<PAGE>   1
                     U.S. SECURITIES AND EXCHANGE COMMISSION
                              Washington, DC 20549

                                    FORM 10-K

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

                     For the fiscal year ended June 30, 1998

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

       For the transition period from _______________ to _________________

                         Commission file number 0-26972

                          SWISSRAY INTERNATIONAL, INC.
            (Exact Name of Registrant as Specified in its Charter)

                  New York                               16-0950197
    (State or Other Jurisdiction of                   (I.R.S. Employer
     Incorporation or Organization)                 Identification No.)

           200 East 32nd Street, Suite 34-B, New York, New York 10016
               (Address of Principal Executive Office) (Zip Code)

         United States - 212-545-0095 Switzerland - 011 41 41 914 12 00
                (Issuer's Telephone Number, Including Area Code)

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

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

                     COMMON STOCK, PAR VALUE $.01 PER SHARE
                                (TITLE OF CLASS)

Indicate by check mark whether the issuer; (1) has filed all reports required 
to be filed by Section 13 or 15(d) of the Exchange Act 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 requirements for the 
past 90 days.
                                                                               
                               Yes  xx (1)           No
                                   ----                  ----

Indicate by check mark if there is no disclosure of delinquent filers pursuant 
to Item 405 of Regulation S-K is not contained in this form, and no disclosure
will be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [ ]

State issuer's revenues for its most recent fiscal year - $22,892,978.

The number of shares outstanding of each of the Registrant's classes of Common
Stock, as of September 24, 1998 is 4,638,976 shares (2), all of one class of 
common stock, $.01 par value. Of this number a total of 4,190,717 shares having
an aggregate market value of $9,177,670, based on the closing price of the
Registrant's common stock of $2.19 on September 28, 1998 as quoted on the
NASDAQ Small Cap market, were held by non-affiliates* of the Registrant.  

* Affiliates for the purpose of this item refers to the Registrant's officers
and directors and/or any persons or firms (excluding those brokerage firms
and/or clearing houses and/or depository companies holding Registrant's
securities as record holders only for their respective clienteles' beneficial
interest) owning 5% or more of the Registrant's Common Stock, both of record and
beneficially.

(1) Excepting for the fact that this Form 10-K should have been filed on or
before October 13, 1998 and the further fact that the Registrant has not yet
filed its Form 10-Q for quarter ended September 30, 1998.

(2) Unless otherwise indicated throughout this Form 10-K, all references to
number of shares, price per share and data of a similar and related nature
retroactively reflect and take into consideration a 1 to 10 reverse stock
split, as effective October 1, 1998.

<PAGE>   2
                   ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS
                           DURING THE PAST FIVE YEARS

Check whether the issuer has filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court.

                               Yes           No
                                  ----          ----

Not Applicable

                    APPLICABLE ONLY TO CORPORATE REGISTRANTS

State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: 4,638,976 shares as of September 24,
1998.


                       DOCUMENTS INCORPORATED BY REFERENCE

If the following documents are incorporated by reference, briefly describe them
and identify the part of the Form 10-K (e.g., Part I, Part II, etc.) into which
the document is incorporated: (1) any annual report to security-holders; (2)
any proxy or information statement; and (3) any prospectus filed pursuant to
Rule 424(b) or (c) of the Securities Act of 1933 ("Securities Act").           

None
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         TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                                                                  Page
                                                                                                 Number
                                                                                                 ------
PART I

<S>               <C>                                                                           <C>
Item 1.           Business                                                                           4

Item 2.           Properties                                                                        11

Item 3.           Legal Proceedings                                                                 11

Item 4.           Submission of Matters to a Vote of Security Holders                               12

PART II

Item 5.           Market For Registrant's Common Equity and Related
                  Stockholder Matters                                                               12

Item 6.           Selected Financial Data                                                           14

Item 7.           Management's Discussion and Analysis of Financial
                  Condition and Results of Operations                                               15

Item 8.           Financial Statements and Supplementary Data                                 26 & F(1)-F(25)

Item 9.           Changes in and Disagreements with Accountants on
                  Accounting and Financial Disclosure                                              27

PART III

Item 10.          Directors and Executive Officers of the Registrant                               27

Item 11.          Executive Compensation                                                           28

Item 12.          Security Ownership of Certain Beneficial Owners and
                  Management                                                                       32

Item 13.          Certain Relationships and Related Transactions                                   33

PART IV

Item 14.          Exhibits, Financial Statement Schedules, and
                  Reports on Form 8-K                                                              33

SIGNATURES                                                                                         34

SUPPLEMENTAL INFORMATION                                                                           35
</TABLE>




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4
                                     PART I

ITEM 1.  BUSINESS

BACKGROUND SUMMARY

         The Registrant was incorporated under the laws of the State of New York
on January 2, 1968 under the name CGS Units Incorporated. On June 6, 1994, the
Registrant merged with Direct Marketing Services, Inc. and changed its name to
DMS Industries, Inc. In May of 1995 the Registrant discontinued the operations
then being conducted by DMS Industries, Inc. and acquired all of the outstanding
securities of SR Medical AG, a Swiss corporation engaged in the business of
manufacturing and selling X-ray equipment, components and accessories. On June
5, 1995 the Registrant changed its name to Swissray International, Inc. The
Registrant's operations are being conducted principally through its wholly owned
subsidiaries, SR Medical Holding AG (known as SR Medical AG until renamed in
February 1998), the latter's wholly owned subsidiaries, SR Medical AG (known as
Teleray AG until renamed in February 1998), a Swiss corporation, Swissray
(Deutschland) Roentgentechnik GmbH (formerly known as SR Medical GmbH), a German
limited liability company and Teleray Research and Development AG (a Swiss
corporation), as well as through the Company's other wholly owned subsidiaries,
SR Management AG (formerly SR Finance AG), a Swiss corporation, Swissray Medical
Systems, Inc. (formerly Swissray Corporation), a Delaware corporation, Swissray
Healthcare, Inc., a Delaware corporation, and Swissray Information Solutions,
Inc., a Delaware corporation and Empower, Inc., a New York corporation.
Unless otherwise specifically indicated, all references hereinafter to the
"Company" refer to the Registrant and its subsidiaries.

BUSINESS

         The Company is active in the markets for diagnostic imaging devices for
the health care industry. Diagnostic imaging devices include X-ray equipment for
plane projections, computer tomography ("CT") systems and magnetic resonance
imaging ("MRI") systems for three dimensional projections, nuclear medicine
("NM") imaging devices and ultrasound devices. The Company is primarily engaged
in the business of manufacturing and selling diagnostic X-ray equipment for all
radiological applications. In addition, the Company is in the business of
selling imaging systems and components and accessories for X-ray equipment and
providing related services. In Switzerland, the Company is the exclusive
distributor of CT systems, MRI systems and NM systems manufactured by Elscint
Ltd., a leading Israeli manufacturer of diagnostic imaging systems and other
technologically advanced products.

          X-rays were discovered in 1895 by Wilhelm Konrad Roentgen. Shortly
thereafter, X-ray imaging found numerous applications for medical diagnostic and
non-medical purposes. Today, medical X-ray imaging is a fundamental tool in bone
and soft tissue diagnosis. X-ray diagnosis is primarily used in orthopedics,
traumatology, gastro-enterology, angiography, urology, mammography and
pulmology. The principal elements of a diagnostic X-ray system are the X-ray
generator, the X-ray tube and the bucky device. The generator generates high
tension, which is converted into X-rays in the X-ray tube. The X-rays so created
are then penetrating a patient's body and subsequently expose a polyester based
film contained in the bucky device. Different types of diagnostic X-ray
equipment have been developed for different uses. A typical room used for
general X-ray examinations (bucky room) contains an X-ray system which includes
a table with a bucky device for examinations of recumbent patients (bucky table)
and a wall stand with a second bucky device for examinations of sitting and
standing patients (bucky wall stand).

         The Company's marketing strategy is to offer to its customers a
complete package of products and services in the field of radiology, including
equipment, accessories and related services. The Company's products include a
full range of conventional X-ray equipment, the direct digital
AddOn-Multi-System and the SwissVision(TM) line of DICOM 3.0 compatible
postprocessing work stations operating on a Windows NT platform. Instead of
using a bucky device which contains a cassette, a screen and a polyester-based
film as in a conventional X-ray system, the bucky of a direct digital X-ray
system contains a detector which directly converts the X-rays into digital image
information. The AddOn-Multi-System, which uses the Company's AddOn Bucky(TM) as
a detector, for the first time makes possible all plane X-ray examinations on
the recumbent, upright and sitting patient without the use of cassettes, films,
chemicals or phosphor plates. The AddOn-Multi-System includes a SwissVision (TM)
workstation which permits the postprocessing of digital image data and the
transfer of such data through central networks or via telecommunications



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systems. The Company is also offering products and services related to
networking, archiving and electronic distribution of digital x-ray images,
including Picture-Archiving and Communications Systems (PACS).

         During the 100 years in which X-ray imaging has been used for medical
purposes, there has been a continuous trend to improve image quality, to reduce
the radiation dose and to improve the ergonomic features of X-ray equipment.
Management believes that the direct digital radiography (ddR) technology
developed by the Company will take this development to the next level because
the ergonomically advanced AddOn-Multi-System provides an excellent image
quality with minimal radiation doses and at the same time reduces operating
expenses through the elimination of films, phosphor plates or cassettes and the
handling, development and storage thereof. By eliminating the darkroom process
with its toxic chemicals, the AddOn-Multi-System helps to protect the
environment.

         Based on the results of marketing and technical research undertaken by
the Company, the Company decided during the fiscal year ended June 30, 1997 not
to market the Company's direct digital detector, the AddOn Bucky(TM), as a
retrofit product for conventional X-ray systems, but rather to offer a complete
multi-functional direct digital X-ray system which combines the functions of a
conventional bucky table and a bucky wall stand. The primary reason for the
Company's new strategy was management's belief that potential customers can
achieve cost benefits with a multi-functional X-ray system compared to
retrofitting existing equipment. These cost benefits result primarily from the
fact that a multi-functional direct digital X-ray system only requires one
detector, the most expensive part of a direct digital X-ray system, to replace
the two bucky devices used in a typical conventional bucky room. Additional
reasons were an upcoming regulatory change in Europe, quality concerns and
potential problems in the after-sales market. As a result, management of the
Company came to the conclusion that market acceptance of a complete direct
digital system would be greater than that of a digital detector alone. The
Company's new strategy with respect to its direct digital technology required
the incurrence of significant additional research and development expenses. Due
to this effort, the AddOn-Multi-System was invented and developed. The first
product for field trial has been delivered to a customer during the first
quarter and additional systems where delivered in the fiscal year 1997/98. The
experiences with the installed Systems shows a high reliability and a very low
breakdown rate. See also Item 1 - "Research and Development" and Item 7 -
"General" to this Form 10-K.

         Services provided by the Company include the installation of imaging
equipment, after-sales services for imaging equipment, consulting services and
application training of radiographers.

         During the fiscal year ended June 30, 1998, the Company had aggregate
sales of $22,892,978 and a net loss of $22,503,109, compared with aggregate
sales of $13,151,701 and a net loss of $13,685,188 during the fiscal year ended
June 30, 1997. The increase in the Company's net loss is primarily due to the
significant increase in interest expenses, which resulted from the amortization
of issuance cost and Conversion benefit of Convertible debentures, issued for
financing purposes. The increase in the Company's operating loss resulted
mainly from an increase in Selling expenses and Salaries incurred with the
building and strengthening of the Company's organization in the principal
markets, including the takeover of the organization and the employees of
Service Support Group in October 1997. The Company continued to have
significant expenses for Research and Development, which were incurred for the
AddOn Multi-system and the Tahoma TMSSM Healthcare asset management software.
The increase in sales came along with a decrease in the gross margin of the
Company. This has its reason partly in the high volume of new developed
products being sold, where the Company is at the beginning of the learning
curve and expects production costs to decrease over the near future. See also
Item 1 - "Research and Development".                          

         The Company estimates that the global market for X-ray equipment,
accessories and related services is approximately $5 billion, 45% of which is in
the United States, 26% in Western Europe, 19% in Japan and 10% in the rest of
the world (Sources: National Electrical Manufacturers Association; Market Line).
The Company's principal markets for its X-ray equipment, components and
accessories by geographic region are Europe and the United States constituting
60% and 40% respectively of the Company's sales during the fiscal year ended
June 30, 1998. The Company believes that because of the need to bring medical
services to Western standards Eastern Europe continues to offer interesting
opportunities as a market for the Company's conventional X-ray equipment and
accessories.



                                                                               5
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6


         The Company believes that the principal markets for its direct digital
Radiography equipment are located in North America and Western Europe, where
installations of the AddOn-Multi-System have been made in various locations. The
company has received FDA Section 510 (k) clearance in December 1997 for its
AddOn-Multi-System.

         Consistent with the Company's marketing strategy, during the fiscal
year ended June 30, 1998 the Company has made additional significant efforts to
build a strong market position in the United States and in Germany, the biggest
European market. On October 17th, 1997 the Company acquired all assets of
Service Support Group LLC, located in Gig Harbor, Washington and merged them
into Swissray Medical Systems, Inc. In November 1998 Swissray created the
companies Swissray Healthcare, Inc. and Swissray Information Solutions, the
latter being headed by Michael J. Baker, who has more than 20 years experience
in radiology, most recently as head of Lockheed Martins's Medical Imaging
Systems division. Swissray Information Solutions, Inc. provides a comprehensive
package of consulting, services and products to enable the healthcare providers
to perform the transition into filmless Radiology. Swissray Healthcare, Inc.
develops and markets Software to allow the radiology departments to assess and
analyze all their imaging modalities. The Company continues to grow it's
Information Solutions division and believes that this business will be very
attractive in the near future. However, no assurance can be given for the
Company's predictions.

PRODUCTS

         General

         The Company's products include a full range of conventional X-ray
equipment, a multi-functional direct digital X-ray system, the
AddOn-Multi-System, and the SwissVision(TM), line of DICOM 3.0 compatible
postprocessing Work Stations operating on a Windows NT platform. Currently, most
of the Company's X-ray equipment is manufactured and developed in Switzerland.
On July 26, 1996, SR Medical AG, the Company's marketing subsidiary, was ISO
9002 and EN 46002 certified. The Company is in the process, to certify for ISO
9001 and EN 46001 by the end of the year 1998.

         Conventional X-ray Equipment, Imaging Systems, Components and
Accessories

         The Company manufactures and sells conventional diagnostic X-ray
equipment for radiological applications. The conventional X-ray equipment
manufactured by the Company includes X-ray generators, basic X-ray equipment,
bucky table systems, mobile X-ray systems, mobile C-arm systems, fluoroscopy
systems, urology systems and remote controlled examination systems. In addition,
the Company is selling components and accessories for X-ray systems. In general,
the components and accessories for X-ray equipment sold by the Company are
manufactured by third parties. In Switzerland, the Company is the exclusive
distributor of CT systems, MRI systems and NM systems manufactured by Elscint
Ltd., a leading Israeli manufacturer of diagnostic imaging systems and other
technologically advanced products. There were no sales of this product range
during the fiscal year ended June 30, 1998. For the fiscal year ended June 30,
1997 total of sales with this product-range have been about 12% of total sales
of the Company during this fiscal year.

         Original Equipment Manufacturing (OEM)

         In June, 1996, the Company entered into a new OEM Agreement (the
"Philips OEM Agreement") with Philips Medical Systems GmbH which replaced a
previous OEM Agreement with Philips, dated July 29, 1992. The Philips OEM
Agreement provides for the production of two conventional X-ray systems, the
Bucky Diagnost TS bucky table and a multi-radiography system (MRS), which is
approved by the World Health Organization (WHO) as a World Health Imaging System
for Radiology (WHIS-RAD). As a result, the Company's MRS system may be tendered
in projects financed by the World Bank. Under the Philips OEM Agreement these
two products are marketed by Philips through its existing distribution network.
The initial Term of the Philips OEM Agreement expires on December 31, 2000 and
may be extended for additional periods of 12 months.


6
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         Digital AddOn-Multi-System/SwissVision

         According to the Company's research, the AddOn-Multi-System is the
first multi-functional direct digital radiography (ddR) system available
worldwide which allows all plane X-ray examinations in a direct digital way. The
AddOn-Multi-System is able to perform on the recumbent, upright and sitting
patient all radiological examinations necessary in orthopedics, traumatology,
chest examination rooms and emergency rooms. The AddOn-Multi-System uses the
Company's AddOn Bucky(TM) as the digital detector, which is able to make
available an X-ray image in a direct digital way for diagnostic study within 20
seconds. The Company's direct digital technology eliminates the handling,
development and storage of cassettes, films, chemicals or phosphor plates. As a
consequence, operating costs are significantly reduced and the efficiency and
the throughput of the bucky room can be increased. The Company believes that an
additional advantage of the Company's AddOn-Multi-System is the fact that all
such X-ray examinations can be made with the use of only one digital detector,
the most expensive part of an X-ray system using direct digital technology. The
AddOn-Multi-System includes a SwissVision(TM) workstation for acquisition and
postprocessing of the digital X-ray images. See also Part I, Item 1 - "Business"
and "Competition".

         The Company's line of SwissVision(TM) postprocessing workstations
permit the postprocessing of digital X-ray images, including section, zooming,
enlargement, soft tissue and bone structure imaging, accentuation of the
limitation of the joints, noise suppression, presentation of different fields of
interest within an area and archiving and transferring the data through central
networks and telecommunication systems. In addition, the SwissVision(TM)
post-processing workstations are able to analyze data stored with respect to a
particular patient. As a result, consistent image quality of different images of
the same patient can be achieved. The workstations operate on a Windows NT
platform and are DICOM 3.0 compatible.

         Services

         The services offered by the Company include the installation and after
sales servicing of imaging equipment, consulting services and application
training of radiographers. The Company also offers products and services related
to networking, archiving and electronic distribution of digital X-ray images,
including Picture Archiving and Communications Systems (PACS). For those
products, strategic alliances with companies such as Agfa, Imation and Emed have
been established.

CUSTOMERS AND DISTRIBUTION

         The Company's customers are hospitals, clinics, radiology centers and
physicians generally. The Company is marketing its products and services
directly through its own sales force in Switzerland, Germany and the United
States and through resellers in these and other markets. The Company is
primarily active in the markets for complete X-ray systems, individual
components (retrofitting), X-ray accessories and related services. The Company
has entered the market for products and services related to networking,
archiving and electronic distribution of digital X-ray images. The Company
believes that in the foreseeable future there will be a continuous growth
world-wide in the markets for complete X-ray systems, components, accessories
and related services because of the improvement of health care services in
developing countries and Eastern Europe and the necessity to meet increasingly
stricter regulations with respect to radiation dosage and other safety features
and environmental hazards in many jurisdictions. With the transition from
conventional to digital X-ray systems, the demand for products and services
related to networking, archiving and electronic distribution of digital X-ray
images will grow in industrialized countries. In these markets the demand for
conventional X-ray equipment, accessories and related services will decrease
over time.

         In the past, the Company has made a significant amount of sales to a
few large customers. For the fiscal year ended June 30, 1998 sales to the
Company's single largest customer during such period accounted for approximately
33% of all revenues. The Company considers the relationship with its largest
customers to be satisfactory. Historically, the identity of the Company's
largest customers and the volumes purchased by them has varied. The loss of the
Company's current largest customer or a reduction of the volume purchased by
this customer would have an adverse effect upon the Company's sales until such
time, if ever, as significant sales to other customers can be made. The Company
expects that as sales of its AddOn-Multi-System increase, the Company's revenue
will be less dependent on a few large customers. See also NOTE 21 to the
Company's consolidated financial statements for additional information with
respect to the Company's largest customer for the fiscal year ended June 30,
1998.

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8

RESEARCH AND DEVELOPMENT

         During the fiscal year ended June 30, 1998, the Company incurred
expenses related to research and development of $3,542,149 (accounting for 18.9%
of the Company's operating expenses), compared to $5,786,158 (accounting for 35%
of the Company's operating expenses) during the previous fiscal year. Beside the
expenses for the AddOn-Multi-System (industrialization, connectivity),
approximately 20% of the R&D expenses where used to develop the Tahoma TMS(SM)
healthcare asset management software.                              

         The Company will continue to have significant research and development
expenses associated with the development of new products (including diagnostic
hardware and software products and new digital X-ray products) and improvements
to existing products manufactured by the Company.

         The number of people employed in research and development are 7. The
Company is outsourcing certain research and development activities and intends
to continue this policy in the future.

         The main focus of the R&D team was the industrialization phase of the
AddOn-Multi-System and the development of communication interfaces (DICOM 3.0,
HL 7, Dicom Worklist etc.) to extend the connectivity of the AddOn-Multi-System
to communication networks such as HIS, RIS, and PACS. Another important task was
to finalize the Tahoma TMSSM software and go into beta-tests. The Tahoma TMSSM,
technology management systems are based on the premise that technology is a
resource that can be managed to achieve organizational objectives, like reducing
operating expense and improving clinical performance.

         The Company has established a scientific board to support its research
and development projects and to enable the Company to develop technologically
advanced products. The Company believes that the integration of academic
institutions and hospitals will provide the Company with access to clinical and
scientific experience and know-how.

RAW MATERIALS AND SUPPLIERS

         The Company has a policy of outsourcing the manufacturing of components
for its X-ray equipment whenever such outsourcing is more efficient and cost
effective than in-house production. In particular, components for which serial
production is available are produced by third-party manufacturers according to
Company specifications. Generally, the X-ray accessories sold by the Company are
manufactured by third parties.

         There is virtually no stock of finished X-ray equipment on the
Company's premises for any extended period of time since X-ray equipment is
generally manufactured at a customer's request. The Company stocks such
components and accessories as it deems necessary. At June 30, 1998 finished
products accounted for approximately 6% of inventory while raw material, parts
and supplies accounted for approximately 92% of inventory and work in process
for approximately 2% as compared to finished products accounting for
approximately 21% of inventory, raw material accounting for approximately 67% of
inventory and work in process accounting for approximately 12% of inventory for
the fiscal year ended June 30, 1997. Due to the delay of selling the
AddOn-Multi-System, the stock of the Company (components and modules) has
increased by the end of the fiscal year 1997/98, but will decrease within the
next months to an accurate level. The increase of stock was also necessary for
economical reasons. The production of the key parts of the AddOn-Multi-System
needed a minimum quantity (lot size) to reach the goals for costs and quality.
The influence was given by the time for installation, the time for testing and
the costs for raw material and components.

         In general, key components for the Company's X-ray equipment can be
obtained from several sources and the Company has entered into supply agreements
with certain of its suppliers. The CCD camera, a key component of the AddOn
Bucky(TM), has been developed on the Company's behalf by the Philips Components
division of Philips GmbH, Hamburg. Philips Components has entered into an
exclusive supply agreement with the Company (which is currently being restated
and negotiations are still ongoing) and the Company considers its relationship
with Philips Components to be satisfactory. While other suppliers of CCD cameras
are available, a significant amount of time would be required to integrate a CCD
camera of another supplier into the Company's AddOn-Multi-System and there can
be no assurance that such integration could be achieved in a timely manner. The
Company believes that there is no anticipated shortage in the supply of key
components for its X-ray equipment.

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COMPETITION

         The markets in which the Company operates are highly competitive. Most
of the Company's competitors are significantly larger than the Company and have
access to greater financial and other resources than the Company. The principal
competitors for the Company's conventional X-ray equipment are General Electric,
Siemens, Toshiba, Trex Medical, Shimatsu, Picker and Philips. In the market for
conventional X-ray equipment, the Company's strategy is to focus on niche
products and standard equipment.

