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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, 1999

                          COMMISSION FILE NO. 0-12850

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

<TABLE>
<S>                                            <C>
                   DELAWARE                                      13-3152648
       (STATE OR OTHER JURISDICTION OF                        (I.R.S. EMPLOYER
        INCORPORATION OR ORGANIZATION)                      IDENTIFICATION NO.)
     200 N. WESTLAKE BOULEVARD, SUITE 202
         WESTLAKE VILLAGE, CALIFORNIA                              91362
   (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)                      (ZIP CODE)
</TABLE>

         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, 1999 were
$38,180,996.

     At March 24, 2000, the issuer had 6,497,564 shares of Common Stock, $0.01
par value per share, 2,000 shares of Series A Preferred Stock, $.01 par value
per share, and 2,250 shares of Series B Preferred Stock, $.01 par value per
share 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 27, 2000 was $14,282,168.

                      DOCUMENTS INCORPORATED BY REFERENCE

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

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     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.

                                     PART I

ITEM 1. DESCRIPTION OF BUSINESS

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 1999 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),
a line of composite resin materials known as "ASAP -- Accelerated Solutions for
Aesthetic Procedures," also for use with the Apollo(TM). Due to less than
expected sales, the Company discontinued the composite product line in the first
quarter of 2000. In addition, the Company manufactures and sells intraoral
camera systems, known as the "TeliCam II System," and "TeliCam Elite," and a
multi-operatory intraoral camera system, known as the "InTELInet," for use in
connection with the TeliCam II System and TeliCam Elite. In September of 1999,
the company introduced a digital dental x-ray device known as
"MPDx(TM)-MegaPixel Diagnostic System or MPDx(TM)".

     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 which will be sold directly to consumers. 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.

     On February 2, 1998, the Company formed "DMDS, Ltd.," a wholly owned
subsidiary created under the laws of the United Kingdom. The Company markets its
products internationally through DMDS, Ltd.

BUSINESS STRATEGY

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

          Delivery of Innovative, Value-Oriented Products. The Company seeks to
     provide innovative products that offer a strong price-value relationship to
     its customers. The Company endeavors to deliver products that offer, or
     will offer, greater or differentiated operating features, such as the
     Company's Apollo(TM) (described below) which can cure most composite
     materials in just three seconds per layer, as compared with the 10-40
     seconds per layer it takes other competing brands of curing lamps, and is
     able to whiten teeth in under 40 minutes. The Company plans to develop a
     cordless version of the Apollo(TM) featuring a new light source technology
     as well as a cordless version of the intraoral camera for customer

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     release during the third quarter of 2000. The Company introduced MPDx(TM),
     an innovative digital x-ray technology, into the worldwide marketplace in
     September 1999. MPDx(TM) provides the thinnest sensors available and
     significantly reduces the patient exposure to radiation.

          Ongoing Commitment to Product Development. The Company is continually
     seeking innovative technology to incorporate into its dental products. From
     inception (October 23, 1995) through December 31, 1999, the Company has
     devoted approximately $4.47 million to product development activities,
     including approximately $1,823,000 in fiscal 1999. The dental market is
     highly competitive and the Company believes that its focus on new and
     improved technologies is essential if the Company is to continue to grow
     and maintain a competitive position in the marketplace.

          Growth Through Acquisitions and Licensing Agreements. The Company
     anticipates that it will complement its internal growth, both in number of
     products and sales, through acquisitions and licensing agreements and a
     focus on developing and marketing new technologies for the dental practice.
     The Company believes that acquisitions and licensing agreements present an
     effective means of obtaining technical personnel and obtaining or expanding
     technologies, products and markets. The Company continually evaluates
     opportunities for acquisitions and licensing agreements.

          Expansion of Domestic and International Sales. Although both the
     domestic and international dental supply markets are highly competitive,
     the Company believes that the size of these markets provides an opportunity
     for growth. The Company increased its sales in the current year through the
     introduction of new products, namely the digital x-ray device (MPDx(TM)),
     and increased sales of existing products including the composite curing and
     tooth whitening device (Apollo(TM)) and the related whitening consumable,
     Apollo Secret(R). The Company plans to introduce a hand held version of the
     Apollo(TM) and a cordless intraoral camera during the third quarter of
     2000. In addition, the Company introduced a tooth whitening kit for home
     use known as Apollo Secret(R) Home Whitening Kits in the first quarter of
     2000. Also, in 1999, in an effort to expand international sales of its
     current and future products, the Company has changed its marketing strategy
     in the two biggest markets in Europe, Germany and the United Kingdom, by
     acquiring the assets of the third party distributors with which the Company
     previously had agreements to distribute the Company's products in those
     respective countries. The Company believes that by duplicating its domestic
     marketing strategy in Germany and the United Kingdom of selling directly to
     dentists, the Company has increased its opportunity for revenue growth
     because of the increased direct access to customers. The Company intends to
     capitalize on its experienced management and sales team to increase its
     domestic and international sales.

CURRENT 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 enables 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

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     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 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 under 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 which 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.

     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 world-wide 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 three quarters, sales have declined due to
competition as competitor's lamps curing time became closer to the 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 the more
acceptance it will receive from the dental industry.

     On October 2, 1998, the Company entered into an agreement with Chrysalis
Dental, Inc. ("CDI") which grants to the Company the exclusive worldwide license
to make or have made, use, or sell patent pending tooth whitening products
created by CDI. Under this license, the Company has begun marketing its own line
of tooth whitening gels (Apollo Secret(R)), intended for use with the Apollo(TM)
and competing lamps.

     Since the introduction of the Apollo(TM) in March 1998, and through
December 31, 1999, the Company has sold 4,928 units internationally, and 8,741
units domestically.

  MPDx(TM), Digital X-ray

     The Company has 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 obtained exclusive
rights to market products to the dental market incorporating certain digital
x-ray

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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 is in the process of obtaining UL and CE approval for MPDx(TM). From
the time of its first introduction in September of 1999, an aggregate of 266
MPDx(TM) digital x-ray systems have been sold by the Company. 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.

  The TeliCam, 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). Currently, the Company's primary
intraoral camera is the "TeliCam Elite," which was introduced into the market
during the second quarter of 1998. The distinguishing feature that sets the
TeliCam apart from competing intraoral dental cameras is the proprietary "Teli"
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 Teli CCU processor incorporates an automatic light
intensity control which substantially eliminates reflection and glare from the
intraoral illumination providing clearer video images. The Company has exclusive
worldwide rights to market the Teli CCU processor to the dental market. Through
December 31, 1999, the Company had sold an aggregate of 8,833 TeliCam I, TeliCam
II and TeliCam Elite Systems to dentists throughout the United States, as well
as to several dental schools, and an aggregate of 3,328 TeliCam I, TeliCam II
and TeliCam Elite Systems internationally.

     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 $6.3 million in the year ended December 31,
1999, and gross margins for intraoral cameras declined from 70% in the year
ended December 31, 1998 to 35% in the year ended December 31, 1999. The Company
is currently researching new technological advancements and clinical uses for
its line of intraoral cameras.

  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
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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
the digital x-ray technology. From the time of its first introduction in late
November 1996, through December 31, 1999, an aggregate of 1,025 InTELInet
multiple operatory networking systems have been sold by the Company.

  Product Development.

     The Company intends to pursue growth through new product development and
introduction and by improving and updating its current products to respond to
competitive pressures.

     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. If
a 510(k) Clearance, or a pre-market notification from the FDA, has then been
received the Company plans to introduce this lamp in the third quarter of 2000.
The Company believes that it will receive a 510(k) Clearance from the FDA for
this product before or during the third quarter of 2000.

     On September, 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 has
begun marketing its own line of in-home whitening kits. The Apollo Secret(R)
Home Whitening Kits use pre-filled trays and the treatments are for 15 minutes
for five days. The product does not require dentist supervision, so it can be
sold directly to the public. The Company introduced this product in the first
quarter of 2000. The other home tooth-whitening method requires 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.

     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 which can be saved onto a floppy disk. The
Company believes that the camera provides better depth of field, connects to a
PC by USB port (no video boards required), and has remote freeze frame ability.
The Company is in the process of obtaining CE approval for the product. The
product has not at this time been submitted for FDA or UL approval. If a 510(k)
Clearance from the FDA and UL approval has then been obtained, the Company
currently plans to introduce this product in the third quarter of 2000. The
Company believes that it will receive a 510(k) Clearance from the FDA and UL
approval for this product before or during the third quarter of 2000.

     The Company expended approximately $1,823,000, $549,000, and $1,214,000 for
research and development of its products for the fiscal years ended December 31,
1999, 1998 and 1997, respectively.

MANUFACTURING AND COMPONENT PARTS

     The Company assembles and tests the Apollo(TM) curing and whitening lamps,
MPDx(TM) digital x-ray system, the TeliCam Elite video camera system and the
TeliCam II video camera system sold worldwide at its

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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. With the exception of the
TeliCam's CCU processor and MPDx(TM) sensors, the Company believes that there
are multiple sources from which it may purchase the components for the
Apollo(TM) and the TeliCam Systems. The Company anticipates that the single
sources that it obtains the CCU processor component of the TeliCam System and
MPDx(TM) sensors from are capable of meeting projected demand for the
foreseeable future. Although the Company believes that, if necessary, it will be
able to negotiate satisfactory alternative supply arrangements, failure to do so
may have a material adverse effect on the Company. Furthermore, there can be no
assurance that suppliers will dedicate sufficient production capacity to satisfy
the Company's requirements within scheduled delivery times or at all. Failure or
delay by the Company's suppliers in fulfilling its anticipated needs may
adversely affect the Company's ability to market the Apollo(TM), MPDx(TM) and
the TeliCam Systems.

     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. While the term of the BMC Distribution
Agreement expires on December 31, 2000, it may be extended by mutual agreement
of the Company and Boston Marketing for an additional five-year term. As of the
date hereof, the Company has not made a determination as to whether it will
attempt to renew this agreement. Management believes that, if necessary, other
CCD chips, CCU processors and frame grabbers could be obtained from third-party
suppliers on comparable terms, although a disruption in supplies of components
could extend for up to six months, which would materially adversely affect the
Company's operating results.

     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, an aggregate of 266 MPDx(TM) digital x-ray
systems have been sold by the Company. 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.

     On December 16, 1999, the Company entered into a manufacturing agreement
with S.E.D. under which S.E.D. was given the rights to assemble, test and
package the Company's hand-held curing light incorporating the cure lamp
developed by Light Technologies for the Company. The Company is currently
working with S.E.D. to produce a hand-held curing light that meets the Company's
specifications. While the Company believes that an acceptable device will be
manufactured, no assurance can be given that S.E.D. will be able to produce a
product which will meet the Company's specifications. 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. The Company cannot begin
shipping products under this agreement to the market until it receives 510(k)
notification. If 510(k) notification is received, the Company intends to begin
introducing the hand held light for sale worldwide in the third quarter of 2000.

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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. The Company's domestic sales are made by five
full-time employees who are based at corporate headquarters, and a national
field force of eighteen 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 TeliCam II, the TeliCam Elite
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 148, 127, 75, and 70
dental conferences and trade shows during 1999, 1998, 1997 and 1996,
respectively. 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 products at the initial stages of a dental
professional's career. With the introduction of the Apollo Secret(R) Whitening
Kits, the Company is considering using Infomericals to market the product.

     International Sales and Distribution. In the international market, with the
exception of the United Kingdom and Germany, the Company sells the Apollo(TM)
and the TeliCam System 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

                                        8
<PAGE>   9

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.

