<PAGE>   1
                     U.S. SECURITIES AND EXCHANGE COMMISSION

                              Washington, DC 20549

                                   FORM 10-KSB

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

                     For the fiscal year ended June 30, 1997

               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.
                 (Name of Small Business Issuer 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 41 919 90 50
                (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)

Check whether the issuer; (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for past 90 days.

                             Yes  xx         No
                                 ----           ----

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

State issuer's revenues for its most recent fiscal year - $13,151,701

The number of shares outstanding of each of the Registrant's classes of Common
Stock, as of September 10, 1997 is 20,857,051 shares, all of one class of common
stock, $.01 par value. Of this number a total of 16,304,461 shares having an
aggregate market value of $27,521,930, based on the closing price of the
Registrant's common stock of $1.688 on September 10, 1997 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.

                   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  xx
                                 ----           ----

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: 20,857,051 shares as of September 10,
1997.

Transitional Small Business Disclosure Format:   Yes    No [x]

                       DOCUMENTS INCORPORATED BY REFERENCE

If the following documents are incorporated by reference, briefly describe them
and identify the part of the Form 10-KSB (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



                                                                          Page
                                                                          Number
                                                                          ------
PART I

Item 1.    Description of Business

Item 2.    Description of Property

Item 3.    Legal Proceedings

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

PART II

Item 5.    Market For Common Equity and Related Stockholder Matters

Item 6.    Management's Discussion and Analysis or Plan of Operation

Item 7.    Financial Statements                                           F1-F23

Item 8.    Changes in and Disagreements with Accountants on Accounting
           and Financial Disclosure

PART III

Item 9.    Directors, Executive Officers, Promoters and Control Persons;
           Compliance With Section 16(a) of the Exchange Act

Item 10.   Executive Compensation

Item 11.   Security Ownership of Certain Beneficial Owners and
           Management

Item 12.   Certain Relationships and Related Transactions

Item 13.   Exhibits, List and Reports on Form 8-K
<PAGE>   3
                                     PART I


ITEM 1.        DESCRIPTION OF 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 15, 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 AG, the latter's wholly owned
subsidiaries, Teleray AG, a Swiss corporation, and Swissray Deutschland
(Rontgentechnik) GmbH (formerly known as SR-Medical GmbH), a German limited
liability company, as well as through the Company's wholly owned subsidiaries,
SR Management AG (formerly SR Finance AG), a Swiss corporation, Swissray Medical
Systems Inc. (formerly Swissray Corporation), a Delaware corporation, and
Empower, Inc., a New York corporation (d/b/a Swissray Empower Inc.). 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 Rontgen. 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


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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 
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 systems.

         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.

         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 developed during the fiscal year
ended June 30, 1997. The first product has been delivered to a customer during
the first quarter


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of the 1997/98 fiscal year and additional deliveries are scheduled for the
second quarter. See Item 1 - "Research and Development" and Item 6 - "General".

         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, 1997, the Company had aggregate
sales of $13,151,701 and a net loss of $10,889,628, compared with aggregate
sales of $10,899,222 and a net loss of $1,891,42 during the fiscal year ended
June 30, 1996. The increase in the Company's operating loss is due to the
significant expenses associated with the development of the Company's products
and the building of the Company's organization and market position 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 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 country are Switzerland, the United States and Germany
constituting 17%, 15% and 11% of the Company's sales during the fiscal year
ended June 30, 1997 respectively. For the fiscal year ended June 30, 1997, 22%
of the Company's sales were made in Eastern Europe, primarily attributable to
the delivery of conventional X-ray equipment to hospitals located in Eastern
Europe under a contract financed by the Swiss government. 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. The Company has also
been able to gain access to markets in Asia, the Middle East and Africa.

         The Company believes that the principal markets for its direct digital
X-ray equipment are located in North America and Western Europe, where the first
sales of the AddOn-Multi-System have been made. The Company submitted both its
AddOn Bucky(TM) and the AddOn-Multi-System to the United States Food and Drug
Administration ("FDA") for Section 510(k) clearance. The Company expects that
the necessary authorization to market the AddOn-Multi-System in the United
States should be forthcoming. However, no assurance can be given as to when or
if at all such authorization will be obtained. Upon obtaining the required
approval from the FDA, the Company intends to sell the AddOn-Multi-System in the
United States through its subsidiaries and other channels.

         Consistent with the Company's marketing strategy, during the fiscal
year ended June 30, 1997 the Company has made a significant effort to build a
market position in the United States and Germany, the biggest European market.
On November 6, 1996 it formed Swissray Corporation (which has been renamed
Swissray Medical Systems, Inc.), a Delaware corporation located in Azusa,
California, to conduct market research in the United States, develop strategies
for the penetration of the US imaging and health care servicing market and
explore various strategic alternatives for the Company. On April 1, 1997 the
Company acquired a controlling interest in Empower, Inc. ("Empower"), located in
Glen Cove, New York. Empower is engaged in distributing and servicing diagnostic
X-ray equipment and accessories in the New York/New Jersey/Connecticut area.
During the fiscal year ended June 30, 1997, the Company also significantly
increased its research and development capacities and created a new Information
Solution Division which will be engaged in


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developing imaging software and Picture Archiving and Communications Systems
(PACS), as well as consulting activities. This division will be located in Gig
Harbor, Washington and headed by Michael J. Baker, who has more than 20 years
experience in radiology, most recently as head of cd Lockheed Martin's Medical
Imaging Systems division. (see Item 1 - "Research and Development").

PRODUCTS

         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.

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.

Original Equipment Manufacturing (OEM)

         On June 11, 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.

Digital AddOn-Multi-System/SwissVision

         The AddOn-Multi-System is the first multi-functional direct digital
radiography (ddR) system available 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


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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 16 to 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 the postprocessing of the digital X-ray images.
See 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. In the future, the Company plans to also offer
products and services related to networking, archiving and electronic
distribution of digital X-ray images, including Picture Archiving and
Communications Systems (PACS).

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 
plans to also enter the markets 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


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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, 1997 sales to the
Company's two largest customers accounted for approximately 33% of all revenues
while sales to the Company's single largest customer during such period
accounted for approximately 18% 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 one or more of the Company's current two largest
customers or a reduction of the volume purchased by either of them 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 27 to the Company's consolidated financial
statements for additional information with respect to both the Company's two
largest customers and single largest customer for the fiscal year ended June 30,
1997.

RESEARCH AND DEVELOPMENT

         During the fiscal year ended June 30, 1997, the Company incurred
expenses related to research and development of $5,786,158 (accounting for 38%
of the Company's operating expenses), compared to $1,700,000 (accounting for 20%
of the Company's operating expenses) during the previous fiscal year. The
increase of the Company's research and development costs by 234% resulted
primarily from the Company's decision not to market the AddOn Bucky(TM) as a
retrofit product for existing conventional bucky table X-ray systems, but rather
to offer a complete multi-functional direct digital X-ray system which combines
a conventional bucky table and a bucky wall stand and includes a postprocessing
system. 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. New products currently being
developed by or on behalf of the Company include a new digital C-arm system, a
digital remote controlled fluoroscopy system, a conventional bucky-table system
and a multi-functional floating table.

         On June 30, 1997, the Company employed six people in research and
development. The number of people employed in research and development has been
increased by 50% since June 30, 1996. The Company is outsourcing certain
research and development activities (such as the development of the Company's
mobile units, C-arm systems and fluoroscopy tables) and intends to continue this
policy in the future. On April 1, 1997, Dr. Felix Riedel, a well-known
specialist in radiology and nuclear medicine with twenty years of clinical and
scientific experience in the United States and Europe joined the Company as head
of the Company's research and development department. Dr. Riedel has received
numerous awards for his achievements in diagnostic radiology from scientific and
academic institutions. He is a member of the Swiss Society of Radiology, a full
voting member of the International Society of Magnetic Resonance Imaging and a
corresponding member of the North American Society of Radiology.


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<PAGE>   9
         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 allow the Company to save research and 
development expenses and will provide it with access to clinical and 
scientific experience and know-how. Currently, the following individuals have 
been appointed to this scientific board: Dr. Felix Riedel, Chairman, Prof. Dr. 
med. Michael Meves, head of the Central Radiology Department at the Northeast 
Hospital in Frankfurt/Main, Germany, Prof. Dr. med. Hanfried Weigand, head of 
the Central Radiology Department of the Dr. Horst-Schmidt-Clinic in Wiesbaden, 
Germany, Dr. med. Paul Jegge, Co-head of the Radiology Department at the 
Regional Hospital, Langenthal, Switzerland, Hans Behrendt, General Manager of 
Elscint GmbH, and Michael L. Baker, head of the Company's Information Solution 
division.

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, 1997 finished
products accounted for approximately 21% of inventory while raw material, parts
and supplies accounted for approximately 67% of inventory and work in process
for approximately 12%.

         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 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.


                                       -8-
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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 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 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 for specific applications (such as mammography). To the 
Company's knowledge there is no competing multi-functional X-ray system 
currently being developed.

INTELLECTUAL PROPERTY

         The Company has obtained patent protection for certain aspects of its
conventional X-ray technology. 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. 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.


                                       -9-
<PAGE>   11
         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 submitted both
its AddOn-Bucky(TM) and the AddOn-Multi-System for Section 510(k) clearance with
the FDA. The Company expects that the necessary authorization to market the
AddOn-Multi-System in the United States should be forthcoming. 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, 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.



                                      -10-
<PAGE>   12
EMPLOYEES

         As of June 30, 1997, the Company had approximately 110 employees. Of
these 53 were employed in Switzerland, 47 in the United States and 10 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 EMPOWER

         On April 1, 1997, the Company acquired from J. Douglas Maxwell a
controlling interest in Empower, and the right to acquire the remaining interest
in Empower, which is being held in escrow pending the payment in full of a
certain payment obligation to the former holder thereof, in exchange for a
consideration consisting of (i) 80,000 shares of Common Stock of the Registrant,
(ii) the right to receive an additional 30,000 shares of Common Stock of the
Registrant in the event Empower meets certain performance goals, (iii) options
to purchase 125,000 shares of Common Stock of the Registrant at an exercise
price of $4.00 under the Registrant's 1996 Non-Statutory Stock Option Plan, (iv)
a convertible debenture, due February 28, 2000, in the principal amount of
$62,266.49 and convertible into common stock of the Registrant at 80% of the
market price at the date of conversion and (v) the assumption of a payment
obligation in the aggregate amount of approximately $72,600 as of the date of
closing of the transaction to the holder of the remaining interest in Empower.
The last payment is scheduled to be made in April, 1998. In connection with this
transaction, the Company also issued 150,000 options to purchase shares of
Common Stock of the Registrant at an exercise price of $3.50 to 14 employees of
Empower under the Company's 1996 Stock Option Plan. During the nine-month period
ended March 31, 1997, Empower had net sales of $4,218,355 and a net loss of
$232,342. As of March 31, 1997, Empower had assets in an aggregate amount of
$2,043,330.



                                      -11-
<PAGE>   13
DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY

         The Directors and Executive Officers of the Company, as of September
28, 1997, were as follows:

<TABLE>
<CAPTION>
Name                 Position(s) Held                                       Age
----                 ----------------                                       ---
<S>                  <C>                                                    <C>
Ruedi G. Laupper     Chairman of the Board of Directors,                    47
                      President and Chief Executive Officer
Josef Laupper        Secretary, Treasurer and a Director                    52
Ueli Laupper         Vice President International Sales and Director        27
Dr. Erwin Zimmerli   Director                                               50
Herbert Laubscher    Chief Financial Officer                                31
</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 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 predecessor of SR-Medical AG and was Chief Executive Officer of SR-Medical
AG until May 1995. He has approximately 22 years of experience in the field of 
radiology.

         Josef Laupper is the brother of Ruedi G. Laupper and has been 
Secretary, Treasurer and a director of the Registrant since May, 1995. He has 
held comparable positions with SR-Medical AG, Teleray AG and their respective 
predecessors since 1990. He is principally in charge of the Company's 
administration. Josef Laupper has in excess of 18 years of experience within 
the medical device business.

