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

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

                                  FORM 10-KSB

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

                 ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
                    OF THE SECURITIES EXCHANGE ACT OF 1934
                  FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000
                          COMMISSION FILE NO. 0-12850

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

                   DENTAL/MEDICAL DIAGNOSTIC SYSTEMS, INC.
                (NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)

              DELAWARE                                       13-3152648
    (STATE OR OTHER JURISDICTION OF                       (I.R.S. EMPLOYER
     INCORPORATION OR ORGANIZATION)                      IDENTIFICATION NO.)


         6416 VARIEL AVENUE
         WOODLAND HILLS, CA                                     91367
(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:
                REDEEMABLE COMMON STOCK PURCHASE WARRANTS, AND
                         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 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. [_]

     The issuer's revenues for the fiscal year ended December 31, 2000 were
$21,049,928.

     At March 23, 2001, the issuer had 19,095,948 shares of Common Stock, $0.01
par value per issued and outstanding.

     The aggregate market value of the outstanding voting and non-voting common
equity held by non-affiliates of the issuer computed by reference to the average
bid and asked price of such common equity as of March 23, 2001 was $3,580,490.

                      DOCUMENTS INCORPORATED BY REFERENCE

Transitional Small Business Disclosure format: Yes [_]  No [X]

========================================================================
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                    DENTAL/MEDICAL DIAGNOSTIC SYSTEMS, INC.

                          FORM 10-KSB ANNUAL REPORT
                      Fiscal Year Ended December 31, 2000

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PART I

Item 1.       Business................................................................................  3
Item 2.       Properties.............................................................................. 12
Item 3.       Legal Proceedings....................................................................... 12
Item 4.       Submission of Matters to a Vote of Security Holders..................................... 12

PART II

Item 5.       Market for the Registrant's Common Equity and Related Stockholder Matters............... 13
Item 6.       Management's Discussion and Analysis of Financial Condition and Results of Operations... 14
Item 7.       Financial Statements.................................................................... 25
Item 8.       Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.... 46

PART III

Item 9.       Directors and Executive Officers of the Registrant...................................... 46
Item 10.      Executive Compensation.................................................................. 46
Item 11.      Security Ownership of Certain Beneficial Owners and Management.......................... 46
Item 12.      Certain Relationships and Related Transactions.......................................... 47

PART IV

Item 13.      Exhibits and Reports on Form 8-K........................................................ 47
</TABLE>

                                       2

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                                    PART I

ITEM 1. DESCRIPTION OF BUSINESS

     This Report contains statements that constitute "forward-looking
statements" within the meaning of Section 21E of the Exchange Act and Section
27A of the Securities Act. The words "expect", "estimate", "anticipate",
"predict", "believe" and similar expressions and variations thereof are intended
to identify forward-looking statements. Such statements appear in a number of
places in this filing and include statements regarding the intent, belief or
current expectations of Dental/Medical Diagnostic Systems, its directors or
officers with respect to, among other things (a) trends affecting the financial
condition or results of operations of Dental/Medical Diagnostic Systems and (b)
the business and growth strategies of Dental/Medical Diagnostic Systems. The
stockholders of Dental/Medical Diagnostic Systems are cautioned not to put undue
reliance on such forward-looking statements. Such forward-looking statements are
not guarantees of future performance and involve risks and uncertainties, and
actual results may differ materially from those projected in this Report, for
the reasons, among others, discussed in the Sections -- "Management's Discussion
and Analysis of Financial Condition and Results of Operations", and "Risk
Factors". Dental/Medical Diagnostic Systems undertakes no obligation to publicly
revise these forward-looking statements to reflect events or circumstances that
arise after the date hereof.

GENERAL

     Dental/Medical Diagnostic Systems, Inc. ("Company") designs, develops,
assembles and markets high technology dental equipment and related consumables.
The Company's best selling product during 2000 was the tooth curing and
whitening device known as the "Apollo(TM)." The Company also markets and sells a
line of whitening gels known as "Apollo Secret(R)" for use with the Apollo(TM).
In addition, the Company manufactures and sells intraoral camera systems, and a
multi-operatory intraoral camera system, known as the "InTELInet," for use in
connection with the Company's intraoral cameras. In September of 1999, the
Company introduced a digital dental x-ray device known as "MPDx(TM) -MegaPixel
Diagnostic System or MPDx(TM)", while in April and November 2000, respectively,
the Company introduced Forever White(TM), a home tooth whitening system, and the
Apollo e, a wireless curing device.

     The Company's current customers are dentists in the domestic and
international marketplace. The Company has also released a tooth whitening kit
for use in the home that is sold directly to consumers through infomercials. In
the domestic market, the United Kingdom and Germany, the Company sells directly
to dentists. In the international market, with the exception of the United
Kingdom and Germany, the Company sells its products through independent dealers
and distributors. The Company's products are not available through traditional
retail channels.

     In April 2001, the Company will cease all direct sales of its dental
equipment business and license the related technology to third-party
manufacturers and distributors. These agreements will allow the Company to
significantly reduce overhead, and will include a license fee and provisions
to purchase existing inventory.

BUSINESS STRATEGY

     The Company's strives to be a leading distributor of tooth whitening
systems and related consumables and licensor of high technology dental devices.
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 developed and introduced a direct-to-consumer
     home tooth whitening system, Forever White (TM), during the second quarter
     of 2000.

                                       3
<PAGE>

          Growth Through Licensing Agreements. The Company anticipates that it
     will complement its internal growth with its whitening systems, through
     licensing agreements for each of its high technology dental devices. The
     Company believes that licensing agreements present an effective means of
     generating revenue while reducing overhead. The Company continually
     evaluates opportunities for additional licensing agreements.

PRODUCTS

     The Apollo(TM)

     On October 2, 1997, the Company purchased the assets of S.E.D. Gerant
("S.E.D."), a company organized under the laws of France. Among the acquired
assets was a patent for S.E.D.'s "Biotron" soft tissue surgery instruments. From
this technology, the Company developed the "Apollo(TM)" a unique, visible-light
curing instrument which is designed for two different applications: the
hardening of tooth-colored dental composite materials in three seconds or less
and for single appointment, in-office tooth whitening in less than forty
minutes. This safe plasma-arc lamp uses a high-frequency electrical field to
generate plasma energy, which is ideal for the fast curing (hardening) of
photosensitive composites. The Apollo(TM) also produces light and heat which,
when used in conjunction with the Apollo Secret(R) whitening materials,
activates the whitening chemicals in the Apollo Secret(R). The result of this
activation is dramatic whitening of stained teeth. The rapid performance of the
Apollo(TM) in both hardening composite materials and whitening teeth should
enable an average dental practice to save about 5 to 8 hours per month of a
dentists' time.

          Curing Composites: Tooth-colored composite materials are one of the
          most requested methods of tooth restoration (bonding) in use today.
          They are delivered to the tooth in syringe-shaped tubes and then
          shaped into the proper tooth contours with dental instruments. In
          order to cure (harden) these paste-like materials, a visible light
          curing lamp (Apollo(TM)) is used to initiate the proper chemical
          reaction. The hand-piece to the Apollo(TM), which delivers the actual
          light source to the mouth, is a cylindrical shaped instrument
          approximately the size of a large pen with a curved end designed to
          make it easy for a dentist to be able to restore or whiten hard to
          reach surface areas of teeth.

          The Apollo(TM) cures most of these filling materials in just three
          seconds per layer compared with the 10-40 seconds per layer it takes
          other competing brands of curing lamps. Most restorations require the
          dentist to place multiple layers of composite material into/onto a
          tooth, curing each layer separately. With the curing lamps that are
          still used in most dental offices today, total curing time per tooth
          averages 2 minutes. The Apollo(TM) shortens the curing time in most
          cases to less than 9 seconds with the same results. Composite curing
          is an essential aspect for the practice of dentistry in all countries,
          making curing lamps a practical device for all dental offices.

          Whitening: "Power bleaching" or "Light-assisted bleaching" is fast
          becoming a sought-after dental protocol that allows the patient to
          leave the dental office, in under 40 minutes, with a dramatically
          whitened smile. The only alternative tooth-whitening method to the
          Apollo(TM) currently available requires the patient to wear an
          uncomfortable custom-fitted tray filled with unpleasant tasting
          whitening gels. In order to achieve dramatic whitening results, the
          trays would have to be worn overnight or for several hours a day for
          two to three weeks. In addition, patients often find themselves in
          pain from soft-tissue contact with the caustic gel.

                                       4

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          With the Apollo(TM), the process is much quicker. The Apollo Secret(R)
          gel is simply applied to the patient's teeth without any tissue
          protection, as the gel's special neutralizing component virtually
          eliminates any tooth or tissue sensitivity. The dentist or dental
          assistant holds the Apollo(TM) against the gel and then applies the
          light to each tooth for only 3 seconds. Several passes are made around
          all of the teeth being bleached and 40 minutes later the patient
          leaves the office with whitened teeth.

          Because the Apollo(TM) is not a laser device, in-office tooth
          whitening in less than forty minutes can be done by a dental assistant
          in a majority of states in the United States. This allows the dentist
          to concentrate on more complex procedures, while offering dentists an
          additional source of revenue that can be generated by a dental
          hygienist/assistant.

     In March 1998, the Company introduced this proprietary, non-laser
technology to markets outside of the US and Canada. After receiving FDA 510(k)
approval in August 1998, the Company began shipping the Apollo(TM) in the U.S.
and Canada. The Company's facility in Irvine, CA handles the manufacturing and
shipping of this product line worldwide after the France manufacturing facility
stopped manufacturing the Apollo(TM) in October of 1999.

     The product's sales increased for the first three quarters after
introduction. Over the past eight quarters, sales have declined due to
competition as competitor's lamps curing time became closer to that of the
Apollo(TM). In addition, the composite material companies and several lecturing
dentists still question the curing properties of high intensity curing lamps.
The Company believes that the Apollo(TM) non-laser lamp produces faster
composite curing and in-office tooth whitening results than any other known
like-product available today, including dental lasers designed for curing. In
addition, the Company believes that as more dentists use the technology, it will
receive more general acceptance from the dental industry.

     On October 2, 1998, the Company entered into an agreement with Chrysalis
Dental, Inc. ("CDI") for the exclusive worldwide license to make or have made,
use, or sell patent pending tooth whitening products created by CDI. Under this
license, and later license agreements with CDI, the Company began marketing its
own line of tooth whitening gels (Apollo Secret(R)), intended for use with the
Apollo(TM) and competing lamps, as well as its two home whitening products:
Apollo Secret Home Whitening(TM) and Forever White(TM). In November 2000, the
Company acquired CDI through the issuance of 550,000 shares of common stock and
has lowered its future cost of its whitening products.

     Since the introduction of the Apollo(TM) in March 1998, and through
December 31, 2000, the Company has sold 6,242 units internationally, and 10,727
units domestically.

     Beginning in April 2001, the Company intends to license this technology to
third party manufacturers and distributors.

     MPDx(TM) Digital X-ray

     The Company entered into an agreement with Suni Imaging Microsystems, Inc.
("Suni") to develop digital x-ray technology for incorporation into a digital x-
ray system for the dental market. The Company has exclusive rights to market
products to the dental market incorporating certain digital x-ray technology
developed by Suni. The Company introduced this product in September 1999. Suni
will retain the rights to developed microchip technology underlying the x-ray
system it develops for the Company. Digital x-ray systems, including those
currently on the market, reduce radiation exposure compared to conventional film
based x-ray systems and allow dentists to view x-ray images in real-time without
the time-consuming process of film development while also eliminating the need
to use and dispose of toxic chemicals required to develop conventional x-ray
film. The Company believes that this technology will provide improved image
quality and a more comfortable sensor (the thinnest available) for the patient
at a lower price point than competitive systems. This technology also is
designed to allow database storage, electronic transmission, and recall of
images for comparison purposes.

     On March 17, 1999, the Company entered into a manufacturing agreement with
Suni under which Suni has agreed to assemble, test and package the Company's
digital x-ray system incorporating the digital x-ray technology developed by
Suni for the Company. Under this agreement, which has a three year term, the
Company has guaranteed payment in full for at least 3,000 units per year and has
agreed to place orders for at least 750 units per quarter beginning in the
fourth quarter of 1999. The Company has also agreed to fulfill all of its
requirements for the x-ray product from Suni during the term of the agreement.
The Company has obtained UL and CE approval for MPDx(TM). From the time of its
first introduction in September of 1999, the Company has sold 465 units
internationally, and 799 units domestically. The agreement with Suni provides
that if the Company fails to purchase at least 750 units per quarter from Suni,
the Company may lose its exclusive right to market products to the dental market
incorporating certain digital x-ray technology developed by Suni. Subsequent to
December 31, 2000, the Company began negotiations with Suni due to a projected
inability to purchase the required number of units under the manufacturing
agreement for the 2001 calendar year. The agreement is expected to release the
Company from future minimum purchase commitments, settle amounts owed to Suni
and result in a loss of

                                 5


<PAGE>

exclusive worldwide marketing rights. However, this settlement has not been
finalized, and we cannot assure you that a settlement on terms satisfactory to
us will be reached.

     Beginning in April 2001, the Company intends to license this technology
to third party manufacturers and distributors.

     Intraoral Cameras

      The Company's best selling product from 1996 through mid-1998 was its line
of intraoral cameras beginning with the "TeliCam I," which was introduced into
the market in February 1996. In the second quarter of 1997, the Company began
marketing the "TeliCam II System," which was developed to allow the video
interfacing of multiple examination rooms via the Company's networking system
known as "InTELInet" (described below). During fiscal 2000 the Company's primary
intraoral camera was the "Telicam." The distinguishing feature that sets the
Company's product apart from competing intraoral dental cameras is the CCU
processor. This "frame grabber computer chip" allows the camera to capture and
"freeze" multiple video images and display them simultaneously without an
additional external device such as a computer, video recorder, or video color
printer. In addition, the CCU processor incorporates an automatic light
intensity control which substantially eliminates reflection and glare from the
intraoral illumination providing clearer video images. Through December 31,
2000, the Company had sold an aggregate of 9,999 interoral cameras to dentists
throughout the United States, as well as to several dental schools, and an
aggregate of 3,632 internationally.

      Previously, the Company had an exclusive right to market the "TeliCam"
products by an agreement with Boston Marketing which required certain minimum
purchases. During the fiscal year ended December 31, 1999, the Company purchased
fewer than 2,500 units under its distribution agreement with Boston Marketing.
In early 2000, Boston Marketing refused to accept subsequently placed orders and
terminated the agreement. On April 7, 2000 Boston Marketing filed suit in Los
Angeles Superior Court alleging breach of contract and seeking unspecified
damages. Following the termination of the Boston Marketing agreement, the
Company first sold its existing Telicam product inventory and then obtained
alternative sources of supply for the CCD chips, CCU processors and frame
grabbers. These parts have been obtained from third-party suppliers with no
disruption in the supply of these products.

      As a result of price erosion and decreasing margins caused by increased
competition from new manufacturers entering the marketplace, the Company
believes that the market for intraoral cameras has become both saturated and
less profitable, resulting in a decline in revenues from the Company's intraoral
camera products. Revenue from intraoral cameras declined from $6.6 million in
the year ended December 31, 1998 to $3.0 million in the year ended December 31,
2000, and gross margins for intraoral cameras declined from 70% in the year
ended December 31, 1998 to 24% in the year ended December 31, 2000. The Company
will be discontinuing the current line of interoral cameras in favor of its
newly developed and technologically advanced wired and wireless version which it
hopes to introduce during the second quarter of 2001.

     Beginning in April 2001, the Company intends to license this technology to
third party manufacturers and distributors.

      InTELInet

      In November 1996, the Company introduced its InTELInet Video Monitoring
System ("InTELInet") which creates a video-electronic information link between
different examination rooms within the same dental office. The System includes a
minimum of two intraoral video cameras, a video monitor with built-in VCR, cable
installation and a single video printer. The InTELInet System allows dentists
and their auxiliaries to conduct multiple patient video examinations at the same
time. This proprietary design allows for the use of just one central video
printer to interface with multiple operatories using cameras simultaneously.
This creates a cost savings and functional benefit when compared to competing
dental inter-operatory video networking systems that require expensive
computers, video printers, or capture devices for each operatory.

      Due to the general absence of multiple operatory practices outside of the
United States, the InTELInet is only being marketed domestically at this time.
The InTELInet network is only compatible with DMD intraoral dental cameras. In
addition, the Company has designed the InTELInet system to be compatible with
its digital x-ray technology. From the time of its first introduction in late
November 1996, through December 31, 2000, an aggregate of 1,125 InTELInet
multiple operatory networking systems have been sold by the Company.

                                 6
<PAGE>

PRODUCT DEVELOPMENT

      The Company intends to license this technology to third party
manufacturers and distributors.

Apollo e

       On June 2, 1999 the Company entered into an agreement with Light
Technologies to develop a hand held cordless curing lamp with a new light source
technology. The Company received exclusive worldwide rights to develop and
market products developed from this technology for the dental and other medical
markets. Light Technologies will retain the rights to manufacture the product
for two years. After two years, the Company can purchase the product from the
lowest priced vendor. The Company believes that this hand held lamp will provide
faster curing times and require less maintenance than competing products. This
hand held curing lamp provides sub-second to 3 second per layer curing using
diodes. Most hand held curing lamps used today require a total curing time per
tooth of approximately 2 minutes. The diode technology works without a bulb.
Currently, curing lamps today require the replacement of the bulbs each year.
The Company received 510(k) clearance, on the basis of equivalency with the
previously-certified Apollo(TM), in the third quarter of 2000, and subsequently
introduced the Apollo e in the fourth quarter of 2000. However, due to continued
technical difficulties surrounding the unit's Nicad battery, the Company
experienced significant returns from initial shipment of this product, and
subsequently changed the design and replaced the Nicad battery with a Lithium
battery. The Company believes the current design now functions in accordance
with the specifications. Because the initial shipments of this product did not
meet specifications, all related sales proceeds were deferred and will not be
recognized as revenue until shipment of product meeting product specifications
are made. The company intends to license this technology to third party
manufacturers and distributors.

Apollo Secret(R) Home Whitening Kit and Forever White

      On September 29, 1999, the Company entered into an agreement with
Chrysalis Dental, Inc. ("CDI") for the exclusive worldwide right to make or have
made, use, or sell patent pending in-home whitening kits known as Apollo
Secret(R) Home Whitening Kit products created by CDI. Under this license, the
Company began marketing its own line of in-home whitening kits which is sold
only by dentists. The Apollo Secret(R) Home Whitening Kits use pre-filled trays
and the treatments are for 15 minutes for five days. The Company introduced this
product in the first quarter of 2000. Competitor home tooth-whitening methods
require the patient to wear a more expensive and uncomfortable custom-fitted
tray filled with unpleasant tasting whitening gels. In order to achieve dramatic
whitening results, the trays would have to be worn overnight or for several
hours a day for two to three weeks. In addition, CDI developed an alternative
product, Forever White(TM), which the Company markets direct to consumers and
which was introduced in the second quarter of 2000. In November 2000, the
Company bought CDI and has lowered its future production costs for whitening
products.

Apollo Wireless

      On March 8, 2000, the Company entered into an agreement with DDM Sarl to
develop a cordless, remote controlled, high resolution, intraoral camera. The
Company has obtained exclusive worldwide rights outside of France to develop and
market products for the dental and other medical markets. The new cordless
camera features a video transmission that can be saved onto a floppy disk. The
Company believes that the camera provides better depth of field, connects to a
personal computer by USB port (no video boards required), and has remote freeze
frame capability. The Company is in the process of obtaining CE approval for the
product. The Company has received 510(k) clearance for equivalency with its
previously-introduced Telicam, and plans to introduce the product in the second
quarter of 2001, although unforeseen circumstances could delay this
introduction. Upon introduction, the Company intends to license this technology
to third party manufacturers and distributors.

      The Company expended approximately $1,064,000, $1,823,000 and $549,000 for
research and development of its products for the fiscal years ended December 31,
2000, 1999 and 1998, respectively.

