENT EVENTS (UNAUDITED)

         Effective February 11, 1997 the Company's Board of Directors approved
the adoption of the 1997 Stock Incentive Plan ("Plan").  The Plan provides for
the grant of stock awards to directors, employees, officers and consultants of
the Company.  A maximum of 350,000 shares of Common Stock are authorized and
reserved for issuance under the Plan.

         On February 13, 1997, the Company received a commitment letter from a
bank to provide a $2,000,000 line of credit, to be secured by a first priority
security interest in the Company's assets and by an assignment of the Company's
rights under the Boston Marketing Distribution Agreement. The credit facility
will bear interest monthly at the bank's prime rate, plus one-quarter of one
percent, through June 1, 1998. All borrowings under the facility will be
subject to a formula based, generally, on the levels of accounts receivable and
inventory.


ITEM 8.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
         FINANCIAL DISCLOSURE.

                 None.





                                       35
<PAGE>   36
                                    PART III

ITEM 9.  DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
         COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.

         Incorporated by reference from the Registrant's Amendment No. 1 to a
Registration Statement on Form SB-2 which was filed with the Commission on 
April 7, 1997.


ITEM 10. EXECUTIVE COMPENSATION.

         Incorporated by reference from the Registrant's Amendment No. 1 to a
Registration Statement on Form SB-2 which was filed with the Commission on 
April 7, 1997.


ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

         Incorporated by reference from the Registrant's Amendment No. 1 to a
Registration Statement on Form SB-2 which was filed with the Commission on 
April 7, 1997.


ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

         Incorporated by reference from the Registrant's Amendment No. 1 to a
Registration Statement on Form SB-2 which was filed with the Commission on 
April 7, 1997.


ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.

(a)      EXHIBITS.

<TABLE>
<CAPTION>
         EXHIBIT      DOCUMENT
           NO.        DESCRIPTION
           ---        -----------
          <S>         <C>

          2.l.        Contribution Agreement, dated February 29, 1996, by and
                      among the Registrant and Robert H. Gurevitch, Hiroki
                      Umezaki, Fred Kinley and Dewey Perrigo, as Members of
                      United Medical Diagnostic Systems, LLC. (1)

          2.2.        Contribution Agreement, dated February 29, 1996, by and
                      among the Registrant and Robert H. Gurevitch, Anatoly
                      Borodyansky and Dewey Perrigo, as stockholders of Bavarian
                      Dental Instruments, Inc. (1)

          2.3         Dental\Medical Diagnostic Systems, Inc. 1997 Stock
                      Incentive Plan. (1)

          3.1.        Amended and Restated Certificate of Incorporation of the
                      Registrant. (1)

          3.2.        Bylaws of the Registrant. (2)

          4.1         Agency Agreement dated as of October 23, 1996, by and
                      between the Registrant and M.H. Meyerson & Co., Inc. (3)

          4.2         Form of Subscription Agreement. (3)

          4.3.        Supplement No. 1 to Confidential Term Sheet, dated
                      November 14, 1996 (3)

          4.4         Form of Secured Convertible Promissory Note, dated as of
                      November 25, 1996. Issued by the Registrant and a Schedule
                      of Warrant Holders. (3)

          4.5         Form of Warrant for the Purchase of Shares of Common
                      Stock, dated as of November 25, 1996.  Issued by the
                      Registrant and a Schedule of Warrant holders. (3)





</TABLE>
                                       36
<PAGE>   37
<TABLE>
<CAPTION>
         <S>          <C>
          4.6         Security Agreement, dated as of November 25, 1996. Entered into by the Registrant.(3)
          4.7         Preliminary Registration Statement on Form SB-2, filed by the Registrant on February 28, 1997 (Registration
                      No. 333-22507).

         10.1.        Employment Agreement, dated as of October 1, 1996, between the Registrant and Robert H. Gurevitch. (3)

         10.2.        Employment Agreement, dated as of October 1, 1996, between the Registrant and Dewey Perrigo. (3)

         10.3.        Letter of Intent, dated August 23, 1996, between the Registrant and Olympus Japan Co., Ltd. (1)

         10.4.        Distribution Agreement, dated as of October 1, 1996, between the Registrant and Boston Marketing Company,
                      Ltd., as amended. (1)

         10.5.        Distributor Agreement, dated August 29, 1996, between the Registrant and 479671 BC Ltd. d/b/a/ National Dental
                      Direct. (1)

         10.6.        Distributor Agreement, dated June 1, 1996, between the Registrant and Michel Van Gerven, Imaging Concepts N.V.
                      (1)

         10.7.        Distributor Agreement, dated May 23, 1996, between the Registrant and New Image Industries Pty Ltd NII. (1)

         10.8.        Distributor Agreement, dated September 19, 1996, between the Registrant and Macana, Inc. d/b/a Florida Dental
                      and Medical Supply. (1)

         10.9.        Form of Distributor Agreement, dated May 30, 1996, between the Registrant and David Lok. (1)

         10.10.       Sales Representative Agreement, dated October 28, 1996, between the Registrant and Boston Marketing Company,
                      Ltd. (1)