         Ueli Laupper, 27 years of age, is the son of the Company's President
with overall Company responsibilities in the area of international marketing and
sales with approximately seven years of experience within the international
X-ray market. He was Chief Executive Officer of SR Medical AG from July 1995
until June 30, 1997.

         Dr. Erwin Zimmerli has been a director of the Company since May, 1995.
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), 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.

         Herbert Laubscher joined the Company as a manager responsible for
finance and controlling


                                      -12-
<PAGE>   14
on August 2, 1996. He was appointed Chief Financial Officer of the Registrant on
September 15, 1997. 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.

ITEM 2.       DESCRIPTION OF PROPERTY

         The Company leases approximately 13,000 square feet of office and
showroom space in Hitzkirch, Switzerland. On April 12, 1997, the production
facility rented by the Company in Hochdorf, Switzerland was affected by a fire
in an adjacent facility. 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 plans to move the offices and other
facilities located in its Hitzkirch facility to the new Hochdorf facility during
the third quarter of the fiscal year ending June 30, 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 approximately 9,000 square feet of office and
warehouse space in Glen Cove, New York. In addition, the Company also leases
office space in New York City, Azusa, California, Gig Harbor, Washington and 
Wiesbaden, Germany.

ITEM 3.       LEGAL PROCEEDINGS


           On or about July 7, 1995, the Company commenced litigation against a
           former officer and director of a corporate predecessor alleging
           certain improprieties on the part of such officer and seeking
           monetary compensation as a result thereof. Such defendant responded
           (in September 1995) by filing certain affirmative defenses and
           counterclaims against the Company and others and subsequently brought
           (together with certain of his family members) an action against the
           Company in the same court which action raised issues and claims
           substantially similar to those raised in the aforesaid counterclaims.
           The two actions were assigned to the same judge and the Company moved
           successfully to dismiss both the counterclaims and the second action.
           Leave to replead both claims were granted and amended counterclaims
           and an amended complaint were served and filed and the Company again
           successfully moved to dismiss both pleadings. Following the most
           recent dismissal, counsel for the Company and the aforesaid former
           officer entered into settlement discussions. Both the Company and
           defendant have agreed to dismiss all claims and counter claims
           against each other, and are awaiting for formal written releases to
           be executed.

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

         Not applicable.

                                     PART II

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

MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS

         (a) Market Information. The Registrant's common stock is listed on the
Nasdaq SmallCap Market and traded under the symbol SRMI. 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.


                                      -13-
<PAGE>   15
<TABLE>
<CAPTION>
                Fiscal Year Ended June 30, 1996         Quarterly Common Stock Price
                          By Quarter                             Ranges (1)
                -------------------------------         ----------------------------
Quarter                   Date                           High                Low
-------                   ----                           ----                ---
<C>             <C>                                     <C>                  <C>
1st                       September 30, 1995(1)          $6.8125             $6.00
2nd                       December 31, 1995(1)           $7.875              $5.50
3rd                       March 31, 1996(1)              $7.25               $4.4375
4th                       June 30, 1996                  $6.50               $5.25
</TABLE>

<TABLE>
<CAPTION>
                Fiscal Year Ended June 30, 1997         Quarterly Common Stock Price
                          By Quarter                             Ranges (1)
                -------------------------------         ----------------------------
Quarter                   Date                           High                Low
-------                   ----                           ----                ---
<C>             <C>                                     <C>                  <C>    
1st                       September 30, 1996             $5.0625             $3.6875
2nd                       December 31, 1996              $4.00               $2.375
3rd                       March 31, 1997                 $3.5625             $1.6875
4th                       June 30, 1997                  $3.250              $1.4063
</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 $4.75. The following statement specifically refers to
         the Common Stock activity, if any, prior to March 20, 1996. The
         existence of limited or sporadic quotations should not of itself be
         deemed to constitute an "established public trading market". To the
         extent that limited trading in the Registrants's Common Stock took
         place, such transactions have been limited to the over-the-counter
         market. Until March 20, 1996, all prices indicated are as reported to
         the Company by broker-dealer(s) making a market in its common stock in
         the National Quotation Data Service ("pink sheets") and in the
         Electronic Over-the-Counter Bulletin Board. Through such date the
         Registrant's Common Stock was not traded or quoted on any automated
         quotation system other than as indicated herein. The over-the-counter
         market and other quotes indicated reflect inter-dealer prices without
         retail mark-up, mark-down or commission and do not necessarily
         represent actual transactions.

         (b) Holders. As of September 10, 1997 there were 748 stockholders of
the Registrant's Common Stock (as indicated on its transfer agent's certified
list of stockholders as of September 10, 1997).


                                      -14-
<PAGE>   16
         (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.

RECENT SALES OF UNREGISTERED SECURITIES

         (a) Title and Amount of Securities and Date of the Transaction. On
August 19, 1997, the Registrant issued $5,000,000 aggregate principal amount of
6% convertible debentures (the "Convertible Debentures"), convertible into
Common Stock of the Registrant in the manner described under (e) below.

         (b) Name of the Placement Agent. Rolcan Finance Ltd., London, United
Kingdom.

         (c) Consideration Received. The aggregate offering price of the
Convertible Debentures was $5,000,000. After deducting underwriting discounts,
commissions and escrow fees in the aggregate amount of $681,250 the Registrant
received a net amount of $4,318,750.

         (d) Persons or Classes of Persons to whom the Securities Were Sold and
Exemption from Registration Claimed. All Convertible Debentures were issued to
accredited investors as defined in Rule 501(a) of Regulation D promulgated under
the Act ("Regulation D") and the Company has received written representations
from each investor to that effect.

         (e) Terms of Conversion. 50% of the face amount of the Convertible
Debentures are convertible into shares of Common Stock of the Registrant at any
time after November 3, 1997 and the remaining 50% of the face value of the
Convertible Debentures are convertible into shares of Common Stock of the
Registrant after December 3, 1997, in each case at a conversion price equal to
80% of the average closing bid price for the five trading days preceding the
date of conversion. Any Convertible Debentures not so converted are subject to
mandatory conversion by the Registrant on the 36th monthly anniversary of the
date of issuance of the Convertible Debentures.

         On each of May 15, 1997 and on June 15, 1997, the Registrant issued
$2,000,000 principal amount of 6% convertible debentures convertible into Common
Stock on terms similar to those of the above mentioned issuance to accredited 
investors as defined in Rule 501(a) of Regulation D. Placement agent for such 
convertible debentures was Rolcan Finance Ltd. The aggregate offering price for
such convertible debentures was $4,000,000. After deducting underwriting 
discounts, commissions and escrow fees in the aggregate amount of $528,610, the
Registrant received an aggregate net amount of $3,458,890. Such convertible 
debentures were refinanced on July 31, 1997, with the proceeds of $4,262,500 
principal amount of convertible debentures issued to non-US persons under 
Regulation S.


                                      -15-
<PAGE>   17
ITEM 6.       MANAGEMENT'S DISCUSSION AND ANALYSIS

GENERAL

         The fiscal year ended June 30, 1997 brought major changes to the
Company. Based on the results of marketing and technical research undertaken by
the Company, the Company decided not to market its direct digital detector, the
AddOn Bucky(TM), as a retrofit product for conventional X-ray systems as it
previously intended, 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 and which is able to perform all examinations necessary
in orthopedics, traumatology, chest examination rooms and emergency rooms. The
primary reason for the Company's new strategy was management's belief that
potential customers can achieve cost benefits with a multi-functional direct
digital 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. In addition, because of an upcoming regulatory change
in Europe, CE qualification will be required for all elements in an X-ray system
if any components are exchanged. The Company was also concerned that the high
quality of its product could not be guaranteed in a retrofitted X-ray system.
Finally, a complete system offers significant advantages for potential customers
and the Company in the after-sales market because suppliers of X-ray equipment
typically are reluctant to extend product warranties and services to a product
that is retrofitted with third party products. As a result, the Company believes
that market acceptance of a complete system would be greater than that of the
AddOn Bucky alone.

         The Company's new strategy with respect to the Company's direct digital
technology required the incurrence of significant additional research and
development expenses. Due to this effort, the AddOn-Multi-System could be
developed during the fiscal year ended June 30, 1997 and the first product has
been delivered to a customer during the first quarter of the 1997/98 fiscal year
and additional deliveries are scheduled for the second quarter.

         During the fiscal year ended June 30, 1997, the Company also built up
its position in the United States because management of the Company believes
that the United States will be an important market for its AddOn-Multi-System.

RESULTS OF OPERATION

         Net sales for the fiscal year ended June 30, 1997 were $13,151,701
compared to $10,899,222 for the fiscal year ended June 30, 1996.

         The 21% increase in net sales was partially due to the acquisition of
Empower on April 1, 1997. The Company could also increase by approximately 21%
sales in Swiss Francs of its conventional X-ray equipment, accessories and
imaging equipment purchased from third parties to customers in Europe and other
markets outside the United States. Contributing factors to this increase were
sales made under the Philips OEM Agreement and an order to deliver X-ray


                                      -16-
<PAGE>   18
equipment to 21 hospitals located in Eastern Europe, which was filled in part
during the fiscal year ended June 30, 1997. The Company made no sales of the
AddOn-Multi-System during the fiscal year ended June 30, 1997.

         Gross profits amounted to $4,706,287 or 36% of net sales for the fiscal
year ended June 30, 1997 compared to $5,105,916 or 46.9% for the fiscal year
ended June 30, 1996.

         The decrease in gross profits is attributable to a number of factors.
During the fourth quarter of the fiscal year ended June 30, 1997, the Company's
Swiss subsidiaries began to consistently allocate direct labor and manufacturing
overhead expenses to costs of goods sold. Previously, consistent with Swiss 
accounting practice such subsidiaries only allocated cost of material to cost 
of goods sold, whereas labor and overhead expenses were allocated to operating 
expenses. In addition, sales of low-margin products increased substantially. 
This is mainly attributable to increased sales of accessories, which are 
generally low-margin products, during the fourth quarter as a result of the 
acquisition of Empower and increased sales of CT systems from Elscint. Each of 
the foregoing contributed approximately 15% to the Company's net sales.

         Operating expenses for the fiscal year ended June 30, 1997 were
$15,165,898 or 115.3% of net sales compared to $8,591,679 or 78.8% of net sales
for the fiscal year ended June 30, 1996. The principal items were research and
development expenses of $5,786,158 or 46% of net sales for the fiscal year ended
June 30, 1996 compared to $1,731,502 or 15.9% of net sales for the fiscal year
ended June 30, 1997 and salaries (net of directors and officers compensation),
which amounted to $2,059,396 or 15.6% of net sales for the fiscal year ended
June 30, 1997 compared to $1,829,535 or 16.8% of net sales for the fiscal year
ended June 30, 1996.

         Research and development expenses increased by 234% mainly due to the
significant additional research necessary to implement the Company's new
strategy with respect to its direct digital technology. Additional research and
development expenses have also been incurred to develop the Bucky Diagnost TS
system for Philips and to maintain the technological advantages of the Company's
conventional X-ray equipment. Management considers the relative size of the
research and development expenses for the fiscal year ended June 30, 1997 as
extraordinarily high and expects a reduction of their relative size in the near
future. However, 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. The increase of 64% in selling
expenses is the result of the continuing strong efforts of the Company to build
its market position in key markets (including the United States and Germany),
develop new markets and to lay the groundwork for a successful market
introduction of the Company's direct digital AddOn-Multi-System. In addition,
the Company has incurred expenses to develop products which are complementary to
its AddOn-Multi-System (such as a digital C-arm system and a digital remote
controlled fluoroscopy system). This will allow the Company to offer a full line
of digital X-ray equipment.