TRAINING, CUSTOMER SUPPORT AND PRODUCT SERVICE

     Management believes that operating the Company's products requires very
little training of dentists or other dental professionals. As part of the
Company's customer service program, the sales representative or international
distributor responsible for the sale of the TeliCam, the Telicam Elite and the
Apollo(TM) schedules an installation and training appointment when the system is
delivered. For the MPDx(TM) product, the Company has contracted with x-ray
certified technicians to perform training. In addition, the Company provides a
systems operating manual to its customers which provides answers to frequently
asked questions about the product's operations. The Company's technical support
personnel, and internationally, the support personnel of the Company's
distributors, are also available to answer customers telephone inquiries during
normal business hours. All 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 retained
by the Company. The Company developed a program for training, customer support
and service for the products which was introduced in June 1999.

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

     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 proprietary technology for the TeliCam is not protected
by any patents. 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.

                                        9
<PAGE>   10

     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 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

                                       10
<PAGE>   11

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 the Telicam Intraoral Camera, the Apollo(TM), and MPDx(TM) and has
applications pending for a hand held cordless curing lamp and a cordless, remote
controlled, high-resolution, intraoral camera. The Company expects to receive
FDA 510(k) notification for these products prior to or during the third quarter
of 2000.

     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 transferrable 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 is seeking 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 March 26, 2000, no 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
                                       11
<PAGE>   12

TeliCam System. 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.

     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 the
TeliCam System 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 ASAP composite materials are Bisco,
Jeneric/Pentron, Kerr, 3M, Dentsply/Caulk, Ultradent Products and
Heraeus/Kulzer. The Company's principal domestic competitors for the MPDx(TM)
are Schick, Dexis, and Trophy.

     The Company also faces competition in its international markets, where the
Company competes on the basis of price and product quality against the same
dental product distributors and manufacturers.

EMPLOYEES

     At March 10, 2000, the Company had 111 full-time and 2 temporary employees,
97 in the United States, 6 in the UK, 6 in Belgium and 5 in Germany. Of the U.S.
employees, 42 were involved in production, 12 were in customer service, 25 were
in administration, 12 were engaged in sales and marketing, and 6 were involved
in engineering and research and development. Of the UK employees, 2 were in
administration and 9 were engaged in sales and marketing, and 6 were in involved
in customer service. The Company believes it has a good relationship with its
employees and none of its employees are represented by a collective bargaining
agreement.

ITEM 2. DESCRIPTION OF PROPERTIES

     The corporate headquarters and principal offices of the Company are located
in Westlake Village, California, consisting of approximately 3,900 square feet
of space under a lease that expires on November 14, 2000 ("Office Lease"). The
Office Lease provides for aggregate minimum monthly rental payments of
approximately $6,200. On January 15, 1999, the Company entered into a sublease
for approximately 1,300 square feet of space adjacent to the principal offices
("Office Sublease"). The Office Sublease expires on June 30, 2000, and provides
for aggregate minimum monthly rental payments of approximately $2,500. Because
the Company felt its existing space was inadequate, on January 25, 2000, the
Company entered to a lease in Woodland Hills, California consisting of
approximately 23,800 square feet of office space (the "New Office Lease") with
the plans to move the corporate headquarters to that facility in April of 2000.
The New Office Lease expires on February 28, 2005, and provides for aggregate
minimum monthly rental payments of approximately $25,466. The Company leases a
facility in Irvine of approximately 12,000 square feet, under a lease that
expires October 31, 2000 at a rental payment of $7,560 per month to perform
these functions. On September 16, 1999, the Company entered into a lease of
approximately 5,600 square feet of additional warehouse facility adjacent to the
Irvine Facility. The lease expires on October 31, 2000, and provides for
aggregate minimum monthly rental payments of approximately $3,640. The Company
believes that the Irvine Facility and the New Office Lease will provide it with
adequate space for the next 2 years. 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.

                                       12
<PAGE>   13

ITEM 3. LEGAL PROCEEDINGS

     The Company is not involved in any material legal proceedings.

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

     None.

                                       13
<PAGE>   14

                                    PART II

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. 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>
March 31, 1998......................................  $8.00    $5.88    $4.00    $2.69
June 30, 1998.......................................   7.50     4.00     3.50     1.50
September 30, 1998..................................   5.50     3.63     2.13     1.13
December 31, 1998...................................   6.75     4.00     2.88     1.38
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
</TABLE>

     On March 8, 2000, the high bid and low ask prices were $2.875 and $2.50,
respectively for the Common Stock and $1.00 and $0.875, respectively, for the
Redeemable Common Stock Purchase Warrants. As of February 22, 2000, there were
204 stockholders of record and approximately 1,400 beneficial holders of common
stock.

  Recent Sales of Unregistered Securities

     On March 3, 2000, the Registrant sold to Esquire Trade & Finance, Inc.,
Austinvest Anstalt Balzers, AMRO International, S.A., Leval Trading and The
Keshet Fund, L.P. (the "Series B Investors") an aggregate of 2,250 shares of
Series B Exchangeable Preferred Stock (the "Series B Shares") and Warrants to
purchase up to 675,000 shares of Common Stock (the "Series B Warrants") for an
aggregate purchase price of $2.25 million. Ladenburg Thalmann & Co., Inc. acted
as placement agent for the Company in connection with this transaction and
received a fee equal to $157,500 and 5 year warrants to purchase up to 64,725
shares of Common Stock at an initial exercise price of $2.51 per share (the
"Landenburg Warrants"). The Series B Shares, the Series B Warrants and the
Landenburg Warrants were issued in reliance upon Section 4(2) of the Securities
Act of 1933 (the "Act") and Rule 506 of Regulation D promulgated thereunder.

     Each Series B Share has a stated value of $1,000 per share and is
exchangeable into common stock at a price per share equal to the lesser of the
average of the closing bid prices of the common stock during the five (5)
trading day period immediately prior to the original issuance date or one
hundred percent (100%) of the Market Price on the date of exchange. If the
exchange price at the time of an exchange is less than $6.00 per share, the
Company has the option to pay the holder of the Series B Shares then being
exchanged an amount of cash equal to (i) the average of the closing bid and
asked prices on the date of the exchange, multiplied by (ii) the number of
shares of common stock that would otherwise be issuable upon exchange of the
Series B Shares then being exchanged. If (A) on or after February 23, 2003, or
(B) the average of the closing bid prices for the Company's common stock for
five (5) consecutive trading days is at least $10.00 per share and the average
trading volume for thirty (30) consecutive trading days is at least 50,000
shares, there remain issued and outstanding any Series B Shares and a
registration statement permitting the resale by the holder of the Series B
Shares the common stock into which such Series B Shares may be exchanged is then
effective,

                                       14
<PAGE>   15

the Company shall be entitled to require all holders of Series B Shares then
outstanding to exchange their Series B Shares for shares of common stock.

     The Series B Investors also received the Series B Warrants to purchase an
aggregate of (i) up to 225,000 shares of Common Stock at an exercise price per
share of $2.51, exercisable at any time on or after August 24, 2000 for a period
of five (5) years and (ii) up to 450,000 shares of Common Stock at an exercise
price of $3.50 per share, exercisable at any time on or after February 29, 2000
and on or prior to the close of business on November 30, 2000. On March 3, 2000,
to induce its consent to the issuance and sale of the Series B Shares and the
Series B Warrants, the Company issued to Endeavour Capital Fund, S.A., a warrant
to purchase up to 10,000 shares of Common Stock of the Company at an initial
exercise price of $2.8125 per share, exercisable at any time on or after
February 29, 2000 and on or prior to the close of business on November 30, 2000
(the "Endeavour Warrant"). The Endeavour Warrant was issued in reliance upon
Section 4(2) of the Act and Rule 506 of Regulation D promulgated thereunder.

     On November 23, 1999, the Company sold to AMRO International, S.A., The
Endeavour Capital Fund, S.A., Esquire Trade & Finance, Inc., and Austinvest
Anstalt Balzers (the "Series A Investors") an aggregate of 2,000 shares of
Series A Exchangeable Preferred Stock (the "Series A Shares"), 2,500 shares of
Common Stock (the "Common Shares") and Warrants to purchase up to 40,000 shares
of Common Stock (the "Series A Warrants") for an aggregate purchase price of $2
million. The Company did not use a placement agent in connection with its sale
of the Series A Shares. The Series A Shares, the Common Shares and the Series A
Warrants were issued in reliance upon Section 4(2) of the Act and Rule 506 of
Regulation D promulgated thereunder.

     Each Series A Share has a stated value of $1,000 per share and is
exchangeable into common stock (a) prior to March 15, 2000, at $4.00 per share
and (b) on and after March 15, 2000, 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. If the exchange price at the time of an
exchange is less than $6.00 per share, the Company has the option to pay the
holder of the Series A Shares then being exchanged an amount of cash equal to
(i) the average of the closing bid and asked prices on the date of the exchange,
multiplied by (ii) the number of shares of common stock that would otherwise be
issuable upon exchange of the Series A Shares then being exchanged. If (A) on or
after November 16, 2002, or (B) at any time after March 15, 2000 the average of
the closing bid prices for the Company's common stock for twenty (20)
consecutive trading days is at least $8.00 per share and the average trading
volume for thirty (30) consecutive trading days is at least 50,000 shares, there
remain issued and outstanding any Series A Shares and a registration statement
permitting the resale by the holder of the Series A Shares the common stock into
which such Series A Shares may be exchanged is then effective, the Company shall
be entitled to require all holders of Series A Shares then outstanding to
exchange their Series A Shares for shares of common stock.

     The investors also received the Series A Warrants to purchase an aggregate
of 40,000 shares of Common Stock at $2.75 per share, exercisable at any time on
or after March 15, 2000 for a period of five (5) years.

     On October 15, 1999, the Company acquired the exclusive worldwide license
agreement for certain home-use tooth whitening products from Chrysalis Dental,
Inc. ("Chrysalis") through the issuance of 100,000 shares of common stock (the
"Chrysalis Shares") to certain affiliates of Chrysalis. The Chrysalis Shares
were issued in reliance upon Section 4(2) of the Act and Rule 506 of Regulation
D promulgated thereunder. The shares were registered for resale on a Form S-3
Registration Statement filed on January 18, 2000 and subsequently declared
effective.

     On September 28, 1999, the Company acquired the worldwide rights, title,
and interest for certain curing light technology from Plasma X France ("Plasma
X") through the issuance of 50,000 shares of common stock (the "Plasma X
Shares"). The Plasma X Shares were issued in reliance upon Section 4(2) of the
Act and Rule 506 of Regulation D promulgated thereunder.

     On March 1, 1999, DMDS, Ltd. purchased the assets of DMD Germany ("DMD
GmbH"), an independent company organized under the laws of Germany. The Company
issued 100,000 shares of its

                                       15
<PAGE>   16

common stock, (the "DMD GmbH Shares"), as the consideration for the purchase of
the assets. The DMD GmbH Shares were issued in reliance upon Section 4(2) of the
Act and Rule 506 of Regulation D promulgated thereunder. 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 DMD Germany and used in the conduct
of the business 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. The Company
issued 50,000 shares of its common stock, (the "Midas Shares"), as the
consideration for the purchase of the assets. The Midas Shares were issued in
reliance upon Section 4(2) of the Act and Rule 506 of Regulation D promulgated
thereunder. 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.

                                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.

                                       16
<PAGE>   17

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, manufactures and
sells high technology dental equipment and related consumables. The Company's
highest grossing product for the 1999 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), and a line of composite resin materials known as
"ASAP -- Accelerated Solutions for Aesthetic Procedures," which product line
will be discontinued in the first quarter of 2000, also for use in conjunction
with the Apollo(TM). Starting in September of 1999, the Company began marketing
and sell the MPDx(TM) digital x-ray system. In addition, the Company continues
to manufacture and sell intraoral camera systems, known as the "TeliCam II
System," and "TeliCam Elite," and a multi-operatory intraoral camera system,
known as the InTELInet, for use in connection with the TeliCam II System and
TeliCam Elite

     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.

     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 has
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.

RESULTS OF OPERATIONS

     The Company derives 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, 1999, the sales of Apollo Secret(R), ASAP and the
MPDx(TM) systems have been less than 15% of total sales.

