<PAGE>
 
                                                                       CONFORMED
                                                                                
                       SECURITIES AND EXCHANGE COMMISSION

                             Washington, D.C. 20549
                                        
                                  FORM 10-KSB

(Mark One)

[X]  Annual Report under Section 13 OR 15(d) of the Securities Exchange Act of
     1934 [Fee Required] for the fiscal year ended December 31, 1997

[_]  Transition Report under Section 13 or 15(d) of the Securities Exchange Act
     of 1934 [No Fee Required] for the transition period from ____ to ____

                    Commission file number     33-23786-LA
                                        
                                   AMDL, Inc.
                  (Name of small business issuer in its charter)
                                        
              Delaware                             87-0188822
              --------                             ----------
   (State or other jurisdiction of      (I.R.S. Employer Identification No.)
    incorporation or organization)

     14272 Franklin Ave., Suite 106
          Tustin, California                       92780-7039
         -------------------                       ----------
(Address of principal executive offices)           (Zip Code)

                   Issuer's telephone number: (714) 505-4460
                                        
     Securities to be registered pursuant to Section 12(b) of the Act: None
                                        
     Securities to be registered pursuant to Section 12(g) of the Act: None
                                        
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes X   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    $42,436

The aggregate market value of the approximately 33,504,567 shares of the
Company's voting stock held by non-affiliates, computed at the bid price of such
stock of $0.16 in the over-the-counter market, as quoted on the Electronic
Bulletin Board on May 29, 1998, was $5,360,730. Such figures do not take into
account the limited nature of the trading market for the Company's common stock
or apply any discount to the current market price for volume. See Item 5.

As of May 29, 1998, the Registrant had outstanding 33,754,903 shares of its
common stock, par value $0.001.

Documents Incorporated by Reference: None

                            Transitional Small Business Disclosure
                            Format (Check one):
                            Yes .... No ..X.
<PAGE>
 
                               TABLE OF CONTENTS


 
Item Number and Caption                                                     Page
 
GLOSSARY OF MEDICAL AND SCIENTIFIC TERMS ..................................    2
 
    PART I ................................................................    7
 
1.  DESCRIPTION OF BUSINESS ...............................................    7
 
2.  DESCRIPTION OF PROPERTY ...............................................   11
 
3.  LEGAL PROCEEDINGS .....................................................   11
 
4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ...................   12
 
    PART II ...............................................................   13
 
5.  MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS ..............   13
 
6.  MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION .............   15
 
7.  FINANCIAL STATEMENTS ..................................................   17
 
8.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
    ON ACCOUNTING AND FINANCIAL DISCLOSURE ................................   17
 
    PART III ..............................................................   17
 
9.  DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
    COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT .....................   17
 
10. EXECUTIVE COMPENSATION ................................................   20
 
11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
    OWNERS AND MANAGEMENT .................................................   22
 
12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS ........................   23
 
13. EXHIBITS AND REPORTS ON FORM 8-K ......................................   26

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
-------------------------------------------
<PAGE>
 
GLOSSARY OF MEDICAL AND SCIENTIFIC TERMS

AFP:

Alpha-fetoprotein, a plasma protein reaching elevated levels indicating liver
diseases such as cancer, cirrhosis and viral hepatitis. A marker for liver
cancer.

Allergy:

A state of hypersensitivity induced by exposure to a particular antigen
(allergen) resulting in harmful immunologic reactions on subsequent exposures;
usually used to refer to hypersensitivity to an environmental antigen or to drug
allergy.

Anaplasia:

A loss of differentiation of cells and of their orientation to one another and
to their axial framework and blood vessels, a characteristic of tumor tissue.

Anaplastic:

Undifferentiated, characterized by anaplasia or reversed development; said of
cells.

Antibody:

An immunoglobulin molecule that has a specific amino acid sequence by virtue of
which it interacts only with the antigen that induced its synthesis in cells of
the lymphoid series (especially plasma cells), or with an antigen closely
related to it.

Antigen:

Any substance which is capable, under appropriate conditions, of inducing a
specific immune response and of reacting with the products of that response.

Bacteria:

Plural of bacterium.

Bacterium:

Any of the unicellular prokaryotic microorganisms that commonly multiply by cell
division (fission) and whose cell is typical contained within a cell wall.

Cancer:

A new and abnormal cell growth the natural course of which is fatal. Cancer
cells, unlike benign tumor cells, exhibit the properties of invasion and
metastasis and are highly anaplastic.

                                       2
<PAGE>
 
CEA:

Carcinoembryonic antigen. A tumor-marker used in detection of colorectal,
gastric, breast and bronchial cancer.

Clinical:

Used in the treatment of patients as opposed to academic or theoretical
applications.

Diabetes:

A chronic syndrome of impaired carbohydrate, protein and fat metabolism owing to
insufficient secretion of insulin or to target tissue insulin resistance.

Diagnosis:

The determination of the nature of the disease. The art of distinguishing one
disease from another.

Diagnostic:

Pertaining to or subserving diagnosis; distinctive of or serving as a criterion
of a disease, as signs and symptoms.

DR-70(TM):

The name of the Company's lung cancer tumor-marker.

ELISA:

Enzyme-Linked Immuno Sorbent Assay.

Enzyme:

A protein molecule that catalyzes chemical reactions of other substances without
itself being destroyed or altered upon completion of the reactions.

HCG:

Human chorionic gonadotropin. A marker for pregnancy. Also used as a marker for
testicular tumors.

Helicobacter Pylori (H. Pylori):

A gram-negative, helical shaped bacterium that colonizes the mucus lining of the
stomach and is associated with gastric and peptic ulcers.

                                       3
<PAGE>
 
Hepatitis:

Inflammation of the liver. Several categories exist, i.e., A, B, C, D and E,
varying in seriousness and symptoms.

Hormone:

A chemical substance, produced in the body by an organ, by cells of an organ, or
by scattered cells, carried by the blood, which has a specific regulatory effect
on the activity of a certain organ or organs on cell types.

Immune:

Protected against infectious disease by either specific or nonspecific
mechanisms.

Immunoassay:

Any of several methods for the quantitative determination of chemical substances
that utilize the highly specific binding between an antigen or hapten and
homologous antibodies, including radioimmunoassay, enzyme immunoassay, and
fluoroimmunoassay.

Immunoglobulin:

Any of the structurally related glycoproteins that function as antibodies,
protecting the body's defense system against foreign substances, divided into
five classes (M,G,A,D,E).

Insulin:

A substance produced in the pancreas that controls the blood sugar level.

Lymphoid:

Resembling or pertaining to lymph or tissue of the lymphoid system.

Malignant:

Cancerous, having the properties of uncontrolled growth, invasion, and the
ability to move within the body and grow in new locations.

Malignant cells:

Cancer cells.

Metastasis:

The transfer of disease from one organ or part to another not directly connected
with it.

                                       4
<PAGE>
 
Non-invasive:

Does not involve puncture or incision of the skin or insertion of an instrument
or foreign material into the body.

OncoChek(TM):

The name of the Company's cancer tumor marker.

Plasma:

The fluid portion of the blood in which the particulate components are
suspended. Plasma is to be distinguished from serum, which is the cell-free
portion of the blood from which the fibrinogen has been separated in the process
of clotting.

Prokaryotic:

Cellular organisms lacking a true nucleus and nuclear membrane. Their nuclear
material consists of a single double-stranded DNA molecule, not associated with
basic proteins.

Protein:

Any of a group of complex organic compounds which contain carbon, hydrogen,
oxygen, nitrogen, and usually sulfur, the characteristic element being nitrogen.
Proteins are the principal constituents of the protoplasm of all cells.

PSA:

Prostate specific antigen. A marker for prostrate cancer.

PyloriProbe(TM):

A trademark for AMDL's ELISA kit for measuring antibody to Helicobacter pylori.
An indicator of infection caused by H. pylori bacteria.

Ring-shaped particle (RSP):

High molecular weight substance believed to be released in significant amounts
by all malignant cells but not by non-malignant cells.

Sensitivity:

The lowest concentration of tumor-marker a given test can detect. When used in
the context of analyzing cancer testing data, the percentage of malignant
samples correctly identified as malignant.

                                       5
<PAGE>
 
Serum:

Clear liquid that separates from blood on clotting.

Specificity:

When used in the context of analyzing cancer testing data, the percentage of
non-malignant samples correctly identified as non-malignant.
Substrate:

A substance upon which an enzyme acts.

Tumor:

Swelling, one of the cardinal signs of inflammation, morbid enlargement. A new
growth of tissue in which the multiplication of cells is uncontrolled and
progressive; called also neoplasm.

Tumor-marker:

A biochemical substance indicative of neoplasia, ideally specific, sensitive,
and proportional to tumor load, used variously to screen, diagnose, assess
prognosis, follow response to treatment, and monitor for recurrence.