         The only direct digital X-ray systems other than the AddOn-Multi-System
currently available are chest examination systems offered by Philips and IMIX, a
Finnish manufacturer. None of these systems is able to perform bone examinations
on extremities. The Company's AddOn-Multi-System is still the only
multi-functional direct digital X-ray system currently available which allows
all plane X-ray examinations on the recumbent, upright and sitting patient
without the use of cassettes, films, chemicals or phosphor plates. A number of
companies, including certain of the Company's competitors in the markets for
conventional X-ray equipment, are currently developing direct digital X-ray
detectors or direct digital X-ray systems. To the Company's knowledge, none of
those systems will be available on the market before fall 1999.

INTELLECTUAL PROPERTY

         The Company has obtained patent protection for certain aspects of its
conventional X-ray technology, which will expire in the year 2000. The Company
has filed patent applications covering certain aspects of its direct digital
technology in key markets in Europe, North-America and Asia, including the
United States, Canada, Switzerland and Germany. Any patents issued are for a
duration of 20 years. There can be no assurance, however, as to the breadth or
degree of protection which such patents may afford the Company, that any patent
applications will result in issued patents or that patents will not be
circumvented or invalidated. Although the Company believes that its products do
not infringe patents or violate proprietary rights of others, it is possible
that infringement of proprietary rights of others has occurred or may occur. In
the event the Company's products infringe patents or proprietary rights of
others, the Company may be required to modify the design of its products or
obtain a license. There can be no assurance that the Company will be able to do
so in a timely manner, upon acceptable terms and conditions or at all. The
failure to do any of the foregoing could have a material adverse effect upon the
Company. In addition, there can be no assurance that the Company will have the
financial or other resources necessary to enforce or defend a patent
infringement action and the Company could, under certain circumstances, become
liable for damages, which also could have a material adverse effect on the
Company.

         The Company also relies on proprietary know-how and employs various
methods to protect its concepts, ideas and technology. However, such methods may
not afford complete protection and there can be no assurance that others will
not independently develop such technology or obtain access to the Company's
proprietary know-how or ideas. Furthermore, although the Company has generally
entered into confidentiality agreements with its employees, suppliers and
developers, there can be no assurance that such arrangements will adequately
protect the Company. The Company has obtained licenses to use certain technology
which is essential for certain of the Company's products, including certain
software used for its line of SwissVision(TM) postprocessing systems.

         The Company considers the Swissray name as material to its business and
has obtained, or is in the process of obtaining, trademark protection in key
markets. The Company is not aware of any claims or infringement or other
challenges to the Company's rights to use this or any other trademarks used by
the Company.

REGULATORY MATTERS

         The Company's X-ray equipment, components and related accessories are
subject to regulation by national or regional authorities in the markets in
which the Company operates. Pursuant to the Federal Food, Drug and Cosmetic Act,
X-ray equipment is a class II medical device which may not be marketed in the
United States without prior approval from the FDA. The Company has received for
both its AddOn-Bucky (TM) and its AddOn-Multi-System Section 510(k) clearance
with the FDA. The Company filed for its products for the CE approval (Quality
label of the European Community) in July 1998. The Company expects that the
necessary authorization should be forthcoming by February 1999. However, no
assurance can be given as to when or if at all such authorization will be
obtained. The electrical components of the Company's products are subject to
electrical safety standards in many jurisdictions,

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<PAGE>   10
10

including Switzerland, EU, Germany and the United States. The Company believes
that it is in compliance in all material respects with applicable regulations.

ENVIRONMENTAL MATTERS

         The Company is subject to various environmental laws and regulations in
the jurisdictions in which it operates, including those relating to air
emissions, wastewater discharges, the handling and disposal of solid and
hazardous wastes and the remediation of contamination associated with the use
and disposal of hazardous substances. The Company owns or leases properties and
manufacturing facilities in Switzerland, the United States and Germany. The
Company, like its competitors, has incurred, and will continue to incur, capital
and operating expenditures and other costs in complying with such laws and
regulations in both the United States and abroad. As a result of the operation
of the Company's business, the Company may have potential liability with respect
to the remediation of past contamination in certain of its presently and
formerly owned or leased facilities in both the United States and abroad. In
addition, certain of the Company's facilities may have used substances or
generated and disposed of wastes which are or may be considered hazardous. It is
possible that such sites, as well as disposal sites owned by third parties to
which the Company has sent wastes, may in the future be identified and become
the subject of remediation. Accordingly, although the Company believes that it
is in substantial compliance with applicable environmental requirements and the
Company to date has not incurred material expenditures in connection with
environmental matters, it is possible that the Company could become subject to
additional environmental liabilities in the future that could result in an
adverse effect on the Company's financial condition or results of operations.

EMPLOYEES

         As of June 30, 1998, the Company had approximately 116 employees. Of
these 74 were employed in Switzerland, 30 in the United States and 12 in
European countries other than Switzerland. The Company believes that its
relationship with employees is satisfactory. The Company has not suffered any
significant labor problems during the last five years.

ACQUISITION OF SUBSTANTIALLY ALL OF THE ASSETS OF SERVICE SUPPORT GROUP LLC.

         On October 17, 1997, the Company acquired substantially all of the
assets of Service Support Group LLC ("SSG") located in Gig Harbor, Washington,
principally in exchange for the payment of approximately $622,000 in cash and
issuance of 33,333 shares of its Common Stock in equal thirds to each of SSG's
then owners based upon certain warranties and representations made by them.
Pursuant to the Terms of the Asset Purchase Agreement and related Registration
Rights Agreement both dated October 17, 1997, the holders of such Company shares
were then given the right, commencing June 30, 1998 and terminating April 17,
1999, to require the Company to purchase any or all of such shares at $45 per
share. Since its formation on October 16, 1996, SSG has been in the business of
selling diagnostic imaging equipment and providing services related thereto in
the markets on the West Coast of the United States. Issues involving the
aforesaid Company shares and a number of other related matters are currently the
subject of dispute and the three former SSG owners relationship with the Company
(and certain Company subsidiaries with whom such persons held positions as
officers, to wit: Swissray Medical Systems, Inc. and Swissray Healthcare, Inc.)
was terminated on July 20, 1998. As a result of such termination Ueli Laupper
has been appointed Chief Executive Officer of both Swissray Medical Systems,
Inc. and Swissray Healthcare, Inc. (with Michael J. Baker being appointed Deputy
Chief Executive Officer of both subsidiaries). Swissray Healthcare, Inc. remains
engaged in providing maintenance management, capital planning and other services
to hospital imaging departments and imaging centers. See also Item 3 "Legal
Proceedings".

SALE OF SUBSTANTIALLY ALL OF THE ASSETS OF EMPOWER INC.

         On April 1, 1997, the Company acquired Empower, Inc., a New York
corporation ("Empower") which since incorporation in 1985, had been engaged in
distributing and servicing diagnostic X-ray equipment and accessories in the New
York/New Jersey/Connecticut area. Certain details with respect to such
acquisition were reported in a Form 8-K and Form 8-K/A1 with date of report of
April 1, 1997. In February 1998 the Company entered into a letter of intent with
E.M. Parker Co., Inc., a Massachusetts corporation ("Parker") with respect to
the sale of Empower's film and x-ray accessories business. On June 30, 1998, the
Company and its wholly owned subsidiary, Empower, Inc. ("Empower") entered into
an Asset Purchase Agreement with Parker pursuant to which the Company   

10
<PAGE>   11
and Empower sold and Parker purchased substantially all of the assets of Empower
(excluding certain excluded assets as defined in the Agreement) in consideration
of: (i) the assumption by Parker of certain liabilities of Empower; (ii) the
cash purchase price of $250,000.00; and (iii) the payment by Parker of
approximately $376,000 to a banking institution in satisfaction of certain
outstanding indebtedness of Empower. Empower remains a wholly owned subsidiary
of the Company.

ITEM 2. PROPERTIES

         On May 15, 1997, the Company purchased a new office and production
facility of approximately 43,000 square feet and moved its entire production to
this facility. The Company moved the offices and other facilities located in its
Hitzkirch facility to the new Hochdorf facility during April 1998. The Company
believes that its new Hochdorf facility provides it with sufficient production
and office space to meet its demand in Switzerland in the foreseeable future.

         The Company also leases office space in New York City, Azusa,
California, Gig Harbor, Washington and Wiesbaden, Germany.

ITEM 3. LEGAL PROCEEDINGS

         In October, 1997, the Registrant and Swissray Healthcare,
Inc. were served with a complaint by a company engaged in the business of
providing services related to imaging equipment alleging that defendant received
benefits from breach of fiduciary duties and contract obligations and
misappropriation of trade secrets by certain former employees of such
competitor. Such company also obtained a temporary restraining order against the
Registrant and Swissray Healthcare, Inc. On November 10, 1997, the Court denied
a Motion for a preliminary injunction and the temporary restraining order was
vacated. On December 1, 1997 and January 30, 1998 the Registrant answered the
Complaint and Amended Complaint respectively by denying the allegations
contained therein. The Plaintiff in such action (on December 2, 1997) filed a
Motion to reargue and renew its prior denied Motion for a Preliminary Injunction
and such Motion was (by Order and Decision dated June 17, 1998) denied. The
Company denied the allegations, vigorously defended the litigation and
thereafter settled such litigation and all outstanding matters with respect
thereto in July 1998 for $60,000.                        

         Dispute with Gary J. Durday ("Durday"), Kenneth R. Montler ("Montler")
and Michael E. Harle ("Harle"). On July 17, 1998, two legal proceedings were
commenced by Swissray, and two of its subsidiaries against Durday, Montler and
Harle. Harle and Montler are former Chief Executive Officers of Swissray Medical
Systems Inc. and Swissray Healthcare Inc., respectively, and Durday is the
former Chief Financial Officer of both of those companies. Each of them was
employed pursuant to an Employment Agreement dated October 17, 1997. In addition
these three individuals were owners of a company by the name of Service Support
Group LLC ("SSG"), the assets of which were sold to Swissray Medical Systems
Inc. pursuant to an Asset Purchased Agreement dated as of October 17, 1997,
whereby Messrs. Durday, Montler and Harle received, among other consideration
33,333 shares of the Company's common stock, together with a put option
entitling these individuals to require Swissray to purchase any or all of such
shares at a purchase price equal to $ 45 per share (on or after June 30, 1998
and until April 16, 1999, subject to certain adjustments set forth in the Asset
Purchase Agreement).

         On July 17, 1998, Swissray and its subsidiaries, Swissray Medical
Systems Inc. and Swissray Healthcare Inc. commenced an arbitration proceeding
before the American Arbitration Association in Seattle, Washington (Case No. 75
489 00196 98) alleging that Messrs. Durday, Montler and Harle fraudulently
induced Swissray and its subsidiaries to enter into the above referenced Asset
Purchase Agreement and otherwise breached that Agreement. The relief sought in
the arbitration proceeding is the recovery of damages suffered as a result of
this alleged wrongful conduct and a rescission of the put option provided for in
the Asset Purchase Agreement. Messrs. Durday, Montler and Harle responded to the
allegations made in the arbitration proceeding and asserted counterclaims
against Swissray and its subsidiaries claiming a breach by them of their
obligations under the Asset Purchase Agreement and other relief.

         The current status with respect to this matter is that an arbitrator
has been selected, but no date has yet been set for a hearing.

                                                                              11
<PAGE>   12
12

         In addition to the above referenced arbitration proceeding, Swissray
and its subsidiaries commenced an action against Messrs. Durday, Montler and
Harle in the Supreme Court of the State of New York, County of New York (Index
603512/98), alleging that these individuals breached the obligations undertaken
by them in their respective Employment Agreements. Messrs. Durday Montler and
Harle have removed this action to the United States District Court for the
Southern District of New York (File No. 98 Civ. 5895; Judge McKenna), where it
is now pending. Counsel for Messrs. Durday, Montler and Harle have since
acknowledged that the action was improperly removed to federal court and have
agreed to remand that action to the Supreme Court of the State of New York,
County of New York. Counsel for Messrs. Durday, Montler and Harle have also
indicated that it is their intention to attempt to dismiss or stay the New York
action in order to have the issues raised in the action consolidated with the
issues to be determined in the American Arbitration Association proceeding, but
no formal action has been taken in that regard.

         While the above may be considered to be in its early stage of
litigation or arbitration as indicated, it is the Company's management's
intention to contest each of these matters vigorously since Swissray believes
that its claims are meritorious, and that it has meritorious defenses to the
claims asserted against them.

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

         The Company held its Annual Meeting of Stockholders for fiscal year
ended June 30, 1997 on December 23, 1997, at which time stockholders (i) elected
each of those six persons nominated to serve on the Company's Board of
Directors, (ii) approved the appointment of STG-Coopers & Lybrand AG as the
Company's independent accountants for fiscal year ended June 30, 1998, (iii)
voted in favor of increasing the number of authorized shares of Company Common
Stock from 30,000,000 shares to 50,000,000 shares (but did not authorize the
creation of a class of Preferred Stock) and (iv) approved the proposal to adopt
the Company's 1997 Stock Option Plan.

         The Company has not as yet established a date for holding its Annual
Meeting of Stockholders for fiscal year ended June 30, 1998. While specific
plans as to agenda, proposed site and date of meeting have not yet been
formalized, it is management's intention to hold such Annual Meeting as soon as
practicable and prior to the end of the first quarter of calendar year 1999.


         In addition to the above and subsequent to the closing of the Company's
June 30, 1998 fiscal year, the Company held a Special Meeting of Stockholders on
August 31, 1998, at which time Company stockholders were asked to consider and
act upon proposals to (1) reverse stock split the currently issued and
outstanding shares of Company Common Stock on the basis of no less than 1 : 4
and no greater than 1 for 10; the exact number, (if any) within such parameter
to be determined by the Board of Directors in its discretion and (2) authorize
the creation of a class of Preferred Stock. The number of shares of Common Stock
voted at the Special Meeting approximated 75 % of all issued and outstanding
securities as of the record date and approximately 88 % of those shares voted in
favor of the aforesaid reverse stock split proposal (while the Company did not
receive a sufficient number of affirmative votes for the creation of a class of
Preferred Stock).

         At a Special Meeting of the Board of Directors on September 21, 1998, a
reverse stock split on the basis of 1 for 10 was approved with an effective date
of October 1, 1998.

                                     PART II

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

         (a) Market Information. The Registrant's common stock was listed on the
NASDAQ SmallCap Market and traded under the symbol SRMI until October 26, 1998
delisting. See also paragraph (d) below. The following table sets forth, for
the periods indicated, the range of high and low bid prices on the dates
indicated for the Company's securities indicated below for each full quarterly
period within the two most recent fiscal years (if applicable) and any
subsequent interim period for which financial statements are included and/or
required to be included.                                                       


12
<PAGE>   13
<TABLE>
<CAPTION>
        Fiscal Year Ended June 30, 1997                               Quarterly Common Stock Price
                By Quarter                                                   Ranges  (1)(2)
        ------------------------------------                          ----------------------------
        Quarter                  Date                                    High                 Low
        -------                  ----                                    ----                 ---
<S>                        <C>                                        <C>                  <C>
         1st               September 30, 1996                          $50.625             $36.875
         2nd               December 31, 1996                           $40.00               $23.75
         3rd               March 31, 1997                              $35.625             $16.875
         4th               June 30, 1997                               $32.50               $14.063
</TABLE>

<TABLE>
<CAPTION>
         Fiscal Year Ended June 30, 1998                                Quarterly Common Stock Price
                 By Quarter                                                       Ranges (1)(2)
         ------------------------------------                          ----------------------------
         Quarter                    Date                               High                   Low
         -------                    ----                               ----                   ---
<S>                        <C>                                         <C>                  <C>
         1st               September 30, 1997                          $16.375              $15.625
         2nd               December 31, 1997                           $12.50                $11.25
         3rd               March 31, 1998                              $16.875                $7.50
         4th               June 30, 1998                                $10.00                $5.00
</TABLE>

<TABLE>
<CAPTION>
         Fiscal Year Ended June 30, 1999                                 Quarterly Common Stock Price
                  By Quarter                                                      Ranges (1)(2)
         -------------------------------                                 ----------------------------
         Quarter                    Date                                     High             Low
         -------                    ----                                     ----             ---
<S>                                 <C>                                  <C>                 <C>
         1st                        September 30, 1998                     $5.625            $1.88
</TABLE>



(1)    The Registrant's common stock, $.01 par value (the "Common Stock"), began
       trading on the NASDAQ SmallCap market on March 20, 1996 with an opening
       bid of $47.50. See also paragraph (d) below.
(2)    All prices indicated hereinabove (and elsewhere throughout this Form 10-K
       unless otherwise indicated) take into account and retroactively reflect a
       1 for 10 reverse stock split effective October 1, 1998.

         (b) Holders. As of September 24, 1998 there were 697 stockholders of
the Registrant's Common Stock (as indicated on its transfer agent's certified
list of stockholders as of September 24, 1998).

         (c) Dividends. The payment by the Registrant of dividends, if any, in
the future rests within the discretion of its Board of Directors and will
depend, among other things, upon the Company's earnings, its capital
requirements and its financial condition, as well as other relevant factors. The
Registrant has not paid or declared any dividends upon its Common Stock since
its inception and, by reason of its present financial status and its
contemplated financial requirements, does not contemplate or anticipate paying
any dividends upon its Common Stock in the foreseeable future.

         (d) Recent NASDAQ Delisting. On October 26, 1998 NASDAQ determined to
delist Registrant's securities from The NASDAQ Stock Market effective with the
close of business October 26, 1998. The advise (accompanying the delisting
letter) indicated in pertinent part that (a) the bid price of Registrant's
common stock had fallen below $1.00 per share on October 26, 1998 despite the
Registrant having demonstrated ".. a closing bid price in excess of $1.00 for a
period of 17 consecutive trading days" and (b) the Registrant's 15 day extension
within which to timely file its Form 10-K for fiscal year ended June 30, 1998
had expired October 15, 1998 and, accordingly, "the Registrant is now deficient
in filing its 10-K for the fiscal year ended June 30, 1998".

         The NASDAQ Listing and Hearing Review Council ("Review Counsel") may,
on its own motion, determine to review any Panel decision within 45 calendar
days after issuance of a written decision and if the Review Counsel determines
to review a decision it may affirm, modify, reverse, dismiss, or remand the
decision to the Panel. The Registrant may also request the Review Council to
review its decision and such request must be made within 15 days of the date of
this decision. The institution of a review, whether by way of any request, or on
the initiative of the Review Council, does not operate as a stay of NASDAQ's
October 26, 1998 delisting decision.

                                                                              13
<PAGE>   14
14

         Registrant formally requested review of NASDAQ's decision in a timely
manner and such request was confirmed by NASDAQ on November 16, 1998 wherein
NASDAQ indicated that the Registrant had until January 15, 1999 for its
submission of any additional information it may deem pertinent for purposes of
Review Council's consideration. Registrant understands that the Review Panel is
prepared to and will consider any and all additional information supplied to it
by the Registrant that did not exist at the time of delisting and, accordingly,
the Registrant intends to provide certain new and significant information for
NASDAQ's consideration.

ITEM 6. SELECTED FINANCIAL DATA

         The summary information below represents financial information of the
Company for the fiscal years ended June 30, 1998, June 30, 1997, June 30, 1996,
June 30, 1995 (six month period), and December 31, 1994, which information was
derived from the audited consolidated financial statements of the Company.

                          Swissray International, Inc.
                                   Years Ended
                      (in Thousands, Except Per Share Data)

<TABLE>
<CAPTION>
                                                                   (Six Months)
                                6/30/98     6/30/97*     6/30/96*   6/30/95 (1)   12/31/94
                                -------     --------     --------   -----------   --------
INCOME STATEMENT DATA:
<S>                             <C>         <C>          <C>        <C>          <C>
Net Sales                         22,893      13,151      10,899       3,806       8,618
Cost of goods sold                18,082       8,445       5,793       2,484       5,363
                                 -------     -------     -------     -------     -------
Gross profit                       4,811       4,706       5,106       1,322       3,255
Gross profit margin (%)               21%         36%         47%         35%         38%
Selling, general and
   administrative expenses        18,748      17,450      14,966       2,307       3,175
                                 -------     -------     -------     -------     -------

Operating (loss) income          (13,937)    (12,744)     (9,860)       (985)         80
Other expense (income) net           281        (317)     (1,004)      3,054          15
Interest expense                   8,590         760         194         122         237
Loss from continuing
   operations before income
   taxes                         (22,808)    (13,187)     (9,050)     (4,161)       (172)
Income taxes                          --         110        (365)       (339)         24
Loss from continuing
   Operations                    (22,808)    (13,297)     (8,685)     (3,822)       (196)
                                 =======     =======     =======     =======     =======
Loss per share from
   continuing operations           (8.48)      (8.41)      (6.69)      (4.80)      (0.30)
                                 =======     =======     =======     =======     =======

BALANCE SHEET DATA:
Working Capital (deficit)          1,085       2,834       3,433      11,851      (1,236)
Total assets                      25,915      24,788      18,793      13,027       3,899
Short-term- debt, including
   current portion, long-term
   debt                            3,910       4,211       2,737       2,954       2,843
Convertible debentures             7,330       5,310          --          --          --
Long-term debt                       441         525          --         705         420
Stockholders' (deficit) equity     6,159       7,693      10,655       6,377
                                                                                    (798)
Total shares outstanding at
   year end (2)                    2,691       1,582       1,297       1,203         785
</TABLE>

14
<PAGE>   15
(1)  In 1995, the Company changed its fiscal year end from December 31 to June
     30. As a result, the Company had a fiscal year beginning on January 1, 
     1995 and ending on June 30, 1995. Accordingly, the Summary Financial Data
     for the period ended June 30, 1995 is for a six month period.

(2)  On October 1, 1998, the Company effectuated a reverse stock split of all
     issued and outstanding common stock on the basis of 1 for 10, effective as
     of the opening of business on October 1, 1998. All per share data has been
     restated to reflect such change.

*      Restated


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS

GENERAL

         The focus of the Company for the fiscal year ended June 30, 1998 was
mainly on the industrialization and commercialization of the newly developed
products Add-On-Multi-system and Bucky Diagnost TS and the building and
strengthening of its organization and distribution channels in the principal
markets USA and Europe. Before, the main focus was on the development of the
above mentioned products.

         In the USA the Company acquired, in October 1997, substantially all of
the assets of Service Support Group LLC (SSG), a company active in the business
ofselling diagnostic imaging equipment and providing services related thereto
in the markets on the West Coast of the United States and took over
approximately 30 employees to have, together with the digital x-ray division of
Empower, direct market presence in the highest populated regions of the US; the
Company's principal market for digital Radiography. The Company also started
its activities, in the US and later also in Europe, in the business of
information solutions by providing a comprehensive package of consulting,
services and products to enable the Healthcare providers to perform the
transition into filmless Radiology. Significant amounts of money were invested
in the opening of the market of the Company's direct digital AddOn Multi
Systems, both in the US and in Europe.
                                                                               
         During the start-up of the production of the Company's newly developed
products, the Add-On-Multi-system and the Bucky Diagnost TS, gross margins were
affected negatively because of the need of extra time for training the newly
hired production staff and implementation of the production run as well as
efforts made to improve and maintain highest product quality. The Company
expects to lower costs and time needed for production of these systems in a
later stage of the learning curve due to positive impact of the optimized
production run. The sales of AddOn Multi-system was slowed down by certain
governmental requirements for the sale of Healthcare products, which differ from
one country to the other. The Company filed for CE approval of the AddOn
Multi-system in July 1998 and expects that the necessary approvals should be
forthcoming.