                                       17
<PAGE>   18

     Revenues by product line, for the fiscal years ended December 31, 1999,
1998, and 1997 are reflected in the following table:

<TABLE>
<CAPTION>
                                              1997         %        1998         %        1999         %
                                           -----------    ---    -----------    ---    -----------    ---
<S>                                        <C>            <C>    <C>            <C>    <C>            <C>
Apollo(TM)...............................  $        --     --    $11,125,629     58%   $26,233,445     69%
TeliCam..................................   15,367,806     96%     6,555,540     34%     6,263,014     16%
MPDx(TM).................................           --     --             --     --      1,186,615      3%
Consumables..............................           --     --        593,060      3%     2,605,521      7%
Other....................................      719,402      4%       953,569      5%     1,892,401      5%
                                           -----------    ---    -----------    ---    -----------    ---
                                           $16,087,208    100%   $19,227,798    100%   $38,180,996    100%
                                           ===========    ===    ===========    ===    ===========    ===
</TABLE>

     Net Sales. Net sales for the fiscal years ended December 31, 1999, 1998 and
1997, were $38,180,996, $19,227,798, and $16,087,208, respectively.

     Net sales for the fiscal year ended December 31, 1999 increased
approximately 99% from the prior year. Net sales for the fiscal year ended
December 31, 1998 increased approximately 19% from the fiscal year ended
December 31, 1997. Sales in 1999 are comprised primarily of the Apollo(TM),
TeliCam Systems, MPDx(TM) digital x-ray systems, and related consumables. The
increase in sales for the fiscal years ended December 31, 1999 and 1998 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, offset in 1998 by reduced
TeliCam sales both domestically and internationally resulting from weaker demand
and increased competition as the market for intraoral cameras matured. 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 TeliCam sales to
continue into the future. No assurance can be given that the Apollo(TM) sales
will continue to offset the reduced TeliCam sales in the future.

     Cost of Sales. Cost of sales for the fiscal years ended December 31, 1999,
1998 and 1997, were $22,144,868, or 58% of net sales, and $9,820,882, or 51% of
net sales, and $10,234,206, or 64% of net sales, respectively. 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. The Company wrote down $805,771 of certain inventory as part of its
ongoing assessment of its needs and the estimated net realizability of the
inventory. Excluding the effect of the fourth quarter writedowns, cost of sales
was 56% of net sales in 1999. Cost of sales, both on an absolute dollar basis
and as a percentage of net sales, decreased from 1997 to 1998 primarily due to
more favorable margins on the Apollo(TM), which represented 58% of net sales for
the year. The Company expects that the margins on the sale of the TeliCams will
continue to shrink, and thus the cost of sales of the TeliCams as a percentage
of TeliCam net sales will increase in the future.

     Selling, General and Administrative Expenses. Selling, general and
administrative expenses totaled $19,659,552, or 51% of net sales, $8,764,910, or
46% of net sales, and $6,031,066, or 37% of net sales, for the fiscal years
ended December 31, 1999, 1998, and 1997, respectively. The absolute dollar
increases in this expense category from year to year are primarily attributed to
a combination of increased sales commissions resulting from increased sales
volumes, increased salaries and legal expenses associated with the Company's
growth, and increased marketing costs resulting from enhanced marketing efforts.
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
consisted primarily of increased commissions of $1,563,049. The increase in
selling, general and administrative expenses as a percentage of net sales from
1997 to 1998 can be attributed to the cost of expanding the Company's work force
in anticipation of future growth.

                                       18
<PAGE>   19

     In early 1999 the Company introduced a composite resin material known as
"ASAP -- Accelerated Solutions for Aesthetic Procedures," for use in conjunction
with the Apollo(TM) into the consumable product line. Due to the high cost of
advertising and lack of related sales volume, the Company decided to discontinue
selling and marketing the composite material during the first quarter of 2000;
however, composites will continue to be sold until the current inventory has
been depleted. Fourth quarter sales and cost of goods sold for the composites
were $412,082 and $171,247; respectively. Fourth quarter operating costs
relating to the composites totaled $901,951, or 2% of net sales, of which
$763,925 was for advertising which are included in sales, general and
administrative expenses.

     Research and Development. Research and development expenses totaled
$1,823,003, or 5% of net sales, $549,304, or 3% of net sales and $1,213,766, or
8% of net sales, for the fiscal years ended December 31, 1999, 1998, and 1997,
respectively. The increase in research and development expenses from fiscal 1998
to fiscal 1999 is due to continued development of the MPDx(TM) digital x-ray
which began shipping late in the third quarter, and the development of a new
cordless camera and a hand-held curing light. Both the decrease in research and
development expenses for fiscal 1998 as compared to fiscal 1997, both on an
absolute dollar basis and as a percentage of net sales, is primarily attributed
to $875,000 of fees paid to Suni Imaging Microsystems, Inc. to fund the
development of the digital x-ray technology for incorporation into systems for
the dental market during the fiscal year ended December 31, 1997. The Company
expects research and development expenses to increase in future periods, as it
continues to pursue the development of new technologies. See "Risk Factors -- As
a result of the decline in sales of the TeliCam, our future depends on our
ability to develop and introduce new products."

     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. Nonrecurring charges of $256,250 in 1997 consist of
costs to acquire exclusive distribution rights of an independent distributor.

     Interest and Other Income. Interest and other income totaled $434,321,
$195,532, and $205,818 for the fiscal years ended December 31, 1999, 1998, and
1997. The interest income in 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 1997 and 1998 is attributed to
the interest earned by investing the net proceeds of both the May 1997 secondary
offering and the March 1998 debt placement in a short-term management account
through Comerica Securities.

     Interest Expense. Interest expense totaled $1,055,813, $1,739,693 and
$138,576 for the fiscal years ended December 31, 1999, 1998, and 1997,
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. Both the substantial increase in fiscal 1998 and
the decrease in fiscal 1999 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 $64,519, $235,484, and $76,431
for the fiscal years ended December 31, 1999, 1998, and 1997, respectively. This
represents 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, 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. Net loss for the fiscal year ended
December 31, 1997 totaled $2,044,729, or $0.47 per share.

                                       19
<PAGE>   20

CAPITAL RESOURCES AND LIQUIDITY

     For the fiscal year ended December 31, 1999, the Company used net cash of
$7,382,404 in operations as compared to $3,781,610 used in 1998. Accounts
receivable increased from $3,757,865 at December 31, 1998 to $5,756,048 at
December 31, 1999, primarily as a result of the increase in sales in the fourth
quarter. Accounts payable and accrued liabilities totaling $6,765,718 at
December 31, 1999 increased from $3,653,831 at the prior year-end period
primarily due to increased inventory purchases. Inventory levels increased
approximately $2.3 million to accommodate the introduction of the digital x-ray
system.

     Cash used in investing activities was $604,000 in 1999 compared to $971,000
used in 1998. Capital expenditures for the year ended December 31, 1999 were
approximately $604,000, with approximately $78,000 spent for the purchase of
furniture and fixtures and approximately $317,000 spent for computer equipment
with the remainder consisting of equipment, tooling and software acquisitions.
Capital expenditures were approximately $722,000 in 1998. In addition, cash used
in investing activities in 1998 included the acquisition of intangible assets of
approximately $304,000.

     Cash provided by financing activities was approximately $8.9 million in
1999 as compared to $4.7 million in 1998. The increase resulted from the
issuance of 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. The Imperial
facility comprises a $2,500,000 fixed rate non-revolving line of credit due May
31, 2000; a $4,000,000 variable rate revolving line of credit due May 31, 2000;
and a $450,000 variable interest rate loan repayable in 16 monthly installments.
The facilities are collateralized by our assets. We intend to use the credit
facilities, when needed, for working capital, capital expenditures and general
corporate purposes. 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. At December 31, 1999, $6,702,593 was
outstanding under the Imperial facility. In March 2000, Imperial Bank extended
the repayment terms on the facility such that the Company is required to repay;
the outstanding fixed rate non-revolving line of credit in installments of
$100,000 commencing March 31, 2000 through April 30, 2001 with the balance due
on May 31, 2001; the $4,000,000 term loan on May 31, 2001, and the variable
interest rate loan on May 31, 2001. In connection with the extension the Company
is required to pay additional interest and issue warrants to purchase up to
75,000 shares of common stock to the Bank. These warrants have an initial
exercise price of $2.50 and are exercisable for a period of seven years.

     On July 16, 1999 we raised approximately $5,000,000 in additional capital
by selling 901,000 shares of common stock to eight investors. The shares were
issued in a private placement and were then subsequently registered for resale
on a Form S-3 Registration Statement filed on July 23, 1999 and subsequently
declared effective.

     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.

     As of the end of March 2000, minimum purchase obligations under the BMC
Agreement and the purchase obligations under the Suni Manufacturing Agreement,
are the only significant future commitments which will be financed by cash from
continuing operations.

                                       20
<PAGE>   21

     Based on our working capital at December 31, 1999, and subsequent sale of
preferred stock together with the extended maturity date of our credit facility,
we believe we have sufficient resources to fund working capital requirements for
the next twelve months.

YEAR 2000 ISSUE

     The Year 2000 problem arises from the inability of information systems, and
other time and date sensitive products and systems, to properly recognize and
process date-sensitive information or system failures. The Year 2000 issue has
an impact on both information technology systems and non-information technology
systems, such as its manufacturing systems and physical facilities including,
but not limited to, security systems and utilities.

     To date, the Company has not experienced a material Year 2000 problem
relating to its information technology or non-information technology systems and
has not been informed of any Year 2000 problem relating to the information
technology or non-information technology systems of its vendors or customers
that could have a material adverse effect on the results of operations,
liquidity or financial condition of the Company. During the year ended December
31, 1999, the Company did not spend a material amount to assess the Year 2000
compliance of its information technology and non-information technology systems
and that of its material vendors. The Company does not intend to make further
assessments of the Year 2000 problem and does not anticipate incurring any
additional expenses related to the Year 2000 problem.

FUTURE ACCOUNTING REQUIREMENTS

     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. SFAS
133 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 our earnings or our financial position, but we will continue to
evaluate the impact of SFAS 133.

     In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial
Statements," which provides the SEC's views on applying generally accepted
accounting principles to selected revenue recognition issues. The Company is
presently evaluating the impact, if any, that this may have on the Company's
revenue recognition policy.

                                  RISK FACTORS

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

     We have only manufactured and distributed our TeliCam systems since October
1995 and manufactured and distributed our Apollo(TM) since March 1998 and we
began manufacturing and distributing our digital x-ray systems in September
1999. Therefore, we have a limited relevant operating history upon which to
evaluate the likelihood of our success. Factors such as the risks, expenses and
difficulties frequently encountered in the operation and expansion of a
relatively new business and the development and marketing of new products must
be considered in evaluating the likelihood of success of our company.

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 year ended December 31, 1997 we had a net
loss of $2,044,729, for the fiscal year ended December 31, 1998 we had a net
loss of $1,816,702, and for the fiscal year ended December 31, 1999 we had a net
loss of $6,727,638. At December 31, 1999, our accumulated deficit was
$12,077,131. Our ability to obtain and sustain profitability will depend, in
part, upon the successful marketing of our existing products and the successful
and

                                       21
<PAGE>   22

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. Sales are generally
higher in the fourth quarter due to the purchasing patterns of dentists in the
United States and are generally lower in the first quarter due primarily to the
effect upon demand of increased purchases in the prior quarter. It is also
expected that our business will experience lower sales in the summer months as a
consequence of holiday vacations and a lesser number of trade shows. These
fluctuations could result in significant fluctuations, including significant
declines in our stock price.

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

     The TeliCam systems, together with related products such as the InTELInet
system, and the Apollo(TM) have been our primary products and have made up a
substantial portion of our revenue. We believe that the market for intraoral
cameras, such as the TeliCam systems, is a market that has declined. TeliCam
systems sales have recently been at or below levels of prior comparable periods,
a trend that we expect to continue.