MANUFACTURING AND COMPONENT PARTS

      During the fiscal year ended December 31, 2000, the Company assembled and
tested the Apollo(TM) curing and whitening lamps, MPDx(TM) digital x-ray system
and, the video camera systems sold worldwide at its facility located in Irvine,
California. Until its closing in October of 1999, the assembling and testing of
the Apollo(TM) for sale in Europe and the Middle East was completed at its
facility in France. In March 2001, in an effort to reduce overhead and focus
resources on sales and marketing, the Company ceased manufacturing in its Irvine
facility. A former employee has assumed the obligations, exclusive of rent, of
the facility and is performing contract manufacturing for the Company under an
oral agreement. The Company has certain remaining obligations to the landlord of
that facility. Shortly, the Company will begin licensing all related technology
for its high technology dental devices to further reduce overhead. These
agreements will include a license fee and provisions to purchase existing
inventory.

                                 7

<PAGE>

      On March 17, 1999, the Company entered into a manufacturing agreement with
Suni under which Suni will assemble, test and package the Company's digital x-
ray system incorporating the digital x-ray technology developed by Suni for the
Company. Under the agreement, which has a three year term, the Company has
guaranteed payment in full for at least 3,000 units per year and has agreed to
place orders for at least 750 units per quarter beginning in the fourth quarter
of 1999. The Company has also agreed to fulfill all of its requirements for the
x-ray product from Suni during the term of the agreement. The Company is in the
process of obtaining UL and CE approval for MPDx(TM). From the time of its first
introduction in September of 1999, the Company has sold 465 units
internationally and 799 units domestically. If the Company fails to purchase at
least 750 units per quarter from Suni, the Company may lose its exclusive right
to market products to the dental market incorporating certain digital x-ray
technology developed by Suni. Subsequent to December 31, 2000, the Company began
negotiations with Suni due to a projected inability to purchase the required
number of units under the manufacturing agreement, for the 2001 calendar year.
The agreement is expected to release the Company from future minimum purchase
commitments, settle amounts owed to Suni and result in a loss of exclusive
worldwide marketing rights. However, the settlement has not been finalized, and
we cannot assure you that a settlement will be reached.

      On December 16, 1999, the Company entered into a manufacturing agreement
with S.E.D., a French manufacturing company under which S.E.D. was given the
rights to assemble, test and package the Company's hand-held curing light, the
Apollo e, incorporating the cure lamp developed by Light Technologies for the
Company. Under the agreement, which has a one year term with an option to extend
the agreement, S.E.D must manufacture a minimum of 12,000 units per year, to
commence on shipment of the initial production unit, November 2000. The Company
received certification through equivalency with the existing Apollo(TM), and
introduced the product in the fourth quarter of 2000. However, as discussed
above, the product as introduced had significant performances issues and has
been subsequently redesigned. As a result, the Company has not recorded any
sales revenue for this product during the 2000 fiscal year.

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

      US Sales and Distribution. Currently, the Company's domestic sales are
made by one full-time employee who is based at corporate headquarters, and a
national field force of thirteen independent Regional Managers. The Company's
full time sales employees are generally experienced in the business of marketing
and distribution of dental products, inclusive of the current intraoral cameras,
upcoming Apollo Legend and Apollo Wireless intraoral cameras, the Apollo(TM)
high intensity composite curing and in-office whitening system and related
consumables, and the MPDx(TM) digital x-ray system. The Company markets its
products through direct mail solicitations, professional publications
advertising, and attendance at dental conferences. Since March 1996, the Company
has run advertisements in various publications for the dental industry on a
monthly basis, and has attended in excess of 100 dental conferences and trade
shows during each of the years ended December 31, 2000, 1999 and 1998. In
addition to an increase in the number of dental conferences and trade shows
attended, during fiscal 1998 the Company expanded its marketing efforts by
engaging in a more comprehensive mailing campaign and increasing publications
advertising. Starting in June 1999, the Company entered into a consumer
advertising campaign in an attempt to inform consumers of the in-office tooth
whitening alternative. The Company placed advertisements in magazines such as
People and Vogue featuring Jack and Kristina Wagner. Because these
advertisements did not produce the anticipated results, the Company discontinued
the advertising campaign in the fourth quarter of 1999. The Company has also
sold equipment and consumables to a number of dental schools including the
University of Southern California, Tufts University, and the University of
California -- Los Angeles. 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. With the introduction of the Forever White(TM), home-use
whitening, the Company began marketing through the use of short-form
infomercials, beginning in the second quarter of 2000.

                                 8

<PAGE>

      International Sales and Distribution. Currently, in the international
market, with the exception of the United Kingdom and Germany, the Company sells
the Apollo(TM) and the intraoral cameras through independent dealers and
distributors, pursuant to oral distribution agreements. Presently, the Company
has approximately fifty independent distributors and dealers, which cover key
international markets including, the Middle East, the Far East, Europe,
Australia and Canada. The Company's international 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 has
been amended to provide that Mr. Umezaki shall receive a 12% commission on sales
made in Japan only. The Company markets the Apollo(TM) through its wholly owned
subsidiary, DMDS, Ltd. and through its existing network of international
distributors.

      On March 1, 1999, DMDS, Ltd. purchased the assets of DMD Germany, an
independent company organized under the laws of Germany, for a purchase price
consisting of 100,000 shares of common stock of the Company. DMD Germany's
primary business was the sale and distribution of the Company's products in
Germany. The assets that DMDS, Ltd. purchased included the business (as a going
concern), customer lists, goodwill, the benefit of the lease and other contracts
with third parties and all other items of whatever nature owned by DMD Germany
and used in the conduct of the business of DMD Germany. The Company also entered
into an employment agreement with Ralf Muller, the General Manager of DMD
Germany.

      On March 1, 1999, DMDS, Ltd. purchased the assets of Midas, Ltd., an
independent company organized under the laws of the United Kingdom, for a
purchase price consisting of 50,000 shares of common stock of the Company.
Midas, Ltd's primary business was the sale and distribution of the Company's
products in the United Kingdom. The assets that DMDS, Ltd. purchased include the
business (as a going concern), customer lists, goodwill, the benefit of the
lease and other contracts with third parties and all other items of whatever
nature owned by Midas, Ltd. and used in the conduct of the business of Midas,
Ltd. The Company also entered into a non-compete agreement with Sostre NV, the
entity that has distributed the Company's products for Midas, Ltd.

      During the third quarter of 2000, the Company sold certain assets
(accounts receivable, inventory and accounts payable) associated with the direct
sale business of Midas Limited, at a sales price equal to the net tangible
assets of the business, and intends to enter into a similar transaction for DMD
Germany. The Company is ceasing its direct sales efforts in the UK and Germany
and is expecting to begin operating within these regions with sales
representatives through the United States.

      In April 2001, the Company will cease all direct sales of its dental
equipment business and license the related technology to third-party
manufacturers and distributors. These agreements will allow the Company to
sufficiently reduce overhead, and will include a license fee and provisions to
purchase existing inventory.

TRAINING, CUSTOMER SUPPORT AND PRODUCT SERVICE

      Management believes that operating the Company's products requires very
little training of dentists or other dental professionals. For the intraoral
camera and the Apollo(TM), the operating manual provided is sufficient for the
training of the dentists and other dental professionals and provides customers
with answers to frequently asked questions about the product's operations. For
the MPDx(TM) product, the Company has contacts with certified x-ray technicians
which are referred to the customers to perform training. 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 DMD 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 referred
by the Company. All installations and training are paid by the customer directly
to the third party.

PATENTS AND PROPRIETARY RIGHTS

      The Company's subsidiary, DMDS, Ltd., holds a patent in France and is
currently seeking worldwide patent protection for the Apollo(TM) system. There
can be no assurance (i) that patents outside of France will be granted for the
Apollo(TM) system, and (ii) if granted, the patents will provide adequate
protection for the Company's technologies. Protection is being sought in all of
the countries of the world in which this technology can be marketed. The Company
has an exclusive worldwide license to distribute the whitening system technology
used in Apollo Secret(R), which is the subject of a pending application for
patent in the US. The Company has established rights in the trademarks under
which it sells its lamps and consumable products and has sought to register
these trademarks with the United States Patent and Trademark Office and the
European common market.

      The Company's success and ability to compete is dependent in part upon its
proprietary technology for which domestic and international patent protection is
pending. The Company's technology for the intraoral cameras is not protected by
any patents.

                                       9
<PAGE>

Consequently, the Company relies primarily on trademark, trade secret and
copyright laws to protect this technology. Also, the Company has implemented 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. 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, may be covered by present insurance
policies but could, nevertheless, 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 Company sells products which are legally defined to be medical
devices, therefore, the Company is considered to be a medical device
manufacturer and as such is subject to the regulations of, among other
governmental entities, the United States Food and Drug Administration 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 the Quality
System Regulation ("QSR") as well as medical device reporting ("MDR"), labeling
and other regulatory requirements. Some Class I medical devices are exempt from
the requirement of pre-market approval or clearance. 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 that 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) Clearance") or
approval of a PMA. Obtaining approval of a PMA application can take several
years. In contrast, the process of obtaining 510(k) 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)
Clearance procedure, while new Class III devices ordinarily enter the market via
the more rigorous PMA procedure. In general, approval of a 510(k) Clearance may
be obtained if a manufacturer or seller of medical devices can 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) Clearance 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

                                 10
<PAGE>

require a new 510(k) 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. FDA prohibits the advertisement or promotion of any approved or cleared
device for uses other than those that are stated in the device's approved or
cleared application.

      The Company has already received FDA 510(k) notification allowing
marketing of intraoral cameras, the Apollo(TM), and MPDx(TM) and has received
510(k) equivalency for the hand held cordless curing lamp and a cordless, remote
controlled, high-resolution, intraoral camera.

      Pursuant to FDC Act 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 the QSR, which, unless the device is a Class I exempt
device, require that the Company manufacture its products and maintain its
documents in a prescribed manner with respect to issues such as design controls,
manufacturing, testing and validation 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 QSR and
MDR requirements.

      In addition, the Company's facility is required to have a California
Medical Device Manufacturing License. The license is not transferable and must
be renewed annually. Approval of the license requires that the Company be in
compliance with the FDA's QSR, labeling and MDR regulations. The Company filed a
timely application for a license to cover its manufacturing activities, and in
early March 1999 the California Department of Health Services (DHS), conducted
an inspection of the Company's facilities and found no "reportable
observations."

      Generally, if the Company is in compliance with FDA and California
regulations, it may market its medical devices throughout the United States.
International sales of medical devices are also subject to the regulatory
requirements of each country. In Europe, the regulations of the European Union
require that a device have a CE mark before it can be sold in that market. The
Company has obtained a CE mark for its Apollo(TM) device and has obtained
approval from the European Union to market the new digital x-ray product. The
regulatory international review process varies from 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 most 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. As of the date of this report, no material
product liability claims have been brought against the Company. The Company
maintains product liability insurance with coverage limits of $1,000,000 per
occurrence and $11,000,000 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 twelve companies offering
intraoral camera systems that are competitive with the Company's product. The
Company's dental curing and whitening device products face competition from
existing curing and whitening systems, including laser systems. 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 that 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.

                                 11
<PAGE>

      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 for its
intraoral cameras are Patterson Dental Co., Henry Schein, Inc., Dentsply and
Ultrak. The Company's principal domestic competitors for the Apollo(TM) are Air
Techniques, Kreativ Products, American Dental Technologies and Argon Laser. The
Company's principal domestic competitors for the Apollo Secret(R) whitening
product are Kreativ Products, Ultradent Products, Discus Dental, DenMat, Shofu
Dental Corporation and American Dental Hygienics/Premier Dental. The Company's
principal domestic competitors for the MPDx(TM) are Schick, Dexis, and Trophy.
The Company's principal competitors for the Forever White(TM) are Brite Smile
and the various teeth-whitening toothpaste products currently on the market.

      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 April 10, 2001, the Company had 11 full-time employees, all in the
United States. Of the U.S. employees, 1 was in customer service, 9 were in
administration and, 1 was engaged in sales and marketing. The Company believes
it has a good relationship with its employees and none of its employees are
represented by a collective bargaining agreement.

      In April 2001, to reduce overhead and structure the Company as a licensor
of dental technology, the Company laid-off an additional 16 employees. The
Company believes with the lay-offs in March combined with these, the Company
maintains sufficient staff levels to accommodate the new business structure.

ITEM 2. DESCRIPTION OF PROPERTIES

      The corporate headquarters and principal offices of the Company are
located in Woodland Hills, California, consisting of approximately 23,800 square
feet of space under a lease that expires on February 28, 2005 ("Office Lease").
The Office Lease provides for aggregate minimum monthly rental payments of
approximately $25,466. The Company leases a manufacturing facility in Irvine of
approximately 12,000 square feet, under a lease that expires October 31, 2001 at
a rental payment of $10,000 per month. The Company is currently seeking to
sublease the Irvine property for the remainder of the term as the Company has
replaced its in-house manufacturing with contract manufacturing. The current
manager of the manufacturing facility will be relocating shortly. All leases
require the Company to pay taxes, maintenance fees, insurance, and periodic rent
increases based on a published price index. The Company does not presently own,
or have any current plans to invest in, any interests in real property other
than through its leases.

ITEM 3. LEGAL PROCEEDINGS

      BOSTON MARKETING

      The Company had an exclusive distribution agreement with Boston Marketing
for the intraoral cameras which required a minimum annual purchase. Boston
Marketing alleged that the Company failed to make such minimum purchases for the
year ended December 31, 1999. Boston Marketing terminated the agreement and has
refused to accept subsequently placed orders. On April 7, 2000 Boston Marketing
filed suit in Los Angeles Superior Court alleging breach of contract and seeking
unspecified damages. The Company is investigating the allegations and intends to
defend the action vigorously believing that it has meritorious defenses to this
suit. Trial was originally set for February 26, 2001 and subsequently continued
until on or about April 18, 2001. Boston Marketing is claiming approximately
$950,000 in damages. Although the Company believes it has defenses to this
lawsuit, it may not prevail in its position and the Company could be liable for
monetary damages in a material amount. Management has obtained alternative
sources of supply for its CCD chips, CCU processors and frame grabbers.

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

      On November 13, 2000, the Company held an annual meeting. Robert H.
Gurevitch, Jack Preston, Marvin Kleinberg, John Khademi and Stephen Weinress
were elected as directors.

                                 12
<PAGE>

      The votes for each are as follows:
<TABLE>
<CAPTION>
                                                                  For            Against       Abstain
                                                                  --             ------        ------
<S>                                                               <C>              <C>        <C>
 Robert H. Gurevitch                                           8,696,016         127,249          0
 Jack Preston                                                  8,696,016         127,249          0
 Marvin Kleinberg                                              8,696,016         127,249          0
 John Khademi                                                  8,696,016         127,249          0
 Stephen Weinress                                              8,646,016         177,249          0
</TABLE>

      In addition, the shareholders approved an amendment to its 1997 Stock
Option Plan to increase the number of shares to be issued from 1,200,000 to
1,800,000.

      The votes for each were as follows:

<TABLE>
<CAPTION>
     For               Against               Abstain
     ---               -------               -------
 <S>                   <C>                   <C>
 1,989,477             368,301                  0
</TABLE>

ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS


      The Common Stock and Redeemable Common Stock Purchase Warrants are
currently traded on the NASDAQ SmallCap Market under the symbols "DMDS" and
"DMDSW," respectively, and on the Boston Stock Exchange under the symbols "DMD"
and "DMDW," respectively. However, as described below in Risk Factors -- "We
will be delisted from the NASDAQ stock market" -- we will be delisted from
NASDAQ on April 9, 2001 for failure to meet its continued listing requirement of
minimum net tangible assets and minimum trading price. When we are delisted
from the Nasdaq Small Cap Market and the Boston Stock Exchange, trading in our
Common Stock, if any, will have to be conducted in the over-the-counter market
in so-called "pink sheets" or, if then available, the OTC bulletin board. As a
result, the holders of our Common Stock would find it more difficult to dispose
of, or to obtain accurate quotations as to the market value of, our Common
Stock.

The following table sets forth the range of the high and low closing prices of
the Common Stock on the NASDAQ SmallCap Market 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>
                                                                          REDEEMABLE
                                                                         COMMON STOCK
                                                                           PURCHASE
                                                     COMMON STOCK          WARRANTS
                                                     ------------       ---------------
               PERIOD ENDED                          HIGH      LOW      HIGH        LOW
               -----------                           ----      ---      ----        ---
<S>                                                  <C>       <C>       <C>        <C>
1999
----
March 31, 1999.................................      8.56      5.81     4.19        2.00
June 30, 1999..................................      9.75      6.44     5.25        2.81
September 30, 1999.............................      7.25      3.88     3.50        1.66
December 31, 1999..............................      4.56      2.13     1.81        0.50

2000
----
March 31, 2000.................................      3.44      2.22     1.44        0.75
June 30, 2000..................................      2.06      0.97     0.91        0.47
September 30, 2000.............................      1.75      0.69     0.88        0.28
December 31, 2000..............................      1.38      0.34     0.31        0.02
</TABLE>

      On March 23, 2001, the high bid and low ask prices were $0.28 and $0.19,
respectively, for the Common Stock and $0.03 and $0.03, respectively, for the
Redeemable Common Stock Purchase Warrants. As of March 23, 2001, there were 206
stockholders of record and approximately 1,400 beneficial holders of common
stock.

                                 13
<PAGE>

Recent Sales of Unregistered Securities

      On November 16, 2000, the Company acquired the stock of Chrysalis Dental
in exchange for 550,000 shares of common stock which was valued at $0.875 per
share. Chrysalis Dental manufactures and supplies the Company with its Forever
White and Apollo Secret patented tooth whitening formulations.

      From April 2000 through September 2000, 1,246 shares of Series A
Exchangeable Preferred Stock were converted into 1,270,216 shares of common
stock, and 937 shares of Series B Exchangeable Preferred Stock were converted
into 1,288,484 shares of common stock. Under the rules and regulations of the
Nasdaq Stock Market, we require stockholder approval to issue 20% or more of our
outstanding common stock in a single transaction. Because the rate at which the
Series A Preferred Stock and Series B Preferred Stock exchange into common stock
fluctuates, it was possible that the number of shares of common stock into which
the Series A Preferred Stock or Series B Preferred Stock may exchange could
exceed 20%. We agreed with the purchasers of the Series A Preferred Stock and
the Series B Preferred Stock that we would seek stockholder approval of these
issuances at the 2000 Annual Meeting of Stockholders. Prior to receiving
stockholder approval, or if stockholder approval is not obtained, any exchange
of shares of Series A Preferred Stock or Series B Preferred Stock in excess of
19.9% of the outstanding common stock of the Company must be paid in cash to the
holder of the Series A Preferred Stock or Series B Preferred Stock.

      In late September 2000, all remaining Series A and Series B holders
requested to convert their remaining shares. Because we had already issued l9.9%
of the outstanding shares, we are obligated to honor the exchange of shares of
Series A Preferred Stock or Series B Preferred Stock in cash. The combined
obligation to the Series A and Series B holders was approximately $4,200,000. In
January 2001, we reached an agreement with the holders of $3,253,000 of such
obligation to convert their obligation to common stock at $.70 per share. As of
March 23, 2001, $963,000 of the conversion obligation remains outstanding.

      On September 7, 2000, the Company completed a $1,920,000 private
placement, selling an aggregate of 2,157,308 shares of common stock at $0.89 a
share, and warrants to purchase 719,103 shares of common stock. In connection
with this transaction, the placement agent received a placement fee of
approximately $50,000, and warrants to purchase 92,697 shares of common stock of
the Company.

      On July 21, 2000, the Company completed a $1,550,000 private placement,
selling an aggregate of 1,396,396 shares of common stock at $1.11 a share, and
warrants to purchase 465,465 shares of common stock. In connection with this
transaction, the placement agent received a placement fee of approximately
$90,000, and the placement agent and certain individuals affiliated with the
placement agent received warrants to purchase 339,640 shares of common stock of
the Company.

DIVIDEND POLICY

      The Company has not paid any cash dividends on the Common Stock since its
inception and does not intend to pay any 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. The Company bank financing agreements impose restrictions on any
payment of dividends. The Board of Directors believes 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 10-KSB.