         The Company's operating loss increased to $10,459,611 for the fiscal
year ended June 30, 1996 from $3,485,763 for the fiscal year ended June 30,
1996. The increase in the Company's


                                      -17-
<PAGE>   19
operating loss is due to the significant expenses associated with the 
development of the Company's products and the building of the Company's 
organization and market position 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. After taking 
into account income tax benefits and extraordinary items of income (loss) the 
resulting net loss of the Company for the fiscal year ended June 30, 1997 
increased to $10,889,628 from $1,891,612 for the fiscal year ended June 30,
1996. Extraordinary expenses include the write off of inventory and clean-up
costs as a consequence of the fire which affected the Company's previous
manufacturing facility. However, the management expects to be able to recover
such expenses at least in part under applicable insurance policies.

FINANCIAL CONDITION

         Total assets of the Company on June 30, 1997 increased by $5,559,477 to
$24,352,915 from $18,793,438 on June 30, 1996, primarily due to the acquisition
of Empower and the new Hochdorf facility. Current Assets increased $2,522,432 to
$14,093,346 on June 30, 1997 from $11,570,914 on June 30, 1996. The increase in
current assets is primarily attributable to the increase of accounts receivable
as a consequence of the acquisition of Empower and the increase in inventory due
to an increased amount of orders to be filled within the first quarter of the
fiscal year ending June 30, 1998. Other Assets decreased $161,290 to $5,922,952
on June 30, 1997 from $6,084,242 on June 30, 1996. The decrease of other assets
was primarily due to a decrease in long-term accounts receivable, which was
partially offset by an increase in intangible assets.

         On June 30, 1997, the Company had total liabilities of $17,784,487
compared to $8,138,182 on June 30, 1996. On June 30, 1997, current liabilities
were $11,259,798 compared to $8,138,182 on June 30, 1996. The increase in
current liabilities is primarily due to the incurrence of a mortgage to finance
in part the acquisition of the new Hochdorf facility. Management currently
intends to refinance this mortgage, which may be terminated on three months
notice, with a long-term mortgage. In addition, as a result of the acquisition
of Empower, there was an increase in accounts payable. On June 30, 1997, the
Company also had $6,000,000 principal amount of convertible subordinated
debentures. Such debentures bear interest at 6% per annum and are repayable at
maturity in Common Stock of the Registrant. As of June 30, 1997, 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 five trading days
preceding the date of conversion, subject, with respect to $2 million principal
amount of debentures with a maturity date of April 28, 1998, to a minimum
conversion price of $2.50. $2 million principal amount of the remaining
debentures with a maturity date of May 15, 2000 and $2 million principal amount
of such debentures with a maturity date of June 13, 2000 were refinanced on July
31, 1997 with the proceeds of the issuance of $4,262,500 principal amount of
convertible debentures. 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.


                                      -18-
<PAGE>   20
         At June 30, 1997, long-term debt net of the current portion thereof
amounted to $524,689 compared to $0 at June 30, 1996. The increase in long-term
debt resulted from the incurrence of new debt obligations and the
reclassification of certain existing debt as long-term debt.

         Working capital at June 30, 1997 was $2,833,548 compared to $3,432,732
at June 30, 1996.

CASH FLOW AND CAPITAL EXPENDITURES

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

         The Company's capital expenditures totaled $3,431,375 for the fiscal
year ended June 30, 1997 compared to $932,066 for the fiscal year ended June 30,
1996. Capital expenditures are primarily for the purchase of the Hochdorf
facility and equipment. The increased financing needs resulted primarily from
the significant research and development expenses necessary in connection with
the development of the AddOn-Multi-System, the purchase of the Hochdorf facility
and the initiation and expansion of the Company's sales organization in Europe
and in the United States.

         The Company financed its liquidity needs during the fiscal year ended
June 30, 1997 primarily through the issuance of $13,300,000 principal amount of
convertible debentures and the issuance of Common Stock for a consideration of
$2 million in the aggregate. 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 improvement of 
the new Hochdorf facility, 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 cash reserves, future cash 
flow and, with respect to the improvements of the Hochdorf facility, the 
incurrence of mortgaged debt. 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 or the anticipated debt financing of the 
improvements to the Hochdorf facility will be available.

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


                                      -19-
<PAGE>   21
particular the exchange rate between the Swiss Franc and the U.S. dollar). For
the fiscal year ended June 30, 1996 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 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 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 increased 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


                                      -20-
<PAGE>   22
         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, 1997, the Company had an order backlog of $10,500,000 for conventional X-ray
equipment and $30,000,000 for digital X-ray equipment.

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
factors discussed hereafter and the information detailed in this Annual Report
for the fiscal year ended June 30, 1997 on Form 10-KSB 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-KSB 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


                                      -21-
<PAGE>   23
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 $12,800,000. 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 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.


                                      -22-
<PAGE>   24
For a discussion of these risks, see Item 6, "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. 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; Improvements in Technology

         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 sources than the Company.

         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. However, there
can be no assurance that such applications will be granted. There can be no
assurance that the Company's issued patents 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


                                      -23-
<PAGE>   25
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 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. 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. While the Company has submitted the
AddOn Bucky(TM) and the AddOn-Multi-System for Section 510(k) approval with the
FDA, there can be no assurance that such approval will be obtained and that the
AddOn-Multi-System may be marketed in the United States. 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 payors. 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


                                      -24-
<PAGE>   26
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; Dependence on
Sole Source Suppliers

         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. In addition, 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.

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 financings, 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 and slide processing 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.


                                      -25-
<PAGE>   27
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 holding
period under Regulation S. In addition, the Company is required to file a
registration statement with respect to the Common Stock issuable upon conversion
of the convertible debentures issued on August 19, 1997, which could adversely
affect the ability of the Company to sell Common Stock for its own account, 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 is quoted on the Nasdaq National Market System under
the symbol "SRMI." There can be no assurance that an active public market for
the Common Stock can be sustained. 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."


                                      -26-
<PAGE>   28
ITEM 7.       FINANCIAL STATEMENTS

         The financial statements required by Item 310 of Regulation S-B are set
forth on pages F-1 through F-23 inclusive of this Form 10-KSB.

ITEM 8.       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, 1997.

                                    PART III

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

         The information required to be disclosed in Item 9 will be set forth
under the caption "Election of Directors" in the Company's Proxy Statement to be
filed within 120 days of the end of the Company's fiscal year ended June 30,
1997, and is incorporated herein by reference.

ITEM 10.      EXECUTIVE COMPENSATION

         The information required to be disclosed in Item 10 will be set forth
under the caption "Executive Compensation" in the Company's Proxy Statement to
be filed within 120 days of the end of the Company's fiscal year ended June 30,
1997, and is incorporated herein by reference.

ITEM 11.      SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

         The information required to be disclosed in Item 11 will be set forth
under the caption "Security Ownership of Certain Beneficial Owners and
Management" in the Company's Proxy Statement to be filed within 120 days of the
end of the Company's fiscal year ended June 30, 1997, and is incorporated herein
by reference.

ITEM 12.       CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         The information required to be disclosed in Item 12 will be set forth
under the caption "Certain Relationships and Related Transactions" in the
Company's Proxy Statement to be filed within 120 days of the end of the
Company's fiscal year ended June 30, 1997, and is incorporated herein by
reference.


                                      -27-
<PAGE>   29
ITEM 13.      EXHIBITS, LIST AND REPORTS ON FORM 8-K

         (a)  LIST OF EXHIBITS

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

2.1            Acquisition Agreement, dated May 1995, by and between
               Registrant, a New York corporation (now SWISSRAY International,
               Inc.); Berkshire International Finance, Inc., SR-Medical AG (a
               Swiss corporation), Teleray AG (a Swiss corporation) and others
               (Incorporated by reference to Exhibit 1 of the Registrant's
               Registration Statement on Form 10SB, Registration No. 0-26972,
               effective February 14, 1996).

2.2            Exchange Agreement, dated as of November 22, 1996 by and between
               the Registrant and Doug Maxwell; Registration Rights
               Agreement, dated as of March 13, 1997, between the Registrant and
               Doug Maxwell; Assignment and Assumption Agreement, dated March
               13, 1997, between the Registrant and Doug Maxwell; Option
               Agreement, dated January 24, 1997, granting options for 125,000
               shares of the Registrant to Doug Maxwell.

3.1            Registrant's Certificate of Incorporation, dated December 20,
               1967 (Incorporated by reference to Exhibit 2(a) of the
               Registrant's Registration Statement on Form 10SB, Registration
               No. 0-26972, effective February 14, 1996).



3.2            Amendment to Registrant's Certificate of Incorporation, dated
               September 19, 1968 (Incorporated by reference to Exhibit 2(b) of
               the Registrant's Registration Statement on Form 10SB,
               Registration No. 0-26972, effective February 14, 1996)

3.3            Amendment to Registrant's Certificate of Incorporation, dated
               September 8, 1972 (Incorporated by reference to Exhibit 2(c) of
               the Registrant's Registration Statement on Form 10SB,
               Registration No. 0-26972, effective February 14, 1996)

3.4            Amendment to Registrant's Certificate of Incorporation, dated
               October 30, 1981 (Incorporated by reference to Exhibit 2(d) of
               the Registrant's Registration Statement on Form 10SB,
               Registration No. 0-26972, effective February 14, 1996)
        
3.5            Certificate of Merger of Direct Marketing Services, Inc. and CGS
               Units Incorporated into CGS Units Incorporated, dated June 16,
               1994 (Incorporated by reference to Exhibit 2(e) of the
               Registrant's Registration Statement on Form 10SB, Registration
               No. 0-26972, effective February 14, 1996)



                                      -28-
<PAGE>   30
3.6            Amendment to Registrant's Certificate of Incorporation, dated
               August 10, 1994.

3.7            Certificate of Correction of Certificate of Merger of Direct
               Marketing Services, Inc. and CGS Units Incorporated into CGS
               Units Incorporated, filed August 5, 1994 (Incorporated by
               reference to Exhibit 2(f) of the Registrant's Registration
               Statement on Form 10SB, Registration No. 0-26972 effective,
               February 14, 1996)

3.8            Amendment to Registrant's Certificate of Incorporation, dated
               May 24, 1995 (Incorporated by reference to Exhibit 2(g) of the
               Registrant's Registration Statement on Form 10SB, Registration
               No. 0-26972, effective February 14, 1996)

3.9            Amendment to Registrant's Certificate of Incorporation, dated
               August 29, 1996.

3.10           Amendment to Registrant's Certificate of Incorporation, dated
               December 13, 1996.

3.11           Amendment to Registrant's Certificate of Incorporation, filed
               March 12, 1997

3.12           Registrant's By-Laws (incorporated by reference to Exhibit 2(h)
               of the Registrant's Registration Statement on Form 10SB,
               Registration No. 0-26972, effective February 14, 1996)

10.1           License Agreement, dated June 24, 1995, by and between the
               Registrant and Hans-Jurgen Behrendt (incorporated by reference to
               Exhibit__ of Registrant's Registration Statement on Form 10SB,
               Registration No. 0-26972, effective February 14, 1996)

10.2           1996 Non-Statutory Stock Option Plan (incorporated by reference
               to Exhibit__ to the Registrant's Registration Statement on Form
               S-8 (Registration No. ____), effective _____________)

10.3           Agreement dated June 11, 1996 between the Registrant and Philips
               Medical System.

10.4           License Agreement, dated as of July 18, 1997, by and between the
               Registrant and Agfa-Gevaer+ N.V., certain portions of which are
               filed under a request for confidential treatment pursuant to Rule
               24b-2 promulgated pursuant to the Securities Exchange Act of
               1934, as amended, and Rule 80(b)(4) of Organization; Conduct and
               Ethics; and Information and Requests adopted under the Freedom of
               Information Act, under Rule 406 of the Securities Act of 1933, as
               amended, and the Freedom of Information Act. 

