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                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                   ----------

                                    FORM 10-K

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

For the Fiscal Year Ended SEPTEMBER 30, 1998

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

For the transition period from _________ to ___________
Commission File Number 0-11914

                                  CAPRIUS, INC.
                                  -------------
             (Exact name of Registrant as specified in its charter)

             DELAWARE                                            22-2457487   
----------------------------                               -------------------
(State or other jurisdiction                                  (I.R.S. Employer
of incorporation or organization)                          Identification No.)

         46 JONSPIN ROAD
    WILMINGTON, MASSACHUSETTS                                           01887  
    -------------------------                                        ----------
(Address of principal executive offices)                             (Zip Code)

       REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (978) 657-8876

           SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
                                      None

           SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
                     Common Stock, $.01 par value per share
                      Warrants for purchase of Common Stock

         Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirement for the past 90 days.

                     YES  X    NO    
                         ---       ---

     Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.

     The aggregate market value of the Registrant's Common Stock, $.01 par
value, held by non-affiliates computed by reference to the average of the
closing bid and asked prices as reported by NASDAQ on December 31, 1998, (based
upon the assumption that each officer, director and person who is known by the
Registrant to own more than five percent of the outstanding common Stock of the
Registrant is an affiliate of the Registrant for purposes of this computation):
$8,518,610.

     Number of shares of the Registrant's Common Stock, $.01 par value,
outstanding as of December 31, 1998: 7,366,790 

             Documents Incorporated by Reference - Not applicable.
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                                      INDEX
<TABLE>
<CAPTION>

                                                                                 Page No.
<S>      <C>                                                                        <C>
PART I
Item 1.  Business                                                                    3
Item 2.  Properties                                                                 14
Item 3.  Legal Proceedings                                                          14
Item 4.  Submission of Matters to a Vote of Securities Holders                      15

PART II
Item 5.  Market for Registrant's Common Equity and Related Stockholder Matters      16

Item 6.  Selected Financial Data                                                    17
Item 7.  Management's Discussion and Analysis of Financial Conditions and
                Results of Operations                                               19
Item 8.  Financial Statements and Supplementary Data                                21
Item 9.  Changes and Disagreements with Accountants on Accounting                   21
                and Financial Disclosure

PART III
Item 10. Directors and Executive Officers of the Registrant                         23
Item 11. Executive Compensation                                                     26
Item 12. Security Ownership of Certain Beneficial Owners and Management             31
Item 13. Certain Relationships and Related Transactions                             33

PART IV
Item 14. Exhibits, Financial Statements Schedules, and Reports on Form 8-K          34

SIGNATURES
</TABLE>


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                                     PART I

ITEM I. DESCRIPTION OF BUSINESS
GENERAL

     Caprius, Inc. ("Caprius" or the "Company") (formerly Advanced NMR Systems,
Inc.) was founded in 1983 and through August 1996, operated under two segments
(one of which was discontinued during fiscal 1996) consisting of Imaging Systems
and Imaging and Rehabilitation Services. Pursuant to the Company's merger with
Advanced Mammography Systems, Inc. ("AMS"), the Company has developed a
dedicated MRI system for breast imaging known as the Aurora(TM) System (the
"Aurora System"). AMS subsequently changed its name to Caprius Systems, Inc. but
is referred to herein as AMS. In July 1998, the Company acquired its first
comprehensive breast care center (The Strax Institute) and the Company's
Management has determined that an opportunity exists for additional acquisitions
of breast imaging centers. The Company is also engaged in rehabilitation
services, consisting of comprehensive physician care, physical therapy and case
management for motor vehicle accident patients.

     In December 1998, Caprius announced that it was pursuing a strategy of
identifying a strategic alliance to either acquire or joint venture its Aurora
technology (the "Strategic Partner"). This is a consequence that at this point
in time, Caprius lacks sufficient funds to continue necessary research and
development or to fund manufacturing costs to produce its next systems. A Letter
of Intent to sell the technology in a transaction valued at approximately $5
million was entered into in December 1998, but was terminated on December 17,
1998. At that time, the Company announced that it would reopen discussions with
other interested parties and would continue to identify and pursue the
acquisition of comprehensive breast imaging centers. The Company anticipates
that any sale or joint venture of the Aurora technology may include some form of
cash, royalty payments and ownership. There can be no assurances that any such
sole or joint venture can be entered into or completed. Furthermore, unless a
Strategic Partner is identified, near term, to acquire its Aurora technology,
the Company's viability could be threatened.

     In July 1998, the Company acquired its first comprehensive breast imaging
center, the Strax Institute, located in Lauderhill, Florida. The Strax Institute
is a multi-modality breast care center that treats approximately 15,000 patients
per year offering x-ray mammography, ultrasound, stereotactic biopsy and bone
densitometry. The Company believes that there is an opportunity to acquire and
consolidate similar breast care centers.

     Effective November 10, 1997, the Company completed a merger with AMS,
whereby AMS merged into AMS Merger Corp., a wholly-owned subsidiary of Caprius,
and became a wholly-owned subsidiary of Caprius (the "Merger"). AMS was
originally formed on July 2, 1992, as a wholly-owned subsidiary of Caprius to
develop a dedicated breast MRI system.

     On February 27, 1997, Medical Diagnostics, Inc. ("MDI"), a wholly-owned
subsidiary of Caprius, merged with MDI Acquisition Corporation, a newly formed
wholly-owned subsidiary of US Diagnostic Inc. ("US Diagnostic") and became a
wholly-owned subsidiary of US Diagnostic. The Company had acquired MDI, which
provided imaging and rehabilitation services, on August 31, 1995. Pursuant to
the US Diagnostic merger, Caprius retained the rehabilitation centers formerly
operated by MDI. Caprius sold MDI principally to pursue its strategy of
developing and installing its breast imaging system and to repay all the
indebtedness to the senior lender.


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     COMPREHENSIVE BREAST CARE CENTERS

     Caprius' focus is to acquire and operate comprehensive breast-imaging
centers. Such a center would contain, at a minimum, conventional x-ray
mammography, ultrasound, stereotactic biopsy, bone densitometry, MRI, and a
cadre of support staff for conducting clinical breast exams, genetic counseling
and pre and post surgical guidance and counsel.

     Most imaging centers do not focus on breast disease. In today's medical
service environment there exist numerous examples of disease specific centers.
Convenience of treatment and accessibility to diagnostic tools are the hallmark
of quality care in current medical practices. Breast imaging centers therefore
must possess all the essential modalities coupled with efficient patient
handling and care for the resolution and swift diagnosis of breast disease.

     A comprehensive breast imaging center with the above performance capacities
responds to the needs and concerns of women. It provides overall comprehensive
care for women; their medical needs, personal concerns and psychological well
being. It provides immediate and unhampered access to a range of modalities
which address, resolve, diagnose and provide complete and dedicated focus on
breast disease. In a fragmented market, such as exists today in the U.S., a
comprehensive breast imaging center provides the care, efficiency, access and
immediate resolution which should serve as a model for the amalgamation of
breast imaging centers.

     The Company intends to identify specific geographic markets within the U.S.
in which to consolidate breast imaging centers. In doing so, the Company, with
its experience in the medical service industry and expertise in breast disease,
should be able to provide better care and treatment of breast disease and more
efficiently utilize medical technology, including MRI, through sharing resources
and cross-referring among centers.

     The Company's own survey indicates that there exists approximately four
hundred (400) breast imaging centers in the U.S. Discussions with numerous
parties, well known in this field, confirm to the best of the Company's
knowledge that no party is currently involved in the consolidation of these
centers. Assuming the Company can access the capital markets, it intends to seek
to acquire one or more centers. However, until a transaction is completed on the
sale of technology, the acquisition of centers could be difficult. The Strax
Breast Diagnostic Institute, is one such acquisition. It is a comprehensive
breast-imaging center with an outstanding reputation for quality.

     Caprius, Inc. acquired all the assets and certain liabilities of The Strax
Institute ("Strax" or "The Institute") in July 1998. The Strax Institute was
founded in 1979 to provide comprehensive breast care for women in Southern
Florida. The Institute operates a single center located in Lauderhill, Florida
occupying 8,500 square feet of space and employs eighteen (18) full-time and six
(6) part time employees. In 1997 alone, the Strax Institute saw approximately
15,000 patients.

     The Institute specializes exclusively in comprehensive breast care
utilizing several imaging modalities and a high level of hands-on patient care.
The Institute performs all imaging and diagnostic services in-house, including
x-ray mammography, ultrasound, stereotactic biopsies, as well as all patient
screening, scheduling, billing and collections, managed care contracts,


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transcription, medical records and accounting.

     The healthcare market that the Institute operates in is favorable for the
services offered. It has a high percentage of elderly female patients and an
area with a growing population base. In the past, the Center did very little
direct marketing to patient or referring physicians, relying primarily on
"word-of-mouth" to promote its services. It has an extremely high percentage of
repeat business, as evidenced by the fact that of the 14,791 patients seen in
1997, 13,609, or approximately 92%, were repeat patients

     The Strax Institute earned revenues of $1,235,000 for the year ended 1997,
with a net loss of $85,000. The purchase price for the Institute was $600,000.
The Company believes there are numerous opportunities available to increase
volume and profitability at the Institute. The Company is designing programs to
expand patient services volume and increase the revenues obtained per patient.

     REHABILITATION SERVICES

     The Company has diversified a portion of its business in a niche
rehabilitation market through its subsidiary, MVA Rehabilitation Associates. On
March 21, 1997, the Company acquired the remaining 25% minority interest in the
rehabilitation centers for $1.5 million, which included a seller note of $1.3
million. The MVA centers provide comprehensive physician care, physical therapy
and case management for motor vehicle accident patients and have developed a
system to document valid personal injury claims and exclude false claims, thus
enabling it to provide more efficient patient care. MVA has an excellent
reputation with third-party payers such as automobile insurance companies.

     MEDICAL DEVICE TECHNOLOGY

     Caprius' technology consists of the development and commercialization of
the Aurora System, the only dedicated breast MRI imaging system cleared by the
U.S. Food and Drug Administration ("FDA"). It has received worldwide acclaim and
attracted General Electric Company ("GE") to acquire a thirteen-percent (13%)
stake in the Company. The product has achieved a stable performance level,
however, further investment in the development of the Aurora System has been
slowed. The Company has approached and is currently in discussions with a number
of strategic corporate prospects who it believes will have interest in assuming
the technology in order to market and sell the Aurora in the U.S. and
international markets and to assume responsibility for manufacturing, further
product enhancement and upgrades. Caprius may benefit from the expected revenue
stream that could flow from placing the system under the umbrella of a larger
corporate partner.

     MRI provides very high resolution medical images of soft tissue. When
interpreted by a trained physician, the images can be used in many applications
and can be a valuable tool in the detection and management of breast disease.
MRI systems use large magnets, digital computers and controlled radio waves to
derive cross-sectional (two dimensional) and volume (three-dimensional) high
resolution images of the body's internal organs, tissues and function. MRI
systems present no currently known risks to patients in contrast to other
diagnostic techniques that subject the patient to potentially harmful ionizing
radiation (including Positron Emission Tomography ("PET"), Computerized Axial
Tomography ("CT") and conventional x-ray).


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     The Company has contracted with most of the third party payers in
Massachusetts, further supporting the clinical acceptance of MRI in breast care.
However, in order to fully commercialize the Aurora System and to demonstrate
its diagnostic effectiveness as an accepted tool for the diagnosis and
management of breast disease and continue to obtain reimbursement for dedicated
breast MRI by third parties such as Medicare, private insurance and managed care
consortiums, maximum clinical efficacy and cost effectiveness must be
demonstrated. The System has been placed at the University of Texas Medical
Branch at Galveston, TX, the Faulkner-Sagoff Centre for Breast Health Care in
Boston, MA, The University of Arkansas Teaching Hospital in Little Rock, AR, the
Breast Care Center at the Englewood Hospital and Medical Center in Englewood,
NJ, and at the Magee Women's Hospital in Pittsburgh, PA.

BREAST DISEASE INCIDENCE AND DIAGNOSIS

     According to the American Cancer Society, except for skin cancer, which has
a low mortality rate, breast cancer is the most common cancer among women,
accounting for one out of every three cancer diagnoses. In 1998, approximately
184,300 new cases of invasive breast cancer are expected to be diagnosed, and
44,300 women are expected to die from this disease. Only lung cancer causes more
cancer deaths in women. Nearly one in eight women will have breast cancer in the
course of their lives.

     In the U.S., National Cancer Institute guidelines recommend women over 40
undergo an annual screening for breast cancer using x-ray mammography.
Approximately 25 million screening procedures were performed in 1998. Screening
exams with x-ray mammography are generally credited with the earlier detection
of lesions and, thus, increasing survival rates among breast cancer patients.
Despite this improvement, however, screening x-ray mammography results in
ambiguous or indeterminate findings in 15-20% of patients tested.

THE AURORA BREAST IMAGING SYSTEM

     The Company believes its Aurora System has the potential to become an
important adjunct in the evaluation of the 15-20% of x-ray mammograms that are
ambiguous or indeterminate, for imaging dense breast tissue use of a patent
pending technique, the Aurora System can suppress fat in breast images, for
possible earlier diagnostic intervention among high risk individuals, for
characterizing breast lesions, for staging cancer treatment and for post surgery
and post radiation follow-up. As broader diagnostic applications are
established, the next goal will be to demonstrate clinical utility beyond
diagnosis to include screening. This expansion of breast MRI's clinical utility
should alter medical practices to include MRI on a more routine basis, which
will drive patient demand and should exceed the capacity of currently available
whole body MRI systems. The Aurora MRI solution is a technology dedicated to
breast imaging to address this potential future demand and meet patient needs
that are distinct from, and not adequately served by, whole body MRI systems.
The Aurora System for breast imaging utilizes a .5T magnet that maintains an
imaging field of view and image quality comparable to a 1.5T whole body system,
dramatically reducing the customer equipment and siting costs. With future
expanded applications and the identification of a potential Strategic Partner to
help fund and distribute the Aurora System, the Company expects sales will
increase. The Aurora System will be marketed to mammography clinics and
practices where patient volume is sufficient to justify the cost of adding MR
breast imaging to the diagnostic workup of certain breast patients.


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MARKETING

     The Company will market its comprehensive breast imaging centers directly
to physicians and patients, including annual follow-up. The Company expects that
by acquiring centers within certain geographic areas, it will be able to offer
higher priced medical technology, including MRI, more efficiently and, because
the centers will be focused primarily on breast disease, it should be able to
provide higher quality care to the patient.

     Furthermore, the Company believes that, as the detection and treatment of
breast disease continues to develop and becomes more sophisticated, the demand
for imaging as a means of detecting and managing diseases at an earlier stage
will increase. Earlier detection of disease, particularly through non-invasive
and minimally invasive imaging technologies, can help reduce medical costs to
third-party payers and/or healthcare providers by reducing treatment costs and
malpractice claims. The Company believes that, as physicians and third-party
payers become more knowledgeable and familiar with the benefits of specialized,
focused breast care and advanced imaging capabilities, patient referrals should
increase.

     In February 1996, the Company was granted a 510(k) clearance by the FDA for
the purpose of commercial distribution of the Aurora System. To accelerate the
establishment of MRI's clinical efficacy and cost effectiveness in the diagnosis
of breast diseases, the Company expects rigorous and scientifically sound
clinical and economic outcome comparisons between MR breast imaging and
mammography will need to be performed.

     Through a potential strategic alliance, the Aurora System may be installed
and operated through two structures:

     "SHARED REVENUE AGREEMENTS"

     The Aurora System may be installed under a shared revenue agreement with a
health center, whereby the Company and/or the Strategic Partner provides the
Aurora breast imaging system, all upgrades to the system made available during
the term of the agreement, all maintenance and cryogens for the system and
equipment insurance coverage. The health center then provides the necessary
siting improvements and all other required services, including the
technologists, and provides for all scheduling and screening, billing and
collecting of revenues from patients and third-party payers, maintaining medical
and administrative records and filing for required clinic licenses, if
necessary.

     In exchange for providing the equipment, the Company and/or a Strategic
Partner will receive a monthly lease payment based on a percentage of the
collected net patient revenue from technical services, approximately 50%. If the
Aurora technology is sold or joint ventured, the Company anticipates that it
will receive a percentage of this lease payment in the form of a royalty. Total
charges billed vary depending on the type and duration of examination. Insurance
reimbursements are normally less than rates charged. In addition, the hospital
enters into contractual arrangements with third-party payers that provide for
volume or group discounts. Professional service charges due to the radiologists
who read and interpret the examination results are generally billed separately
by the radiologists.


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     "DIRECT SALES"

     The Company and/or a Strategic Partner may install the Aurora System
through a direct sale to a hospital or women's health center. Direct sales will
be the most prevalent as breast MRI technology becomes more accepted in managing
and treating breast disease. Additional future revenues are expected to be
generated through sales of upgrades and enhancements as they become available.

COMPETITION

     To the extent the Company and/or a Strategic Partner, either owns and
operates its own breast imaging center or participates in revenue through its
shared revenue arrangement, or seeks to make direct sales of the Aurora System,
it competes with other providers of breast imaging services at hospitals,
private clinics, physician practices and other independent sites. Competitive
factors include the range of services provided, equipment capabilities and the
ability to serve a broad range of patients. Barriers to entry into the markets
include the cost of equipment, hiring of qualified technologists and management,
proprietary business practices and, where applicable, Certificate of Need
("CON") or Determination of Need ("DON") regulation and other regulatory
constraints.

     The health care industry in general, and the market for diagnostic imaging
equipment in particular, is highly competitive and virtually all of the other
entities known to management of the Company engaged in the manufacture of MRI
systems possess substantially greater resources than the Company. At the present
time, manufacturers of whole body scanners include the General Electric Company;
Toshiba; Bruker Medical Imaging Inc.; Elscint; Siemens Corporation; Philips
Medical Systems, a division of Philips Industries, N.V.; Picker International
Corporation; Shimadzu; and Hitachi. Although the Company is not aware of any
other entities involved in developing dedicated use MRI scanners for breast
imaging, competition may be experienced from either entities developing other
dedicated use MRI scanners to image other parts of the body seeking to expand
into the area of mammography or manufacturers of whole body scanners designed to
utilize breast coils to image the breast area. In addition to competition on
price, the principal elements of competition which will affect the ability to
engage in the marketing of MRI systems will include product performance, service
and support capability, financing terms and brand name recognition. To some
extent, competition will also come from the manufacturers of other types of
diagnostic imaging systems, such as ultrasound or thermography.