INTRODUCTION

      Dental/Medical Diagnostic Systems, Inc. designs, develops, and sells high
technology dental equipment and related consumables. The Company's best selling
product for the 2000 fiscal year was the tooth curing and whitening device known
as the "Apollo(TM)." The Company also markets and sells a line of whitening
products known as "Apollo Secret(R)" for use in conjunction with the Apollo(TM)
as well as two home whitening products, Apollo Secret Home and Forever White.
Starting in September of 1999, the Company began marketing and selling the
MPDx(TM) digital x-ray system. In addition, the Company continues to manufacture
and sell intraoral camera systems and a multi-operatory intraoral camera system,
known as the InTELInet, for use in connection with the intraoral cameras.

                                      14
<PAGE>

      From early 1996 to mid 1998, the Company was primarily involved in
designing, developing, manufacturing, and marketing intra-oral camera systems
referred to as "TeliCam Systems". The first shipments to customers of the
TeliCam System commenced in early February 1996. The exclusive supply agreement
for such products was terminated by the supplier for alleged breaches and the
Company now sells its own brand of intraoral camera product. The Company is
developing new improved versions of the intraoral camera which it anticipates
releasing later in 2001.

      On October 2, 1997, the Company purchased the assets of S.E.D. Gerant
("S.E.D."), a company organized under the laws of France. Among the acquired
assets was a patent for S.E.D.'s "Biotron" soft-tissue surgical device. From
this technology, the Company developed the "Apollo(TM)" a unique, visible-light
curing instrument which is designed for two different applications: the
hardening of tooth-colored dental composite materials in three seconds or less
and for single appointment, in-office tooth whitening in less than forty
minutes. This safe plasma-arc lamp uses a high-frequency electrical field to
generate plasma energy, which is ideal for the fast-curing (hardening) of
photosensitive composites. The Apollo(TM) also produces light and heat which,
when used in conjunction with the Apollo Secret(R) whitening materials,
activates the whitening chemicals in the Apollo Secret(R). The result of this
activation is dramatic whitening of stained teeth. The rapid performance of the
Apollo(TM) in both hardening composite materials and whitening teeth enables an
average dental practice to save about 5 to 8 hours per month of a dentists time.

      On October 10, 1997, the Company entered into an agreement with Suni
Imaging Microsystems, Inc. ("Suni") to develop digital x-ray technology for
incorporation into a digital x-ray system for the dental market. The Company
obtained exclusive rights to market products to the dental market incorporating
certain digital x-ray technology developed by Suni. 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 while eliminating the
need to use and dispose of chemicals required to develop conventional x-ray
film. The resulting MPDx(TM) digital x-ray system was introduced in September
1999. Due to the difficulty of compliance with certain minimum purchase
requirements, the Company is negotiating an amendment to that agreement which
would eliminate the exclusivity, resolve open payment obligations and provide
the Company with a continuing source of product supply. The amendment has not
been finalized and we cannot assure you that these terms will ultimately be
agreed to.

RESULTS OF OPERATIONS

      The Company historically derived its revenues primarily from the sale of
four product lines: TeliCam intra-oral camera systems, Apollo(TM) curing and
whitening devices, Apollo Secret(R) tooth whitening chemicals and ASAP composite
materials for use in conjunction with the Apollo(TM), which began shipping in
the fourth quarter of 1998 and second quarter of 1999, respectively, and the
MPDx(TM) digital x-ray system which began shipping at the end of the third
quarter of 1999. Through December 31, 2000, the sales of Apollo Secret(R), ASAP
and Forever White have been less than 15% of total sales.

      In April 2001, the Company will cease all direct sales of its dental
equipment business and license the related technology to third-party
manufacturers and distributors. These agreements will allow the Company to
significantly reduce overhead, and will include a license fee and provisions to
purchase existing inventory.

      Revenues by product line, for the fiscal years ended December 31, 2000,
1999, and 1998 are reflected in the following table:

<TABLE>
<CAPTION>
                                         1998            %             1999             %              2000            %
                                   --------------       ---       --------------       ---       --------------       ---
<S>                               <C>                  <C>        <C>                  <C>       <C>                  <C>
Apollo(TM)                         $   11,125,629        58%      $   26,233,445        69%      $    9,411,287        45%
Intraoral cameras                       6,555,540        34%           6,263,014        16%           3,026,649        14%
MPDx(TM)                                       --        --            1,186,615         3%           4,267,980        20%
Consumables                               593,060         3%           2,605,521         7%           2,261,308        11%
Other                                     953,569         5%           1,892,401         5%           2,082,704        10%
                                   --------------       ---       --------------       ---       --------------       ---
                                   $   19,227,798       100%      $   38,180,996       100%      $   21,049,928       100%
                                   ==============       ===       ==============       ===       ==============       ===
</TABLE>

      Net Sales. Net sales for the fiscal years ended December 31, 2000, 1999,
and 1998, were $21,049,928, $38,180,996, and $19,227,798, respectively.

      Net sales for the fiscal year ended December 31, 2000 decreased
approximately 45% from the prior year. Net sales for the fiscal year ended
December 31, 1999 increased approximately 99% from the fiscal year ended
December 31, 1998. Sales in 2000 are comprised primarily of the Apollo(TM),
intraoral cameras, MPDx(TM) digital x-ray systems, and related consumables. The
decrease in sales for the fiscal year ended December 31, 2000 was primarily due
to the reduction in Apollo sales, both domestically and internationally,
resulting from a change in management focus to the new Apollo e-Light(TM) which
was substantially delayed and ultimately introduced in the fourth quarter of
2000. However, due to significant returns of initial shipments and an
expectation to rework each unit due to design changes, there were no revenues
recognized on Apollo e-Light(TM) during the year ended December 31, 2000. There
was

                                 15
<PAGE>

also a reduction in sales of intraoral cameras both domestically and
internationally resulting from weaker demand and increased competition as the
market for intraoral cameras matured. This decrease was marginally offset by an
increase in the MPDx digital x-ray system sales.

      The increase in sales for the fiscal year ended December 31, 1999 was
primarily due to the introduction of the Apollo(TM) and related consumables,
which began shipping in Europe during the first quarter of 1998 and in the
United States during the third quarter of 1998. In addition, the increase in
sales for the fiscal year ended December 31, 1999 is also due to a lesser
extent, to the introduction of the MPDx(TM) digital x-ray system in September
1999. The Company expects the decline in intraoral cameras and Apollo sales to
continue into the future. No assurance can be given that the Apollo e-Light(TM)
and whitening product sales will offset these reduced sales in the future.

      Cost of Sales. Cost of sales for the fiscal years ended December 31, 2000,
1999, and 1998, were $16,323,236, or 78% of net sales, $22,144,868, or 58% of
net sales, and $9,820,882, or 51% of net sales, respectively. Cost of sales
decreased on an absolute dollar basis from 1999 to 2000 due to a reduction in
gross revenues. Cost of sales as a percentage of net sales increased from 1999
to 2000 due to reduced margins on the intraoral camera and Apollo. The margins
on the Apollo were reduced as prices were lowered to reduce inventory levels in
preparation of the Apollo e-Light product launch. Cost of sales, both on an
absolute dollar basis and as a percentage of net sales, increased from 1998 to
1999 primarily due to a decrease in the margin on the TeliCam resulting from
increased market saturation and a write down of inventory value to net estimated
realizable value during the fiscal year ended December 31, 1999. In 1999, the
Company wrote down $805,771 of certain inventory as part of it ongoing
assessment of its needs and the realizability of the inventory. The Company
expects that the margins on the sale of the Apollos will continue to shrink, and
thus the cost of sales of the intraoral cameras and Apollos as a percentage of
intraoral cameras and Apollo net sales, respectively, will increase in the
future.

      Selling, General and Administrative Expenses. Selling, general and
administrative expenses totaled $19,471,539, or 93% of net sales, $19,659,552,
or 51% of net sales, and $8,764,910, or 46% of net sales, for the fiscal years
ended December 31, 2000, 1999, and 1998, respectively. The large increase in
selling, general and administrative expenses as a percentage of net sales from
1999 to 2000 is due to the reduction in gross revenues, which was not matched by
a corresponding decrease in overhead. The decrease in selling, general and
administrative expenses on an absolute dollar basis from 1999 to 2000 is not
significant and mainly due to decreases in salaries, advertising, and commission
expenses, which were offset by increases in amortization and depreciation, and
facility expenses. Salaries and employee benefits decreased from $5,024,413 in
1999 to $4,221,531 in 2000 due to a reduction in headcount that occurred in
first and second quarters of 2000. Advertising and marketing costs decreased
from $6,702,775 in 1999 to $4,757,831 in 2000 due to a refocusing of our
marketing efforts. Commissions decreased from $3,067,552 in 1999 to $1,428,857
in 2000 due to a reduction in gross revenues. Amortization and depreciation
expense increased from $888,440 in 1999 to $1,885,604 due to the write-offs of
intangible assets relating to the purchase of foreign distributors Midas and DMD
GmbH in the third quarter of 2000. Facility expense increased from $376,907 in
1999 to $792,403 in 2000 due to the lease of a 25,000 square foot corporate
facility in second quarter 2000.

      The increase in selling, general and administrative expenses as a
percentage of net sales from 1998 to 1999 is due to the increase in salaries and
employee benefits and increased advertising and marketing costs resulting from
the introduction of the MPDx(TM) digital x-ray which began selling late in the
third quarter, and enhanced marketing efforts on our other products. Salaries
and employee benefits increased from $2,300,048 in 1998 to $5,024,413 in 1999,
and advertising and marketing costs increased from $2,256,179 in 1998 to
$6,702,775 in 1999. The remaining increase in selling, general, and
administrative expenses in 1999 consisted primarily of increased commissions of
$1,563,049.

      Research and Development. Research and development expenses totaled
$1,063,844, or 5% of net sales, $1,823,003, or 5% of net sales, and $549,304, or
3% of net sales, for the fiscal years ended December 31, 2000, 1999, and 1998,
respectively. The absolute dollar decrease in research and development expenses
from fiscal 1999 to fiscal 2000 is due to MPDx development being completed in
1999. This decrease was partly offset by increases in expenditures for
development of the Apollo e-Light(TM), a hand-held curing light, and a new
cordless camera. The research and development expense as a percentage of net
sales remained constant in fiscal 2000. Management continued to allocate
resources to research and development during the last year to help increase
revenue in the longer term. The increase in research and development expenses
from fiscal 1998 to fiscal 1999 was due to increased development of the MPDx(TM)
digital x-ray which began shipping late in the third quarter of 1999, and the
development of a new cordless camera and the Apollo e-Light.

                                      16
<PAGE>

      Nonrecurring Charges. Nonrecurring charges of $566,893 in 1999 consist of
the costs incurred with respect to a secondary offering, which was abandoned in
the third quarter of 1999.

      Interest and Other Income. Interest and other income totaled $438,367,
$434,321, and $195,532, for the fiscal years ended December 31, 2000, 1999, and
1998, respectively. The interest income in 2000 and 1999 is primarily
attributable to the interest earned by investing available cash in a short-term
management account through Imperial Bank and Comerica Bank. The income from 1998
is attributed to the interest earned by investing the net proceeds of the March
1998 debt placement in a short-term management account through Comerica
Securities.

      Interest Expense. Interest expense totaled $639,195, $1,055,813, and
$1,739,693, for the fiscal years ended December 31, 2000, 1999, and 1998,
respectively. This expense category includes interest paid on capital lease
obligations, on bridge notes, on notes payable to related parties, and on the
12% Senior Subordinated Notes. The substantial increase in fiscal 1998 and the
decreases in fiscal 1999 and fiscal 2000 are primarily due to the accrued
interest and the amortization of the debt discount on the $4.5 million of Senior
Subordinated Notes, which was repaid in January 1999 with proceeds from the new
credit facility with Imperial Bank.

      Amortization of debt issuance cost totaled $89,046, $64,519, and $235,484,
for the fiscal years ended December 31, 2000, 1999, and 1998, respectively. The
current year amount represents the amortization of the estimated fair value of
the warrants issued to Imperial Bank on March 23, 2000 to amend its credit
facility to modify certain of its financial covenants and to extend the
repayment terms for an additional year to May 31, 2001. The prior years
represent the amortization of the issuance costs incurred in connection with the
Bridge Notes issued in November 1996 and the 12% Senior Subordinated Notes
issued in March 1998. These costs were amortized over the term of the Notes. The
Company repaid the Bridge Notes out of the proceeds of the May 1997 secondary
offering. In addition, the Senior Subordinated Notes were repaid in January 1999
out of the proceeds of the Company's new credit facility with Imperial Bank.

      Net Loss. Net loss for the fiscal year ended December 31, 2000 totaled
$16,053,171, or $2.28 per share. Net loss for the fiscal year ended December 31,
1999 totaled $6,727,638, or $1.15 per share. Net loss for the fiscal year ended
December 31, 1998 totaled $1,816,702, or $0.35 per share.

CAPITAL RESOURCES AND LIQUIDITY

      For the fiscal year ended December 31, 2000, the Company used net cash of
approximately $6.2 million in operations as compared to $7.4 million used in
1999. Accounts receivable decreased from $5,756,048 at December 31, 1999 to
$913,017 at December 31, 2000, primarily as a result of the decrease in gross
revenues in 2000 and continued shift to primarily credit card sales for direct
sales to dentists. Accounts payable and accrued liabilities totaling $6,009,625
at December 31, 2000 decreased from $6,765,718 at the prior year-end period
primarily due to decreased inventory purchases and decreased accrued
commissions. Inventory levels decreased approximately $2.4 million from $7.8
million at December 31, 1999 to $5.4 million at December 31, 2000 as we reduced
our Apollo inventory to prepare for the Apollo e-Light launch.

      Cash used in investing activities was approximately $652,000 in 2000
compared to approximately $604,000 used in 1999. Capital expenditures on
equipment and furniture for the year ended December 31, 2000 were approximately
$530,000 compared to approximately $604,000 in 1999. In addition, cash used in
investing activities in 2000 included costs of patent registration of
approximately $21,000.

      Cash provided by financing activities was approximately $2.7 million in
2000 as compared to $8.9 million in 1999. In 2000 we issued preferred stock and
common stock resulting in net proceeds of approximately $5.4 million offset by a
reduction in outstanding borrowings of $2.7 million. In 1999 we issued equity
securities resulting in net proceeds of approximately $6.9 million offset by a
reduction in outstanding borrowings as further discussed below.

      On January 4, 1999, we replaced our credit agreements with our previous
lender, Comerica, with a $6,950,000 facility with Imperial Bank. On January 21,
1999, we borrowed against the Imperial facility to repay the balance owing on
the Comerica capital credit line of $343,890 plus accrued interest of $1,120. On
January 25, 1999, we borrowed against the Imperial facility to repay the
$4,500,000 12% Senior Subordinated Notes plus accrued interest of $189,000.

      On March 23, 2000, we amended our facility with Imperial Bank to modify
certain of its financial covenants and extend the repayment terms. Under this
amendment, the fixed rate non-revolving line of credit is due in monthly
installments of $100,000 commencing March 31, 2000 until April 30, 2001 with the
balance due on May 31, 2001. Interest under this line of credit increased to

                                      17
<PAGE>

10.0% per annum. The $4,000,000 variable rate revolving line of credit and the
variable rate loan repayment dates were extended to May 31, 2001, with no
principal payments required at any earlier dates. The interest rate under the
variable rate revolving line of credit was amended to 0.5% plus the bank's index
rate. In addition, we granted the bank 75,000 warrants at an exercise price of
$2.50 per share. In connection with the revised repayment schedule, we repaid
approximately $2.6 million during the year ended December 31, 2000, which
included a $1.5 million certificate of deposit applied to the fixed rate non-
revolving line of credit in September 2000. As of December 31, 2000 there are no
amounts available under the line of credit.

      At December 31, 2000, September 30, 2000 and June 30, 2000, we were not in
compliance with financial covenants of the credit agreement. As of August 18,
2000, we entered into a forbearance agreement stating that so long as the
Company remains current in payments of principal and interest Imperial Bank will
not exercise any remedies it may have resulting from such lack of compliance.
That original forbearance was through September 21, 2000 and has been
subsequently extended on a monthly basis with the current extension through
April 30, 2001. We are currently seeking alternative financing sources.
Additionally in March 2001, Imperial Bank suspended our merchant account, which
allows us to process credit cards on our sales. We are currently seeking an
alternative merchant account.

      On July 16, 1999 we raised approximately $5,000,000 in additional capital
by selling 901,000 shares of common stock to eight investors in a private
placement.

      On November 23, 1999 we sold an aggregate of 2,000 shares of Series A
Exchangeable Preferred Stock, 2,500 shares of Common Stock and Warrants to
purchase up to 40,000 shares of Common Stock. The Company received $2,000,000 in
gross proceeds less costs of $100,000.

      On February 29, 2000 we sold an aggregate of 2,250 shares of Series B
Exchangeable Preferred Stock, B-1 Warrants to purchase up to 225,000 shares of
Common Stock and B-2 Warrants to purchase up to 450,000 shares of common stock.
The Company received $2,250,000 in gross proceeds less placement agent fees and
costs of $157,500.

      On July 21, 2000, we sold an aggregate of 1,396,396 shares of common stock
at $1.11 a share, and warrants to purchase 465,465 shares of common stock. The
Company received $1,550,000 in gross proceeds less placement agent fees of
approximately $90,000 warrants to purchase 300,000 shares of common stock of the
Company.

      On September 7, 2000, we issued an aggregate of 2,157,308 shares of common
stock at $0.89 a share, and warrants to purchase 719,103 shares of common stock.
The Company received $1,920,000 in gross proceeds less placement agent fees of
approximately $50,000, and warrants to purchase 92,697 shares of common stock of
the Company.

      We have several potential obligations which could be material. One is a
potential liability to Boston Marketing which could result from a lawsuit filed
against us in April 2000 claiming approximately $950,000 in damages for our
failure to comply with minimum purchase and other requirements of the supply
agreement for our Telicam products. Although we believe we have meritorious
defenses to the claims, trial has been set for on or about April 18, 2001 and we
cannot assure you that we will prevail. A material liability arising from this
matter would have a negative effect on our liquidity. In addition, we have
unfulfilled minimum purchase and other financial obligations to Suni under our
exclusive agreements for manufacture of our digital x-ray product. We are in the
process of negotiating an amendment to our existing Suni agreement which
currently contemplates our becoming a non-exclusive customer of the product and
resolving all open matters between us. However, this resolution of our
obligations has not been finalized and we cannot assure you that an agreement
with Suni will be reached which will resolve these issues.

      We continue to assess our operations and business structure to address our
recurring losses, net capital deficiency, conversion obligation under our
preferred stock agreement, need to refinance bank debt by May 31, 2001 and
significant past due payables. To reduce overhead and decrease operating losses,
we initiated several cost reduction measures in March 2001. These actions
included an approximate 60% headcount reduction in the corporate headquarters,
and a further reassessment of our advertising and marketing strategy to reduce
expenditures by approximately $3.8 million annualized. We also intend to
relocate to a smaller, more cost-effective corporate facility before the end of
the second quarter of 2001. In regards to the conversion obligation under our
preferred stock agreement, we are currently negotiating a settlement which
contemplates an equity conversion. These discussions are not final and we cannot
assure you that this obligation will be converted.

      To further reduce overhead, and streamline operations, in March 2001 the
current manager of our manufacturing facility agreed to assume some of the
obligations of the facility and begin working on a contract manufacturing basis.
We also began similar discussions in March 2001 with our President of DMDS, Ltd.
for a similar relationship, whereby the subsidiary would be closed with

                                 18
<PAGE>

the existing entity becoming a customer. We anticipate that the implementation
of both transactions would significantly reduce overhead and allow for a more
predictable cost structure.

      We are also attempting to refinance the capital structure by raising
sufficient capital to retire the bank debt and finance continuing development of
new products.

      In April 2001, the Company will cease all direct sales of its dental
equipment business and license the related technology to third-party
manufacturers and distributors. These agreements will allow the Company to
significantly reduce overhead, and will include a license fee and provisions to
purchase existing inventory.