10.5           Agreement, dated July 14, 1995, by and between Teleray AG and
               Optische Werke G. Roderstock, certain portions of which are
               filed under a request for confidential treatment pursuant to Rule
               24b-2 promulgated pursuant to the Securities Exchange Act of
               1934, as amended, and Rule 80(b)(4) of Organization; Conduct and
               Ethics; and Information and Requests adopted under the Freedom of
               Information Act, under Rule 406 of the Securities Act of 1933, as
               amended, and the Freedom of Information Act.

21             List of Subsidiaries

23             Consent of Bederson & Company LLP

27             FINANCIAL DATA SCHEDULE



                                      -29-
<PAGE>   31
(b)      REPORTS ON FORM 8-K

         Form 8-K, dated July 31, 1997 (August 20, 1997) with respect to the
         issuance by the Registrant of $4,262,500 of convertible debentures in
         reliance upon Regulation S under the Securities Act of 1933.


                                      -30-
<PAGE>   32
                                   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   /Ruedi G. Laupper/
                                                -------------------------------
                                                Ruedi G. Laupper, Chairman of 
                                                the Board of Directors, 
                                                President & Chief Executive 
                                                Officer

Date:  September 29, 1997

         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>  
/Ruedi G. Laupper/         Chairman of the Board                                Dated:  September 29, 1997
-----------------------    of Directors, President & Chief Executive Officer
   Ruedi G. Laupper           

/Josef Laupper/            Secretary-Treasurer                                  Dated:  September 29, 1997
-----------------------    and a Director
   Josef Laupper           

/Herbert Laubscher         Chief Financial Officer                              Dated:  September  29, 1997
-----------------------
   Herbert Laubscher

/Ueli Laupper/             Vice President and a Director                        Dated:  September 29, 1997
-----------------------
  Ueli Laupper

/Dr. Erwin Zimmerli/       Director                                             Dated:  September 29, 1997
-----------------------
Dr.  Erwin Zimmerli
</TABLE>


                                      -31-

<PAGE>   33
                                  EXHIBIT INDEX


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


2.1            Acquisition Agreement, dated May __, 1995, by and between
               Registrant, a New York corporation (now SWISSRAY International,
               Inc.); Berkshire International Finance, Inc., SR-Medical AG (a
               Swiss corporation), Teleray AG (a Swiss corporation) and others.

2.2            Exchange Agreement, dated as of November 22, 1996 by and between
               the Registrant and Doug Maxwell; [; Registration Rights
               Agreement, dated as of March 13, 1997, between the Registrant and
               Doug Maxwell; Assignment and Assumption Agreement, dated March
               13, 1997, between the Registrant and Doug Maxwell; Option
               Agreement, dated January 24, 1997, granting options for 125,000
               shares of the Registrant to Doug Maxwell.]

3.1            Registrant's Certificate of Incorporation, filed January 2, 1968
               (Incorporated by reference to Exhibit 2(a) of the Registrant's
               Registration Statement (Incorporated by reference to Exhibit 1 of
               the Registrant's Registration Statement on Form 10SB,
               Registration No. 0-26972, effective February 14, 1996) on Form
               10SB, Registration No. 0-26972, effective February 14, 1996)

3.2            Amendment to Registrant's Certificate of Incorporation, filed
               October 1, 1968 (Incorporated by reference to Exhibit 2(b) of the
               Registrant's Registration Statement on Form 10SB, Registration
               No. 0-26972, effective February 14, 1996)

3.3            Amendment to Registrant's Certificate of Incorporation, filed
               September 19, 1972 (Incorporated by reference to Exhibit 2(c) of
               the Registrant's Registration Statement on Form 10SB,
               Registration No. 0-26972, effective February 14, 1996)

3.4            Amendment to Registrant's Certificate of Incorporation, filed
               January 5, 1982 (Incorporated by reference to Exhibit 2(d) of the
               Registrant's Registration Statement on Form 10SB, Registration
               No. 0-26972, effective February 14, 1996)



                                      -32-
<PAGE>   34
3.5            Certificate of Merger of Direct Marketing Services, Inc. and CGS
               Units Incorporated into CGS Units Incorporated, filed June 15,
               1994 (Incorporated by reference to Exhibit 2(e) of the
               Registrant's Registration Statement on Form 10SB, Registration
               No. 0-26972, effective February 14, 1996)

3.6            Amendment to Registrant's Certificate of Incorporation, filed
               August 19, 1994.

3.7            Certificate of Correction of Certificate of Merger of Direct
               Marketing Services, Inc. and CGS Units Incorporated into CGS
               Units Incorporated, filed August 5, 1994 (Incorporated by
               reference to Exhibit 2(f) of the Registrant's Registration
               Statement on Form 10SB, Registration No. 0- 26972 effective,
               February 14, 1996)

3.8            Amendment to Registrant's Certificate of Incorporation, filed
               June 5, 1995 (Incorporated by reference to Exhibit 2(g) of the
               Registrant's Registration Statement on Form 10SB, Registration
               No. 0-26972, effective February 14, 1996)

3.9            Amendment to Registrant's Certificate of Incorporation, filed
               August 30, 1996.

3.10           Amendment to Registrant's Certificate of Incorporation, filed
               December 26, 1996.

3.11           Amendment to Registrant's Certificate of Incorporation, filed
               March 12, 1997

3.12           Registrant's By-Laws (incorporated by reference to Exhibit 2(h)
               of the Registrant's Registration Statement on Form 10SB,
               Registration No. 0- 26972, effective February 14, 1996)

10.1           License Agreement, dated June 24, 1995, by and between the
               Registrant and Hans-Jurgen Behrendt

10.2           1996 Non-Statutory Stock Option Plan (incorporated by reference
               to Exhibit__ to the Registrant's Registration Statement on Form
               S-8 (Registration No. ____), effective _____________)

10.3           Agreement dated June 11, 1996 between the Registrant and Philips
               Medical System.

10.4           License Agreement, dated as of July 18, 1997, by and between the
               Registrant and Agfa-Gevaer N.V.


                                      -33-
<PAGE>   35
10.5           Agreement, dated July 14, 1995, by and between Teleray AG and
               Optische Werke G. Roderstock, certain portions of which are filed
               under a request for confidential treatment pursuant to Rule 24b-2
               promulgated pursuant to the Securities Exchange Act of 1934, as
               amended, and Rule 80(b)(4) of Organization; Conduct and Ethics;
               and Information and Requests adopted under the Freedom of
               Information Act, under Rule 406 of the Securities Act of 1933, as
               amended, and the Freedom of Information Act.

21             List of Subsidiaries


23             Financial Data Schedule


         The following financial statements for the fiscal years ended June 30,
1997 and June 30, 1996 have been prepared in accordance with the requirements of
Regulation S-B and supplementary financial information included herein, if any,
has been prepared in accordance with Item 302 of Regulation S-K, such
information appears on pages F-1 through F-23 inclusive of this Form 10-KSB.

                          SWISSRAY INTERNATIONAL, INC.
                             JUNE 30, 1997 AND 1996

                                    CONTENTS

                                                                     Page

         Index to Consolidated Financial Statements                  F-1
         Independent Auditor's Report                                F-2
         Consolidated Balance Sheets                                 F-3
         Consolidated Statements of Operations                       F-4
         Consolidated Statements of Stockholders' Equity             F-5
         Consolidated Statements of Cash Flows                       F-7
         Notes to Consolidated Financial Statements                  F-8 - F-23


                                      -34-
<PAGE>   36
                          SWISSRAY INTERNATIONAL, INC.


                        CONSOLIDATED FINANCIAL STATEMENTS


                             JUNE 30, 1997 AND 1996






                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS



                                                                           PAGE



Independent Auditors' Report................................................F-2

Consolidated Balance Sheets.................................................F-3

Consolidated Statements of Operations.......................................F-4

Consolidated Statements of Stockholders' Equity.............................F-5

Consolidated Statements of Cash Flows.......................................F-6

Notes to Consolidated Financial Statements......................... F-7 to F-23


                                       F-1
<PAGE>   37
                          INDEPENDENT AUDITORS' REPORT




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


We have audited the accompanying consolidated balance sheets of Swissray
International, Inc., and its subsidiaries, as of June 30, 1997 and 1996, and the
related consolidated statements of operations, stockholders' equity and cash
flows for the years then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits. We did
not audit the financial statements of Swissray (Deutschland) Rontgentechnik
GmbH, a wholly owned subsidiary, which statements reflect total assets of
$437,021 as of June 30, 1997 and total revenues of $1,255,140 for the year then
ended. Those statements were audited by other auditors whose report has been
furnished to us, and our opinion, insofar as it related to the amounts included
for Swissray (Deutschland) Rontgentechnick GmbH, is based solely on the report
of the other auditors.

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

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Swissray
International, Inc., and its subsidiaries, at June 30, 1997 and 1996 and the
results of their operations and their cash flows for the years then ended, in
conformity with generally accepted accounting principles.


                                             BEDERSON & COMPANY LLP





West Orange, New Jersey
September 16, 1997


                                       F-2
<PAGE>   38
                                      

                          SWISSRAY INTERNATIONAL, INC.
                           CONSOLIDATED BALANCE SHEETS
                             JUNE 30, 1997 AND 1996

<TABLE>
<CAPTION>
                                               ASSETS

                                                                                       1997            1996
                                                                                   -----------     -----------
<S>                                                                                <C>             <C>        
CURRENT ASSETS:
  Cash and cash equivalents                                                        $ 3,091,307     $ 3,252,685
  Accounts receivable, net of allowance for doubtful
    accounts of $148,390 and $109,843                                                5,154,794       3,335,679
  Accounts receivable - affiliates                                                        --            31,533
  Note receivable                                                                         --           962,500
  Inventories                                                                        3,911,107       2,912,836
  Prepaid expenses and sundry receivables                                            1,936,138       1,075,681
                                                                                   -----------     -----------
  TOTAL CURRENT ASSETS                                                              14,093,346      11,570,914
                                                                                   -----------     -----------
PROPERTY AND EQUIPMENT, NET                                                          4,336,617       1,138,282
                                                                                   -----------     -----------
OTHER ASSETS:
  Due from stockholders                                                                 69,587          17,414
  Due from affiliate                                                                      --           166,384
  Loan receivable                                                                       17,396          20,292
  Accounts receivable - long-term, net of allowance
    for doubtful account of $814,178 and $300,000                                      240,912       1,038,693
  Licensing agreement, net of accumulated amortization
    of $869,151 and $372,493                                                         4,097,424       4,594,082
  Patents and trademarks, net of accumulated amortization
    of $54,941 and $28,001                                                             206,003         220,018
  Capitalized computer software, net of accumulated
     amortization of $34,512                                                           317,524            --
  Organization cost, net of accumulated amortization of $2,464 and $978                  5,921           7,407
  Security deposits                                                                     43,728          19,952
  Note receivable - long-term                                                          513,643            --
  Goodwill, net of accumulated amortization of $9,023                                  410,814            --
                                                                                   -----------     -----------
  TOTAL OTHER ASSETS                                                                 5,922,952       6,084,242
                                                                                   -----------     -----------
TOTAL ASSETS                                                                       $24,352,915     $18,793,438
                                                                                   ===========     ===========
                                  LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
  Current maturities of long-term debt                                             $   243,135     $   511,101
  Notes payable - banks                                                              3,834,706       2,069,828
  Loan payable                                                                         133,008         156,254
  Accounts payable                                                                   5,336,749       4,186,092
  Accounts payable - affiliates                                                           --             1,541
  Accrued expenses                                                                   1,401,938       1,135,693
  Customer deposits                                                                    170,436          77,673
  Due to stockholders and officers                                                     139,826            --
                                                                                   -----------     -----------
  TOTAL CURRENT LIABILITIES                                                         11,259,798       8,138,182
                                                                                   -----------     -----------
CONVERTIBLE DEBENTURES                                                               6,000,000            --
                                                                                   -----------     -----------
LONG-TERM DEBT, less current maturities                                                524,689            --
                                                                                   -----------     -----------
STOCKHOLDERS' EQUITY:
  Common stock                                                                         196,944         141,851
  Additional paid-in capital                                                        26,608,594      19,268,400
  Accumulated deficit                                                              (18,808,576)     (7,918,948)
  Accumulated other comprehensive loss                                              (1,428,534)       (836,047)
                                                                                   -----------     -----------
  TOTAL STOCKHOLDERS' EQUITY                                                         6,568,428      10,655,256
                                                                                   -----------     -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                                         $24,352,915     $18,793,438
                                                                                   ===========     ===========