AS A RESULT OF DECLINING INTRAORAL CAMERA MARKET, OUR FUTURE DEPENDS ON OUR
ABILITY TO DEVELOP AND INTRODUCE NEW PRODUCTS.

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

     - long-term forecasting of market trends;

     - the development and implementation of new designs;

     - compliance with extensive governmental regulatory requirements; and

     - a substantial capital commitment.

     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 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 requirements, or if there are any significant delays in product
development or introduction, this could have a material adverse effect on our
business.

WE WILL NEED ADDITIONAL MONEY TO FINANCE RESEARCH AND DEVELOPMENT OF NEW
PRODUCTS.

     We anticipate that we will need additional money during fiscal 2000 to
finance research and development requirements for new products. We are currently
exploring alternatives to fulfill these requirements, but cannot assure you that
additional financing will be available when needed or that, if available, it
will be on terms favorable to us. If needed funds are not available, we may be
required to limit or forego the development of new products, 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 it may
result in dilution to current stockholders.

                                       22
<PAGE>   23

WE SUBSTANTIALLY DEPEND UPON THIRD PARTIES FOR SEVERAL CRITICAL ELEMENTS OF OUR
BUSINESS, INCLUDING THE DEVELOPMENT AND LICENSING FOR DISTRIBUTION OF OUR
PRODUCTS AND IF THESE THIRD PARTIES DO NOT DELIVER WE MAY BE FORCED TO LIMIT
OPERATIONS.

     We are dependent upon 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. 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, we were forced to find an
alternative product to that which we had contracted with ILT.

IF WE DO NOT MAKE CERTAIN REQUIRED MINIMUM ROYALTY PAYMENTS TO SUNI, WE WILL
LOSE OUR EXCLUSIVE RIGHTS TO THE DIGITAL X-RAY TECHNOLOGY DEVELOPED FOR US BY
SUNI.

     In order to maintain our rights to be the exclusive dental licensee of the
digital x-ray technology developed by Suni, our agreement with Suni requires us
to make minimum royalty payments to Suni, and we must purchase a significant
amount of certain products manufactured by Suni. The royalty payments began
coming due when products incorporating the developed technology were introduced
to the market. We cannot guarantee that we will be able to make the minimum
royalty payments required to maintain our rights to be the exclusive
distributor, nor can we guarantee that we will be able to purchase the amount of
products that are required to maintain our right to be the exclusive
distributor. If we do not make the required royalty payments, Suni will 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
operating results and financial condition.

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, 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

     - 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 premarket approval application or FDA approval
of an application for 510k clearance. FDA conducts periodic inspections to
assure compliance with its regulations. The Company has applications pending for
a hand held cordless curing lamp and a cordless, remote controlled,
high-resolution, intraoral camera. The Company expects to receive FDA 510(k)
notification for these products prior to or during the third quarter of 2000.
Any delay in receipt of FDA 510(k) notification for these products will delay
our ability to market and sell these products and could allow our competitors to
develop and introduce competing products.

                                       23
<PAGE>   24

     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
including any new products using digital x-ray technology. 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 HAVE SIGNIFICANT PROTECTION FROM 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. Patent protection is being sought 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)
systems, 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 financial condition.

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 the
rights thereof, may have the effect of delaying, deterring or preventing a
change in control.

                                       24
<PAGE>   25

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 more vulnerable areas of the human 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 $1,000,000 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.

OUR RECENT SALES OF SERIES A AND B EXCHANGEABLE PREFERRED STOCK, COMMON STOCK
AND WARRANTS TO PURCHASE COMMON STOCK MAY RESULT IN SUBSTANTIAL DILUTION TO OUR
COMMON SHAREHOLDERS.

     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.

     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 Exchangeable Preferred Stock then being exchanged. As a
result, the holders will likely be in a position to exchange their shares for
shares of common stock at a discount to the then current trading price of our
common stock.

     Holders of Series B Exchangeable Preferred Stock may exchange their shares
into common stock at a price per share equal to the lesser of the average of the
closing bid prices of the common stock during the five (5) trading day period
immediately prior to the original issuance date or one hundred percent (100%) of
the Market Price on the date of exchange. As a result, the holders of Series B
Exchangeable Preferred Stock may be in a position to exchange their shares of
common stock at a discount to the then current trading price of our common
stock.

     The conversion price of our Series A Preferred Stock and Series B Preferred
Stock is variable and may dilute the price of our common stock. Each Series A
Share has a stated value of $1,000 per share and is exchangeable into common
stock (a) prior to March 15, 2000, at $4.00 per share and (b) on and after March
15, 2000, 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.
Each Series B Share has a stated value of $1,000 per share and is exchangeable
into common stock at a price per share equal to the lesser of the average of the
closing bid prices of the common stock during the five (5) trading day period
immediately prior to the original issuance date or one hundred percent (100%) of
the Market Price on the date of exchange. If the trading price of our common

                                       25
<PAGE>   26

stock declines, the number of shares of Common Stock into which the Series A
Preferred Stock and Series B Preferred Stock may exchange will increase. The
following table illustrates this effect:

<TABLE>
<CAPTION>
                     NUMBER OF SHARES OF COMMON            NUMBER OF SHARES OF COMMON
                  STOCK INTO WHICH 2,000 SHARES OF      STOCK INTO WHICH 2,250 SHARES OF         PERCENTAGE OF
   ASSUMED          SERIES A PREFERRED STOCK MAY          SERIES B PREFERRED STOCK MAY       OUTSTANDING SHARES OF
EXCHANGE PRICE                EXCHANGE                              EXCHANGE                     COMMON STOCK
--------------   -----------------------------------   -----------------------------------   ---------------------
<S>              <C>                                   <C>                                   <C>
    $2.75                       727,273                               818,182                        23.8%
     2.50                       800,000                               900,000                        26.2%
     2.25                       888,889                             1,000,000                        29.1%
     2.00                     1,000,000                             1,125,000                        32.7%
</TABLE>

WE REQUIRE STOCKHOLDER APPROVAL OR AN ADDITIONAL CASH PAYMENT FOR WHICH WE DO
NOT CURRENTLY HAVE SUFFICIENT FUNDS AND MUST SEEK ADDITIONAL FINANCING.

     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 is 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 have agreed
with the purchasers of the Series A Preferred Stock and the Series B Preferred
Stock that we will 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 attempted 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. Because, in connection
with the sale of shares of Series B Preferred Stock, we issued warrants to
purchase up to 675,000 shares of common stock (10% of our then outstanding
common stock), if we do not receive stockholder approval of the Series B
transaction we will likely have to honor the exchange of a significant number of
shares of Series B Preferred Stock in cash. We do not currently have sufficient
funds to honor the exchange of a significant number of shares of Series A
Preferred Stock or Series B Preferred Stock in cash., and any efforts by the
holders of Series A Preferred Stock or Series B Preferred Stock to receive cash
in exchange for shares of Series A Preferred Stock or Series B Preferred Stock
could have a material adverse effect on our liquidity and financial condition.
If we are obligated to honor the exchange of shares of Series A Preferred Stock
or Series B Preferred Stock in cash, we would likely have to obtain considerable
financing to fulfill the obligation. We cannot guarantee that such financing
will be available or, if available, that it can be obtained on terms
satisfactory to us or on terms favorable to the holders of our common stock.

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.

     Exchange of shares of our Series A Preferred Stock or Series B Preferred
Stock into common stock at a discount to the market price of our common stock
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.

IF THE TRADING PRICE OF OUR COMMON STOCK FALLS BELOW $1.00, WE MAY BE DELISTED
FROM THE NASDAQ STOCK MARKET AND THE BOSTON STOCK EXCHANGE.

     The closing sale price of our Common Stock on March 24, 2000 was $2.41 per
share. 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

                                       26
<PAGE>   27

$1.00. If the trading price per share of our common stock falls below $1.00, we
may be delisted from the Nasdaq Small Cap Market and the Boston Stock Exchange.
If we were delisted from the Nasdaq Small Cap Market and the Boston Stock
Exchange, trading in our common stock, if any, would 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.

     If our Common Stock is delisted from trading on Nasdaq and the Boston Stock
Exchange and the trading price is less than $5.00 per share, trading in our
Common Stock would 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.

A LARGE VOLUME OF SALES OF OUR COMMON STOCK RESULTING FROM THE EXCHANGE OF
SHARES OF SERIES A AND B EXCHANGEABLE PREFERRED STOCK AND/OR THE EXERCISE OF
WARRANTS MAY RESULT IN DOWNWARD PRESSURE OR INCREASED VOLATILITY IN THE TRADING
PRICE OF OUR COMMON STOCK.

     Because we have agreed to register for resale the 2,500 shares of Common
Stock and the shares of Common Stock issuable upon exchange or exercise of the
Series A and B Exchangeable Preferred Stock and the Warrants, 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 Series A and B Exchangeable Preferred Stock
and the Warrants 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.

IF WE FAIL TO TIMELY EFFECT AN EXCHANGE OF SERIES A AND B EXCHANGEABLE PREFERRED
STOCK FOR SHARES OF COMMON STOCK, WE MAY BE LIABLE FOR SIGNIFICANT LIQUIDATED
DAMAGES.

     We have agreed to effect an exchange of Series A and B Exchangeable
Preferred Stock into Common Stock within four (4) trading days of receipt of a
notice from a holder of Series A or B Exchangeable Preferred Stock requesting an
exchange. If we fail to effect an exchange of Series A Exchangeable Preferred
Stock into Common Stock within four (4) trading days of receipt of a valid
notice, we have agreed to pay to the holder of Series A and B Exchangeable
Preferred Stock requesting the exchange liquidated damages in an amount equal to
$100 per day for the first ten (10) days and $200 per day thereafter for each
$5,000 in liquidation preference amount then being exchanged. An obligation to
pay these liquidated damages could have a material adverse effect on our
liquidity and cash flows.

                                       27
<PAGE>   28

ITEM 7. FINANCIAL STATEMENTS

                    DENTAL/MEDICAL DIAGNOSTIC SYSTEMS, INC.

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
                                                              PAGE
                                                              ----
<S>                                                           <C>
Report of Independent Accountants...........................   29
Consolidated Balance Sheets as of December 31, 1999 and
  1998......................................................   30
Consolidated Statements of Operations for the Fiscal Years
  ended December 31, 1999, 1998 and 1997....................   31
Consolidated Statements of Stockholders' Equity for the
  Fiscal Years ended December 31, 1999, 1998 and 1997.......   32
Consolidated Statements of Cash Flows for the Fiscal Years
  ended December 31, 1999, 1998 and 1997....................   33
Consolidated Statements of Comprehensive Loss for the Fiscal
  Years ended December 31, 1999, 1998 and 1997..............   34
Notes to Consolidated Financial Statements..................   35
</TABLE>

                                       28
<PAGE>   29

                       REPORT OF INDEPENDENT ACCOUNTANTS

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

     In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, stockholders' equity, cash flows
and comprehensive loss present fairly, in all material respects, the financial
position of Dental/Medical Diagnostic Systems, Inc. and its subsidiaries (the
"Company") at December 31, 1999 and 1998, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1999, in conformity with accounting principles generally accepted in the
United States. 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 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 the opinion expressed above.