      However, even if we are successful in reducing costs and achieving
profitability, we will need to raise additional capital which may be very
difficult given our history of operating losses. Any funds we are able to raise
may be on unfavorable terms.

RISK FACTORS

WE HAVE SUBSTANTIAL DOUBT ABOUT OUR ABILITY TO CONTINUE AS A GOING CONCERN.

We have experienced significant operating losses in the current and prior years.
We have been unable to pay all of our trade creditors and certain other
obligations in accordance with their terms. We also have a conversion obligation
of $963,000 under our preferred stock agreement and are in violation of various
covenants on our loan of $4.2 million with Imperial Bank which expires on May
31, 2001. As of August 18, 2000, we entered into a forbearance agreement stating
that so long as we remain current in our payments of principal and interest
Imperial Bank will not exercise any remedies it may have resulting from such
lack of compliance. That original forbearance was through September 21, 2000 and
has been subsequently extended on a monthly basis with the current extension
through April 30, 2001. If we are not able to remain current in our payments of
principal and interest or obtain additional extensions on the forbearance
agreement, Imperial Bank can declare the loans in default and require us to pay
the balance of the loan, which is currently approximately $4.2 million. We
intend to improve liquidity in various ways such as (a) the completion of equity
or debt financing or other strategic transactions; (b) the continued monitoring
and reduction of manufacturing, facility and administrative costs; and (c) the
development and introduction of new products. However, there is no assurance
that we will succeed in accomplishing any or all of these initiatives. Our
fiscal 2000 consolidated financial statements have been prepared assuming that
the Company will continue as a going concern and do not include any adjustments
that might result from the outcome of this uncertainty.

WE WILL BE DELISTED FROM THE NASDAQ STOCK MARKET AND THE BOSTON STOCK EXCHANGE

On March 30, 2001, the Company was notified by Nasdaq that our securities will
be delisted from The Nasdaq SmallCap market at the opening of business on April
9, 2001.

The closing sale price of our Common Stock was below $1.00 per share for thirty
consecutive days in December 2000. Under the rules and regulations of the Nasdaq
Stock Market and the Boston Stock Exchange, to maintain listing on the Nasdaq
Small Cap Market and the Boston Stock Exchange we must maintain a trading price
per share of more than $1.00. On December 28, 2000, Nasdaq notified us that we
had failed to maintain a minimum bid price of $1.00 over the last 30 consecutive
trading days as required for continued listing on The Nasdaq SmallCap Market as
set forth in Marketplace Rule 4310(c)(4) (the "Rule"). In accordance with
Marketplace Rule 4310(c)(8)(B), we were provided 90 calendar days, or until
March 28, 2001 to regain compliance with this Rule by at anytime before March
28, 2001 maintaining a bid price of our common stock of at least $1.00 for a
minimum of 10 consecutive trading days. Unfortunately we did not demonstrate
compliance within the 90 day period.

In addition, at December 31, 2000 and September 30, 2000 we failed to meet the
$2,000,000 minimum for net tangible assets, which is also a requirement for
continued listing.

When we are delisted from the Nasdaq Small Cap Market and the Boston Stock
Exchange, trading in our common stock, if any, will have to be conducted in the
over-the-counter market in so-called "pink sheets" or, if then available, the
OTC Bulletin Board. As a result, the holders of our common stock would find it
more difficult to dispose of, or to obtain accurate quotations as to the market
value of, our common stock.

When our common stock is delisted from trading on Nasdaq and the Boston Stock
Exchange, trading in our common stock will also be subject to the requirements
of Rule 15g-9 promulgated under the Securities Exchange Act of 1934. Under such
rule, broker/dealers who recommend these low-priced securities to persons other
than established customers and accredited investors must satisfy special sales
practice requirements, including a requirement that they make an individualized
written suitability determination for the purchaser and receive the purchaser's
written consent prior to the transaction. The Securities Enforcement Remedies
and Penny Stock Reform Act of 1990 also requires additional disclosure in
connection with any trades involving a stock defined as a penny stock (generally
any equity security not traded on an exchange or quoted on Nasdaq that has a
market price of less than $5.00 per share, subject to certain exceptions),
including the delivery, prior to any penny stock transaction, of a disclosure
schedule explaining the penny stock market and the risks associated with the
penny stock market. These requirements would likely severely limit the market
liquidity of our common stock and the ability of our shareholders to dispose of
their shares, particularly in a declining market.

OUR EXISTING MERCHANT ACCOUNT WITH IMPERIAL BANK HAS BEEN SUSPENDED

Imperial Bank has suspended our merchant account, which allows us to process
credit cards on our sales. This has significantly affected our ability to
generate cash through the shipment of product. We are currently searching for an
alternative merchant account, however, we can give no assurances we will secure
another source. If we are unable to secure another merchant account, it could
have a material adverse effect on our ability to continue operating as a going
concern.

                                 19
<PAGE>

WE HAVE SIGNIFICANT OBLIGATIONS FOR WHICH WE DO NOT HAVE SUFFICIENT FUNDS AND WE
WILL NEED TO SEEK ADDITIONAL FINANCING.

On November 23, 1999 we sold an aggregate of 2,000 shares of Series A
Exchangeable Preferred Stock ($2 million face value), 2,500 shares of Common
Stock and Warrants to purchase up to 40,000 shares of Common Stock. On March 3,
2000 we sold an aggregate of 2,250 shares of Series B Exchangeable Preferred
Stock ($2.25 million face value) and Warrants to purchase up to 675,000 shares
of Common Stock.

Under the rules and regulations of the Nasdaq Stock Market, we require
stockholder approval to issue 20% or more of our outstanding common stock in a
single transaction. Because the rate at which the Series A Preferred Stock and
Series B Preferred Stock exchange into common stock fluctuates, it was possible
that the number of shares of common stock into which the Series A Preferred
Stock or Series B Preferred Stock may exchange could exceed 20%. We agreed with
the purchasers of the Series A Preferred Stock and the Series B Preferred Stock
that we would seek stockholder approval of these issuances at the 2000 Annual
Meeting of Stockholders. Prior to receiving stockholder approval, or if
stockholder approval is not obtained, any exchange of shares of Series A
Preferred Stock or Series B Preferred Stock in excess of 19.9% of the
outstanding common stock of the Company must be paid in cash to the holder of
the Series A Preferred Stock or Series B Preferred Stock.

In late September 2000, all remaining Series A and Series B holders requested to
convert their remaining shares. Because we had already issued l9.9% of the
outstanding shares, we are obligated to honor the exchange of shares of Series A
Preferred Stock or Series B Preferred Stock in cash. The combined obligation to
the Series A and Series B holders was approximately $4,200,000. In January 2001,
we reached an agreement with the holders of $3,253,000 of such obligation to
convert their obligation to common stock at $.70 per share. As of March 23,
2001, $963,000 of the conversion obligation remains outstanding. Currently, the
Company does not have sufficient liquid funds to meet this obligation.

In addition our $4.2 million in bank debt is due May 31, 2001. We also have $3.6
million in past due payables.

WE WILL NEED TO RAISE SIGNIFICANT ADDITIONAL CAPITAL IN THE SHORT TERM.

At December 31, 2000, we had cash and cash equivalents of $577,729. After taking
into account our cash and cash equivalents, projected revenues and receipt of
funds from other sources, we will need to raise additional funding through debt
or equity financing during the next twelve months to satisfy our requirements
for research and product development, marketing, and general and administrative
expenses. Our cash requirements, however, may vary materially from those now
planned because of changes in our operations or market conditions. In addition,
we have a $963,000 conversion obligation under our preferred stock agreements.
Further, at December 31, 2000, September 30, 2000 and June 30, 2000, we were not
in compliance with financial covenants of our Imperial Bank credit agreement. As
of August 18, 2000, we entered into a forbearance agreement stating that so long
as we remain current in our payments of principal and interest Imperial Bank
will not exercise any remedies it may have resulting from such lack of
compliance. That original forbearance was through September 21, 2000 and has
been subsequently extended on a monthly basis with the current extension through
April 30, 2001. If we are not able to remain current in our payments of
principal and interest or obtain additional extensions on the forbearance
agreement, Imperial Bank can declare the loans in default and require us to pay
the balance of the loan, which is currently approximately $4.2 million. In
addition, our bank line expires May 31, 2001 and due, in part to change in
ownership of the bank, we do not believe it is likely that it will be renewed.

In all events, we would seek to obtain alternative financing, including bank
financing. There can be no assurance that alternative financing, whether from
equity or debt financing agreements, will be available, if at all, on favorable
terms to us or our stockholders in

                                 20
<PAGE>

light of our operating results and the tightening of capital generally. If we
need capital and cannot raise additional funds, we may be required to limit or
forego the development of new products or limit the scope of our current
operations, which could have a material adverse effect on our business,
operating results and financial condition. If we raise needed funds through the
sale of additional shares of our common stock or securities convertible into
shares of our common stock as we have done in the last several years, it would
very likely result in dilution to current stockholders.

WE HAVE A LIMITED OPERATING HISTORY UPON WHICH TO EVALUATE OUR LIKELIHOOD OF
SUCCESS.

We have only manufactured and distributed our digital x-ray systems since
September 1999, our intraoral cameras systems since October 1995 and our
Apollo(TM) since March 1998. Therefore, we have a limited relevant operating
history upon which to evaluate the likelihood of our success. In addition, our
plan to return to profitability is dependant upon significant additional
revenues from our two most recent new products, Apollo e and Forever White(TM)
and our upcoming new intraoral camera products. The Apollo e began shipment at
the end of November 2000 but due to performance issues, design changes were
required which delayed revenues, and our national advertising campaign for
Forever White(TM) began in August. We have not yet commenced significant sales
of Apollo e or Forever White(TM) and we can give no assurances as to the
likelihood of success of these products. Factors such as the risks, expenses and
difficulties frequently encountered in the operation and expansion of a new
business and the development and marketing of new products must be considered in
evaluating the likelihood of our success.

WE HAVE A HISTORY OF LOSSES AND ACCUMULATED DEFICIT AND THIS TREND OF LOSSES MAY
CONTINUE IN THE FUTURE.

For the period from October 23, 1995 to March 2, 1996, we incurred a net loss of
$1,625,213. For the fiscal years ended December 31, 1997, 1998, 1999 and 2000 we
had net losses of $2,044,729, $1,816,702, $6,727,638 and $16,053,171,
respectively. At December 31, 2000, our accumulated deficit was $28,130,302. Our
ability to obtain and sustain profitability will depend, in part, upon the
successful marketing of our existing products and the successful and timely
introduction of new products. We can give no assurances that we will achieve
profitability or, if achieved, that we will sustain profitability.

FLUCTUATION IN QUARTERLY RESULTS MAY RESULT IN DECLINES IN OUR STOCK PRICE.

Certain quarterly influences may affect our business. Historically, sales have
been generally higher in the fourth quarter due to the purchasing patterns of
dentists in the United States and have been generally lower in the first quarter
due primarily to the effect upon demand of increased purchases in the prior
quarter. Historically we have experienced lower sales in the summer months as a
result of holiday vacations and fewer trade shows. These fluctuations in
quarterly operating results could result in increased volatility, including
significant declines, of the trading price of our common stock.

TWO OF OUR PRIMARY PRODUCTS HAD A SIGNIFICANT DECLINE IN SALES AND IF THIS
DECLINE CONTINUES WE MAY NOT BE ABLE TO ACHIEVE OR SUSTAIN PROFITABILITY.

The TeliCam systems, together with related products such as the InTELInet
system, and the Apollo(TM) have been our primary products since inception. We
believe that our market for the intraoral cameras, is a market that has
declined, as sales have recently been at or below levels of prior comparable
periods. These products, however, are planned for phase-out upon the release of
the Apollo Legend and Apollo Wireless, the new wireless and wired interoral
cameras, scheduled for release in the second quarter of 2001. In addition, there
has been a decrease in Apollo(TM) sales as competitor's lamps curing times
become closer to that of the Apollo(TM), a trend which we also expect to
continue. The Company expects the sales to decrease with the introduction of the
Apollo e, however, the product is not being discontinued as the Apollo e does
not perform teeth whitening.

AS A RESULT OF THE DECLINE IN SALES OF THE INTRAORAL CAMERAS SYSTEMS AND
APOLLO(TM) PRODUCTS, OUR FUTURE DEPENDS ON OUR ABILITY TO DEVELOP AND INTRODUCE
NEW PRODUCTS.

As a result of the decline in our intraoral camera market, our future depends
upon our ability to develop and successfully introduce new products to make up
for the diminished sales of these products. Development of new product lines is
risk intensive and often requires:

      .  long-term forecasting of market trends;

      .  the development and implementation of new designs;

                                 21
<PAGE>

      .   compliance with extensive governmental regulatory requirements; and

      .   a substantial capital commitment.

Also, the medical and dental device industry is characterized by rapid
technological change. As technological changes occur in the marketplace, we may
have to modify our products in order to become or remain competitive or to
ensure that our products do not become obsolete. If we fail to anticipate or
respond in a cost effective and timely manner to government requirements, market
trends or customer demands, or if there are any significant delays in product
development or introduction, our revenues and profit margins may decline which
could adversely affect our cash flows, liquidity and operating results.

HISTORICALLY, THE SALES OF OUR NEWLY INTRODUCED PRODUCTS HAVE DECLINED IN A
RELATIVELY SHORT PERIOD OF TIME FOLLOWING THE INITIAL INTRODUCTION OF THE
PRODUCT.

Our sales records indicate that the sales of our products decline within a
relatively short period of time following the initial introduction of the
product. If this sales pattern holds true for four new products, the Apollo e,
the Apollo Legend, the Apollo Wireless and Forever White(TM) and our future
products, we must continuously develop and introduce new products in order to
maintain an appropriate level of sales and revenue. As a result, if we fail to
develop and introduce new products on a timely basis, it could adversely affect
our revenues and operating results.

WE SUBSTANTIALLY DEPEND UPON UNAFFILIATED THIRD PARTIES FOR SEVERAL CRITICAL
ELEMENTS OF OUR BUSINESS, INCLUDING THE DEVELOPMENT AND LICENSING FOR
DISTRIBUTION OF OUR PRODUCTS.

We are dependent upon unaffiliated third party developers and suppliers for the
development and manufacture of all of the components used in our dental
equipment and for the development and manufacture of our consumable products.
Outside of updating our current products, we do not develop any of our
technology. Instead of developing technology, we continually seek out third
parties that own new and innovative technology that they may be willing to
license to us or develop into new dental products under a development agreement.
We have had problems in the past obtaining a marketable product from companies
with whom we had entered into a licensing arrangement. In March 1998, we entered
into a licensing agreement with Ion Laser Technology under which ILT was unable
to develop a product in accordance with the delivery schedule established by our
agreement that met our specifications; as a result, in August 1998 we were
forced to find an alternative product to that which we had contracted with ILT.

IF WE FAIL TO PURCHASE REQUIRED AMOUNTS OF CERTAIN PRODUCTS MANUFACTURED BY
SUNI, WE MAY LOSE OUR EXCLUSIVE RIGHTS TO THE DIGITAL X-RAY TECHNOLOGY DEVELOPED
FOR US BY SUNI.

In order to maintain our right to be the exclusive dental licensee of the
digital x-ray technology developed by Suni, we must make significant minimum
periodic royalty payments to Suni, and we must purchase a significant amount of
certain products manufactured by Suni. To date, we have made the required
periodic minimum royalty payments to Suni, and have purchased the required
amounts of certain products manufactured by Suni. If we fail to make such
minimum purchases in 2001, Suni may be able to license the developed technology
to our competitors, or grant an exclusive license to a competitor, which could
have a material adverse effect on our business. Subsequent to December 31, 2000,
we began negotiations with Suni due to a projected inability to purchase the
required number of units under the manufacturing agreement, for the 2001
calendar year. The agreement is expected to release us from future minimum
purchase commitments, settle amounts owed to Suni and result in a loss of
exclusive worldwide marketing rights. We cannot assure you that a settlement
will be reached.

THE GOVERNMENT EXTENSIVELY REGULATES OUR PRODUCTS AND FAILURE TO COMPLY WITH
APPLICABLE REGULATIONS COULD RESULT IN FINES, SUSPENSIONS, SEIZURE ACTIONS,
PRODUCT RECALLS, INJUNCTIONS AND CRIMINAL PROSECUTIONS.

The United States Food and Drug Administration or FDA, as well as state and
foreign agencies, regulate almost all aspects of our medical devices including:

      .   entry into the marketplace;
      .   design;
      .   testing;
      .   manufacturing procedures;
      .   reporting of complaints;
      .   labeling; and


                                      22
<PAGE>

      .   promotional activities.

Under the Federal Food, Drug, and Cosmetic Act, FDA has the authority to control
the introduction of new products into the marketplace. Unless specifically
exempted by the agency, medical devices enter the marketplace through either FDA
clearance of a premarket approval application or FDA approval of an application
for 510k clearance. FDA conducts periodic inspections to assure compliance with
it's regulations. The Company has applications pending for a hand held cordless
curing lamp and a cordless, remote controlled, high resolution, intraoral
camera. The Company received FDA 510k notification for these products during the
third quarter of 2000.

Unless specifically exempted by FDA's regulations, we will need to file a 510k
submission or PMA application for any new products developed in the future. The
process of obtaining a clearance or approval can be time-consuming and
expensive. Compliance with FDA's regulatory requirements can be expensive and
time consuming. We do not guarantee that the required regulatory approvals or
clearances will be obtained. Any approval or clearance obtained from FDA may
include significant limitations on the use of the medical device which is the
subject of the approval or clearance.

We cannot market a medical device if needed FDA approval or clearance is not
granted. Inability to obtain such approval or clearance could result in a delay
or suspension of the manufacture and sale of affected medical devices. Any such
delay or suspension would have a material adverse effect on our business. In
addition, changes in existing regulations or the adoption of new regulations
could make regulatory compliance by us more difficult in the future. The failure
to obtain the required regulatory clearances or to comply with applicable
regulations could result in one or more of the following:

      .   fines;

      .   delays or suspensions of device clearances;

      .   seizure actions;

      .   mandatory recalls;

      .   injunction action; and

      .   criminal prosecution.

THE LOSS OF OUR CHIEF EXECUTIVE OFFICER COULD RESULT IN THE LOSS OF A
SIGNIFICANT PORTION OF OUR BUSINESS BECAUSE OF HIS PERSONAL RELATIONSHIPS IN THE
INDUSTRY.

Our success is highly dependent upon our Chairman of the Board and Chief
Executive Officer, Robert H. Gurevitch. Unlike larger companies, we rely heavily
on a small number of officers to conduct a large portion of our business. The
loss of service of Robert H. Gurevitch along with the loss of his numerous
contacts and relationships in the industry would have a material adverse effect
on our business. We have entered into an Employment Agreement with Robert H.
Gurevitch under which he has agreed to render services to us until September 30,
2002. We have obtained "key person" life insurance on Mr. Gurevitch in the
amount of $2,000,000, of which we are the sole beneficiary, but there can be no
assurance that the proceeds of such insurance will be sufficient to offset the
loss to us in the event of his death.

NONE OF OUR PRODUCTS ARE PROTECTED BY PATENTS, AND THEREFORE, THEY MAY NOT BE
ADEQUATELY PROTECTED FROM COPYING BY COMPETITORS.

Our future success and ability to compete is dependent in part upon our
proprietary technology used in the Apollo(TM). The Apollo(TM) is currently only
protected by a patent in France. We are currently seeking patent protection in
all of the countries of the world in which this technology can be marketed.
There can be no assurance that patents outside of France will be granted for the
Apollo(TM) system, and, if granted, the patents will provide adequate protection
for the Company's technologies. Consequently, we rely primarily on trademark,
trade secret and copyright laws to protect our technology. However, there can be
no assurance that third parties will not try to copy our products. In addition,
many foreign countries' laws may not protect us from improper use of our
proprietary technology overseas. We may not have adequate remedies if our
proprietary rights are breached and therefore a breach of our proprietary rights
could have a material adverse effect on our business.