</TABLE>

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

                                       F-3
<PAGE>   39
                                      

                          SWISSRAY INTERNATIONAL, INC.
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                       YEARS ENDED JUNE 30, 1997 AND 1996

<TABLE>
<CAPTION>
                                                    1997               1996
                                                ------------       ------------
<S>                                             <C>                <C>         
NET SALES                                       $ 13,151,701       $ 10,899,222

COST OF SALES                                      8,445,414          5,793,306
                                                ------------       ------------

GROSS PROFIT                                       4,706,287          5,105,916
                                                ------------       ------------

OPERATING EXPENSES:
  Officers and directors compensation                693,906            612,776
  Salaries                                         2,059,396          1,829,535
  Selling                                          1,873,389          1,140,604
  Research and development                         5,786,158          1,731,502
  General and administrative                       1,717,795          1,161,291
  Other operating expenses                         1,645,800          1,098,346
  Bad debts                                          619,160            491,487
  Depreciation and amortization                      770,294            526,138
                                                ------------       ------------

  TOTAL OPERATING EXPENSES                        15,165,898          8,591,679
                                                ------------       ------------

LOSS BEFORE OTHER INCOME (EXPENSES)
  AND INCOME TAXES                               (10,459,611)        (3,485,763)

OTHER INCOME (EXPENSES)                               67,720            810,003
                                                ------------       ------------

LOSS FROM CONTINUING OPERATIONS
  BEFORE INCOME TAXES AND
  EXTRAORDINARY ITEMS                            (10,391,891)        (2,675,760)

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

LOSS FROM CONTINUING OPERATIONS
  BEFORE EXTRAORDINARY ITEMS                     (10,502,114)        (2,311,112)

EXTRAORDINARY ITEMS, net of income tax
  of approximately $-0- and $343,000                (387,514)           419,500
                                                ------------       ------------

NET LOSS                                        $(10,889,628)      $ (1,891,612)
                                                ============       ============


LOSS PER COMMON SHARE:
  Loss from continuing operations               $       (.67)      $       (.18)
  Extraordinary items                                   (.02)               .03
                                                ------------       ------------

  NET LOSS                                      $       (.69)      $       (.15)
                                                ============       ============

WEIGHTED AVERAGE NUMBER OF
  SHARES OUTSTANDING                              15,817,571         12,974,749
                                                ============       ============
</TABLE>

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


                                       F-4
<PAGE>   40
                                       

                          SWISSRAY INTERNATIONAL, INC.
                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                       YEARS ENDED JUNE 30, 1997 AND 1996


<TABLE>
<CAPTION>
                                                                                                Accumulated
                                             Common Stock         Additional                      Other
                                         --------------------       Paid-in     Accumulated    Comprehensive
                                          Shares       Amount       Capital       Deficit          Loss         Total
                                          ------       ------     ----------    -----------    -------------    -----
<S>                                      <C>          <C>        <C>            <C>            <C>              <C>
BALANCE - July 1, 1995                   12,035,064   $120,351   $ 12,719,998   $(6,027,336)   $   (436,180)     $ 6,376,833
                                                                                                                 -----------
  COMPREHENSIVE LOSS:
    Net loss for the year                      --         --             --      (1,891,612)           --         (1,891,612)
 
   Other comprehensive loss net of 
      taxes $-0- foreign currency 
      translation adjustments                  --         --             --            --          (399,867)        (399,867)
                                                                                                                 ----------- 

    TOTAL COMPREHENSIVE LOSS                   --         --             --            --              --         (2,291,479)
                                                                                                                 ----------- 

  Issuance of common stock for cash       1,100,000     11,000      5,189,000          --              --          5,200,000

  Stock options exercised for cash        1,050,000     10,500      2,039,500          --              --          2,050,000

  Public offering expenses                     --         --         (680,098)         --              --           (680,098)
                                        -----------   --------   ------------   -----------    ------------      ----------- 

BALANCE - June 30, 1996                  14,185,064    141,851     19,268,400    (7,918,948)       (836,047)      10,655,256
                                                                                                                 -----------
</TABLE>


                                       F-5
<PAGE>   41
<TABLE>
<S>                                       <C>            <C>          <C>             <C>             <C>             <C>   
  COMPREHENSIVE LOSS:

    Net loss for year                         --             --            --          (10,889,628)        --           (10,889,628)

    Other comprehensive loss net of 
      taxes $-0- foreign currency 
      translation adjustments                 --             --            --               --           (592,487)         (592,487)
                                                                                                                        -----------

    TOTAL COMPREHENSIVE LOSS                  --             --            --               --              --          (11,482,115)
                                                                                                                        -----------

  Issuance of common stock for cash        5,197,759       51,977       6,947,830           --              --            6,999,807
  
  Issuance of common stock in lieu of 
   interest payment                           70,610          706         132,244           --              --              132,950
  
  Stock options exercised for cash           161,000        1,610         115,920           --              --              117,530
  
  Stock option granted as compensation        --             --            25,000           --              --               25,000

  Purchase of subsidiary for stock            80,000          800         119,200           --              --              120,000
                                          ----------     --------     -----------      -----------     ------------   -------------

BALANCE - June 30, 1997                   19,694,433     $196,944     $26,608,594      (18,808,576)    $(1,428,534)    $  6,568,428
                                         ===========     ========     ===========      ============    ============    ============
</TABLE>

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


                                       F-6
<PAGE>   42
                                     

                          SWISSRAY INTERNATIONAL, INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                       YEARS ENDED JUNE 30, 1997 AND 1996


<TABLE>
<CAPTION>
                                                                 1997              1996
                                                             ------------      ----------- 
<S>                                                          <C>               <C>         
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net loss                                                   $(10,889,628)     $(1,891,612)
  Adjustment to reconcile net loss to net
    cash from operating activities:
    Depreciation and amortization                                 770,294          526,138
    Provision for bad debts                                       552,725          336,706
    Write off of affiliate receivable                             166,384             --
    Operating expenses through issuance of stock options          157,950             --
    Gain on sale of marketable securities                            --           (762,500)
    (Increase) decrease in operating assets:
      Accounts receivable                                      (1,857,662)      (1,870,866)
      Accounts receivable - affiliates                             31,533          (31,533)
      Accounts receivable - other                                 283,603           22,138
      Inventories                                                (998,271)      (1,420,393)
      Prepaid expenses and sundry receivables                    (860,457)        (976,664)
    Increase(decrease) in operating liabilities:
      Accounts payable                                          1,601,074        1,514,465
      Accounts payable - affiliates                                (1,541)           1,541
      Accrued expenses                                            266,245          855,041
      Customer deposits                                            92,763           38,874
                                                             ------------      -----------
  NET CASH USED BY OPERATING ACTIVITIES                       (10,684,988)      (3,658,665)
                                                             ------------      -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
  Acquisition of property and equipment                        (3,431,375)        (932,066)
  Licensing agreement                                            (352,036)            --
  Purchase of marketable securities                                  --           (200,000)
  Patents and trademarks                                          (12,925)         (45,309)
  Goodwill                                                       (299,837)            --
  Organization cost                                                  --             (8,385)
  Collection of note receivable                                   448,857             --
  Security deposits                                               (23,776)         (19,952)
  Repayments from affiliates                                         --             34,592
  Repayment of loans receivable                                     2,896             --
                                                             ------------      -----------

  NET CASH USED BY INVESTING ACTIVITIES                        (3,668,196)      (1,171,120)
                                                             ------------      -----------

CASH FLOWS FROM FINANCING ACTIVITIES:
  Proceeds from short-term borrowing                            9,834,706        2,069,828
  Proceeds from long-term borrowing                               248,987             --
  Principal payment of short-term borrowings                   (2,093,074)      (2,711,086)
  Principal payments of long-term borrowing                      (442,681)        (281,004)
  Issuance of common stock for cash                             7,117,337        7,250,000
  Repayment from (advances to) stockholder and officers            87,653          141,054
  Public offering expenses                                           --           (680,098)
                                                             ------------      -----------
  NET CASH PROVIDED BY FINANCING ACTIVITIES                    14,752,928        5,788,694
                                                             ------------      -----------
EFFECT OF EXCHANGE RATE CHANGES ON CASH                          (561,122)        (383,050)
                                                             ------------      -----------
NET INCREASE (DECREASE) IN CASH                                  (161,378)         575,859
CASH AND CASH EQUIVALENTS - beginning of period                 3,252,685        2,676,826
                                                             ------------      -----------

CASH AND CASH EQUIVALENTS - end of period                    $  3,091,307      $ 3,252,685
                                                             ============      ===========
</TABLE>

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


                                       F-7
<PAGE>   43
                                      

                          SWISSRAY INTERNATIONAL, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             JUNE 30, 1997 AND 1996



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 "C.G.S. Units, Inc." On May 23,
           1994, the Company acquired 100% of the outstanding securities of
           Direct Marketing Services, Inc., a company incorporated in the State
           of Delaware on June 3, 1993. On June 6, 1994, the Company merged with
           Direct Marketing Services, Inc. and the surviving corporation changed
           its' name to DMS Industries, Inc. DMS Industries, Inc. was
           principally engaged in the promotion and sales of its proprietary
           brand of cigarettes on a commission basis. In May of 1995 the Company
           discontinued its' operations and changed its' name to Swissray
           International, Inc.

           PRINCIPLES OF CONSOLIDATION
           The accompanying consolidated financial statements include the
           accounts of Swissray International, Inc. (Parent), and its' wholly
           owned subsidiaries SR Medical AG and SR Management AG (both Swiss
           corporations), Swissray Corporation and Swissray Empower, Inc. (both
           U.S. corporations) and SR Medical AG's wholly owned subsidiaries
           Teleray AG (a Swiss Corporation) and Swissray (Deutschland)
           Rontgentechnik GmbH (a German corporation). All material intercompany
           transactions and balances have been eliminated in consolidation.

           SR Medical AG (a Swiss corporation) was organized in 1988 and markets
           and services diagnostic x-ray medical equipment.

           Teleray AG (a Swiss corporation) was organized in 1994 and is engaged
           in research, development and assembly activities related to
           diagnostic x-ray medical equipment and accessories.

           Swissray (Deutschland) Rontgentechnik GmbH (a German corporation) was
           organized in 1988 and is engaged in sales and marketing of diagnostic
           x-ray medical equipment and accessories. The Company in 1997 changed
           its name from SR Medical GmbH to Swissray (Deutschland)
           Rontgentechnik GmbH.

           SR Management AG (a Swiss corporation) was organized in December of
           1995 as a service oriented company serving only the other companies
           within the consolidated group in the areas of consultation,
           bookkeeping, logistics, and employment services. The Company in 1997
           changed its name from SR Finance AG to SR Management AG.

           Swissray Corporation (a U.S. corporation) was organized in November
           of 1996 and is engaged in sales and marketing of diagnostic x-ray
           medical equipment and accessories.

           Swissray Empower, Inc. (a U.S. corporation) was organized in 1985 and
           was acquired by Swissray International, Inc. on April 1, 1997. The
           Company is engaged in the sale of diagnostic x-ray supplies.

           BUSINESS ACQUISITION
           On April 1, 1997, Swissray International, Inc. exchanged 80,000
           shares of common stock at the then quoted market price of $120,000
           ($1.50 per share) for all the outstanding shares of Empower, Inc. The
           consolidated financial statements presented include the accounts of
           Swissray Empower, Inc., formerly Empower, Inc., from April 1, 1997
           (date of acquisition) to June 30, 1997. The acquisition has been
           accounted for as a purchase.