                                       6
<PAGE>
 
                                     PART I
                                        
                        ITEM 1. DESCRIPTION OF BUSINESS
                                        
General Development of Business

AMDL, Inc., the Registrant (hereinafter referred to as "AMDL" or the "Company")
offers for sale various immunodiagnostic kits. Since the founding of the Company
in 1989 until 1997, the Company was primarily engaged in the commercial
development of, and obtaining various governmental regulatory approvals for the
marketing of a proprietary diagnostic tumor-marker test kit to detect the
presence of lung cancer. In 1997 and continuing into 1998, the Company broadened
its scope and product line and offers a selection of diagnostic test kits for
allergy, autoimmune, cancer markers, clinical chemistry, drugs of abuse,
fertility, gastrointestinal disease, infectious disease, pregnancy, serology,
serum proteins, thyroid, urine chemistry and other immunoassays.

The Company is in the development stage and has not generated any significant
revenues from product sales. The Company has accumulated a significant deficit
since inception and expects to incur a significant loss during the 1998 fiscal
year. The Company will require substantial additional funding for continuing
research and development, obtaining regulatory approval and for
commercialization of its products.

Products

AMDL's products include non-proprietary diagnostic test kits for allergy,
autoimmune, cancer markers, clinical chemistry, drugs of abuse, fertility,
gastrointestinal disease, infectious disease, pregnancy, serology, serum
proteins, thyroid, urine chemistry and miscellaneous immunoassays. AMDL's
proprietary tests include DR-70(TM) for lung cancer detection, OncoChek(TM) for
breast cancer detection, and PyloriProbe(TM) for the detection of H. pylori.

DR-70(TM) is marketed as a lung cancer tumor-marker and the test involves a
small amount of blood serum drawn from a patient. The test uses a common
microtiter format familiar to most laboratories in the diagnostic industry. The
technology is ELISA and uses a specific antibody which in combination with
substrate produces a visible color in proportion to the amount of DR-70(TM)
antigen in the patient. A study recently published in the Journal of Immunoassay
shows DR-70(TM) able to detect 13 different types of cancer including lung,
stomach, breast, colon, liver, uterus, pancreas and others. DR-70(TM) is only
available from AMDL and this rapid, inexpensive test can be used for both the
diagnosis and monitoring of cancer.

OncoChek(TM), another proprietary cancer tumor marker, is in pre-clinical
trials. These studies were conducted at the University of California, Irvine
Medical Center under the supervision of Dr. Lewis M. Slater. These studies were
designed to investigate 1) the general ability of OncoChek(TM) to detect various
types of cancers including colon, ovary, breast, larynx, lung and lymph and 2)
test result interference by non-cancer diseases. A study published in the
January/February 1998 edition of IVD Technology reports that OncoChek(TM), "when
used together with established organ-specific markers, the overall clinical
performance may be improved."

                                       7
<PAGE>
 
PyloriProbe(TM) detects H. pylori, a bacterium associated with chronic gastritis
and ulcers which can possibly lead to stomach cancer if untreated. This is also
an ELISA technology similar to DR-70(TM). Management believes PyloriProbe(TM)
has several advantages over competitors' tests. The advantages include color
coded ready-to-use reagents, superior reproducibility, durable breakaway wells,
elimination of the calibration curve requirement and significantly lower cost.

Other Products

In addition to DR-70(TM), PyloriProbe(TM) and OncoChek(TM), AMDL offers a full
line of non-proprietary cancer tumor markers which include: CEA for colon, PSA
for prostate, AFP for liver and HCG for testicular cancer. Additional tests
include test kits for: allergy, autoimmune, drug abuse, fertility, infectious
disease, pregnancy, febrile infections, thyroid and other hormones and serology
tests.

Marketing

AMDL's strategy is to provide OEM or private label test kits to under-served
international markets through distributor relationships and to domestic markets
through relationships with large diagnostic companies. AMDL will make use of the
Internet, select journals and industry trade shows for its marketing activities.
ICD, L.L.C., ("ICD") AMDL's joint venture with Briana Bio-Tech Inc. ("Briana"),
is responsible for marketing DR-70(TM) worldwide with the exception of the
United States and Canada. AMDL has retained the marketing rights for the United
States and Briana has retained the marketing rights for Canada. Only minimal
revenues have been received from diagnostic product sales to date and there can
be no assurance of any future revenues.

In January 1998, Gary L. Dreher joined the Company as Vice President of Sales
and Marketing. Mr. Dreher, with 27 years of biomedical and diagnostic marketing
experience, is implementing a marketing strategy that includes identifying and
contacting potential worldwide partners for distribution, technology licensing
and OEM product arrangements as well as increasing corporate visibility through
trade show representation and advertising.

Production

AMDL's facility in Tustin, California includes approximately 3,000 square feet
of manufacturing area. The Company intends to produce only DR-70(TM), its lung
cancer tumor-marker diagnostic kit, OncoChek(TM), its breast cancer tumor-marker
diagnostic kit and PyloriProbe(TM), its H. pylori bacterium detection diagnostic
kit at its Tustin facility. These products will be produced in both the ELISA
and rapid test formats. AMDL intends to subcontract on a 'private label' basis,
to established manufacturers, other products with packaging, quality control and
labeling functions occurring at the Tustin facility. Some products will be `drop
shipped' directly from the manufacturer to AMDL's customer.

AMDL is registered with the U.S. Food and Drug Administration as a manufacturer
of in vitro diagnostic kits and has received the FDA's Good Manufacturing
Practices ("GMP") manufacturing credential for its Tustin facility. The GMP
credential is required by various countries seeking to import AMDL's products.

                                       8
<PAGE>
 
Regulation

The Company's products, to the extent they may be deemed medical devices or
biologics, are governed by the Federal Food, Drug and Cosmetics Act and by the
regulations promulgated thereunder by the FDA as well as the regulations of
state agencies and various foreign government agencies.

DR-70(TM)

The Company has not yet submitted an application to the FDA to sell DR-70(TM) in
the United States. It is anticipated that DR-70(TM) will require a formal
clearance route known as the Premarket Approval Application, or "PMA", in order
to obtain a Biologic Product License to market such a product in the United
States. A PMA for DR-70(TM) would describe the components and the manufacturing
process of the test system, summarize clinical studies which establish
consistent and acceptable specificity and sensitivity levels and provide other
data which demonstrate the efficacy and stability of the product.

The Company has received approval to sell DR-70(TM) in Canada. A clinical trial
protocol for lung cancer was approved in 1993 by the Cross Cancer Institute in
Edmonton, Alberta, Canada under the auspices of the Alberta Cancer Board. The
objective of the clinical trial at the Cross Cancer Institute was to evaluate
the sensitivity and specificity of the AMDL DR-70(TM) lung cancer tumor-marker
and to determine if the level of the tumor-marker correlates with the stage of
lung cancer development and determine its usefulness for monitoring response to
treatment and for predicting recurrence of cancer.

In this clinical trial, 237 patients with newly diagnosed lung cancer and 244
volunteers with no clinical evidence of disease were selected. The DR-70(TM)
tumor-marker was measured in blood serum samples collected from both cancer
patients and the volunteers. The control group was composed of smokers and non-
smokers. The results showed sensitivity of the lung cancer test was 66% and
specificity was 92%. The Company believes these results and data reported in
continued studies at the Cross Cancer Institute demonstrate the value of the DR-
70(TM) lung cancer tumor-marker as a diagnostic test for detecting lung cancer.

In June 1995, the Company received approval from the Cross Cancer Institute to
apply for marketing clearance for its DR-70(TM) lung cancer tumor-marker from
the Health Protection Branch in Ottawa, Canada. In August 1995, the Company
received marketing clearance from the Health Protection Branch. In September
1995, the U.S. Food and Drug Administration ("FDA") certified the Company for
clearance to export the DR-70(TM) lung cancer tumor-marker diagnostic kit to
Canada.

Additional clinical studies of DR-70(TM) were recently completed in Wuhan,
China. The studies determined that the DR-70(TM) immunoassay kit detected a
number of different cancers with a high degree of specificity and sensitivity.
Thirteen different types of cancer, including cancers of the lung, stomach,
breast, colon, liver, uterus and pancreas, were found in the screening process,
indicating that DR-70(TM) has significant usefulness as a cancer-screening tool.
The Company is in the process of applying for regulatory approval to market DR-
70(TM) throughout China.