         The Company started a restructuring process in the fourth quarter of
its fiscal year ended June 30, 1998 with the employment of Mr. E.A. Kalbermatter
as the Company's new Chief Operation Officer. Mr. Kalbermatter is an
internationally experienced manager with expertise in the areas of electronics
and telecommunications, who has also served as managing director of Private &
Business Communications of ASCOM Ltd., Berne, Switzerland being responsible for
the turn-over of more than 1 billion Swiss Francs, with approximately 4,800
employees worldwide. With the sale of Empower's Film, Processor and Chemistry
Business to E.M. Parker, the Company continued its focus on digital
Radiography. The process of restructuring is ongoing and includes mainly
internal reorganization to achieve lean structures and cost savings.           

Year 2000 Policy Statement

         The Company will help their customers to achieve Year 2000 compliance
on their equipment purchased from the Company through a program of solutions.
The Company has conducted an extensive program to check the status of its
equipment related to the millennium.

                                                                              15
<PAGE>   16
16

         For relevant material delivered by third parties the Company has asked
and gotten written assurances when they expect their year 2000 compliance's will
be solved. To date, the Company received written responses of 84% and out of
those 71% confirmed to have no year 2000 problems.

         In fact, over 63 % of the Company's installed base equipment is already
in compliance and expected to encounter no problems on January 1, 2000.

         The Company has organized its products according to A-B-C-D categories
of compliance:

Category A: Already compliant
Category B: Not yet compliant but will be made compliant
Category C: Not listed in A or B categories
Category D: Non- The Company branded products

         To all of the Company's customers, specific compliance information also
will be provided to advise them on the status of their equipment purchased from
the Company and to offer solutions for the millennium.

         For those customers with non-compliant systems, the Company will
provide solutions in virtually all cases. For a flat fee, these solutions will
cover any applicable site surveys, software licensing, software, installation,
and labor.

         The Company does not recommend some solutions offered by other
companies, so-called "workaround" scenarios, such as setting back the clock
because the Company believes that the safest, surest way to maintain the
integrity of data and the viability of information networks is to correct the
problem, not mask it with labor-intensive stop-gaps. Simply put, to protect the
customers the Company will fix their equipment right the first time.

Year 2000 Compliant Lists

         The Company reserves the right to modify or update these lists as it
continues to work on the Year 2000 status of its products. The products listed
have been tested on a stand alone basis; therefore an operational environment's
test results may differ. This information does not affect existing warranties,
warranty exclusions, exclusive warranty remedies or limitations of liability.

Class A Systems: Year 2000 Compliant

GEN-X-Generators:          Bucky Table Systems:
GEN-X-1000                 -    Euramove 1
GEN-X-2000                 -    Euramove 2
GEN-X-3000                 -    Euramove 3
GEN-X-4000                 -    Euramove 4
MRS Conv.                  -    Eurastat 2
                           -    Eurastat 4
Atlas Systems:             -    Bucky-Diagnost TS
Atlas-U / US 2000
Atlas-U / US 3000          Special Systems
Atlas-U / US 4000          -    Euralem 1400
Atlas-BV-Tomo              -    Euralem 1500
MRS Stativ                 -    Euralem 1800
                           -    Euralem Tomo
Urology Systems:
KU-100                     Digital Bucky Systems:
KU-100 H                   -    AddOn-Multisystem
KU-100 H Tomo


16
<PAGE>   17
Class B Systems: Not Year 2000 Compliant, Solution will be offered

GEN-X-Generators:          Mobile C-Arm Systems:
Turnomat 500               -    Eurabil C-Arm Standard
GEN-X-500                  -    Eurabil C-Arm Plus
GEN-X-650                  -    Eurabil C-Arm Top
GEN-X-800
                           Mobile Systems:
Fluoroscopy Systems:       -    Eurabil 5
Euroscop 3A                -    Eurabil 15
Euroscop 6, 6+, 6++        -    Eurabil 30

IT-Systems internally used

         In its year 2000 project the Company has tested and asked for
statements about the year 2000 compliance. In fact 100% of IT-Systems within the
Company are compliant and expected to encounter no problems on January 1, 2000.

         The operating system of the Company's IT-Systems are build on
Microsoft. (Windows 95 and/or Windows NT). SWISSRAY also uses the Microsoft
Office packages for its administration and therefore relies for the operating
system as well as the Microsoft Office package on the year 2000 compliance of
Microsoft for the above mentioned products.

IT-Systems Third Parties

         The Company also asked all important partners (e.g. banks, suppliers,
sales channels) for statements about the year 2000 compliance. This survey 
still is ongoing and the Company has not received negative responses. Of the
partners being asked approximately 60% have already answered.         

YEAR 2000 Project costs

         The Company has separated its cost in the following parts:

<TABLE>
<CAPTION>
                                                          Until June 30, 1998         Total expected
                                                          -------------------         --------------
<S>                                                       <C>                         <C>
Test & Survey own Products                                    $  42,000                 $   50,000
Test & Survey Third Parties Products                          $   8,000                 $   20,000
Modification own Products                                     $  12,000                 $   20,000
Administration (Communication  with Third Parties)            $   5,000                $     5,000
Consultant                                                    $       -                $     5,000
TOTAL YEAR 2000 Project costs                                 $  67,000                $   100,000
</TABLE>

RESULTS OF OPERATION

         Net sales for the fiscal year ended June 30, 1998 were $22,892,978
compared to $13,151,701 and $10,899,222 for the fiscal years ended June 30, 1997
and June 30, 1996 respectively.

         The 74% increase in net sales was partially due to the acquisition of
Empower on April 1, 1997 (Sales of Empower were $7,134,928 for the fiscal year
ended June 30, 1998 compared to $2,000,603 for the fiscal year ended June 30,
1997), the Asset purchase of Service Support Group LLC on October 17, 1997 
(Sales of Swissray Medical Inc. which started its selling activities after the
asset purchase of Service Support Group was $1,577,298 for the fiscal year
ended June 30, 1998 compared to $0 for the fiscal year ended June 30, 1997) and
the increase in sales made under the Philips OEM Agreement of $6,500,529. Also
sales to third parties in Switzerland almost doubled in the fiscal year ended
June 30, 1998 compared with the previous fiscal year. These increases have been
partially offset by the decrease of $1,519,159 in Sale of Elscint products and
decreased sales for Eastern Europe. The Company sold four of the
AddOn-Multi-System during the fiscal year ended June 30, 1998.               

                                                                              17
<PAGE>   18
18

         Gross profits amounted to $4,811,192 or 21% of net sales for the fiscal
year ended June 30, 1998, compared to $4,706,287 or 35.8% of net sales for the
fiscal year ended June 30, 1997 and $5,105,916 or 46.9% of net sales for the
fiscal year ended June 30, 1996.

         The decrease in gross profits as a percentage of net revenues is
primarily attributable to the fact that sales of lower-margin products increased
substantially compared to the fiscal years ended June 30, 1997 and June 30, 1996
respectively. This is mainly attributable to increased sales of accessories,
which are generally low-margin products, as a result of the acquisition of
Empower (net sales of Empower contributed approximately 31% to the Company's
net sales). The Company also sold a significant number of units of newly
developed products, where the Company is at the beginning of the learning curve
in the production process, which results in higher production costs than in a
later stage of the learning curve. These products are the Bucky Diagnost TS
produced under the OEM Agreement with Philips (which contributed approximately
22% to the Company's net sales) and the AddOn Multisystem (which contributed
approximately 6% to the Company's net sales). The Company expects sales of
accessories to be of a smaller percentage of total sales for the fiscal year
ending June 30, 1999 because of the sale of Empower's accessory business to
E.M. Parker.                                                       

         Operating expenses for the fiscal year ended June 30, 1998 were
$18,747,729 or 81.9% of net sales compared to $17,450,333 or 132.7% of net sales
for the fiscal year ended June 30, 1997 and compared to $14,966,147 or 137.3% of
net sales for the fiscal year ended June 30, 1996. The principal items were
selling expenses of $3,740,391 or 16.3% of net sales compared to $1,873,389 or
14.2% of net sales for the fiscal year ended June 30, 1997 and compared to
$1,140,604 or 10.5% of net sales for the fiscal year ended June 30, 1996 and
salaries (net of directors and officers compensation) of $4,168,540 or 18.2% of
net sales compared to $2,059,396 or 15.6% of net sales for the fiscal year ended
June 30, 1997 and compared to $1,829,535 or 16.8% of net sales for the fiscal
year ended June 30, 1996. Research and Development was $3,542,149 or 15.5% of
net sales compared to $5,786,158 or 44% of net sales for the fiscal year ended
June 30, 1997 and compared to $1,731,502 or 15.9% of net sales for the fiscal
year ended June 30, 1996.

         General and administrative expenses for the years ended June 30, 1997
and 1996 include value of stock options granted in the amount of $1,161,462 and
$6,374,468, respectively, whereas no stock options were granted during the
fiscal year ended June 30, 1998. The Company made an accrual of $500,000 for
planned restructuring of its organization. No such costs were accrued in the
fiscal years ended June 30, 1997 and June 30, 1996.

         The increase of 102% in Salaries was mainly due to the acquisition of
Empower Inc. on April 1, 1997 (with salaries included in the consolidated
statement of operation only for one quarter of the fiscal year ended June 30,
1997) and the takeover of all of the employees of Service Support Group on
October 17, 1997. Both acquisitions where within the Company's marketing
strategy to build a strong market position with its own organization in one of
its principle markets. The number of employees in Switzerland was increased by
21 mainly to handle the significant rise in production volume.

         The increase of 100% in selling expenses is the result of additional
significant efforts on the part of the Company to build a strong market position
in the United States and in Germany, the biggest European market as well as the
costs incurred for successful market introduction of the Company's direct
digital AddOn-Multi-System. The Company also made efforts to lay the groundwork
for the market introduction of Swissray Information Solutions comprehensive
package of consulting, services and products.

         Research and development expenses decreased by 39%. Management
considered the relative size of the research and development expenses for the
fiscal year ended June 30, 1997 as high. The main focus of the R&D was the
industrialization phase of the AddOn-Multi-System and the development of
communication interfaces (DICOM 3.0, HL 7, Dicom Worklist etc.) to extend the
connectivity of the AddOn-Multi-System to communication networks such as HIS,
RIS, and PACS. Another important task was to finalize the Tahoma TMSSM software
and go into beta-tests. The Tahoma TMSSM, technology management systems are
based on the premise that technology is a resource that can be managed to
achieve organizational objectives, like reducing operating expense and improving
clinical performance. Additional research and development expenses have also
been incurred to maintain the technological advantages of the Company's
conventional X-ray equipment. Significant research and development expenses will
continue to be incurred for the development of new technologically advanced
products and the continuing improvement of existing products.

18
<PAGE>   19
         The Company's operating loss increased to $13,936,537 for the fiscal
year ended June 30, 1998 from $12,744,046 for the fiscal year ended June 30,
1997 and $9,860,231 for the fiscal year ended June 30, 1996. The increase in the
Company's operating loss is due to the significant expenses associated with the
building of the Company's organization and market position primarily in one of
its principle markets, the USA. After taking into account Interest expenses,
other income, income tax benefits and extraordinary items of income (loss) the
resulting net loss of the Company for the fiscal year ended June 30, 1998
increased to $22,503,109 from $13,685,188 for the fiscal year ended June 30,
1997 and $8,266,080 for the fiscal year ended June 30, 1996. The increase of net
loss is mainly due to the significant amount of interest expenses which resulted
from the amortization of issuance cost and beneficial Conversion features of
Convertible debentures issued for financing purposes, which amounted to
$8,590,268 for the fiscal year ended June 30, 1998 compared to $759,853 for the
fiscal year ended June 30, 1997 and $193,930 for the fiscal year ended June 30,
1996. Extraordinary income include the Gain on early extinguishment of Debt
which resulted from refinancing of Convertible debentures.           

FINANCIAL CONDITION

         Total assets of the Company on June 30, 1998 increased by $1,126,363 to
$25,914,597 from $24,788,234 on June 30, 1997, as the net effect of an increase
in inventory and goodwill and a decrease of cash and accounts receivables.
Current Assets decreased $1,024,089 to $13,069,257 on June 30, 1998 from
$14,093,346 on June 30, 1997. The decrease in current assets is primarily
attributable to the decrease of cash and accounts receivables and the increase
in inventory due to the delay in selling the Add-On-Multisystem for which a
minimum quantity (lot size) of parts had to be purchased to reach the goals for
costs and quality. Property and Equipment increased due to the extension and
expansion of the production plant in Hochdorf, Switzerland. Other Assets
increased $476,691 to $6,834,962 on June 30, 1998 from $6,358,271 on June 30,
1997. The increase in other assets was primarily due to an increase in
intangible assets.

         On June 30, 1998, the Company had total liabilities of $19,755,870
compared to $17,095,046 on June 30, 1997. On June 30, 1998, current liabilities
were $11,984,554 compared to $11,259,798 on June 30, 1997. The increase in
current liabilities is primarily due to the increase in accrued expenses. On
June 30, 1998, the Company also had $7,330,642 (net of discounts) principal
amount of convertible debentures. Such debentures bear interest between 6% and
8% per annum and are repayable at maturity in Common Stock of the Registrant. As
of June 30, 1998, all of such convertible debentures could be converted into
Common Stock of the Registrant at a price equal to 80% of the average Closing
price during the ten trading days preceding the date of Conversion, except
$145,969 principal amount of debentures with a maturity date of December 1999,
which could be converted at a price equal to 85% of the average Closing price
during the five trading days preceding the date of Conversion. Such debentures
may have a dilutive effect on the investment of stockholders of the Registrant
upon Conversion or payment of the principal at maturity, but no funds of the
Company are expected to be used for their repayment. At June 30, 1998, long-term
debt net of the current portion thereof was $440,674 compared to $524,689 at
June 30, 1997. The decrease of long-term debt is due to a partial repayment.

         Working capital at June 30, 1998 was $1,084,703 compared to $2,833,548
at June 30, 1997.

CASH FLOW AND CAPITAL EXPENDITURES

         Cash used by operating activities for the fiscal year ended June 30,
1998 increased to $11,759,371 from $10,684,988 for the fiscal year ended June
30,1997 and $3,658,665 for the fiscal year ended June 30, 1996 and cash used by
investing activities increased to $4,517,140 for the fiscal year ended June 30,
1998 from $3,668,196 for the fiscal year ended June 30, 1997 compared to
$1,171,120 for the fiscal year ended June 30, 1996. Cash flow from financing
activities for the fiscal year ended June 30, 1998 was $14,799,200 compared to
$14,752,928 for the fiscal year ended June 30, 1997 and $5,788,694 for the
fiscal year ended June 30, 1996.

         The Company's capital expenditures totaled $2,849,205 for the fiscal
year ended June 30, 1998 compared to $3,431,375 for the fiscal year ended June
30, 1997 and $932,066 for the fiscal year ended June 30, 1996. Capital
expenditures were primarily for the improvements of the Hochdorf facility and
the purchase of equipment. The increased financing needs resulted primarily from
the building and strengthening of the Company's organization and distribution
channels in the US and Europe and the improvements of the Hochdorf facility.

                                                                              19
<PAGE>   20
20

         The Company financed its liquidity needs during the fiscal year ended
June 30, 1998 primarily through the issuance of $16,190,000 principal amount of
convertible debentures. The Company anticipates that its use of cash will be
substantial for the foreseeable future. In particular, management of the Company
expects substantial expenditures in connection with the production of the
planned increase of sales, the continuation of the strengthening and expansion
of the Company's marketing organization and, to a lesser degree, ongoing
research and development projects. The Company expects that funding for these
expenditures will be available out of the Company's future cash flow and/or
issuance of equity and/or debt securities. However, the availability of a
sufficient future cash flow will depend to a significant extent on the
marketability of the Company's AddOn-Multi-System. Accordingly, the Company may
be required to issue additional convertible debentures or equity securities to
finance such capital expenditures and working capital requirements. There can be
no assurance whether or not such financing will be available on terms
satisfactory to management.

         On August 31, 1998 the Company issued $3,832,849 aggregate principal
amount of 5% convertible debentures (the "Convertible Debentures") including a
25% premium and accrued interest, convertible into Common Stock of the Company.
The Company did not receive any cash proceeds from the offering of the
Convertible Debentures. The full amount was paid by investors to holders of the
Company's Convertible Debentures issued on March 14, 1998 holding $3,000,000 of
such Convertible Debentures as repayment in full of the Company's obligations
under such Convertible Debentures. During the same period the Company issued
$2,311,000 aggregate principal amount of 5% Convertible Debentures, convertible
into Common Stock of the Company. After deducting fees, commissions and escrow
fees in the aggregate amount of $311,000 the Company received a net amount of
$2,000,000. The face amount of both Convertible Debentures are convertible into
shares of Common Stock of the Company commencing March 1, 1999 at a conversion
price equal to the lesser of 82% of the average closing bid price for the ten
trading days preceding the date of the conversion or $1.00 per share. Any
Convertible Debentures not so converted are subject to mandatory conversion by
the Company on the 24th monthly anniversary of the date of issuance of the
Convertible Debentures.

         On October 6, 1998 the Company issued $2,940,000 aggregate principal
amount of 5% convertible debentures (the "Convertible Debentures") including
$540,000 repurchase of stock, convertible into Common Stock of the Company.
After deducting fees, commissions and escrow fees in the aggregate amount of
$300,000 the Company received a net amount of $2,100,000. The face amount of the
Convertible Debentures is convertible into shares of Common Stock of the Company
any time after the closing date at a conversion price equal to the lesser of 82%
of the average closing bid price for the ten trading days preceding the date of
the conversion or $1.00. Any Convertible Debentures not so converted are subject
to mandatory conversion by the Company on the 24th monthly anniversary of the
date of issuance of the Convertible Debentures.

EFFECT OF CURRENCY ON RESULTS OF OPERATIONS

         The result of operations and the financial position of the Company's
subsidiaries outside of the United States is reported in the relevant foreign
currency (primarily in Swiss Francs) and then translated into U.S. dollars at
the applicable foreign exchange rate for inclusion in the Company's consolidated
financial statements. Accordingly, the results of operations of such
subsidiaries as reported in U.S. dollars can vary significantly as a result of
changes in currency exchange rates (in particular the exchange rate between the
Swiss Franc and the U.S. dollar). For the fiscal year ended June 30, 1998 the
Swiss Franc depreciated by approximately 9% against the US dollar compared to
the rate in effect during the fiscal year ended June 30, 1997. If such exchange
rate had remained in effect, the Company's net sales and net loss would have
been higher by approximately $1,241,942 and $657,457, respectively. For the
fiscal year ended June 30, 1997 the Swiss Franc depreciated by approximately 11%
against the US dollar compared to the rate in effect during the fiscal year
ended June 30, 1996. If such exchange rate had remained in effect, the Company's
net sales and net loss would have been higher by approximately $2,788,209 and
$2,335,548, respectively.

TAXES

         The Company is subject to taxation in many jurisdictions throughout the
world. The Company's effective tax rate and tax liability is affected by a
number of factors, such as the amount of taxable income in particular
jurisdictions, the tax rates in such jurisdictions, tax treaties between
jurisdictions, the extent to which the Company transfers funds between
jurisdictions and income is repatriated, and future changes in law. Generally,
the tax liability

20
<PAGE>   21
for each legal entity is determined either (i) on a non-consolidated basis or
(ii) on a consolidated basis only with other entities incorporated in the same
jurisdiction, in either case without regard to the taxable losses of
non-consolidated affiliated entities. As a result, the Company may pay income
taxes in certain jurisdictions even though the Company on an overall basis
incurs a net loss for the period.

ENVIRONMENTAL MATTERS

         The Company is subject to various environmental laws and regulations in
the jurisdictions in which it operates. The Company, like many of its
competitors, has incurred, and will continue to incur, capital and operating
expenditures and other costs in complying with such laws and regulations. The
Company does not currently anticipate any material capital expenditures for
environmental control technology. Some risk of environmental liability is
inherent in the Company's business, and there can be no assurance that material
environmental costs will not arise in the future. However, the Company does not
anticipate any material adverse effect on its results of operations or financial
condition as a result of future costs of environmental compliance. See also Part
1, Item 1 -"Business-Environmental Matters."

INFLATION

         Inflation can affect the costs of goods and services used by the
Company. The competitive environment in which the Company operates limits
somewhat the Company's ability to recover higher costs through increasing
selling prices. Moreover, there may be differences in inflation rates between
countries in which the Company incurs the major portion of its costs and other
countries in which the Company sells its products, which may limit the Company's
ability to recover increased costs, if not offset by future increase of selling
prices. To date, the Company's sales to high-inflation countries have either
been made in Swiss Francs or US dollars. Accordingly, inflationary conditions
have not had a material effect on the Company's operating results.

SEASONALITY

         The Company's business has historically experienced a slight amount of
seasonal variation with sales in the first fiscal quarter slightly lower than
sales in the other fiscal quarters due to the fact that the Company's first
quarter coincides with the summer vacations in certain of the Company's markets.

BACKLOG

         Management estimates that as of the end of the fiscal year ended June
30, 1998, the Company had an order backlog of $13,000,000.

FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISKS

         On occasion, the Company enters into currency forward contracts as a
hedge against anticipated foreign currency exposures and not for speculative
purposes. Such contracts, which are types of financial derivatives, limit the
Company's exposure to both favorable and unfavorable currency fluctuations. In
the past, the Company has used forward contracts exclusively in connection with
the purchase of material in currencies other than Swiss Francs or US dollars. In
the event of a default of the supplier under the purchase contract with respect
to which a forward contract has been concluded combined with an adverse currency
fluctuation, the Company may be exposed to a loss under the respective forward
contract. However, the Company believes that any such loss, should it occur,
would not have a material adverse effect on the results of the Company.



CAUTIONARY STATEMENT FOR PURPOSES OF THE SAFE HARBOR PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995

         Investment in the securities of the Company involves a high degree of
risk. In evaluating an investment in the Company's Common Stock, Company
stockholders and prospective investors should carefully consider the risk

                                                                              21
<PAGE>   22
22

factors discussed hereafter and the information detailed in this Annual Report
for the fiscal year ended June 30, 1998 on Form 10-K including, without
limitation, Item 1 "Business" and Item 6 "Management's Discussion and Analysis
of Financial Condition and Results of Operations", as well as information
contained in the Company's other filings with the Securities and Exchange
Commission.

         This Form 10-K includes forward-looking statements that reflect the
Company's current views with respect to future events and financial performance,
including capital expenditures, strategic plans and future cash sources and
requirements. These forward-looking statements are subject to certain risks and
uncertainties, including those identified below, which could cause actual
results to differ materially from historical results or those anticipated. The
words, "believe," "expect," "anticipate," "estimate" and similar expressions
identify forward-looking statements. Readers are cautioned not to place undue
reliance on these forward-looking statements, which speak only as of their
dates. The Company undertakes no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise. The following risks could cause actual results to differ
materially from historical results or those anticipated.