     The Aurora will also experience competition from the use of x-ray
mammography machines. These machines are widely established and clinically
accepted. The cost of x-ray mammography equipment is typically $60,000, which is
significantly less than the expected cost to the user of the Aurora breast
imaging MRI system. Today, the charge for a typical mammogram is about $130 and
a typical MR is about $1,000. Since the Aurora cost to the purchaser is expected
to be about one-half to one-third of a whole body MRI system, the Company
believes that a proportionate savings might be passed to the patient, which
should make MR scans more economically viable and competitive, compared to whole
body MRI systems.

     Although the Company believes that an MRI scanner for breast imaging will
represent a safer and more effective diagnostic imaging device, there can be no
assurance that any products developed will be commercially accepted, especially
in light of the cost savings involved in 


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purchasing x-ray mammography machines and the familiarity of current
practitioners in operating such devices. However, the Company also believes that
MR breast imaging would provide additional information, especially in patients
with mammographically dense breasts, and will make it an important diagnostic
tool without having to displace x-ray mammography.

     Although the Company's rehabilitation services are also considered to be in
highly competitive markets, the Company believes the market sector it is
targeting (value-added services for motor vehicle accident victims and their
insurers) is unique. The Company is not aware of any other significant
participants in this endeavor.

MANUFACTURING

     The Company anticipates that its facility in Wilmington, Massachusetts
would be transferred with a sale to or joint venture with a Strategic Partner
and believes it has sufficient capacity to satisfy its commitments under
existing contracts.

RESEARCH AND DEVELOPMENT

     Although at a slower pace, the Company continues to develop the Aurora
System and enhance the product's software.

     As of December 31, 1998, the Company had 5 scientists and engineers
involved on a full-time basis in developing its MRI scanner for breast imaging.


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PATENTS

     The Company currently owns 19 U. S. patents and has 3 other pending patents
relating to MRI imaging. All major patents are protected in Japan, Canada and
the European Market countries. Pursuant to the GE transaction, GE has been
granted a royalty-free license to 11 of the U.S. patents and 2 of the pending
patents.

EQUIPMENT AND SUPPLIES

     All of the diagnostic equipment utilized by the Company is technologically
complex. For the breast care centers, the Company contracts with equipment
manufacturers and third-party service organizations for comprehensive
maintenance and repair services for its medical equipment to minimize the period
of time equipment is unavailable during scheduled use hours because of
unanticipated malfunctions or breakdowns. All of the major equipment utilized by
the center has multiple manufacturers. However, there can be no assurance that
equipment will be available from those suppliers, should the centers existing
equipment be damaged beyond repair.

     For the Aurora technology, the Company provides comprehensive maintenance
and repair services for its Aurora System to minimize the period of time
equipment is unavailable during scheduled use hours because of unanticipated
malfunctions or breakdowns. The Company also has extensive relationships with
certain suppliers for maintenance and repair of all of the related and auxiliary
equipment on the units that are subject to mechanical failures.

     Although the Company's equipment is insured against the risks of damage in
an accident, repairs to damaged equipment may not restore the equipment to its
original condition and level of performance. The Company also maintains business
interruption insurance to offset lost revenue that may occur in the event of
prolonged equipment downtime. However, no assurance can be given that the
Company would receive sufficient insurance proceeds following any damage to its
equipment to fully compensate it for the losses resulting from such damage.

     Many of the components of the Aurora System are purchased from outside
suppliers. In addition, there are several suppliers of FDA-approved MRI contrast
agents used to enhance the images produced. The Company has not experienced any
problems in obtaining sufficient quantities of components and other supplies.
However, no assurances can be given that these outside suppliers will continue
to supply those components or that interruption of the flow of supplies would
not disrupt the assembly of the breast imaging system.

GOVERNMENT REGULATION AND REIMBURSEMENT

     The health care operations of the Company are subject to extensive federal
and state regulation. Magnetic Resonance Diagnostic Devices ("MRDD") generally,
and any products the Company may develop, in particular, are subject to
regulation by the FDA and certain state and federal agencies that regulate the
provision of health care, particularly the Health Care Financing Administration
("HCFA") and the Environmental Protection Agency ("EPA").


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     FDA Regulation

     The MRI scanner for breast imaging and other MRI technology devices which
the Company intends to develop will be regulated as medical devices by the FDA
and as such require regulatory clearance prior to commercialization. There can
be guarantee that such regulatory clearance will be obtained for all such
devices the Company intends to develop. The level of its classification as a
medical device would determine the extent and the scope of the FDA approval
process for the MRI scanner. Various states and foreign countries in which the
Company's products may be sold in the future may impose additional regulatory
requirements.

     The Company submitted a Pre-market Notification of intent to market the
Aurora System under section 510(k) of the Federal Food, Drug, and Cosmetic Act
in February of 1995. Clearance to market the Aurora System was granted by the
FDA in February of 1996.

     Any products distributed by the Company pursuant to the above described
clearances will be subject to continuous regulation by the FDA, such as
performance standards or special controls promulgated by the FDA. Labeling and
promotional activities are subject to scrutiny by the FDA and, in certain
instances, by the Federal Trade Commission. The export of medical devices is
also subject to regulation in certain instances. In addition, the use of the
Company's products may be regulated by various state agencies. Moreover, future
changes in regulations or enforcement policies could impose more stringent
requirements on the Company, compliance with which could adversely affect the
Company's business. Failure to comply with applicable regulatory requirements
could result in enforcement action, including withdrawal of marketing
authorization, injunction, seizure of products, and liability for civil and/or
criminal penalties.

     Third Party Coverage, Reimbursement and Related Health Care Regulations

     The market for MRI systems, including the Company's proposed product, is
likely to be affected significantly by the amount which Medicare, Medicaid or
other third party payers, including private insurance companies, will reimburse
hospitals and other providers for diagnostic procedures using MRI systems.
Recent proposals to reduce reimbursement for certain diagnostic procedures
coupled with studies questioning the need for custom testing for breast cancer
could result in limitations on or reductions for reimbursements to providers of
MRI for breast imaging.

     MRI diagnostic services provided on an outpatient basis are reimbursable
under Part B of the Medicare program. The professional and technical components
of radiological procedures which are performed in a physician's office or
freestanding diagnostic imaging center, and the professional component of
radiological procedures performed in a hospital setting, are currently
reimbursed on the basis of a relative value scale which phased in beginning
January 1, 1992. Prior to January 1, 1992, screening mammography was not a
covered benefit under Medicare. Payment for the professional and technical
component is limited by statute.

     The market for the Company's proposed product could also be adversely
affected by the amount of reimbursement provided by third party payers to
hospitals for procedures performed using such products. Reimbursement rates from
private insurance companies vary depending upon the procedure performed, the
third-party payer, the insurance plan, and other factors. Medicare generally
reimburses hospitals that are expected to purchase the Company's proposed
product for their operating costs for in-patients on a prospectively-determined
fixed amount for the costs 


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associated with an inpatient hospital stay based on the patient's discharge
diagnosis, regardless of the actual costs incurred by the hospital in furnishing
care. The willingness of these hospitals ("PUS hospitals") to purchase the
Company's proposed products could be adversely affected if they determined that
the prospective payment amount to be received for the procedures for which the
Company's proposed product are used would be inadequate to cover the hospitals'
costs associated with performing the procedures using the Company's proposed
product, or to be less profitable than using an alternative procedure for the
same condition.

     The Mammography Quality Standards Act of 1992 ("MQSA") authorizes the U.S.
Department of Health and Human Services ("DHHS") to regulate facilities that
provide mammography services and utilize radiological equipment. Under the MQSA,
no facility may provide mammographys (as defined therein to mean a radiography
(i.e., an x-ray) of the breast), unless it has obtained a certificate from DHHS
to do so. The MQSA also requires that the Secretary of DHHS develop quality
standards to assure the safety and accuracy of mammography carried out by such
facilities. The Company's MRI product currently under development does not
provide radiography of the breast. Instead, it relies upon magnetic resonance
imaging technology, which does not currently fall within the scope of the MQSA.
The Company is aware of the high MQSA standard and endeavors to develop the
Aurora System to meet the MQSA guidelines. Nonetheless, the Company cannot
predict whether the MQSA will be amended or interpreted to regulate the use of
the Company's proposed MRI product. As such, there can be no assurance that the
MQSA and the standards promulgated thereunder will not have an adverse effect on
the Company's future ability to market its Aurora MRI product.

     In much of its operations, the Company is subject to HCFA Medicare and
Medicaid anti-fraud and abuse statutes which prohibit bribes, kickbacks, rebates
and any direct or indirect remuneration in connection with providing services,
items or equipment for which payment may be made in whole or in part under
Medicare or Medicaid. These statutes are intended to prevent the improper
referral of patients for medical tests or treatment by health service providers
who may have a financial interest in the entity which provides such services.
Violation of these provisions may result in significant criminal penalties and
exclusion from participation in Medicare and Medicaid programs for both the
entity paying the kickback or rebate and the entity receiving it.

     The Company believes that none of its operations are in violation of the
anti-fraud and abuse statutes.

     The Health Care Financing Administration ("HCFA"), a federal agency that
regulates national standards for charges for all medical examinations, currently
has Customary Procedure Time ("CPT") codes for breast care services.
Substantially all of the procedures performed at the centers are reimbursed,
including the use of MRI to diagnose breast disease. However, this does not
assure that breast imaging service, particularly MRI, will be reimbursable by
other third party payers or in other states.

     Congress has also enacted legislation generally prohibiting physicians from
billing Medicare and Medicaid for patients referred by a physician to any of a
broad range of health services (including diagnostic imaging services) if the
physician has (i) an ownership or investment interest in the health service, or
(ii) otherwise receives compensation (broadly defined in the legislation) from
the health service. The legislative prohibitions were effective January 1, 1995.
The Company has no physician ownership in its businesses that would violate this
statute.


                                                                             12


<PAGE>   13


     A number of states, through CON and DON laws, limit the establishment of a
new facility or service or the purchase of major medical equipment to situations
where it has been determined that the need for such facility, service or
equipment exists. While many states exempt noninstitutional providers from CON
coverage, a number of states have extended CON coverage to physicians' offices
or medical groups by restricting the purchase of major medical equipment
wherever located. The CON and DON programs throughout the country vary
significantly from each other in the scope of regulation. Generally, however,
the CON or DON authorizes the holder to provide, or in the instance of a
hospital, to receive services at specific sites and/or to acquire equipment to
provide services. The Company presently holds all CONs and DONs necessary for it
to conduct its business. However, there can be no assurance that such CONs and
DONs can be obtained if needed in the future.

     Laws, rules and regulations pertaining to health care benefits and
reimbursement have been subject to change in the past and may change in the
future. At this time the Company cannot predict how any such changes would
affect the Company.

     ENVIRONMENTAL PROTECTION AGENCY ("EPA") REGULATION

     The Company, and any research facility which it operates, is required to
comply with any applicable federal and state environmental regulations and other
regulations related to hazardous materials used, generated, and/or disposed of
in the course of its operations. The Company currently is registered as a Very
Small Quantity Generator of hazardous waste.

     Future EPA regulations may impact Company policies on air pollution, waste
management, and radon testing. While the Company does not expect to have to
incur substantial costs in order to comply with existing regulations, no
assessment can be made as to the impact of future regulations upon operations of
the Company.

EMPLOYEES

     As of December 31, 1998, the Company's breast imaging businesses had a
staff of 51 full-time employees, including 5 persons devoted to research and
development, 1 physician, 8 technologists and 3 senior managers.

     As of December 31, 1998, the rehabilitation business had 27 full-time
employees, including 6 physical therapists and 3 physicians.

     None of the Company's employees is represented by labor organizations and
the Company is not aware of any activities seeking such organization. The
Company considers its relations with employees to be good.


                                                                             13


<PAGE>   14


ITEM 2. PROPERTIES

     The Company leases a facility in Wilmington, Massachusetts consisting of
approximately 61,000 square feet of office, research and development,
manufacturing and warehouse space. The Company has exercised its option to renew
its lease as of May 1996 for another 5-year term at a base monthly rental of
approximately $37,000. The Company currently subleases approximately 25,000
square feet to a third party for $16,270 per month and subleases approximately
9,400 square feet to MDI, its former subsidiary, for $6,928 per month. The
Company believes that the space it currently occupies is adequate for the
Company's needs for the foreseeable future.

     The Company leases 1,290 square feet of office space in Fort Lee, New
Jersey for certain administrative and investor relations personnel pursuant to a
lease expiring March 31, 1999, at a base monthly rental of approximately $2,300.

     The Company leases space for its breast imaging center at the Faulkner
Hospital pursuant to a lease with monthly rental payments of $1,439 expiring in
August, 2004, with a five-year renewal option.

     The Company leases 8,400 square feet for its comprehensive breast imaging
center in Lauderhill, Florida, pursuant to a lease with a monthly rental payment
of $9,250. The lease expires on January 31, 1999 and the Company is negotiating
for a lease renewal.

     The Company leases facilities for its rehabilitation operations in
Springfield, and Holyoke, Massachusetts. These facilities include approximately
7,400, and 3,100 square feet, respectively, over lease terms that expire on June
30, 2001 and June 1, 2001, respectively. The current rent for these facilities
are $142,000 and $19,000 per annum, respectively, plus operating expenses. In
September 1997, a Malden facility was closed and in August, 1998, the Company
entered into a lease termination agreement with the landlord which consisted of
a termination payment of $34,000 as well as rent and outstanding charges through
November 1998.

ITEM 3. LEGAL PROCEEDINGS

     On January 7, 1998, the Company and Jack Nelson, the Company's Chairman and
Chief Executive Officer were served with a complaint in connection with a
purported class action brought against them by Dorothy L. Lumsden in the United
States District Court of the District of Massachusetts. The complaint contains
claimed for alleged violations of Sections 10(b) and 20(a) under the Securities
Exchange Act and for common law. Ms. Lumsden purported to bring her action "on
behalf of herself and all other persons who purchased or otherwise acquired the
common stock of the Company during the period August 10, 1994 through and
including December 12, 1997". On February 2, 1998, the Company and Mr. Nelson
were served with a second class action complaint naming them as defendants in
connection with another action brought in the United States District Court for
the District of Massachusetts. This action was brought by Robert Curry and the
complaint alleged the same purported class and contained similar allegations and
claims as the class action complaint discussed above. On April 24, 1998, the
District Court consolidated the two class actions claims into one for pre-trial
purposes. On January 7, 1999, the Company announced that it has reached a
preliminary settlement in the 


                                                                             14


<PAGE>   15


shareholder class action in Federal Court in Boston. Under the terms of the
settlement, Caprius will make a cash payment of $150,000 and issue 325,000
shares of common stock to Plaintiffs. Caprius' insurance carrier will contribute
$100,000 of the cash payment. The settlement also stipulates that in the event
Caprius sells all or part of its business within 12 months an additional payment
of $75,000 and issuance of 100,000 additional shares will be made by Caprius to
plaintiffs. The agreement is subject to final court approval.

     In December 1998, the Company filed a complaint against Eric T. Shebar,
M.D. ("Shebar"), the former Chief Operating Officer and Medical Director for the
Company's motor vehicle accident rehabilitation ("MVA") business, and MVA Center
for Rehabilitation, Inc. ("MVA, Inc.") whereby the Company alleges breach of
contract and certain misrepresentations and seeks damages in an amount to be
determined at trial. The Company filed a preliminary injunction to reach and
apply a secured promissory note to MVA, Inc. against damages sought from Shebar
and to enjoin against any remedies under default of the Note. The final Note
payment of $347,000 was due October 15, 1998. The ruling on the injunction is
pending.

     Effective November 28, 1995, the Company terminated the Key Employment
Agreement, dated May 2, 1995, of John A. Lynch, Chief Executive Officer of MDI
("Lynch Employment Agreement"). In March 1996, Mr. Lynch filed a demand for
arbitration seeking a declaratory ruling, equitable relief, monetary damages of
approximately $2.0 million and legal fees related to claims arising out of the
Lynch Employment Agreement. On September 23, 1997, the arbitration panel ruled
in favor of the Company and MDI on substantially all of Mr. Lynch's claims such
that the only issues remaining in the Lynch arbitration were for performance
unit payments defined in the Lynch Employment Agreement and reasonable
attorneys' fees. In July 1998, the arbitration panel ruled in favor of the
Company and MRI on the final two issues and a final payment of approximately
$200,000 was made to Lynch.

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

       None.


                                                                             15


<PAGE>   16


                                     PART II

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

     Since November 10, 1997, upon the Merger with AMS, the Company's common
stock has traded on the NASDAQ Small Cap Market under the symbol ("CAPR"). From
May 17, 1996, the Company's common stock traded on the NASDAQ Small Cap Market
under the symbol ("ANMR"), from February 1994 to May 16, 1996, it traded on the
NASDAQ National Market System and since its inception through February 1994
traded on the over-the-counter market and was listed on the Boston and Pacific
Stock Exchanges. Trading in the Warrants (NASDAQ: CAPRW) commenced on August 31,
1995, after the closing of the MDI merger. Prior to the AMS Merger, the Warrants
traded under the symbol ("ANMRW").

     The following table sets forth, for the calendar quarters indicated, the
reported high and low bid quotations per share, as reported on the NASDAQ Small
Cap Market Market and NASDAQ National Market System. Such quotations reflect
inter-dealer prices, without retail mark-up, mark-down or commission, and may
not necessarily represent actual transactions. The prices shown below give
effect to a reverse stock split of 1:10 that occurred on November 10, 1997.

      Common Stock                          High                Low
      ------------                          ----                ---

      1998
      ----

                Fourth Quarter              1.729               1.063
                Third Quarter               1.542               1.042
                Second Quarter              1.709               0.896
                First Quarter               2.380               1.272


      1997
      ----

                Fourth Quarter              4.38                1.56
                Third Quarter               4.10                2.20
                Second Quarter              6.56                2.19
                First Quarter               6.88                2.19




     The Company has paid no dividends on its shares of Common Stock since its
inception in July 1983 nor does the Company expect to declare any dividends on
its common stock in the foreseeable future.

     On December 31, 1998, there were approximately 1,081 holders of record of
the Common Stock of the Company. Since a large number of shares of common stock
are held in street or nominee name, it is believed that there are a substantial
number of additional beneficial owners of the Company's Common Stock. On
December 31,1998, there were 7,366,790 shares outstanding.


                                                                             16


<PAGE>   17


ITEM 6. SELECTED FINANCIAL DATA


                    SELECTED FINANCIAL INFORMATION OF CAPRIUS

The selected historical financial information of Caprius set forth below has
been derived from the consolidated financial statements for the fiscal year
December 31, 1994, for the nine-month period ended September 30, 1995, and for
the twelve-month periods ended September 30, 1998, 1997, 1996 and 1995. The
financial statements for each of years presented, except for the twelve-months
ended September 30, 1995 have been derived from audited financial statements.
The financial statements for the twelve-month period ended September 30, 1995
are unaudited. In the opinion of management, such unaudited information includes
all adjustments, consisting only of normal recurring consolidated financial
statements and related notes included elsewhere herein; see "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS."