/s/ PricewaterhouseCoopers LLP
Woodland Hills, CA
March 17, 2000 except for the
subsequent event described
in Note 10, as to which the
date is March 23, 2000

                                       29
<PAGE>   30

            DENTAL/MEDICAL DIAGNOSTIC SYSTEMS, INC. AND SUBSIDIARIES

                          CONSOLIDATED BALANCE SHEETS
                        AS OF DECEMBER 31, 1999 AND 1998

                                     ASSETS

<TABLE>
<CAPTION>
                                                                  1999           1998
                                                              ------------    -----------
<S>                                                           <C>             <C>
Current assets
  Cash and cash equivalents.................................  $  4,615,501    $ 3,941,305
  Accounts receivable, less allowance for returns and
     doubtful accounts of $448,081 and $20,975 at December
     31, 1999 and 1998......................................     5,756,048      3,757,865
  Inventories...............................................     7,835,377      5,559,751
  Prepaid expenses and other current assets.................     1,226,199      1,332,427
  Debt issuance costs, net of accumulated amortization......            --         64,516
                                                              ------------    -----------
          Total current assets..............................    19,433,125     14,655,864
  Property and equipment, net of accumulated depreciation...     1,302,758        996,940
  Intangible assets, net of accumulated amortization........     2,031,521        798,437
  Loans to related parties..................................        70,000         70,000
  Other assets..............................................       988,458         49,119
                                                              ------------    -----------
          Total assets......................................  $ 23,825,862    $16,570,360
                                                              ============    ===========
                          LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Current portion of capital lease obligations..............  $     18,670    $    22,440
  Current portion of long term debt.........................       122,320      4,277,505
  Line of credit............................................     1,000,000        114,630
  Accounts payable..........................................     4,514,639      2,413,767
  Accrued liabilities.......................................     2,251,079      1,240,064
  Customer deposits.........................................       205,102         60,833
                                                              ------------    -----------
          Total current liabilities.........................     8,111,810      8,129,239
  Borrowings under line of credit...........................            --        229,260
  Long term notes payable...................................     5,702,593             --
  Capital lease obligations.................................            --         22,935
  Other long term liabilities...............................            --         15,061
                                                              ------------    -----------
                                                                13,814,403      8,396,495
Commitments and contingencies (Note 12)
Mandatory redeemable preferred stock, stated value $1,000
  per share; 2,000 shares issued and outstanding at December
  31, 1999 (liquidation value of $2,000,000)................     1,816,343             --
Stockholders' equity:
  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; 6,497,564 and 5,255,694 shares issued and
     outstanding at December 31, 1999 and 1998..............        64,975         52,556
  Additional paid in capital................................    20,535,345     13,469,597
  Accumulated deficit.......................................   (12,077,131)    (5,349,493)
  Cumulative translation adjustment.........................      (328,073)         1,205
                                                              ------------    -----------
          Total stockholders' equity........................     8,195,116      8,173,865
                                                              ------------    -----------
          Total liabilities and stockholders' equity........  $ 23,825,862    $16,570,360
                                                              ============    ===========
</TABLE>

  The accompanying notes are an integral part of these consolidated financial
                                  statements.
                                       30
<PAGE>   31

            DENTAL/MEDICAL DIAGNOSTIC SYSTEMS, INC. AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF OPERATIONS
              FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997

<TABLE>
<CAPTION>
                                                         1999           1998           1997
                                                      -----------    -----------    -----------
<S>                                                   <C>            <C>            <C>
Net sales...........................................  $38,180,996    $19,227,798    $16,087,208
Cost of sales.......................................   22,144,868      9,820,882     10,234,206
                                                      -----------    -----------    -----------

  Gross profit......................................   16,036,128      9,406,916      5,853,002

Selling, general and administrative expense.........   19,659,552      8,764,910      6,031,066
Research and development expense....................    1,823,003        549,304      1,213,766
Non-recurring charge................................      566,893           __--        256,250
                                                      -----------    -----------    -----------

  Operating (loss) income...........................   (6,013,320)        92,702     (1,648,080)

Interest and other income...........................     (434,321)      (195,532)      (205,818)
Interest expense....................................    1,055,813      1,739,693        138,576
Amortization of debt issuance costs.................       64,519        235,484         76,431
                                                      -----------    -----------    -----------

Loss before income taxes and extraordinary item.....   (6,699,331)    (1,686,943)    (1,657,269)

Provision for income taxes..........................       28,307        129,759        153,311
                                                      -----------    -----------    -----------

Loss before extraordinary item......................   (6,727,638)    (1,816,702)    (1,810,580)

Extraordinary loss on early extinguishment of debt
  (net of tax benefit of $143,511)..................           --             --       (234,149)
                                                      -----------    -----------    -----------

          Net loss..................................  $(6,727,638)   $(1,816,702)   $(2,044,729)
                                                      ===========    ===========    ===========

Basic and diluted loss per share before
  extraordinary item................................  $     (1.15)   $      (.35)   $      (.42)

Basic and diluted loss per share after extraordinary
  item..............................................  $     (1.15)   $      (.35)   $      (.47)

Basic and diluted weighted average number of
  shares............................................    5,839,416      5,151,614      4,341,498
</TABLE>

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

                                       31
<PAGE>   32

            DENTAL/MEDICAL DIAGNOSTIC SYSTEMS, INC. AND SUBSIDIARIES

                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
              FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997

<TABLE>
<CAPTION>
                                                    COMMON STOCK       ADDITIONAL                   CUMULATIVE
                                                 -------------------     PAID IN     ACCUMULATED    TRANSLATION
                                                  SHARES     AMOUNT      CAPITAL       DEFICIT      ADJUSTMENT       TOTAL
                                                 ---------   -------   -----------   ------------   -----------   -----------
<S>                                              <C>         <C>       <C>           <C>            <C>           <C>
Balance, December 31, 1996.....................  2,985,537   $29,855   $ 2,695,832   $ (1,488,062)   $      --    $ 1,237,625
  Issuance of common stock for cash, net of
    issuance costs.............................  2,120,000    21,200     8,509,192             --           --      8,530,392
  Exercise of stock options....................     10,240       102         8,910             --           --          9,012
  Amortization of deferred
    compensation...............................         --        --        57,850             --           --         57,850
  Net loss.....................................         --        --            --     (2,044,729)          --     (2,044,729)
                                                 ---------   -------   -----------   ------------    ---------    -----------
Balance, December 31, 1997.....................  5,115,777    51,157    11,271,784     (3,532,791)          --      7,790,150
  Issuance of common stock for distribution
    rights.....................................    100,000     1,000       461,500             --           --        462,500
  Issuance of warrants with Senior Subordinated
    Notes......................................         --        --     1,619,755             --           --      1,619,755
  Exercise of stock options....................     39,917       399       116,558             --           --        116,957
  Net loss.....................................         --        --            --     (1,816,702)          --     (1,816,702)
  Translation adjustment.......................         --        --            --             --        1,205          1,205
                                                 ---------   -------   -----------   ------------    ---------    -----------
Balance, December 31, 1998.....................  5,255,694    52,556    13,469,597     (5,349,493)       1,205      8,173,865
  Issuance of common stock and warrants in
    connection with preferred stock offering...      2,500        25        83,632             --           --         83,657
  Issuance of common stock for cash, net of
    issuance costs.............................    901,000     9,010     4,960,767             --           --      4,969,777
  Issuance of common stock for acquisitions....    150,000     1,500     1,142,250             --           --      1,143,750
  Issuance of common stock for acquisition of
    technology and distribution rights.........    150,000     1,500       611,000             --           --        612,500
  Issuance of stock options to non-employees...         --        --        89,437             --           --         89,437
  Exercise of stock options and warrants.......     38,370       384       178,662             --           --        179,046
  Net loss.....................................         --        --            --     (6,727,638)          --     (6,727,638)
  Translation adjustment.......................         --        --            --             --     (329,278)      (329,278)
                                                 ---------   -------   -----------   ------------    ---------    -----------
Balance, December 31, 1999.....................  6,497,564   $64,975   $20,535,345   $(12,077,131)   $(328,073)   $ 8,195,116
                                                 =========   =======   ===========   ============    =========    ===========
</TABLE>

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

                                       32
<PAGE>   33

            DENTAL/MEDICAL DIAGNOSTIC SYSTEMS, INC. AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF CASH FLOWS
          FOR THE FISCAL YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997

<TABLE>
<CAPTION>
                                                                 1999           1998           1997
                                                              -----------    -----------    -----------
<S>                                                           <C>            <C>            <C>
Cash flows from operating activities:
  Net loss..................................................  $(6,727,638)   $(1,816,702)   $(2,044,729)
    Adjustments to reconcile net loss to net cash used by
       operating activities:
    Depreciation and amortization...........................      779,365        338,462         16,562
    Amortization of debt issue costs........................       64,516        235,484         76,431
    Amortization of debt discount...........................      348,435      1,271,790             --
    Allowance for returns and doubtful accounts.............      427,174             --        (86,428)
    Inventory write down....................................    1,005,772        156,620         29,205
    Extraordinary item......................................           --             --        377,660
    Amortization of deferred compensation...................           --             --         57,850
    Deferred taxes..........................................           --             --         90,000
    Deferred rent...........................................      (15,061)         4,009         (3,046)
    Common stock and stock options issued for services......       89,437             --             --
    Changes in operating assets and liabilities:
       Accounts receivable..................................   (2,490,970)    (1,782,471)      (722,742)
       Inventories..........................................   (3,297,867)    (2,818,298)    (1,412,400)
       Prepaid expenses and other current assets............       92,539       (941,706)      (180,509)
       Other assets.........................................     (939,339)       442,831       (449,680)
       Accounts payable.....................................    2,088,891        889,808        433,080
       Accrued liabilities and income taxes payable.........    1,048,073        220,725        538,430
       Customer deposits....................................      144,269         17,838          9,388
                                                              -----------    -----------    -----------
         Net cash used by operating activities..............   (7,382,404)    (3,781,610)    (3,270,928)
                                                              -----------    -----------    -----------
Cash flows from investing activities:
  Loans to related parties..................................           --         56,000       (126,000)
  Purchase of intangible assets.............................           --       (304,494)       (86,950)
  Purchase of property and equipment........................     (603,804)      (722,056)      (284,082)
                                                              -----------    -----------    -----------
         Net cash used in investing activities..............     (603,804)      (970,550)      (497,032)
                                                              -----------    -----------    -----------
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................................   (5,095,186)            --             --
  Repayment of bridge loan..................................           --             --     (1,600,000)
  Repayments on borrowings to related parties...............           --        (45,030)      (227,936)
  Principal payments on capital lease obligations...........      (26,705)       (17,839)       (21,282)
  Issuance of common stock through exercise of options and
    warrants................................................      179,046        116,957          9,012
  Issuance of common stock..................................    4,969,777             --      8,530,392
  Issuance of mandatory redeemable preferred stock..........    1,900,000             --             --
                                                              -----------    -----------    -----------
         Net cash provided by financing activities..........    8,880,822      4,723,487      6,690,186
                                                              -----------    -----------    -----------
         Net increase (decrease) in cash and cash
           equivalents......................................      894,614        (28,673)     2,922,226
Effect of exchange rate changes on cash and cash
  equivalents...............................................     (220,418)       (11,084)            --
Cash and cash equivalents, beginning of period..............    3,941,305      3,981,062      1,058,836
                                                              -----------    -----------    -----------
Cash and cash equivalents, end of period....................  $ 4,615,501    $ 3,941,305    $ 3,981,062
                                                              ===========    ===========    ===========
Supplemental cash flow information:
  Interest paid.............................................  $   455,215    $   310,615    $   281,693
  Income taxes paid.........................................       48,840         17,553         50,279
Supplemental schedule of non-cash investing and financing
  activities:
  Issuance of common stock for acquisition of businesses....  $ 1,143,750    $        --    $        --
  Issuance of common stock for acquisition of intangible
    assets..................................................      612,500        462,500             --
</TABLE>

  The accompanying notes are an integral part of these consolidated financial
                                  statements.
                                       33
<PAGE>   34

            DENTAL/MEDICAL DIAGNOSTIC SYSTEMS, INC. AND SUBSIDIARIES

                 CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
          FOR THE FISCAL YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997

<TABLE>
<CAPTION>
                                                         1999           1998           1997
                                                      -----------    -----------    -----------
<S>                                                   <C>            <C>            <C>
Net loss............................................  $(6,727,638)   $(1,816,702)   $(2,044,729)
Other comprehensive income (loss):
  Foreign currency translation adjustment...........     (329,278)         1,205             --
                                                      -----------    -----------    -----------
Comprehensive loss..................................  $(7,056,916)   $(1,815,497)   $(2,044,729)
                                                      ===========    ===========    ===========
</TABLE>

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

                                       34
<PAGE>   35

            DENTAL/MEDICAL DIAGNOSTIC SYSTEMS, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 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), and in the second quarter of 1999 introduced a line of
composite resin materials known as "ASAP -- Accelerated Solutions for Aesthetic
Procedures." In the first quarter of 2000 it was decided to discontinue the ASAP
product line. In addition, the Company continues to manufacture and sell
intraoral camera systems, known as the "TeliCam II System," and "TeliCam Elite,"
and a multi-operatory intraoral camera system, known as the InTELInet, for use
in connection with the TeliCam II System and TeliCam Elite." In the third
quarter of 1999, the Company introduced the MPDx(TM) digital x-ray system.