                                       9
<PAGE>
 
PyloriProbe(TM)

In July 1996, the Company filed a 510(k) Premarket Notification with the FDA
requesting approval to sell PyloriProbe(TM) in the United States. In November
1996, the FDA requested a withdrawal of AMDL's 510(k) Premarket Notification
Application for PyloriProbe(TM) until additional clinical data is secured. The
Company resubmitted the Application to the FDA in April 1998 although there can
be no assurance that the Company will receive the regulatory approval required
to market PyloriProbe(TM) or that the FDA will review the product within a
predictable period of time.

Other Products

The Company's other diagnostic products have not been approved by the FDA for
sale in the United States.

Patents

The Company's success depends in part on its ability to obtain United States and
foreign patent protection for its products, preserve its trade secrets, and
operate without infringing upon the proprietary rights of third parties. The
Company has four patent applications pending in the United States with respect
to its methodology for detecting the presence of the ring shaped particle and
DR-70(TM) tumor-markers as reliable indicators of the presence of cancer. Two of
the Company's patents describe methods for measuring ring-shaped particles in
extracellular fluid as a means for detecting cancer have been granted and issued
by the United States Patent and Trademark Office. Patents have also been issued
directed to this technology in Taiwan, South Africa, Australia, India, New
Zealand, Philippines, Russia, Israel, Korea and Japan. There can be no assurance
that any additional patents will be issued to the Company or that, if issued,
the breadth or degree of protection of these patents will be adequate to protect
the Company's interests. In addition, there can be no assurance that others will
not independently develop substantially equivalent proprietary information or
obtain access to the Company's know-how or that others will not be issued
patents which may prevent the sale of the Company's test kits or require
licensing and the payment of significant fees or royalties by the Company in
order for it to be able to carry on its business. Further, there can be no
guarantee that any patents issued to or licensed by the Company will not be
infringed by the products of others. Defense and prosecution of patent claims
can be expensive and time consuming, even in those instances in which the
outcome is favorable to the Company. If the outcome is adverse, it could subject
the Company to significant liabilities to third parties, require the Company to
obtain licenses from third parties or require the Company to cease its research
and development activities or sales.

Competition

A large number of companies are in both direct and indirect competition with the
Company, many of which are larger, more firmly established, have significant
marketing and development budgets and have greater capital resources than the
Company. Therefore, there can be no assurance that the Company will be able to
achieve and maintain a competitive position in the diagnostic test

                                       10
<PAGE>
 
industry. AMDL plans on increasing its chances of success through strategic
alliances with one or more of these companies.

Many major medical device manufacturers including Abbott Diagnostics, Baxter
Healthcare Corp., Beckman Diagnostics, Boehringer Mannheim, Centocor, Diagnostic
Products Corporation, Bio-Rad Laboratories, Roche Diagnostic Systems, Sigma
Diagnostics and others are manufacturers or marketers of diagnostic products.
The Company is not aware of any efforts currently being devoted to development
of products such as the Company's DR-70(TM); however, there can be no assurance
that such efforts are not being undertaken without the Company's knowledge. In
addition, such companies could develop products similar to the Company's
proposed products which are superior to those of the Company and could also
prove to be more successful than the Company in the marketing and manufacturing
of their products.

Environmental Considerations

Compliance with federal, state and local provisions regulating the discharge of
materials into the environment, or otherwise relating to the protection of the
environment, are not anticipated to have a material effect on the capital
expenditures, earnings or competitive position of the Company. The Company's
premises and waste disposal practices are designed to comply with all federal,
state and local statutes applicable to the discharge of materials into the
environment.

Product Liability Insurance

The Company currently produces products for clinical studies and for
investigational purposes. The Company anticipates producing its products in
commercial sale quantities as it receives various regulatory approvals in the
future. There can be no assurance that users will not claim that effects other
than those intended may result from the Company's products, including, but not
limited to claims alleged to be related to incorrect diagnoses leading to
improper or lack of treatment in reliance on test results. In the event that
liability claims arise out of allegations of defects in the design or
manufacture of the products of the Company, one or more claims for damages may
require the expenditure of funds in defense of such claims or one or more
substantial awards of damages against the Company, and may have a material
adverse effect on the Company by reason of its inability to defend against or
pay such claims. The Company is investigating the availability of product
liability insurance for its products and intends to obtain product liability
coverage if it is available on terms acceptable to the Company. However, there
can be no assurance that product liability insurance will be available to the
Company on terms that it can afford, or at all, or that the Company will ever
obtain such insurance.

Employees

The Company currently has 11 full-time employees. The Company from time to time
supplements its permanent staff with temporary laboratory personnel. None of the
employees of the Company is represented by a union or is subject to a collective
bargaining agreement, and the Company considers its relations with its employees
to be favorable. The Company has entered into certain agreements with its
employees regarding their services. See Item 12 below. The Company also utilizes
the services of consultants for research, testing and other services.

                                       11
<PAGE>
 
                        ITEM 2. DESCRIPTION OF PROPERTY
                                        
The Company's offices, research laboratory and manufacturing facilities
consisting of approximately 6,000 square feet are located at 14272 Franklin
Avenue, Tustin, California. The Company leases such facilities from a non-
affiliate at a rental rate of $9,400 per month, including property taxes,
insurance and maintenance. The lease term is for three years and terminates
November 30, 1999. The lessor has the unilateral right to terminate the lease at
any time by giving the Company a minimum of nine months' notice. The Company has
received no indication that the landlord intends to terminate the lease.

                           ITEM 3. LEGAL PROCEEDINGS
                                        
In February 1996, the Company instituted litigation in the U.S. District Court
for the Central District of California against Roger L. Lallone, Ph.D.
("Lallone") and Dr. Edward L. Stephen ("Stephen") and their corporate affiliates
for misappropriation of trade secrets, breach of contract, conversion and
violation of the Lanham Act relating to Lallone's activities and in particular
the production of a monoclonal antibody using DR-70(TM). The Company sought
delivery of proprietary technology arising out of a Consulting Agreement and a
subsequent Assignment Agreement with Lallone, as well as injunctive relief and a
determination that the royalty provisions of the Assignment Agreement be deemed
revoked. Stephen, a former employee of the Company, entered into a business
relationship with Lallone to develop medical diagnostic products and the Company
claims, among other things, that Stephen deceived the Company during his
employment with the Company by utilizing and exploiting the Company's
proprietary information for his own purposes.

Stephen filed a motion to compel arbitration and to stay the U.S. District Court
proceedings against him and his related companies. That motion was denied and
Stephen and his related companies filed an Answer denying the material
allegations of the Company's complaint. In addition, Stephen asserted
counterclaims against the Company for alleged breach of his employment contract
and interference with prospective economic advantage, claiming damages in excess
of $100,000, as well as punitive damages. In March 1997, the Company settled its
action against Stephen and his related companies by obtaining a permanent
injunction against Stephen from any use of the Company's technology, and
requiring return of the Company's technology and proprietary information. The
Company also settled Stephen's counterclaim by paying Stephen $50,000 in
complete settlement of all salary, expense and other claims asserted by Stephen
against the Company.

Lallone had filed an answer to the Company's complaint and a cross-complaint for
breach of contract, fraud and trade secret misappropriation. Lallone sought
compensatory and punitive damages from the Company. In July 1997, the Company
settled its action against Lallone by obtaining a permanent injunction against
Lallone from any use of the Company's technology, and requiring return of the
Company's technology and proprietary information. The Company also settled
Lallone's counterclaim by paying Lallone $1,500 in complete settlement of all
claims asserted by Lallone against the Company.

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

During the Registrant's fourth fiscal quarter ended December 31, 1997, no
matters were submitted to a vote of security holders of the Registrant.

                                       12
<PAGE>
 
                                    PART II
                                        
        ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
                                        
                          PRICE RANGE OF COMMON STOCK
                                        
The Company's common stock is traded in the over-the-counter market, and is
quoted and is listed on the Electronic Bulletin Board under the symbol "AMDD".
The market for the Company's common stock must be characterized as a limited
market due to the relatively low trading volume. Set forth in the following
table are high and low bid quotations for the Company's common stock for each
quarter during the fiscal years ended December 31, 1996 and 1997 and the 1998
first quarter ended March 31, 1998. The quotations represent inter-dealer
quotations without retail markups, markdowns or commissions and may not
represent actual transactions:

Quarter Ended                        High            Low
------------------                  -----           -----
March 31, 1996                      $1.00           $0.63
June 30, 1996                        1.50            0.63
September 30, 1996                   1.50            0.59
December 31, 1996                    0.59            0.32
March 31, 1997                       0.49            0.28
June 30, 1997                        0.38            0.15
September 30, 1997                   0.29            0.15
December 31, 1997                    0.20            0.09
March 31, 1998                       0.18            0.08

                                       13
<PAGE>
 
SECURITIES TRANSACTIONS

The following table sets forth the Company's securities transactions made
pursuant to exemptions from the Securities Act of 1933, as amended, under
Regulation D or Section 4(2) during the past three (3) years. Except as noted,
none of such sales involved any underwriters, nor the payment of any
underwriting commissions or discounts.