         10.11.       Exclusive Purchase Agreement, dated October 28, 1996, between the Registrant and Fujimi Optics Corp. (1)

         10.12.       1996 Systems Integrator/Value Added Integrator Agreement, dated April 1, 1996, between the Registrant and Sony
                      Business & Professional Products Group, Sony Electronics, Inc. (1)

         10.13.       Promissory Note, dated February 1, 1996, made by the Registrant in favor of Boston Marketing Company, Ltd. (1)

         10.14.       Promissory Note, dated February 15, 1996, made by the Registrant in favor of Boston Marketing Company, Ltd.
                      (1)

         10.15.       Promissory Note, dated April 11, 1996, made by the Registrant in favor of Boston Marketing Company, Ltd. (1)

         10.16.       Extension of Promissory Note, dated November 5, 1996, between the Registrant and Boston Marketing Company,
                      Ltd. (4)

         10.17.       Promissory Note, dated February 1, 1996, between the Registrant and Robert H. Gurevitch. (1)

         10.18.       Promissory Note, dated February 15, 1996, made by the Registrant in favor of Robert H. Gurevitch.(1)

         10.19.       Extension of Promissory Note, dated November 5, 1996, between the Registrant and Robert H. Gurevitch. (4)

         10.20.       Form of Indemnification Agreement and Schedule of Indemnified Parties. (1)

         10.21.       Form of Notice of Vested Stock Option Letter and Schedule of Recipients. (1)

         10.22.       Standard Office Lease, dated October 30, 1995, between John Hancock Mutual Life Insurance Company ("John
                      Hancock") and the Registrant, for Suite 202 at 200 North Westlake Boulevard Office; and Guaranty of Lease,
                      dated November 6, 1995, made by Robert H. Gurevitch in favor of John Hancock.(1)
                     
</TABLE>

                                       37
<PAGE>   38
<TABLE>
         <S>          <C>
         10.24        Industrial Lease, dated October 23, 1995, between Registrant and The Irvine Company, for One Technology Park
                      Office.(1)

         11.1.        Statement Re:  Computation of per share earnings. (1)

         21.1.        Subsidiaries of the Registrant. (1)
 
         22.1.        Information Statement filed by Registrant (No. 0-12850) on November 29, 1996.
 
         24.1.        Power of Attorney (included in Part II, Page 6).

         27.1.        Financial Data Schedule.

</TABLE>
___________

(1)      Incorporated by reference to exhibits to Registrant's Registration
         Statement on Form SB-2, filed on February 28, 1997 (Registration No.
         333-22507).

(2)      Incorporated by reference to Exhibit 3(b) to Registrant's Registration
         Statement on Form S-1 (File No. 2-88997).

(3)      Incorporated by reference to the exhibits to Registrant's Report on
         Form 10-QSB for the quarter ended November 30, 1996.


(B)      REPORTS ON FORM 8-K

         (1)     On March 17, 1996, the Company filed a report on Form 8-K,
dated March 1, 1996, regarding the acquisition of Dental/Medical Diagnostic
Systems, LLC ("DMD") and Bavarian Dental Instruments, Inc. ("BDI").

         (2)     On May 15 and 20, 1996, the Company filed an amendment to the
Form 8-K dated March 1, 1996 to submit the required financial statements
regarding the acquisition of DMD and BDI.


         (3)     On May 31, 1996, the Company filed a Form 8-K, dated May 20,
1996 disclosing the Company's change in fiscal year-end from July 31 to the
Saturday nearest to February 28th.

         (4)     On February 13, 1997, the Company filed a Form 8-K regarding
the resignation of two of the Company's directors and a change in the Company's
fiscal year-end from the nearest Saturday to February 28th to a December 31
fiscal year-end.





                                       38
<PAGE>   39
                                   SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the Registrant has duly caused this Report to be signed
on its behalf by the undersigned thereunto duly authorized in the City of Los
Angeles and State of California on the 14th day of April 1997.



                                     Dental/Medical Diagnostic Systems, Inc.


                                     By:/s/Robert H. Gurevitch 
                                           ------------------------------------
                                           Robert H. Gurevitch 
                                           Chairman and Chief Executive Officer

Pursuant to the requirements of the Securities and Exchange Act of 1934, this
Report has been signed below by the following persons in the capacities and on
the date indicated:



<TABLE>
<CAPTION>
Signature                                   Title                                       Date
---------                                   -----                                       ----
<S>                                         <C>                                         <C>
                                            Chairman, Chief Executive Officer,          April 14, 1997
/s/Robert H. Gurevitch                      and Director
-------------------------------                         
Robert H. Gurevitch


/s/Jack D. Preston                          Director                                    April 14, 1997
----------------------------------                                                                    
Jack D. Preston  


/s/Ronald E. Wittman                        Chief Financial Officer,                    April 14, 1997
-------------------------------             Principal Accounting Officer                                  
Ronald E. Wittman





</TABLE>
                                       39