     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. Gerant, 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.

 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

  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.

                                       35
<PAGE>   36
            DENTAL/MEDICAL DIAGNOSTIC SYSTEMS, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

  Revenue Recognition

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

  Cash and Cash Equivalents

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

  Inventories

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

  Property and Equipment

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

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

  Patents, Trademarks and Other Intangibles

     Patents, trademarks and other intangibles are carried at cost less
accumulated amortization which is calculated on a straight-line basis over the
estimated useful lives of the assets, ranging from five to 15 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.

  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, 1999, 1998
and 1997, were $6,702,775, $2,256,179, and $1,528,203, respectively. Prepaid
advertising and promotion costs at December 31, 1999 and 1998 were $541,489 and
$376,316, respectively.

  Research and Development Costs

     Costs related to research and development are expensed as incurred.

                                       36
<PAGE>   37
            DENTAL/MEDICAL DIAGNOSTIC SYSTEMS, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

  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.

  Stock-Based Employee Compensation Awards

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

  Concentration of Credit Risk and Major Customers

     Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of 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, 1999, 1998 and 1997 international
customers accounted for 45%, 40%, and 24% of sales, respectively. At December
31, 1999 and 1998, 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, 1999.

     The Company performs ongoing credit evaluations of its customers' financial
condition and generally does not require collateral. 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.

  Computation of Earnings Per Share

     The Company adopted Statement of Financial Accounting Standards (SFAS) No.
128; "Earnings Per Share" for the year ended December 31, 1997, and has reported
earnings per common share for all periods presented in accordance with the new
standard. 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

                                       37
<PAGE>   38
            DENTAL/MEDICAL DIAGNOSTIC SYSTEMS, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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, 1999, 1998, and 1997 potential common shares related to
1,268,979, 891,806, and 600,881 stock options, respectively, and 4,339,844,
4,300,000, and 4,300,000, stock warrants, respectively, are 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.

     The following is a reconciliation of accumulated other comprehensive income
balance for the year ended December 31, 1999 and 1998.

<TABLE>
<CAPTION>
                                                    1999        1998
                                                  ---------    ------
<S>                                               <C>          <C>
Beginning balance...............................  $   1,205    $   --
Current period change...........................   (329,278)    1,205
                                                  ---------    ------
Ending balance..................................  $(328,073)   $1,205
                                                  =========    ======
</TABLE>

  Foreign Currency

     Financial statements of foreign subsidiaries are translated in 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. Gains (losses)
resulting from foreign currency transactions are included in the statement of
operations and amounted to ($119,824), ($69,726) and $0 for the years ended
December 31, 1999, 1998 and 1997, respectively.

  Reclassifications

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

  Future Accounting Requirements

     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. SFAS
133 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 our earnings or our financial position, but we will continue to
evaluate the impact of SFAS 133.

     In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial
Statements," which provides the SEC's views on applying

                                       38
<PAGE>   39
            DENTAL/MEDICAL DIAGNOSTIC SYSTEMS, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

generally accepted accounting principles to selected revenue recognition issues.
The Company is presently evaluating the impact, if any, that this may have on
the Company's revenue recognition policy.

 3. RELATED PARTY TRANSACTIONS

     On May 27, 1997, the Company loaned Dewey Perrigo, Vice President of Sales
of the Company, and Andrea Niemiec-Perrigo, an employee of the Company, $126,000
for the purpose of buying a home. The Promissory Notes evidencing such loans
bear interest at prime plus .25% (8.0% at December 31, 1998), and are 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.

 4. INVENTORIES

     Inventories consisted of the following at December 31, 1999 and 1998:

<TABLE>
<CAPTION>
                                                                 1999          1998
                                                              ----------    ----------
<S>                                                           <C>           <C>
Raw materials...............................................  $3,446,566    $2,313,810
Work in process.............................................   1,092,058       874,002
Finished goods..............................................   3,296,753     2,371,939
                                                              ----------    ----------
                                                              $7,835,377    $5,559,751
                                                              ==========    ==========
</TABLE>

 5. PREPAID EXPENSES AND OTHER CURRENT ASSETS

     Prepaid expenses and other current assets consisted of the following at
December 31, 1999 and 1998:

<TABLE>
<CAPTION>
                                                                 1999          1998
                                                              ----------    ----------
<S>                                                           <C>           <C>
Prepaid advertising and industry trade show fees............  $  541,489    $  376,316
Prepaid royalties...........................................     100,000            --
Prepaid inventory...........................................          --       220,219
VAT recoverable.............................................          --       321,254
Other.......................................................     584,710       414,638
                                                              ----------    ----------
                                                              $1,226,199    $1,332,427
                                                              ==========    ==========
</TABLE>

 6. PROPERTY AND EQUIPMENT

     Property and equipment consisted of the following at December 31, 1999 and
1998:

<TABLE>
<CAPTION>
                                                                 1999          1998
                                                              ----------    ----------
<S>                                                           <C>           <C>
Equipment and software, including $88,250 and $112,853 of
  capitalized leases at December 31, 1999 and 1998..........  $1,392,629    $1,128,919
Furniture and fixtures......................................     625,579       295,360
Leasehold improvements......................................      52,723        47,251
                                                              ----------    ----------
                                                               2,070,931     1,471,530
Less accumulated depreciation and amortization, including
  $70,067 and $45,142 relating to capitalized leases at
  December 31, 1999 and 1998................................    (768,173)     (474,590)
                                                              ----------    ----------
                                                              $1,302,758    $  996,940
                                                              ==========    ==========
</TABLE>

                                       39
<PAGE>   40
            DENTAL/MEDICAL DIAGNOSTIC SYSTEMS, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

 7. INTANGIBLE ASSETS

     Intangible assets consisted of the following at December 31, 1999 and 1998:

<TABLE>
<CAPTION>
                                                                 1999          1998
                                                              ----------    ----------
<S>                                                           <C>           <C>
Patents and trademarks......................................  $  384,523    $  395,905
Excess cost over fair value of assets acquired..............   1,115,338            --
License agreements..........................................     875,000       462,500
Acquired technology.........................................     200,000            --
                                                              ----------    ----------
                                                               2,574,861       858,405
Less accumulated amortization...............................    (543,340)      (59,968)
                                                              ----------    ----------
                                                              $2,031,521    $  798,437
                                                              ==========    ==========
</TABLE>

     On October 2, 1998, the Company acquired the exclusive worldwide license
agreement for certain tooth whitening products from Chrysalis Dental, Inc.
through the issuance of 100,000 shares of common stock valued at $462,500.

     On March 1, 1999, the Company issued 150,000 shares of common stock for the
purchase of DMD Germany and Midas Limited, resulting in $1,115,338 of excess
cost over estimated fair value of assets acquired.

     On September 28, 1999, the Company acquired worldwide rights, title, and
interest for certain curing light technology from Plasma X France through the
issuance of 50,000 shares of common stock valued at $200,000.

     On October 15, 1999, the Company acquired the exclusive worldwide license
agreement for certain home-use tooth whitening products from Chrysalis Dental,
Inc. through the issuance of 100,000 shares of common stock valued at $412,500.

 8. OTHER ASSETS

     Other assets consisted of the following at December 31, 1999 and 1998:

<TABLE>
<CAPTION>
                                                                 1999          1998
                                                              ----------    ----------
<S>                                                           <C>           <C>
Prepaid royalties...........................................  $  575,000    $       --
Deposits....................................................      69,347        49,119
Other.......................................................     344,111            --
                                                              ----------    ----------
                                                              $  988,458    $   49,119
                                                              ==========    ==========
</TABLE>

                                       40
<PAGE>   41
            DENTAL/MEDICAL DIAGNOSTIC SYSTEMS, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

 9. ACCRUED LIABILITIES

     Accrued liabilities consisted of the following at December 31, 1999 and
1998:

<TABLE>
<CAPTION>
                                                                 1999          1998
                                                              ----------    ----------
<S>                                                           <C>           <C>
Accrued purchase receipts...................................  $  623,571    $       --
Accrued commissions.........................................     516,064       362,019
Accrued royalties...........................................     169,334            --
Accrued salaries, wages, and payroll taxes..................     156,992        84,661
Accrued advertising.........................................     125,535        78,983
Accrued vacation............................................     103,578        64,225
Accrued warranty............................................      90,813        85,000
Accrued income taxes payable................................      15,302       124,452
Accrued interest............................................          --       161,488
Deferred revenue............................................          --        32,866
Accrued other...............................................     449,890       246,370
                                                              ----------    ----------
                                                              $2,251,079    $1,240,064
                                                              ==========    ==========
</TABLE>

10. BORROWINGS UNDER LINE OF CREDIT AND NOTES PAYABLE

     On July 1, 1997, the Company finalized a credit agreement with Comerica
Bank ("Comerica") extending up to a $2,000,000 line of credit to the Company,
collateralized by a first priority security interest in the Company's assets and
by an assignment of the Company's rights under the Boston Marketing Distribution
Agreement. The credit facility bore interest at the rate of prime plus .25% per
annum (8.00% at December 31, 1998). All borrowings under the facility were
subject to a formula based, generally, on accounts receivable and inventory. No
amounts were outstanding under this line of credit at December 31, 1998.

     On December 10, 1997, the Company finalized a second agreement with
Comerica Bank ("Comerica") extending up to a $500,000 line of credit to the
Company for capital expenditures, collateralized by a first priority interest in
the Company's assets. The credit facility bore interest at a rate of prime plus
 .5% per annum (8.25% at December 31, 1998). The line expired on December 10,
1998, at which time the principal balance began to amortize over a thirty-six
(36) month period. Borrowings were at 80% of the capital expenditure. At
December 31, 1998, $343,890 was outstanding under this line of credit. The
outstanding balance was repaid in full in 1999.

     On January 4, 1999, the Company replaced its credit agreements with
Comerica with a $6,950,000 facility with Imperial Bank ("Imperial"). The
Imperial facility comprises of a $2,500,000 fixed rate non-revolving line of
credit due May 31, 2000 of which $1,766,000 bears interest of 9.0% at December
31, 1999 and $734,000 bears interest of 8.01% at December 31, 1999; a $4,000,000
variable rate revolving line of credit loan due May 31, 2000 bearing interest of
9.0% at December 31, 1999; and a $450,000 variable interest rate loan repayable
in 16 monthly installments through May 31, 2000 bearing interest of 9.25% at
December 31, 1999. The facilities are collateralized by the assets of the
Company. The credit facility also requires the Company to comply with certain
financial and non-financial covenants. The Company intends to use the credit
facilities, when needed, for working capital, capital expenditures and general
corporate purposes. On January 21, 1999, the Company borrowed against the
Imperial facility to repay the balance owed to Comerica capital credit line of
$343,890 plus accrued interest of $1,120. On January 25, 1999, the Company
borrowed against the Imperial facility to repay the $4,500,000 12% Senior
Subordinated Notes plus accrued interest of $189,000. At December 31, 1999,
$2,400,000, $4,000,000, and $302,593 was outstanding under the fixed rate
non-revolving line of credit, the variable revolving line of credit, and the
variable rate loan, respectively. The Company was in violation of certain
financial covenants at December 31, 1999 for which it received a waiver.