                                       F-8
<PAGE>   44
                                       

                          SWISSRAY INTERNATIONAL, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             JUNE 30, 1997 AND 1996



NOTE 1 -   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

           BASIS OF ACCOUNTING
           The Company maintains its records on the accrual basis of accounting.
           Revenues are recognized when the products are delivered and expenses
           are recorded when incurred.

           CERTAIN SIGNIFICANT RISK AND UNCERTAINTIES
           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.

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

           PROPERTY AND EQUIPMENT
           Property and equipment including significant betterments, are
           recorded at cost. Upon retirement or disposal of properties, the cost
           and accumulated depreciation are removed from the accounts, and any
           gain or loss is included in income. Maintenance and repair costs are
           charged to expense as incurred.

           DEPRECIATION
           Depreciation of property and equipment is provided for over the
           estimated useful lives of the respective assets. Depreciation is
           recorded on the straight-line method. The estimated useful lives of
           each asset category are as follows:

                                                                       Years

                 Automobiles                                            3
                 Equipment                                            5  - 10
                 Office furniture and equipment                       5  - 10
                 Office and leasehold improvements                      10
                 Building                                               40

           INTANGIBLE ASSETS
           Licensing agreement is stated at cost less imputed interest net of
           accumulated amortization computed on the straight-line method over
           its estimated economic life of 10 years. Amortization commenced on
           October 1, 1995 upon the initial sale of the Company's products
           within the defined territories of the agreement. Amortization
           expense, for the licensing agreement, for the years ended June 30,
           1997 and 1996 was $465,293 and $372,493, respectively.

           Patents and trademarks are stated at cost less accumulated
           amortization computed on the straight-line method over their
           estimated economic life of 10 years. Amortization expense, for
           patents and trademarks, for the years ended June 30, 1997 and 1996
           was $26,940 and $28,001, respectively.

           Capitalized computer software is stated at cost less accumulated
           amortization computed on the straight-line method over its estimated
           useful lives of 5 to 8 years. Amortization commenced on January 1,
           1997, therefore no amortization expense has been provided for the
           year ended June 30, 1996. Amortization expense, for capitalized
           computer software, for the year ended June 30, 1997 was $34,512.


                                       F-9
<PAGE>   45
                                      

                          SWISSRAY INTERNATIONAL, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             JUNE 30, 1997 AND 1996



NOTE 1 -   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

           All cost incurred by the Company in connection with incorporation of
           subsidiaries have been capitalized and are being amortized over a
           period of sixty (60) months. Amortization expense, for organization
           cost, for the years ended June 30, 1997 and 1996 was $1,486 and $978,
           respectively.

           Goodwill has been recorded for the amount of cost in excess of fair
           value of the net assets of Empower, Inc. which was acquired in a
           purchase transaction on April 1, 1997. The goodwill is being
           amortized on a straight-line method over 10 years. Amortization
           charged to operations amounted to $9,023 for the year ended June 30,
           1997. No amortization was charged during the year ended June 30,
           1996.

           The Company reevaluates intangible assets based on expectations of
           cash flows and operating income to determine whether any potential
           impairment exists. If necessary, the Company writes down the recorded
           cost of the intangible asset to the fair value when recorded costs,
           prior to impairment, are higher.

           ADVERTISING AND PROMOTION
           Advertising and promotion cost are expensed as incurred and included
           in "Selling Expenses". Advertising and promotion expenses for the
           years ended June 30, 1997 and 1996 were $781,189 and $740,044,
           respectively.

           RESEARCH AND DEVELOPMENT
           Cost associated with research, new product development, and product
           cost improvements are treated as expenses when incurred. Research and
           development costs expended for the years ended June 30, 1997 and 1996
           were $5,786,158 and $1,731,502, respectively.

           DEFERRED INCOME TAXES
           Deferred income taxes are provided on a liability method whereby
           deferred income tax assets are recognized for deductible temporary
           differences and operating loss carryforwards and deferred income tax
           liabilities are recognized for taxable temporary differences.
           Temporary differences are the differences between the reported
           amounts of assets and liabilities and their tax bases. Deferred
           income tax assets are reduced by a valuation allowance when, in the
           opinion of management, it is more likely than not that some portion
           or all deferred tax assets will not be realized. Deferred income tax
           assets and liabilities are adjusted for the effects of changes in tax
           laws and rates on the date of enactment.

           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
           Loss per common share is computed by dividing the net loss by the
           weighted average number of shares of common stock outstanding during
           the periods.

           RECLASSIFICATIONS
           Certain reclassifications have been made to prior year's financial
           statements to conform to the June 30, 1997 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 the 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,
           while gains and losses resulting from foreign currency transactions
           are included in operations.


                                      F-10
<PAGE>   46
                                       

                          SWISSRAY INTERNATIONAL, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             JUNE 30, 1997 AND 1996



NOTE 2 -   CONCENTRATION OF CREDIT RISK AND RISK ARISING FROM CASH DEPOSITS IN
           EXCESS OF INSURED LIMITS

           The Company sells its products to various customers primarily in
           Europe, Asia and Africa. 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 maintains reserves for potential credit
           losses and such losses have been within management's expectations.

           The Company maintains its cash balances with major United States,
           Swiss and German financial institutions. Funds on deposit with
           financial institutions in the United States are insured by the
           Federal Deposit Insurance Corporation ("FDIC") up to $100,000. At
           June 30, 1997, all funds on deposit in the United States are insured.
           The cash balances at Swiss and German financial institutions are not
           insured. At June 30, 1997 and 1996, cash in the amount of $3,021,843
           and $3,252,685, respectively, was not insured.

NOTE 3 -   DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS

           The Company measures its financial assets and liabilities in
           accordance with generally accepted accounting principles. For certain
           of the Company's financial instruments, including cash and cash
           equivalents, trade and other accounts receivable, notes receivable,
           accounts payable, accrued expenses, notes and loans payable, the
           carrying amounts approximate fair value due to their short term
           maturities. The amount shown for long-term receivables also
           approximate fair value.

           Investments in affiliated companies for which there is no quoted
           market price are accounted for by the equity method resulting in no
           carrying value which the Company considers a fair value.

NOTE 4 -   ACCOUNTS RECEIVABLE - AFFILIATES

           The Company sells merchandise to affiliated sales companies in the
           normal course of business. No amounts were due to the Company at June
           30, 1997 whereas at June 30, 1996 the amounts due to the Company were
           $31,533.

NOTE 5 -   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.

NOTE 6 -   INVENTORIES

           Inventories are summarized by major classification as follows:

<TABLE>
<CAPTION>
                                                                            June 30,
                                                                   --------------------------
                                                                      1997            1996
                                                                   ----------      ----------
<S>                                                                <C>             <C>       
           Raw materials, parts and supplies                       $2,632,256      $1,854,322
           Work in process                                            468,204         853,657
           Finished goods                                             810,647         204,857
                                                                   ----------      ----------

                                                                   $3,911,107      $2,912,836
                                                                   ==========      ==========
</TABLE>


                                      F-11
<PAGE>   47
                                       

                          SWISSRAY INTERNATIONAL, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             JUNE 30, 1997 AND 1996



NOTE 7  -  PREPAID EXPENSES AND SUNDRY RECEIVABLES

           Prepaid expenses and sundry receivables consist of the following:

<TABLE>
<CAPTION>
                                                                          June 30,
                                                                  ------------------------
                                                                     1997          1996
                                                                  ----------    ----------
<S>                                                               <C>           <C>       
          Prepaid expenses, deposits and advance payments         $  681,742    $  258,373
          Insurance claim for fire damage                            352,996         --
          Prepaid and refundable taxes                               888,169       806,138
          Employee loans                                              13,231         1,378
          Interest receivable                                          --            9,792
                                                                  ----------    ----------

                                                                  $1,936,138    $1,075,681
                                                                  ==========    ==========
</TABLE>

NOTE 8  - PROPERTY AND EQUIPMENT

             Property and equipment consist of the following:

<TABLE>
<CAPTION>
                                                                          June 30,
                                                                  ------------------------
                                                                     1997          1996
                                                                  ----------    ----------
<S>                                                               <C>           <C>  
             Land and building                                    $3,022,772    $   --
             Equipment                                             1,223,572     1,031,849
             Office furniture and equipment                          161,223       121,404
             Office and leasehold improvements                       249,160       219,024
                                                                  ----------    ----------
                                                                   4,656,727     1,372,277
             Less: Accumulated depreciation and amortization         320,110       233,995
                                                                  ----------    ----------
                                                                  $4,336,617    $1,138,282
                                                                  ==========    ==========
</TABLE>

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

NOTE 9  -  DUE FROM STOCKHOLDER

           The Company has made unsecured advances to its' President (a
           principal stockholder) requiring interest only payments at 6% per
           annum. The balance at June 30, 1996 was $17,414 and by June 30, 1997
           has been repaid. Interest charged the stockholder for the years ended
           June 30, 1997 and 1996, was $891 and $12,530, respectively.

           The Company also 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. Interest charged to the stockholder for
           the year ended June 30, 1997 was $3,460.

NOTE 10 -  DUE FROM AFFILIATES

           The Company has made non-interest bearing advances to Swissray
           Medical GmbH, Willich, an affiliated sales company. The balance due
           to the Company at June 30, 1996 was $166,384, which was written off
           in 1997.


                                      F-12
<PAGE>   48
                                      

                          SWISSRAY INTERNATIONAL, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             JUNE 30, 1997 AND 1996



NOTE 11 -  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 and 1996 was $240,912 and
           $1,038,693, respectively, after applying a discount for imputed
           interest and a provision for doubtful collection in the total amount
           of $814,178 and $300,000, respectively.

NOTE 12 -  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 660,000 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.

NOTE 13 -  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, therefore, the Company is carrying these investments as
           follows:

<TABLE>
<CAPTION>
                                                           June 30, 1997           June 30, 1996
                                                        --------------------     -------------------
                                            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., Bratislaua           34%         6,757        --         6,757        --
Swissray Medical s.r.o., Brno                  34%         6,757        --         6,757        --
Teleray s.r.o., Willich                        49%        38,403        --        28,362        --
Teleray s.r.o., Brno                           34%         6,757        --         6,757        --
Digitec GmbH, Neuss                            20%        59,641        --        11,484        --
                                                        --------     -------     -------     -----
                                                                                                
Total                                                   $135,207     $  --       $77,009     $  --
                                                        ========     =======     =======     =====
</TABLE>

NOTE 14 -  NOTES PAYABLE - BANK

           The Company has negotiated a line-of-credit agreement with the Union
           Bank of Switzerland dated July 16, 1996 for $376,310, based on the
           exchange rate in effect on June 30, 1997, for borrowing availability
           in excess of cash balances on deposit with the bank. Pending
           renegotiation of the agreement, the bank is reducing the amount
           available in excess of the cash on deposit with the bank by $102,630
           per month until October of 1997.

           The Company has also negotiated a line-of-credit agreement with the
           Swiss Bank Corporation for $1,505,240, based on the exchange rate in
           effect on June 30, 1997.

           Swissray Empower, Inc., a subsidiary, has 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 is reduced in the future by $25,000 per
           quarter terminating on December 31, 2001.


                                      F-13
<PAGE>   49
                                      

                          SWISSRAY INTERNATIONAL, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             JUNE 30, 1997 AND 1996




NOTE 14 -  NOTES PAYABLE - BANK (CONTINUED)

           Notes payable are summarized as follows:

<TABLE>
<CAPTION>
                                                                                                June 30,
                                                                                      ----------------------------
                                                                                         1997              1996
                                                                                      ----------        ----------
<S>                                                                                   <C>               <C>       
               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 accounts receivable. Cash balances on deposit at
               Union Bank of Switzerland at June 30, 1997 and 1996 were
               $2,805,747 and $1,596,200, respectively.                               $1,421,075        $2,069,828

               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. 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%, collateralized by
               the assets of Swissray Empower, Inc. and
               guaranteed by the Company.   Total assets
               of Swissray 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 the land and building.                     1,368,400             --
                                                                                      ----------        ----------

                                                                                      $3,834,706        $2,069,828
                                                                                      ==========        ==========
</TABLE>

NOTE 15 -  LOAN PAYABLE

           The Company has negotiated a 5% demand loan from a private foundation
           fund. The loan balance payable at June 30, 1997 and 1996 was $133,008
           and $156,254, respectively.