History of Losses; Profitability Uncertain

         As of June 30, 1995 the Registrant has accumulated losses on a
consolidated basis of approximately $6,000,000. A substantial part of such
losses resulted from activities unrelated to the Company's present operations.
Since June 30, 1995, the Company has incurred additional net losses aggregating
approximately $44,000,000. Such losses resulted from the significant expenses
associated with the development of the Company's products and the building of
the Company's organization and market position as well as the costs of
amortization of debenture issuance costs and beneficial Conversion features on
the one hand and the absence of a significant increase in sales as a result of
the delay in the market introduction of certain of the Company's products, in
particular the AddOn-Multi-System and the Bucky Diagnost TS, on the other hand.
The likelihood of the success of the Company must be considered in light of the
problems, expenses, difficulties, complications and delays frequently
encountered in connection with the development of new products and the
competitive environment in which the Company operates. Although the Company is
deriving operating revenue from its current operations, such revenue has not
been sufficient to make the Company's operations profitable. There can be no
assurance that the Company will be able to develop significant additional
sources of revenue or that it will become profitable. Results of operations may
fluctuate significantly and will depend upon numerous factors, including
regulatory actions, market acceptance of the Company's products, efficient
manufacturing, new product introductions and competition.

Need for Market Acceptance of the AddOn-Multi-System

         The Company's future performance will depend to a substantial degree
upon market acceptance of the AddOn-Multi-System. The Company's marketing
efforts to date have generated considerable awareness about the
AddOn-Multi-System among radiologists. However, the extent of, and rate at
which, market acceptance and penetration can be achieved by the
AddOn-Multi-System are functions of many variables including, but not limited
to, price, effectiveness, acceptance by potential customers and manufacturing,
training capacity and marketing and sales efforts. There can be no assurance
that the AddOn-Multi-System will achieve or maintain acceptance in its target
markets. Similar risks may confront other products developed by the Company in
the future.

Reliance on a Single Product

         The Company has concentrated its efforts primarily on the development
of the AddOn-Multi-System and will be dependent to a significant extent upon
acceptance of that product to generate additional revenues. There can be no
assurance that the AddOn-Multi-System will be successfully commercialized.

Risk of Currency Fluctuations

         The Company is subject to risks and uncertainties resulting from
changes in currency exchange rates. Future currency fluctuations, to the extent
not adequately hedged, could have an adverse effect on the Company's business,
financial condition and results of operations. On occasion, the Company enters
into currency forward contracts as a hedge against anticipated foreign currency
exposures and not for speculative purposes. Such contracts, which are types of
financial derivatives, limit the Company's exposure to both favorable and
unfavorable currency fluctuations.

22
<PAGE>   23
In the past, the Company has used forward contracts exclusively in connection
with the purchase of material in currencies other than Swiss Francs or US
dollars. For a discussion of these risks, see Item 7, "Management's Discussion
and Analysis of Financial Condition and Results of Operations" - "Effect of
Currency on Results of Operations."

Risks Associated with International Operations

         The Company does business in numerous countries, including Switzerland,
the United States and Germany. Revenue from international operations outside the
United States was 60% of total sales for the fiscal year ended June 30, 1998. In
addition to the currency risks discussed above, the Company's international
operations are subject to the risk of new and different legal and regulatory
requirements in local jurisdictions, tariffs and trade barriers, potential
difficulties in staffing and managing local operations, credit risk of local
customers and distributors, potential inability to obtain regulatory approvals,
different requirements as to product standards, potential difficulties in
protecting intellectual property, risk of nationalization of private
enterprises, potential imposition of restrictions on investments or transfer of
funds, potentially adverse tax consequences, including imposition or increase of
withholding and other taxes on remittances and other payments by subsidiaries,
and local economic, political and social conditions, including the possibility
of hyper-inflationary conditions, in certain countries. Any adverse change in
any of these conditions could have a material adverse effect on the Company's
business or financial condition.

Competition

      The markets in which the Company operates are highly competitive. The
Company competes with numerous competitors, many of which are well-established
in the Company's markets. Most competitors are divisions of larger companies
with potentially greater financial and other resources than the Company.

Improvements in Technology

         The Company's competitors can be expected to continue to improve the
design and performance of their products and to introduce new products with
competitive price and performance characteristics. Although the Company believes
that it has certain technological and other advantages over its competitors,
realizing and maintaining these advantages will require continued investment by
the Company in research and development, sales and marketing and customer
service and support. There can be no assurance that the Company will have
sufficient resources to continue to make such investments or that the Company
will be successful in maintaining such advantages.

Dependence on Patents and Proprietary Licensed Technology

         The Company has patented certain aspects of its proprietary technology
in certain markets and has filed patent applications for the key technology of
the AddOn Bucky(TM) in key markets, including the United States. If such patents
are granted the duration would be 20 years. However, there can be no assurance
that such applications will be granted. There can be no assurance that the
Company's issued patents for conventional equipment (which expire in the year
2000) or other patents issued in the future will afford protection from material
infringement or that such patents will not be challenged. The Company also
relies on trade secrets and proprietary and licensed know-how, which it
protects, in part, through confidentiality agreements with employees,
consultants and other parties. There can be no assurance that these agreements
will not be breached, that the Company would have adequate remedies for any
breach or that the Company's trade secrets will not otherwise become known to,
or independently developed by, competitors.

Litigation, Potential Unavailability of Insurance

         The Medical device industry has been the subject of extensive
litigation regarding patents and other intellectual property rights, and the
Company may institute or otherwise be involved in such litigation to enforce its
patents, protect its trade secrets or know-how, challenge the validity of
proprietary rights of others or defend against alleged infringement by the
Company of proprietary rights of others. An adverse determination in any
litigation could limit the value of any patents awarded to the Company or result
in invalidation of those patents, subject the Company to significant liabilities
to third parties, require the Company to seek licenses from third parties or
prevent the Company


                                                                              23
<PAGE>   24
24

from manufacturing and selling its products, any of which could have a material
adverse effect on the Company's business, financial condition and results of
operations.

Government Regulation

         The Company's services, products and manufacturing activities are
subject to extensive and rigorous government regulation, including the
provisions of the Federal Food, Drug and Cosmetic Act (X-ray equipment is a
class II medical device). Commercial distribution in certain foreign countries
is also subject to government regulations. The process of obtaining required
regulatory approvals can be lengthy, expensive and uncertain. Moreover,
regulatory approvals, if granted, may include significant limitations on the
indicated uses for which a product may be marketed. The FDA actively enforces
regulations prohibiting marketing without compliance with the premarket approval
provisions of products. Failure to comply with applicable regulatory
requirements can result in, among other things, fines, suspensions of approvals,
seizures or recalls of products, operating restrictions and criminal
prosecutions. Furthermore, changes in existing regulations or adoption of new
regulations could affect the timing of, or prevent the Company from obtaining,
future regulatory approvals. The effect of government regulation may be to delay
for a considerable period of time or to prevent the marketing and full
commercialization of future products or services that the Company may develop
and/or to impose costly requirements on the Company. There can also be no
assurance that additional regulations will not be adopted or current regulations
amended in such a manner as will materially adversely affect the Company.

Sales to Health Care Industry

         The Company's products are used exclusively in the health care
industry. The health care industry in key markets for the Company's products,
including the United States, has experienced a significant pressure to reduce
costs, which has led in some jurisdictions to substantial reorganizations and
consolidations of health care providers or payers. It is also possible that
legislation could be adopted in any of these jurisdictions which could increase
such pressures or which could otherwise result in a modification of the private
or public health care system or both or impose limitations on the ability of the
Company to market its products in any such jurisdiction. Any such event or
condition could have an adverse impact on the Company's business, financial
condition or results of operations.

Reliance on Key Management

         The Company's business is highly dependent on the principal members of
its management, marketing, research and development and technical staffs, and
the loss of their services might impede the achievement of the Company's
business objectives. In addition, the Company's future success will depend in
part upon its ability to retain highly qualified management, scientific,
technical and marketing personnel. There can be no assurance that the Company
will be successful in retaining such qualified personnel or hiring additional
qualified personnel. Losses of key personnel could have a material adverse
effect on the Company's business. The Company has no key man life insurance
policies with respect to any of its senior executives.

Limited Manufacturing History with Respect to AddOn-Multi-System;

         The Company has limited experience with the manufacture and assembly of
the AddOn-Multi-System in the volumes that will be necessary for the Company to
generate significant revenues from the sale of the AddOn-Multi-System. The
Company may encounter difficulties in scaling up its production or in hiring and
training additional personnel to manufacture the AddOn-Multi-System. Future
interruptions in supply or other production problems could have a material
adverse effect on the Company's business, financial condition and results of
operations.

Dependence on Sole Source Suppliers

         The Company has only single sources for certain essential components of
the AddOn-Multi-System. Interruptions in the supply of such components might
result in production delays, each of which could have a material adverse effect
on the Company's business, financial condition and results of operations.


24
<PAGE>   25
Future Capital Needs and Uncertainty of Additional Financing

         There can be no assurance that the Company will not be required to seek
additional equity or debt capital to finance its operations in the future. In
addition, there can be no assurance that any such financing, if needed, will be
available to the Company or that adequate funds for the Company's operations,
whether from the Company's revenues, financial markets, collaborative or other
arrangements with corporate partners or from other sources, will be available
when needed or on terms attractive to the Company. The inability to obtain
sufficient funds may require the Company to delay, scale back or eliminate some
or all of its research and product development programs, sales and marketing
efforts, manufacturing operations, clinical studies and/or regulatory activities
or to grant licenses to third parties to commercialize products or technologies
that the Company would otherwise seek to market and sell itself.

Potential Litigation; Potential Unavailability of Insurance

         The Medical device industry has been characterized by significant
malpractice litigation. As a result, the Company faces a risk of exposure to
product liability, errors and omissions or other claims in the event that the
use of its X-ray equipment, components, accessories or related services or other
future potential products is alleged to have resulted in a false diagnosis and
there can be no assurance that the Company will avoid significant liability.
There also can be no assurance that the Company will be able to obtain adequate
insurance coverage or that, if obtained, such coverage will continue to be
available at an acceptable cost, if at all. Consequently, such claims could have
a material adverse effect on the business or financial condition of the Company.

Dilution; Effect of Outstanding Convertible Debentures, Warrants and Certain
Shares

         The Company has outstanding convertible debentures, options and
Warrants to purchase Common Stock at prices that may be below the per share
price to purchasers of the Company's Common Stock in the market. The exercise
of such convertible debentures, options and Warrants may have a dilutive effect
on the investment of a holder of the Company's Common Stock. The market price
of the Company's Common Stock may also be adversely affected by sales of
substantial amounts of Common Stock in the public market, including sales of
Common Stock under Rule 144 or after the expiration of the applicable one year
holding period under Regulation S. In addition, the Company is required to file
registration statements with respect to the Common Stock issuable upon
conversion of the convertible debentures issued on August 31, 1998 and on
October 6, 1998, which could adversely affect the ability of the Company to
sell Common Stock for its own account as well as, the market price of the
Company's Common Stock and could require the Company to incur significant
expenses.
                                                                               
Limited Public Market; Liquidity; Possible Volatility of Stock Price

         The Common Stock was quoted on the NASDAQ SmallCap Market under the
symbol "SRMI" until delisting effective October 26, 1998. See also Item 5 (d)
for further information. There can be no assurance that an active public market
for the Common Stock can be re-established. The market price of the Common Stock
could fluctuate significantly as a result of the Company's financial results,
regulatory approval filings, clinical studies, technological innovations or new
commercial products introduced by the Company or its competitors, developments
concerning patents or proprietary rights, trends in the health care industry or
in health care generally, litigation, the adoption of new laws or regulations or
new interpretations of existing laws or regulations and other factors.

Environmental Matters

         The Company is subject to various environmental laws and regulations in
the jurisdiction in which it operates. For a discussion of risks relating to
environmental matters, see "Environmental Matters" above and Item 1 -
"Business-Environmental Matters."

ITEM 8.         FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

         The following financial statements have been prepared in accordance
with the requirements of Regulation S-X and supplementary financial information
included herein, if any, has been prepared in accordance with Item 301 of
Regulation S-K.

                                                                              25
<PAGE>   26
                          INDEPENDENT AUDITORS' REPORT


To the Stockholders and Board of Directors
Swissray International, Inc.
New York, New York

We have audited the accompanying consolidated balance sheet of Swissray
International, Inc. and subsidiaries as of June 30, 1998 and the related
consolidated statements of operations, changes in stockholders' equity and cash
flows for the year then ended. These 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 consolidated financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Swissray International, Inc.
and subsidiaries as of June 30, 1998, and the results of its operations, changes
in stockholders' equity and cash flows for the year then ended in conformity
with generally accepted accounting principles.




                                           /s/ Feldman Sherb Ehrlich & Co., P.C.
                                           Feldman Sherb Ehrlich & Co., P.C.
                                           Certified Public Accountants

New York, New York
November 20, 1998

26

<PAGE>   27
                           SWISSRAY INTERNATIONAL INC.
                           CONSOLIDATED BALANCE SHEET
                             JUNE 30, 1998 and 1997
                                     ASSETS

<TABLE>
<CAPTION>
                                                                         ------------------------------
                                                                              1998              1997
                                                                         ------------------------------
                                                                                             (Restated)
<S>                                                                       <C>                 <C>
CURRENT ASSETS
Cash and cash equivalents                                                 $ 1,281,552       $ 3,091,307
Accounts receivable, net of allowance for doubtful
accounts of $ 32,356 and $ 148,390                                          2,584,651         5,154,794
Inventories                                                                 7,701,145         3,911,107
Prepaid expenses and sundry receivables                                     1,501,909         1,936,138
                                                                         ------------------------------
TOTAL CURRENT ASSETS                                                       13,069,257        14,093,346
                                                                         ------------------------------
PROPERTY AND EQUIPMENT, at cost, net of accumulated depreciation
of $ 581,077 and $ 320,110                                                  6,010,378         4,336,617
                                                                         ------------------------------

OTHER ASSETS
Due from stockholders                                                              --            69,587
Loan receivable                                                                20,005            17,396
Accounts receivable - long-term, net of allowance of $ 891,409
and $ 814,178 for doubtful account                                                 --           240,912
Licensing agreement, net of accumulated amortization of                     3,600,766         4,097,424
$ 1,365,809 and $ 869,151
Patents and trademarks, net of accumulated amortization of                    230,614           206,003
$ 82,716 and $ 54,941
Software development costs, net of accumulated amortization of                455,318           317,524
$ 121,892 and $ 34,512
Organization cost, net of accumulated amortization of                              --             5,921
$ 8,385 and $ 2,464
Security deposits                                                              38,280            43,728
Note receivable - long-term, net of allowance of $ 30,733 and $ -0-           513,643           513,643
Goodwill, net of accumulated amortization of $ 136,939 and $ 9,023          1,796,336           410,814
Debt issance costs on convertible debentures, net of accumulated
amortization of $ 60,000 and $ 200,566                                        180,000           435,319
                                                                         ------------------------------

TOTAL OTHER ASSETS                                                          6,834,962         6,358,271
                                                                         ------------------------------
TOTAL ASSETS                                                              $25,914,597       $24,788,234
                                                                         ==============================
</TABLE>

                                       F 1
    The accompanying notes are an integral part of these financial statements
<PAGE>   28
                            SWISSRAY INTERNATIONAL
                    CONSOLIDATED BALANCE SHEET (Continued)
                            JUNE 30, 1998 and 1997


                      LIABILITIES AND STOCKHOLDERS' EQUITY

<TABLE>
<S>                                              <C>                 <C>
CURRENT LIABILITIES
Current maturities of long-term debt             $    233,746        $    243,135
Notes payable - banks                               3,551,091           3,834,706
Loan payable                                          125,029             133,008
Accounts payable                                    5,030,449           5,336,749
Accrued expenses                                    2,365,450           1,401,938
Restructuring                                         500,000                  --
Customer deposits                                     176,583             170,436
Due to stockholders and officers                        2,206             139,826
                                                 ---------------------------------
TOTAL CURRENT LIABILITIES                          11,984,554          11,259,798
                                                 ---------------------------------

CONVERTIBLE DEBENTURES                              7,645,969           6,000,000
Conversion Benefit                                   (315,327)           (689,441)
                                                 ---------------------------------
Net Convertible Debentures                          7,330,642           5,310,559
                                                 ---------------------------------

LONG-TERM DEBT, less current maturities               440,674             524,689

STOCKHOLDERS' EQUITY
Common stock                                           41,426              19,694
Additional paid-in capital                         58,074,793          35,957,659
Common stock to be issued to officer
  (48,259 shares in 1997)                                  --           1,122,973
Accumulated deficit                               (50,481,713)        (27,978,604)
Accumulated other comprehensive loss               (1,475,779)         (1,428,534)
                                                 ---------------------------------
TOTAL STOCKHOLDERS' EQUITY                          6,158,727           7,693,188
                                                 ---------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY       $ 25,914,597        $ 24,788,234
                                                 =================================
</TABLE>

                                       F 2
    The accompanying notes are an integral part of these financial statements
<PAGE>   29
                           SWISSRAY INTERNATIONAL INC.
                      CONSOLIDATED STATEMENT OF OPERATIONS
                    YEARS ENDED JUNE 30, 1998, 1997 and 1996

<TABLE>
<CAPTION>
                                          ----------------------------------------------------
                                               1998                1997                1996
                                                                 (Restated)         (Restated)
                                          ----------------------------------------------------
<S>                                       <C>                 <C>                 <C>
NET SALES                                 $ 22,892,978        $ 13,151,701        $ 10,899,222
COST OF SALES                               18,081,786           8,445,414           5,793,306
                                          ----------------------------------------------------
GROSS PROFIT                                 4,811,192           4,706,287           5,105,916
                                          ----------------------------------------------------

OPERATING EXPENSES
Officers and directors compensation            569,816           1,816,879             612,776
Salaries                                     4,168,540           2,059,396           1,829,535
Selling                                      3,740,391           1,873,389           1,140,604
Research and development                     3,542,149           5,786,158           1,731,502
General and administrative                   2,612,262           2,879,257           7,535,759
Restructuring cost                             500,000                  --                  --
Other operating expenses                     1,735,877           1,645,800           1,098,346
Bad debts                                      133,196             619,160             491,487
Depreciation and amortization                1,745,498             770,294             526,138
                                          ----------------------------------------------------
TOTAL OPERATING EXPENSES                    18,747,729          17,450,333          14,966,147
                                          ----------------------------------------------------

LOSS BEFORE OTHER INCOME (EXPENSES)
  AND INCOME TAXES                         (13,936,537)        (12,744,046)         (9,860,231)

Other income (expenses)                       (281,227)            318,763           1,003,933
Interest expense                            (8,590,268)           (762,168)           (193,930)
                                          ----------------------------------------------------
OTHER INCOME (EXPENSES)                     (8,871,495)           (443,405)            810,003
                                          ----------------------------------------------------

LOSS FROM CONTINUING OPERATIONS
  BEFORE INCOME TAXES AND
  EXTRAORDINARY ITEMS                      (22,808,032)        (13,187,451)         (9,050,228)

INCOME TAX PROVISION (BENEFIT)                      --             110,223            (364,648)
                                          ----------------------------------------------------

LOSS FROM CONTINUING OPERATIONS
  BEFORE EXTRAORDINARY ITEMS               (22,808,032)        (13,297,674)         (8,685,580)

Extraordinary income (expenses) net of
 taxes                                         304,923            (387,514)            419,500
                                          ----------------------------------------------------
NET LOSS                                  $(22,503,109)       $(13,685,188)       $ (8,266,080)
                                          ====================================================


LOSS PER COMMON SHARE BASIC
Loss from continuing operations                  (8.48)              (8.41)              (6.69)
Extraordinary items                               0.11               (0.24)               0.32
                                          ----------------------------------------------------
NET LOSS                                         (8.37)              (8.65)              (6.37)
                                          ====================================================
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING                           2,690,695           1,581,757           1,297,475
                                          ============           =========           =========
</TABLE>


                                       F 3
    The accompanying notes are an integral part of these financial statements
<PAGE>   30
                           SWISSRAY INTERNATIONAL INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                   YEARS ENDED JUNE 30, 1998, 1997 AND 1996

<TABLE>
<CAPTION>
                                                                    ----------------------------------------------------
                                                                        1998                1997                1996
                                                                    ----------------------------------------------------
                                                                                         (Restated)           (Restated)
<S>                                                                 <C>                 <C>                 <C>
CASH FLOWS FROM OPERATING ACTIVITES
Net loss                                                            $(22,503,109)       $(13,685,188)       $ (8,266,080)
Adjustment to reconcile net loss to net
        cash used by operating activities
        Depreciation and amortization                                  1,874,206             770,294             526,138
        Provision for bad debts                                          (38,803)            552,725             336,706
        Write-off of affiliate receivable                                     --             166,384                  --
        Interest expense on Debt issuance cost and
          conversion benefit                                           7,905,225             511,125                  --
        Operating expenses through issuance of stock
         options and common stock to be issued                           449,376           2,442,385           6,374,468
        Early extinguishment of  Debt (gain)                            (304,923)                 --                  --
        Gain on Sale of marketable securities                                 --                  --            (762,500)

        (Increase) decrease in operating assets:
        Accounts receivable                                            2,887,427          (1,857,662)         (1,870,866)
        Accounts receivable - affiliates                                      --              31,533             (31,533)
        Accounts receivable - long-term                                  163,680             283,603              22,138
        Inventories                                                   (3,790,038)           (998,271)         (1,420,393)
        Prepaid expenses and sundry receivables                          434,229            (860,457)           (976,664)
        Increase (decrease) in operating liabilities:
        Accounts payable                                                (306,300)          1,601,074           1,514,465
        Accounts payable-affiliates                                           --              (1,541)              1,541
        Accrued expenses                                               1,463,512             266,245             855,041
        Customers deposits                                                 6,147              92,763              38,874
                                                                    ----------------------------------------------------
NET CASH USED BY OPERATING ACTIVITIES                                (11,759,371)        (10,684,988)         (3,658,665)
                                                                    ----------------------------------------------------
CASH FLOW FROM INVESTING ACTIVITIES
        Acquisition of property and equipment                         (2,849,205)         (3,431,375)           (932,066)
        Capitalized Computer Software                                   (225,174)           (352,036)                 --
        Purchase of marketable securities                                     --                  --            (200,000)
        Patents and trademarks                                           (52,386)            (12,925)            (45,309)
        Goodwill                                                        (802,107)           (299,837)                 --
        Organization costs                                                    --                  --              (8,385)
        Asset Purchase net of cash received                             (591,108)                 --                  --
        Collection of note receivable                                         --             448,857                  --
        Security deposits                                                  5,448             (23,776)            (19,952)
        (Repayment of) loan receivable                                    (2,608)              2,896                  --
        Repayments from (advances to) affiliates                              --                  --              34,592
                                                                    ----------------------------------------------------
NET CASH USED BY INVESTING ACTIVITIES                                 (4,517,140)         (3,668,196)         (1,171,120)

CASH FLOWS FROM FINANCING ACTIVITIES
        Proceeds from short-term borrowings                           10,342,060           9,198,821           2,069,828
        Proceeds from long-term borrowings                                    --             248,987                  --
        Principal payment of short-term borrowings                    (3,852,075)         (2,093,074)         (2,711,086)
        Principal payment of long-term borrowings                        (21,748)           (442,681)           (281,004)
        Principal payment of long-term borrowings with stock             (62,267)                 --                  --
        Issuance of common stock for cash                              8,461,262           7,753,222           7,250,000
        Repayment from (payment to) stockholders and officers            (68,032)             87,653             141,054
        Public offering expenses                                              --                  --            (680,098)
                                                                    ----------------------------------------------------
CASH PROVIDED BY FINANCING ACTIVITIES                                 14,799,200          14,752,928           5,788,694
                                                                    ----------------------------------------------------
EFFECT OF EXCHANGE RATE ON CASH                                         (332,444)           (561,122)           (383,050)
                                                                    ----------------------------------------------------

NET INCREASE (DECREASE) IN CASH                                       (1,809,755)           (161,378)            575,859
CASH AND CASH EQUIVALENT - beginning of period                         3,091,307           3,252,685           2,676,826
                                                                    ----------------------------------------------------
CASH AND CASH EQUIVALENTS - end of period                           $  1,281,552        $  3,091,307        $  3,252,685
                                                                    ====================================================
</TABLE>

                                      F 4
    The accompanying notes are an integral part of these financial statements
<PAGE>   31
                       SUPPLEMENTAL CASH FLOW INFORMATION



             Cash payments for the years ended June 30, 1998, 1997 and
1996, include interest of $161,093, $122,427 and $193,930, respectively. Cash
payments for the years ended June 30, 1997 and June 30, 1996 included income
taxes of $56,562 and $-0-, respectively. No income taxes had to be paid in the
fiscal year ended June 30, 1998

             NON-CASH OPERATING ACTIVITIES
             In April of 1997, the Company issued options to an officer under
the 1996 non-statutory stock option plan. The excess of the then quoted market
price over the option price has been recorded as additional compensation
amounting to $25,000.