WE ARE SUSCEPTIBLE TO PRODUCT LIABILITY SUITS AND IF A LAWSUIT IS BROUGHT
AGAINST US IT COULD RESULT IN US HAVING TO PAY LARGE LEGAL EXPENSES AND/OR
JUDGMENTS.

Although we have not yet had any product liability claims, because of the nature
of the medical/dental device industry, there can be no assurance that we will
not be subject to such claims in the future. Our products come into contact with
vulnerable areas of the human

                                 23
<PAGE>

body, such as the mouth, tongue, teeth and gums, and, therefore, the sale and
support of dental products makes us susceptible to the risk of such claims. A
successful product liability claim or claim arising as a result of use of our
products brought against us, or the negative publicity brought up by such claim,
could have a material adverse effect upon our business. We maintain product
liability insurance with coverage limits of $10,000,000 per occurrence and
$11,000,000 per year. While we believe that we maintain adequate insurance
coverage, we do not guarantee that the amount of insurance will be adequate to
satisfy claims made against us in the future, or that we will be able to obtain
insurance in the future at satisfactory rates or in adequate amounts.

ISSUANCE OF PREFERRED STOCK MAY HAVE THE EFFECT OF PREVENTING A CHANGE OF
CONTROL.

We have authorized 1,000,000 shares of preferred stock, which may be issued by
the Board of Directors with certain rights not granted to the holders of common
stock. Issuance of such preferred stock, depending upon the terms and rights
thereof, may have the effect of delaying, deterring or preventing a change of
control.

A DECREASE IN THE PRICE OF OUR COMMON STOCK COULD INCREASE SHORT SALES OF OUR
COMMON STOCK BY THIRD PARTIES WHICH COULD RESULT IN FURTHER REDUCTIONS IN THE
PRICE OF OUR COMMON STOCK.

Our Series A Preferred Stock and Series B Preferred Stock have been exchanged
into common stock at a discount to the market price of our common stock as a
result of the formula's included in the preferred stock purchase agreements.
This issuance of shares at a discount could result in reductions in the market
price of our common stock. Downward pressure on the price of our common stock
could encourage short sales of our common stock by third parties. Material
amounts of short selling could place further downward pressure on the market
price for our common stock. A short sale is a sale of stock that is not owned by
the seller. The seller borrows the stock for delivery at the time of the short
sale, and buys back the stock when it is necessary to return the borrowed
shares. If the price of the stock declines between the time the seller sells
short the stock and the time the seller subsequently repurchases the stock, the
seller will realize a profit.

A LARGE VOLUME OF SALES OF OUR COMMON STOCK MAY RESULT IN DOWNWARD PRESSURE OR
INCREASED VOLATILITY IN THE TRADING PRICE OF OUR COMMON STOCK.

Because in the last six months we have agreed to register for resale shares of
common stock in other registration statements totaling 9,426,336, the holders
thereof may sell without regard to any volume restrictions, including the volume
restrictions set forth in Rule 144 promulgated under the Securities Act of 1933.
As a result, sales by the holders of such registered stock could lead to an
excess supply of shares of our Common Stock being sold which could, in turn,
result in downward pressure or increased volatility in the trading price of our
Common Stock.

WE FACE CLAIMS OF BOSTON MARKETING, WHICH COULD RESULT IN SIGNIFICANT LIABILITY
AND ADVERSELY AFFECT OUR OPERATING RESULTS.

Effective October 1, 1996, we amended our 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, we have the exclusive right (i) to market
certain Teli manufactured CCD chip assemblies with CCU processors (each a "Teli
unit," and collectively the "Teli Units") to the dental market, and (ii) to use
the "TeliCam" trademark. The Units are key components of our intraoral digital
cameras. The initial term of the BMC Distribution Agreement, as amended, was due
to expire December 31, 2000, and was terminable by Boston Marketing if we fail
to meet our annual minimum purchase obligation. In April 2000, we were served
with a lawsuit that makes numerous claims including the allegation that we
failed to make the minimum purchases for calendar year 1999 and 2000, and that
the BMC Distribution Agreement has been terminated as a result. Boston Marketing
has refused to accept subsequently placed orders. The lawsuit also claims that
we failed to pay certain commissions to Boston Marketing. The total amount
claimed is approximately $950,000.

We are investigating the claims made by Boston Marketing in their complaint. We
intend to defend this matter vigorously and believe we have meritorious defenses
to this suit. Although we had settlement discussions with Boston Marketing, no
settlement has been reached. Trial was initially set for February 26, 2001 and
has subsequently been continued until on or about April 18, 2001. If Boston
Marketing prevails at trial, we could owe substantial sums which would
negatively impact our operating results.

                                 24
<PAGE>

ITEM 7. FINANCIAL STATEMENTS.


                    DENTAL/MEDICAL DIAGNOSTIC SYSTEMS, INC.

                  INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
                                                                                             PAGE
                                                                                             ----
<S>                                                                                          <C>
Report of Independent Accountants........................................................     26

Consolidated Balance Sheets as of December 31, 2000,
 and 1999................................................................................     27

Consolidated Statements of Operations for the Fiscal
 Years ended December 31, 2000, 1999 and 1998............................................     28

Consolidated Statements of Stockholders' Equity (Deficit)
 for the Fiscal Years ended December 31, 2000, 1999 and  1998............................     29

Consolidated Statements of Cash Flows for the Fiscal Years
 ended December 31, 2000, 1999 and 1998..................................................     30

Consolidated Statements of Comprehensive Loss for the
 Fiscal Years ended December 31, 2000, 1999 and 1998.....................................     31

Notes to Consolidated Financial Statements...............................................     32
</TABLE>

                                      25
<PAGE>

                       REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and
Stockholders of Dental/Medical Diagnostic Systems, Inc.

In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, comprehensive loss, stockholders' equity
(deficit) and cash flows present fairly, in all material respects, the financial
position of Dental Medical Diagnostics Systems, Inc. and its subsidiaries (the
"Company") at December 31, 2000 and 1999, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 2000 in conformity with accounting principles generally accepted in the
United States of America. These financial statements are the responsibility of
the Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with auditing standards generally accepted in the
United States of America, which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.

As discussed in Note 16 to the consolidated financial statements, the Company
changed its method of calculating the beneficial conversion feature associated
with the issuance of convertible preferred stock.

The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company has incurred recurring losses from operations
and has a working capital and net capital deficiency all of which raise
substantial doubt about its ability to continue as a going concern. In addition,
the Company has a conversion obligation of $963,000 under its preferred stock
agreements and is in violation of the financial covenants on $4.2 million of
bank debt. Management's plans in regard to these matters are also described in
Note 2. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.

/s/ PricewaterhouseCoopers LLP
Woodland Hills, California
March 23, 2001

                                 26
<PAGE>

           DENTAL/MEDICAL DIAGNOSTIC SYSTEMS, INC. AND SUBSIDIARIES

                          CONSOLIDATED BALANCE SHEETS
                       AS OF DECEMBER 31, 2000 AND 1999

                                            ASSETS

<TABLE>
<CAPTION>
                                                                          2000              1999
                                                                    --------------    --------------
<S>                                                                <C>               <C>
Current assets
 Cash and cash equivalents.......................................   $      577,729    $    4,615,501
 Restricted cash.................................................          100,000                --
 Accounts receivable, less allowance for returns
  and doubtful accounts of $566,034 and $448,081 at
  December 31, 2000 and 1999.....................................          913,017         5,756,048
 Inventories.....................................................        5,408,691         7,835,377
 Prepaid expenses and other current assets.......................        2,421,576         1,226,199
                                                                    --------------    --------------
       Total current assets......................................        9,421,013        19,433,125

 Property and equipment, net of accumulated depreciation.........        1,635,041         1,302,758
 Intangible assets, net of accumulated amortization..............        1,140,598         2,031,521
 Loans to related parties........................................               --            70,000
 Other assets....................................................          612,413           988,458
                                                                    --------------    --------------
       Total assets..............................................   $   12,809,065    $   23,825,862
                                                                    ==============    ==============

       LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
 Current portion of capital lease obligations....................   $       13,826    $       18,670
 Current portion of long term debt...............................               --           122,320
 Borrowings under line of credit.................................        4,148,952         1,000,000
 Accounts payable................................................        4,706,576         4,514,639
 Accrued liabilities.............................................        1,303,049         2,251,079
 Customer deposits...............................................        2,755,383           205,102
                                                                    --------------    --------------
       Total current liabilities.................................       12,927,786         8,111,810


 Long term notes payable.........................................               --         5,702,593
 Capital lease obligations.......................................           69,878                --
                                                                    --------------    --------------
       Total liabilities.........................................       12,997,664        13,814,403

Commitments and contingencies (Note 12)

Mandatory redeemable preferred stock, stated value $1,000 per
 share;..........................................................        4,216,330         1,816,343

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; 13,164,963 and 6,497,564 shares issued and
  outstanding at December 31, 2000 and 1999......................          131,649            64,975
 Additional paid in capital......................................       24,093,823        20,535,345
 Accumulated deficit.............................................      (28,130,302)      (12,077,131)
 Cumulative translation adjustment...............................         (500,099)         (328,073)
                                                                    --------------    --------------
       Total stockholders' equity (deficit)......................       (4,404,929)        8,195,116
                                                                    --------------    --------------

       Total liabilities, mandatory redeemable preferred stock
        and stockholders' equity (deficit).......................   $   12,809,065    $   23,825,862
                                                                    ==============    ==============
</TABLE>

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


                                       27
<PAGE>

           DENTAL/MEDICAL DIAGNOSTIC SYSTEMS, INC. AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF OPERATIONS
             FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998

<TABLE>
<CAPTION>
                                                                     2000               1999              1998
                                                                 ------------       ------------      ------------
<S>                                                              <C>                <C>               <C>
Net sales................................................        $ 21,049,928       $ 38,180,996      $ 19,227,798
Cost of sales............................................          16,323,236         22,144,868         9,820,882
                                                                 ------------       ------------      ------------

  Gross profit...........................................           4,726,692         16,036,128         9,406,916

Selling, general and administrative expense..............          19,471,539         19,659,552         8,764,910
Research and development expense.........................           1,063,844          1,823,003           549,304
Non-recurring charge.....................................                  --            566,893                --
                                                                 ------------       ------------      ------------

  Operating (loss) income................................         (15,808,691)        (6,013,320)           92,702

Interest and other income................................            (438,367)          (434,321)         (195,532)
Interest expense.........................................             639,195          1,055,813         1,739,693
Amortization of debt issuance costs......................              89,046             64,519           235,484
                                                                 ------------       ------------      ------------

 Loss before income taxes and extraordinary item.........         (16,098,565)        (6,699,331)       (1,686,943)

Provision (benefit) for income taxes.....................             (45,394)            28,307           129,759
                                                                 ------------       ------------      ------------

          Net loss.......................................         (16,053,171)        (6,727,638)       (1,816,702)

Accretion of conversion obligation on preferred stock....           2,799,645                 --                --
Beneficial conversion feature on Series B preferred stock              97,478                 --                --
                                                                 ------------       ------------      ------------

Net loss attributable to common stockholders before......         (18,950,294)        (6,727,638)       (1,816,702)
  cumulative effect of accounting change

Cumulative effect of accounting change on beneficial
  conversion feature.....................................           1,179,900                 --                --
                                                                 ------------       ------------      ------------

         Net loss attributable to common stockholders....        $(20,130,194)      $ (6,727,638)     $ (1,816,702)
                                                                 ============       ============      ============

Basic and diluted net loss per share:

  Net loss attributable to common stockholders before
  cumulative effect of accounting change.................        $      (2.14)      $      (1.15)           $(0.35)

  Cumulative effect of accounting change on beneficial
  conversion feature.....................................               (0.14)                --                --
                                                                 ------------       ------------      ------------

  Net loss attributable to common stockholders...........        $      (2.28)      $      (1.15)     $      (0.35)
                                                                 ============       ============      ============

  Basic and diluted weighted average number of shares
  outstanding............................................           8,844,280          5,839,416         5,151,614
</TABLE>

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

                                       28
<PAGE>

           DENTAL/MEDICAL DIAGNOSTIC SYSTEMS, INC. AND SUBSIDIARIES

           CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
             FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998

<TABLE>
<CAPTION>
                                                                                                     ADDITIONAL
                                                                         COMMON STOCK                  PAID IN
                                                                   SHARES            AMOUNT            CAPITAL
                                                                 ----------       -----------        ------------
<S>                                                           <C>                 <C>                <C>
Balance, December 31, 1997...........................                5,115,777    $     51,157       $ 11,271,784
  Issuance of common stock for distribution rights...                  100,000           1,000            461,500
  Issuance of warrants with Senior Subordinated Notes                       --              --          1,619,755
  Exercise of stock options..........................                   39,917             399            116,558
  Net loss...........................................                       --              --                 --
  Translation adjustment.............................                       --              --                 --
                                                                 -------------    ------------       ------------
Balance, December 31, 1998...........................                5,255,694          52,556         13,469,597
  Issuance of common stock and warrants in
  connection with preferred stock offering..........                     2,500              25             83,632
  Issuance of common stock for cash, net of issuance
  costs..............................................                  901,000           9,010          4,960,767
  Issuance of common stock for acquisitions..........                  150,000           1,500          1,142,250
  Issuance of common stock for acquisition of
  technology and distribution rights.................                  150,000           1,500            611,000
  Issuance of stock options to non-employees.........                       --              --             89,437
  Exercise of stock options and warrants.............                   38,370             384            178,662
  Net loss...........................................                       --              --                 --
  Translation adjustment.............................                       --              --                 --
                                                                 -------------    ------------       ------------
Balance, December 31, 1999...........................                6,497,564          64,975         20,535,345
  Issuance of warrants in connection with preferred
  stock offering.....................................                       --              --            788,723
  Issuance of common stock for cash, net of issuance
  costs..............................................                3,553,699          35,537          3,293,623
  Issuance of common stock for acquisition of
  Chrysalis Dental, Inc..............................                  550,000           5,500            475,750
  Issuance of common stock for conversion of
  preferred stock....................................                2,558,700          25,587          1,627,828
  Accretion of conversion obligation on preferred
  stock..............................................                       --              --         (2,799,645)
  Issuance of warrants for debt amendment............                       --              --            133,568
  Issuance of common stock and warrants for services.                    5,000              50             38,631
  Net loss...........................................                       --              --                 --
  Translation adjustment.............................                       --              --                 --
                                                                 -------------    ------------       ------------
Balance, December 31, 2000...........................               13,164,963    $    131,649       $ 24,093,823
                                                                 =============    ============       ============
</TABLE>

<TABLE>
<CAPTION>
                                                                                    CUMULATIVE
                                                                 ACCUMULATED       TRANSLATION
                                                                   DEFICIT          ADJUSTMENT          TOTAL
                                                                 ------------      ------------      ------------
<S>                                                              <C>               <C>               <C>
Balance, December 31, 1997...........................            $ (3,532,791)     $         --      $  7,790,150
  Issuance of common stock for distribution rights...                      --                --           462,500
  Issuance of warrants with Senior Subordinated Notes                      --                --         1,619,755
  Exercise of stock options..........................                      --                --           116,957
  Net loss...........................................              (1,816,702)               --        (1,816,702)
  Translation adjustment.............................                      --             1,205             1,205
                                                                 ------------      ------------      ------------
Balance, December 31, 1998...........................              (5,349,493)            1,205         8,173,865
  Issuance of common stock and warrants in
  connection with preferred stock
  offering...........................................                      --                --            83,657
  Issuance of common stock for cash, net of issuance
  costs..............................................                      --                --         4,969,777
  Issuance of common stock for acquisitions..........                      --                --         1,143,750
  Issuance of common stock for acquisition of
  technology and distribution rights.................                      --                --           612,500
  Issuance of stock options to non-employees.........                      --                --            89,437
  Exercise of stock options and warrants.............                      --                --           179,046
  Net loss...........................................              (6,727,638)               --        (6,727,638)
  Translation adjustment.............................                      --          (329,278)         (329,278)
                                                                 ------------      ------------      ------------
Balance, December 31, 1999...........................             (12,077,131)         (328,073)        8,195,116
  Issuance of warrants in connection with preferred
  stock offering.....................................                      --                --           788,723
  Issuance of common stock for cash, net of issuance
  costs..............................................                      --                --         3,329,160
  Issuance of common stock for acquisition of
  Chrysalis Dental, Inc..............................                      --                --           481,250
  Issuance of common stock for conversion of
  preferred stock....................................                      --                --         1,653,415
  Accretion of conversion obligation on preferred
  stock..............................................                      --                --        (2,799,645)
  Issuance of warrants for debt amendment............                      --                --           133,568
  Issuance of common stock and warrants for services.                      --                --            38,681
  Net loss...........................................             (16,053,171)               --       (16,053,171)
  Translation adjustment.............................                      --          (172,026)         (172,026)
                                                                 ------------      ------------      ------------
Balance, December 31, 2000...........................            $(28,130,302)     $   (500,099)     $ (4,404,929)
                                                                 ============      =============     ============
</TABLE>

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

                                      29
<PAGE>

                  DENTAL/MEDICAL DIAGNOSTIC SYSTEMS, INC. AND SUBSIDIARIES

                           CONSOLIDATED STATEMENTS OF CASH FLOWS
                 FOR THE FISCAL YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998

<TABLE>
<CAPTION>
                                                                               2000               1999               1998
                                                                         ---------------    ---------------    ---------------
<S>                                                                     <C>                <C>                <C>
Cash flows from operating activities:
Net loss...............................................................  $   (16,053,171)   $    (6,727,638)  $     (1,816,702)
 Adjustments to reconcile net loss to net cash used by
  operating activities;
  Depreciation and amortization........................................          709,977            779,365            338,462
 Amortization of debt issue costs......................................           89,046             64,516            235,484
 Amortization of debt discount.........................................               --            348,435          1,271,790
 Allowance for returns and doubtful accounts...........................          121,437            427,174                 --
 Inventory write down..................................................          562,105          1,005,772            156,620
 Write off of intangible assets........................................          783,585                 --                 --
 Write off of related party loans......................................          144,000                 --                 --
 Write off of prepaid royalties........................................          375,000                 --                 --
 Deferred rent.........................................................               --            (15,061)             4,009
 Common stock and stock options issued for services....................           38,681             89,437                 --
 Changes in operating assets and liabilities:
    Accounts receivable................................................        3,970,433         (2,490,970)        (1,782,471)
    Inventories........................................................        1,794,491         (3,297,867)        (2,818,298)
    Prepaid expenses and other current assets..........................       (1,342,716)            92,539           (941,706)
    Other assets.......................................................          706,866           (939,339)           442,831
    Accounts payable...................................................          225,347          2,088,891            889,808
    Accrued liabilities and income taxes payable.......................         (926,133)         1,048,073            220,725
    Customer deposits..................................................        2,559,105            144,269             17,838
                                                                         ---------------    ---------------    ---------------
     Net cash used by operating activities.............................       (6,241,947)        (7,382,404)        (3,781,610)
                                                                         ---------------    ---------------    ---------------
Cash flows from investing activities:
 Loans to related parties..............................................               --                 --             56,000
 Purchase of intangible assets.........................................          (21,349)                --           (304,494)
 Purchase of property and equipment....................................         (530,307)          (603,804)          (722,056)
 Restricted cash.......................................................         (100,000)                --                 --
                                                                         ---------------    ---------------    ---------------
     Net cash used in investing activities.............................         (651,656)          (603,804)          (970,550)
Cash flows from financing activities:                                    ---------------    ---------------    ---------------
 Borrowings from revolving line of credit..............................               --          4,000,000            343,890
 Net proceeds from issuance of notes payable...........................               --          2,953,890          4,625,509
 Payment of debt issuance costs........................................               --                 --           (300,000)
 Repayment of notes payable............................................       (2,668,199)        (5,095,186)                --
 Repayments on borrowings to related parties...........................               --                 --            (45,030)
 Principal payments on capital lease obligations.......................          (34,104)           (26,705)           (17,839)
 Issuance of common stock through exercise of options and                             --
 warrants..............................................................               --            179,046            116,957
 Issuance of common stock..............................................        3,329,160          4,969,777                 --
 Issuance of mandatory redeemable preferred stock......................        2,042,480          1,900,000                 --
                                                                         ---------------    ---------------    ---------------
     Net cash provided by financing activities.........................        2,669,337          8,880,822          4,723,487
                                                                         ---------------    ---------------    ---------------
     Net increase (decrease) in cash and cash
       equivalents.....................................................       (4,224,266)           894,614            (28,673)
Effect of exchange rate changes on cash and cash
 equivalents...........................................................          186,494           (220,418)           (11,084)
Cash and cash equivalents, beginning of period.........................        4,615,501          3,941,305          3,981,062
                                                                         ---------------    ---------------    ---------------
Cash and cash equivalents, end of period...............................  $       577,729    $     4,615,501    $     3,941,305
                                                                         ===============    ===============    ===============
Supplemental cash flow information:
 Interest paid.........................................................  $       449,197    $       455,215    $       310,615
 Income taxes paid.....................................................           18,131             48,840             17,553
Supplemental schedule of non-cash investing and financing
 activities:
 Acquisitions of furniture & equipment through capital
 lease financing.......................................................  $        99,138    $            --    $            --
 Issuance of common stock for acquisition of businesses................          481,250          1,143,750                 --
 Issuance of common stock for acquisition of intangible
 assets................................................................               --            612,500            462,500
 Issuance of common stock on conversion of preferred stock.............        1,653,415                 --                 --
 Sale of assets of Midas UK for note receivable........................          629,921                 --                 --
</TABLE>