<TABLE>
<CAPTION>
            Number of Shares    Amount of Cash        Amount of
  Date      of Common Stock        Proceeds       Cancellation of Debt             Explanation
--------    -----------------   --------------    --------------------    --------------------------------
<S>         <C>                 <C>               <C>                     <C>
07/06/95          32,737            32,266                     -          Exercise of outstanding warrants
09/19/95          65,000             3,250                     -          Exercise of outstanding option
10/24/95         133,000           100,000                     -          Issuance to investor*
11/13/95          10,000             2,500                     -          Exercise of outstanding warrants
12/31/95          89,127                 -                22,282          Issuance to noteholder**
12/31/95          11,200                 -                 2,800          Issuance to noteholder
12/31/95          65,800                 -                16,450          Issuance to noteholder
12/31/95          44,800                 -                11,200          Issuance to noteholder**
12/31/95          44,800                 -                11,200          Issuance to noteholder**
12/31/95          44,182                 -                11,046          Issuance to noteholder**
12/31/95          43,867                 -                10,967          Issuance to noteholder
12/31/95          43,722                 -                10,931          Issuance to noteholder
12/31/95          44,800                 -                11,200          Issuance to noteholder**
12/31/95         110,948                 -                27,735          Issuance to noteholder**
03/15/96          10,500             2,625                     -          Exercise of outstanding warrants
04/22/96          19,500             4,875                     -          Exercise of outstanding warrants
05/20/96          89,127                 -                22,282          Issuance to noteholder**
06/11/96          16,778                 -                15,000          Issuance to creditor
07/09/96          13,384                 -                11,933          Issuance to creditor
09/30/96          47,333                 -                11,833          Issuance to control person
03/31/97          80,000            20,000                     -          Exercise of outstanding warrants
03/31/97          20,000             5,000                     -          Exercise of outstanding warrants
06/20/97         100,000                 -                     -          Compensation for services***
12/11/97          25,000                 -                     -          Settlement with former option holder
</TABLE>
*5% commission paid in cash and 6,667 warrants exercisable at $1.00
**10% commission paid in cash and various warrants exercisable at $0.25 per
share
*** Quoted market value at date of grant was $17,000.

Holders

There were approximately 3,350 holders of record of the common stock as of April
30, 1998, including shares held of record by brokerage houses and clearing
corporations on behalf of their customers.

Dividends

The Company has not paid dividends with respect to its common stock and does not
anticipate that it will pay dividends in the foreseeable future.

                                       14
<PAGE>
 
       ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
                                        
This "Management's Discussion and Analysis or Plan of Operation" should be read
in conjunction with the Company's annual audited financial statements, the notes
thereto and the other financial data included elsewhere herein and includes
forward-looking statements which involve risks and uncertainties which are based
upon the Company's beliefs, and assumptions and information currently available
to the Company. The Company's actual results may differ materially from the
results indicated by such forward-looking statements due to various factors,
including, but not limited to, those risks and uncertainties which are discussed
below.

General

Since inception, the Company has been in the development stage and has devoted
its resources to research and development, obtaining regulatory approval and the
commercialization of its proposed diagnostics for cancer and other diseases. As
of March 31, 1998 the Company has received only minimal revenues from sales of
products and historically its income has come from the sale of licenses,
royalties and options to purchase marketing rights. The Company has incurred
losses since inception and expects to incur a significant operating loss during
the fiscal year ending December 31, 1998. The Company will require substantial
additional funding for continuing research and development, obtaining regulatory
approval and for commercialization of its products. There can be no assurances
that the Company will be able to obtain such funding when needed or at all, or
if available, what the terms thereof will be.

Liquidity and Capital Resources

The Company has generated only minimal revenues from sales of products and
historically its income has come from the sale of licenses, royalties and
options to purchase marketing rights. Operations have been funded principally
through private placements of its equity securities, and income received from
the sale of licenses, royalties and options to acquire marketing rights. The
Company expects to incur continued losses in the near-term as it continues
development of its test kit systems, undertakes clinical trials and other
actions necessary to obtain regulatory approvals and engages in marketing and
sales activities. The amount of expenditures required in the future for
administrative costs and commercialization expenditures for products far exceeds
existing cash. The availability of sources of cash for such expenditures is
presently unknown. From December 31, 1996 to December 31, 1997, the Company's
cash, cash equivalents and short-term investments decreased to approximately
$1,498,000 as a result of working capital requirements. The Company is also
hopeful of obtaining revenues from product sales, but there is no commitment by
any person for purchase of any of the Company's products. In the absence of
significant sales and profits, the Company may seek to raise additional funds to
meet its working capital needs principally through the additional sales of its
securities. However, there is no assurance that the Company will be able to
obtain sufficient additional funds when needed, or that such funds, if
available, will be obtainable on terms satisfactory to the Company. The Company
can make no prediction as to when, if ever, it will be profitable.

The Company believes that its present cash and cash equivalents balances to be
sufficient only for operations through the third quarter of 1998, assuming the
Company is able to extend forbearance of collection efforts on its outstanding
indebtedness. However, certain scheduled activities will be 

                                       15
<PAGE>
 
curtailed after the second quarter unless additional operating capital is
obtained. The Company's efforts during the next 12 months will be dedicated to
raising sufficient capital to finance continuing operations and to providing
assistance to ICD in connection with international market development for
DR-70(TM), international and domestic market development for the Company's other
products, development and commercialization of new products and obtaining the
required regulatory approvals. There can be no assurance as to the success of
these efforts.

Currently, the Company does not anticipate any significant changes in the number
of employees. The Company may not be able to retain its present employees if
additional financing is not obtained. If such financing is obtained, the Company
may also seek to add employees to further its efforts to commercialize its
products.

At December 31, 1997, the Company was indebted for $583,647 for accrued salaries
payable to five persons who are officers and other employees and former
employees, four of whom agreed to payments equal to their proportionate share of
5 % of sales revenues, if any, of the Company, but not less than $500 per month
per person. See Item 12. At December 31, 1997, the Company also had total notes
payable outstanding of $25,000.

During the 12 months ended December 31, 1997, the Company received gross cash
proceeds of $25,000 from the exercise of warrants. The warrants were issued as
part of notes payable in 1992. During 1997, the Company also issued 100,000
shares of common stock as partial compensation for a services agreement and
25,000 shares of common stock as settlement with a holder of options.

Results of Operations

Year Ended December 31, 1997 Compared to Year Ended December 31, 1996. During
----------------------------------------------------------------------      
the year ended December 31, 1997, the Company received only minimal revenues of
$42,436 from product sales. The Company also received $121,932 interest income
on short-term investments. Total operating expenses for the year ended December
31, 1997 were $1,888,743 compared to total operating expenses for the year ended
December 31, 1996 of $1,750,652. Expense categories reflecting increases over
the prior year include payroll, laboratory and rent expense, none of which
individually were extraordinary. Expense categories reflecting decreases over
the prior year include consulting and miscellaneous. The decrease resulted from
conscious cost cutting due to limited cash resources. In 1997, the Company's
loss was $1,747,414, compared to a loss of $1,622,380 in 1996.

Year Ended December 31, 1996 Compared to Year Ended December 31, 1995. During
----------------------------------------------------------------------      
the year ended December 31, 1996, the Company received no revenues for product
sales. The Company received a $43,138 partial payment of the ICD marketing
rights fees from Briana. The Company also received $85,134 interest income on
short-term investments. Total operating expenses for the year ended December 31,
1996 were $1,750,652 compared to total operating expenses for the year ended
December 31, 1995 of $1,734,027. Operating expenses in 1995 included recognition
of $300,000 to reflect the cancellation of a raw materials royalty agreement
with Briana which occurred incident to the formation of ICD. Expense categories
reflecting increases over the prior year include payroll and laboratory expense.
Expense categories reflecting decreases over the prior period include interest
expense, amortization and depreciation expense.

In 1996, the Company's loss was $1,622,380, compared to a loss of $1,457,470 in
1995.

                                       16
<PAGE>
 
                          ITEM 7. FINANCIAL STATEMENTS
                                        
                See Financial Statements starting with page F-1.

             ITEM 8.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
                     ON ACCOUNTING AND FINANCIAL DISCLOSURE
                                        
Inapplicable.
                                    PART III
                                        
     ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
               COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT

Executive Officers and Directors

The following table sets forth certain information regarding the executive
officers and directors of the Company.