                                       41
<PAGE>   42
            DENTAL/MEDICAL DIAGNOSTIC SYSTEMS, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

     On March 23, 2000, the Company amended its facility with Imperial Bank to
modify certain of its financial covenants and to 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 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, the Company granted the bank 75,000 warrants at
an exercise price of $2.50 per share. The financial statements reflect the
amended repayment terms. The maturity period is as follows:

<TABLE>
<S>                                        <C>
2000.....................................  $1,000,000
2001.....................................   5,702,593
                                           ----------
                                           $6,702,593
                                           ==========
</TABLE>

11. NOTES PAYABLE:

     Notes payable consisted of the following at December 31, 1999 and 1998:

<TABLE>
<CAPTION>
                                                                1999         1998
                                                              --------    ----------
<S>                                                           <C>         <C>
$4,500,000 12% Senior Subordinated Notes due March 19, 1999,
  net of unamortized discount of $348,435...................  $     --    $4,151,565
Notes payable to certain individuals bearing interest at 12%
  at December 31, 1998. Due on demand prior to December
  2000......................................................   122,320       125,940
                                                              --------    ----------
                                                              $122,320    $4,277,505
                                                              ========    ==========
</TABLE>

12. COMMITMENTS AND CONTINGENCIES

  Leases

     As of December 31, 1999 the Company leases four facilities under operating
leases that expire in 2000 of which two will not be renewed. On January 25,
2000, the Company leased a fifth facility under an operating lease that expires
in 2005. The leases require the Company to pay taxes, maintenance fees, and
insurance and provide for periodic fixed rent increases based on a published
price index. The Company also leases certain equipment under capital leases that
expire in 2000 and has the right to purchase the underlying equipment at the
termination of the leases for its fair market value. Rent expense for all
operating leases was approximately $196,000, $189,000, and $132,000 for the
fiscal years ended December 31, 1999, 1998 and 1997, respectively. Two of the
facility leases are guaranteed by Robert H. Gurevitch, Chief Executive Officer
and Chairman of the Board of the Company.

                                       42
<PAGE>   43
            DENTAL/MEDICAL DIAGNOSTIC SYSTEMS, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

     The aggregate liability for future rentals under lease agreements with
noncancelable lease terms in excess of one year as of December 31, 1999, is
summarized as follows:

<TABLE>
<CAPTION>
                                                              CAPITAL   OPERATING
                   YEAR ENDED DECEMBER 31                     LEASES      LEASES
                   ----------------------                     -------   ----------
<S>                                                           <C>       <C>
2000........................................................  $19,956   $  424,394
2001........................................................       --      305,592
2002........................................................       --      314,760
2003........................................................       --      324,203
2004........................................................       --      333,929
                                                              -------   ----------
                                                               19,956   $1,702,878
                                                              =======   ==========
Less amounts representing:
  Interest..................................................    1,286
  Current portion...........................................   18,670
                                                              -------
Long term portion...........................................  $    --
                                                              =======
</TABLE>

  Distribution Agreements

     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.

     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 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 can be offset against future 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

                                       43
<PAGE>   44
            DENTAL/MEDICAL DIAGNOSTIC SYSTEMS, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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 fees
offsettable against future royalty payments.

     On October 2, 1998, the Company entered into an agreement with Chrysalis
Dental, Inc. to acquire the exclusive worldwide license agreement for certain
new tooth whitening products ("New Products"). Pursuant to the terms of the
agreement the Company is required to pay minimum annual royalties during the
term of the agreement. Should the Company fail to make the minimum annual
royalty payments after December 31, 2000, the Company shall have the option to
convert the exclusive agreement to a non-exclusive agreement and thereafter
forego payment of the minimum annual royalties. The Company is also required to
pay specified royalties on the net sales of the New Products by the Company in
excess of the minimum payments.

     On September 29, 1999, the Company entered into another agreement with
Chrysalis Dental, Inc. to acquire the exclusive worldwide license agreement for
certain additional tooth whitening products ("New Products"). Pursuant to the
terms of the agreement the Company is required to pay minimum annual royalties
during the first three years of the agreement. Should the Company fail to make
the minimum annual royalty payments after December 31, 2000, the Company shall
have the option to convert the exclusive agreement to a non-exclusive agreement
and thereafter forego payment of the minimum annual royalties. The Company is
also required to pay specified royalties on the net sales of the New Products by
the Company in excess of the minimum payments.

13. CAPITAL TRANSACTIONS

     On May 14, 1997, the Company closed a secondary offering of 2,070,000
shares of common stock. Each share of common stock included one redeemable
warrant to purchase one share of common stock at a purchase price of $5.00. This
offering resulted in gross proceeds of $10,350,000 less expenses of
approximately $2,075,858 for net proceeds of approximately $8,274,142. In
addition, the underwriter to the secondary offering received an option to
purchase 180,000 shares of common stock and/or 180,000 warrants at a purchase
price of $4.95 per share and $0.55 per warrant.

     On September 17, 1997, the Company issued 50,000 shares of Common Stock to
DMD NV, the Company's licensed exclusive distributor of the TeliCam system in
Europe, in exchange for termination of DMD NV's exclusive distribution rights in
Europe. The market value of the Common Stock issued was $256,250.

     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 are (i) exercisable commencing on May 15, 1998, and for five years
thereafter for the purchase of one share of Common Stock per Warrant; and (ii)
at an exercise price of $5.812 per share. The Senior Subordinated Notes (i) bear
interest payable semi-annually at a rate of 12% per annum; (ii) mature on the
first anniversary of the date of issuance; and (iii) may 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.

                                       44
<PAGE>   45
            DENTAL/MEDICAL DIAGNOSTIC SYSTEMS, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

     On July 16, 1999, we 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 filed on July 23, 1999 and subsequently declared
effective.

     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 approximately $100,000. The net proceeds of the
offering of $1,900,000 were allocated based on the relative fair value to the
mandatory redeemable 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 may 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 consecutive
days is at least $8.00 (and trading volume exceeds specified limits) the Company
is required to demand conversion at the exchange price above. 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 Stock Warrants are exercisable into an aggregate 40,000
shares of Common Stock at a purchase price of $2.749 per share through March 15,
2005.

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, 1999 is 1,200,000.

     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 plans. Had
compensation costs for the Company's stock option plan been determined

                                       45
<PAGE>   46
            DENTAL/MEDICAL DIAGNOSTIC SYSTEMS, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

based upon the methodology prescribed under SFAS No. 123, the Company's net loss
would approximate the pro forma amounts below:

<TABLE>
<CAPTION>
                                                            AS REPORTED     PRO FORMA
                                                            -----------    -----------
<S>                                                         <C>            <C>
YEAR ENDED DECEMBER 31, 1999:
Net loss..................................................  $(6,727,638)   $(7,199,832)
Net loss per share (basic and diluted)....................  $     (1.15)   $     (1.23)
YEAR ENDED DECEMBER 31, 1998:
Net loss..................................................  $(1,816,702)   $(2,215,967)
Net loss per share (basic and diluted)....................  $      (.35)   $      (.43)
YEAR ENDED DECEMBER 31, 1997:
Net loss..................................................  $(2,044,729)   $(2,180,726)
Net loss per share (basic and diluted)....................  $      (.47)   $      (.50)
</TABLE>

     The pro forma amounts above were computed using the Black-Scholes option
pricing model with the following assumptions for 1999, 1998 and 1997: (i)
risk-free interest rate of 6.00%, 4.82% and 6.33%, respectively (ii) expected
option life of 5 years, (iii) forfeiture rate of 0, (iv) expected volatility of
80.3%, 72.6% and 68.73%, 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,
1999, 1998, 1997 and 1996, and the changes during the years ended December 31,
1999, 1998 and 1997, is presented below:

<TABLE>
<CAPTION>
                                                        WEIGHTED AVERAGE    WEIGHTED AVERAGE
                                           NUMBER OF         OPTION            GRANT DATE
                                            SHARES       EXERCISE PRICE        FAIR VALUE
                                           ---------    ----------------    ----------------
<S>                                        <C>          <C>                 <C>
Options outstanding at December 31,
  1996...................................    139,943         $2.63
  Granted................................    471,691          3.79               $2.71
  Canceled...............................       (513)         2.95
  Exercised..............................    (10,240)          .88
                                           ---------
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
                                           =========
Options exercisable at December 31,
  1999...................................    507,560          3.95
  Options available for future grant.....    149,700
</TABLE>

                                       46
<PAGE>   47
            DENTAL/MEDICAL DIAGNOSTIC SYSTEMS, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

<TABLE>
<CAPTION>
                                   OPTIONS OUTSTANDING                               OPTIONS EXERCISABLE
                 --------------------------------------------------------   -------------------------------------
                 NUMBER OUTSTANDING   WEIGHTED AVERAGE                      NUMBER OUTSTANDING
   RANGE OF       AT DECEMBER 31,        REMAINING       WEIGHTED AVERAGE    AT DECEMBER 31,     WEIGHTED AVERAGE
EXERCISE PRICE          1999          CONTRACTUAL LIFE    EXERCISE PRICE           1999           EXERCISE PRICE
--------------   ------------------   ----------------   ----------------   ------------------   ----------------
<S>              <C>                  <C>                <C>                <C>                  <C>
$0.88 - 2.93           415,757           6.03 years           $2.15              174,261              $2.33
$4.00 - 4.50           439,850           8.02 years           $4.06              152,430              $4.05
$5.00 - 5.875          352,872           7.98 years           $5.28              165,869              $5.21
$6.44 - 8.50            60,500           9.31 years           $7.75               15,000              $7.81
                     ---------                                                   -------
                     1,268,979                                                   507,560
                     =========                                                   =======
</TABLE>

     The following is a summary of warrants outstanding at December 31, 1999:

<TABLE>
<CAPTION>
              NUMBER OF
     COMMON SHARES UNDER WARRANTS   EXERCISE PRICE    EXPIRATION DATE
     ----------------------------   --------------   -----------------
<S>  <C>                            <C>              <C>
                450,000                 $5.81          May 15, 2003
                180,000                  5.55          May 14, 2002
              2,069,844                  5.00          May 14, 2002
              1,600,000                  5.00        November 27, 2002
                 40,000                  2.75        November 23, 2004
              ---------
              4,339,844
              =========
</TABLE>

15. INCOME TAXES

     The income tax expense for the fiscal years ended December 31, 1999, 1998
and 1997 is as follows:

<TABLE>
<CAPTION>
                                                       1999        1998        1997
                                                      -------    --------    --------
<S>                                                   <C>        <C>         <C>
Current:
  Federal...........................................  $    --    $     --    $113,299
  State.............................................    1,600       1,600      40,012
  Foreign...........................................   26,707     128,159          --
                                                      -------    --------    --------
                                                       28,307     129,759     153,311
Deferred:
  Federal...........................................       --          --          --
  State.............................................       --          --          --
                                                      -------    --------    --------
          Total.....................................  $28,307    $129,759    $153,311
                                                      =======    ========    ========
</TABLE>

     The Company's effective tax rate for the fiscal years ended December 31,
1999, 1998 and 1997 differs from the statutory federal income tax rate as
follows:

<TABLE>
<CAPTION>
                                                              1999     1998     1997
                                                              -----    -----    -----
<S>                                                           <C>      <C>      <C>
Tax provision at the statutory rate.........................  (34.0)%  (34.0)%  (34.0)%
Nondeductible expenses......................................    0.3       --      2.0
State taxes, net of federal benefit.........................   (5.6)    (7.1)    (6.0)
Research and development credit.............................     --       --     (5.0)
Valuation allowance.........................................   40.3     43.2     52.0
Foreign taxes...............................................     --      2.3       --
Other.......................................................   (1.0)     3.3      0.3
                                                              -----    -----    -----
                                                                 --%     7.7%     9.3%
                                                              =====    =====    =====
</TABLE>

                                       47
<PAGE>   48
            DENTAL/MEDICAL DIAGNOSTIC SYSTEMS, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

     The components of the net deferred taxes are as follows:

<TABLE>
<CAPTION>
                                              DECEMBER 31,    DECEMBER 31,    DECEMBER 31,
                                                  1999            1998            1997
                                              ------------    ------------    ------------
<S>                                           <C>             <C>             <C>
Deferred Tax Assets:
  Inventory reserves........................  $   194,000     $    64,600     $    39,000
  Warranty accrual..........................       39,000          33,900          33,000
  Allowance for returns and doubtful
     accounts...............................      169,700           8,300          20,700
  Net operating loss carryforwards..........    4,182,000       1,625,000       1,029,700
  Research and development credits..........      132,900         171,800         100,000
  Accrued vacation..........................       44,300          25,600          24,100
  Fixed assets..............................       40,300          (7,800)         31,400
  Intangible assets.........................     (139,600)       (127,000)             --
  State tax credits.........................     (349,000)       (111,500)             --
  Other.....................................      153,300          81,500          17,100
  Valuation allowance.......................   (4,466,900)     (1,764,400)     (1,295,000)
                                              -----------     -----------     -----------
                                              $        --     $        --     $        --
                                              ===========     ===========     ===========
</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 $9.7 million and
$9.7 million, respectively, which begin to expire in 2017 and 2002,
respectively.