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

                                       30
<PAGE>

           DENTAL/MEDICAL DIAGNOSTIC SYSTEMS, INC. AND SUBSIDIARIES

                 CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
          FOR THE FISCAL YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998




<TABLE>
<CAPTION>
                                                                   2000                1999                  1998
                                                              ------------         -----------           -----------
<S>                                                           <C>                  <C>                   <C>
Net loss                                                      $(16,053,171)        $(6,727,638)          $(1,816,702)
Other comprehensive income (loss):
 Foreign currency translation adjustment                          (172,026)           (329,278)                1,205
                                                              ------------         -----------           -----------
Comprehensive loss                                            $(16,225,197)        $(7,056,916)          $(1,815,497)
                                                              ============         ===========           ===========
</TABLE>

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

                                      31
<PAGE>

1. GENERAL

      The Company designs, develops, manufactures and sells high technology
dental equipment and operates in one industry segment. The Company's primary
existing product emphasis is on the manufacture and sale of a tooth curing and
whitening device known as the "Apollo(TM)." The Company also markets and sells a
line of whitening products known as "Apollo Secret(R)" for use in conjunction
with the Apollo(TM). In addition, the Company continues to manufacture and sell
intraoral camera systems, and a multi-operatory intraoral camera system, known
as the InTELInet, for use in connection with the intraoral cameras. In the third
quarter of 1999, the Company introduced the MPDx(TM) digital x-ray system. In
June 2000, the Company began marketing the home whitening system, Forever White
(TM), through a national advertising campaign. In the fourth quarter of 2000,
the Company introduced the Apollo e, a hand-held, wireless, curing lamp.

      On February 2, 1998 the Company formed "DMDS, Ltd." a wholly owned
subsidiary created under the laws of the United Kingdom. DMDS, Ltd. holds the
assets acquired in 1997 from S.E.D., a company organized under the laws of
France. In addition, the Company is marketing certain of its new products
internationally through DMDS, Ltd.

      On March 1, 1999, DMDS, Ltd. purchased the assets of DMD Germany, an
independent company organized under the laws of Germany, for a purchase price
consisting of 100,000 shares of common stock of the Company. Also, on March 1,
1999, DMDS, Ltd. purchased the assets of Midas, Ltd., an independent company
organized under the laws of the United Kingdom, for a purchase price consisting
of 50,000 shares of common stock of the Company. During the third quarter of
2000, the Company sold certain assets (accounts receivable, inventory and
accounts payable) associated with the direct sale business of Midas Limited, at
a sales price equal to the net tangible assets of the business, and the Board of
Directors has authorized management to enter into a similar transaction for DMD
Germany. The net tangible assets were sold to the former owner in consideration
of a note receivable of $629,921, repayable over a two-year period. As a result,
the unamortized cost over fair value of assets acquired related to the two
entities was written-off during the third quarter of 2000.

      On April 9, 2000, the Company formed Forever White, Inc. as a wholly-owned
subsidiary created under the laws of the United States. The Company markets the
Forever White product through this subsidiary.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis for Presentation and Management's Plans

       The accompanying consolidated financial statements have been prepared on
a going concern basis, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. The Company has
incurred recurring losses from operations and has a working capital and net
capital deficiency that raise substantial doubt about its ability to continue as
a going concern. In addition, the Company has a conversion obligation of
$963,000 under its preferred stock agreements and is in violation of the
financial covenants on $4.2 million of debt from a bank for which it has
obtained a forbearance agreement through April 30, 2001 (See Note 10). The bank
has also suspended the Company's merchant account. These items raise substantial
doubt about the Company's ability to continue as a going concern. The Company's
continuation as a going concern is dependent upon its ability to generate
sufficient cash flow from its new and existing products to meet its obligations
on a timely basis and to obtain additional financing or refinancing as may be
required until the Company ultimately attains profitability and positive cash
flows. The financial statements do not include any adjustments that might arise
from the outcome of this uncertainty.

      Management is assessing its operations and business structure to address
the factors noted above. To reduce overhead and the Company's breakeven point,
the Company initiated several cost reduction measures in March 2001. These
actions included an approximate 60% headcount reduction in the corporate
facilities, and a further reassessment of the Company's advertising and
marketing strategy to reduce advertising and promotion expenditures from the
$4.8 million recorded for the year ended December 31, 2000. The Company also
plans to relocate to a smaller, more cost-effective corporate facility before
the end of the second quarter of 2001. In regards to the conversion obligation
under its preferred stock agreements, the Company is currently negotiating a
settlement through the issuance of stock. The settlement has not been finalized.

                                      32
<PAGE>

      To further reduce overhead, and streamline operations, the Company began
discussions in March 2001 with the current manager of its manufacturing facility
to assume the obligations of the facility and begin working on a contract
manufacturing basis. Currently, the two companies are operating under an oral
agreement and are finalizing the agreement. The Company also began similar
discussions in March 2001 with its President of DMDS, Ltd. for a similar
relationship, whereby the subsidiary would be closed with the existing entity
becoming a customer. Both transactions would significantly reduce overhead and
allow for a more predictable cost structure.

      Further, the Company is attempting to refinance the capital structure by
raising sufficient capital to retire the bank debt and continue developing new
products.

      Additionally, the Company is negotiating to convert existing accounts
payable to equity through the issuance of stock, which can only be consummated
if the shareholders approve an increase in authorized shares.

Principles of Consolidation

      The consolidated financial statements include the accounts of DMDS and its
wholly owned subsidiaries. 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.

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
four product families. 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 equipment and supplies at
the time of shipment, net of an allowance for estimated sales returns, once the
following conditions have been met: a) an authorized purchase order has been
received, b) shipment of the product has occurred, c) collection on account has
occurred or is reasonable predictable, d) title has transferred, and e) if
stipulated by the contract, customer acceptance has occurred and all significant
vendor obligations, if any, have been satisfied. The Company generally
warranties its products for one year. A provision for estimated future costs
relating to warranty is recorded when equipment is 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.

                                      33
<PAGE>

Restricted Cash

      Restricted cash at December 31, 2000 relates to the reserve required to be
maintained by the financial institution which processes the Company's credit
card sales. The amount is a reserve against future chargebacks and credits.

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 over the primary term
of the lease, whichever is less, as follows:

<TABLE>
<CAPTION>
<S>                                                                                               <C>
Equipment and software, including capitalized leases...........................................   5 years
Furniture and fixtures.........................................................................   7 years
Leasehold improvements and tooling.............................................................   3 years
</TABLE>

Intangible Assets

      Intangible assets consist of amounts paid for licenses, patents and
trademarks, acquired technology and the excess cost over fair value of assets
acquired. Intangible assets are amortized on a straight-line basis over their
estimated useful life, generally five years.

Long-Lived Assets

      The carrying value of long-lived assets is periodically reviewed by
management, and impairment losses, if any, are recognized when the expected non-
discounted future operating cash flows derived from such assets are less than
their carrying values. In the third quarter of 2000, the Company decided to
cease the sales of products through the direct sales channel in the U.K. and
Germany. As a result, management determined that the carrying value of the
intangible assets associated with these operations was impaired and wrote-off
the unamortized balance of the intangible assets.

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 fiscal years ended December 31, 2000, 1999,
and 1998, were $4,757,831, $6,702,775, and $2,256,179, respectively. Prepaid
advertising and promotion costs at December 31, 2000 and 1999 were $146,411, and
$541,489, respectively.

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 currently payable for the period and the change
during the period in deferred tax assets and liabilities.

                                 34
<PAGE>

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."
Stock-based awards to non-employees are accounted for in accordance with SFAS
No. 123 and EITF 96-18.

Concentration of Credit Risk and Major Customers

      Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of trade accounts receivable.
Also, at various times throughout the year, cash balances are maintained in
excess of Federally insured deposit limits.

      For the fiscal years ended December 31, 2000, 1999 and 1998 international
customers accounted for 45% and 40% of sales, respectively. At December 31, 2000
and 1999, international customers accounted for approximately 82% and 78% of
accounts receivable, respectively. No customer accounted for more than 10% of
revenues in any of the periods presented. Five customers accounted for 43% of
the Company's accounts receivable at December 31, 2000.

      The Company primarily sells with the receipt of a credit card, and
provides credit terms solely to certain foreign distributors. Estimated credit
losses and returns have been provided for in the financial statements.

      The majority of the Company's current customers consist of dental
professionals and independent distributors. 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.

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 due to the short term maturity of the Company's
obligations.

Computation of Earnings Per Share

      Net income (loss) per common share is computed by dividing net income
(loss) by the weighted average number of shares of common stock outstanding
during the period. Net income (loss) per common share assuming dilution is
computed by dividing net income (loss) by the weighted average number of shares
of common stock outstanding plus the number of additional common shares that
would have been outstanding if all dilutive potential common shares had been
issued, using the treasury stock method, unless antidilutive. For the years
ended December 31, 2000, 1999 and 1998 potential common shares related to
938,212, 1,268,979 and 891,806 shares of common stock issuable under outstanding
stock options, respectively, and 6,771,540, 4,339,844 and 4,300,000 shares of
common stock issuable under outstanding stock warrants, respectively, are
excluded from the computation because their effect is antidilutive. For the
years ended December 31, 2000 and 1999, potential common shares issuable upon
conversion or convertible preferred stock are also excluded from the computation
because their effect is antidilutive.

Comprehensive Income

      In January 1998, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS
130"). SFAS 130 establishes standards for reporting and displaying comprehensive
income and its components (revenues, expenses, gains and losses) in financial
statements. SFAS 130 requires that all items that are required to be recognized
under accounting standards as components of comprehensive income be reported in
a financial statement that is displayed with the same prominence as other
financial statements.

      No tax effect has been allocated to the foreign currency translation
adjustment for the periods presented.

                                 35
<PAGE>

      The following is a reconciliation of accumulated other comprehensive
income balance for the year ended December 31, 2000 and 1999.

<TABLE>
<CAPTION>
                                2000          1999
                             ----------     ---------
<S>                          <C>            <C>
Beginning balance            $(328,073)     $   1,205
Current period change         (172,026)      (329,278)
                             ---------       --------
Ending balance               $(500,099)     $(328,073)
                             =========      =========
</TABLE>

Foreign Currency

      Financial statements of foreign subsidiaries are translated to US dollars
using the exchange rate at the balance sheet date for assets and liabilities and
a weighted average exchange rate for each period for revenues, expenses, gains
and losses. The effect of unrealized exchange rate fluctuations on translating
foreign currency assets and liabilities into US dollars are accumulated as a
separate component of shareholders' equity. Losses resulting from foreign
currency transactions are included in the statement of operations and amounted
to $(141,337), ($119,824), and ($69,726) for the years ended December 31, 2000,
1999, and 1998, respectively.

Reclassifications

      Certain prior year balances have been reclassified to conform with current
year presentation.

Current Accounting Pronouncements

      In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities ("SFAS 133"). SFAS 133 requires that all derivative
instruments be recorded on the balance sheet at their fair value. Changes in the
fair value of the derivatives are recorded each period in current earnings or
other comprehensive income, depending on whether a derivative is designed as
part of a hedge transaction and, if it is, the type of hedge transaction.
SFAS133 is effective for fiscal years beginning after June 15, 2000. The Company
does not anticipate that the adoption of this new standard will have a material
effect on earnings or financial position.

3. RELATED PARTY TRANSACTIONS

      On May 27, 1997, the Company loaned Dewey Perrigo, former Vice President
of Sales of the Company, and Andrea Niemiec-Perrigo, a former employee of the
Company, $126,000 for the purpose of buying a home. The Promissory Notes
evidencing such loans bore interest at prime plus .25% (9.5% at December 31,
2000), and were due and payable on November 30, 2002. On August 19, 1998, a
principal payment of $56,000 and an interest payment of $6,152 were made leaving
a loan balance of $70,000. During the third quarter of 2000, the remaining loan
balance, including interest, was written-off, in connection with the separation
of the employees from the Company.

      During the year ended December 31, 2000, the Company paid certain expenses
on behalf of Robert Gurevitch, the President of the Company, aggregating
$148,000. The advance is being repaid in the form of salary reductions of
$74,000 in each of fiscal 2000 and 2001 and taken to compensation expense. As of
December 31, 2000, the remaining balance of $74,000 is included within Other
Assets.

4. INVENTORIES

      Inventories consisted of the following at December 31, 2000 and 1999:

<TABLE>
<CAPTION>
                                            2000                   1999
                                        ----------              ----------
<S>                                     <C>                     <C>
Raw materials......................     $1,125,035              $3,446,566
Work in process....................         54,559               1,092,058
Finished goods.....................      4,229,097               3,296,753
                                        ----------              ----------
                                        $5,408,691              $7,835,377
                                        ==========              ==========
</TABLE>

                                      36
<PAGE>

5. PREPAID EXPENSES AND OTHER CURRENT ASSETS

      Prepaid expenses and other current assets consisted of the following at
December 31, 2000 and 1999:

<TABLE>
<CAPTION>
                                                                 2000              1999
                                                             ----------        ----------
<S>                                                         <C>                <C>
VAT recoverable........................................      $  810,706                --
Prepaid royalties......................................         569,111        $  100,000
Note receivable from sale of Midas UK Limited..........         299,100                --
Prepaid advertising and industry trade show fees.......         146,411           541,489
Other..................................................         596,248           584,710
                                                             ----------        ----------
                                                             $2,421,576        $1,226,199
                                                             ==========        ==========
</TABLE>

6. PROPERTY AND EQUIPMENT

      Property and equipment consisted of the following at December 31, 2000
and 1999:

<TABLE>
<CAPTION>
                                                                                          2000         1999
                                                                                      -----------   ----------
<S>                                                                                   <C>             <C>
Equipment and software, including $88,250 of capitalized
leases at December 31, 2000 and 1999...........................................        $2,118,666   $1,392,629
Furniture and fixtures, including $99,138 and $0 of
 capitalized leases at December 31, 2000 and 1999..............................           642,760      625,579
Leasehold improvements.........................................................            19,471       52,723
                                                                                      -----------   ----------
                                                                                        2,780,897    2,070,931
Less accumulated depreciation and amortization, including
 $92,370 and $70,067 relating to capitalized leases at
 December 31, 2000 and 1999....................................................        (1,145,856)    (768,173)
                                                                                      -----------   ----------
                                                                                       $1,635,041   $1,302,758
                                                                                      ===========   ==========
</TABLE>

7. INTANGIBLE ASSETS

      Intangible assets consisted of the following at December 31, 2000 and
1999:

<TABLE>
<CAPTION>
                                                                                          2000            1999
                                                                                      ----------       ----------
<S>                                                                                   <C>              <C>
Excess cost over fair value of assets acquired..................................      $  271,938       $1,115,338
Patents and trademarks..........................................................         382,420          384,523
Acquired technology and other...................................................       1,075,000        1,075,000
                                                                                      ----------       ----------
                                                                                       1,729,358        2,574,861
Less accumulated amortization...................................................        (588,760)        (543,340)
                                                                                      ----------       ----------
                                                                                      $1,140,598       $2,031,521
                                                                                      ==========       ==========
</TABLE>

8. OTHER ASSETS

      Other assets consisted of the following at December 31, 2000 and 1999:

<TABLE>
<CAPTION>
                                                               2000           1999
                                                             --------       --------
<S>                                                    <C>             <C>
Long-term portion of Midas note receivable...............    $330,821       $     --
Deposits.................................................      40,612         69,347
Prepaid royalties........................................          --        575,000
Other.....................................................    240,980        344,111
                                                             --------       --------
                                                             $612,413       $988,458
                                                             ========       ========
</TABLE>

                                      37
<PAGE>

9. ACCRUED LIABILITIES

        Accrued liabilites consisted of the following at December 31, 2000 and
1999:

<TABLE>
<CAPTION>
                                                                 2000            1999
                                                              ----------      ----------
<S>                                                           <C>             <C>
Accrued purchase receipts............................         $  399,421      $  623,571
Accrued warranty.....................................            150,813          90,813
Accrued commissions..................................            138,509         516,064
Accrued royalties....................................            103,059         169,334
Accrued vacation.....................................             97,757         103,578
Accrued salaries, wages, and payroll taxes...........             57,724         156,992
Accrued advertising..................................                 --         125,535
Accrued other........................................            355,766         465,192
                                                              ----------      ----------
                                                              $1,303,049      $2,251,079
                                                              ==========      ==========
</TABLE>

10. BORROWINGS UNDER LINE OF CREDIT AND NOTES PAYABLE

      In January 1999, the Company entered into a credit facility (the
"Facility") with a bank. The facility comprises a $2,500,000 10% fixed rate non-
revolving line of credit, a $4,000,000 variable revolving line of credit
(bearing interest of 9.0% at December 31, 1999 and 10.25% at December 31, 2000),
and a $450,000 variable rate loan credit (bearing interest of 9.0% at December
31, 1999 and 10.25% at December 31, 2000). As of December 31, 1999 the Company
was not in compliance with certain financial covenants and as a result on March
23, 2000 amended certain covenants and extended the repayment terms under the
Facility. In connection with the modification of the credit facility the Company
granted the bank warrants to purchase 75,000 shares of common stock of the
Company at an exercise price of $2.50 per share. The estimate fair value of the
warrants, computed using the Black-Scholes option pricing model, was $133,568
and has been recorded as a debt issue cost and is being amortized over the
expected period of the debt. Amortization expense for the year ended December
31, 2000 was $89,046.

      As of December 31, 2000 and 1999, the Company had the following amounts
outstanding under its facility with the bank:

<TABLE>
<CAPTION>
                                                                         2000            1999
                                                                      ----------      ----------
<S>                                                                   <C>             <C>
Variable revolving line of credit due May 31, 2001............        $4,000,000      $4,000,000
Variable rate loan with monthly payments of $12,608 due
  May 31, 2001................................................           148,952         302,593
Fixed rate non-revolving loan due in monthly installments
  through May 31, 2001........................................                --       2,400,000
                                                                      ----------      ----------
                                                                      $4,148,952      $6,702,593
                                                                      ==========      ==========
</TABLE>

      At December 31, 2000, September 30, 2000 and June 30, 2000, the Company
was not in compliance with certain financial covenants of its credit agreement
with the bank. As of August 18, 2000, the Company obtained a forbearance
agreement from the bank stating that so long as the Company remains current in
its payments of principal and interest, the bank will not exercise any remedies
it may have resulting from such lack of compliance. That original forbearance
was through September 21, 2000 and has been subsequently extended on a monthly
basis with the current extension through April 30, 2001.