NOTE 16 - 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.

           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.

           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.


                                      F-14
<PAGE>   50
                                      

                          SWISSRAY INTERNATIONAL, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             JUNE 30, 1997 AND 1996







NOTE 17 -  CONVERTIBLE DEBENTURES

           Convertible debentures consist of the following:

<TABLE>
<CAPTION>
                                                                                               June 30,
                                                                                      -------------------------
                                                                                         1997            1996
                                                                                      ----------      ---------
<S>                                                                                   <C>             <C>   
             Convertible promissory note 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 lessor 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.              2,000,000      $    --

             Convertible promissory debenture dated May 15, 1997 and due May 15,
             2000 with interest at 6% per annum. The debentures are convertible
             into common shares at any time after June 29, 1997 at a price equal
             to 80% of the average closing bid price for the five (5) trading
             days preceding the date of conversion. Any debenture not so
             converted is subject to mandatory conversion on May 15, 2000.             2,000,000           --

             Convertible promissory debenture dated June 13, 1997 and due June
             13, 2000 with interest at 6% per annum. The debentures are
             convertible into common shares at any time after July 28, 1997 at a
             price equal to 80% of the average closing bid price for the five
             (5) trading days preceding the date of conversion. Any debenture
             not so converted is subject to mandatory conversion on
             June 13, 2000.                                                            2,000,000           --
                                                                                      ----------      ---------

                                                                                      $6,000,000      $    --
                                                                                      ==========      =========
</TABLE>


                                      F-15
<PAGE>   51
                                      

                          SWISSRAY INTERNATIONAL, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             JUNE 30, 1997 AND 1996



NOTE 18 -  LONG-TERM DEBT

           Long-term debt consists of the following:

<TABLE>
<CAPTION>
                                                                           June 30,
                                                                    ---------------------
                                                                      1997        1996
                                                                    --------     --------
<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                                                     $182,617     $   --

Note payable - Thatcher Company of New York, in monthly
installments of $855, including principal interest at 10.25%
per annum, maturing on October 3, 2001, secured by various
x-ray chemical mixing machines                                        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%, expiring on September 30, 2000             450,417         --

Capitalized leases related to the acquisition of various
computer and office equipment in 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 secured by 
the specific equipment leased                                         30,747         --

Note payable - Dr. Zeman-Wiegand Helga, due on demand, 
requires interest only payments at 7% per annum with no 
current amortization required                                         68,420       87,070

Note payable - Carba, AG, due July 1, 1996, requiring interest
only payments at 6% per annum with no current amortization 
required                                                                --        293,426

Note payable - Carbamed-Ruegge Reduktion, due July 1, 1996,
requiring interest only payments at 6% per annum with no
current amortization required                                           --        130,605
                                                                    --------     --------
                                                                     767,824      511,101
Less:  Current portion                                               243,135      511,101
                                                                    --------     --------
                                                                    $524,689     $   --
                                                                    ========     ========
</TABLE>



                                      F-16
<PAGE>   52
                                      

                          SWISSRAY INTERNATIONAL, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             JUNE 30, 1997 AND 1996



NOTE 18 -  LONG-TERM DEBT (CONTINUED)

           The aggregate long-term debt payment are as follows:

<TABLE>
<CAPTION>
                 Years Ending
                    June 30,
                 ------------
<S>                                                                   <C>        
                      1998                                            $ 243,135
                      1999                                              180,834
                      2000                                              190,321
                      2001                                               99,889
                      2002                                               43,134
                      Thereafter                                         10,511
                                                                      ---------

                                                                      $ 767,824
                                                                      =========
</TABLE>

NOTE 19 -  COMMON STOCK

           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.

           The Company's outstanding shares of common stock of $.01 par value at
           June 30, 1997 and 1996 were 19,694,433 and 14,185,064, respectively.

NOTE 20 -  ISSUANCE OF COMMON STOCK FOR CASH

           The Company issued 2,150,000 shares for $7,250,000 (includes
           1,050,000 shares for $2,050,000 issued under stock option plan) for
           the year ended June 30, 1996 and 5,358,759 shares for $7,117,337
           (including 161,000 shares for $117,530 issued under stock option
           plan) for the year ended June 30, 1997.

NOTE 21 -  PENSION AND EMPLOYEE BENEFIT PLANS

           The Swiss and Germany Subsidiaries, mandated by government
           regulations, are required to contribute approximately five (5%)
           percent of 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, 1997 and 1996, were $274,009 and $198,722,
           respectively.

           Effective March 1, 1992, Swissray Empower, Inc. (formerly Empower,
           Inc.), a U.S. subsidiary, adopted a qualified 401(k) retirement plan
           for the benefit of substantially 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, 1997 was $4,185.

           Effective April 3, 1992, Swissray Empower, Inc. (formerly 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.


                                      F-17
<PAGE>   53
                                      

                          SWISSRAY INTERNATIONAL, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             JUNE 30, 1997 AND 1996




NOTE 22 -  OTHER INCOME (EXPENSES)

<TABLE>
<CAPTION>
                                                         Year Ended June 30,
                                                     --------------------------
                                                        1997             1996
<S>                                                  <C>              <C>      
Interest income                                      $  68,950        $ 131,166
Interest income - stockholder and officer                4,351           12,530
Foreign currency income                                484,846          377,587
Miscellaneous income                                     6,833              512
Loss from investments                                 (246,217)            --
Interest expense                                      (248,728)        (193,930)
Interest expense - stockholder                          (2,315)            --
Licensing income                                          --            482,138
                                                     ---------        ---------

TOTAL OTHER INCOME (EXPENSES)                        $  67,720        $ 810,003
                                                     =========        =========
</TABLE>

NOTE 23 -  INCOME TAXES

           Deferred income tax assets as of June 30, 1997 and 1996 of $6,020,961
           and $2,947,792, respectively, as a result of net operating losses,
           have been fully offset by a valuation allowance. 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 federal income tax rate (34%)
           and the effective income tax rates based on continuing operations is
           as follows:

<TABLE>
<CAPTION>
                                                       Year Ended June 30,
                                                  -----------------------------
                                                      1997              1996
                                                  -----------       -----------
<S>                                               <C>               <C>         
Statutory federal income tax (benefit)            $(3,665,678)      $(1,067,008)
State and foreign income tax                           79,296              --
Foreign income tax (benefit) in
  excess of domestic rate                             509,203          (325,715)
Benefit not recognized on operating loss              114,233              --
Valuation allowance                                 3,073,169         1,028,075
                                                  -----------       -----------

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

           Net operating loss carryforwards at June 30, 1997 were approximately
           as follows:

<TABLE>
<S>                                                                  <C>        
United States (expiring through June 30, 2012)                       $ 9,100,000
Switzerland (expiring through June 30, 2007)                          15,200,000
                                                                     -----------

                                                                     $24,300,000
                                                                     ===========
</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.

           No income tax benefit has been recognized related to the
           extraordinary loss incurred as a result of fire damage for the year
           ended June 30, 1997.


                                      F-18
<PAGE>   54
                                      

                          SWISSRAY INTERNATIONAL, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             JUNE 30, 1997 AND 1996




NOTE 24 -  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 $419,500
           ($.03 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, net of income taxes of $-0-.

NOTE 25 -  SUPPLEMENTAL CASH FLOW INFORMATION

           Cash payments for the years ended June 30, 1997 and 1996, include
           interest of $122,427 and $193,930, respectively, and income taxes of
           $56,562 and $-0-, respectively.

           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.

           NON-CASH OPERATING ACTIVITIES
           In April of 1997, the Company issued options to an officer under the
           1996 non-compensation 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.

           The Company issued 70,610 shares of common stock in lieu of interest
           payments due on convertible notes in the amount of $132,950.

           NON-CASH INVESTING ACTIVITIES
           On April 1, 1997, the Company acquired a subsidiary through the
           issuance of 80,000 shares of common stock at the then quoted market
           price of $120,000 ($1.50 per share). This transaction was accounted
           for as a purchase.

NOTE 26 -  STOCK OPTIONS

           The Board of Directors, on January 30, 1996, adopted a non-statutory
           stock option plan and reserved 3,000,000 shares for issuance to
           eligible full and part-time employees, officers, directors and
           consultants. Options are non-transferrable and are exercisable during
           a term of not more than ten (10) years from the grant date. The
           options are issuable in such amounts and at such prices as determined
           by the Board of Directors, except that each option price of each
           grant will not be less than twenty (20%) percent of the fair market
           value of such shares on the date the options are granted.

           The following table summarizes the non-statutory stock options
           outstanding as of June 30, 1997.

<TABLE>
<CAPTION>
                       Price Per      Options          Options         Options
  Date Granted           Share        Granted         Exercised      Outstanding
  ------------         ---------     ---------        ---------      -----------
<S>                    <C>           <C>              <C>            <C>
March 11, 1996           $1.00          50,000           50,000            --
March 11, 1996            2.00       2,000,000        1,000,000       1,000,000
July 22, 1996              .73         200,000          151,000          49,000
January 24, 1997          4.00         125,000             --           125,000
January 24, 1997          3.50         150,000             --           150,000
April 4, 1997             1.00          50,000             --            50,000
June 13, 1997              .73         270,000           10,000         260,000
                                     ---------        ---------       ---------
                                                                   
                                     2,845,000        1,211,000       1,634,000
                                     =========        =========       =========
</TABLE>
                                                                 

                                      F-19
<PAGE>   55
                                      

                          SWISSRAY INTERNATIONAL, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             JUNE 30, 1997 AND 1996



NOTE 26 -  STOCK OPTIONS (CONTINUED)

           The Company has also issued other stock options as follows:

<TABLE>
<CAPTION>
                         Price Per     Options     Options        Options
   Date Granted            Share       Granted    Exercised     Outstanding
   ------------          ---------     -------    ---------     -----------
<S>                      <C>           <C>        <C>           <C>    
September 20, 1995         $6.50       200,000       --           200,000
June 8, 1996                5.00       100,000       --           100,000
May 16, 1996                4.75        35,000       --            35,000
                                       -------     -------        -------

                                       335,000       --           335,000
                                       =======     =======        =======
</TABLE>

NOTE 27 -  SIGNIFICANT CUSTOMER AND GEOGRAPHIC AREAS

           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, 1997 and 1996 were as
           follows:

<TABLE>
<CAPTION>
                                                   1997                  1996
                                               -----------           -----------
<S>                                            <C>                   <C>      
United States                                  $ 2,000,608           $      --
Switzerland                                      2,184,161             2,002,374
Germany                                          1,393,072             4,976,503
Other export sales                               7,573,860             3,920,345
                                               -----------           -----------

                                               $13,151,701           $10,899,222
                                               ===========           ===========
</TABLE>

           The following summarizes customers sales in excess of 10% or more of
           the total revenues for the years ended June 30, 1997 and 1996:

<TABLE>
<CAPTION>
                                                    1997               1996
                                                 ----------         ----------
<S>                                              <C>                <C>       
         Largest customers:
           Sales                                 $4,288,697         $4,499,893
           Percentage                               33%                 41%
           Number of customers                       2                   3

         Single largest customer:
           Sales                                 $2,389,613         $1,603,631
           Percentage                               18%                 15%
</TABLE>

           The accounts receivable balance at June 30, 1997 from the two largest
           customers amounted to approximately $1,150,800 representing
           approximately 22% of total trade accounts receivable with the single
           largest customer balance of approximately $835,700 representing
           approximately 16% of total trade receivables. The accounts receivable
           balance at June 30, 1996 from the three largest customers amounted to
           approximately $1,650,000 representing approximately 48% of total
           trade accounts receivable with the single largest customer balance of
           approximately $1,500,000 representing approximately 44% of total
           trade accounts receivable.