                                                                             17

<PAGE>   18


                   AS OF AND FOR THE YEAR ENDED SEPTEMBER 30,
                   ------------------------------------------
<TABLE>
<CAPTION>
                                                                                                       As of and for   As of and for
                                                                                                          the Nine       the Year 
                                                                                                        Months Ended      Ended
                                                                                         (Unaudited)    September 30,   December 31,
                                                 1998           1997           1996          1995          1995            1994
                                                 ----           ----           ----          ----          ----            ----
<S>                                          <C>            <C>            <C>           <C>            <C>            <C>         
STATEMENT of OPERATIONS DATA
Revenues:
Net patient service revenue                  $  3,764,189   $ 12,436,463   $25,480,813   $  1,934,322   $  1,934,322   $         --
Management fees and other revenue                      --        287,315       653,425         40,220         40,220             --
                                             ------------   ------------   -----------   ------------   ------------   ------------
  Total revenues                                3,764,189     12,723,778    26,134,238      1,974,542      1,974,542             --
                                             ------------   ------------   -----------   ------------   ------------   ------------
Operating Expenses:
Cost of service operations                      3,616,331      8,914,513    16,205,961      1,203,497      1,203,497             --
Research & development                          2,950,578             --            --        940,141        664,786        992,365
Purchased R&D                                   7,097,566             --            --             --             --             --
Selling, general & administrative               5,166,042      3,869,788     4,254,964      2,449,364      2,002,075      1,582,820
Provision for bad debt                            340,426        926,507     2,126,471        162,377        162,377             --
Loss on sale of imaging business                  265,791      9,515,903            --             --             --             --
Write-down of intangibles                       1,900,000             --            --             --             --             --
                                             ------------   ------------   -----------   ------------   ------------   ------------
Total operating expenses                       21,336,734     23,226,711    22,587,396      4,755,379      4,032,735      2,575,185
                                             ------------   ------------   -----------   ------------   ------------   ------------
Income (loss) from operations                 (17,572,545)   (10,502,933)    3,546,842     (2,780,837)    (2,058,193)    (2,575,185)
Interest expense                                 (219,338)      (977,909)   (1,847,910)      (139,020)      (139,020)            --
Other income (expense)                              3,050        214,120       126,263        579,758        579,758             --
Interest income                                   328,235        274,593       212,814        195,191        265,208        208,480
Equity in net loss of unconsolidated sub          (67,358)    (1,304,496)   (2,373,580)            --             --             --
Minority interest                                      --       (202,234)   (1,005,831)       783,520        569,354        702,965
                                             ------------   ------------   -----------   ------------   ------------   ------------
Loss from continuing operations before
   income taxes                               (17,527,956)   (12,498,859)   (1,341,402)    (1,361,388)      (782,893)    (1,663,740)
Provision for Income taxes                         98,177        103,444       (42,288)           --              --             --
                                             ------------   ------------   -----------   ------------   ------------   ------------
Loss from continuing operations               (17,626,133)   (12,395,415)   (1,383,690)    (1,361,388)      (782,893)    (1,633,470)
Income (loss) from operations of
discontinued division                                  --         30,181    (3,928,706)    (2,521,580)      (894,865)    (1,883,258)
Income (loss) on disposal of disc. division       107,430      2,690,462    (3,510,563)            -- 
                                             ------------   ------------   -----------   ------------   ------------   ------------
Net income (loss)                            $(17,518,703)  $ (9,674,772)  $(8,822,959)  $ (3,882,968)  $ (1,677,758)  $ (3,546,998)
                                             ============   ============   ===========   ============   ============   ============
Loss per common share:
Loss from continuing operations              $      (2.51)  $      (3.00)  $     (0.45)  $      (0.57)  $      (0.32)  $      (0.70)
Income (loss) from operations of
   discontinued division                               --           0.01         (1.28)         (1.05)         (0.37)         (0.80)
Gain (loss) on disposal of discontinued
   division                                          0.02           0.65         (1.15)            --             --             --
                                             ------------   ------------   -----------   ------------   ------------   ------------
Net income (loss) per share                  $      (2.49)  $      (2.34)  $     (2.88)  $      (1.62)  $      (0.69)  $      (1.50)
                                             ============   ============   ===========   ============   ============   ============
Weighted average shares outstanding             7,025,802      4,126,587     3,058,332      2,402,065      2,424,390      2,360,325
BALANCE SHEET DATA:

Working capital (deficit)                    $  2,862,559   $ 12,179,109   $(6,735,989)  $ 11,083,145   $ 11,083,145   $  8,614,161
Total assets                                 $ 11,567,380   $ 19,834,601   $50,724,530   $ 58,431,709   $ 58,431,709   $ 12,692,152
Long-term debt                               $  1,207,624   $    337,500   $ 5,682,719   $ 16,279,352   $ 16,279,352   $    338,409
Total liabilities                            $  4,341,556   $  2,511,417   $26,906,107   $ 30,413,743   $ 30,413,743   $  2,993,228
Stockholders'equity                          $  7,225,824   $ 17,323,184   $23,818,423   $ 28,017,966   $ 28,017,966   $  9,698,924
</TABLE>


                                                                            18
<PAGE>   19
ITEM 7.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND
          RESULTS OF OPERATIONS

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF
OPERATIONS

           The following discussion should be read in conjunction with the
audited consolidated financial statements and notes thereto for the years ended
September 30, 1998, 1997 and 1996.

GENERAL

           Due to significant changes in the nature of operations of the Company
during the past three years, comparisons of results of operations between years
may not be meaningful.

RESULTS OF OPERATIONS

           Fiscal Year Ended September 30, 1998 Compared to Fiscal Year Ended
September 30, 1997

           Net patient service revenue totaled $3,764,000 for the year ended
September 30, 1998 versus $12,436,000 for the year ended September 30, 1997.
Cost of service operations totaled $3,616,000 for the year ended September 30,
1998 versus $8,915,000 for the year ended September 30, 1997. The decrease from
1997 to 1998 was largely the result of the US Diagnostic Merger in February
1997, partially offset by net patient revenue from the Company's Aurora start-up
at the Faulkner Centre of $302,000 for the year ended September 30, 1998. This
revenue is expected to increase with increased patient volume and with the
start-up of Aurora Systems at the University of Arkansas, Englewood Hospital in
New Jersey, and Magee Womens Hospital in Pennsylvania.

           Management fees and other revenues for the year ended September 30,
1997, included a $70,000 settlement with an equipment manufacturer associated
with the delay in delivery of imaging equipment.

           Research and development reflects the change in the accounting
treatment of AMS from equity to consolidation accounting. Purchased research and
development reflects the portion of the AMS purchase price allocated to research
and development projects in process.

           Selling, general and administrative expenses totaled $5,166,000 for
the year ended September 30, 1998 versus $3,870,000 for the year ended
September 30, 1997. This increase reflects the effects of the US Diagnostic
Merger offset by the increased efforts in marketing, promoting and developing
Aurora Systems installations.

           Loss on sale of imaging business reflects the accounting for the US
Diagnostic Merger in February 1997. 




                                                                              19
<PAGE>   20
           Write down of intangibles in 1998, in the amount of $1,900,000,
reflects the reduction in goodwill related to the Company's Rehabilitation
Services business based on a review of undiscounted future cash flows.

           Other income for the year ended September 30, 1997, includes a gain
of $223,000 from the sale of certain equipment.

           Minority interests in net income of consolidated entities reflects
the share of income allocated to MDI's joint venture partners. Equity in net
loss of unconsolidated subsidiary reflects the Company's share of losses in AMS
prior to the AMS Merger.

Fiscal Year Ended September 30, 1997 Compared to Fiscal Year Ended September 30,
1996

           Net patient service revenue totaled $12,436,000 for the year ended
September 30, 1997 versus $25,481,000 for the year ended September 30, 1996.
Cost of service operations totaled $8,915,000 for the year ended September 30,
1997 versus $16,206,000 for the year ended September 30, 1996. These decreases
were largely the result of the MDI merger in February 1997 partially offset by
increased rehabilitation service revenues and expenses associated with the new
MVA centers established in the second and third quarters of fiscal 1996.

           Selling, general and administrative expenses totaled $3,870,000 for
the year ended September 30, 1997 versus $4,255,000 for the year ended September
30, 1996. This decrease is due to the change in the accounting treatment of the
Company's investment in AMS from consolidation to equity accounting and due to
the MDI merger.

           Minority interests in net income of consolidated entities consists of
earnings allocated to MDI's joint venture partners. Prior to September 1996, the
allocated earnings were offset by losses allocated to the AMS minority
shareholders. The equity in net loss of unconsolidated subsidiary reflects the
Company's equity share of the AMS loss subsequent to September 1996 and prior to
the AMS Merger.

LIQUIDITY AND CAPITAL RESOURCES

           The Company had available cash and cash equivalents of $1,791,476 at
September 30, 1998. The Company intends to utilize the funds for the continuing
development of the Aurora dedicated breast imaging system while the Company
continues its efforts to identify a Strategic partner for its Aurora technology
and for the opening of breast imaging centers. Unless the Company successfully
identifies a Strategic Partner, the Company will have difficulty in pursuing its
plans to acquire comprehensive breast care centers. Furthermore, if no Strategic
Partner is identified, the Company may be unable to implement its plan to
acquire breast care centers and the Company's viability could be threatened.
Accordingly, the auditors report on the Company's 1998 financial statements
contains an explanatory paragraph expressing substantial doubt about the
Company's ability to continue as a going concern.


           The significant cash flows used for investing activities for the year
ended September 30, 1998 consists primarily of $1,981,000 for medical equipment
additions. Cash flows from financing activities include $2,106,000 of proceeds
from financing of medical equipment, offset by principal payments on equipment
debt. Cash used for operations amounted to $8,378,000.

           Since February 1997, the Company has funded its operations
principally through the cash obtained from the MDI merger.




                                                                              20

<PAGE>   21
INFLATION

           To date, inflation has not had a material effect on the Company's
business. The Company believes that the effects of future inflation may be
minimized by controlling costs and increasing efficiency through an increase in
the volume of MRI examinations performed.

YEAR 2000 SYSTEMS

           The Company has undertaken a review concerning the ability of its
internal information systems to handle date information and to function
appropriately from and after January 1, 2000, and does not believe that the
total cost to address any changes required as a result of the so-called "Year
2000 Problem" will be material. In addition, the Company has evaluated the
impact of possible Year 2000 problems encountered by its suppliers and customers
upon the Company and does not believe that any problem would have material
effect upon the Company.

           The Company is including the following cautionary statement in this
Annual Report of Form 10-K to make applicable and take advantage of the safe
harbor provisions of the Private Securities Litigation Reform Act of 1995 for
any forward-looking statements made by, or on behalf of, the Company.
Forward-looking statements include statements concerning plans, objectives,
goals, strategies, future events or performance and underlying assumptions and
other statements which are other than statements of historical facts. Certain
statements contained herein are forward-looking statements and accordingly
involve risks and uncertainties which could cause actual results or outcomes to
differ materially from those expressed in the forward-looking statements. The
Company's expectations, beliefs and projections are expressed in good faith and
are believed by the Company to have a reasonable basis, including without
limitations, management's examination of historical operating trends, data
contained in the Company's records and other data available from third parties,
but there can be no assurance that management's expectation, beliefs or
projections will result or be achieved or accomplished. In addition to other
factors and matters discussed elsewhere herein, the following are important
factors that, in the view of the Company, could cause actual results to differ
materially from those discussed in the forward-looking statements: technological
advances by the Company's competitors, changes in health care reform, including
reimbursement programs, capital needs to fund any delays or extensions of
research programs, delays in product development, lack of market acceptance of
technology and the availability of capital on terms satisfactory to the Company.
The Company disclaims any obligation to update any forward-looking statements to
reflect events or circumstances after the date hereof.

ITEM 8.    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

           See Item 14 and the Index therein for a listing of the financial
statements and supplementary data as a part of this report.

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

           None, except as described in Form 8-K, dated June 3, 1998. (See
below)




                                                                              21
<PAGE>   22
           Effective April 1, 1998 the Boston office of Richard A. Eisner &
Company, LLP ("RAE") was merged into the Boston office of BDO Seidman, LLP
("BDO"). This merger resulted in RAE no longer having an office in the Boston
area and Caprius, Inc. ("the Company") concluded that it would be appropriate to
select a new accounting firm. At a meeting of the Audit Committee of the Company
on June 3, 1998, it was approved that the Company would retain BDO to serve as
its independent auditors, effective immediately. During the Company's two most
recent fiscal years and through June 3, 1998, there were no disagreements
between the Company and RAE on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedure which
disagreement, if not resolved to the satisfaction of RAE, would have caused it
to make reference to the subject matter of the disagreements in connection with
its report on the audited financial statements for such years.

           The reports of RAE on the financial statements of the Company for the
past two fiscal years contained no adverse opinion or disclaimer of opinion and
were not qualified or modified as to uncertainty, audit scope or accounting
principles, except that RAE's report on the Company's financial statements for
the fiscal year ended September 30, 1996 contained a statement expressing
substantial doubt about the Company's ability to continue as a going concern.

           During the two most recent fiscal years and through June 3, 1998
there have been no reportable events (as defined in Regulation S-K item
304(a)(1)(v)).

           Prior to the engagement of BDO, there were no discussions with
representatives of said firm regarding (i) the applications of any accounting
principles to a specific or completed transaction, (ii) the type of audit
opinion that might be rendered on the Company's financial statements, or (iii)
any matter that was the subject of disagreement with the Company's former
auditor on any matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedure.

           The Company requested that RAE furnish it with a letter addressed to
the Securities and Exchange Commission stating whether or not RAE agreed with
the above statements. A copy of such letter, dated June 8, 1998, is filed as
Exhibit 16 to Form 8-K.



                                                                              22
<PAGE>   23
                                    PART III

ITEM 10.   DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

           The directors and executive officers of the Company are:

Name                           Age        Position
----                           ---        --------

Jack Nelson(1)                 47         Chairman of the Board,
                                          Chief Executive Officer and Treasurer

Robert Spira, MD(1)(3)         49         Vice Chairman of the Board

Enrique Levy (1)               60         President, Chief Operating Officer
                                          and Director

Steven J. James                43         Chief Financial Officer and Secretary

Sol Triebwasser, PhD(2)        76         Director

Alison Estabrook, MD(2)        46         Director

Bernard Weiner, MD (3)         50         Director

Susan S. Bailis(2)             53         Director

Daniel E. Straus (3)           41         Director

--------------------
(1) Member of the Executive Committee.
(2) Member of the Audit Committee.
(3) Member of the Compensation/Option Committee

           The principal occupations and brief summary of the background of each
Director and executive officer of Caprius during the past five years is as
follows:

           JACK NELSON. Mr. Nelson has been Chairman of the Board since June
1991 and Treasurer since November 1990. From 1976 through 1993, Mr. Nelson had
been engaged in the private practice of law as senior partner with the law firm
of Zaslowsky, Marx & Nelson in New York, New York. Since January 1994, he has
been employed full-time with the Company. Mr. Nelson serves on the Board of
Directors of Advanced Machine Vision, Inc., a publicly traded company (NASDAQ:
AMVC). Mr. Nelson holds a B.A. degree from Yeshiva University and J.D. degree
from Hofstra University School of Law.

           ROBERT SPIRA, M.D. Dr. Spira has been a director of the Company since
September 1990 and Vice Chairman since February 1994. Since October 1992, he has
been the Director of the Department of Gastroenterology at St. Michael's Medical
Center in Newark, New Jersey, and for more than five years prior thereto, he
served as Chief of Gastrointestinal Endoscopy at St. Michael's Medical Center.
Dr. Spira is a graduate of New York University Medical School, a




                                                                              23

<PAGE>   24
past president of the New Jersey Society for Gastrointestinal Endoscopy and
President-elect of the New Jersey Society of Gastroenterology

           ENRIQUE LEVY. Mr. Levy has been President and Chief Operating Officer
since October 1995 and a Director since August 31, 1995. From May 1994 to
October 1995 he was at Xerox Graphic Systems, Harrison, New York, a venture of
Xerox Corporation. From April 1989 to May 1994, he was Executive Vice President
of Worldwide Process Technologies, Allendale, New Jersey, a manufacturer of
process systems and equipment for the web handling and film and paper coating
industries. Prior to 1989, he was President and Chief Executive Officer of
Polychrome Corporation, an international manufacturer of supplies to the graphic
arts and printing industry. He holds a B.S. in Chemical Engineering from the
Louisiana State University.

           STEVEN J. JAMES Mr. James has been Chief Financial Officer since
February 1997. From December 1993 through February 1997, he served as Chief
Financial Officer of MDI. Mr. James joined MDI as controller in 1988 and served
as MDI's Vice President of Finance from September 1992 to December 1993. Mr.
James is a Certified Public Accountant and a member of the AICPA and the
Massachusetts Society of CPAs. He is a graduate of Bentley College with a B.S.
in Accounting.

           SOL TRIEBWASSER, PH.D. Dr. Triebwasser has been a director of the
Company since July 1984. Until recently, Dr. Triebwasser was Director of
Technical Journals and Professional Relations for the IBM Corporation in
Thornwood, New York. Since receiving his Ph.D. in physics from Columbia in 1952,
he had managed various projects in device research and applications at IBM. Dr.
Triebwasser is a fellow of the Institute for Electrical and Electronic
Engineers, the American Physical Society and the American Association for the
Advancement of Science.

           ALISON ESTABROOK, M.D. was a director of AMS for the period from
August 29, 1996 through November 10, 1997, whereupon she became a director of
the Company. Since 1992, she has been an Associate Attending Physician at
Columbia Presbyterian Hospital and Associate Professor of Clinical Surgery at
Columbia University. From 1985 through 1995, Dr. Estabrook served as Director of
the Breast Clinic and since 1991 she has been the Chief of Breast Service at
Columbia University. Dr. Estabrook serves on the quality assurance committee of
the Division of Breast Surgery at Columbia Presbyterian Hospital. She received
the Outstanding Woman Doctor of the Year Award in 1989. Dr. Estabrook holds a
B.A. degree from Barnard College and is a graduate of New York University School
of Medicine.