             For the years ended June 30, 1997 and 1996, the Company issued
options to various individuals and companies for services rendered under the
1996 non-qualified stock option plan. The excess of the fair value over the
option price has been charged to operations in the amounts of $1,161,462 and
$6,374,468, for the years ended June 30, 1997 and 1996, respectively. No options
have been issued during the fiscal year ended June 30, 1998

             For the years ended June 30, 1998 and June 30, 1997, the Company
issued 60,999 shares of common stock in the amount of $449,376 in lieu of
interest payments due on convertible debentures and 7,061 shares of common stock
in the amount of $132,950 in lieu of interest payments due on convertible
debentures respectively.


            NON-CASH INVESTING AND FINANCING ACTIVITIES 
            For the year ended June 30, 1996 the Company received a note
receivable for $962,500 from the sale of marketable securities. No cash was
received.                       

            On April 1, 1997, the Company acquired a subsidiary through the
issuance of 8,000 shares of common stock at the then quoted market price of
$120,000 ($15 per share). This transaction was accounted for as a purchase.

            On May 15, 1997 and June 13, 1997, the Company issued convertible
debentures which were convertible into common shares at a price equal to eighty
(80%) of the average closing bid price for the five (5) trading days preceding
the date of the conversion. A beneficial conversion feature of $1,000,000 was
charged to additional paid-in capital and is being amortized over the period
from the date of issuance to the first available conversion date of the
respective debenture.                                                      

        During 1997, pursuant to agreements with an officer of the Comany, dated
December 1996 and June 1997 (as described in Note 16), the Company was required
to issue 48,259 shares of common stock with a fair value of $1,122,973 in lieu
of cash compensation.

            On July 31, 1997, the Company issued convertible debentures in
exchange for $4,262,500 (including interest of $262,500) of 6% convertible
debentures dated May 15, 1997 and June 13, 1997. The Company did not receive
any cash proceeds from this transaction. The debentures, due July 31, 2000, are
convertible into common shares at a price equal to eighty (80%) of the average
closing bid price for the five (5) trading days preceding the date of
conversion.
                                                                               
            On August 19, 1997, the Company issued $5,000,000 of 6% convertible
Debentures which were convertible into common shares at a price equal to eighty
(80%) of the average closing bid price for the five (5) trading days preceding
the date of conversion. A beneficial conversion feature of $1,250,000 was
charged to additional paid-in capital and is being amortized over the period
from the date of issuance to the first available conversion date of the
respective debenture.                                                          

            On October 17, 1997, the Company acquired substantially all of the
assets of Service Support Group LLC ("SSG") located in Gig Harbor, Washington,
in exchange for the payment of approximately $621,892 in cash and issuance of
33,333 shares of its Common.

                                       F 5
<PAGE>   32

            Between November 26, 1997 and December 11, 1997, the Company issued
$2,158,285 of convertible debentures including a 15% premium and accrued
interest, convertible into Common shares at a price equal to 75% of the average
closing bid price for the five (5) trading days preceding the date of
conversion. The registrant did not receive any cash proceeds from the offering
of the Convertible Debentures. An amount of $2,158,285 was paid by investors to
holders of the Company's Convertible Debentures issued on August 19,1997
holding $1,850,000 of such Convertible Debentures as repayment in full of the
Company's obligations under such Convertible Debentures. During the same period
the Company issued $3,690,000 aggregate principal amount of convertible
debentures, convertible into Common shares at a price equal to 75% of the
average closing bid price for the five (5) trading days preceding the date of
conversion A beneficial conversion feature of $1,949,426 was charged to
additional paid-in capital and is being amortized over the period from the date
of issuance to the first available conversion date of the respective debenture.
                                                                               
            On March 16, 1998, the Company issued $5,500,000 convertible
debentures convertible into Common shares at a price equal to 80% of the
average closing bid price for the ten (10) trading days preceding the date of
conversion. A beneficial conversion feature of $875,500 was charged to
additional paid-in capital and is being amortized over the period from the date
of issuance to the first available conversion date of the respective debenture.
                                                                               
            On June 15, 1998, the Company issued $2,000,000 convertible
debentures convertible into Common shares at a price equal to 80% of the
average closing bid price for the ten (10) trading days preceding the date of
conversion. A beneficial conversion feature of $420,436 was charged to
additional paid-in capital and is being amortized over the period from the date
of issuance to the first available conversion date of the respective debenture.
                                                                               
                                       F 6
<PAGE>   33
SWISSRAY INTERNATIONAL, INC.
CONSOLITATED STATEMENT OF STOCKHOLDERS' EQUITY
YEARS ENDED JUNE 30, 1998, 1997 and 1996 

<TABLE>
<CAPTION>
                                                                                                             Common
                                                                                        Additional            Stock
                                                                                          Paid-in             to be
                                                                  Common Stock            Capital             issued
                                                              Shares         Amount      (Restated)         (Restated) )
                                                             -----------------------------------------------------------
<S>             <C>                                          <C>          <C>            <C>                <C>
BALANCE - July, 1, 1995                                      1,203,506    $     12,035   $ 12,828,314       $     --

COMPREHENSIVE LOSS:
     Net loss of the year                                           --              --             --             --   
     Foreign currency translation losses net of taxes $ -0-         --              --             --             --
                                                                                                      
     TOTAL COMPREHENSIVE LOSS                                       --              --             --             --   

Issuance of common stock for cash                              110,000           1,100      5,198,900             --
Stock options exercised for cash                               105,000           1,050      2,048,950             --
Stock options granted for services                                                          6,374,468              -- 
Public offering expenses                                                                     (680,098)             -- 
                                                             -----------------------------------------------------------

BALANCE - June 30, 1996                                      1,418,506          14,185     25,770,534             --

COMPREHENSIVE LOSS:
     Net loss of the year                                           --              --             --             --   
     Foreign currency translation losses net of taxes $ -0-         --              --             --             --

     TOTAL COMPREHENSIVE LOSS                                       --              --             --             --   

Issuance of common stock for cash                              519,776           5,197      7,630,495             --
Stock options exercised for cash                                16,100             161        117,369             --
Issuance of common stock in lieu of interest payment             7,061              71        132,879             --
Beneficial conversion feature of convertible debentures             --              --      1,000,000             --
Stock options granted as compensation                               --              --         25,000             --
Stock options granted for services                                  --              --      1,161,462             --
Shares to be issued to officers for services                        --              --             --      1,122,973
Purchase of subsidiary for stock                                 8,000              80        119,920             --
                                                             -----------------------------------------------------------

BALANCE - JUNE 30, 1997                                      1,969,443          19,694     35,957,659      1,122,973

COMPREHENSIVE LOSS:
     Net loss of the year                                           --              --             --             --
     Foreign currency translation losses net of taxes $ -0-         --              --             --             --

     TOTAL COMPREHENSIVE LOSS                                       --              --             --             --

Issuance of common stock for cash                            2,013,688          20,137     13,581,739             --
Stock options exercised for cash                                16,900             169        123,201             --
Shares issued to officers for services                          48,259             483      1,122,490     (1,122,973)
Issuance of common stock in lieu of interest payment            60,999             610        448,766             --
Beneficial conversion feature of convertible debentures             --              --      5,738,149             --
Early extinguishment of Debt                                        --              --       (396,875)            --
Issuance of common stock for asset purchase                     33,333             333      1,499,664             --
                                                             -----------------------------------------------------------

BALANCE - JUNE 30, 1998                                      4,142,622    $     41,426   $ 58,074,793   $         --
                                                             ===========================================================
</TABLE>


<TABLE>
<CAPTION>
                                                                            Accumulated
                                                             Accumulated        Other
                                                               Deficit      Comprehensive        Total
                                                              (Restated)         Loss         s (Restated)
                                                            ----------------------------------------------
<S>             <C>                                          <C>             <C>             <C>
BALANCE - July, 1, 1995                                      $ (6,027,336)   $   (436,180)   $  6,376,833

COMPREHENSIVE LOSS:
     Net loss of the year                                      (8,266,080)             --      (8,266,080)
     Foreign currency transaction losses net of taxes $ -0-      (399,867)       (399,867)             
                                                                                            --------------
     TOTAL COMPREHENSIVE LOSS                                          --              --      (8,665,947)
                                                                                            --------------
Issuance of common stock for cash                                      --              --       5,200,000
Stock options exercised for cash                                       --              --       2,050,000
Stock options granted for services                                     --              --       6,374,468
Public offering expenses                                               --              --        (680,098)
                                                            ----------------------------------------------

BALANCE - June 30, 1996                                       (14,293,416)       (836,047)     10,655,256

COMPREHENSIVE LOSS:
     Net loss of the year                                     (13,685,188)             --     (13,685,188)
     Foreign currency transaction losses net of taxes $ -0-            --        (592,487)       (592,487)
                                                                                            --------------
     TOTAL COMPREHENSIVE LOSS                                          --              --     (14,277,675)
                                                                                            --------------
Issuance of common stock for cash                                      --              --       7,635,692
Stock options exercised for cash                                       --              --         117,530
Issuance of common stock in lieu of interest payment                   --              --         132,950
Beneficial conversion feature of convertible debentures                --              --       1,000,000
Stock options granted as compensation                                  --              --          25,000
Stock options granted for services                                     --              --       1,161,462
Shares to be issued to officers for services                           --              --       1,122,973
Purchase of subsidiary for stock                                       --              --         120,000
                                                            ----------------------------------------------

BALANCE - JUNE 30, 1997                                       (27,978,604)     (1,428,534)      7,693,188

COMPREHENSIVE LOSS:
     Net loss of the year                                     (22,503,109)             --     (22,503,109)
     Foreign currency transaction losses net of taxes $ -0-                       (47,245)         (47,245)
                                                                                            --------------
     TOTAL COMPREHENSIVE LOSS                                          --              --     (22,550,354)
                                                                                            --------------
Issuance of common stock for cash                                      --              --      13,601,876
Stock options exercised for cash                                       --              --         123,370
Shares issued to officers for services                                 --              --              --
Issuance of common stock in lieu of interest payment                   --              --         449,376
Beneficial conversion feature of convertible debentures                --              --       5,738,149
Early extinguishment of Debt                                           --              --        (396,875)
Issuance of common stock for asset purchase                            --              --       1,499,997
                                                            ----------------------------------------------

BALANCE - JUNE 30, 1998                                      $(50,481,713)   $ (1,475,779)   $  6,158,727
                                                            ==============================================
</TABLE>

                                       F 7
    The accompanying notes are an integral part of these financial statements


                                   
<PAGE>   34
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

ORGANIZATION

The Company was incorporated under the laws of the State of New York on January
2, 1968 under the name CGS Units Incorporated. On June 6, 1994, the Company
merged with Direct Marketing Services, Inc. and changed its name to DMS
Industries, Inc. In May of 1995 the Company discontinued the operations then
being conducted by DMS Industries, Inc. and acquired all of the outstanding
securities of SR Medical AG, a Swiss corporation engaged in the business of
manufacturing and selling X-ray equipment, components and accessories. On June
5, 1995 the Company changed its name to Swissray International, Inc. The
Company's operations are being conducted principally through its wholly owned
subsidiaries, SR Medical Holding AG (known as SR Medical AG until renamed in
February 1998), the latter's wholly owned subsidiaries, SR Medical AG (known as
Teleray AG until renamed in February 1998), a Swiss corporation, Swissray
(Deutschland) Roentgentechnik GmbH (formerly known as SR Medical GmbH), a German
limited liability company and Teleray Research and Development AG (a Swiss
corporation), as well as through the Company's other wholly owned subsidiaries,
SR Management AG (formerly SR Finance AG), a Swiss corporation, Swissray Medical
Systems, Inc. (formerly Swissray Corporation), a Delaware corporation, Swissray
Healthcare, Inc., a Delaware corporation, and Swissray Information Solutions,
Inc., a Delaware corporation and Empower, Inc. (whose assets were substantially
sold in June 1998), a New York corporation.

PRINCIPLES OF CONSOLIDATION

The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries. All significant intercompany balances and
transactions have been eliminated. Investments which are recorded on a equity
method and have operated at a Loss in excess of equity are carried at a zero
value. See Note 9 Investments

BUSINESS ACQUISITION

On April 1, 1997, Swissray International, Inc. exchanged 8,000 shares of common
stock at the then quoted market price of $120,000 ($15 per share) for all the
outstanding shares of Empower, Inc.The consolidated financial statements
presented include the accounts of Empower, Inc.(whose assets were substantially
sold in June 1998), from April 1, 1997 (date of acquisition) to June 30, 1998.
The acquisition has been accounted under the purchase accounting method. The
contract requires the Company to repurchase the 8,000 shares of common stock at
$40 per share for a period of one year commencing two years from the date of
the contract at the option of the former owner of Empower, Inc. On October 17,
1997, the Company acquired substantially all of the assets and assumed certain
liabilities of Service Support Group, LLC (SSG) located in Gig Harbor,
Washington pursuant to an asset purchase agreement. The acquisition has been
accounted under the purchase accounting method. SSG is in the business of
selling diagnostic imaging equipment and related services in markets on the
West Coast of the United States. The purchase price consisted of (1) cash in
the amount of $621,892, (2) 33,333 shares of the Company's common stock, (3) an
amount equal to fifty percent of certain accounts receivable net of certain
accounts payable and (4) the assumptions of certain other liabilities. As a
result of these transactions, the Company recorded goodwill of $1,933,275. The
contract requires the Company to repurchase the 33,333 common shares at $45 per
share during the period June 30, 1998 to April 17, 1999 at the option of the
former owners of SSG.

REVENUE AND INCOME RECOGNITION POLICIES

The Company maintains its records on the accrual basis of accounting.

Revenues from the sale of products is recorded when the products are shipped,
collection of the purchase price is probable and the Company has no significant
further obligations to the customer. Cost of remaining insignificant company
obligations, if any, are accrued as costs of revenue at the time of revenue
recognition.

USE OF ESTIMATES IN THE PREPARATION OF THE FINANCIAL STATEMENTS

The preparation of financial statements in conformity with generally accepted
accounting principles require management to make estimates and assumptions that
effect the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during this period. Actual results
could differ from those estimates

WARRANTY

The company accrues a warranty allowance at the time of sale. The warranty
allowance is based upon the companies experience and varies between 0.5 and 2%
of the net sales amount.
                                     F 8

<PAGE>   35
FAIR VALUE OF FINANCIAL INSTRUMENTS

Statement of Financial Accounting Standard No. 107 "Disclosures about Fair Value
of Financial Instruments" (SFAS 107) requires the disclosure of fair value
information about financial instruments whether or not recognized on the balance
sheet, for which it is practicable to estimate the value. Where quoted market
prices are not readily available, fair values are based on quoted market prices
of comparable instruments. The carrying amount of cash and equivalents, accounts
receivable and accounts payable approximates fair value because of the short
maturity of those instruments.

CASH EQUIVALENTS

The Company considers all highly liquid investments purchased with an original
maturity of three months or less to be cash equivalents.

INVENTORIES

Inventories are stated at the lower of cost or market, with cost being
determined on the first-in, first-out (FIFO) method. Inventory costs include
material, labor, and overhead.

PROPERTY AND EQUIPMENT

Property and equipment are stated at cost and are depreciated using the
straight-line method over the estimated useful lives of the respective assets,
which are three years for Computers and Telecommunication Equipment, five to ten
years for Equipment, Office furniture and Equipment and Office and leasehold
improvements and thirty years for Buildings. Leasehold improvements are
amortized over the shorter of the estimated useful lives of the improvements, or
the term of the facility lease.

Expenditures for repairs and maintenance are charged to expense as incurred. The
cost of major renewals and betterment's are capitalized and depreciated over
their useful lives. Upon disposition, the cost and related accumulated
depreciation of property and equipment are removed from the accounts and any
resulting gain or loss is reflected in operations.

The Company is required to review long-lived assets for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable, in accordance with the provisions of Statement of
Financial Accounting Standards No.121, "Accounting for Impairment of Long-Lived
Assets and Long-Lived Assets to Be Disposed Of" ("SFAS 121"). Accordingly, when
indicators of impairment are present, the Company evaluates the carrying value
of property, plant, and equipment and intangibles using projected undiscounted
future cash flows and operating income for each subsidiary to determined whether
material impairment of these assets exists.

INTANGIBLE ASSETS

Excess of cost over fair value of net assets acquired ("goodwill") resulted from
the acquisition of Empower and SSG and is being amortized over ten years from
the date of acquisition using the straight-line method. Patents and Trademarks
are capitalized and are amortized using the straight-line method over their
estimated useful lives (10 year).Debt issuance costs are amortized using the
straight-line method over the term of the related debts, which range from two to
six months. Periods of amortization are evaluated periodically to determine
whether later events and circumstances warrant revised estimates of useful
lives. At each balance sheet date, the Company evaluates the recoverability of
unamortized goodwill based upon expectations of nondiscounted cash flows and
operating income. Impairments, if any, would be recognized in operating results
if a permanent diminution in value were to occur.

Capitalization of software development costs begins upon the establishment of
technological feasibility of new or enhanced software products. Technological
feasibility of a computer software product is established when the Company has
completed all planning, designing, coding and testing that is necessary to
establish that the software product can be produced to meet design
specifications including functions, features and technical performance
requirements. All costs incurred prior to establishing technological feasibility
of a software product are charged to research and development as incurred. The
Company amortizes capitalized software development costs over the related sales
on a product-by-product basis at the greater of the amount computed using (a)
the ratio of current gross revenues for a product to the total of current and
anticipated future gross revenues or (b) the straight-line method over the
estimated remaining economic life of the software products, generally five to
eight years.

All cost incurred by the Company in connection with incorporation of
subsidiaries have been capitalized and are being amortized over a period up to
60 months.
                                     F 9
<PAGE>   36
ADVERTISING AND PROMOTION

Advertising and promotion cost are expensed as incurred and included in "Selling
Expenses". Advertising and promotion expense for the years ended June 30, 1998,
1997 and 1996 were $ 1,737,935, $ 781,189 and $ 740,044, respectively

RESEARCH AND DEVELOPMENT

Costs associated with research, new product development, and product cost
improvements are treated as expenses when incurred.

CONVERTIBLE DEBT

Convertible debt is recorded as a liability until converted into common stock,
at which time it is recorded as equity

INCOME TAXES

Deferred tax assets and liabilities are determined based on the difference
between the financial statement and tax basis of assets and liabilities using
enacted tax rates in effect for the year in which the differences are expected
to affect taxable income. Valuation allowances are established when necessary to
reduce deferred tax assets to the amounts expected to be realized.

EXPENSES RELATED TO SALES AND ISSUANCE OF SECURITIES

All costs incurred in connection with the sale of the Company's common stock
have been capitalized and charged to additional paid-in capital.

NET LOSS PER COMMON SHARE

In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128 ("SFAS No. 128"), "Earnings Per Share",
which established new standards for computation of earnings per share. SFAS No.
128 requires the presentation on the face of the income statement of "basic"
earnings per share and "diluted" earnings per share.

Basic earnings per share is computed by dividing the net income (loss) available
to common shareholders by the weighted average number of outstanding common
shares. The calculation of diluted earnings per share is similar to basic
earnings per share except the denominator includes dilutive common stock
equivalents such as stock options and convertible debentures. Common stock
options and the common shares underlying the convertible debentures are not
included for the years ended June 30, 1998 ("Fiscal 1998"), June 30, 1997
("Fiscal 1997") and June 30, 1996 (`Fiscal 1996') as their effect would be
anti-dilutive.

ACCOUNTING FOR STOCK OPTIONS

As permitted by Statement of Financial Accounting Standards No. 123 ("SFAS No.
123"), "Accounting for Stock Based Compensation", the Company applies Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" and
related interpretations in accounting for the Swissray International, Inc. 1996
Non-Statutory Stock Option Plan and the 1997 Stock Option Plan (the "Stock
Option Plans"). Accordingly, no compensation cost has been recognized for
options granted under the Stock Option Plans except for $1,186,462 for Fiscal
1997, and $6,374,468 for Fiscal 1996 related to the fair value of services
rendered in exchange for options granted to consultants. However, the Company
has disclosed in Note 16, Shareholders' Equity the pro forma effects had
compensation cost been determined based on the fair value of the options, not
including the options for which expense has been previously recognized, at the
grant date.

RECLASSIFICATIONS

Certain reclassifications have been made to prior year's financial statements to
conform to the June 30, 1998 presentation.

FOREIGN CURRENCY TRANSLATION

Assets and liabilities of subsidiaries operating in foreign countries are
translated into U.S. dollars using both the exchange rate in effect at the
balance sheet date or historical rate, as applicable. Results of operations are
translated using the average exchange rates prevailing throughout the year. The
effects of exchange rate fluctuations on translating foreign currency assets and
liabilities into U.S. dollars are included in stockholders equity (Accumulated
other comprehensive loss), while gains and losses resulting from foreign
currency transactions are included in operations.

                                     F 10
<PAGE>   37
NEW ACCOUNTING PRONOUNCMENTS

The Company will adopt Statement of Financial Accounting Standards No. 131
"Disclosures about Segments of an Enterprise and Related Information" ("SFAS No.
131") for the year ended June 30, 1999. SFAS No. 131 requires the Company to
report selected information about operating segments in its financial
statements. It also establishes standards for related disclosures about products
and services, geographic areas, and major customers. The application of the new
pronouncement is not expected to have a material impact on the Company's
disclosures.

The Company will adopt Statement of Financial Accounting Standards No. 132
("SFAS No. 132"), "Employers' Disclosures about Pensions and Other
Postretirement Benefits" for the year ended June 30, 1999. SFAS No. 132 revises
employers' disclosures about pension and other postretirement benefit plans. The
application of the new pronouncement is not expected to have a material impact
on the Company's financial statements.

The Company will adopt Statement of Financial Accounting Standard No. 133 ("SFAS
No. 133"), "Accounting for Derivative Instruments and Hedging Activities" for
the year ended June 30, 2000. SFAS No. 133 establishes a new model for
accounting for derivatives and hedging activities and supersedes and amends a
number of existing standards. The application of the new pronouncement is not
expected to have a material impact on the Company's financial statements.