17. EXTRAORDINARY ITEM

     On May 14, 1997, the Company repaid the $1,600,000 principal amount Bridge
Notes in connection with the Company's Offering. An extraordinary charge of
$234,149 (net of tax benefit of $143,511) was incurred for the early
extinguishment of those notes.

18. 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.

     On September 17, 1997, the Company repurchased the exclusive distribution
rights of its products into the European market from an independent distributor
for 50,000 shares of common stock. This resulted in a non-recurring charge of
$256,250.

19 SEGMENT INFORMATION

     The Company operates in one segment -- dental medical equipment which, at
December 31, 1999, comprised 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
ASAP composite materials; 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.

                                       48
<PAGE>   49
            DENTAL/MEDICAL DIAGNOSTIC SYSTEMS, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

     The following are sales by product lines for the year ended December 31,
1999, 1998, and 1997:

<TABLE>
<CAPTION>
                                                 1999           1998           1997
                                              -----------    -----------    -----------
<S>                                           <C>            <C>            <C>
TeliCam.....................................  $ 6,263,014    $ 6,555,540    $15,367,806
Apollo(TM)..................................   26,233,445     11,125,629             --
MPDx(TM)....................................    1,186,615             --             --
Consumables.................................    2,605,521        593,060             --
Other.......................................    1,892,401        953,569        719,402
                                              -----------    -----------    -----------
                                              $38,180,996    $19,227,798    $16,087,208
                                              ===========    ===========    ===========
</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, 1999, 1998 and 1997:

<TABLE>
<CAPTION>
                                                 1999           1998           1997
                                              -----------    -----------    -----------
<S>                                           <C>            <C>            <C>
Sales by geography:
United States...............................  $26,548,072    $13,182,354    $16,087,208
Europe......................................   11,632,924      6,045,444             --
                                              -----------    -----------    -----------
                                              $38,180,996    $19,227,798    $16,087,208
                                              ===========    ===========    ===========
</TABLE>

     The following is long-lived asset information by geographic area as of
December 31, 1999 and 1998:

<TABLE>
<CAPTION>
                                                                 1999         1998
                                                              ----------    --------
<S>                                                           <C>           <C>
Long Lived assets:
United States...............................................  $  949,223    $866,950
Europe......................................................     353,535     129,990
                                                              ----------    --------
                                                              $1,302,758    $996,940
                                                              ==========    ========
</TABLE>

20. FOURTH QUARTER ADJUSTMENTS

     During the fourth quarter of 1999, as a result of the Company's
reassessment of its business plan and related impact upon its inventory
requirements, the Company recorded a charge of $805,771 to cost of sales to
reduce the carrying amount of certain inventory to its estimated net realizable
value. In addition, after performing a thorough assessment of the collectibility
of its outstanding accounts receivable following a recent change in not
requiring sales to individual dentists to be paid via credit cards, the Company
increased its allowance for bad debts by $382,106 in the fourth quarter.

21. SUBSEQUENT EVENTS

     On February 29, 2000 the Company 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 costs of
$157,500. The holders of Series B Exchangeable Preferred Stock may exchange
their shares for shares of common stock at the average of the closing bid prices
of the common stock during any five (5) of the prior thirty (30) consecutive
trading days selected by the holder of the Series B Shares then being exchanged.
The Preferred Stock will receive $30 in dividends per year with payments due
quarterly. The B-1 Warrants are exercisable into an aggregate 225,000 shares of
common stock at a purchase price of $2.7188 per share. The B-2 Warrants are
exercisable into an aggregate 450,000 shares of common stock at a purchase price
of $3.50 per share.

                                       49
<PAGE>   50

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

     None.

                                    PART III

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

     The information required in Item 9, is hereby incorporated by reference to
the Company's definitive Proxy Statement to be filed with the Securities and
Exchange Commission for the 2000 Annual Meeting of its Stockholders ("Proxy
Statement").

ITEM 10. EXECUTIVE COMPENSATION

     The information required in Item 10 is hereby incorporated by reference to
the Registrant's Proxy Statement.

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     The information required in Item 11 is hereby incorporated by reference to
the Registrant's Proxy Statement.

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     The information required in Item 12 is hereby incorporated by reference to
the Registrant's Proxy Statement.

ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K

(a) EXHIBITS.

<TABLE>
<CAPTION>
EXHIBIT
NUMBER                       DOCUMENT DESCRIPTION
-------                      --------------------
<S>      <C>
 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)
</TABLE>

                                       50
<PAGE>   51

<TABLE>
<CAPTION>
EXHIBIT
NUMBER                       DOCUMENT DESCRIPTION
-------                      --------------------
<S>      <C>
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 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.
10.29    Exclusive License Agreement, by and between the Registrant
         and Chrysalis, Inc., dated as of October 28, 1999.
10.30    First addendum to Exclusive License Agreement dated
         September 29, 1999, by and between the Registrant and
         Chrysalis Dental, Inc., dated as of November 15, 1999.
10.31    Letter of Intent for Exclusive License Agreement, by and
         between the Registrant and Chrysalis Dental, Inc., dated as
         of September 16, 1998.
10.32    First addendum 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.
10.33    Stock Purchase Agreement, by and between the Registrant and
         Chrysalis Dental, Inc., dated as of October 2, 1998.
</TABLE>

                                       51
<PAGE>   52

<TABLE>
<CAPTION>
EXHIBIT
NUMBER                       DOCUMENT DESCRIPTION
-------                      --------------------
<S>      <C>
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.
10.36    License Agreement, by and between DMDS Ltd. and Francois
         Duret.
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.
10.38    Standard Industrial Lease, between the Registrant and AKA
         Enterprises, dated January 25, 2000, for 6416 Variel Avenue,
         Woodland Hills, CA.
10.39    Services Agreement by and between the Registrant and Shoebox
         Entertainment, dated April 27, 1999.
10.40    Advertising Agreement by and between the Registrant and Jack
         Wagner and Kristina Wagner, dated June 24, 1999.
10.41    Exchangeable Preferred Stock and Warrants 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    Form 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.
10.46    Certificate of Designations, Preferences and Rights of
         Series B Exchangeable Preferred Stock of the Registrant, as
         filed March 3, 2000.
10.47    Form of B-1 Stock Purchase Warrant, dated as of February 24,
         2000.
10.48    Form of B-2 Stock Purchase Warrant, dated as of February 24,
         2000.
10.49    Registration Rights Agreement, dated as of February 24,
         2000, by and among the Registrant and the several investors
         set forth therein.
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.
21.1     Subsidiaries of the Registrant.
23.1     Consent of PricewaterhouseCoopers LLP.
24.1     Power of Attorney (included in signature page attached to
         this Form 10-K/SB).
27.1     Financial Data Schedule.
</TABLE>

---------------
 *  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).

(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.

(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.

                                       52
<PAGE>   53

(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.

(b) REPORTS ON FORM 8-K.

     Current Report on Form 8-K dated November 23, 1999, filed on December 8,
1999.

                                       53
<PAGE>   54

                                   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 29th 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    March 29, 2000
--------------------------------------------------------      Officer, and Director
                  Robert H. Gurevitch

                  /s/ JACK D. PRESTON                       Executive Vice-President     March 29, 2000
--------------------------------------------------------          and Director
                    Jack D. Preston

                  /s/ STEPHEN F. ROSS                       Chief Financial Officer,     March 29, 2000
--------------------------------------------------------  Principal Accounting Officer
                    Stephen F. Ross

                /s/ MARVIN H. KLEINBERG                             Director             March 29, 2000
--------------------------------------------------------
                  Marvin H. Kleinberg

                  /s/ JOHN A. KHADEMI                               Director             March 29, 2000
--------------------------------------------------------
                    John A. Khademi
</TABLE>

                                       54
<PAGE>   55

                                 EXHIBIT INDEX

<TABLE>
<CAPTION>
EXHIBIT
NUMBER                       DOCUMENT DESCRIPTION
-------                      --------------------
<S>      <C>
 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)
</TABLE>

                                       55
<PAGE>   56

<TABLE>
<CAPTION>
EXHIBIT
NUMBER                       DOCUMENT DESCRIPTION
-------                      --------------------
<S>      <C>
10.23    Agreement for the Sale of the Seller's Business and Assets,
         by and among DMD Gmbh, Ralf Muller and DMDS 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.
10.29    Exclusive License Agreement, by and between the Registrant
         and Chrysalis, Inc., dated as of October 28, 1999.
10.30    First addendum to Exclusive License Agreement dated
         September 29, 1999, by and between the Registrant and
         Chrysalis Dental, Inc., dated as of November 15, 1999.
10.31    Letter of Intent for Exclusive License Agreement, by and
         between the Registrant and Chrysalis Dental, Inc., dated as
         of September 16, 1998.
10.32    First addendum 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.
10.33    Stock Purchase Agreement, by and between the Registrant and
         Chrysalis Dental, Inc., dated as of October 2, 1998.
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.
10.36    License Agreement, by and between DMDS Ltd. and Francois
         Duret.
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.
10.38    Standard Industrial Lease, between the Registrant and AKA
         Enterprises, dated January 25, 2000, for 6416 Variel Avenue,
         Woodland Hills, CA.
10.39    Services Agreement by and between the Registrant and Shoebox
         Entertainment, dated April 27, 1999.
10.40    Advertising Agreement by and between the Registrant and Jack
         Wagner and Kristina Wagner, dated June 24, 1999.
10.41    Exchangeable Preferred Stock and Warrants 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    Form 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.
10.46    Certificate of Designations, Preferences and Rights of
         Series B Exchangeable Preferred Stock of the Registrant, as
         filed March 3, 2000.
10.47    Form of B-1 Stock Purchase Warrant, dated as of February 24,
         2000.
10.48    Form of B-2 Stock Purchase Warrant, dated as of February 24,
         2000.
10.49    Registration Rights Agreement, dated as of February 24,
         2000, by and among the Registrant and the several investors
         set forth therein.
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.
</TABLE>

                                       56
<PAGE>   57

<TABLE>
<CAPTION>
EXHIBIT
NUMBER                       DOCUMENT DESCRIPTION
-------                      --------------------
<S>      <C>
21.1     Subsidiaries of the Registrant.
23.1     Consent of PricewaterhouseCoopers LLP.
24.1     Power of Attorney (included in signature page attached to
         this Form 10-K/SB).
27.1     Financial Data Schedule.
</TABLE>

---------------
 *  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).

(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.

(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.

                                       57