           BERNARD WEINER, M.D. was a director of AMS for the period from June
29, 1995 through November 10, 1997, whereupon he became a director of the
Company. Since 1985, Dr. Weiner has been the Director of Nephrology and
Hemodialysis at Westchester Square Medical Center. Since 1980 Dr. Weiner has
been Assistant Clinical Professor in the Department of Medicine at Albert
Einstein College of Medicine. Dr. Weiner has written articles in several medical
publications and is a member of American College of Physicians, the National
Kidney Foundation, the American Society of Internal Medicine and the
International Society of Nephrology.

           SUSAN S. BAILIS was elected a director of the Company on November 10,
1997. Ms. Bailis has served since 1985 as President and Chief Executive Officer
of The A-D-S group, a wholly-owned subsidiary of The Multicare Companies, Inc.
("Multicare"), a NYSE listed company that was acquired by Genesis Health
Ventures. Prior to her employment with The A-D-S Group, Ms.




                                                                              24

<PAGE>   25
Bailis served as Associate Director (1983-1985) and Director of Social Services
(1977-1985), of the New England Medical Center. Ms. Bailis serves as President
of the Massachusetts Extended Care Federation and a Trustee of Simmons College
and also serves as a board member of numerous charitable organizations. She
received her B.S. from Brandeis University and her M.S.W. from Simmons College.

           DANIEL E. STRAUS was elected a director of the Company on November
10, 1997. Mr. Straus has served as President, Co-Chief Executive Officer and
director of Multicare since September 1992. From 1978 to 1984 he was involved in
the business of Multicare's predecessors. Mr. Straus received his B.A. degree in
1978 from Columbia University and his J.D. degree in 1981 from New York
University Law School.

           All directors hold office until the next annual meeting of
stockholders of the Company or until their successors are elected and qualified.
Executive officers hold office until their successors are chosen and qualified,
subject to earlier removal by the Board of Directors. See "Security Ownership of
Certain Beneficial Owners and Management."

           The Board of Directors met, either in person or telephonically, four
times in fiscal 1998. Each of the directors attended or participated in 75% or
more of the meetings.

           The Board of Directors has standing Executive, Audit and
Compensation/Option Committees.

           The Executive Committee exercises all the powers and authority of the
Board of Directors in the management and affairs of the Company between meetings
of the Board of Directors, to the extent permitted by law. The executive
committee met on a bi-weekly basis during fiscal 1998.

           The Audit Committee reviews with the Company's independent
accountants the scope and timing of the accountants' audit services and any
other services they are asked to perform, their report on the Company's
financial statements following completion of their audit and the Company's
policies and procedures with respect to internal accounting and financial
controls. In addition, the Audit Committee reviews the independence of the
independent public accountants and makes annual recommendations to the Board of
Directors for the appointment of independent public accountants for the ensuing
year. The Audit Committee met during fiscal 1998.

           The Compensation/Option Committee reviews and recommends to the Board
of Directors the compensation and benefits of all officers of the Company,
reviews general policy matters relating to compensation and benefits of
employees of the Company and administers the Company's Stock Option Plans. The
Compensation/Option Committee met during fiscal 1998.



                                                                              25

<PAGE>   26
ITEM 11.   EXECUTIVE COMPENSATION

           The following table sets forth the aggregate cash compensation paid
by the Company to (i) its Chief Executive Officer and (ii) its most highly
compensated officers whose cash compensation exceeded $100,000 for services
performed during the year ended September 30, 1998. The Company was reimbursed
by AMS for a portion of the executive salaries pursuant to the Shared Services
Agreement prior to the AMS Merger.

<TABLE>
<CAPTION>
                           Annual Compensation                           Long Term Compensation
                           -------------------                           ----------------------
                                                                        Awards              Payouts 
                                                                        ------              ------- 
                                                                              Securities
                                                  Other          Restricted   Underlying
Name and                                          Annual         Stock        Options       LTIP        All Other
Prinicpal                    Salary    Bonus      Compensation   Award(s)     SARs          Payouts     Compensation
Position           Year      ($)       ($)            ($)           ($)       (#)             ($)           ($)
--------------------------------------------------------------------------------------------------------------------
<S>                <C>       <C>       <C>        <C>            <C>          <C>           <C>         <C>
Jack Nelson        1998(8)   258,505   150,000        -0-           -0-       100,000         -0-       16,200(3)
Chairman/CEO       1997(4)   247,201       -0-        -0-           -0-           -0-         -0-       16,200(3)
                   1996      234,999    50,000        -0-           -0-        25,000         -0-       16,200(3)
--------------------------------------------------------------------------------------------------------------------
Enrique Levy       1998(8)   247,500   125,000        -0-           -0-       100,000         -0-        8,400(3)
President/         1997(4)   242,740       -0-        -0-           -0-           -0-         -0-        8,400(3)
COO                1996(5)   246,346       -0-        -0-           -0-        25,000         -0-        8,400(3)
--------------------------------------------------------------------------------------------------------------------
Steven James (7)   1998      142,501       -0-        -0-           -0-        15,500         -0-             -0-
CFO                1997(4)   215,685       -0-        -0-           -0-         2,500         -0-             -0-
--------------------------------------------------------------------------------------------------------------------
David Gaynor (2)   1997(4)   322,500       -0-        -0-           -0-           -0-         -0-             -0-
President/MDI      1996      212,538       -0-        -0-           -0-        15,000         -0-       1,500 (3)
--------------------------------------------------------------------------------------------------------------------
Robert Kwolyk(6)   1997(4)   168,490       -0-        -0-           -0-           -0-         -0-             -0-
VP/Sales&Marketing 1996      170,769       -0-        -0-           -0-           -0-         -0-             -0-
--------------------------------------------------------------------------------------------------------------------
</TABLE>

(1)  Mr. Nelson became a full-time employee beginning January 1, 1994.
(2)  Mr. Gaynor became President of MDI beginning December 1, 1995 and
     terminated his Employment Agreement effective January 31, 1997, whereupon
     pursuant to the merger of MDI with US Diagnostic, he received $247,500 in
     severance, plus accrued salary and vacation pay in the amount of $60,380.
(3)  Paid to Mr. Nelson for the purpose of reimbursing him for transportation
     and other expenses; and to Messrs. Levy, Gaynor and Kwolyk for the purpose
     of reimbursing them for transportation.
(4)  Includes salary, all other compensation and stock options awarded during
     the year ended September 30, 1997.
(5)  Mr. Levy became President and COO beginning October 1, 1995. Mr. Levy's
     salary includes a "signing" bonus of $30,000.
(6)  Mr. Kwolyk was Vice President, Sales and Marketing until May 1, 1997 when
     his contract was terminated.
(7)  Mr. James became Chief Financial Officer on March 31, 1997. Total salary
     includes $150,000 in satisfaction of severance payments due from the sale
     of MDI.
(8)  The Company has committed to issue restricted shares of the Company's
     common stock



                                                                              26

<PAGE>   27
     to Mr. Nelson and Mr. Levy in the amount of 125,000 and 100,000 shares,
     respectively. (See "Employment Agreements" for description). In addition,
     compensation includes bonus of $150,000 and $125,000, respectively, as
     approved by the Compensation Committee. 

EMPLOYMENT AGREEMENTS

           The Company has an employment agreement with Jack Nelson (the "Nelson
Employment Agreement"), employing him as Chairman of the Board, Chief Executive
Officer and Treasurer. The Agreement was originally entered into on December 20,
1995, whereby Mr. Nelson was employed by both the Company and AMS. Effective
with the AMS Merger, Mr. Nelson became fully employed by the Company. The Nelson
Employment Agreement includes an aggregate base salary of $258,500, with any
additional increases in base salary thereafter being instituted by the Board of
Directors. Effective October 30, 1998, Mr. Nelson took a voluntary 25% salary
reduction such that his base salary is $193,875. At Mr. Nelson's discretion,
base salary can be restored to $258,500 at any time.

           Effective February 19, 1998, the Board of Directors approved an
Amended and Restated Employment Agreement for Mr. Nelson whereby the following
changes were instituted: 1) Mr. Nelson received 125,000 of an authorized
1,000,000 Units under a Long Term Incentive Plan ("LTIP") established by the
Company. The LTIP provides for a bonus award of $15.00 for each Unit granted to
the participant and are dependent on the Company achieving earnings of $7.5
million or earnings per share of $0.50 in any of fiscal years 1998, 1999 or
2000; 2) Mr. Nelson was to be granted 125,000 shares of Restricted Common Stock
which is restricted as to transferability, pledge or disposition until such time
as the shares issued become Vested. Vesting to occur on the earliest of a)
January 1, 2007; b) March 1, 2001, provided that Company achieves Net Income or
earnings per share goals as set in the LTIP; c) change of control of the Company
(as defined in the Agreement); d) termination of Mr. Nelson's employment, unless
for "cause", as defined. The restricted shares will be issued in fiscal year
1999; 3) 300,000 stock options were authorized to Mr. Nelson under the 1993
Employee Stock Option Plan, of which 100,000 options have been granted at an
exercise price of $1.28 per share expiring February 19, 2008. The balance of
200,000 will be granted when more shares become available under the Plan or the
options authorized under the Plan are increased. The options are exercisable
immediately into Restricted Common Stock with vesting provisions similar to
those outlined in the Restricted Common Stock grant in 2 above. Mr. Nelson will 
be eligible to receive a bonus of between $125,000 and $200,000 for each fiscal 
year, as determined by the Compensation Committee based on performance.

           The Nelson Employment Agreement further provides that if Mr. Nelson
terminates his employment "for cause" or the Company terminates his employment
"without cause" (as each such term is defined in the Nelson Employment
Agreement), or upon Mr. Nelson's death or disability, Mr. Nelson or his
representative shall receive his annual base salary as paid by the Company or
AMS, as the case may be, for two full years from the date of his termination,
less any amounts received under the Company's insurance policies. In the event
that the Company, without the consent of Mr. Nelson, assigns its rights and
obligations under either of the Nelson Employment Agreement to any company with
or into which the Company may merge or consolidate, or to which the Company may
sell or transfer all or substantially all of its assets or of which 50% or more
of the equity investment and of the voting control is owned, directly or
indirectly, by the Company, and if the assignee was not previously part of a
consolidated group with the Company, then Mr. Nelson may terminate the
applicable Nelson Employment Agreement within thirty days after notice of
assignment, and he shall receive 2.99 times his full annual base salary plus any
bonuses, but not to exceed such amount which would result in an excise tax.




                                                                              27

<PAGE>   28
           The Company has an Employment Agreement with Enrique Levy (the "Levy
Employment Agreement"), employing him as President and Chief Operating Officer.
The Agreement was originally entered in September 1995 whereby Mr. Levy was
employed by both the Company and AMS. Effective with the AMS Merger, Mr. Levy
became fully employed by the Company. The Levy Employment Agreement includes a
base salary of $247,500, with any additional increases in base salary thereafter
being instituted by the Board of Directors. Mr. Levy also received a $30,000
"signing" bonus. Effective October 30, 1998, Mr. Levy took a voluntary 25%
salary reduction such that his base salary is $185,625. At Mr. Nelson's
discretion, base salary can be restored to $247,500 at any time.

           Effective February 19, 1998, the Board of Directors approved an
Amended and Restated Employment Agreement for Mr. Levy whereby the following
changes were instituted: 1) Mr. Levy received 100,000 of an authorized 1,000,000
Units under a Long Term Incentive Plan ("LTIP") established by the Company. The
LTIP provides for a bonus award of $15.00 for each Unit granted to the
participant and are dependent on the Company achieving earnings of $7.5 million
or earnings per share of $0.50 in any of fiscal years 1998, 1999 or 2000; 2) Mr.
Levy was to be granted 100,000 shares of Restricted Common Stock which is
restricted as to transferability, pledge or disposition until such time as the
shares issued become Vested. Vesting to occur on the earliest of a) January 1,
2007; b) March 1, 2001, provided that Company achieves Net Income or earnings
per share goals as set in the LTIP; c) change of control of the Company (as
defined in the Agreement); d) termination of Mr. Levy's employment, unless for
"cause", as defined. The restricted shares will be issued in fiscal year 1999;
3) 250,000 stock options were authorized to Mr. Levy under the 1993 Employee
Stock Option Plan, of which 100,000 options have been granted at an exercise
price of $1.28 per share expiring February 19, 2008. The balance of 150,000 will
be granted when more shares become available under the Plan or the options
authorized under the Plan are increased. The options are exercisable immediately
into Restricted Common Stock with vesting provisions similar to those outlined
in the Restricted Common Stock grant in 2 above. Mr. Levy will be eligible to 
receive a bonus of between $100,000 and $200,000 for each fiscal year, as 
determined by the Compensation Committee based on performance.

           The Levy Employment Agreement further provides that if Mr. Levy
terminates his employment "for cause" or the Company terminates his employment
"without cause" (as such term is defined in the Levy Employment Agreement), or
upon Mr. Levy's death or disability, Mr. Levy or his representative shall
receive his annual base salary for two full years from the date of his
termination, less any amounts received under the Company's insurance policies.
In the event that the Company, without the consent of Mr. Levy, assigns its
rights and obligations under the Levy Employment Agreement to any company with
or into which the Company may merge or consolidate, or to which the Company may
sell or transfer all or substantially all of its assets or of which 50% or more
of the equity investment and of the voting control is owned, directly or
indirectly, by the Company, and if the assignee was not previously part of a
consolidated group with the Company, then Mr. Levy may terminate the Levy
Employment Agreement within thirty days after notice of assignment, and he shall
receive 2.99 times his full annual base salary plus any bonuses, but not to
exceed such amount which would result in an excise tax.

           On November 1, 1996, each member of senior management accepted the
opportunity to have the exercise price of all outstanding stock options held by
them repriced to the market price of the Company's Common Stock as of August 22,
1996 ($0.50) if, in exchange for such repricing, such member of senior
management agreed to defer 17% of his salary for one year, at which time the
Compensation Committee would determine whether additional deferrals were
necessary. Messrs. Nelson, Levy and Gaynor agreed to the repricing of options
held by them on



                                                                              28

<PAGE>   29
such terms.

           As of March 31, 1997, Steven J. James' employment agreement was
amended to provide that upon the MDI merger his employment as Vice President of
Finance/ CFO would be with both Caprius and AMS, instead of MDI, at an annual
base salary of $125,000 split between the two companies, terminating on June 30,
1999, and each company would grant to him options for the purchase of 2,500
shares (on a post-reverse stock split basis) of its common stock at the market
price upon the respective date of grant. The change of control provisions in his
employment agreement were terminated upon payment of $150,000 to Mr. James in
satisfaction of the application of such provisions to the entry into the MDI/ US
Diagnostic merger agreement.

           Upon the Merger of AMS with the Company, the Company assumed all
obligations pursuant to the above employment agreements.

           The Company does not have any annuity, retirement, pension or
deferred compensation plan or other arrangement under which any executive
officers are entitled to participate without similar participation by other
employees.

<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------

OPTION/SAR GRANTS IN LAST FISCAL YEAR

                                                                           Potential Realized
                                                                           Value at Assumed     Alternative to
                               Individual                                Annual Rates of Stock    (f) and (g)
                                 Grants                                 Price Appreciation for    Grant Date
                                                                              Option Term            Value
   (a)              (b)            (c)         (d)            (e)         (f)          (g)            (h)
                                  % of
                 Number of        Total
                Securities      Options/     Exercise                                                Grant
                Underlying        SARS       on Base      Expiration                                 Date
   Name          Options/      Granted to     Price          Date        5% ($)      10% ($)        Present
                   SARs        Employee(s)    ($/Sh)                                                Value $
                Granted (#)     in Fiscal
                    (1)           Year
                                   (1)
---------------------------------------------------------------------------------------------------------------
<S>             <C>            <C>           <C>          <C>           <C>          <C>            <C>

Jack Nelson       100,000          26%        $1.28         2/19/08     $210,800     $346,500         -0-

Enrique Levy      100,000          26%        $1.28         2/19/08     $210,800     $346,500         -0-

Steven James       15,500           2%        $0.84         1/02/03     $ 17,500     $ 23,000         -0-

Robert Kwolyk         -0-

</TABLE>

(1) Reflects the Company's 1-for 10 Reverse Stock Split



                                                                              29

<PAGE>   30

--------------------------------------------------------------------------------
                          FISCAL YEAR END OPTION VALUE

                         NUMBER OF SECURITIES        VALUE OF UNEXERCISED
                        UNDERLYING UNEXERCISED       IN-THE-MONEY OPTIONS
                      OPTIONS AT SEPT. 30, 1998       AT SEPT. 30, 1998
NAME                  EXERCISABLE/UNEXERCISABLE        EXERCISABLE ($)
----                  -------------------------      --------------------

Jack Nelson                 186,000/27,000                   $-0-

Steven J. James             18,800/15,500                    $-0-

Enrique Levy                170,001/14,999                   $-0-


COMPENSATION OF DIRECTORS

           Directors who are employees of the Company are not paid any fees or
additional compensation for services as members of the Company's Board of
Directors or any committee thereof. Although non-employee Directors do not
receive Board fees, they are entitled to Options to purchase shares of the
Company's Common Stock. Each person that becomes a member of the Board is
granted Options to purchase 15,000 shares of the Common Stock. Thereafter, a
Director is granted Options to purchase 10,000 shares annually if that person
has been a Director of the Company for more than six months. Pursuant to the
1993 Directors Stock Option Plan for Non-Employee Directors (the "1993 Directors
Plan"), which was amended in December 1997, the number of shares available under
the 1993 Directors Plan has been increased to 200,000 shares on a post-Reverse
Stock Split basis. See "Submission of matters to a Vote of Security Holders."

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

           The members of the Company's Compensation/Option Committee are Robert
Spira, M.D., Bernard Weiner, M.D. and Daniel E. Straus, none of whom is an
executive officer or employee of the company or its subsidiaries. The
Compensation Committee met during Fiscal 1998 to review executive compensation
and, primarily based on the report of a compensation consultant to the Company,
obtained approval from the Board of Directors for changes to executive
compensation. See "Executive Compensation - Employment Agreements".