<TABLE>
<CAPTION>

                                                                                              Year First
Name                              Age   Positions With the Company                            Became Director
----                              ---   --------------------------                            ---------------
<S>                               <C>   <C>                                                   <C>
William M. Thompson III,           70   Chairman of the Board of Directors and                1989
 M.D.                                   Director
That T. Ngo, Ph.D.                 54   President, Chief Executive Officer and                1994
                                        Director
Harry Berk                         57   Vice President - Finance and Chief Financial             -
                                        Officer, Secretary and Treasurer
Douglas C. MacLellan               42   Director                                              1992
Gary L. Dreher                     51   Vice-President - Sales and Marketing                     -
Axel J. Kutcher                    46   Director                                              1997
Edward R. Arquilla, M.D.,          75   Director                                              1997
 Ph.D.
</TABLE>

A director's regular term is for a period of one year or until the next annual
meeting of stockholders and his successor is duly elected and qualified. An
officer's regular term is for a period of one year, expiring at the next annual
meeting of the board of directors or when his successor is elected and
qualified.

Dr. William M. Thompson, III has been a Director of the Company since June 1989.
His responsibilities include corporate and scientific planning, liaison to the
clinical medicine community and advisor on FDA and medico-legal affairs. From
1969 to the present, Dr. Thompson has been a practicing General Surgeon in
Orange County, California. From October 1995 to the present, he also has been
Vice President for Medical Affairs and Medical

                                       17
<PAGE>
 
Director of Beech Street, Irvine, California. He has been a founder of two
managed medical care companies, Beech Street and August International, serving
as National Medical Director and Board member from 1980 to 1990. More recently
he was Vice President of August Healthcare Services from 1990-91. He was a
founding Director of OSCAP, owner of SCPIE, the physician-owned malpractice
insurance carrier, and serves as Chairman of the Claims Committee. He was the
principal architect in organizing, implementing and directing a county-wide
emergency medical care system in Orange County, California. He was the founding
Director of the Trauma Service at Fountain Valley Regional Hospital, serving
from 1980 to 1989. He is Assistant Clinical Professor of Surgery at the
University of California, Irvine College of Medicine. Prior to his medical
career, Dr. Thompson worked for 13 years in the pharmaceutical industry in
research and development, law and senior management. He has devoted almost 30
years to hospital medical staff administration, serving as an officer or
department chief at four hospitals and having been elected president of a
national organization of hospital Chief-of-Staffs. He has also spent almost 30
years in service to organized medicine as an officer, Board member, and
Committee Chairman at the county and state levels. He has served as an officer
or Board member of numerous charitable, professional and business organizations.

That T. Ngo, Ph.D., President, Chief Executive Officer and Director, brings to
AMDL nearly 20 years experience in research and development, general management,
manufacturing, marketing and sales. A leading international authority in
commercial applications of immunology, enzymology and bioprocessing, he was
previously Chairman and Chief Executive Officer of StressGen Biotechnologies
Corp., Victoria, British Columbia. Before that he was founding President, Chief
Executive Officer, and most recently, Chairman of Tustin, California based
BioProbe International, Inc. until its sale in 1992 to UniSyn Fibertec of San
Diego, California. A Fellow of the American Institute of Chemists, Dr. Ngo has
published more than 130 scientific articles and has edited five books on
immunodiagnostics, bioseparation and plant biotechnology. He has served on the
editorial boards of five international journals. After earning a Ph.D. in
biochemistry from the University of Saskatchewan, Canada, he completed a
postdoctoral. fellowship at the University of Ottawa, Albert Einstein College of
Medicine and Clinical Research Institute in Montreal.

Harry Berk became Chief Financial Officer of the Company in September 1992. From
1990 to 1992, Mr. Berk was Chief Financial Officer for HQ Office Supplies
Warehouse, a public corporation operating multiple branch retail stores. From
1984 to 1990, Mr. Berk was the Chief Financial Officer for Tam's Stationers, a
privately-held corporation operating multiple branch retail stores. Mr. Berk
received his B.S. degree in Accounting from California State University at
Northridge. He also completed all graduate course requirements for a M.S. degree
in Management from the same University.

Douglas C. MacLellan became a Director of the Company in September 1992. Mr.
MacLellan is currently President and CEO of The MacLellan Group, Inc., a
privately held financial advisory firm since May 1992. He is also a co-founder
and member of the Board of Directors of Datalex Corporation, a Canadian based
millennium software solution provider since May 1997. From November 1996 until
February 1998, Mr. MacLellan was a member of the Board of Directors and
Investment Committee of the Strategic East European Fund. From November 1995
until March 1998, Mr. MacLellan was President, Chief Executive Officer and
Director of PortaCom Wireless, Inc., a publicly held Canadian company engaged as
a developer and operator of cellular and wireless telecommunications ventures in
selected developing world markets. From 1993 to

                                       18
<PAGE>
 
1995, Mr. MacLellan was a Principal and co-founder of Maroon Bells Capital
Partners, Inc., a U.S. based merchant bank which specializes in providing
corporate finance services to companies in the international and domestic
telecommunications and media industries. Mr. MacLellan is also a former member
of the Board of Directors and co-founder of the InterAmericas Communications
Corporation, an international telecommunications company which operates a
competitive access fiber and satellite network in Latin America and is a former
co-founder and Director of Great Bear Technology, Inc., a Bulgaria and
California based multi-media software development company. Mr. MacLellan is also
a member of the Board of Directors of Albion Offset Group, privately held
international trade advisory firm. Mr. MacLellan was educated at the University
of Southern California in economics and finance, with advanced training in
classical economic theory.

Edward R. Arquilla, M.D. Ph.D. has been a Director of the Company since February
1997. His responsibilities include corporate and scientific planning, and
liaison to the clinical and academic medical community. From 1959 until 1994,
Dr. Arquilla was a full time faculty member of the Departments of Pathology at
the University of Southern California, University of California at Los Angeles
and University of California, Irvine, ("UCI") respectively. He served as
Professor and Chair of Pathology at UCI and Chief of Pathology services at UCI
Medical Center ("UCIMC") from 1968 until 1986. In this capacity he established
the UCI Pathology referral services. He has had an active interest in the
application of immunology to diagnostic tests for the past fifty years and was
among the first to develop immunological tests for the measurement of proteins
and hormones. Dr. Arquilla has been very active in the two major volunteer
diabetes organizations; the American Diabetes Association and the Juvenile
Diabetes Foundation International. In 1977 he was appointed to a three year term
as a charter member of the National Diabetes Advisory Board by the Secretary of
Health and Human Services. The Board was charged to review and evaluate the
implementation of a long range plan to combat Diabetes Mellitus. He has also
participated on several National Institutes of Health Study sections concerned
with the extramural funding of Diabetes Research in general and the immunology
of Diabetes in particular. Dr. Arquilla's academic and professional
responsibilities, in addition to the Chair and Chief of Pathology Services at
UCI, include a two year term as Chief of Staff at UCIMC from 1975 to 1977 and
President of the Academic Senate of the College of Medicine at UCI from 1978 to
1980. He received his undergraduate B.S. degree at Northern Illinois University
in 1947, and M.S. in Physiology from the University of Illinois in 1949, and
M.D. from Western Reserve University in 1955, a Ph.D. in Anatomy from Western
Reserve University in 1957, completed his residency in Pathology in 1959 and was
Board Certified in Anatomic Pathology in 1963. He is licensed to practice
Medicine in Ohio and California.

Axel J. Kutscher became a Director of the Company in February 1997. Mr. Kutscher
was a founding partner of EURO-AMERICAN Beteiligungsverniitlungsgesellschaft
GmbH, an investment banking firm investing in start-up biomedical companies and
is also a sales manager and Vice President of the firm. Mr. Kutscher currently
serves as the Chairman of the Board of Directors of GlukoMediTech, AG of Mainz,
Germany, a medical device company emphasizing the development of in vivo glucose
monitoring sensors, a Director of Sangui Biotech AG in Mainz, Germany, a company
dealing with blood substitute research and development and a Director of Sangui
Biotech, Inc. of Santa Ana, California, a start-up biotech company specializing
in blood substitute products, esoteric immunodiagnostic products and
environmental sensors. Mr. Kutscher was a sales manager of Euro-Pacific
Securities Services GmbH of Dusseldorf, an account executive at Hetkamp und
Partner GmbH in Gelshenkirchen, Germany and a salesman at

                                       19
<PAGE>
 
Deutsch-Amerikanische Marketing Corp. and International Stock Broker Corp. of
Essen, Germany.