STOCK SPLIT

On October 1, 1998 the Company declared a 1 for 10 reverse stock split. The
financial statements for all periods presented have been retroactively adjusted
for the stock split.

NOTE 2 - NOTE RECEIVABLE

On June 20, 1996 the Company sold marketable securities for a 5% promissory note
in the amount of $962,500 originally due on October 20, 1996 of which $100,000
was paid on December 10, 1996. On January 15, 1997, the Company renegotiated the
terms of the unpaid balance. A new note in the amount of $862,500 was
renegotiated, with interest at 6% cumulative and payable when the note matures
on January 1, 2000. At June 30, 1997, principal payments of $348,857 were
received leaving a balance due of $513,643. Interest payments were also paid to
June 30, 1997. At June 30, 1998 no payments were received.

NOTE 3 - INVENTORIES

Inventories are summarized by major classification as follows:

<TABLE>
<CAPTION>
                                            June 30,
                                    -----------------------
                                       1998         1997
                                    ----------   ----------
<S>                                 <C>          <C>
Raw materials, parts and supplies   $7,047,001   $2,632,256
Work in process                        160,064      468,204
Finished goods                         494,080      810,647
                                    -----------------------
                                    $7,701,145   $3,911,107
                                    ==========   ==========
</TABLE>

                                     F 11
<PAGE>   38
NOTE 4  - PREPAID EXPENSES AND SUNDRY RECEIVABLES

Prepaid expenses and sundry receivables consist of the following:

<TABLE>
<CAPTION>
                                                         June 30,
                                                  -----------------------
                                                     1998         1997
                                                  -----------------------
<S>                                               <C>          <C>
Prepaid expenses, deposits and advance payments   $  616,183   $  681,742
Insurance claim for fire damage                      165,655      352,996
Prepaid and refundable taxes                         708,246      888,169
Employee loans                                        11,825       13,231
                                                  -----------------------
                                                  $1,501,909   $1,936,138
                                                  ==========   ==========
</TABLE>

NOTE 5  - PROPERTY AND EQUIPMENT

Property and equipment consist of the following:

<TABLE>
<CAPTION>
                                                          June 30,
                                                   -----------------------
                                                      1998         1997
                                                   -----------------------
<S>                                                <C>          <C>
Land and building                                  $4,956,328   $3,022,772
Equipment                                           1,305,092    1,223,572
Office furniture and equipment                        328,258      161,223
Office and leasehold improvements                       1,777      249,160
                                                   -----------------------
                                                    6,591,455    4,656,727
Less:  Accumulated depreciation and amortization      581,077      320,110
                                                   -----------------------
                                                   $6,010,378   $4,336,617
                                                   =======================
</TABLE>

Depreciation and amortization expense, for property and equipment, for the years
ended June 30, 1998, 1997 and 1996 were $1,077,074, $233,040 and $ 103,176,
respectively.

NOTE 6   INTANGIBLE ASSETS

Intangible Assets at June 30, 1998 and 1997 consisted of the following

<TABLE>
<CAPTION>
                                                       June 30,
                                               -----------------------
                                                  1998         1997
                                               -----------------------
<S>                                            <C>          <C>
Excess of cost over fair value of net assets
 acquired                                      $1,933,275   $  419,837
Licensing                                       4,966,575    4,966.575
Software development cost                         577,210      352,036
Patents and Trademarks                            313,330      260,944
Other                                               8,385        8,385
                                               -----------------------
                                                7,798,775    6,007,777
Less:  Accumulated amortization                 1,715,741      970,091
                                               -----------------------
                                               $6,083,034   $5,037,686
                                               =======================
</TABLE>

Amortization expense, for Intangible Assets, for the years ended June 30, 1998,
1997 and 1996 were $1,227,719, $ 537,254, and $ 401,472, respectively.

                                     F 12
<PAGE>   39
NOTE 7 - ACCOUNTS RECEIVABLE - LONG-TERM

The Company sold merchandise to a customer in 1995. In June 1996,the Company
renegotiated payment terms with the customer and agreed that the customer would
pay the Company approximately $5,000 to $30,000 per month based on usage of the
merchandise for a period of 5 years. The amount due the Company at June 30, 1997
was $240,912 after a provision for doubtful collection in the total amount of
$814,178. The balance of the account receivable, totaling $ 124,697 was written
during Fiscal 1998.
                   
 NOTE 8 - LICENSING AGREEMENT

The Company entered into a licensing agreement in June of 1995 with an
unaffiliated individual. The agreement is for an exclusive field-of-use license
within the United States and Canada to use the proprietary information,
including the patent rights, for certain technology regarding the integration of
computer technology with diagnostic x-ray and radiology medical equipment
through digital imaging systems. The agreement required a fee of $5,000,000
consisting of $1,200,000 in cash and 66,000 shares of the Company's common
stock. The cash payment requirement consisted of $900,000 upon the signing of
the agreement and the $300,000 balance due on December 31, 1996. The fee has
been discounted at 7.5% for imputed interest of $33,425 resulting in a net
capitalized cost of $4,966,575. This agreement is for an indefinite term or
until all of the proprietary information becomes public knowledge and the patent
rights expire.

The Licensing Agreement is amortized over the related sales on a
product-by-product basis at the greater of the amount computed using (a) the
ratio of current gross revenues for a product to the total of current and
anticipated future gross revenues or (b) the straight-line method over the
estimated remaining economic life, generally ten years. At each balance sheet
date, the Company evaluates the recoverability of the unamortized License Fee
based upon expectations of nondiscounted cash flows and operating income of its
US-Operation. Impairments, if any, would be recognized in operating results if a
permanent diminution in value were to occur.

NOTE 9 - INVESTMENTS

The Company has made various investments which are recorded on the equity
method. These entities have operated at a loss in excess of equity, and
therefore, the Company is carrying these investments as follows:

<TABLE>
<CAPTION>
                                                        June 30, 1998          June 30, 1997
                                                        -------------          -------------
                                         Ownership               Carrying                Carrying
                                             %          Cost       Value       Cost        Value
                                         ---------    --------   ---------  ---------  --------
<S>                                      <C>          <C>        <C>        <C>        <C>

Swissray SR Medical GmbH, Willich            34%      $ 16,892   $     --   $ 16,892   $    --
Swissray Medical, s.r.o., Bratislava         34%         6,757         --      6,757        --
Swissray Medical, s.r.o., Brno               34%         6,757         --      6,757        --
Teleray s.r.o., Willich                      49%        38,403         --     38,403        --
Teleray s.r.o., Brno                         34%         6,757         --      6,757        --
Digitec GmbH, Neuss                          20%        59,641         --     59,641        --
Total                                                 $135,207    $    --   $135,207   $     --
                                                      ========    ========   ========   =======
</TABLE>

NOTE 10 - NOTES PAYABLE - BANKS

The Company has negotiated a revolving line-of-credit agreement with Migros Bank
of Switzerland, dated March 23, 1998, for up to $1,314,924. The company has also
negotiated an agreement for up to $1,314,924 for the issuance of guarantees and
letter of credit, both with a commission of 15 % per $ 1,000,000, quarterly
while outstanding. There were $ 971,644 outstanding guarantees and $ -0- of
letter of credits as of June 30, 1998 The Company also negotiated a fixed line
of credit for up to $2,630,000. All lines of credit are based on the Exchange
rate in effect on June 30, 1998

The Company had negotiated a line-of-credit agreement with the Union Bank of
Switzerland dated July 16, 1996 for borrowing availability up to $ 376,310 in
excess of cash balances on deposit with the bank, based on the

                                     F 13
<PAGE>   40
exchange rate in effect on June 30, 1997. As of October 31, 1997, the bank
reduced the line of credit to the cash balances on deposit with the bank.

The Company had negotiated a line-of-credit agreement with the Swiss Bank
Corporation for up to $1,505,240, based on the exchange rate in effect on June
30, 1997. This line of credit was terminated during Fiscal 1998.

The Company had negotiated a line-of-credit agreement with Cantonal Bank of
Lucerne for up to $ 1,368,400, based on the exchange rate in effect on June 30,
1997. The line of credit was terminated during Fiscal 1998.

Empower, Inc., a subsidiary, had negotiated a line-of-credit agreement with the
State Bank of Long Island dated October 21, 1996 with a maximum borrowing base
of $450,000 as of June 30, 1997. The maximum borrowing base was reduced by
$25,000 per quarter beginning January 1, 1997. The full line of credit was
terminated during Fiscal 1998. .

Notes payable are summarized as follows:

<TABLE>
<CAPTION>
                                                                      June 30,
                                                               -----------------------
                                                                  1998         1997
                                                               ----------   ----------
<S>                                                            <C>          <C>
Migros Bank revolving line of credit, due on
demand,with interest at 4.75% per
annum, collateralized by certain accounts
receivable                                                     $  408,786   $       --

Migros Bank, on demand with six week notice,
with interest at 4 % per annum,
collateralized by land and
building                                                        2,630,000           --

Union Bank of Switzerland, due on demand, with
interest at 8% per annum, collateralized by the
cash on deposit at Union Bank of Switzerland and
certain accounts receivable. Cash balances on deposit
at Union Bank of Switzerland at June 30, 1998 and 1997
were $627,625 and $2,805,747, respectively                        512,305    1,421,075


Swiss Bank Corporation, due on demand, with interest
 at 5.25% per annum, collaterized by the cash on
deposit at Swiss Bank Corporation and accounts
receivable of $ -0- and $ 853,065 as of June 30,
1998 and 1997, respectively. . Cash balances on deposit at
Swiss Bank Corporation at June 30, 1997 were $106,007                  --      695,231

State Bank of Long Island, due on demand, with
interest at prime plus 2.25%, (prime rate as June 30,
1997 was 8.5.%) collateralized by the assets of Empower,
Inc. and guaranteed by the Company Total assets of
Empower, Inc. were $1,983,502 at June 30, 1997                         --      350,000

Cantonal Bank of Lucerne, on demand with three months notice,
with interest at 5.25% payable quarterly, collateralized
by land and building                                                   --    1,368,400
                                                               ----------   ----------
                                                               $3,551,091   $3,834,706
                                                               ==========   ==========
</TABLE>

                                     F 14
<PAGE>   41
NOTE 11 - LOAN PAYABLE

The Company has negotiated a 5% demand loan from a private foundation fund. The
loan balance payable at June 30, 1998 and 1997 was $125,029 and $133,008
respectively. Interest expenses for the years ended June 30, 1998, 1997 and 1996
were $3,223, $16,258 and $ -0-, respectively.

NOTE 12 - DUE FROM STOCKHOLDERS

The Company made unsecured advances to its former Chairman of the Board of
Directors (a principal stockholder) during the year ended June 30, 1997
requiring interest at 6% per annum. The balance at June 30, 1997 was $69,587 and
by June 30, 1998 had been repaid. Interest charged to the stockholder for the
year ended June 30, 1997 was $3,460. No interest had been charged to the
stockholder for the year ended June 30, 1998 because repayment took place on
July 1, 1997.

NOTE 13 - DUE TO STOCKHOLDERS AND OFFICERS

In June 1997, the President of the Company (a principal stockholder) made
non-interest bearing advances to the Company in the amount of $5,862. The amount
of the non-interest-bearing advance for June 30, 1998 was $2,207

Prior to the acquisition of Empower, Inc., the president of Empower, Inc.
advanced that company funds for operating expenses at 8.25% interest. As part of
the acquisition, the Company agreed to continue to pay this obligation. The
balance due the stockholder of the Company at June 30, 1997 was $112,013
including unpaid interest of $25,695. Interest payable to the stockholder for
the period from April 1, 1997 (date of acquisition) to June 30, 1997 was $2,315.
The whole amount was repaid during Fiscal 1998. The balance at June 30, 1998
was $0                            

An officer of Swissray Corporation made non-interest bearing advances to the
subsidiary for operating expenses during 1997. The balance due at June 30, 1997
was $21,951. The amount was repaid and the balance was $0 at June 30, 1998.

Pursuant to agreements between the President of the Company and the Company,
dated as of December 1996 and June 1997, the Company incurred additional
compensation to the officer payable as 48,259 shares with a fair value of
$1,122,973. The compensation was in consideration of the officer's agreement for
the cancellation of 1,608,633 shares of common stock held by the officer or
companies controlled by him which allowed the Company to maintain a sufficient
number of shares of common stock to meet certain obligations of the Company to
issue common stock and to permit certain financings prior to the increase in the
number of authorized shares of common stock from 15,000,000 to 30,000,000
shares. The shares were issued by the Compny on July 22, 1997 and at June 30.
1997 are recorded as "Common Stock to be Issued to Officer" in the equity
section of the balance sheet.

NOTE 14 - CONVERTIBLE DEBENTURES

Convertible debentures consist of the following:

<TABLE>
<CAPTION>
                                                                                            June 30,
                                                                                       1998           1997
                                                                                   -----------    -----------
<S>                                                                                <C>            <C>
Convertible debenture dated April 28, 1997 and due April 28, 1998 with
interest at 6% per annum. The principle shall be convertible into common shares
one year from the issue date of the note at the greater of eighty (80%) percent
of bid price or $2.50 per share on the date of conversion. Interest due on the
note shall similarly be paid in common stock at the time of conversion             $         0    $ 2,000,000


Convertible debenture dated May 15, 1997 and due May 15, 2000 with interest at
6% per annum. The debentures are convertible into common shares at a price equal
to eighty (80%) of the average closing bid price for the five (5) trading days
preceding the date of conversion. One-half of the debentures are convertible at
the earlier of a registration effective date or August 7, 1997.
</TABLE>

                                     F 15
<PAGE>   42
<TABLE>
<S>                                                                                <C>            <C>
The remainder are convertible 30 days thereafter. Any debenture not so converted
is subject to mandatory conversion on May 15, 2000 Debt issuance cost was
$327,310, beneficial conversion feature was $500,000                                         0      2,000,000


Convertible debenture dated June 13, 1997 and due June 13, 2000 with interest
at 6% per annum. The debentures are convertible into common shares at a price
equal to eighty (80%) of the average closing bid price for the five (5) trading
days preceding the date of conversion. One-half of the debentures are
convertible at the earlier of a registration effective date or September 13,
1997. The remainder are convertible 30 days thereafter. Any debenture not so
converted is subject to mandatory conversion on June 13, 2000. Debt
issuance cost was $308,575, beneficial conversion feature was $500,000                       0      2,000,000

Convertible debenture dated December 11, 1997 and due December 11,
1999 with interest at 8% per annum. The debentures are convertible into common
shares at a price equal to seventy five (75%) of the average closing bid price
for the five (5) trading days preceding the date of conversion. Twenty five
percent (25%) of the debentures are convertible at the earlier of a registration
effective date or March 21, 1998. Additionally twenty five percent (25%) of the
debentures are convertible at the earlier of 30 days after the effective date of
the Registration Statement or April 20, 1998. Additionally twenty five percent
(25%) of the debentures are convertible at the earlier of 60 days after the
effective date of the Registration Statement or May 20, 1998. The remaining
twenty five percent (25%) are convertible at the earlier of 90 days after the
effective date of the Registration Statement or June 20, 1998. Any debenture not
so converted is subject to mandatory conversion on December 11, 1999. Debt
issuance cost was $690,000, beneficial conversion feature was $1,949,428               145,969              0


Convertible debenture dated March 14, 1998 and due March 14, 2000 with interest
at 6% per annum. The debentures are convertible into common shares at a price
equal to eighty (80%) of the average closing bid price for the ten (10) trading
days preceding the date of conversion. All of the debentures are convertible at
the earlier of a registration effective date or May 14, 1998. Any debenture not
so converted is subject to mandatory conversion on March 14, 2000 On July 21,
1998 and August 13, 1998 a total of $1,500,000 was converted into 484,254 
shares. On August 31, 1998 the amount of $3,000,000 was refinanced (See Note
25 - Subsequent Events) Debt issuance cost was $615,000, beneficial conversion 
feature was $857,500                                                                 5,500,000              0


Convertible debenture dated June 15, 1998 and due June 15, 2000 with
interest at 6% per annum. The debentures are convertible into common shares at a
price equal to eighty (80%) of the average closing bid price for the ten (10)
trading days preceding the date of conversion. All of the debentures are
convertible at the earlier of a registration effective date or August 15, 1998
Any debenture not so converted is subject to mandatory conversion on June 15,
2000. Debt issuance cost was $240,000, beneficial conversion feature was $420,436    2,000,000              0
                                                                                   -----------    -----------
                                                                                     7,645,969      6,000,000
Less discount due to beneficial conversion features,  net of accumulated
amortization of $105,109 and $310,559 respectively                                    (315,327)      (689,441)
                                                                                   -----------    -----------
                                                                                   $ 7,330,642    $ 5,310,559
                                                                                   ===========    ===========
</TABLE>

The Company is currently in violation of certain covenants in their debenture
agreements. Such covenants have been waived by the holders.



                                     F 16
<PAGE>   43
NOTE 15 - LONG-TERM DEBT

Long-term debt consists of the following:
<TABLE>
<CAPTION>
                                                                                        June 30,
                                                                                  --------------------
                                                                                     1998       1997
                                                                                   --------   --------
<S>                                                                                <C>        <C>
Note payable - Edward Coyne, in weekly installments of $817, including principal
and interest at 8% per annum, maturing on October 9, 2002                          $153,603   $182,617


Note payable - Thatcher Company of New York, in monthly installments of $855,
including interest at 10.25% per annum, maturing on October 3, 2001,
collateralized by various x-ray chemical mixing machines. The full note was
assumed by the purchaser of Empower during Fiscal 1998                                   --     35,623


Note payable - Union Bank of Switzerland, related to the acquisition of
equipment sold to a customer (see Accounts Receivable -Long-Term), in monthly
installments of $12,589 With imputed interest at 6.0% per annum, maturing on
September 30, 2000                                                                  335,062    450,417

Capitalized leases related to the acquisition of various computer and office
equipment in payable monthly installments over periods ranging up to June 4,
2001 with interest imputed at rates ranging from 9.1% to 28.3%. These leases are
collaterlized by the specific equipment                                              13,377     30,747

Note payable - Dr. Zeman-Wiegand Helga,
due on demand, requires interest only
payments at 7% per annum with no current
amortization required. The note was repaid during Fiscal 1998                            --     68,420

Capitalized leases related to the acquisition of various computer and office
equipment in monthly installments over periods ranging up to April 2001 with
interest imputed at rates ranging from 18% - 21%. These leases are collaterlized
by the specific equipment                                                           172,378         --
                                                                                   --------   --------
                                                                                    674,420    767,824
Less:  Current portion                                                             (233,746)  (243,135)
                                                                                   --------   --------
                                                                                   $440,674   $524,689
                                                                                   ========   ========
</TABLE>

The aggregate long-term debt principal payment are as follows:

<TABLE>
<CAPTION>
Years Ending
 June 30,
-----------
<S>               <C>
1999              $233,746
2000               247,275
2001               142,154
2002                40,006
2003                11,239
                  --------
                  $674,420
                  ========
</TABLE>

                                     F 17
<PAGE>   44
NOTE 16 - SHAREHOLDERS' EQUITY

Authorized Shares

On March 12, 1997, the Company amended its certificate of incorporation to
change the number of authorized common shares from 15,000,000 to 30,000,000 of
$.01 par value common shares. On December 26, 1997, the Company amended its
certificate of incorporation to change the number of authorized common shares
from 30,000,000 to 50,000,000 of $.01 par value common shares.

The Company's outstanding shares of common stock of $.01 par value at June 30,
1998 and 1997 were 4,142,622 and 1,969,443, respectively.

Common Stock

The Company issued 2,030,588 shares for $13,725,246 for the year ended June 30,
1998 (including 16,900 shares for $123,370 issued under stock option plan) and
535,876 shares for $7,753,222 (including 16,100 shares for $117,530 issued under
stock option plan) for the year ended June 30, 1997 and 215,000 shares for
$7,250,000 (includes 105,000 shares for $2,050,000 issued under stock option
plan) for the year ended June 30, 1996.

Stock Option

The Stock Option Plans provide for the grant of options to officers, directors,
employees and consultants. Options may be either incentive stock options or
non-qualified stock options, except that only employees may be granted incentive
stock options. The maximum number of shares of Common Stock with respect to
which options may be granted under the Stock Option Plans is 500,000 shares.
Options vest at the discretion of the Board of Directors. All options granted in
1997 and 1996 vested immediately. The maximum term of an option is ten years.
The 1996 Stock Option Plan will terminate in January, 2006, though options
granted prior to termination may expire after that date. The 1997 Stock Option
Plan will terminate at the discretion of the Board of Directors. In Fiscal 1998.
there were no grants or vesting of stock options. In Fiscal 1997 and 1996, had
compensation cost for the Stock Option Plans been determined based on the fair
value at the grant dates for awards under the Stock Option Plans, except for
grants to consultants for which compensation expense has been recognized
consistent with the method of SFAS No. 123, as discussed in Note 1, the
Company's net loss and net loss per share would have increased to the pro forma
amounts indicated below:


<TABLE>
<CAPTION>
                          Fiscal 1997                Fiscal 1996
                          ------------------------   ------------------------
                                As         Pro            As           Pro
                            Reported      Forma        Reported       Forma
                          ----------    ----------    ----------   ----------
<S>                       <C>           <C>           <C>          <C>
Net loss (in thousands)   $  (13,685)   $  (13,959)   $   (8,266)  $   (8,365)
Basic and diluted
 net loss per share       $    (8.65)   $    (8.82)   $    (6.37)  $    (6.45)
</TABLE>

The fair value of each option grant is estimated on the date of grant using the
Black Scholes option-pricing method with the following weighted average
assumptions used for grants.

<TABLE>
<CAPTION>
                             1997       1996
                           -------    -------
<S>                        <C>        <C>
Dividend yield                   0%         0%
Expected volatility           61.6%      23.1%
Risk-free interest rate       6.25%      6.25%
Expected lives, in years         1          1
</TABLE>

A summary of the weighted-average fair market values and weighted-average
exercise prices, both as of the date of grant, is presented below. No options
were granted in Fiscal year 1998.