                                                                              30

<PAGE>   31

ITEM 12.   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

           The following table sets forth, as of December 31, 1998, certain
information regarding the beneficial ownership of Common Stock by (i) each
person who is known by the Company to own beneficially more than five percent of
the outstanding Common Stock, (ii) each director of the Company, and (iii) all
directors and executive officers as a group:

<TABLE>
<CAPTION>
                                                              Amount and Nature   Percentage of
Name of                           Position with               of Beneficial       Common
Beneficial Owner                  Company                     Ownership (1)       Stock
------------------------------------------------------------------------------------------------
<S>                               <C>                         <C>                 <C>
Jack Nelson                       Chairman of the             218,500 (2)          3.0%
                                  Board; Chief
                                  Executive Officer
                                  Treasurer

Enrique Levy                      President; Chief            182,001 (3)          2.5%
                                  Operating Officer;
                                  Director

Steven J. James                   Chief Financial Officer;     18,800 (4)             *
                                  Secretary

Robert Spira, M.D.                Director                     14,000 (5)             *

Sol Triebwasser, Ph.D.            Director                     17,000 (6)             *

Alison Estabrook, M.D.            Director                      9,000 (7)             *

Bernard Weiner, M.D.              Director                     11,500 (8)             *

Susan S. Bailis                   Director                              0             *

Daniel E. Straus                  Director                              0             *

All directors and executive
officers as a group (9 persons)  (2)(3)(4)(5)(6)(7)(8)            470,801

</TABLE>

--------------
*  Less than one percent (1%).




                                                                              31

<PAGE>   32

(1)  All shares of Caprius Common Stock are beneficially owned, and the sole
     voting and investment power is held by the persons named, except as set
     forth in the notes below. A person is deemed to be the beneficial owner of
     shares that can be acquired within 60 days of the date of this table upon
     exercise of options or warrants.

(2)  Includes 32,500 shares owned and 186,000 shares underlying presently
     exercisable options granted under the 1993 Employee Plan. Excludes (i)
     30,200 shares owned by Mr. Nelson's wife and children, as to which shares
     he disclaims beneficial ownership; (ii) 27,000 shares underlying options
     granted under the 1993 Employee Plan which are subject to vesting
     thereunder; (iii) 125,000 shares of restricted stock that the Company has
     committed to issue (see "Employment Agreements" for description).

(3)  Includes 12,000 shares owned and 170,001 shares underlying presently
     exercisable options granted under the 1993 Employee Plan. Excludes(i)
     14,999 shares underlying options granted under the 1993 Employee Plan which
     are subject to vesting thereunder; and (ii) 100,000 shares of restricted
     stock that the Company has committed to issue (see "Employment
     Agreements").

(4)  Includes 18,800 shares underlying presently exercisable options granted
     under the 1993 Employee Plan. Underlying options include 10,000 options
     granted under the 1993 Employee Plan pursuant to the Merger. Excludes
     15,500 share underlying options granted under the 1993 Employee Plan which
     are subject to vesting thereunder.

(5)  Includes 14,000 shares underlying options presently exercisable granted
     under the 1993 Directors Plan and excludes 1,500 shares underlying options
     granted under the 1993 Directors Plan, which are currently not exercisable.

(6)  Includes 17,000 shares underlying options presently exercisable granted the
     1993 Directors Plan and excludes 1,500 shares underlying options granted
     under the 1993 Directors Plan, which are currently not exercisable.

(7)  Includes 9,000 shares underlying options presently exercisable granted
     under the 1993 Directors Plan and excludes 5,000 shares underlying options
     granted under the 1993 Directors Plan, which are currently not exercisable.

(9)  Includes 11,500 shares underlying options presently exercisable granted
     under the 1993 Directors Plan and excludes 2,500 shares underlying options
     granted under the 1993 Directors Plan, which are currently not exercisable.





                                                                              32

<PAGE>   33
ITEM 13.   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

           In July 1992, the Company formed AMS as a subsidiary for the purpose
of financing the development of a MRI breast imaging system. Pursuant to the
License Agreement, the Company licensed its proprietary technology for such
system to AMS, which paid $1,680,000 and issued to the Company 4,000,000 shares
of AMS Common Stock, of which 2,750,000 shares were subject to an escrow
agreement ("Escrow Agreement"), which has been terminated. In early 1993, AMS
completed an initial public offering, whereupon AMS and the Company entered into
a shared services agreement ("Shared Services Agreement"). Effective November
10, 1997, upon the Merger of AMS into Caprius, the Shared Services Agreement was
terminated.




                                                                              33

<PAGE>   34
                                     PART IV

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

(a)(1)     The following financial statements are filed herewith:

           Independent Auditors' Reports

           Consolidated Balance Sheets

           Consolidated Statements of Operations

           Consolidated Statements of Stockholders' Equity

           Consolidated Statements of Cash Flows

           Notes to Consolidated Financial Statements

(a)(2)     The following Financial Statement Schedules are filed herewith: None.
           All schedules have been omitted because they are inapplicable or not
           required, or the information is included in the financial statements
           or notes thereto.

(a)(3)     Exhibits, including those incorporated by reference.

Exhibit No.   Description
-----------   -----------

2.1           Agreement and Plan of Merger among Registrant, ANMR Acquisition
              Corp. and MDI, dated May 2, 1995 (incorporated by reference to
              Annex A to the Joint Proxy Statement/Prospectus to Registrant's
              Registration Statement on Form S-4, declared effective August 3,
              1995 (File No. 33-95302)("Registrant's Form S-4").

2.2           Agreement and Plan of Merger, dated January 20, 1997, by and among
              Registrant, MDI, MDI Acquisition Corporation and US Diagnostic
              (incorporated by reference to Exhibit 1 to Registrant's Report of
              Form 8-K filed January 23, 1997)

2.3           Agreement and Plan of Merger, dated as of June 23, 1997, among
              Registrant, ANMR/AMS Merger Corp. and AMS (incorporated by
              reference to Annex A to the Joint Proxy Statement Prospectus that
              forms part of Registrant's Registration Statement of Form S-4
              filed on October 9, 1997.




                                                                              34

<PAGE>   35
Exhibit No.   Description
-----------   -----------

3.1           Certificate of Incorporation of Registrant. (incorporated by
              reference to Exhibit 3 filed with Registrant's Registration
              Statement on Form S-2, and amendments thereto, declared effective
              August 18, 1993 (File No. 2084785 ("Registrant's Form S-2"))

3.2           Amendment to Certificate of Incorporation of Registrant filed
              November 5, 1993 (incorporated by reference to Exhibit 3.2 to
              Registrant's Form S-4).

3.3           Amendment to Certificate of Incorporation of Registrant, filed
              August 31, 1995, (incorporated by reference to Exhibit 3.1 to
              Registrant's Form 8-K for an event of August 31, 1995 (the "August
              1995 Form 8-K")).

3.4           Amendment to Certificate of Incorporation of Registrant, filed
              September 21, 1995.

3.5           Amended and Restated By-laws of Registrant (incorporated by
              reference to Exhibit 3.4 to Registrant's Form S-4).

4.1.1         Form of Warrant Agreement between Registrant and American Stock
              Transfer & Trust Company, as Warrant Agent (incorporated by
              reference to Exhibit 4 to Registrant's August 1995 Form 8-K).

4.1.2         Form of Warrant Certificate (incorporated by reference to Annex B
              to the Registrant's Joint Proxy Statement, dated August 31, 1995).

4.2           Specimen Certificate for Common Stock, par value $.01 per share,
              of Registrant (incorporated by reference to Exhibit 4.2 to
              Registrant's Form S-4).

4.3.1         Form of Supplemental Agreement relating to Registrant's assumption
              of MDI's Obligations under the Warrant Agreement between MDI and
              First Albany Corporation and Janney Montgomery Scott, Inc.
              (incorporated by reference to Exhibit 4.3.1 to Registrant's
              Form S-4).

4.3.2         Form of Supplemental Agreement relating to Registrant's assumption
              of MDI's Obligations under the Warrant Agreement between MDI and
              Jacob Agam (incorporated by reference to Exhibit 4.3.2 to
              Registrant's Form S-4).

4.4           Form of Warrant Certificate, dated as of March 6, 1994, issued to
              Dominick & Dominick Incorporated (incorporated by reference to
              Exhibit 4.4 to Registrant's Form S-4).

4.5           Certificate of Designation of Series A Preferred Stock of the
              Company (incorporated by reference to the Company's Current Report
              on Form 8-K, filed on March 31, 1996 (File No. 0-11914).

4.6           Certificate of Designation of Series B Convertible Redeemable
              Preferred Stock of Registrant (incorporated by reference to
              Registrant's Report of Form 8-K, filed September 2, 1997).

10.1          Registrant's 1983 Incentive and Non-Qualified Stock Option Plan,
              Amended and Restated as of February 1, 1988, and form of incentive
              stock option (incorporated by reference to Exhibit 10.4 to
              Registrant's Form S-2).

10.2          Registrant's 1993 Employee Stock Option Plan (incorporated by
              reference to Exhibit A of the Proxy Statement for Registrant's
              1993 Annual Meeting of Stockholders (File No. 0-11914)).




                                                                              35

<PAGE>   36
Exhibit No.   Description
-----------   -----------

10.3          Registrant's 1993 Directors Stock Option Plan for Non-Employee
              Directors (incorporated by reference to Exhibit B of the Proxy
              Statement for Registrant's 1993 Annual Meeting of Stockholders
              (File No. 0-19914)).

10.4.1        Amended and Restated Agreement between the Registrant and General
              Electric Company, dated November 30, 1989 (incorporated by
              reference to Exhibit 10.6 filed with Registrant's Annual Report on
              Form 10-K for the fiscal year ended December 31, 1990 (File No.
              0-19914)).

10.4.2        Amended 1989 Agreement with General Electric Company, dated March
              5, 1993 (incorporated by reference to Exhibit 10.12 filed with
              Registrant's Annual Report on Form 10-K for the fiscal year ended
              December 31, 1992 (File No. 0-11914).

10.4.3        Amended 1993 Agreement with General Electric Company, dated March
              5, 1993 (incorporated by reference to Exhibit 10.4.2 filed with
              Registrant's Annual Report on Form 10-K for the fiscal year ended
              December 31, 1994 (File No. 0-11914) (the "ANMR 1994 Form 10-K").

10.4.5        1994 Agreement between Registrant and General Electric Company,
              dated July 29, 1994 (incorporated by reference to Exhibit 10.4.5
              to Registrant's Form S-4).

10.4.6        Purchase Agreement between Registrant of GE, dated July 29, 1994
              (incorporated by reference to Exhibit 10.4.5 to Registrant's
              Form S-4.

10.4.7        Registration Rights Agreement, dated august 18, 1997, between the
              Registrant and GE (incorporated by reference to Exhibit 10.2 to
              the Registrant's Report on Form 8-K, filed September 2, 1997).

10.4.8        Stockholders Agreement, dated August 18, 1997, between the
              Registrant and GE (incorporated by reference to Exhibit 10.3 to
              the Registrant's Report on Form 8-K, filed September 2, 1997).

10.4.9        Settlement and Release Agreement, dated August 18, 1997, between
              the Registrant and GE (incorporated by reference to Exhibit 10.4
              to the Registrant's Report of Form 8-K, filed September 2, 1997).

10.4.10       License Agreement, dated August 18, 1997, between the Registrant
              and GE (incorporated by reference to Exhibit 10.4 to the
              Registrant's Report of Form 8-K, filed September 2, 1997).

10.5          Employment Agreement between Registrant and Jack Nelson, dated as
              of December 6, 1993 (incorporated by reference to Exhibit 10.5
              filed with the ANMR 1994 Form 10-K).

10.6          Employment Agreement among Registrant, Advanced Mammography
              Systems, Inc. ("AMS") and Enrique Levy, dated September 17, 1995.

10.7          Employment Agreement between Registrant and Robert L. Kwolyk,
              dated as of April 25, 1994 (incorporated by reference to Exhibit
              10.8 to Registrant's Form S-4).

10.8          Employment Agreement among Registrant, MDI and John A. Lynch,
              dated May 2, 1995 (incorporated by reference to Exhibit 47 to
              MDI's Schedule




                                                                              36

<PAGE>   37
Exhibit No.   Description
-----------   -----------

              14D-9 (Amendment No. 18) filed on May 3, 1995).

10.9          Lease Agreement between Registrant and John T. Spinelli, dated May
              5, 1991 (incorporated by reference to Exhibit 10.9 filed with
              Registrant's Annual Report on Form 10-K for the fiscal year ended
              December 31, 1995 (File No. 0-19914)).

10.10         License Agreement between Registrant and AMS, dated July 29, 1992
              (incorporated by reference to Exhibit 10.13 to Registrant's Form
              S-2).

10.11         Shared Services Agreement between Registrant and AMS dated August
              29, 1996.

10.12         Escrow Agreement among Registrant, AMS and American Stock Transfer
              & Trust Company, dated December 1992 (incorporated by reference to
              Exhibit 10.15 to Registrant's Form S-2).

10.13         Loan and Security Agreement, dated as of August 31, 1995, between
              MDI and Chemical Bank (without exhibits) (incorporated by
              reference to Exhibit 10.2 to Registrant's August 1995 Form 8-K).

10.14         Guaranty and Security Agreement, dated as of August 31, 1995,
              between Registrant and Chemical Bank (without exhibits)
              (incorporated by reference to Exhibit 10.3 to Registrant's August
              1995 Form 8-K).

10.15         Guaranty and Security Agreement, dated as of August 31, 1995,
              between certain subsidiaries of MDI and Chemical Bank (without
              exhibits) (incorporated by reference to Exhibit 10.4 to
              Registrant's August 1995 Form 8-K).

10.16         Pledge Agreement, dated as of August 31, 1995, between Registrant
              and Chemical Bank (incorporated by reference to Exhibit 10.5 to
              Registrant's August 1995 Form 8-K).

10.17         Pledge Agreement, dated as of August 31, 1995, between MDI and
              Chemical Bank (incorporated by reference to Exhibit 10.6 to
              Registrant's August 1995 Form 8-K).

10.18         Amended and Restated Joint Venture Agreement among MDI and Medical
              Imaging Partners, L.P., dated August 6, 1990 (incorporated by
              reference to Exhibit 10(b)(1) to MDI's Registration Statement on
              Form S-1 as amended on October 30, 1991 (File No. 33-42748)) (the
              "MDI Registration Statement").

10.19         Restated Management Agreement between MDI and Mass. Mobile Imaging
              Venture, dated August 6, 1990 (incorporated by reference to
              Exhibit 10(b)(2) to the MDI Registration Statement).

10.20         Restated and Amended Medical Imaging Lease and Services Agreement
              between Western Mass. Magnetic Resonance Services, Inc. and Mass.
              Mobile Imaging Venture, dated August 6, 1990 (incorporated by
              reference to Exhibit 10(b)(3) to the MDI Registration Statement).

10.21         Medical Imaging Lease and Services Agreement between Mobile MRI of
              Western Massachusetts Associates and Mass. Mobile Imaging Venture,




                                                                              37

<PAGE>   38
Exhibit No.   Description
-----------   -----------

              dated August 6, 1990 (incorporated by reference to Exhibit
              10(b)(4) to the MDI Registration Statement).

10.22         Lease Agreement between Medical Imaging Partners, L.P. and Mass.
              Mobile Imaging Venture, dated December 31, 1986 (incorporated by
              reference to Exhibit 10(b)(9) to the MDI Registration Statement).

10.23         MRI Management Services Agreement between Merrimack Valley Health
              Services, Inc. and MDI dated October 1, 1990 (incorporated by
              reference to Exhibit 10(f)(1) to the MDI Registration Statement).

10.24         Joint Venture Agreement of Mobile MRI of Western Massachusetts
              Associates, between Mobile MRI of Western Massachusetts, Inc. and
              MRI Associates Inc., dated December 22, 1986 (incorporated by
              reference to Exhibit 10(h)(1) to the MDI Registration Statement).

10.25.1       Lease Agreement between MDI and the Trustees of Six New England
              Executive Park, dated January 22, 1988 (incorporated by reference
              to Exhibit 10(j) to the MDI Registration Statement).

10.25.2       First Amendment to Lease Agreement between MDI and the Trustees of
              Six New England Executive Park, dated October 15, 1992.

10.25.3       Second Amendment to Lease Agreement between MDI and the Trustees
              of Six New England Executive Park, dated April 6, 1993.

10.26         Severance Agreements between MDI and each of Judy C. Erbstein,
              David C. Gaynor, Steven J. James, Eileen H. Kirrane, Elaine H.
              McCarthy, Ruselle W. Robinson and John F. Sweeney, each dated
              February 16, 1995 (incorporated by reference to Exhibit 35 to
              MDI's Schedule 14D-9 (Amendment No. 13) filed with the Commission
              on February 23, 1995).

10.27         Stock Purchase Agreement between MDI, John W. Hammer and
              Hi-Chicago Trust, dated October 12, 1988 (incorporated by
              reference to Exhibit 10(o) to the MDI Registration Statement).

10.28         Clinical License for MRI Services by Western Mass. Magnetic
              Resonance Services, Inc. (incorporated by reference to Exhibit
              10(p)(1) to the MDI Registration Statement).

10.29         Clinical License for MRI Services by Mobile MRI of Western
              Massachusetts Associates (incorporated by reference to Exhibit
              (10(p)(2) to the MDI Registration Statement).

10.30         Clinical License for MRI Services by Central Mass. MRI Limited
              Partnership ("Central Mass.") (incorporated by reference to
              Exhibit 10(p)(4) to the MDI Registration Statement).

10.31         Clinical License for MRI Services by Greater Boston MRI Limited
              Partnership ("Greater Boston") (incorporated by reference to
              Exhibit 10(p)(3) to the MDI Registration Statement).

10.32.1       Determination of Need issued to Western Mass. Magnetic Resonance
              Services, Inc., to provide Mobile MRI Services, dated May 29, 1986
              (incorporated by reference to Exhibit 10(q)(1) to the MDI
              Registration Statement).

10.32.2       Determination of Need issued to Western Mass. Magnetic Resonance
              Services, Inc., to provide free-standing, fixed site MRI services,
              dated




                                                                              38

<PAGE>   39
Exhibit No.   Description
-----------   -----------

              April 3, 1989 (incorporated by reference to Exhibit 10(q)(2) to
              the MDI Registration Statement).

10.33         Determination of Need issued to Central Mass., dated July 20, 1988
              (incorporated by reference to Exhibit 10(q)(3) to the MDI
              Registration Statement).

10.34.1       Determination of Need issued to Greater Boston MRI Services, Inc.
              ("Greater Boston"), dated April 8, 1988, with letter transferring
              ownership of the Determination of Need to Greater Boston
              (incorporated by reference to Exhibit 10(q)(4) to the MDI
              Registration Statement).

10.34.2       Determination of Need issued to Greater Boston, dated October 12,
              1989 (incorporated by reference to Exhibit 10(q)(5) to the MDI
              Registration Statement).

10.35         Determination of Need issued to Mobile MRI of Western
              Massachusetts Associates, dated August 28, 1989 (incorporated by
              reference to Exhibit 10(q)(6) to the MDI Registration Statement).