Gary L. Dreher joined AMDL in January 1998 as Vice President of Sales and
Marketing. He brings 27 years of accomplishment in the biomedical and diagnostic
industry with him. Mr. Dreher has had extensive training in sales, marketing and
sales management from Fortune 500 companies earlier in his career. Mr. Dreher,
until joining AMDL, was President of Medical Market International, Yorba Linda,
Ca., a marketing and management services company he co-founded. Medical Market
International was responsible for the rapid introduction and promotion of U.S.-
made medical products in international markets, including Southeast Asia, South
America, Mexico and other developing countries. Mr. Dreher was Vice President of
Sales and Marketing for Apotex Scientific, Arlington, Texas, a division of
Canada's largest pharmaceutical company. Mr. Dreher oversaw the global marketing
of autoimmune and other diagnostic kits, as well as securing significant
revenues from sales to large U.S. commercial reference laboratories. Previously,
as Vice President of Sales for Ventrex Laboratories, Portland, Maine, Mr. Dreher
was responsible for the sales and marketing of that company's diagnostic tests
and its capital equipment, significantly increasing sales. Mr. Dreher will
establish an overall sales and marketing plan and develop distribution
worldwide. Mr. Dreher, a graduate of California State University, Long Beach,
earned his B. S. degree in Microbiology and Lab Technology.

                        ITEM 10. EXECUTIVE COMPENSATION
                                        
Officers' Compensation

The following table sets forth all cash compensation paid by the Company to its
only executive officer during the year ended December 31, 1997 whose
compensation exceeded $100,000:

<TABLE>
<CAPTION>
                                                             Annual Compensation
                                           ---------------------------------------------------------
Name and Position                           Year         Salary           Bonus            Other
----------------------------------------------------------------------------------------------------
<S>                                        <C>         <C>              <C>              <C>
That T. Ngo
  President and Chief Executive Officer     1997       $222,000            -0-             -0/(1)/
                                            1996       $185,000            -0-             -0/(1)/
                                            1995       $144,000            -0-             -0/(1)/
</TABLE>
                                        
(1) Substantial salaries from prior years are accrued and represent a
    substantial portion of the Company's current liabilities. In 1997 the
    Company made payments on accrued unpaid salaries to Dr. Ngo of $6,000 in
    addition to the amount shown above. The current base salary of Dr. Ngo is
    $222,000 per annum.

Directors' Compensation

Certain members of the Board of Directors received cash compensation only for
their services on special committees. Total cash compensation paid to all
members of the Board of Directors during 1997 was $72,000.

                                       20
<PAGE>
 
Stock Compensation Programs

On April 22, 1992, the Company adopted its 1992 Stock Option Plan (the "1992
Plan"). Effective April 22, 1992, the Company made specific option grants to
certain key employees and consultants to purchase an aggregate of 2,622,500
shares of the Company's Common Stock at a price of $0.25 per share (the
"Specified Options"). It was provided in the Specified Options that exercise
could occur if certain conditions were satisfied.

All of the Specified Options had option terms of three years and expired in
1995, except the options to purchase 380,000 shares to Richard Anderson, which
options have a ten-year term. Of the options to purchase 380,000 shares, options
to purchase 136,000 shares will become exercisable if the Company has annual
gross revenues from product sales of a minimum of $1,000,000. Options to
purchase 136,000 shares will become exercisable if the Company has annual net
income before taxes of a minimum of $1,000,000, and options to purchase 108,000
shares will become exercisable if the Company has annual net income before taxes
of a minimum of $5,000,000. In 1994, the Company terminated the 1992 Plan,
except with respect to options which had previously been granted.

Subsequent to the adoption of the 1992 Plan, the Company granted options and
warrants to various persons. Grants to officers and directors of the Company are
more particularly described in Item 11.

In 1995, the Company adopted its Stock Bonus Plan pursuant to which the Company
may select employees or consultants to receive a bonus of shares of the
Company's common stock. This Plan was to be administered by the Board of
Directors, or by a Committee selected by the Board (the "Administrators"). The
Administrators had the authority to select the persons to receive a bonus of
shares of Common Stock, the number of shares of Common Stock to be issued, and
the time in which the Common Stock is to be issued. The total number of shares
authorized was 500,000. The Administrators reserved 100,000 shares for issuance
to That T. Ngo, the Company's President. The actual number of shares to be
issued to Dr. Ngo, and the timing for this occurrence were to be determined by
the Administrators. The Stock Bonus Plan terminated on June 30, 1997.

In addition, the Company issued stock options pursuant to various employment
agreements and agreements for services. See "Certain Relationships and Related
transactions."

Two other stock option plans, the 1994 Stock Option Plan and the 1988 Stock
Option Plan, were terminated on March 7, 1997. No options were issued under
either plan.

                                       21
<PAGE>
 
               ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
                             OWNERS AND MANAGEMENT
                                        
Set forth in the following table is information regarding beneficial ownership
of the Company's Common Stock as of April 30, 1998, by each person known to the
Company to be the beneficial owner of more than five percent of the Company's
Common Stock, by each officer and director, and by all officers and directors as
a group. Except as otherwise indicated, all shares are held beneficially and of
record, and each stockholder has sole voting, investment and dispositive power.

<TABLE>
<CAPTION>
                                                        Number of
                       Name                            Shares Owned                        Percent
-----------------------------------------------------------------------------------------------------
<S>                                                    <C>                                 <C>
Officers and Directors
 
Edward R. Arquilla, M.D., Ph.D.                          60,000                             0.2%
 
Harry Berk                                              236,250  (1)                        0.7%
 
Gary L. Dreher                                           31,250  (2)                        0.1%
 
Axel J. Kutscher                                         20,000  (3)                        0.1%
 
Douglas C. MacLellan                                     50,336                             0.1%
 
That T. Ngo, Ph.D.                                    2,090,000  (4)                        5.8%
 
William M. Thompson, III, M.D.                           90,000                             0.3%
 
All Officers and Directors as a Group (7 persons)     2,577,836  (1)-(4)                    7.1%
</TABLE>

(1) Includes 6,250 shares of common stock granted pursuant to an employment
    agreement. Also includes options to purchase 100,000 shares of common stock
    at $0.97 per share exercisable until December 31, 1999 and options to
    purchase 100,000 shares of common stock at $0.44 per share exercisable until
    December 31, 2000.
(2) Includes options to purchase 31,250 shares of common stock at $0.13 per
    share exercisable until December 31, 2002.
(3) Mr. Kutscher does not own any shares of record of common stock, but may be
    deemed to be the beneficial owner of the shares of Euro-American GMBH. Mr.
    Kutscher is the Sales Manager and a Vice President of Euro-American GMBH.
(4) Includes options to purchase 650,000 shares of common stock at $1.375 per
    share and 150,000 shares of common stock at $1.25 exercisable until June 30,
    1999. Also includes options to purchase 1,200,000 shares of common stock at
    $0.657 per share exercisable until September 30, 2001.

                                       22
<PAGE>
 
            ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
                                        
In October 1996, the Company entered into a two year employment agreement with
Dr. That T. Ngo, President and Chief Executive Officer. The agreement specifies
an annual base salary of $222,000. Dr. Ngo also received options to purchase up
to 1,500,000 shares of the Company's common stock at the exercise price of
$0.657 per share exercisable until September 2001. Options to purchase 750,000
shares vested upon execution of the agreement. The options to purchase the
remaining 750,000 shares will vest in quarterly installments of 90,000 each over
the next seven calendar quarters and 120,000 in the eighth calendar quarter. The
agreement contains a severance provision. Dr. Ngo shall be entitled to a
severance payment equal to six months salary. The employment agreement also
includes provisions for customary medical insurance, vacation, sick leave,
nondisclosure and covenants not to compete. If the Company creates an executive
bonus plan, Dr. Ngo shall be entitled to participate in such a plan.

In January 1997, the Company entered into a one year employment agreement with
Mr. Berk. The agreement specifies an annual base salary of $80,000. Mr. Berk
also received options to purchase up to 100,000 shares of the Company's common
stock at an exercise price equal to the closing bid price on the date of
approval of the agreement, $0.44 per share, until December 31, 2000. The options
vest in installments of 25,000 each at the end of each of the following four
calendar quarters. The agreement contains a severance provision. If he is
terminated without cause, Mr. Berk shall be entitled to a severance payment
equal to three months salary. The employment agreement also includes provisions
for customary medical insurance, vacation, sick leave, nondisclosure and
covenants not to compete. If the Company creates an executive bonus plan, Mr.
Berk shall be entitled to participate in such a plan.

In October 1996, the Company entered into a two year employment agreement with
Dr. Ronald J. Moore, Vice President of Operations. The agreement specifies an
annual base salary of $80,000. Dr. Moore also received options to purchase up to
100,000 shares of the Company's common stock at the exercise price of $0.563 per
share exercisable until September 2001. In May 1997, Dr. Moore's annual base
salary was increased to $90,000. Dr. Moore tendered his resignation effective
March 31, 1998.