                                      F-20
<PAGE>   56
                                      

                          SWISSRAY INTERNATIONAL, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             JUNE 30, 1997 AND 1996




NOTE 27 -  SIGNIFICANT CUSTOMER AND GEOGRAPHIC AREAS (CONTINUED)

           The following summarizes operating profit (losses) before provision
           for income tax by geographic areas for the years ended June 30, 1997
           and 1996:

<TABLE>
<CAPTION>
                                                 1997                   1996
                                            ------------            -----------
<S>                                         <C>                     <C>      
United States                               $   (175,254)           $      --
Switzerland                                   (9,883,240)            (2,612,087)
Germany                                         (333,397)               (63,673)
                                            ------------            -----------

                                            $(10,391,891)           $(2,675,760)
                                            ============            =========== 
</TABLE>


           The following summarizes identifiable assets by geographic area:

<TABLE>
<CAPTION>
                                                              June 30,
                                                    ----------------------------
                                                        1997             1996
                                                    -----------      -----------
<S>                                                 <C>              <C>      
United States                                       $ 2,028,307      $      --
Switzerland                                          21,576,069       18,129,362
Germany                                                 748,539          664,076
                                                    -----------      -----------
                                            
                                                    $24,352,915      $18,793,438
                                                    ===========      ===========
</TABLE>
                                      
NOTE 28 -  COMMITMENTS

           The Company leases various facilities and vehicles under operating
           lease agreements expiring through September 2002. The Company has
           excluded all vehicle leases in the schedule below because they are
           deemed to be immaterial. The facilities lease agreements provide for
           a base monthly payment of $20,767 per month. Rent expense for the
           years ended June 30, 1997 and 1996 was $297,926 and $242,658,
           respectively.

           Future minimum annual lease payments, based on the exchange rate in
           effect on June 30, 1997, under the facilities lease agreements are as
           follows:

<TABLE>
<CAPTION>
                  Year Ended
                    June 30,
                  ----------
<S>                                                                   <C>     
                     1998                                             $249,212
                     1999                                              179,612
                     2000                                              165,512
                     2001                                              110,869
                     2002                                               98,525
                     Thereafter                                         24,631
</TABLE>


                                      F-21
<PAGE>   57
                                      

                          SWISSRAY INTERNATIONAL, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             JUNE 30, 1997 AND 1996




NOTE 28 -  COMMITMENTS (CONTINUED)

           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, 1997, future minimum payments
           under this contract, which is cancelable with four months notice, are
           as follows:

<TABLE>
<CAPTION>
                   Years Ending
                     June 30,
                   ------------
<S>                                                                  <C>        
                       1998                                          $ 4,337,130
                       1999                                            5,250,210
                       2000                                            1,902,250
                                                                     -----------

                       Total minimum contract payments               $11,489,590
                                                                     ===========
</TABLE>

           The Company's total purchases under this agreement was $1,534,646 for
           the year ended June 30, 1997.

NOTE 29 -  LITIGATION

           On or about July 7, 1995, the Company commenced litigation against a
           former officer and director of a corporate predecessor alleging
           certain improprieties on the part of such officer and seeking
           monetary compensation as a result thereof. Such defendant responded
           (in September 1995) by filing certain affirmative defenses and
           counterclaims against the Company and others and subsequently brought
           (together with certain of his family members) an action against the
           Company in the same court which action raised issues and claims
           substantially similar to those raised in the aforesaid counterclaims.
           The two actions were assigned to the same judge and the Company moved
           successfully to dismiss both the counterclaims and the second action.
           Leave to replead both claims were granted and amended counterclaims
           and an amended complaint were served and filed and the Company again
           successfully moved to dismiss both pleadings. Following the most
           recent dismissal, counsel for the Company and the aforesaid former
           officer entered into settlement discussions. Both the Company and
           defendant have agreed to dismiss all claims and counter claims
           against each other, and are awaiting for formal written releases to
           be executed.

NOTE 30 -  SUBSEQUENT EVENTS

           In July, 1997, 110,000 non-statutory stock options were exercised for
           $80,300 ($.73 per share).

           On July 31, 1997, the Company issued $4,262,500 of 7% 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. (See Convertible Debentures.) The Company did not receive
           any cash proceeds from this transaction. The debentures, due July 31,
           2000, are convertible into common shares at any time after September
           14, 1997 at a price equal to 80% of the average closing bid price for
           the five (5) trading days preceding the date of conversion. Any
           debenture not so converted is subject to mandatory conversion on July
           31, 2000.

           In August, 1997, the Company issued $5,000,000 of convertible
           debentures due August 2000 with interest at 6% per annum. The
           debentures are convertible into common shares at any time after 45
           days from the date of issuance at a price equal to 80% of the average
           closing bid price for the five (5) trading days preceding the date of
           conversion. Any debenture not so converted is subject to mandatory
           conversion in August, 2000. The Company received cash proceeds of
           $4,293,750, net of related costs of $706,250.


                                      F-22
<PAGE>   58
                                      

                          SWISSRAY INTERNATIONAL, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             JUNE 30, 1997 AND 1996




NOTE 31 -  UNAUDITED PROFORMA CONDENSED COMBINED STATEMENT OF OPERATIONS

           The following unaudited proforma condensed combined statements of
           operations for the years ended June 30, 1997 and 1996 give
           retroactive effect of the acquisition of Empower, Inc. on April 1,
           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 STATEMENT OF OPERATIONS
                        FOR THE YEAR ENDED JUNE 30, 1996

<TABLE>
<CAPTION>
                                Swissray                                                Proforma
                           International, Inc.   Empower, Inc.     Adjustments        As Adjusted
                           -------------------   -------------     -----------        -----------
<S>                        <C>                   <C>               <C>                <C>        
Revenues                      $ 10,899,222        $8,813,949       $   --             $ 9,903,871

Income (loss) before
  extraordinary
  items                       $ (2,311,112)       $   30,536       $(36,000)(1)       $(2,244,576)

Net income (loss)             $ (1,891,612)       $   30,536       $(36,000)(1)       $(1,897,076)

Loss per share                                                                        $      (.15)

Weighted average number
  of shares outstanding                                                                13,054,749
</TABLE>


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

<TABLE>
<CAPTION>
<S>                           <C>                 <C>                <C>                <C>         
Revenues                      $ 11,133,745        $ 8,071,824        $   --             $ 19,205,569

Loss before
  extraordinary
  items                       $(10,434,180)       $  (235,736)       $(36,000)(1)       $(10,705,916)

Net loss                      $(10,821,694)       $  (235,736)       $(36,000)(1)       $(11,093,430)

Loss per share                                                                          $       (.69)

Weighted average number
  of shares                                                                               15,877,571
</TABLE>

             (1)  Adjustment to record amortization of goodwill


                                      F-23
<PAGE>   59
EXHIBIT
   NO.                                      DESCRIPTION



2.1         Acquisition Agreement, dated May 1995, by and between
            Registrant, a New York corporation (now SWISSRAY International,
            Inc.); Berkshire International Finance, Inc., SR-Medical AG (a
            Swiss corporation), Teleray AG (a Swiss corporation) and others
            (Incorporated by reference to Exhibit 1 of the Registrant's 
            Registration Statement on Form 10SB, Registration No. 0-26972,
            effective February 14, 1996).

2.2         Exchange Agreement, dated as of November 22, 1996 by and between the
            Registrant and Doug Maxwell; Registration Rights Agreement, dated
            as of March 13, 1997, between the Registrant and Doug Maxwell;
            Assignment and Assumption Agreement, dated March 13, 1997, between
            the Registrant and Doug Maxwell; Option Agreement, dated January 24,
            1997, granting options for 125,000 shares of the Registrant to Doug
            Maxwell.

3.1         Registrant's Certificate of Incorporation, dated December 20, 1967
            (Incorporated by reference to Exhibit 2(a) of the Registrant's
            Registration Statement on Form 10SB, Registration
            No. 0-26972, effective February 14, 1996)

3.2         Amendment to Registrant's Certificate of Incorporation, dated
            September 19, 1968 (Incorporated by reference to Exhibit 2(b) of the
            Registrant's Registration Statement on Form 10SB, Registration No.
            0-26972, effective February 14, 1996)

3.3         Amendment to Registrant's Certificate of Incorporation, dated
            September 18, 1972 (Incorporated by reference to Exhibit 2(c) of the
            Registrant's Registration Statement on Form 10SB, Registration No.
            0-26972, effective February 14, 1996)

3.4         Amendment to Registrant's Certificate of Incorporation, dated
            October 30, 1981 (Incorporated by reference to Exhibit 2(d) of the
            Registrant's Registration Statement on Form 10SB, Registration No.
            0-26972, effective February 14, 1996)

3.5         Certificate of Merger of Direct Marketing Services, Inc. and CGS
            Units Incorporated into CGS Units Incorporated, dated June 16, 1994
            (Incorporated by reference to Exhibit 2(e) of the Registrant's
            Registration Statement on Form 10SB, Registration No. 0-26972,
            effective February 14, 1996)

3.6         Amendment to Registrant's Certificate of Incorporation, dated August
            10, 1994.
<PAGE>   60
3.7         Certificate of Correction of Certificate of Merger of Direct
            Marketing Services, Inc. and CGS Units Incorporated into CGS Units
            Incorporated, filed August 5, 1994 (Incorporated by reference to
            Exhibit 2(f) of the Registrant's Registration Statement on Form
            10SB, Registration No. 0-26972 effective, February 14, 1996)

3.8         Amendment to Registrant's Certificate of Incorporation, dated May
            24, 1995 (Incorporated by reference to Exhibit 2(g) of the
            Registrant's Registration Statement on Form 10SB, Registration No.
            0-26972, effective February 14, 1996)

3.9         Amendment to Registrant's Certificate of Incorporation, dated August
            29, 1996.

3.10        Amendment to Registrant's Certificate of Incorporation, dated
            December 13, 1996.

3.11        Amendment to Registrant's Certificate of Incorporation, filed March
            12, 1997

3.12        Registrant's By-Laws (incorporated by reference to Exhibit 2(h) of
            the Registrant's Registration Statement on Form 10SB, Registration
            No. 0-26972, effective February 14, 1996)

10.1        License Agreement, dated June 24, 1995, by and between the
            Registrant and Hans-Jurgen Behrendt (Incorporated by reference to
            Exhibit __ of the Registrant's Registration Statement on Form 10SB,
            Registration No. 0-26972, effective February 14, 1996)

10.2        1996 Non-Statutory Stock Option Plan (incorporated by reference to
            Exhibit__ to the Registrant's Registration Statement on Form S-8
            (Registration No. ____), effective _____________)

10.3        Agreement dated June 11, 1996 between the Registrant and Philips
            Medical System.

10.4        License Agreement, dated as of July 18, 1997, by and between the
            Registrant and Agfa-Gevaer+ N.V. certain portions of which are filed
            under a request for confidential treatment pursuant to Rule 24b-2
            promulgated pursuant to the Securities Exchange Act of 1934, as
            amended, and Rule 80(b)(4) of Organization; Conduct and Ethics; and
            Information and Requests adopted under the Freedom of Information
            Act, under Rule 406 of the Securities Act of 1933, as amended, and
            the Freedom of Information Act.

10.5        Agreement, dated July 14, 1995, by and between Teleray AG and
            Optische Werke G. Roderstock certain portions of which are filed
            under a request for confidential treatment pursuant to Rule 24b-2
            promulgated pursuant to the Securities Exchange Act of 1934, as
            amended, and Rule 80(b)(4) of Organization; Conduct and Ethics; and
            Information and Requests adopted under the Freedom of Information
            Act, under Rule 406 of the Securities Act of 1933, as amended, and
            the Freedom of Information Act.

21          List of Subsidiaries

23          Consent of Bederson of Company LLP 

27          FINANCIAL DATA SCHEDULE