10.36         Agreement between Stephen O. Dell, Seacoast Scanning, Inc., MDI
              and Casco Bay MR Services, Inc., dated June 20, 1987 (incorporated
              by reference to Exhibit 10(u) to the MDI Registration Statement).

10.37         Agreement in principle between MDI and Toshiba America Medical
              Systems, Inc., dated November 8, 1991 (incorporated by reference
              to Exhibit 10(ae)(7) to the MDI Registration Statement).

10.38         "Maxiservice" MRI Lease Agreement between General Electric Company
              and Mass. Mobile Imaging Venture, dated February 21, 1991
              (incorporated by reference to Exhibit 10(af)(1) to the MDI
              Registration Statement).

10.39         "Masterline" Van Lease Agreement between General Electric Company
              and Mass. Mobile Imaging Venture, dated February 21, 1991
              (incorporated by reference to Exhibit 10(af)(2) to the MDI
              Registration Statement).

10.40         Asset Purchase Agreement and Support Services Agreement
              (incorporated by reference to Exhibit E-1 and E-2 to MDI's Report
              on Form 8-K filed on November 17, 1993 (File No. 0-11914)).

10.41         Stock Purchase Agreement and First Amendment to Stock Purchase
              Agreement (incorporated by reference to Exhibit E-1 and E-2 to
              MDI's Report on Form 8-K/A filed on July 25, 1994 (File No.
              0-11914)).

10.42         Amended License and Services Agreement between Burlington Imaging
              Associates, Inc., P.C. and MDI (incorporated by reference to
              Exhibit 10 to MDI's Annual Report on Form 10-K for the fiscal year
              ended September 30, 1994 (File No. 0-19736)).

10.43         Purchase and Sale Agreement dated November 17, 1994 between MDI
              Rehab, Inc. and MVA Center for Rehabilitation, P.C. (incorporated
              by reference to Exhibit 2 to MDI's Report on Form 8-K filed on
              February 15, 1995 (File No. 0-19736)).

10.44         Amended Management Agreement between MDI and ICI dated October 30,
              1987 and amended October 1, 1991 (incorporated by reference to
              Exhibit 10(a)(1) and 10(a)(2) to the MDI Registration Statement).

10.45         Key Employment Agreement between MVA Rehabilitation Associates and




                                                                              39

<PAGE>   40
Exhibit No.   Description
-----------   -----------

              Eric T. Shebar, M.D. dated as of January 31, 1995 (incorporated by
              reference to Exhibit 10(b) to MDI's Report on Form 8-K filed on
              February 15, 1995 (File No. 0-19736)).

10.46         Amended and Restated Agreement of Partnership of MVA
              Rehabilitation Associates (incorporated by reference to Exhibit
              10(a) to MDI's Report on Form 8-K filed on February 15, 1995 (File
              No. 0-19736)).

10.47         Employment Agreement, dated December 20, 1995, between ANMR and
              Jack Nelson.

10.48         Employment Agreement, dated December 1, 1995, between MDI and
              David Gaynor.

10.49         Form of Regulation S Securities Subscription Agreement relating to
              the Company's Series A Preferred Stock (incorporated by reference
              to the Company's current report on Form 8-K, dated March 31, 1996
              (File No. 0-11914)).

21*           List of Company's subsidiaries.

23.1*         Consent of BDO Seidman, LLP, independent public accountants for
              Company.

23.2*         Consent of Richard A. Eisner & Company, LLP.

27*           Financial Data Schedule


(b)        Reports of Form 8-K

           On June 3, 1998, the Company filed a Form 8-K announcing a change in
           the registrant's certifying accountants. This change was due to the
           Boston office of the Company's accountants, Richard A. Eisner &
           Company, LLP, merging with BDO Seidman, LLP.

-----------------
*  Filed herewith



                                                                              40

<PAGE>   41
                                   SIGNATURES


Pursuant to the requirements of the Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized on the 12th day of
January 1998.


CAPRIUS, INC.



By: /s/ Enrique Levy
    ---------------------------
    Enrique Levy, President/COO


Pursuant to the requirements of the Securities Exchange Act of 1934 this report
has been signed by the following persons in the capacities and on the dates
indicated.

Signature                Title                                Date
---------                -----                                ----

/s/ Jack Nelson          Chairman of the Board                January 13, 1999
----------------------
Jack Nelson

/s/ Enrique Levy         President, Chief Operating           January 13, 1999
----------------------   Officer and Director
Enrique Levy

/s/ Steven J. James      Chief Financial and Accounting       January 13, 1999
----------------------   Officer
Steven J. James







                                                                              41
<PAGE>   42
                         CAPRIUS, INC. AND SUBSIDIARIES

                                    I N D E X




Independent Auditors' Reports                                   F-2, F-3


Consolidated Balance Sheets                                          F-4


Consolidated Statements of Operations                                F-5


Consolidated Statements of Stockholders' Equity                      F-6


Consolidated Statements of Cash Flows                                F-7


Notes to Consolidated Financial Statements                           F-8





                                      F-1

<PAGE>   43
                          INDEPENDENT AUDITORS' REPORT


The Board of Directors and Stockholders
Caprius, Inc.

           We have audited the accompanying consolidated balance sheet of
Caprius, Inc. (formerly Advanced NMR Systems, Inc.) and subsidiaries as oft
September 30, 1998, and the related consolidated statements of operations,
stockholders' equity, and cash flows for year ended September 30, 1998. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audit.

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

           In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the consolidated financial
position of Caprius, Inc. and subsidiaries at September 30, 1998, and the
results of their operations and their cash flows for the year then ended in
conformity with generally accepted accounting principles.

           The accompanying financial statements have been prepared assuming
that the Company will continue as a going concern. However, the Company has
incurred substantial losses in recent years which raises substantial doubt about
its ability to continue as a going concern. Management's plans in regard to this
matter are described in Note A. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.


/s/ BDO Seidman, LLP
BDO Seidman, LLP
Boston, Massachusetts
November 30, 1998




                                      F-2

<PAGE>   44
                          INDEPENDENT AUDITORS' REPORT


The Board of Directors and Stockholders
Caprius, Inc.

           We have audited the accompanying consolidated balance sheet of
Caprius, Inc. (formerly Advanced NMR Systems, Inc.) and subsidiaries as of
September 30, 1997 and the related consolidated statements of operations,
stockholders' equity, and cash flows for the years ended September 30, 1997 and
September 30, 1996. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.

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

           In our opinion, the consolidated financial statements enumerated
above present fairly, in all material respects, the consolidated financial
position of Caprius, Inc. and subsidiaries at September 30, 1997, and the
consolidated results of their operations and their cash flows for the years
ended September 30, 1997 and September 30, 1996 in conformity with generally
accepted accounting principles.

/s/ Richard A. Eisner & Company, LLP
Richard A. Eisner & Company, LLP
Cambridge, Massachusetts
November 28, 1997




                                      F-3

<PAGE>   45
                         CAPRIUS, INC. AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                    September 30,    September 30,
                                                         1998             1997
                                                    -------------    -------------
<S>                                                 <C>              <C>
ASSETS

CURRENT ASSETS:
  Cash and cash equivalents                         $  1,791,476     $  9,752,768
  Cash, restricted                                             -        1,744,967
  Accounts receivable, net of reserve for
   bad debts of $663,314 at September 30,
   1998 and $612,500 at September 30, 1997             2,899,282        2,691,858
  Inventories                                            720,858                -
  Other current assets                                   584,875          163,433
                                                    ------------     ------------
       Total current assets                            5,996,491       14,353,026
                                                    ------------     ------------

PROPERTY AND EQUIPMENT:
  Medical equipment                                    2,145,674          494,725
  Office furniture and equipment                         251,199          624,245
  Other equipment                                      1,518,874           48,597
  Leasehold improvements                               1,153,576          751,394
                                                    ------------     ------------
                                                       5,069,323        1,918,961
  Less: accumulated depreciation and amortization      1,824,946          618,263
                                                    ------------     ------------
       Net property and equipment                      3,244,377        1,300,698
                                                    ------------     ------------

OTHER ASSETS:
  Goodwill, net of accumulated amortization of
   $2,357,703 at September 30, 1998 and $311,200
   at September 30, 1997                               1,053,797        2,383,377
  Other intangibles, net of accumulated
   amortization of $371,698 at September 30,
   1998 and $800 at September 30, 1997                 1,240,678           58,595
  Investment in and advances to unconsolidated
   subsidiary                                                  -        1,525,387
  Other                                                   32,037          213,518
                                                    ------------     ------------
       Total other assets                              2,326,512        4,180,877
                                                    ------------     ------------
                                                    $ 11,567,380     $ 19,834,601
                                                    ============     ============
LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
  Accounts payable                                  $    810,990     $    462,118
  Accrued expenses                                       964,922          949,277
  Accrued compensation                                   388,748          212,522
  Other current liabilities                               53,664                -
  Current portion of long-term debt and
   capital lease obligations                             915,608          550,000
                                                    ------------     ------------
       Total current liabilities                       3,133,932        2,173,917
                                                    ------------     ------------

LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS,
 NET OF CURRENT PORTION                                1,207,624          337,500

STOCKHOLDERS' EQUITY:
  Preferred stock
    Authorized - 1,000,000 shares
    Issued and outstanding - Series A, none;
    Series B, convertible, 27,000 shares at
    September 30, 1998 and September 30, 1997.
    Liquidation preference $2,700,000                  2,700,000        2,700,000
  Common stock, $.01 par value
    Authorized - 50,000,000 shares
    Issued and outstanding - 7,369,040 shares
    at September 30, 1998 and 4,374,763 shares
    at September 30, 1997                                 73,690           43,748
  Additional paid-in capital                          63,561,672       56,170,271
  Accumulated deficit                                (59,107,288)     (41,588,585)
  Treasury stock (22,500 common shares, at cost)          (2,250)          (2,250)
                                                    ------------     ------------
       Total stockholders' equity                      7,225,824       17,323,184
                                                    ------------     ------------
                                                    $ 11,567,380     $ 19,834,601
                                                    ============     ============
</TABLE>

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


                                      F-4

<PAGE>   46
                         CAPRIUS, INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                                    Year Ended September 30,
                                                                1998            1997            1996
                                                            ------------    ------------    ------------
<S>                                                         <C>             <C>             <C>
REVENUES:
  Net patient service revenues                              $  3,764,189    $ 12,436,463    $ 25,480,813
  Management fees and other                                            -         287,315         653,425
                                                            ------------    ------------    ------------
       Total revenues                                          3,764,189      12,723,778      26,134,238
                                                            ------------    ------------    ------------

OPERATING EXPENSES:
  Cost of service operations                                   3,616,331       8,914,513      16,205,961
  Research and development                                     2,950,578               -               -
  Purchased research and development                           7,097,566               -               -
  Selling, general and administrative                          5,166,042       3,869,788       4,254,964
  Provision for bad debt and collection costs                    340,426         926,507       2,126,471
  Loss on sale of imaging business                               265,791       9,515,903               -
  Write down of intangibles                                    1,900,000               -               -
                                                            ------------    ------------    ------------
       Total operating expenses                               21,336,734      23,226,711      22,587,396
                                                            ------------    ------------    ------------
       Operating income (loss) from continuing operations    (17,572,545)    (10,502,933)      3,546,842

Other income                                                       3,050         214,120         126,263
Interest income                                                  328,235         274,593         212,814
Interest expense                                                (219,338)       (977,909)     (1,847,910)
                                                            ------------    ------------    ------------
  Income (loss) from continuing operations before
  minority interests, equity in loss of subsidiary
  and provision for income taxes                             (17,460,598)    (10,992,129)      2,038,009

Minority interests in net income of consolidated entities              -        (202,234)     (1,005,831)
Equity in net loss of unconsolidated subsidiary                  (67,358)     (1,304,496)     (2,373,580)
                                                            ------------    ------------    ------------
  Loss from continuing operations before provision
  for income taxes                                           (17,527,956)    (12,498,859)     (1,341,402)

Provision for income tax (expense) benefit                       (98,177)        103,444         (42,288)
                                                            ------------    ------------    ------------
  Loss from continuing operations                            (17,626,133)    (12,395,415)     (1,383,690)

Income (loss) from operations of discontinued division                 -          30,181      (3,928,706)

Income (loss) on disposal of discontinued division               107,430       2,690,462      (3,510,563)
                                                            ------------    ------------    ------------
      Net Loss                                              $(17,518,703)   $ (9,674,772)   $ (8,822,959)
                                                            ============    ============    ============

Income (loss) per basic and diluted common share:
  Loss from continuing operations                           $      (2.51)   $      (3.00)   $      (0.45)
  Income (loss) from operations of discontinued division               -            0.01           (1.28)
  Income (loss) on disposal of discontinued division                0.02            0.65           (1.15)
                                                            ------------    ------------    ------------
  Net loss per share                                        $      (2.49)   $      (2.34)   $      (2.88)
                                                            ============    ============    ============

Weighted average number of common shares outstanding           7,025,802       4,126,587       3,058,332
                                                            ============    ============    ============
</TABLE>


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



                                      F-5

<PAGE>   47
                         CAPRIUS, INC. AND SUBSIDIARIES

                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
                           Preferred Stock         Common Stock         Treasury Stock
                       -----------------------------------------------------------------   Additional                      Total
                         Number                  Number      $0.01     Number    $0.01       Paid-in     Accumulated   Stockholders'
                       of Shares     Amount    of Shares  Par Value  of Shares Par Value     Capital       Deficit         Equity
                       -------------------------------------------------------------------------------------------------------------
<S>                    <C>        <C>          <C>        <C>        <C>       <C>        <C>            <C>           <C>

BALANCE, 
 SEPTEMBER 30, 1996       2,194   $       22   3,418,078   $34,181     22,500   $(2,250)  $55,700,283   $(31,913,813)   $23,818,423
Issuance of
 redeemable
 preferred stock         27,000    2,700,000           -         -          -         -             -              -      2,700,000
Increase in 
 proportionate
 share of Subsidiary's
 equity related to
 sale of subsidiary's
 stock                        -            -           -         -          -         -       934,615              -        934,615
Change in ownership
 of subsidiary                -            -           -         -          -         -      (455,082)             -       (455,082)
Conversion of
 preferred stock         (2,194)         (22)    956,685     9,567          -         -        (9,545)             -              -
Net loss                      -            -           -         -          -         -             -     (9,674,772)    (9,674,772)
                       -------------------------------------------------------------------------------------------------------------

BALANCE,
 SEPTEMBER 30, 1997      27,000   $2,700,000   4,374,763   $43,748     22,500   $(2,250)  $56,170,271   $(41,588,585)   $17,323,184

Issuance of common
 stock related to
 AMS merger                   -            -   2,956,741    29,567          -         -     7,362,287              -      7,391,854
Conversion of note
 payable                      -            -      27,429       274          -         -        20,725              -         20,999
Exercise of stock
 options                      -            -      10,107       101          -         -         8,389              -          8,490
Net loss                      -            -           -         -          -         -             -    (17,518,703)   (17,518,703)
                       -------------------------------------------------------------------------------------------------------------

BALANCE,
 SEPTEMBER 30, 1998      27,000   $2,700,000   7,369,040   $73,690     22,500   $(2,250)  $63,561,672   $(59,107,288)    $7,225,824
                       =============================================================================================================


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

</TABLE>



                                      F-6
<PAGE>   48
                         CAPRIUS, INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF CASH FLOWS


<TABLE>
<CAPTION>
                                                                                     Year Ended September 30,
                                                                                 1998            1997           1996
                                                                             ------------    ------------    -----------
<S>                                                                          <C>             <C>             <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
      Net Loss                                                               $(17,518,703)   $ (9,674,772)   $(8,822,959)
      Adjustments to reconcile net loss to net cash provided by (used in)
           operating activities:
           Equity in net loss of unconsolidated subsidiary                         67,358       1,304,496      2,373,580
           Loss (gain) on disposal of discontinued operations                           -      (2,690,462)     3,510,563
           Loss (gain) on sale of imaging business                                      -       9,515,903              -
           Minority interest in net income (loss) of consolidated entities              -         202,234      1,005,831
           Purchased research and development                                   7,097,566               -              -
           Depreciation and amortization                                        2,352,068       1,271,862      3,373,278
           Gain on sale of assets                                                       -               -       (174,891)
           Changes in operating assets and liabilities:
               Accounts receivable, net                                          (207,425)        146,143      1,726,809
               Inventories                                                         87,976         526,597        (50,949)
               Other current assets                                              (293,435)        481,301        249,001
               Accounts payable and accrued expenses                               36,156      (1,499,325)    (2,375,539)
                                                                             ------------    ------------    -----------
                    Net cash provided by (used in) operating activities        (8,378,439)       (416,023)       814,724
                                                                             ------------    ------------    -----------

CASH FLOWS FROM INVESTING ACTIVITIES:
      Purchase of imaging and rehabilitation business                                   -      (1,500,000)      (254,249)
      Proceeds from sale of equipment                                                   -               -        344,527
      Proceeds from sale of imaging business                                            -       7,800,297              -
      Proceeds from the sale of discontinued division                                   -       2,432,580              -
      Cash of formerly consolidated subsidiary                                          -               -     (1,832,563)
      Cash used in AMS merger                                                    (128,406)              -              -
      Advances to unconsolidated subsidiaries                                    (479,673)       (910,159)             -
      Patent costs                                                                      -               -        (39,998)
      Purchase of equipment, furniture and leasehold improvements              (1,981,001)     (2,711,873)    (5,537,275)
      Other assets                                                                      -         118,821              -
                                                                             ------------    ------------    -----------
                    Net cash provided by (used in) investing activities        (2,589,080)      5,229,666     (7,319,558)
                                                                             ------------    ------------    -----------

CASH FLOWS FROM FINANCING ACTIVITIES:
      Exercise of stock options                                                     8,490               -        130,667
      Proceeds from issuance of preferred stock                                         -               -      3,316,645
      Proceeds from issuance of redeemable preferred stock                              -       2,700,000              -
      Proceeds from issuance of long-term debt                                  2,105,921       3,142,707      3,949,658
      Repayment of long-term debt and capital lease obligations                  (853,151)     (1,975,834)    (4,324,764)
      Distribution to minority interests                                                -        (470,661)      (822,000)
                                                                             ------------    ------------    -----------
                    Net cash provided by financing activities                   1,261,260       3,396,212      2,250,206
                                                                             ------------    ------------    -----------

NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS                           (9,706,259)      8,209,855     (4,254,628)

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD                                 11,497,735       3,287,880      7,542,508
                                                                             ------------    ------------    -----------

CASH AND CASH EQUIVALENTS, END OF PERIOD                                     $  1,791,476    $ 11,497,735    $ 3,287,880
                                                                             ============    ============    ===========



SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
      Cash paid for interest during the period                               $    203,876    $    977,909    $ 1,842,591
                                                                             ============    ============    ===========

      Additions to capital leases                                            $          -     $         -    $ 1,870,874
                                                                             ============    ============    ===========

      Common stock issued in AMS Merger                                      $  7,391,854     $         -    $         -
                                                                             ============    ============    ===========
</TABLE>


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



                                      F-7
<PAGE>   49
                         CAPRIUS, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                               SEPTEMBER 30, 1998



(NOTE A) - BUSINESS

           Caprius, Inc. ("Caprius" or the "Company") (formerly Advanced NMR
Systems, Inc.) was founded in 1983 and through August 1996, operated under two
segments (one of which was discontinued during fiscal 1996) consisting of
Imaging Systems and Imaging and Rehabilitation Services. Pursuant to the merger
(see below) with Advanced Mammography Systems, Inc. ("AMS"), the Company is now
developing, marketing and commercializing a dedicated MRI system for breast
imaging known as the Aurora system and in September 1997 opened its first breast
imaging center at the Faulkner-Sagoff Center for Breast Health Care in Boston,
Massachusetts ("Faulkner Center"). The Company is also engaged in rehabilitation
services, consisting of comprehensive physician care, physical therapy and case
management for motor vehicle accident patients.