                                     F 18
<PAGE>   45
<TABLE>
<CAPTION>
                                    1997                       1996
                                    --------     --------      --------    -------
                                    Weighted     Weighted      Weighted    Weighted
                                    Average      Average       Average     Average
                                    Fair         Exercise      Fair        Exercise
                                    Value        Price         Value       Price
                                    --------     -------       ------      ------
<S>                                 <C>          <C>           <C>         <C>
Options granted above fair value    $  -         $   -         $ 7.20      $48.90
Options granted below fair value    $22.80       $ 7.60        $29.20      $21.60
</TABLE>

A summary of the status of the Stock Option Plans at June 30, 1998, 1997 and
1996 and the changes during the years then ended is presented below:

<TABLE>
<CAPTION>
                                       1998                          1997                       1996
                                       ------------------------      ----------------------     -----------------------
                                       Weighted                      Weighted                   Weighted
                                       Shares          Average       Shares        Average      Shares        Average
                                       Underlying      Exercise      Underlying    Exercise     Underlying     Exercise
                                       Options         Price         Options       Price        Options        Price
                                       --------        --------      ---------     --------     --------       --------
<S>                                     <C>            <C>           <C>           <C>                 <C>     <C>
Outstanding at beginning of year        318,000        $  23.40      238,500       $  25.20            0       $     --
Granted                                      --        $     --       79,500       $  17.80      238,500       $  25.20
Exercised                               (16,900)       $   7.30
Outstanding at end of year              301,100        $  24.30      318,000       $  23.40      238,500       $  25.02
                                        ========       ========      =========     ========     ========       ========
 Exercisable at end of year             301,100        $  24.30      318,000       $  23.40      238,500       $  25.20
                                        ========       ========      =========     ========     ========       ========
</TABLE>

The following table summarizes information about stock options under the Stock
Option Plans at June 30, 1998:

<TABLE>
<CAPTION>
                         Options Outstanding                            Options Exercisable
                         -------------------                            -------------------
                                        Weighted    
                                        Average      Weighted                       Weighted
                                        Remaining    Average                        Average
    Range of          Number            Contractual  Exercise       Number          Exercisable
 Exercise Price       Outstanding       Life         Price          Exercisable     Price
 --------------       -----------       -----------  ---------      ------------    -----------
<S>                   <C>               <C>          <C>            <C>             <C>
$ 7.30 - $ 10.00        40,100           8.4         $   8.00        40,100         $   8.00
$20.00 - $ 40.00       227,500           7.8         $  22.10       227,500         $  22.10
$47.50 - $ 65.00        33,500           7.5         $  58.70        33,500         $  58.70
                       -------                                      -------
                       301,100                                      301,100
                       =======                                      ========
</TABLE>

NOTE 17 - DEFINED CONTRIBUTION PLANS

The Swiss and German Subsidiaries, mandated by government regulations, are
required to contribute approximately five (5%) percent of all eligible, as
defined, employees' salaries into a government pension plan. The subsidiaries
also contribute approximately five (5%) percent of eligible employee salaries
into a private pension plan. Total contributions charged to operations for the
years ended June 30, 1998, 1997 and 1996, were $ 347,854, $274,009 and $198,722,
respectively.

Effective March 1, 1992, Empower, Inc., a U.S. subsidiary, adopted a qualified
401(k) retirement plan for the benefit of all its employees. Under the plan,
employees can contribute and defer taxes on compensation contributed. The
subsidiary matches, within prescribed limits, the contributions of the
employees. The subsidiary also has the option to make an additional contribution
to the plan. The subsidiary's contribution to the plan for the period April 1,
1997 (date of acquisition) to June 30, 1998 and 1997 was $ 10,260 and $4,185,
respectivly.

                                     F 19
<PAGE>   46

Effective April 3, 1992, Empower, Inc., a U.S. subsidiary, adopted
a "Section 125" employee benefits plan, which is also referred to as a
"Cafeteria" plan. The subsidiary pays for approximately 85% of the employees'
health coverage and the employee pays approximately 15% of the cost of coverage.
With the implementation of the Cafeteria plan, the employees' payments for
coverage are on a pre-tax basis. A new employee has only a ninety (90) day
waiting period before he or she becomes eligible to participate in the group
insurance plan and the Cafeteria plan.

NOTE 18 - OTHER INCOME (EXPENSES)

<TABLE>
<CAPTION>
                                                                      Year Ended June 30,
                                                        1998              1997              1996
                                                    ----------        ----------        ----------
<S>                                                 <C>               <C>               <C>
Interest income                                     $   58,902        $   68,950        $  131,166
Interest income - stockholder and officer                   --             4,351            12,530
Foreign currency income                                (87,148)          484,846           377,587
Miscellaneous income                                    60,648             6,833               512
Loss from investments                                       --          (246,217)               --
Loss on sale of certain asset and Liabilities          313,629                --                --
Licensing income                                            --                --          482,138
                                                    ----------        ----------        ----------

TOTAL OTHER INCOME (EXPENSES)                       $ (281,227)       $  318,763        $1,003,933
                                                    ==========        ==========        ==========
</TABLE>

NOTE 19 - INCOME TAXES

Deferred income tax assets as of June 30, 1998 of $9,500,000 as a result of net
operating losses, have been fully offset by valuation allowances. The valuation
allowances have been established equal to the full amounts of the deferred tax
assets, as the Company is not assured that it is more likely than not that these
benefits will be realized.

A reconciliation between the statutory United States corporate income tax rate
(34%) and the effective income tax rates based on continuing operations is as
follows:

<TABLE>
<CAPTION>
                                                              Year Ended June 30,
                                                -------------------------------------------------
                                                    1998               1997               1996
                                                -----------        -----------        -----------
<S>                                             <C>                <C>                <C>
Statutory federal income tax (benefit)          $(7,754,000)       $(4,101,913)       $(3,077,078)
Foreign income tax (benefit) in
           excess of domestic rate                  543,000            509,203           (325,715)
Benefit not recognized on operating loss          5,111,000          2,816,057          3,038,145
Permanent, timing and other differences           2,100,000            886,886                 --
                                                -----------        -----------        -----------

                                                  $    -0-         $   110,223        $  (364,648)
                                                ===========        ===========        ===========
</TABLE>

Net operating loss carryforwards at June 30, 1998 were approximately as follows:

<TABLE>
<S>                                                  <C>
United States (expiring through June 30, 2013)       $15,200,000
Switzerland (expiring through June 30, 2008)          15,600,000
                                                     -----------
                                                     $30,800,000
                                                     ===========
</TABLE>

The income tax related to the extraordinary gain on sale of marketable
securities was approximately $343,000 for the year ended June 30, 1996.

                                     F 20
<PAGE>   47
No income tax benefit has been recognized related to the extraordinary loss
incurred as a result of fire damage or the year ended June 30, 1997.

NOTE 20 - EXTRAORDINARY ITEMS

In June of 1996, the Company sold marketable securities for $962,500, at a cost
of $200,000, resulting in an extraordinary gain of $419,500 ($ 0.32 per share),
net of income taxes of approximately $343,000.

On April 12, 1997, the Company sustained significant fire damage at a leased
production and office facility in Hochdorf, Switzerland, resulting in an
extraordinary loss, net of insurance proceeds, of $387,514 ($ 0.24) per share),
net of income taxes of $-0-.

On July 31, 1997 the Company refinanced Convertible debentures issued in May and
June 1997. A gain on extinguishment of debt of $154,212 resulted from that
transaction net of income taxes of $-0-.

In December, 1997 the Company refinanced part of the Convertible debentures
issued in August 1997. A gain on extinguishment of debt of $150,711 resulted
from that transaction net of income taxes of $-0-.

Note 21  SIGNICIANT CUSTOMER AND CONCENTRATION OF CREDIT RISK

The company sells its products to various customers primarily in Europe and USA.
The company performs ongoing credit evaluations on its customers and generally
does not require collateral. Export sales are usually made under letter of
credit agreements. The company establishes reserves for expected credit losses
and such losses, in the aggregate, have not exceeded management's expectations.

The company maintains its cash balances with major Swiss, United States and
German financial institutions. Funds on deposit with financial institutions in
the United States are insured by the Federal Deposits Insurance Corporation
("FDIC) up to $ 100,000.

During the years ended June 30, 1998. 1997 and 1996 there were sales to four
customers that exceeded 10% of net consolidated sales. Sales to these customers
were: 1998 customer A, $ 0 (0%), customer B $7,647,354 (33%), customer C $0 (0%)
and customer D $1,209,390 (5%); 1997 customer A , $0 (0%), customer B $
1,899,084 (14%) customer C $0 (0%) and customer D $2,389,613 (18%); 1996
customer A $1,603,631 (15%), customer B $1,505,954 (14%), customer C $1,390,308
(13%) and customer D $0 (0%) The company operates in a single industry segment,
providing x-ray medical equipment.

The Company derives all of its revenues from its subsidiaries located in the
United States, Switzerland and Germany. Sales by geographic areas for the years
ended June 30, 1998, 1997 and 1996 were as follows:.

<TABLE>
<CAPTION>
                                                              1998              1997             1996
<S>                                                           <C>               <C>              <C>
         United States                                        $ 9,127,569       $  2,000,608     $          0
         Switzerland                                           12,851,115          2,184,161        2,002,374
         Germany                                                  914,294          1,393,072        4,976,503
         Other export sales                                            --          7,573,860        3,920,345
                                                              -----------       ------------     ------------
         Total                                                $22,892,978       $ 13,151,701     $ 10,899,222
</TABLE>



The following summarizes identifiable assets by geographic area:

<TABLE>
<CAPTION>
June 30,

                                                                   1998           1997                1996
<S>                                                           <C>              <C>              <C>
         United States                                        $  8,075,151     $ 2,008,307      $         --
         Switzerland                                            17,454,379      22,031,388        18,129,362
         Germany                                                   385,067         748,539           664,076
                                                              ------------      -----------      -----------
                                                              $ 25,914,597     $24,788,234      $ 18,793,438
                                                              ============      ===========      ===========
</TABLE>

                                     F 21
<PAGE>   48
The following summarizes operating losses before provision for income tax:


<TABLE>
<CAPTION>
June 30,

                                                              1998              1997             1996
<S>                                                           <C>               <C>              <C>
         United States                                        $(13,962,842)     $(   175,254)    $         -- 
         Switzerland                                           ( 8,803,842)      (12,678,800)      (8,986,555)
         Germany                                                   (42,184)         (333,397)         (63,673)
                                                              ------------      ------------     ------------
                                                              $(22,808,032)     $(13,187,451)    $ (9,050,228)
                                                              ============      ============     ============
</TABLE>

NOTE 22 - COMMITMENTS

The Company leases various facilities and vehicles under operating lease
agreements expiring through September 2003. The company has excluded all vehicle
leases in its presentation because they are deemed to be immaterial. The
facilities lease agreements provide for a base monthly payment of $22,285 per
month. Rent expense for the years ended June 30, 1998, 1997 and 1996 was 
$324,726, $ 297,926 and $ 242,658 respectively Future minimum annual lease
payments, based on the exchange rate in effect on June 30, 1998, under the
facilities lease agreements are as follows: 1999 $267,422, 2000 $173,549, 2001
$162,526, 2002 $166,995, 2003 $137,994, Thereafter $0

On January 1, 1996, the Company entered into a long term purchase agreement with
a major vendor to supply the camera module for a product the Company sells. At
June 30, 1998, future minimum payments under this contract, which is cancelable
with four months notice, are as follows: 1999 $ 7,717,921. The Company's total
purchases under this agreement was for the year ended June 30, 1998 $1,685,611
respectively for the year ended June 30, 1997 $ 1,534,646.--. Due to a change of
the production plant of its vendor from Europe to the USA this contract is
presently in process to be renegotiated. The company believes that the outcome
of this renegotiations will have a positive impact to lower the existing
commitments into the future.

The Company has employment agreements with six of its executives. Minimum
compensation under these agreements are as follows:

<TABLE>
<CAPTION>
         Year Ended
         ----------
<S>                                     <C>
         June 30, 1999                 $  963,000
         June 30, 2000                    843,000
         June 30, 2001                    500,000
         June 30, 2002                    273,000
         June 30, 2003                    147,000
                                       ----------
                                       $2,726,000
                                       ==========
</TABLE>

NOTE 23 - LITIGATION

In October 1997, the Registrant and Swissray Healthcare, Inc. were served with a
complaint by a company engaged in the business of providing services related to
imaging equipment alleging that defendant

                                     F 22
<PAGE>   49
received benefits from breach of fiduciary duties and contract obligations and
misappropriation of trade secrets by certain former employees of such
competitor. Such company also obtained a temporary restraining order against the
Registrant and Swissray Healthcare, Inc. On November 10, 1997, the Court denied
a Motion for a preliminary injunction and the temporary restraining order was
vacated. On December 1, 1997 and January 30, 1998 the Registrant answered the
Complaint and Amended Complaint respectively by denying the allegations
contained therein. The Plaintiff in such action (on December 2, 1997) filed a
Motion to reargue and renew its prior denied Motion for a Preliminary Injunction
and such Motion was (by Order and Decision dated June 17, 1998) denied. The
Company denied the allegations, vigorously defended the litigation and
thereafter settled such litigation and all outstanding matters with respect
thereto for $60,000 in July 1998.

Dispute with Gary J. Durday ("Durday"), Kenneth R. Montler ("Montler") and
Michael E. Harle ("Harle"). On July 17, 1998, two legal proceedings were
commenced by Swissray, and two of its subsidiaries against Durday, Montler and
Harle. Harle and Montler are former Chief Executive Officers of Swissray Medical
Systems Inc. and Swissray Healthcare Inc., respectively, and Durday is the
former Chief Financial Officer of both of those companies. Each of them was
employed pursuant to an Employment Agreement dated October 17, 1997. In addition
these three individuals were owners of a company by the name of Service Support
Group LLC ("SSG"), the assets of which were sold to Swissray Medical Systems
Inc. pursuant to an Asset Purchased Agreement dated as of October 17, 1997.
whereby Messrs. Durday, Montler and Harle received, among other consideration
33,333 shares of the Company's common stock, together with a put option
entitling these individuals to require Swissray to purchase any or all of such
shares at a purchase price equal to $ 45.00 per share (on or after June 30, 1998
and until April 16, 1999, subject to certain adjustments set forth in the Asset
Purchase Agreement).

On July 17, 1998, Swissray and its subsidiaries, Swissray Medical Systems Inc.
and Swissray Healthcare Inc. commenced an arbitration proceeding before the
American Arbitration Association in Seattle, Washington (Case No. 75 489 00196
98) alleging that Messrs. Durday, Montler and Harle fraudulently induced
Swissray and its subsidiaries to enter into the above referenced Asset Purchase
Agreement and otherwise breached that Agreement. The relief sought in the
arbitration proceeding is the recovery of damages suffered as a result of this
alleged wrongful conduct and a rescission of the put option provided for in the
Asset Purchase Agreement. Messrs. Durday, Montler and Harle responded to the
allegations made in the arbitration proceeding and asserted counterclaims
against Swissray and its subsidiaries claiming a breach by them of their
obligations under the Asset Purchase Agreement and other relief.

The current status with respect to this matter is that an arbitration has been
selected, but no date has yet been set for a hearing.

In addition to the above referenced arbitration proceeding, Swissray and its
subsidiaries commenced an action against Messres Durday, Montler and Harle in
the Supreme Court of the State of New York, County of New York (Index
603512/98), alleging that these individuals breached the obligations undertaken
by them in their respective Employment Agreements. Messrs. Durday Montler and
Harle have removed this action to the United States District Court for the
Southern District of New York (File No. 98 Civ. 5895; Judge McKenna), where it
is now pending. Counsel for Messrs. Durday, Montler and Harle have since
acknowledged that the action was improperly removed to federal court and have
agreed to remand that action to the Supreme Court of the State of New York,
County of New York. Counsel for Messrs. Durday, Montler and Harle have also
indicated that it is their intention to attempt to dismiss or stay the New York
action in order to have the issues raised in the action consolidated with the
issues to be determined in the American Arbitration Association proceeding, but
no formal action has been taken in that regard.

While the above may be considered to be in its early stage of litigation or
arbitration as indicated, it is the Company's management's intention to contest
each of these matters vigorously since Swissray believes that its claims are
meritorious, and that it has meritorious defenses to the claims asserted against
them.

NOTE 24 - RESTRUCTURING

During the year ended June 30, 1998 the Company recorded restructuring charges
of $500,000, as a result of its decision to relocate two facilities. The charges
consist primarily of the present value of the remaining lease obligations of
those facilities.

                                     F 23
<PAGE>   50
NOTE 25 - SUBSEQUENT EVENTS

On August 31, 1998 the Company issued $3,832,849 aggregate principal amount of
5% convertible debentures (the "Convertible Debentures") including a 25% premium
and accrued interest, convertible into Common Stock of the Company. The Company
did not receive any cash proceeds from the offering of the Convertible
Debentures. The full amount was paid by investors to holders of the Company's
Convertible Debentures issued on March 14, 1998 holding $3,000,000 of such
Convertible Debentures as repayment in full of the Company's obligations under
such Convertible Debentures. During the same period the Company issued
$2,311,000 aggregate principal amount of 5% Convertible Debentures, convertible
into Common Stock of the Company. After deducting fees, commissions and escrow
fees in the aggregate amount of $311,000 the Company received a net amount of
$2,000,000. The face amount of both Convertible Debentures are convertible into
shares of Common Stock of the Company commencing March 1, 1998 at a conversion
price equal to the lesser of 82% of the average closing bid price for the ten
trading days preceding the date of the conversion or $1.00. Any Convertible
Debentures not so converted are subject to mandatory conversion by the Company
on the 24th monthly anniversary of the date of issuance of the Convertible
Debentures.

Subsequent to the closing of the Company's June 30, 1998 fiscal year, the
Company held a Special Meeting of Stockholders on August 31, 1998, at which time
Company stockholders were asked to consider and act upon proposals to (1)
reverse stock split the currently issued and outstanding shares of Company
Common Stock on the basis of no less than 1 : 4 and no greater than 1 for 10;
the exact number, (if any) within such parameter to be determined by the Board
of Directors in its discretion and (2) authorize the creation of a class of
Preferred Stock. The number of shares of Common Stock voted at the Special
Meeting approximated 75 % of all issued and outstanding securities as of the
record date and approximately 88 % of those shares voted in favor of the
aforesaid reverse stock split proposal (while the Company did not receive a
sufficient number of affirmative votes for the creation of a class of Preferred
Stock).

On October 6, 1998 the Company issued $2,940,000 aggregate principal amount of
5% convertible debentures (the "Convertible Debentures") including $540,000
repurchase of stock, convertible into Common Stock of the Company. After
deducting fees, commissions and escrow fees in the aggregate amount of $300,000
the Company received a net amount of $2,100,000. The face amount of the
Convertible Debentures is convertible into shares of Common Stock of the Company
any time after the closing date at a conversion price equal to the lesser of 82%
of the average closing bid price for the ten trading days preceding the date of
the conversion or $1.00. Any Convertible Debentures not so converted are subject
to mandatory conversion by the Company on the 24th monthly anniversary of the
date of issuance of the Convertible Debentures.

NOTE 26 - RESTATEMENT

The accompanying financial statements have been restated to properly record the
accounting treatment of certain benefical conversion features and debt issuance
costs of convertible debentures issued during the year ended June 30, 1997, the 
accounting for the value of stock options granted during the years ended June
30, 1997 and 1996, and the accounting for the value of common stock to be issued
to an officer as additional compensation during the year ended June 30, 1997.

The effect of such restatements on the Company's 1997 and 1996 financial
statements follow:


<TABLE>
<CAPTION>
                                                        1997                                            1996
                                      -----------------------------------------       -----------------------------------------
                                         As                               As             As                               AS
                                      Reported       Adjustments       Restated       Reported       Adjustments       Restated
                                      --------       -----------       --------       --------       -----------       --------
<S>                                  <C>             <C>              <C>             <C>           <C>               <C>
Balance Sheet Adjustments
 Assets                              $24,352,915    $  435,319        $24,788,234     $18,793,438    $        --     $18,793,438
 Liabilities                          17,784,487      (689,441)        17,095,046       8,138,182             --       8,138,182
 Stockholders' equity                  6,568,428     1,124,760          7,693,188      10,655,256             --      10,655,256

Statement of Operations
 Adjustments
  Operating expenses                 $15,165,898    $2,284,435        $17,450,333     $ 8,591,679    $ 6,374,468     $14,966,147
  Other income (expenses)                 67,720      (511,125)          (443,405)        810,003             --         810,003
  Loss from operations               (10,502,114)   (2,795,560)       (13,297,674)     (2,311,112)    (6,374,468)     (8,685,580)
  Net loss                           (10,889,628)   (2,795,560)       (13,685,188)     (1,891,612)    (6,374,468)     (8,266,080)

  Net loss per common share basic    $      (.69)   $     (.17)       $      (.86)    $      (.15)   $      (.49)    $      (.64)
</TABLE>


                                                                             

                                     F 24
<PAGE>   51
Stockholders' equity has been restated to reflect the following:

<TABLE>
<CAPTION>
                                                Additional          Accumulated
                                              Paid-in Capital         Deficit
                                              ---------------       -----------
<S>                                           <C>                  <C>

As originally reported, June 30, 1996         $19,268,400          $ (7,918,948)
Value of stock options granted                  6,374,468            (6,374,468)
                                              -----------          -------------
As restated, June 30, 1996                    $25,642,868          $(14,293,416)
                                              ===========          =============

As originally reported, June 30, 1997         $26,608,594          $(18,808,576)
Effect of 1996 restatement                      6,374,468            (6,374,468)
                                              -----------          -------------
                                               32,983,062           (25,183,044)
                         

Beneficial conversion feature                   1,000,000              (310,559)
Debt issuance cost                                635,885              (200,566)
Value of stock options granted                  1,161,462            (1,161,462)
value of common stock to be issued                     --            (1,122,973)
                                              -----------          -------------
                                              $35,780,409          $(27,978,604)
                                              ===========          =============
</TABLE>


NOTE 27 - UNAUDITED PROFORMA CONDENSED COMBINED STATEMENT OF OPERATIONS

The following unaudited proforma condensed combined statements of operations for
the years ended June 30, 1998 and 1997 give retroactive effect of the
acquisition of Empower, Inc. on April 1, 1997 and SSG on October 17, 1997,
which has been accounted for as a purchase. The unaudited proforma condensed
combined statements of operations give retroactive effect to the foregoing
transaction as if it had occurred at the beginning of each year presented. The
proforma statements do not purport to represent what the Company's results of
operations would actually have been if the foregoing transactions had actually
been consummated on such dates or project the Company's results of operations
for any future period or date.     

The proforma statements should be read in conjunction with the historical
financial statements and notes thereto.

                           SWISSRAY INTERNATIONAL, INC
  UNAUDITED PROFORMA CONDENSED COMBINED CONSOLIDATED STATEMENT OF OPERATIONS
               FOR THE YEAR ENDED JUNE 30, 1998 AND JUNE 30, 1997

<TABLE>
<CAPTION>
                                                                                      Year Ended June 30
                                                                                      ------------------
                                                                                   1998               1997
                                                                              ------------       ------------
<S>                                                                           <C>                <C>
Revenues                                                                      $ 23,837,000       $ 21,223,000
Loss before extraordinary items                                                (21,963,000)       (13,568,000)
Net loss                                                                       (22,403,000)       (13,956,000)
Loss per share                                                                       (8.33)             (8.79)
Weighted average number of shares outstanding                                    2,690,695          1,587,757
</TABLE>

It was not practicable to include information for SSG for the year ended 
June 30, 1997                                                   

                                     F 25




<PAGE>   52
26

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

         No disagreements with accountants on accounting and financial
disclosure matters existed during the Company's fiscal year ended June 30, 1998.
See also Item 14 (e)(i) regarding change of auditors.

                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

         Set forth below is certain information concerning each director and
executive officer of Swissray International, Inc. (the "Registrant" or the
"Company"), including age, position(s) with the Registrant, present principal
occupation and business experience during the past five years.

<TABLE>
<S>                         <C>  <C>
Ruedi G. Laupper            48   Chairman of the Board of Directors, President and Chief Executive Officer
Josef Laupper               53   Director and Secretary
Dr. Sc. Dov Maor            51   Director and Member of the independent Audit Committee
Dr. Erwin Zimmerli          51   Director and Member of the independent Audit Committee
Ueli Laupper                28   Director and Vice President International Sales
Erich A. Kalbermatter       42   Chief Operating Officer
Herbert Laubscher           32   Chief Financial Officer and Treasurer
</TABLE>


         Directors are elected to serve until the next annual meeting of
stockholders and until their successors have been elected and have qualified.
Officers are appointed to serve until the meeting of the Board of Directors
following the next annual meeting of stockholders and until their successors
have been elected and have qualified.