11. NOTES PAYABLE:

      Notes payable consisted of the following at December 31, 2001 and 2000:

<TABLE>
<CAPTION>
                                                                              2000          1999
                                                                            --------      --------
<S>                                                                         <C>           <C>
Notes payable to certain individuals bearing interest at 12% at
  December 31, 1998. Due on demand prior to December 2000.............      $     --      $122,320
                                                                            --------      --------
                                                                            $     --      $122,320
                                                                            ========      ========

</TABLE>

                                       38
<PAGE>

12. COMMITMENTS AND CONTINGENCIES

Leases

      As of December 31, 2000 the Company leases one facility under an operating
lease that expires in 2000. On January 25, 2000 the Company leased a second
facility under an operating lease that expires in 2005. The leases requires 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 operating leases. Rent expense for all operating leases
was approximately $654,000, $196,000 and $189,000 for the fiscal years ended
December 31, 2000, 1999 and 1998, respectively. The facility lease is guaranteed
by Robert H. Gurevitch, Chief Executive Officer and Chairman of the Board of the
Company. The Company also leases certain equipment under capital leases.

      The aggregate liability for future rentals under lease agreements with
noncancelable lease terms in excess of one year as of December 31, 2000, is
summarized as follows:

<TABLE>
<CAPTION>
                                                                    CAPITAL       OPERATING
YEAR ENDED DECEMBER 31                                               LEASES         LEASES
----------------------                                              --------      ----------
<S>                                                                 <C>           <C>
2001...................................................              $25,660      $  376,841
2002...................................................               25,660         373,063
2003...................................................               25,660         372,308
2004...................................................               25,660         362,914
2005...................................................               64,150          60,460
                                                                    --------      ----------
                                                                     166,790      $1,545,586
Less amounts representing:
  Interest.............................................               83,086
  Current portion......................................               13,826
                                                                    --------
Long term portion......................................             $ 69,878
                                                                    ========
</TABLE>


Litigation

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. The Boston Marketing 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. During the fiscal year ended December 31, 1999, the
Company purchased fewer than 2,500 units under the BMC Distribution Agreement.
Boston Marketing has refused to accept a subsequently placed order. On April 7,
2000 Boston Marketing filed suit in Los Angeles Superior Court alleging breach
of contract and seeking unspecified damages. The Company intends to defend the
action vigorously believing that it has meritorious defenses to this suit. Trial
was originally set for February 26, 2001 and subsequently continued until on or
about April 18, 2001. As the Company is unable to predict the outcome of this
litigation, no expense has been accrued for the possible adverse resolution of
this matter.

Distribution Agreements

      On October 10, 1997, the Company entered into an agreement with Suni
Imaging Microsystems, Inc. ("Suni") to develop digital x-ray technology for
incorporation into systems for the dental market. The Company has obtained
exclusive rights to market products to the dental market incorporating certain
digital x-ray technology developed by Suni. Suni will retain the rights to
developed microchip technology underlying the x-ray system it develops for the
Company.

      Under the agreement with Suni, the Company was required to pay a non
refundable fee of $875,000 to Suni to develop technology for a digital x-ray
system for the dental market. This non-refundable fee was charged to research
and development expense during the

                                       39
<PAGE>

year ended December 31, 1997. If the initial prototype developed subsystem was
not accepted by the Company, the fee was not refundable to the Company and the
Company was under no obligation to pay any additional development fees or
financial penalties to Suni. If the initial prototype subsystem was accepted by
the Company, upon acceptance of the final prototype subsystem, the Company was
obligated to pay an additional development fee of $375,000 which would be offset
against future royalty payments, only subsequent to the fourth year of royalty
payments. Under the terms of the agreement, the Company will also be required to
pay a per unit royalty on each licensed product sold. During 1999, the Company
accepted the final prototype subsystem.

      On March 17, 1999, the Company entered into a manufacturing agreement with
Suni under which Suni will assemble, test and package the Company's digital x-
ray system incorporating the digital x-ray technology developed by Suni for the
Company. Under the agreement, which has a three year term, the Company has
guaranteed payment in full for at least 3,000 units per year and has agreed to
place orders for at least 750 units per quarter. The Company has also agreed to
fulfill all of its requirements for the x-ray product from Suni during the term
of the agreement. The Company paid $200,000 in advance royalty under this
agreement which were fully recouped against royalty obligations.

      The Company is in negotiations with Suni due to a projected inability to
purchase the required number of units under the manufacturing agreement for the
2001 year and subsequent calendar years. The agreement is expected to release
the Company from future purchase commitments and will result in the loss of
exclusive worldwide marketing rights. Based upon these developments the Company
wrote-off the $375,000 in prepaid royalties during the year ended December 31,
2000, as management believes these prepaid royalties are no longer recoverable.

      In October 2000, the Company entered into a five-year licensing agreement
with GC Corporation of Japan for the Apollo e(TM). Under the terms of the
agreement, GC Corporation ("GC") will purchase, from a third party manufacturer,
Apollo e(TM) units which incorporate the Company's patented LED technology. In
consideration for the technology incorporated in the Apollo e(TM), GC will pay
the Company $150 for each unit purchased from the third party manufacturer.
Under the terms of the agreement, GC has to purchase a minimum of 25,000 units,
subject to adjustment upon the occurrence of certain events, and has made an
advance payment to the Company of $750,000 for the first 5,000 units to be
purchased from the third party manufacturer. As of December 31, 2000, no units
had been purchased by GC and accordingly the $750,000 is included in deferred
revenue in the consolidated financial statements.

13. CAPITAL TRANSACTIONS

      On March 2, 1998, the Company entered into an agreement with accredited
investors and institutional purchasers for the private placement (the "Debt
Placement") of its 12% Senior Subordinated Notes due 1999, and 450,000 warrants
(the "1998 Warrants"). The Debt Placement was consummated on March 19, 1998. The
1998 Warrants were exercisable commencing on May 15, 1998, and for five years
thereafter for the purchase of one share of common stock per warrant, at an
exercise price of $5.812 per share. The Senior Subordinated Notes (i) bore
interest payable semi-annually at a rate of 12% per annum; (ii) matured on the
first anniversary of the date of issuance; and (iii) could be repaid by the
Company prior to maturity at one hundred and two (102%) percent of the amount of
the unpaid principal plus interest due as of the date of repayment. As a result
of the warrant issuance, the Senior Subordinated Notes were discounted by
$1,620,225, which was amortized over the term of the Notes. On January 27, 1999,
the Company repaid the Senior Subordinated Notes, in full.

      On July 16, 1999, the Company raised approximately $5,000,000 through the
issuance of 901,000 shares of common stock to eight investors. The shares were
issued in a private placement and were then registered for resale on a Form S-3
Registration Statement.

      On November 23, 1999 the Company sold an aggregate of 2,000 shares of
Series A Exchangeable Preferred Stock, 2,500 shares of common stock and warrants
to purchase up to 40,000 shares of common stock. The Company received $2,000,000
in gross proceeds less costs of approximately $100,000. The net proceeds of the
offering of $1,900,000 were allocated based on the relative fair value to the
preferred stock ($1,816,343) and to the common stock and warrants ($83,657).
Prior to March 15, 2000, holders of Series A Exchangeable Preferred Stock could
exchange their shares into common stock at $4.00 per share based upon a stated
value of $1,000 per share of Series A Exchangeable Preferred Stock. On and after
March 15, 2000, holders of Series A Exchangeable Preferred Stock may exchange
their shares for shares of common stock at the lesser of $4.00 per share or the
average of the closing bid prices of the common stock during any three (3) of
the prior thirty (30) consecutive trading days selected by the holder of the
Series A Shares then being exchanged. The preferred stock will mandatorily
convert to common stock after (i) the third anniversary from the date of
issuance; or (ii) if after 122 days from the date of issuance, the average
closing bid price of the Company's common stock for twenty

                                       40
<PAGE>

consecutive days is at least $8.00 (and trading volume exceeds specified
limits). The Company may redeem the preferred stock at any time upon the earlier
of (i) a public offering, as defined, or (ii) six months after the original
issuance date at a price equal to 140% of the stated value plus accrued and
unpaid dividends, unless the closing bid price is less than the market price, as
defined, on date of issuance in which case the redemption price shall be at 125%
of the stated value. The Preferred Stock will receive $40 in dividends per year
with payments due quarterly. The warrants are exercisable into an aggregate of
40,000 shares of Common Stock at $2.749 per share through March 15, 2005.

      On February 29, 2000 the Company sold an aggregate of 2,250 shares of
Series B Exchangeable Preferred Stock, "Series B Preferred Stock", B-1 Warrants
to purchase up to 225,000 shares of common stock and B-2 Warrants to purchase up
to 450,000 shares of common stock. The Company received $2,250,000 in gross
proceeds less costs of $207,520. The net proceeds of $2,042,480 were allocated
based on the relative fair value to the preferred stock ($1,253,757) and to the
warrants ($788,723). The holders of Series B Preferred Stock may exchange their
shares for shares of common stock at the lower of (i) $2.85 or (ii) 100% of the
market price of the common stock, as defined on the date of exchange. The Series
B Preferred Stock is non voting, however, without the consent of at least 75% of
the holders of the Series B Preferred Stock, the Company may not alter the terms
or preferences of the Series B Preferred Stock, or create any additional classes
of preferred stock having liquidation preference over the Series B Preferred
Stock. The Series B Preferred Stock ranks equally with the Series A Exchangeable
Preferred Stock with respect to dividends and preferences upon liquidation. The
Company can require the Series B Preferred Stock to convert to common stock
after the third anniversary or in the event the common stock price is at least
$10 per share and the trading volume exceeds a specified volume. The Company
also has the option to redeem the Series B Preferred Stock after the third
anniversary. The Series B Preferred Stock will receive $30 in dividends per year
with payments due quarterly. The B-1 and B-2 stock warrants are exercisable into
an aggregate 225,000 shares of common stock at $2.51, and 450,000 shares of
common stock at $3.50 per share, respectively, through June 15, 2005.

      The Series A and B Preferred Stock agreements also contain provisions that
a change in control is deemed a liquidating event and accordingly the Series A
and B Preferred Stock have been classified as mandatorily redeemable in the
balance sheet.

      On July 21, 2000, the Company completed a $1,550,000 private placement,
selling an aggregate of 1,396,396 shares of common stock at $1.11 a share, and
warrants to purchase 465,465 shares of common stock at $2.50 per share. In
connection with this transaction, the placement agent received a placement fee
of approximately $90,000, and warrants to purchase 339,640 shares of common
stock of the Company at $1.67 per share.

      On September 7, 2000, the Company completed a $1,920,000 private
placement, selling an aggregate of 2,157,308 shares of common stock at $0.89 a
share, and warrants to purchase 719,103 shares of common stock at $2.22 per
share. In connection with this transaction, the placement agent received a
placement fee of approximately $50,000, and the placement agent and certain
individuals affiliated with the placement agent received warrants to purchase
92,697 shares of common stock of the Company at $0.89 per share.

      From April 2000 through September 2000, 1,246 shares of Series A
Exchangeable Preferred Stock were converted into 1,270,216 shares of common
stock, and 937 shares of Series B Exchangeable Preferred Stock were converted
into 1,288,484 shares of common stock.

      Under the rules and regulations of the Nasdaq Stock Market, the Company
requires stockholder approval to issue 20% or more of outstanding common stock
in a single transaction. Because the rate at which the Series A Preferred Stock
and Series B Preferred Stock exchange into common stock fluctuates, it was
possible that the number of shares of common stock into which the Series A
Preferred Stock or Series B Preferred Stock may exchange could exceed 20%. The
Company agreed with the purchasers of the Series A Preferred Stock and the
Series B Preferred Stock that stockholder approval would be sought for these
issuances at the 2000 Annual Meeting of Stockholders. Prior to receiving
stockholder approval, or if stockholder approval is not obtained, any exchange
of shares of Series A Preferred Stock or Series B Preferred Stock in excess of
19.9% of the outstanding common stock of the Company must be paid in cash to the
holder of the Series A Preferred Stock or Series B Preferred Stock.

      In late September 2000, all remaining Series A and Series B holders
requested to convert their remaining shares into common stock. Because the
Company had already issued l9.9% of the outstanding shares in prior conversions,
the Company is obligated to honor the exchange of shares of Series A and Series
B Preferred Stock in cash. The combined obligation to the Series A and Series B
holders was approximately $4,200,000. As a result, the Company accreted the
carrying value of the preferred stock by $2,799,645 which has been recorded as a
charge to net loss attributable to common stockholders. In January 2001, the
Company reached an agreement with the holders of $3,253,000 of the redemption
value of the preferred stock to exchange such value for shares of common stock
at $0.70 per share. As of March 23, 2001, $963,000 of the conversion obligation
remains outstanding.

                                       41
<PAGE>

      On November 14, 2000, the Company acquired Chrysalis Dental, Inc., the
developer and manufacturer of its whitening products (Apollo Secret and Forever
White), for 550,000 shares of common stock. In connection with the transaction,
$271,938 was recorded as the excess of the purchase price over the estimated
fair value of the net assets acquired.

14. STOCK OPTIONS AND WARRANTS

      In March 1997, the Company's Board of Directors approved the "1997 Stock
Incentive Plan." Under the plan, incentive stock options and non-statutory stock
options may be granted to employees, directors, and consultants to purchase a
specified number of shares of common stock at a price not less than the fair
market value on the date of grant and for a term not to exceed 10 years. Options
for employees generally vest over a period of 5 years. The maximum number of
shares authorized for grants of options under the 1997 Stock Incentive Plan at
December 31, 2000 is 1,800,000.

      SFAS No. 123, "Accounting for Stock-Based Compensation," encourages but
does not require companies to record compensation cost for stock-based employee
compensation plans at fair value. The Company has chosen to continue to account
for stock based compensation using the intrinsic value method prescribed in
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," and related interpretations. Accordingly, no compensation expense
has been recognized for the Company's stock based compensation plan. Had
compensation costs for the Company's stock option plan been determined based
upon the methodology prescribed under SFAS No. 123, the Company's net loss would
approximate the pro forma amounts below:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 2000:                                                   AS REPORTED         PRO FORMA
-----------------------------                                                  -------------       -------------
<S>                                                                            <C>                 <C>
Net loss..........................................................             $ (16,053,171)      $ (16,381,502)
Net loss per share (basic and diluted)............................             $       (2.28)      $       (2.31)
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1999:                                                   AS REPORTED         PRO FORMA
-----------------------------                                                  -------------       ---------------
<S>                                                                            <C>                 <C>
Net loss.........................................................              $  (6,727,638)      $    (7,199,832)
Net loss per share (basic and diluted)...........................              $       (1.15)      $         (1.23)
</TABLE>

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1998:                                                   AS REPORTED         PRO FORMA
-----------------------------                                                  -------------       -------------
<S>                                                                            <C>                 <C>
Net loss.........................................................              $  (1,816,702)      $  (2,215,967)
Net loss per share (basic and diluted)...........................              $        (.35)      $        (.43)
</TABLE>

      The pro forma amounts above were computed using the Black-Scholes option
pricing model with the following assumptions for 2000, 1999 and 1998: (i) risk-
free interest rate of 5.28%, 6.00% and 4.82%, respectively (ii) expected option
life of 5 years, (iii) forfeiture rate of 0, (iv) expected volatility of 82.0%,
80.3% and 72.6%, respectively and (v) no expected dividends.

      The effects of applying SFAS No. 123 in this pro forma disclosure are not
indicative of future amounts. SFAS No. 123 does not apply to awards prior to
1996.

      A summary of the status of the Company's stock options as of December 31,
2000, 1999, 1998 and 1997, and the changes during the years ended December 31,
2000, 1999 and 1998, is presented below:

<TABLE>
<CAPTION>
                                                                                  WEIGHTED              WEIGHTED
                                                                                   AVERAGE               AVERAGE
                                                                 NUMBER OF         OPTION              GRANT DATE
                                                                  SHARES        EXERCISE PRICE         FAIR VALUE
                                                                  ------        -------------          ---------
<S>                                                             <C>             <C>                    <C>
Options outstanding at December 31, 1997...............           600,881              3.63
  Granted..............................................           362,950              4.20               $2.67
  Canceled.............................................           (32,108)             4.85
  Exercised............................................           (39,917)             2.93
                                                                ---------
Options outstanding at December 31, 1998...............           891,806              4.15
  Granted..............................................           454,150              3.61               $2.34
  Canceled.............................................           (38,763)             5.67
  Exercised............................................           (38,214)             4.68
                                                                ---------
Options outstanding at December 31, 1999...............         1,268,979              3.97
  Granted..............................................           178,500              1.53               $1.03
  Cancelled............................................          (509,267)             3.95
  Exercised............................................                --                --                  --
                                                                ---------
Options outstanding at December 31, 2000...............           938,212              3.50
                                                                =========
Options exercisable at December 31, 2000...............           477,882              3.85
Options available for future grant.....................           861,788
</TABLE>

                                       42
<PAGE>

<TABLE>
<CAPTION>
                                         OPTIONS OUTSTANDING
                     ---------------------------------------------------------------
                                            WEIGHTED AVERAGE                                        OPTIONS EXERCISABLE
                     ---------------------------------------------------------------      --------------------------------------
  RANGE OF         NUMBER OUTSTANDING AT        REMAINING            WEIGHTED AVERAGE      NUMBER OUTSTANDING    WEIGHTED AVERAGE
EXERCISE PRICE       DECEMBER 31, 2000      CONTRACTUAL LIFE          EXERCISE PRICE      AT DECEMBER 31, 2000    EXERCISE PRICE
--------------       -----------------      ----------------          --------------      --------------------    --------------
<S>                  <C>                    <C>                      <C>                  <C>                    <C>
$0.88- 2.93                369,178             8.18 years                 $1.62               126,995                 $1.64
$4.00- 4.50                352,500             6.86 years                 $4.08               220,100                 $4.10
$5.00-5.875                181,034             7.16 years                 $5.36               117,397                 $5.31
$6.44- 8.50                 35,500             8.23 years                 $7.88                13,390                 $7.90
                           -------                                                            -------
                           938,212                                                            477,882
                           =======                                                            =======
</TABLE>

   The following is a summary of warrants outstanding at December 31, 2000:

<TABLE>
<CAPTION>
      NUMBER OF COMMON
    SHARES UNDER WARRANTS      EXERCISE PRICE        EXPIRATION DATE
    ---------------------      --------------        ---------------
    <S>                        <C>                   <C>
           1,600,000                $5.00            November 27, 2001
             180,000                 5.55            May 14, 2002
           2,069,910                 5.00            May 14, 2002
             450,000                 5.81            May 15, 2003
              40,000                 2.75            November 23, 2004
             675,000                 3.50            March 19, 2005
              64,725                 2.51            March 19, 2005
             465,465                 2.50            August 1, 2005
             339,640                 1.67            August 1, 2005
             719,103                 2.22            September 7, 2005
              92,697                 0.89            September 7, 2005
              75,000                 2.50            May 5, 2007
           ---------
           6,771,540
           =========
</TABLE>

15. INCOME TAXES

      The income tax expense (benefit) for the fiscal years ended December 31,
2000, 1999 and 1998 is as follows:

<TABLE>
<CAPTION>
                                                             2000            1999          1998
                                                           --------        --------      --------
<S>                                                        <C>             <C>           <C>
Current:
     Federal.....................................          $     --        $     --      $
     State.......................................             1,600           1,600         1,600
     Foreign.....................................           (46,994)         26,707       128,159
                                                           --------        --------      --------
                                                            (45,394)         28,307       129,759
Deferred:
     Federal.....................................                --              --            --
     State.......................................                --              --            --
                                                           --------         -------      --------
          Total..................................          $(45,394)        $28,307      $129,759
                                                           ========         =======      ========
</TABLE>

      The Company's effective tax rate for the fiscal years ended December 31,
2000, 1999 and 1998 differs from the statutory federal income tax rate as
follows:

<TABLE>
<CAPTION>
                                                                                  2000     1999     1998
                                                                                  ----     ----     ----
<S>                                                                               <C>      <C>      <C>
Tax provision (benefit) at the statutory rate..........................           (34.0)%  (34.0)%  (34.0)%
Nondeductible expenses.................................................            0.2      0.3       --
State taxes, net of federal benefit....................................             --     (5.6)    (7.1)
Valuation allowance....................................................           34.1     40.3     43.2
Foreign taxes..........................................................             --       --      2.3
Other..................................................................           (0.3)    (1.0)     3.3
                                                                                  ----     ----     ----
                                                                                   --%      --%     7.7%
                                                                                  ====     ====     ====
</TABLE>

                                       43
<PAGE>

           The components of the net deferred taxes are as follows:


<TABLE>
<CAPTION>
                                                             DECEMBER 31,             DECEMBER 31,            DECEMBER 31,
                                                                2000                     1999                    1998
                                                             -----------              -----------             -----------
<S>                                                          <C>                      <C>                     <C>
Deferred Tax Assets:
  Inventory reserves...................................       $  168,000              $    181,000            $    64,600
  Warranty accrual.....................................           60,000                    36,000                 33,900
  Allowance for returns and doubtful accounts..........          218,000                   158,000                  8,300
  Deferred revenue.....................................          788,000                    82,000                     --
  Net operating loss carryforwards.....................        7,527,000                 3,888,000              1,625,000
  Research and development credits.....................          141,000                   117,000                171,800
  Accrued vacation.....................................           39,000                    41,000                 25,600
  Fixed assets.........................................           61,000                    38,000                 (7,800)
  Intangible assets....................................            7,000                  (130,000)              (127,000)
  Other................................................          487,000                    56,000                (30,000)
  Valuation allowance..................................       (9,496,000)               (4,467,000)            (1,764,400)
                                                             -----------               -----------            -----------
                                                             $        --               $        --            $        --
                                                             ===========               ===========            ===========
</TABLE>

      As a result of the Company's recent loss history, a valuation allowance
has been recorded for the full amount of the Company's net deferred tax assets.