In May 1997, the Company entered into a two year employment agreement with
Donald C. Swanson, Director of Manufacturing. The agreement specifies an annual
base salary of $70,000. Mr. Swanson also received options to purchase up to
50,000 shares of the Company's common stock at the exercise price of $0.35 per
share exercisable until April 2002. The options will vest in installments of
6,250 each at the end of each three month period of the first two years of
continuous employment. The agreement contains a severance provision. If Mr.
Swanson is terminated without cause, he shall be entitled to a severance payment
equal to two months salary.

In January 1998, the Company entered into a two year employment agreement with
Gary L. Dreher, Vice President of Sales and Marketing. The agreement specifies
an annual base salary of $100,000. The agreement also specifies the payment of a
quarterly commission calculated on the net year to date sales receipts as of the
end of each calendar quarter. The commission rates are four percent on year to
date sales receipts up to $1,000,000, five percent on amounts between $1,000,001
and $2,000,000, and six percent on amounts in excess of $2,000,000. Mr. Dreher
also received options to purchase up to 250,000 shares of the Company's

                                       23
<PAGE>
 
common stock at the exercise price of $0.13 per share exercisable until December
2002. The options will vest in installments of 31,250 each at the end of each of
the following eight calendar quarters. The agreement contains a severance
provision. If Mr. Dreher is terminated without cause, he shall be entitled to a
severance payment equal to two months salary.

The Company has been unable to meet a substantial portion of the salary
obligations due to its employees, including officers and directors. At December
31, 1997, the Company was indebted for $583,647 for accrued salaries payable to
five persons who are officers and other employees and former employees. The
Company has made payment arrangements with four persons who are current or
former employees who are owed an aggregate of $452,200 at December 31, 1997. The
Company has agreed to pay each of these persons their proportionate share of
five percent of sales revenues, if any, of the Company, but not less than $500
per month per person. In addition, if a person currently employed by the Company
is terminated under certain circumstances, the minimum monthly payment would be
increased. All amounts must be paid no later than February 28, 2001. In January
1997, the Company paid the accrued salary of an officer who had not agreed to a
payment arrangement as part of a separation agreement. The Company has had
various communications with the other employee concerning possible alternative
arrangements. There can be no assurance as to the success of these efforts.

In January 1997, Robert R. Guerrero, Ph.D., Vice President of Research and
Development and a director, resigned his positions with the Company. In February
1997, Axel J. Kutcher, a principal in Euro-American GMBH, and Edward R.
Arquilla, M.D., Ph.D., were invited to become members of the Company's Board of
Directors. Both individuals accepted the invitations and were approved by the
other members. In February 1997, Donald E. Rounds, Ph.D., the Company's former
Chief Scientist, resigned his position as a director. In June 1997, John G.
Tkachuk, President of AMDL Canada, Inc. ("AMDL Canada"), a subsidiary of Briana,
resigned his position as director. In February 1997, the Company began cash
compensation payments to certain directors for special services to the Company.
Payment arrangements to certain directors were made retroactive to November
1996. The payments range in amounts from $1,000 per month to $2,500 per month
and will continue through December 1998.

In January 1989, the Company entered into a licensing agreement (the "Licensing
Agreement") with AMDL Canada Inc. formed for the purpose of entering into the
Licensing Agreement. Pursuant to the terms of the Licensing Agreement, the
Company granted to AMDL Canada an exclusive license to market and sell the
Company's proposed cancer detection product, DR-70(TM), in Canada directly or
through agents, distributors or other representatives. Pursuant to the terms of
the Licensing Agreement, as amended, AMDL Canada has paid the Company an
aggregate of $120,000 and agreed to pay the Company an additional $500,000 in
the form of a $1 surcharge on each of the first 500,000 test kits sold by or
through AMDL Canada in Canada. Dr. Robert R. Guerrero, then an officer and
director of the Company, was a director of Briana Resources, Ltd., an affiliate
of Briana, from February 1989 to August 1990, although he abstained from voting
with respect to the Licensing Agreement or the amendments thereto. In February
1995, the Company and Briana created a joint venture, ICD, LLC, as a limited
liability company under Delaware law ("ICD"). ICD was formed to market and
license the Company's technology throughout the world, exclusive of the United
States and its territories and possessions and Canada. The Company and Briana
are the two members of ICD. Three managers conduct the business of ICD. The
Company and Briana each selected one manager. The manager selected by the
Company is the Company's President, That T. Ngo. The manager selected by

                                       24
<PAGE>
 
Briana is John G. Tkachuk, the President of AMDL Canada Inc. The third manager
will be selected by the two managers at a later date.

Initial capital contributions to ICD were made by the Company and Briana of $650
and $350, respectively. Additional contributions are to be made from the members
by unanimous consent. Any amounts in addition to the initial capital
contributions required by ICD are to be contributed in proportion to the
members' respective percentage interest. Profits and losses of ICD were to be
allocated in accordance with percentage interests, which are 65% to the Company
and 35% to Briana. The Company and Briana agreed that their percentage interests
in ICD would be changed to 50 % each if the Company failed to satisfy either of
the two following tests as determined by the Cross Cancer Institute and could
not reverse such determination within nine months thereof. The first requirement
was that clinical trial testing done on DR-70(TM) at the Cross Cancer Institute
result in a finding that DR-70(TM) has a sensitivity and specificity sufficient
to qualify DR-70(TM) as a commercial grade tumor-marker test for lung cancer to
be approved for use in the Canadian market by either the Cross Cancer Institute
or the Health Protection Branch. The second requirement was that within six
months after the Company's receipt of the second installment of the marketing
rights fee from Briana (which occurred in April, 1995), the Company shall cause
its technology to (i) have developed to the level where the Company can
demonstrate the efficacy of such technology with lung and ovarian tumors and/or
(ii) be at a stage where the Company can demonstrate marketable level accuracy
on the basis of well characterized sera test results to make a valid assessment.
The Company believes that these requirements were met on a timely basis.

The purchase price for each product developed from the Company's technology sold
to ICD will be equal to the costs incurred by the Company in producing such
product. The Company has agreed to supply Briana with sufficient product for the
Canadian market, as determined by Briana, as well as make all reasonable efforts
to supply ICD with sufficient product for markets outside Canada and the United
States on a timely basis. The Company cannot unreasonably withhold supply of
product to Briana or ICD. In the event that supply requirements cannot be met to
fill bona fide purchase orders for the product within a reasonable time frame,
product will be supplied to all markets on a pro-rata basis. If the Company
cannot supply product then Briana will have the right to have the product
produced by an independent third party.

Briana was required to make marketing rights fee installment payments totaling
$1,000,000 to the Company. If an installment was unpaid, Briana's percentage
interests were to be reduced. As of December 31, 1996, the Company had received
$367,253 of this fee from Briana. In January 1997, AMDL, Inc. provided Briana
Bio-Tech Inc., with written notice of default in payment of the marketing fee
affecting percentage ownership interest in ICD. In accordance with terms of the
Operating Agreement, Briana's percentage ownership interest in ICD, L.L.C. has
been reduced from 35 percent to 12.85 percent. AMDL's percentage ownership
interest in ICD, L.L.C. has been increased from 65 percent to 87.15 percent.

                                       25
<PAGE>
 
                   ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
Exhibits

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

3.1    Certificate Of Incorporation of the Company, previously filed as an
       Exhibit to the Company's Report On Form 10-K for the year ended December
       31, 1989, is incorporated herein by this reference.

3.2    Bylaws of the Company, previously filed as an Exhibit to the Company's
       Report On Form 10-K for the year ended December 31, 1991, is incorporated
       herein by this reference.

10.1   Amendments To License Agreement Between the Company and AMDL Canada,
       Inc., Dated September 20, 1989, June 16, 1990 and July 5, 1990,
       previously filed as an Exhibit to the Company's Report on Form 10-K for
       the year ended December 31, 1990, is incorporated herein by this
       reference.

10.2   Option For Marketing Rights Between the Company and Biotech Marketing
       Group, Inc., Dated June 29, 1990, As Amended November 20, 1990,
       previously filed as an Exhibit to the Company's Report On Form 10-K for
       the year ended December 31, 1990, is incorporated herein by this
       reference.

10.2(a)Second Amendment Between AMDL, Inc. and Biotech Marketing Group, Inc.,
       Dated February 4, 1991, previously filed as an Exhibit to the Company's
       Report on Form 10-K for the year ended December 31, 1991, is incorporated
       herein by this reference.

10.3   Agreement Between the Company and AMDL Canada, Inc., Dated January 21,
       1992, previously filed as an Exhibit to the Company's Report on Form 10-K
       for the year ended December 31, 1991, is incorporated herein by this
       reference.

10.4   The Company's Incentive Stock Option Plan, adopted in 1988, previously
       filed as an Exhibit to   the Company's Report on Form 10-K for the year
       ended December 31, 1990, is incorporated herein by this reference.