         Ruedi G. Laupper has been President, Chief Executive Officer and a
director of the Registrant since May, 1995 and Chairman of the Board of
Directors since March 1997. In addition, he is Chairman of the Board of
Directors and President of the Company's principal operating subsidiaries. Ruedi
G. Laupper is the founder of the predecessors of the Company and was Chief
Executive Officer of SR-Medical AG until May 1995. He has approximately 23 years
of experience in the field of radiology.

         Josef Laupper has been Secretary, Treasurer (until January 1998) and a
director of the Registrant since May, 1995 (with the exception of not having
served as Secretary from December 23, 1997 to February 23, 1998). He has held
comparable positions with SR-Medical Holding AG, SR Medical AG and their
respective predecessors since 1990. He is principally in charge of the Company's
administration. Josef Laupper has approximately 19 years of experience within
the Medical device business.

         Dr. Sc. Dov Maor was appointed as a member of the Registrant's Board of
Directors and a member of its Independent Audit Committee effective March 26,
1998. Dr. Sc. Maor currently holds the position of Chief Scientist of the
Advanced Technology Center of Elscint, Haifa. Dr. Sc. Dov Maor is well
experienced in the field of Nuclear Medicine and medical imaging and has been
employed for over 10 year in a leading position in Research & Development.
Additionally, he was working in conjunction with the Max Planck Institute for
Nuclear Physics in Heidelberg within his field of experience. In addition to his
technical knowledge, Dr. Sc. Dov Maor is experienced in the commercial sector of
the industry.

         Dr. Erwin Zimmerli has been a director of the Company since May, 1995
and since January 1998, a member of the Registrant's Independent Audit
Committee. Since receiving his Ph.D. degree in law and economics from the
University of St. Gall, Switzerland in 1979, Dr. Zimmerli has served as head of
the White Collar Crime Department of the Zurich State Police (1980-86), as an
expert of a Swiss Parliamentary Commission for penal law and Lecturer at the
Universities of St. Gall and Zurich (1980-87), Vice President of an accounting
firm (1987-1990) and Executive Vice President of a multinational aviation
company (1990-92). Since 1992 he has been actively engaged in various
independent consulting capacities primarily within the Swiss legal community.

         Ueli Laupper has overall Company responsibilities in the area of
international marketing and sales with approximately eight years of experience
within the international X-ray market. He has been Vice President
         
                                                                              27
<PAGE>   53
of International Sales since March, 1997 and a director of the Company since
March, 1997. He was Chief Executive Officer of SR Medical AG from July 1995
until June 30, 1997. Since the beginning of July 1998, he has been in charge of
the Company's US Operations and currently services as CEO of both Swissray
Medical Systems, Inc. and Swissray Healthcare, Inc. as well as President of
Swissray American Inc. since the latter's formation in September, 1998.

         Erich A. Kalbermatter, commenced serving the Company in the position of
Chief Operating Officer in April 1998. Mr. Kalbermatter was a member of ASCOM's
Group Management, an international communications corporation. Mr. Kalbermatter,
whose background is principally as an internationally experienced manager with
expertise in the areas of electronics and telecommunications, has also served as
managing director of Private & Business Communications of ASCOM Ltd., Berne,
Switzerland being responsible for the turn-over of more than 1 billion Swiss
Francs, with approximately 4,800 employees worldwide.

         Herbert Laubscher joined the Company as a manager responsible for
finance and controlling on August 2, 1996. He was appointed Chief Financial
Officer of the Registrant on September 15, 1997 and Treasurer in January 1998.
Herbert Laubscher obtained his graduate degree in business administration from
the University of St. Gall, Switzerland in October 1992. From October 1992 until
June 1995 he was an accountant with Price Waterhouse in Zurich. Prior to joining
the Company he served as group financial officer of AZ Zibatra Holding GmbH in
Leipzig, Germany.

         On December 23, 1997 Messrs. Seddigh and Wuersch were elected to serve
as members of the Company's Board of Directors with Mr. Wuersch also assuming
the position of Company Secretary on December 23, 1997. Additionally, such two
persons along with Dr. Erwin Zimmerli (a Company director) comprised the
Company's newly formed committee of Company directors. While Dr. Zimmerli
remains a Company director, Messrs. Seddigh and Wuersch resigned on February 23,
1998 from all positions held with Registrant in order to pursue other interests
unrelated to Registrant. Such resignations were not the result of any
disagreement whatsoever with Registrant on any matter relating to its
operations, policies or practices as no such disagreements have ever existed or
currently exist.

SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

         Section 16(a) of the Exchange Act requires the Company's directors,
officers and persons who own more than 10% of a registered class of the
Company's equity securities, to file initial reports of ownership and reports of
changes in ownership with the Securities and Exchange Commission (the
"Commission"). Such persons are required by the Commission to furnish the
Company with copies of all Section 16(a) forms they file. Based solely on its
review of the copies of Forms 3, 4 and 5 received by it, the Company believes
that, with the exception of those persons indicated below, all directors,
officers and 10% stockholders complied with such filing requirements.

         According to the Company's records, the following filings appear not to
have been timely made: one initial statement of beneficial ownership on Form 3
and one statement of changes in beneficial ownership on Form 5 covering two
transactions (such Form 5 representing a delinquent Form 4) were not filed
timely by Ruedi G. Laupper; one initial statement of beneficial ownership was
not filed timely by Ueli Laupper; one initial statement of beneficial ownership
on Form 3 and one statement of changes in beneficial ownership on Form 5
covering one transaction (such Form 5 representing a delinquent Form 4) were not
filed timely by Tomlinson Holding, Inc.; one initial statement of beneficial
ownership on Form 3 was not filed timely by Joseph Laupper; one initial
statement of beneficial ownership was not filed timely by Ulrich Ernst; one
initial statement of beneficial ownership was not filed timely by Berkshire
Capital Management and one initial statement of beneficial ownership and one
statement of changes in beneficial ownership on Form 5 covering one transaction
(such Form 5 representing a delinquent Form 4) were not filed timely by Erwin
Zimmerli.

ITEM 11. EXECUTIVE COMPENSATION

         The following Summary Compensation Table sets forth certain information
for the years ended June 30, 1996, 1997 and 1998 concerning the cash and
non-cash compensation earned by or awarded to the Chief Executive Officer of the
Registrant, the three other most highly compensated executive officers of the
Registrant as of 1998 and the former Chairman of the Board of Directors:


28                                               
<PAGE>   54
28

                           Summary Compensation Table

<TABLE>
<CAPTION>
                                             ANNUAL COMPENSATION                      LONG-TERM COMPENSATION
                                             -------------------                      ----------------------
NAME AND                     FISCAL                          OTHER ANNUAL               STOCK       ALL OTHER
PRINCIPAL POSITION             YEAR      SALARY    BONUS     COMPENSATION               OPTIONS   COMPENSATION
------------------           ------     --------   -----     ------------             ---------     ---------
<S>                          <C>       <C>         <C>       <C>                      <C>           <C>
Ruedi G. Laupper               1998     $189,644     --        $   15,000(1)               --            --
   President and Chief                                         $1,122,973(7)
   Executive Officer,          1997     $146,983     --        $   15,000(1)          120,000(5)         --
   Chairman of the
   Board of Directors          1996     $161,085     --        $   15,000(1)               --            --


Josef Laupper                  1998     $ 94,669     --        $   12,000(1)               --             --
   Secretary, Director         1997     $ 96,861     --        $   12,000(1)               --             --
                               1996     $106,229     --        $   12,000(1)               --             --
                                                                                 
Ueli Laupper                   1998     $ 95,685     --        $   10,000(1)               --             --
   Vice President              1997           --     --                --                  --             --
   International Sales (2)     1996           --     --                --                  --             --

Herbert Laubscher              1998           --     --                --                  --             --
   Chief Financial Officer     1997           --     --                --                  --             --
   and Treasurer (2) (3)       1996           --     --                --                  --             --

Erich A. Kalbermatter          1998           --     --                --                  --             --
   Chief Operating             1997           --     --                --                  --             --
       Officer (2) (6)         1996           --     --                --                  --             --


Ulrich Ernst (4)               1998            --    --                --                  --             --
                               1997      $ 96,979    --        $   10,000(1)               --             --
                               1996      $ 98,197    --        $   15,000(1)               --             --
</TABLE>


(1)      Fees for service on the Board of Directors of the Registrant.

(2)      Compensation did not exceed $100,000 in any fiscal year.

(3)      Herbert Laubscher joined the Registrant on August 2, 1996.

(4)      Ulrich Ernst was Chairman of the Board of Directors from May, 1995
         until March 18, 1997.

(5)      The options, which were fully vested on date of grant (6/13/97), were
         issued in exchange for services to the Registrant as Chairman of the
         Board of Directors.

(6)      Erich A. Kalbermatter joined the Registrant on April 14, 1998.

(7)      Compensation paid in 48,259 shares of common stock for cancellation of
         common stock held by officer

STOCK OPTIONS AND STOCK APPRECIATION RIGHTS

         The following tables set forth certain information concerning the grant
of options to purchase shares of the Common Stock to each of the executive
officers of the Registrant, as well as certain information concerning the
exercise and value of such stock options for each of such individuals. Options
generally become exercisable upon issuance and expire no later than ten years
from the date of grant.


                                                                              29
<PAGE>   55
            STOCK OPTIONS GRANTED IN FISCAL YEAR ENDED JUNE 30, 1998

<TABLE>
<CAPTION>
                                                  Percent
                                                  of Total
                             Number of            Options
                             Securities          Granted to                          Market
                             Underlying           Employees       Exercise or       Price on
                              Options             in Fiscal        Base Price        Date of         Expiration
   Name                       Granted               Year           Per Share         Grant (4)          Date
   ----                       -------               ----           ---------         ---------          ----
<S>                         <C>                 <C>               <C>               <C>              <C>
Ruedi G. Laupper                 __                  __                __              __               __
Josef Laupper(1)                 __                  __                __              __               __
Ueli Laupper(1)                  __                  __                __              __               __
Herbert Laubscher(1)             __                  __                __              __               __
Ulrich Ernst(1)(2)               __                  __                __              __               __
Erich A. Kalbermatter(1)         __                  __                __              __               __
</TABLE>


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

(1)      These individuals own no stock options of the Registrant.

(2)      Mr. Ernst was Chairman of the Board of Directors from May, 1995 until
         March 18th, 1997.

               AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND
                             FY-END OPTION VALUES(1)

<TABLE>
<CAPTION>
                                                                                             VALUE OF
                                            NUMBER OF SECURITIES                           UNEXERCISED
                                           UNDERLYING UNEXERCISED                          IN-THE-MONEY
                                       OPTIONS AT FISCAL YEAR-END  (#)                      OPTIONS AT
                                         EXERCISABLE/UNEXERCISABLE                     FISCAL YEAR-END($)(2)
     Name                                -------------------------                     ---------------------
     ----
<S>                                           <C>                                      <C>
Ruedi G. Laupper  CEO                           12,000/0 (3)                                   0/0
Josef Laupper(4)                                     0/0                                       0/0
Ueli Laupper(4)                                      0/0                                       0/0
Herbert Laubscher(4)                                 0/0                                       0/0
Ulrich Ernst(4)(5)                                   0/0                                       0/0
Erich A. Kalbermatter(4)                             0/0                                       0/0
</TABLE>



(1)      No options were exercised by a Named Executive Officer during the
         fiscal year ended June 30, 1998.

(2)      Options are in-the-money if the fair market value of the underlying
         securities exceed the exercise price of the option.

(3)      Includes 12,000 options which are owned indirectly by Ruedi G. Laupper
         through SR Medical Equipment Ltd., a corporation which is wholly owned
         by Ruedi G. Laupper.

(4)      These individuals own no stock options of the Registrant.

(5)      Mr. Ernst was Chairman of the Board of Directors from May 1995 until
         March 18, 1997.


30                                          
<PAGE>   56
30

STOCK OPTION PLAN

         On January 30, 1996, the Board of Directors adopted the Company's 1996
Non-Statutory Stock Option Plan (the "1996 Plan"). Substantially all of the
options under such plan have been granted. Consequently, the Board of Directors
and the Registrant's stockholders approved the Swissray International, Inc. 1997
Stock Option Plan (the "Stock Option Plans").

         The purpose of the Stock Option Plans is to provide directors, officers
and employees of, and consultants to the Company and its subsidiaries with
additional incentives by increasing their ownership interests in the Company.
Directors, officers and other employees of the Company and its subsidiaries are
eligible to participate in the Stock Option Plans. Options may also be granted
to directors who are not employed by the Company and consultants providing
valuable services to the Company and its subsidiaries. In addition, individuals
who have agreed to become an employee of, director of or a consultant to the
Company and its subsidiaries are eligible for option grants, conditional in each
case on actual employment, directorship or consultant status. Awards of options
to purchase Common Stock may include incentive stock options under Section 422
of the Internal Revenue Code ("ISOs") and/or non-qualified stock options
("NQSOs"). Grantees who are not employees of the Company or a subsidiary shall
only receive NQSOs.

         The maximum number of options that may be granted under this plan shall
be options to purchase 2,000,000 shares of Common Stock. As of March 31, 1998,
none of such options have been granted.

         The Compensation Committee will administer the Stock Option Plan. The
Compensation Committee generally will have discretion to determine the terms of
any option grant, including the number of option shares, exercise price, term,
vesting schedule, the post-termination exercise period, and whether the grant
will be an ISO or NQSO. Notwithstanding this discretion: (i) the number of
shares subject to options granted to any individual in any calendar year may not
exceed 20,000; (ii) the term of any option may not exceed 10 years (unless
granted as an ISO to an individual or entity who possesses more than 10% of the
voting power of the Company, which term may not exceed five years); (iii) an
option will terminate as follows: (a) if such termination is on account of
permanent and total disability (as determined by the Compensation Committee),
such options shall terminate one year thereafter; (b) if such termination is on
account of death, such options shall terminate six months thereafter; (c) if
such termination is for cause (as determined by the Compensation Committee),
such options shall terminate immediately; (d) if such termination is for any
other reason, such options shall terminate three months thereafter; and (iv) the
exercise price of each share subject to an ISO shall be not less than 100%, or,
in the case of an ISO granted to an individual described in Section 422(b)(6) of
the Code, 110% of the fair market value (determined in accordance with Section
422 of the Code) of a share of the Stock on the date such option is granted.
Unless otherwise determined by the Compensation Committee, (i) the exercise
price per share of Common Stock subject to an option shall be equal to the fair
market value of the Common Stock on the date such option is granted; (ii) all
outstanding options become exercisable immediately prior to a "change in
control" of the Company (as defined in the Stock Option Plans) and (iii) each
option shall become exercisable in three equal installments on each of the
first, second and third anniversary of the date such option is granted.

         The Stock Option Plans may be amended, altered, suspended, discontinued
or terminated by the Board of Directors without further stockholder approval,
unless such approval is required by law or regulation or under the rules of the
stock exchange or automated quotation system on which the Common Stock is then
listed or quoted. Thus, stockholder approval will not necessarily be required
for amendments which might increase the cost of the Stock Option Plans or
broaden eligibility. The Stock Option Plans will remain in effect until
terminated by the Board of Directors. No ISO may be granted more than ten years
after such date.

                              DIRECTOR COMPENSATION

         Directors of the Registrant receive $10,000 annually for serving as
directors except for Josef Laupper, who receives $12,000 as Secretary and Ruedi
Laupper, the Chairman of the Board of Directors, who receives $15,000. Ruedi
Laupper also received options to acquire 12,000 shares of the Registrant's
common stock on June 13, 1997 in exchange for services to the Registrant as
Chairman of the Board of Directors. The exercise price for such options is $.73
per share. The options were fully vested on the date of grant.

                                                                              31
<PAGE>   57
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

         The following table sets forth certain information regarding beneficial
ownership of the Common Stock as of September 24, 1998 (except where otherwise
noted) with respect to (a) each person known by the Registrant to be the
beneficial owner of more than five percent of the outstanding shares of Common
Stock, (b) each director of the Registrant, (c) the Registrant's executive
officers and (d) all officers and directors of the Registrant as a group (except
as indicated in the footnotes to the table, all of such shares of Common Stock
are owned with sole voting and investment power):

<TABLE>
<CAPTION>
                                              Number           Percentage
                                             of Shares          of Shares
                                            Beneficially       Beneficially
   Name of Beneficial Owner (2)               Owned               Owned
   --------------------------------           -----               -----
<S>                                         <C>                  <C>
Ruedi G. Laupper, CEO (3) (1)                 410,259              8.84%
Josef Laupper (4) (1)                          50,000              1.08%
Ulrich R. Ernst (5) (6) (1)                    50,000              1.08%
Erwin Zimmerli (7) (1)                          5,000                *
Ueli Laupper (1)                                    0             --
Herbert Laubscher (1)                               0             --
Erich A. Kalbermatter (1)                           0             --
Dr. Sc. Dov Maor (1)                                0             --
Sovereign Investors LP(8)(10)                 868,750             17.5%
Dominion Capital Fund Ltd (9)(10)             737,500             15.3%
                                              -------            -----
All directors and officers as
a group  (8 Persons)                          515,259             11.11%
</TABLE>


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

*   Represents less than 1%.

(1)      The address of each such person is c/o Swissray International, Inc.,
         200 East 32nd Street, Suite 34-B, New York, NY 10016.

(2)      Unless otherwise indicated, the Company believes that all persons named
         in the table have sole voting and Investment power with respect to all
         shares of the Common Stock beneficially owned by them. A person is
         deemed to be the beneficial owner of securities which may be acquired
         by such person within 60 days from the date indicated above upon the
         exercise of options, warrants or convertible securities. Each
         beneficial owner's percentage ownership is determined by assuming that
         options that are held by such person (but not those held by any other
         person) and which are exercisable within 60 days of the date hereof
         have been exercised.

(3)      Includes (i) 30,000 shares owned indirectly by Mr. Laupper through SR
         Medical Equipment Ltd., a corporation which is wholly owned by Mr.
         Laupper; (ii) 368,259 shares owned indirectly by Mr. Laupper through
         Tomlinson Holding, Inc., a corporation which is wholly owned by Mr.
         Laupper and (iii) 12,000 shares which may be acquired upon exercise of
         immediately exercisable options, which options are owned indirectly by
         Mr. Laupper through SR Medical Equipment Ltd., a corporation which is
         wholly owned by Mr. Laupper.

(4)      Includes 50,000 shares owned indirectly by Joseph Laupper through Lairy
         Investment Inc., a corporation of which Joseph Laupper is a majority
         shareholder.

(5)      Includes 50,000 shares owned indirectly by Mr. Ernst through a
         corporation of which Mr. Ernst is a majority shareholder.

(6)      Mr. Ernst was Chairman of the Board of Directors from May 1995 until
         March 18, 1997.

(7)      Includes 5,000 shares which may be acquired upon exercise of
         immediately exercisable options.

32
<PAGE>   58
32


(8)      Includes 718,750 shares which may be issued upon conversion of
         previously-issued convertible debentures the "Convertible Debentures")
         assuming conversion based on the last reported sales price on June 30,
         1998. The ace amount of the Convertible Debentures are convertible into
         shares of common stock of the Registrant at any time starting May 13,
         1998. Includes also 150,000 shares which may be issued upon conversion
         of previously- issued convertible debentures (the "Convertible
         Debentures") assuming conversion based on the last reported sales price
         on June 30, 1998. The face amount of the Convertible Debentures are
         convertible into shares of common stock of the Registrant at any time
         starting August 14, 1998.

(9)      Includes 437,500 shares which may be issued upon conversion of
         previously-issued convertible debentures (the "Convertible Debentures")
         assuming conversion based on the last reported sales price on June 30,
         1998. The face amount of the Convertible Debentures are convertible
         into shares of common stock of the Registrant at any time starting May
         13, 1998. Includes also 50,000 shares which may be issued upon
         conversion of previously-issued convertible debentures (the
         "Convertible Debentures") assuming conversion based on the last
         reported sales price on June 30, 1998. The face amount of the
         Convertible Debentures are convertible into shares of common stock of
         the Registrant at any time starting August 14, 1998.

(10)     See also "Management's Discussion and Analysis of Financial Condition
         and Results of Operations Cash Flow - Capital Expenditure " (fourth
         paragraph) for information regarding these debentures and the fact that
         further agreement with respect thereto were entered into on August 31,
         1998.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         In the fiscal Year ended June 30, 1997, the Registrant issued 48,259
shares of Common Stock to a company controlled by Ruedi G. Laupper pursuant to
an agreement between Ruedi G. Laupper and the Registrant, dated as of June 30,
1997, in consideration of Ruedi G. Laupper's agreement to the temporary
cancellation of 160,863 shares of Common Stock held by Ruedi G. Laupper or
companies controlled by him to enable the Company to maintain a sufficient
number of shares of Common Stock to meet certain obligations of the Company to
issue Common Stock and to permit certain financings prior to the increase of the
number of authorized shares of Common Stock from 15,000,000 to 30,000,000.

                                     PART IV

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

         (a)      Reference is herewith made to the consolidated financial
                  statements and notes thereto included in this Form 10-K.

         (b)      No exhibits are being filed with this Form 10-K.

         (c)      During the last quarter of the Company's fiscal year ended
                  June 30, 1998, the following Forms 8-K were filed:

                  i)       8-K/A2 with date of report of November 7, 1997 filed
                           April 6, 1998.

         (d)      During the first quarter of the Company's fiscal year ended
                  June 30, 1999, no Forms 8-K were filed.

         (e)      During the second quarter of the Company's fiscal year ended
                  June 30, 1999, the following Forms 8-K were filed:

                  i)       8-K and 8-K/A each with date of report of November 3,
                           1998 filed November 6, 1998 and November 27,
                           1998 indicating change of auditors.

                                                                              33
<PAGE>   59
                                   SIGNATURES

         In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.

                          SWISSRAY INTERNATIONAL, INC.


                          By /s/ Ruedi G. Laupper
                          -------------------------------
                          Ruedi G. Laupper, Chairman of the Board of Directors,
                          President & Chief Executive Officer

Date: November 27, 1998

         In accordance with the Exchange act, This report has been signed below
by the following persons on behalf of the registrant and in the capacities and
on the dates indicated.

<TABLE>
<S>                                <C>                                         <C>
 /s/ Ruedi G. Laupper              Chairman of the Board                       Dated:  Nov. 27, 1998
------------------------           of Directors, President &
Ruedi G. Laupper                   Chief Executive Officer

 /s/ Josef Laupper                 Secretary and a Director                    Dated:  Nov. 27, 1998
------------------------      
Josef Laupper

/s/ Dr. Sc. Dov Maor               Director                                    Dated:  Nov. 27, 1998
-------------------------
Dr. Sc. Dov Maor


                                   Vice President and a Director               Dated:  Nov.   , 1998
------------------------
Ueli Laupper


/s/ Dr. Erwin Zimmerli             Director                                    Dated:  Nov. 27, 1998
------------------------
Dr. Erwin Zimmerli


/s/ Erich A. Kalbermatter          Chief Operating Officer                     Dated:  Nov. 27, 1998
------------------------
Erich A. Kalbermatter

/s/ Herbert Laubscher               Chief Financial Officer                     Dated:  Nov. 27, 1998
------------------------            and Treasurer
Herbert Laubscher
</TABLE>




34
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34

Supplemental Information

         Supplemental Information to be Furnished With reports Filed Pursuant to
Section 15(d) of the Act by Registrants Which Have Not Registered Securities
Pursuant to Section 12 of the Act.

Not Applicable.


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