      The Company has federal tax and state NOL carryforwards of $18.9 million
which begin to expire in 2017 and 2002, respectively. Section 382 of the
Internal Revenue Code imposes an annual limitation on the utilization of net
operating loss carryforwards based on a statutory rate of return (usually the
"applicable federal funds rate," as defined in the Internal Revenue Code) and
the value of the corporation at the time of a "change of ownership" as defined
by Section 382. We have not completed our evaluation of the circumstances under
which the exercise of our outstanding warrants and options, combined with our
private stock sales over the last few years, may trigger a "change in ownership"
under Section 382. If this were to occur, it could significantly diminish the
value of our net operating loss carryforwards by limiting the rate at which they
could be permitted to offset them against any future taxable income.

16. CUMULATIVE EFFECT OF ACCOUNTING CHANGE

      In November 2000, the Emerging Issues Task Force ("EITF") issued EITF
Issue No. 00-27 "Application of EITF Issue No. 98-5, Accounting for Convertible
Securities with Beneficial Conversion Features or Contingently Adjustable
Conversion Ratios, to Certain Convertible Instruments" which resulted in a
change in accounting for beneficial conversion features on convertible
securities. As a result, the Company recomputed the amount of beneficial
conversion arising from issuances of convertible securities since May 1999, by
comparing the fair value of the common stock on the date of close of the Series
A and Series B preferred stock against an effective conversion price, rather
than the stated conversion price. As a result, in accordance with the EITF Issue
No. 00-27, the Company recorded in the fourth quarter of 2000 a cumulative
effect of an accounting change of $1,179,900 as a charge to net loss
attributable to common stockholders.

17. NON-RECURRING CHARGES

      During the fiscal year ended December 31, 1999, the Company has a non-
recurring charge of $566,893 for costs related to an abandoned secondary
offering.

18. SEGMENT INFORMATION

      The Company operates in one segment -- dental medical equipment which, at
December 31, 2000, comprised of four main products: TeliCam Systems -- an
intraoral camera and dental networking system; Apollo(TM) tooth whitening and
curing system; other accessories including the Apollo Secret(R) whitening
product; and MPDx(TM) digital x-ray systems. Accordingly no separate segment
information is provided other than Enterprise Wide disclosures as required by
SFAS No. 131.

      The following are sales by product lines for the year ended December 31,
2000, 1999, and 1998:

                                       44
<PAGE>

<TABLE>
<CAPTION>
                                                                2000              1999             1998
                                                            -----------       -----------      -----------
<S>                                                         <C>               <C>              <C>
Apollo(TM)                                                  $ 9,411,287       $26,233,445      $11,125,629
TeliCam                                                       3,026,649         6,263,014        6,555,540
MPDx(TM)                                                      4,267,980         1,186,615               --
Consumables                                                   2,261,308         2,605,521          593,060
Other                                                         2,082,704         1,892,401          953,569
                                                            -----------       -----------      -----------
                                                            $21,049,928       $38,180,996      $19,227,798
                                                            ===========       ===========      ===========
</TABLE>

      The Company ships products from its operations in the US and Europe. The
following are sales by its US and European locations for the years ended
December 31, 2000, 1999 and 1998:

<TABLE>
<CAPTION>
                                                     2000             1999          1998
                                                  -----------    -----------     -----------
<S>                                               <C>            <C>             <C>
Sales by geography:
United States                                     $15,409,160    $26,548,072     $13,182,354
Europe                                              5,640,768     11,632,924       6,045,444
                                                  -----------    -----------     -----------
                                                  $21,049,928    $38,180,996     $19,227,798
                                                  ===========    ===========     ===========
</TABLE>

      The following is long-lived asset information by geographic area as of
December 31, 2000 and 1999:

<TABLE>
<CAPTION>
                                                     2000            1999
                                                  ----------       ----------
<S>                                               <C>              <C>
Long Lived assets:
United States                                     $1,176,703       $  949,223
Europe                                               458,338          353,535
                                                  ----------       ----------
                                                  $1,635,041       $1,302,758
                                                  ==========       ==========
</TABLE>

19. SUBSEQUENT EVENT


      On January 16, 2001 the Company negotiated final settlement for $3,253,000
of the conversion obligation to certain preferred stockholders through the
issuance of stock. The conversion obligation was converted into common stock at
a price of $0.70 per share, resulting in approximately 4,647,000 shares of
common stock being issued.

                                       45
<PAGE>

20. QUARTERLY FINANCIAL DATE (UNAUDITED)


<TABLE>
<CAPTION>
($ in thousands  except per share data)                                   Quarter Ended
                                          ------------------------------------------------------------------------------------
                                          March 31, 2000       June 30, 2000       September 30, 2000        December 31, 2000
                                          --------------       -------------       ------------------        -----------------
<S>                                       <C>                  <C>                 <C>                       <C>
Revenues                                  $    7,999           $    5,642          $    3,357                $    4,052
Gross profit                                   2,830                1,503                 (16)                      409
Net loss                                      (2,999)              (3,146)             (4,955)                   (4,953)
Net loss attributable to common
stockholders                                  (3,136)              (3,177)             (7,776)                   (6,041)
Net loss attributable to common
stockholders per share                          (.48)                (.47)               (.84)                     (.55)
</TABLE>

<TABLE>
<CAPTION>
                                                                           Quarter Ended
                                  ---------------------------------------------------------------------------------------
                                  March 31, 1999           June 30, 1999       September 30, 1999      December 31, 1999
                                  --------------           -------------       ------------------      -----------------
<S>                             <C>                      <C>                 <C>                      <C>
Revenues                          $  10,214                 $  10,964            $    6,448                   $  10,555
Gross profit                          5,302                     5,737                 2,116                       2,881
Net income (loss)                     1,159                     1,463                (3,380)                     (5,969)
Net loss attributable to common
stockholders per share                  .17                       .20                  (.54)                       (.92)
</TABLE>

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

      None.

                              PART III

ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.


      Information regarding the executive officers and directors of the Company
is incorporated by reference to the information set forth under the caption
"Business--Executive Officers and Directors" and under the caption "Proposal
One: Election of Directors" in the Company's Proxy Statement for the Annual
Meeting of Stockholders to be filed with the Commission within 120 days after
the end of the Company's year ended December 31, 2000.

ITEM 10. EXECUTIVE COMPENSATION.

      Information regarding executive compensation is incorporated by reference
to the information set forth under the caption "Executive Compensation" in the
Company's Proxy Statement for the Annual Meeting of Stockholders to be filed
with the Commission within 120 days after the end of the Company's year ended
December 31, 2000.

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

      Information regarding security ownership of certain beneficial owners and
management is incorporated by reference to the information set forth under the
caption "Voting Securities of Principal Stockholders and Management" in the
Company's Proxy

                                 46
<PAGE>

Statement for the Annual Meeting of Stockholders to be filed with the Commission
within 120 days after the end of the Company's year ended December 31, 2000.

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

      Information regarding certain relationships and related transactions is
incorporated by reference to the information set forth under the caption
"Executive Compensation -Certain Transactions" in the Company's Proxy Statement
for the Annual Meeting of Stockholders to be filed with the Commission within
120 days after the end of the Company's year ended December 31, 2000.

ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K

    (a) EXHIBITS.


EXHIBIT
  NO.                                DOCUMENT DESCRIPTION
  ---                                --------------------
  1.1       Form of Underwriting Agreement.(1)

  1.2       Form of Underwriter's Purchase Option granted to M.H. Meyerson &
            Co., Inc.(1)

  2.1       Dental/Medical Diagnostic Systems, Inc. 1997 Stock Incentive
            Plan.(2)

  3.1       Amended and Restated Certificate of Incorporation of the
            Registrant.(2)

  3.2       Bylaws of the Registrant.(2)

  4.1       Specimen Stock Certificate of the Registrant.(1)

  4.2       Form of Warrant Agreement between American Stock Transfer & Trust
            Company and the Registrant and form of Warrant Certificate.(3)

  10.1      Agency Agreement dated as of October 23, 1996, by and between the
            Registrant and M.H. Meyerson & Co., Inc.(4)

  10.2      Form of Registration Rights Agreement Letter, dated January 31,
            1997, from Registrant to those certain purchasers of the
            Registrant's Common Stock listed on the Schedule thereto.(2)

  10.3      Commitment Letter, dated February 13, 1997, from Comerica Bank
            confirming the existence of a secured line of credit for the
            Registrant.(2)

  10.4      Employment Agreement, dated as of October 1, 1996, entered into by
            the Registrant and Robert H. Gurevitch.(4)

  10.5      Employment Agreement, dated as of October 1, 1996, entered into by
            the Registrant and Dewey Perrigo.(4)

  10.6      Distribution Agreement, dated as of October 1, 1996, between the
            Registrant and Boston Marketing Company, Ltd., as amended.(2)

  10.7      Promissory Note, dated February 1, 1996, between the Registrant and
            Robert H. Gurevitch.(2)

  10.8      Promissory Note, dated February 15, 1996, made by the Registrant in
            favor of Robert H. Gurevitch.(2)

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

  10.10     Form of Indemnification Agreement and Schedule of Indemnified
            Parties.(3)

  10.11     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.(2)

  10.12     Agreement between the Registrant and DMD NV dated as of September
            30, 1997.(6)

  10.13     Agreement between the Registrant and Suni Imaging Microsystems, Inc.
            dated October 10, 1997.(7)

  10.14     Extension of automatic termination provisions of agreement between
            the Registrant and Suni Imaging Microsystems, Inc., dated November
            11, 1997.(7)

  10.15     Purchase Agreement by and among the Registrant and the purchasers
            named therein with respect to the sale and purchase of an aggregate
            of $4,500,000 aggregate principal amount of the Registrant's 12%
            Senior Subordinated Notes due 1999, and Warrants dated as of March
            2, 1998.(7)

  10.16     Form of 12% Senior Subordinated Note due 1999.(7)

  10.17     Form of Common Stock Purchase Warrant.(7)

  10.18     Revolving Credit Loan and Security Agreement between the Registrant
            and Comerica Bank-California, dated as of December 10, 1997.(7)

  10.19     Variable Rate-Single Payment Note of the Company in form of Comerica
            Bank-California, dated as of December, 10, 1997.(7)

  10.20     First modification to Variable Rate-Single Payment Note, between the
            Company and Comerica Bank-California, dated as of December 24,
            1997.(7)

  10.21     Exclusive License Agreement, by and between the Registrant and
            Chrysalis Dental, Inc., dated as of October 2, 1998.*(8)

  10.22     Agreement for the Sale of the Seller's Business and Assets, by and
            among the Registrant, Fadi Nahab and DMDS Ltd., dated March 1, 1999.
            (8)

  10.23     Agreement for the Sale of the Seller's Business and Assets, by and
            among DMD Gmbh, Ralf Muller and DMDS

                                       47
<PAGE>

 EXHIBIT
   NO.                             DOCUMENT DESCRIPTION
   ---                             --------------------

            Ltd., dated March 1, 1999. (8)

  10.24     Credit Agreement between the Registrant and Imperial Bank, dated as
            of January 4, 1999. (8)

  10.25     Standard Office Lease, between the Company and Frank F. Parker (with
            addendum), dated as of August 8, 1997, for 16722 Millikan Avenue,
            Irvine, CA. (8)

  10.26     Second Addendum to Standard Office Lease, between the Company and
            Frank F. Parker, dated July 29, 1998, for 16722 Millikan Avenue,
            Irvine, CA. (8)

  10.27     Suni-DMD Manufacturing, Assembly & Test Services Agreement, by and
            between Registrant and Suni Imaging Microsystems, Inc., dated as of
            March 17, 1999.* (8)

  10.28     Contract between DMDS Ltd. and DDM SARL, dated as of March 8, 2000.
            (10)

  10.29     Exclusive License Agreement, by and between the Registrant and
            Chrysalis, Inc., dated as of October 28, 1999. (10)

  10.30     First amendment to Exclusive License Agreement dated September 29,
            1999, by and between the Registrant and Chrysalis Dental, Inc.,
            dated as of November 15, 1999. (10)

  10.31     Letter of Intent for Exclusive License Agreement, by and between the
            Registrant and Chrysalis Dental, Inc., dated as of September 16,
            1998. (10)

  10.32     First amendment to Exclusive License Agreement dated September 16,
            1998, by and between the Registrant and Chrysalis Dental, Inc. and
            Den-Pak, LLC, dated as of August 12, 1999. (10)

  10.33     Stock Purchase Agreement, by and between the Registrant and
            Chrysalis Dental, Inc., dated as of October 2, 1998. (10)

  10.35     Contract about a manufacturing relationship related to the partial
            manufacturing of a product called "LED Light" (or Apollo-E-Light),
            by and between the Registrant and Francois Duret. (10)

  10.36     License Agreement, by and between DMDS Ltd. and Francois Duret. (10)

  10.37     Standard Industrial/Commercial Single Tenant Lease, between the
            Registrant and Frank F. Parker, dated September 15, 1999, for 1540
            S. Lyon Street, Santa Ana, CA. (10)

  10.38     Standard Industrial Lease, between the Registrant and AKA
            Enterprises, dated January 25, 2000, for 6416 Variel Avenue,
            Woodland Hills, CA. (10)

  10.39     Services Agreement by and between the Registrant and Shoebox
            Entertainment, dated April 27, 1999. (10)

  10.40     Advertising Agreement by and between the Registrant and Jack Wagner
            and Kristina Wagner, dated June 24, 1999. (10)

  10.41     Exchangeable Preferred Stock and Warrant's Purchase Agreement, by
            and among the Registrant and the several investors set forth
            therein, dated as of October 25, 1999. (9)

  10.42     Certificate of Designations, Preferences and Rights of Series A
            Exchangeable Preferred Stock of the Registrant as filed November 16,
            1999. (9)

  10.43     For of Stock Purchase Warrant, dated as of October 25, 1999. (9)

  10.44     Registration Rights Agreement, dated as of October 25, 1999, by and
            among the Registrant and the several investors set forth therein.
            (9)

  10.45     Exchangeable Preferred Stock and Warrants Purchase Agreement, by and
            among the Registrant and the several investors set forth therein,
            dated as of February 24, 2000. (10)

  10.46     Certificate of Designations, Preferences and Rights of Series B
            Exchangeable Preferred Stock of the Registrant, as filed March 3,
            2000. (10)

  10.47     Form of B-1 Stock Purchase Warrant, dated as of February 24, 2000.
            (10)

  10.48     Form of B-2 Stock Purchase Warrant, dated as of February 24, 2000.
            (10)

  10.49     Registration Rights Agreement, dated as of February 24, 2000, by and
            among the Registrant and the several investors set forth therein.
            (10)

  10.50     Third amendment to promissory note in the principal amount of
            $2,500,000 and fifth amendment to credit agreement and waiver, dated
            as of March 23, 2000, by and between the Registrant and Imperial
            Bank. (10)

  10.51     Third Addendum to Lease between DMD and Frank Parker.

  10.52     Fourth Addendum to Lease between DMD and Frank Parker

  10.53     License Agreement between DMD and GC E.

  10.54     Fifth Amendment and Restated Forbearance Agreement between DMD and
            Imperial Bank.

  21.1      Subsidiaries of the Registrant. (10)

  23.1      Consent of PricewaterhouseCoopers LLP.

  24.1      Power of Attorney (included in signature page attached to this Form
            10-K/SB).

----------

*   The Registrant has requested Confidential Treatment of portions of the
    referenced exhibit.

(1) Incorporated by reference to exhibits to Pre-effective Amendment No. 1 to
    the Registration Statement on Form SB-2 of the Registrant filed on April 7,
    1997 (File No. 333-22507).

                                       48
<PAGE>

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

 (3)      Incorporated by reference to exhibits to Pre-effective Amendment No. 2
          to the Registrant's Registration Statement on Form SB-2 filed on
          April 30 (File No. 333-22507).

 (4)      Incorporated by reference to exhibits to the Registrant's Report on
          Form 10-QSB, dated November 30, 1996.

 (5)      Incorporated by reference from the Registrant's Report on Form 8-K,
          dated March 1, 1996.


                                       49
<PAGE>

 (6)       Incorporated by referenced from exhibits to the Registrant's Report
           on Form 10-QSB dated September 30, 1997.

 (7)       Incorporated by reference to exhibits to Registrant's Report on Form
           10-KSB for the fiscal year ended December 31, 1997.

 (8)       Incorporated by reference to exhibits to the Registrant's Report on
           Form 10-KSB for the fiscal year ended December 31, 1998.

 (9)       Incorporated by reference to exhibits to Registrant's Current Report
           on Form 8-K dated November 23, 1999, filed on December 8, 1999.

 (10)      Incorporated by reference to exhibits to Registrant's Report on Form
           10-KSB for the fiscal year ended December 31, 1999, filed on March
           30, 2000.

 (b) REPORTS ON FORM 8-K.

       There were no reports on Form 8-K filed on the quarter ended December 31,
2000.

                                       50
<PAGE>

                                  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 on Form 10KSB
to be signed on its behalf by the undersigned thereunto duly authorized in the
City of Los Angeles and State of California on the 13th day of March, 2000.

                                    DENTAL/MEDICAL DIAGNOSTIC SYSTEMS, INC.

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

      Each person whose signature appears below constitutes and appoints Robert
H. Gurevitch, and each of them, as his true and lawful attorneys-in-fact and
agents with full power of substitution and resubstitution, for him and his name,
place and stead, in any and all capacities, to sign any or all amendments to
this Annual Report on Form 10KSB and to file the same, with all exhibits
thereto, and other documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorneys-in-fact and agents, and each
of them, full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the foregoing, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or either of them, or
their substitutes, may lawfully do or cause to be done by virtue hereof.

    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>

/s/ Robert H. Gurevitch        Chairman, Chief Executive Officer, and Director       April 13, 2001
--------------------------
Robert H. Gurevitch


/s/ Jack D. Preston                           Director                               April 13, 2001
--------------------------
Jack D. Preston


/s/ Stephen F. Ross         Chief Financial Officer, Principal Accounting Officer    April 13, 2001
--------------------------
Stephen F. Ross


/s/ Marvin H. Kleinberg                       Director                               April 13, 2001
--------------------------
Marvin H. Kleinberg

/s/ John A. Khademi                           Director                               April 13, 2001
--------------------------
John A. Khademi
</TABLE>
                                      51