           In December 1998, Caprius announced that it was pursuing a strategy
of identifying a strategic alliance to either acquire or joint venture its
Aurora technology (the "Strategic Partner"). This is a consequence that at this
point in time, Caprius lacks sufficient funds to continue necessary research and
development or to fund manufacturing costs to produce its next systems. A Letter
of Intent to sell the technology in a transaction valued at approximately $5
million was entered into in December 1998, but was terminated on December 17,
1998. At that time, the Company announced that it would reopen discussions with
other interested parties and would continue to identify and pursue the
acquisition of comprehensive breast imaging centers. The Company anticipates
that any sale or joint venture of the Aurora technology may include some form of
cash, royalty payments and ownership. There can be no assurances that any such
sole or joint venture can be entered into or completed. Furthermore, unless a
Strategic Partner is identified, near term, to acquire its Aurora technology,
the Company's viability could be threatened. The financial statements do not 
include any adjustments relating to the recoverability of assets and 
classification of liabilities that might be necessary should the Company be 
unable to continue as a going concern.

           In July 1998, the Company acquired its first comprehensive breast
imaging center, the Strax Institute, located in Lauderhill, Florida. The Strax
Institute is a multi-modality breast care center that treats approximately
15,000 patients per year offering x-ray mammography, ultrasound, stereotactic
biopsy and bone densitometry. The Company believes that there is an opportunity
to acquire and consolidate similar breast care centers.

           Effective November 10, 1997, the Company completed a merger with AMS,
whereby AMS merged into AMS Merger Corp., a wholly owned subsidiary of Caprius,
and became a wholly owned subsidiary of Caprius (the "Merger"). AMS was
originally formed on July 2, 1992 as a wholly owned subsidiary of Caprius to
develop a dedicated breast MRI system. AMS obtained its mammography technology
from Caprius and retained certain rights to other dedicated MRI systems
utilizing the technology rights. AMS then completed an initial public offering
of its securities in 1993 generating net cash proceeds of approximately $7.4
million. Subsequently, certain warrants and options were exercised, AMS closed a
private placement and 2,750,000



                                      F-8

<PAGE>   50
                         CAPRIUS, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                               SEPTEMBER 30, 1998



(NOTE A) - BUSINESS - CONTINUED


shares of AMS common stock owned by Caprius were forfeited from escrow, such
that the Company's interest in AMS was approximately 14% immediately preceding
the merger.

           On February 27, 1997, Medical Diagnostics, Inc. ("MDI") a
wholly-owned subsidiary of Caprius merged with MDI Acquisition Corporation, a
newly formed wholly-owned subsidiary of US Diagnostic, Inc. ("US Diagnostic")
and became a wholly-owned subsidiary of US Diagnostic. The Company had acquired
MDI, which provided imaging and rehabilitation services, on August 31, 1995.
Pursuant to the US Diagnostic merger, Caprius retained the rehabilitation
centers formerly operated by MDI. Caprius sold MDI principally to pursue its
strategy of developing and installing its breast imaging system and to repay all
the indebtedness to the senior lender.

(NOTE B) - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

           [1] PRINCIPLES OF CONSOLIDATION

           The consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries. All significant intercompany
transactions have been eliminated in consolidation.

           [2]  REVENUE RECOGNITION

           The breast imaging and rehabilitation services businesses recognize
revenue as services are provided to patients. Reimbursements for services
provided to patients covered by Blue Cross/Blue Shield, Medicare, Medicaid,
HMO's and other contracted insurance programs are generally less than rates
charged by the Company. Differences between gross charges and estimated
third-party payments are recorded as contractual allowances in determining net
patient service revenue during the period that the services are provided.

           Revenue from the sale of Aurora systems will be recognized when the
system is installed at the customer site and training is completed.

           [3] CASH EQUIVALENTS

           The Company considers all highly liquid debt instruments purchased
with a maturity of three months or less to be cash equivalents.



                                      F-9

<PAGE>   51
                         CAPRIUS, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                               SEPTEMBER 30, 1998



(NOTE B) - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED

           [4] INVENTORIES

           Inventories are accounted for at the lower of cost or market using
the first-in, first-out ("FIFO") method.

           [5]  EQUIPMENT, FURNITURE AND LEASEHOLD IMPROVEMENTS

           Equipment, furniture and leasehold improvements are recorded at cost.
Expenditures for repairs and maintenance are charged to expense as incurred,
whereas major betterments are capitalized. Depreciation and amortization are
computed by the straight-line method over the estimated lives of the applicable
assets, or term of the lease, if applicable. Assets are written off when they
become fully depreciated.

           Equipment under capital lease is stated at the lower of the fair
market value or the net present value of the minimum lease payments at the
inception of the lease. Capitalized lease equipment is amortized over the
shorter of the term of the lease or the estimated useful life.

           Asset Classification                               Useful Lives
           --------------------                               ------------

           Medical and other equipment                        5-8 years
           Office furniture and equipment                     5 years
           Other equipment                                    5 years
           Leasehold improvements                             Term of lease

           [6] GOODWILL AND OTHER INTANGIBLES

           Goodwill is related to the Company's Rehabilitation Services business
and to its breast care center. Other intangibles at September 30, 1998
consisting of purchased contracts and other intangibles relate to the merger
with AMS. Goodwill and other intangibles are amortized over their estimated
useful lives. The Company periodically reviews the carrying amount of goodwill
and other intangibles to determine whether an impairment has been incurred based
on undiscounted future cash flows. During the year ended September 30, 1998, the
Company reduced the goodwill related to the Company's rehabilitation services
business in the amount of $1,900,000 pursuant to this review.

           [7] NET LOSS PER SHARE

           Effective October 1, 1997, the Company adopted Statement of Financial
Accounting Standards No. 128, "Earning Per Share" ("SFAS No. 128"). SFAS No. 128
requires the



                                      F-10

<PAGE>   52
                         CAPRIUS, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                               SEPTEMBER 30, 1998



(NOTE B) - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED

           [7] NET LOSS PER SHARE - CONTINUED


presentation of both basic and diluted earnings per share and replaces
previously required standards for computing and presenting earnings per share.
Earnings per share amounts for all periods have been presented, and where
appropriate, restated to conform to the new requirements of SFAS No. 128.
Adoption of SFAS No. 128 did not have an effect on the Company's loss per share
calculation.

           Basic net loss per common share was computed using the weighted
average common shares outstanding during the period. Outstanding warrants and
options had an anti-dilutive effect and were therefore excluded from the
computation of diluted net loss per common share.

           [8] MINORITY INTERESTS IN NET INCOME OR LOSS OF CONSOLIDATED ENTITIES

           Minority interests in net income or loss of consolidated entities
represents the allocation of net income from certain consolidated entities to
the respective minority interest shareholders and joint venture partners.

           [9] INCOME TAXES

           The Company utilizes the liability method of accounting for income
taxes, as set forth in Statement of Financial Accounting Standards No. 109.
"Accounting for Income Taxes". Under this method, deferred tax liabilities and
assets are recognized for the expected tax consequences of temporary differences
between the carrying amount and the tax basis of assets and liabilities.

           [10] USE OF ESTIMATES

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

           [11] RECENT PRONOUNCEMENTS

           In June 1997, the Financial Accounting Standards Board issued two new
disclosure standards. Results of operations and financial position will be
unaffected by implementation of these new standards.



                                      F-11

<PAGE>   53
                         CAPRIUS, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                               SEPTEMBER 30, 1998



(NOTE B) - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED

           [11] RECENT PRONOUNCEMENTS - CONTINUED


Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income." ("SFAS No. 130") established standards for reporting and display of
comprehensive income, its components, and accumulated balances. Comprehensive
income is defined to include all changes in equity except those resulting from
investments by owners and distributions to owners. Among other disclosures, SFAS
No. 130 requires that all items that are required to be recognized under current
accounting standards as components of comprehensive income be reported in a
financial statement that is displayed with the same prominence as other
financial statements.

           SFAS No. 131, "Disclosure about Segments of an Enterprise and Related
Information", which supersedes SFAS No. 14, "Financial Reporting for Segments of
a Business Enterprise", establishes standards for the way that public
enterprises report information about operating segments in annual financial
statements and requires reporting of selected information about operating
segments in interim financial statements issued to the public. It also
establishes standards for disclosures regarding products and services,
geographic areas, and major customers. SFAS No. 131 defines operating segments
as components of an enterprise about which separate financial information is
available that is evaluated regularly by the chief decision maker in deciding
how to allocate resources and in assessing performance.

           Both of these new standards are effective for financial statements
for periods beginning after December 15, 1997 and require comparative
information for earlier years to be restated. Management does not expect
implementation of these standards to materially affect future financial
statements and disclosures.

           In June 1998, the Financial Accounting Standards Board issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS
No. 133"). SFAS No. 133 requires companies to recognize all derivatives
contracts as either assets or liabilities in the balance sheet and to measure
them at fair value. If certain conditions are met, a derivative may be
specifically designated as a hedge the objective of which is to match the timing
of gain or loss recognition on the hedging derivative with the recognition of
(i) the changes in the fair value of the hedged asset or liability that are
attributable to the hedge risk or (ii) the earning effect of the hedged
forecasted transaction. For a derivative not designated as a hedging instrument,
the gain or loss is recognized in income in the period of change. SFAS No. 133
is effective for all fiscal quarters of fiscal years beginning after June 15,
1999. The Company has no derivitives and does not expect the pronouncement to
materially effect future financial statements and disclosures.



                                      F-12
<PAGE>   54
                         CAPRIUS, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                               SEPTEMBER 30, 1998



(NOTE C) - ACQUISITIONS

           On July 1, 1998, the Company acquired substantially all of the assets
and business of the Gertrude and Philip Strax Breast Diagnostic Institute in
Lauderhill, Florida, a comprehensive breast imaging center. As consideration for
the acquisition, the Company paid $600,000 in cash. The acquisition was
accounted for under the purchase method of accounting and the cost in excess of
net assets of approximately $450,000 is being amortized over 20 years.

           Effective November 10, 1997, the Company acquired the majority
interest in AMS through the issuance of 2,956,741 shares of common stock to the
AMS stockholders. The acquisition was accounted for as a purchase. Prior to the
acquisition, the Company accounted for its minority interest in AMS using the
equity method. The calculation of the cost of AMS and the allocation of that
cost is as follows (see Note I for Pro forma effects of this acquisition): 

Calculation of cost of AMS:

  AMS shares outstanding                                        8,641,854
  Less shares owned by Caprius                                 (1,250,000)
                                                              -----------
  Shares converted                                              7,391,854
  Conversion ratio                                                    .40
                                                              -----------
  Caprius shares issued                                         2,956,741
  Caprius share price                                         $      2.50
                                                              -----------
  Value of Caprius shares issued                                7,391,855
  Transaction costs - AMS                                         101,252
  Transaction costs - Caprius                                     344,549
                                                              -----------
  Cost of AMS shares purchased                                  7,837,655
  Basis of existing investment in AMS                            (123,681)
  Accounts receivable from AMS                                  1,937,701
                                                              -----------
  Total cost of AMS                                           $ 9,651,675
                                                              ===========

Cost allocated as follows:
  Cash                                                        $    20,193
  Inventories                                                     808,834
  Other current assets                                            137,225
  Equipment                                                       631,824
  Other  assets                                                    38,153
  Purchased contracts                                             500,000
  Purchased research and development                            7,097,566
  Other intangible assets                                       1,000,000
  Other current liabilities                                      (578,160)
  Note payable                                                     (3,960)
                                                              -----------
Total cost of AMS                                             $ 9,651,675
                                                              ===========


                                      F-13

<PAGE>   55
                         CAPRIUS, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                               SEPTEMBER 30, 1998



(NOTE C) - ACQUISITIONS - CONTINUED

           The purchased research and development costs were immediately charged
to expense. The amounts allocated to purchased contracts and other intangible
assets are being amortized over five years.

(NOTE D) - INVENTORY

           Inventory represents materials used to manufacture the Aurora system.
At September 30, 1998 the components of inventory were:

           Raw materials                  $454,124
           Work in process                 266,734
                                          --------
                                          $720,858
                                          ======== 

(NOTE E) - LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS

            Long-term debt and capital lease obligations at September 30, 1998
and 1997 consisted of the following:

<TABLE>
<CAPTION>
                                                                1998         1997
                                                             ----------    --------
<S>                                                          <C>           <C>

Notes payable to various leasing companies, secured by
 the respective medical equipment, interest rates ranging
 from 10.0% to 11.9%, monthly payments of principal and
 interest ranging from $1,107 to $15,200, maturities
 ranging from November  2000 to May 2002                     $1,542,046    $    -0-

Note payable to former minority owner of rehabilitation
 business, interest at 12%, quarterly principal payments
 of $137,500 plus interest through October 1998 with a
 balloon payment of $200,000, collateralized by certain
 assets of the rehabilitation business (See Note G-2)           337,500     887,500

Note payable to a hospital for leasehold improvements,
 interest at 11%, monthly payments of principal and
 interest of $4,685 payable through August 2005                 243,686         -0-
                                                             ----------    --------

Total long-term debt and capital lease obligations            2,123,232     887,500

Less: current maturities                                        915,608     550,000
                                                             ----------    --------
                                                             $1,207,624    $337,500
                                                             ==========    ========
</TABLE>



                                      F-14
<PAGE>   56
                         CAPRIUS, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                               SEPTEMBER 30, 1998



(NOTE E) - LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS - CONTINUED

Future minimum debt payments for the next five years are as follows:

<TABLE>
<CAPTION>
<S>                                    <C>
           Fiscal Year
           1999                        $  915,608
           2000                           568,363
           2001                           460,888
           2002                            81,626
           2003                            47,942
           2004                            48,805
                                       ----------
                                       $2,123,232
                                       ==========
</TABLE>

 (NOTE F) - INCOME TAXES

           At September 30, 1998, the Company had deferred tax assets totaling
approximately $11,000,000 due to a temporary difference relating to the
amortization of goodwill ($800,000) and a net operating loss carryover
($10,200,000). At September 30, 1997, the Company had a deferred tax asset due
to a net operating loss carryover of approximately $7,400,000. All tax assets
have been fully reserved due to uncertainty as to the realization of the
benefit.

           As discussed in Note A, during the year ended September 30, 1997 the
Company sold MDI. This sale resulted in a taxable gain for the Company, which
was offset by utilization of net operating losses, resulting in a lower net
operating loss carryforward to 1998.

           At September 30, 1998 and September 30, 1997, the Company had
available net operating loss carryforwards for tax purposes, expiring through
2013 of approximately $30,000,000 and $22,000,000 respectively. The Internal
Revenue Code contains provisions which may limit the net operating loss carry
forward available for use in any given year if significant changes in ownership
interest of the Company occur.

           Effective November 10, 1997, the Company and AMS file a consolidated
income tax return. Accordingly, losses incurred by AMS prior to that date may be
limited in their availability to offset future income.




                                      F-15

<PAGE>   57
                         CAPRIUS, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                               SEPTEMBER 30, 1998



(NOTE F) - INCOME TAXES - CONTINUED

           The following table reconciles the tax provision per the accompanying
statements of operations with the expected provision obtained by applying
statutory tax rates to the pretax loss:

<TABLE>
<CAPTION>
                                           Year Ended September 30,
                                      1998            1997           1996
                                  ------------    -----------    -----------
<S>                               <C>             <C>            <C>

Pretax Loss                       $(17,420,526)   $(9,778,216)   $(8,780,671)

Loss attributable to AMS
  prior to merger                       67,358      1,304,496      2,373,580
                                  ------------    -----------    -----------

Parent company pretax
  income (loss)                   $(17,353,168)   $(8,473,720)   $(6,407,091)
                                  ============    ===========    ===========

Expected tax (benefit) at 34%       (5,900,077)   $(2,881,065)   $(2,178,411)

Adjustment due to
  increase in valuation reserve      3,600,000      2,881,065      2,178,411

Non-deductible purchased
  R&D Costs                          2,300,077             --             --

Other                                  (98,177)       103,444        (42,488)
                                  ------------    -----------    -----------

Tax benefit (expense) per
  financial statements            $    (98,177)   $   103,444    $   (42,288)
                                  ============    ===========    ===========
</TABLE>




(NOTE G) - COMMITMENTS AND CONTINGENCIES

           [1]  OPERATING LEASES

           The Company leases facilities and equipment under non-cancelable
operating leases expiring at various dates through fiscal 2003. Facility leases
require the Company to pay certain insurance, maintenance and real estate taxes.
Rental expenses totaled approximately $528,000 and $587,000 and $2,349,000 for
the years ended September 30, 1998, 1997 and 1996.



                                      F-16

<PAGE>   58
                         CAPRIUS, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                               SEPTEMBER 30, 1998



(NOTE G) - COMMITMENTS AND CONTINGENCIES: CONTINUED

           [1]  OPERATING LEASES -  CONTINUED

           Future basic rental commitments under operating leases net of
subleases are as follows. Sublease income for fiscal 1999 and 2000 equals
approximately $278,000 and $186,000, respectively.

               Fiscal Year                     Amount
              ----------------------------------------
               1999                          $393,090
               2000                           248,658
               2001                            17,265
               2002                            17,265
               2003                            15,826
                                             --------
                                             $692,104
                                             ========

           [2] LEGAL PROCEEDINGS

           On January 7, 1998, the Company and Jack Nelson, the Company's
Chairman and Chief Executive Officer were served with a complaint in connection
with a purported class action brought against them by Dorothy L. Lumsden in the
United States District Court of the District of Massachusetts. The complaint
contains claimed for alleged violations of Sections 10(b) and 20(a) under the
Securities Exchange Act and for common law. Ms. Lumsden purports to bring her
action "on behalf of herself and all other persons who purchased or otherwise
acquired the common stock of the Company during the period August 10, 1994
through and including December 12, 1997". On February 2, 1998, the Company and
Mr. Nelson were served with a second class action complaint naming them as
defendants in connection with another action brought in the United States
District Court for the District of Massachusetts. This action was brought by
Robert Curry and the complaint alleged the same purported class and contained
similar allegations and claims as the class action complaint discussed above. On
April 24, 1998, the District Court consolidated the two class actions claims
into one for pre-trial purposes. On January 7, 1999, the Company announced that
it has reached a preliminary settlement in the shareholder class action in
Federal Court in Boston. Under the terms of the settlement, Caprius will make a
cash payment of $150,000 and issue 325,000 shares of common stock to Plaintiffs.
Caprius' insurance carrier will contribute $100,000 of the cash payment. The
settlement also stipulates that in the event Caprius sells all or part of its
business within 12 months an additional payment of $75,000 and issuance of
100,000 additional shares will be made by Caprius to plaintiffs. The agreement
is subject to final court approval. The Company will account for the Settlement
when it becomes final and it is not expected to have a material effect on the
financial statements.

           In December 1998, the Company filed a complaint against Eric T.
Shebar, M.D. ("Shebar"), the former Chief Operating Officer and Medical Director
for the Company's motor



                                      F-17

<PAGE>   59
                         CAPRIUS, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                               SEPTEMBER 30, 1998



(NOTE G) - COMMITMENTS AND CONTINGENCIES: CONTINUED

           [2] LEGAL PROCEEDINGS - CONTINUED

vehicle accident rehabilitation ("MVA") business, and MVA Center for
Rehabilitation, Inc. ("MVA, Inc.") whereby the Company alleges breach of
contract and certain misrepresentations and seeks damages, in an amount to be
determined at trial. The Company received a preliminary injunction to reach and
apply a secured promissory note to MVA, Inc. against damages sought from Shebar
and to enjoin against any remedies under default of the Note. The Note payment
of $347,000 was due October 15, 1998. A final motion has been scheduled for
January, 1999.

           MDI, as general partner of Mass. Mobile Imaging Venture (MMIV), and
Western Massachusetts Magnetic Resonance Services, Inc. (WMMRS) filed a
complaint in September 1992 in Middlesex County Superior Court, Cambridge,
Massachusetts against Medical Imaging Partners, L.P. (MIP), which is wholly
owned by Raytel Medical Corporation (Raytel), and certain of its affiliates,
seeking a declaration, unspecified monetary damages and equitable relief
relating to an alleged breach by MIP of certain fiduciary and contractual
obligations with respect to the business of MMIV. MIP filed a counterclaim
against MDI also seeking a declaratory judgment, unspecified monetary damages
and equitable relief on the basis of an alleged breach of fiduciary and
contractual obligations by MDI with respect to the business of MMIV. In
connection with the MDI sale to US Diagnostic in February 1997, Caprius
indemnified US Diagnostic from any claims or damages. On September 12, 1997, the
parties entered into a settlement agreement pursuant to which all actions were
dismissed between them and provided each other with mutual releases and divided
all funds in an escrow account between themselves, such that pursuant to its
arrangement with US Diagnostic, Caprius received the MDI portion, or $ 270,000.

           Effective November 28, 1995, the Company terminated the Key
Employment Agreement, dated May 2, 1995, of John A. Lynch, Chief Executive
Officer of MDI ("Lynch Employment Agreement"). In March 1996, Mr. Lynch filed a
demand for arbitration seeking a declaratory ruling, equitable relief, monetary
damages of approximately $2.0 million and legal fees related to claims arising
out of the Lynch Employment Agreement. On September 23, 1997, the arbitration
panel ruled in favor of the Company and MDI on substantially all of Mr. Lynch's
claims such that the only issues remaining in the Lynch arbitration were for
performance unit payments defined in the Lynch Employment Agreement and
reasonable attorneys' fees. In July 1998, the arbitration panel ruled in favor
of the Company and MRI on the final two issues.



                                      F-18

<PAGE>   60
                         CAPRIUS, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                               SEPTEMBER 30, 1998



(NOTE H) - CAPITAL TRANSACTIONS

           [1] PREFERRED STOCK - CLASS A

           In May 1996, the Company closed a private placement (the "Placement")
of $3.7 million principal amount of newly issued Series A Convertible Preferred
Stock, $.01 par value, (the "Preferred Stock"). Each share of Preferred Stock
was convertible into shares of common stock at a conversion price equal to the
lesser of 125% of the market price on the issuance date, or 75% of the market
price on the conversion date. At September 30, 1997, all of the Preferred Stock
Class A had been converted into a total of 1,348,832 shares of common stock.

           [2] PREFERRED STOCK - CLASS B

         On August 18, 1997, the Company entered into various agreements with
General Electric Company ("GE") including an agreement whereby GE purchased
27,000 shares of newly issued Series B Convertible Redeemable Preferred Stock
(the "Series B Preferred Stock") for $2,700,000.

           The Series B Preferred Stock consists of 27,000 shares, ranks senior
to any other shares of preferred stock which may be created and the Common
Stock. It has a liquidation value of $100.00 per share, plus accrued and unpaid
dividends, is non-voting except if the Company proposes an amendment to its
Certificate of Incorporation which would adversely affect the rights of the
holders of the Series B Preferred Stock, and is initially convertible into
1,597,930 shares of Common Stock, subject to customary anti-dilution provisions,
commencing on August 18, 1998, or earlier upon a change of control as defined.
No fixed dividends are payable on the Series B Preferred Stock, except that if a
dividend is paid on the Common Stock, dividends are paid on the shares of Series
B Preferred Stock as if they were converted into shares of Common Stock.

           [3] WARRANTS

            At September 30, 1998, in connection with various transactions
  including the acquisition of MDI and the AMS Merger, the Company had
  outstanding warrants to purchase 996,987 shares of the Company's common stock
  at exercise prices ranging from $4.20 to $106.30 and have a weighted average
  exercise price of $16.83. The warrants expire at various dates from January
  31, 2000 to May 31, 2001.

           [4] STOCK OPTIONS

           The Company has an Incentive and Nonqualified Stock Option Plan which
provides for the granting of options to purchase not more than 100,000 shares of
common stock. Exercise prices for any incentive options are at prices not less
than the fair market value at the date of grant, while exercise prices for
nonqualified options may be at any price in excess of $.01. When fair market



                                      F-19

<PAGE>   61
                         CAPRIUS, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                               SEPTEMBER 30, 1998



(NOTE H) - CAPITAL TRANSACTIONS- CONTINUED

           [4] STOCK OPTIONS- CONTINUED

value at the date of issuance is in excess of the option exercise price, the
excess is recorded as compensation expense. The total number of shares
authorized for grant under this plan were reached during 1993 and no additional
options can be granted. During fiscal 1997 and 1998 certain options were
canceled and replaced with options exercisable at the then fair market value.

           Stock option transactions under the above plan for the past three
fiscal periods are as follows:

                                        Number of               Option Price
                                         Shares                  Per Share
                                        ---------               ------------

Balance, September 30, 1995              29,622                 $6.50 - $43.80
Granted in 1996                          12,500                 $5.00
Exercised in 1996                        (3,163)                $6.50
Cancelled in 1996                       (23,750)                $26.30 - $43.80
                                        -------

Balance, September 30, 1996              15,209                 $5.00 - $43.80
Cancelled in 1997                       (10,709)                $5.00 - $43.80
                                        -------

Balance, September 30, 1997               4,500                 $5.00 - $31.30
Repriced Options:
    Original                             (2,000)                $3.13
    Repriced                              2,000                 $0.84
Cancelled in 1998                        (2,500)                $5.00
                                        -------
Balance, September 30, 1998               2,000                 $0.84
                                        =======

           During 1993, the Company adopted a new employee stock option plan and
a stock option plan for non-employee directors. The employee stock option plan
provides for the granting of options to purchase not more than 1,000,000 shares
of common stock. The options issued under the plan may be incentive or
nonqualified options. The exercise price for any incentive options cannot be
less than the fair market value of the stock on the date of the grant, while the
exercise price for nonqualified options will be determined by the option
committee. The Directors' stock option plan provides for the granting of options
to purchase not more than 200,000 shares of common stock. The exercise price for
shares granted under the Directors' plan cannot be less than the fair market
value of the stock on the date of the grant. Both plans expire May 25, 2003.




                                      F-20

<PAGE>   62
                         CAPRIUS, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                               SEPTEMBER 30, 1998



(NOTE H) - CAPITAL TRANSACTIONS- CONTINUED

           [4] STOCK OPTIONS- CONTINUED

           During 1998 certain options were cancelled and replaced with options
exercisable at the then fair market value. Stock option transactions under the
1993 plans are as follows:

                                        Number of               Option Price
                                          Shares                 Per Share
                                        ---------               ------------

Balance, September 30, 1995              238,904                $7.90 - $52.50
Granted in 1996                           44,000                $5.00 - $21.90
Exercised in 1996                         (7,586)               $14.50 - $25.60
Cancelled in 1996                        (62,249)               $15.80 - $52.50
                                        --------

Balance, September 30, 1996              213,069                $5.00 - $52.50
Granted in 1997                            2,500                $2.80
Cancelled in 1997                        (33,802)               $5.00 - $25.60
                                        --------

Balance, September 30, 1997              181,767                $2.80 - $52.50
Granted in 1998                          576,510                $0.84 - $1.46
Granted pursuant to AMS Merger           454,000                $0.84 - $20.00
Exercised in 1998                        (10,107)               $0.84
Repriced Options:
   Original                             (182,141)               $5.00 - $8.00
   Repriced                              182,141                $0.84
Cancelled in 1998                       (292,849)               $0.84 - $42.50
                                        --------
Balance, September 30, 1998              909,321                $0.84 - $33.80
                                        ========





                                      F-21

<PAGE>   63
                         CAPRIUS, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                               SEPTEMBER 30, 1998



(NOTE H) - CAPITAL TRANSACTIONS- CONTINUED

           [4] STOCK OPTIONS- CONTINUED

           Stock option transactions not covered under the option plans in 1998,
1997 and 1996 are as follows:

                                           Number of        Option Price
                                             Shares          Per Share
                                           ---------        ------------

Balance, September 30, 1995                  87,532         $7.90 - $33.80
Granted in 1996                              13,000         $5.00 - $14.10
Cancelled in 1996                           (15,000)        $25.60
                                            -------

Balance September 30, 1996                   85,532         $7.90 - $33.80
Cancelled in 1997                            (4,500)        $33.80
                                            -------

Balance, September 30, 1997                  81,032         $7.90 - $33.80
Repriced Options:
   Original                                  (6,000)        $5.00
   Repriced                                   6,000         $0.84
Cancelled in 1998                            (4,000)        $14.10
                                            -------
Balance, September 30, 1998                  77,032         $0.84 - $20.10
                                            =======


Under all plan and non-plan stock options, as of September 30, 1998, options to
purchase 290,679 shares were available for grant and options to purchase 650,424
shares at a weighted average price of $3.88 per share were exercisable. The
outstanding options expire at various dates within ten years from the date of
grant.




                                      F-22

<PAGE>   64
                         CAPRIUS, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                               SEPTEMBER 30, 1998



(NOTE H) - CAPITAL TRANSACTIONS- CONTINUED

           [4] STOCK OPTIONS- CONTINUED

           The Company has adopted the disclosure-only provisions of SFAS No.
123, "Accounting or Stock-Based Compensation", but applies Accounting Principles
Board Opinion No. 25 and related interpretations in accounting for its plans.
There was no compensation expense recognized in 1998, 1997, or 1996. If the
Company had elected to recognize compensation cost for the plans based on the
fair value at the grant date for awards under the plans, consistent with the
method prescribed by SFAS No. 123, net income per share would have been changed
to the pro forma amounts indicated below:

<TABLE>
<CAPTION>
                                           Year Ended  September 30,
                                        1998          1997            1996
                                   ------------    -----------    ------------
<S>                                <C>             <C>            <C>
           Net income:
              As reported          $(17,518,703)   $(9,674,772)   $(8,822,959)
              Pro forma            $(17,600,935)   $(9,782,703)   $(9,881,236)

           Net loss per share:
              As reported          $      (2.49)   $     (2.34)   $     (2.88)
              Pro forma            $      (2.51)   $     (2.37)   $     (3.23)
</TABLE>

           The fair value of the Company's stock options used to compute pro
forma net income and net income per share disclosures is the estimated present
value at grant date using the Black-Scholes option-pricing model with the
following weighted average assumptions for 1998, 1997, and 1996: dividend yield
of 0%; expected volatility of 0.30; a risk free interest rate of 5.70%; and an
expected holding period of 5-10 years.

           The weighted-average grant-date fair value of options granted was
$0.44 per share, $1.09 per share and $4.39 per share for the years ended
September 30, 1998, 1997 and 1996, respectively.

           During fiscal 1998, the stockholders of the Company approved a
reverse 1 for 10 stock split and an increase of shares authorized under the 1993
plans to 1,200,000 shares on a post-reverse stock split basis. All share and
option amounts have been restated to reflect the stock split. On January 1,
1998, all 190,141 of the then outstanding employee stock options were repriced
to the current market price, using the existing exercise durations. 

                                      F-23

<PAGE>   65
                         CAPRIUS, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                               SEPTEMBER 30, 1998



(NOTE I) - UNCONSOLIDATED SUBSIDIARY (AMS):

           AMS completed its initial public offering of stock in 1993 which
generated net cash proceeds to AMS of approximately $7,400,000. As a result of
the offering, the Company's percentage ownership of AMS was reduced to 73%.
Prior to the offering, AMS issued bridge notes with warrants to purchase shares
of common stock at a price of one-half the public offering price. In connection
with the offering, AMS also granted an option to the underwriter to purchase
shares at a price of 130% of the public offering price. AMS has also established
an employee stock option plan under which certain options have been granted. As
the warrants and options were exercised, the Company's percentage ownership of
AMS was further reduced. During 1994 and 1995, most of the above warrants and
options were exercised whereby the Company's percentage ownership of AMS was
reduced to approximately 61% at September 30, 1995.

           On May 15, 1996, AMS closed a private placement (the "AMS Placement")
of $3 million principal 4% convertible debentures. Net proceeds from the AMS
Placement was approximately $2,752,000 after payment of fees and related
expenses. As of January 31, 1997, an additional 1,748,364 shares of common stock
had been issued in connection with the conversion of these debentures at which
time the Company's percentage ownership of AMS was reduced to approximately 48%.
Accordingly, as of September 30, 1996, the Company changed from consolidation of
AMS to the equity method of accounting for its investment in AMS.

           In connection with the AMS public offering, the Company, which was
the sole stockholder of AMS, placed in escrow an aggregate of 2,750,000 (the
"Escrow Shares") of the 4,000,000 shares of Common Stock it owned. On May 1,
1997, all shares subject to the escrow were forfeited as a result of AMS'
failure to achieve certain financial milestones, which if achieved would have
resulted in the release of the escrow shares to the Company. Upon forfeiture of
the escrow shares, the Company's interest in AMS was reduced to approximately
16%.

           As of September 30, 1997, an additional 1,025,600 shares of common
stock had been issued in connection with the conversion of the May 1996
convertible debentures reducing ownership of AMS to approximately 14%. The
Company continued to account for its investment in AMS utilizing the equity
method through the merger of AMS.

           On November 10, 1997, the shareholders of Caprius and AMS agreed to
merge, and AMS became a wholly-owned subsidiary of the Company (See Note C).

            The following unaudited pro forma financial information sets for the
results of the Company as if the AMS merger and the MDI merger had occurred
prior to October 1, 1997 and October 1, 1996, respectively. The pro forma
financial information does not purport to be indicative of what would have
occurred had the acquisition been made as of 1996, or results that may occur in
the future. The pro forma information does not include the expense for the
purchased research and development costs.



                                      F-24

<PAGE>   66
                         CAPRIUS, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                               SEPTEMBER 30, 1998



(NOTE I) - UNCONSOLIDATED SUBSIDIARY (AMS): - CONTINUED

                                                      Year ended September 30,
                                                          1998          1997
                                                       ---------     ---------
                                                               (000's)

           Net revenues                                $  3,764      $ 13,124
           Operating expenses                           (15,005)      (18,586)
                                                       --------      --------
           Operating loss from continuing operations   $(11,241)     $ (5,462)
           Net loss                                    $(11,395)     $ (5,979)
           Net loss per common share                   $  (1.55)     $  (0.82)

(NOTE J) - MEDICAL DIAGNOSTICS, INC.

           On February 27, 1997, MDI a wholly owned subsidiary of the Company,
merged with MDI Acquisition Corporation, a newly-formed wholly-owned subsidiary
of US Diagnostic and became a wholly-owned subsidiary of US Diagnostic (the "MDI
Merger"). The MDI Merger was effected pursuant to an Agreement and Plan of
Merger, dated January 20, 1997.

           At the effective time of the MDI Merger, US Diagnostic paid the
Company $22,000,000 (the "Merger Consideration") as follows: (1) to Chase
Manhattan Bank N.A. (the "Bank"), on behalf of obligations of MDI which were
guaranteed by the Company, an amount sufficient to fully satisfy all of MDI's
obligations to the Bank (approximately $12,000,000) and (2) the remainder of the
Merger Consideration (approximately $10,000,000) to the Company. As a result of
the MDI Merger, US Diagnostic assumed approximately $9,000,000 in payment
obligations under MDI's capital leases. The Company paid a financial advisor fee
to Leeds Group Inc. and other expenses related to the MDI Merger.

           In addition, there were mutual indemnifications between the Company
and US Diagnostic whereby the Company had indemnified US Diagnostic from any
claims arising from the termination of the Key Employment Agreement of John A.
Lynch, MDI's former Chief Executive Officer and from any losses arising from the
lawsuits between MDI and Raytel Medical Corporations, et al. Both claims have
since been settled.

(NOTE K) - DISCONTINUED OPERATIONS

           In August 1996, the Company's Board of Directors adopted a formal
plan to discontinue its Imaging Systems business segment. The segment was
accounted for as discontinued operations in accordance with APB 30, which among
other provisions, requires the plan of disposal to be carried out within one
year. The Company's estimated loss on disposal was less than anticipated
resulting in income in fiscal 1998 amounting to approximately $107,000.



                                      F-25