10.5   The Company's 1992 Stock Option Plan, previously filed as an Exhibit to
       the Company's Report on Form 10-K for the year ended December 31, 1991,
       is incorporated herein by this reference.

10.6   Research Agreement Between The Company, The Alberta Cancer Board And AMDL
       Canada, Inc., Dated September 10, 1991, previously filed as an Exhibit to
       the Company's Report on Form 10-K for the year ended December 31, 1991,
       is incorporated herein by this reference.

10.7   Employment Agreement Between The Company And Dr. Robert R. Guerrero,
       Dated September 1, 1991, previously filed as an Exhibit to the Company's
       Report on Form 10-K for the year ended December 31, 1991, is incorporated
       herein by this reference.

                                       26
<PAGE>
 
10.8   Employment Agreement Between The Company And Dr. Donald E. Rounds, Dated
       September 1, 1991, previously filed as an Exhibit to the Company's Report
       on Form 10-K for the year ended December 31, 1991, is incorporated herein
       by this reference.

10.9   Restated Employment Agreement Between 'Me Company And Louis R. Dilts,
       Dated August 22, 1991, previously filed as an Exhibit to the Company's
       Report on Form 10-K for the year ended December 31, 1991, is incorporated
       herein by this reference.

10.10  Agreement For The Termination of Employment Between The Company And Dr.
       Richard Anderson, Dated September 1, 1991, previously filed as an Exhibit
       to the Company's Report on Form 10-K for the year ended December 31,
       1991, is incorporated herein by this reference.

10.11  Agreement For The Termination Of Employment Between The Company And
       Thomas V. Tilton, Dated September 1, 1991, previously filed as an Exhibit
       to the Company's Report on Form 10-K for the year ended December 31,
       1991, is incorporated herein by this reference.

10.12  Contract for Performance of Services Between the Company and Glen R.
       Justice, M.D., Dated May 15, 1991, is amended by letter dated May 26,
       1992, previously filed as an Exhibit to the Company's Report on Form 10-K
       for the year ended December 31, 1991, is incorporated herein by this
       reference.

10.13  Contract for Performance of Services Between the Company and Sally Ann
       Kraensel, Dated May 15, 1991, as amended by letter dated June 30, 1992,
       previously filed as an Exhibit to the Company Report on Form 10-KSB for
       the year ended December 31, 1992, is incorporated herein by this
       reference.

10.14  Employment Agreement between the Company and Edward L. Stephen, D. V. M.,
       dated January 15, 1993, previously filed as an Exhibit to the Company
       Report on Form 10-KSB for the year ended December 31, 1992, is
       incorporated herein by this reference.

10.15  Employment Agreement between the Company and William M. Thompson, III,
       M.D., dated February 22, 1993, previously filed as an Exhibit to the
       Company Report on Form 10-KSB for the year ended December 31, 1992, is
       incorporated herein by this reference.

10.16  Employment Agreement between the Company and Harry Berk, dated March 10,
       1993, previously filed as an Exhibit to the Company Report on Form 10-KSB
       for the year ended December 31, 1992, is incorporated herein by this
       reference.

10.17  1994 Stock Option Plan, previously filed as an Exhibit to the Company
       Report on Form 10-KSB for the year ended December 31, 1993, is
       incorporated herein by this reference.

10.18  Independent Contract Agreement between the Company and Roger Lallone
       doing business as Brookwood Biomed, previously filed as an Exhibit to the
       Company Report on Form 10-KSB for the year ended December 31, 1993, is
       incorporated herein by this reference.

                                       27
<PAGE>
 
10.19  Assignment Agreement between Roger Lallone, doing business as Brookwood
       Biomedical, and the Company dated December 22, 1993, previously filed as
       an Exhibit to the Company Report on Form 10-KSB for the year ended
       December 31, 1993, is incorporated herein by this reference.

10.20  Employment Agreement between the Company and That T. Ngo, dated June 1,
       1994./(1)/

10.21  Employment Agreement between the Company and Robert R. Guerrero, dated
       September 1, 1994./(1)/

10.22  Employment Agreement between the Company and Harry R. Berk, dated
       January 3, 1995./(1)/

10.23  Operating Agreement of ICD, L.L.C./(1)/

10.24  Letter Agreement between the Company and Briana Bio-Tech, Inc. and AMDL
       Canada, Inc., dated February 7, 1995./(1)/

10.25  Sub-Lease Agreement between UniSyn Technologies, Inc., and the Company,
       dated February 1995, regarding the premises located at 14272 Franklin
       Avenue, Tustin, California./(1)/

10.26  Nonstatutory Stock Option Agreement between the Company and Donald E.
       Rounds, dated March 16, 1994./(1)/

10.27  The Company's Stock Bonus Plan./(2)/

10.28  Form of International Distribution Agreement of ICD, L.L.C./(2)/

10.29  Employment Agreement Between the Company and Harry Berk, Dated January 1,
       1996./(2)/

10.30  Form of Accrued Salary Payment Agreement Between the Company and Various
       Employees and Former Employees Dated September 20, 1996./(3)/ 

10.31  Employment Agreement Between the Company and That T. Ngo, Dated October
       1, 1996./(3)/ 

10.32  Employment Agreement Between the Company and Ronald J. Moore, Dated
       October 23, 1996./(3)/

10.33  Employment Agreement Between the Company and Harry Berk, Dated January 1,
       1997./(3)/

10.34  Employment Agreement Between the Company and Donald C. Swanson, Dated May
       5, 1997.

10.35  Employment Agreement Between the Company and Gary L. Dreher, Dated
       January 15, 1998.

22     Subsidiaries./(3)/

27     Financial Data Schedule

                                       28
<PAGE>
 
(1)  Previously filed as an Exhibit to the Company Report on Form 1O-KSB for the
     year ended December 31, 1994, is incorporated herein by this reference.

(2)  Previously filed as an Exhibit to the Company Report on Form 1O-KSB for the
     year ended December 31, 1995, is incorporated herein by this reference.

(3)  Previously filed as an Exhibit to the Company Report on Form 10-KSB for the
     year ended December 31, 1996, is incorporated herein by this reference.

Reports on Form 8-K

During the last quarter of the fiscal year ended December 31, 1997, the
Registrant filed no reports on Form 8-K.

                                       29
<PAGE>
 
                         INDEX TO FINANCIAL STATEMENTS
                         -----------------------------
 
                                                                Page
                                                                ----

  Report of Independent Public Accountants                      F-1
  Balance Sheets                                                F-2
  Statements of Operations                                      F-3
  Statements of Stockholders' Equity (Deficit)                  F-4
  Statements of Cash Flows                                      F-8
  Notes to Financial Statements                                 F-9

                                       30
<PAGE>
 
                   REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
                   ----------------------------------------


To the Shareholders of AMDL, Inc.:

We have audited the accompanying balance sheets of AMDL, INC. (a Delaware
corporation), a development stage company, as of December 31, 1997 and 1996, and
the related statements of operations and cash flows for each of the three years
ended December 31, 1997, 1996 and 1995 and for the period of inception (July 10,
1987) to December 31, 1997, and the related statements of stockholders' equity
from inception to date.  These financial statements are the responsibility of
the Company's management.  Our responsibility is to express an opinion on these
financial statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of AMDL, INC. as of December 31,
1997 and 1996, and the results of its operations and its cash flows for each of
the three years ended December 31, 1997, 1996 and 1995 and for the period from
inception (July 10, 1987) to December 31, 1997, in conformity with generally
accepted accounting principles.

The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern.  As shown in the accompanying
financial statements, the Company is a development stage company which has
experienced significant losses since inception with no significant revenues.
These factors and other factors discussed in Note 1 to the financial statements
raise a substantial doubt about the ability of the Company to continue as a
going concern.  Management's plans in regard to these matters are described in
Note 1.  The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.



                                       ARTHUR ANDERSEN LLP


Orange County, California
February 13, 1998

                                    - F-1 -
<PAGE>
 
                                  AMDL, INC.
                                  ----------
                         (A development stage company)
                                        
                  BALANCE SHEETS - DECEMBER 31, 1997 AND 1996
                  -------------------------------------------


                                    ASSETS
                                    ------
<TABLE>
<CAPTION>
                                                         1997          1996    
                                                     -----------    ----------- 
<S>                                                  <C>            <C>       
CURRENT ASSETS:                                                               
  Cash and cash equivalents                          $ 1,498,540     $3,504,660
                                                                              
OTHER ASSETS                                               7,863          7,863
                                                     -----------    -----------
                                                     $ 1,506,403    $ 3,512,523
                                                     ===========    ===========
</TABLE>



                     LIABILITIES AND STOCKHOLDERS' EQUITY
                     ------------------------------------
<TABLE>
<CAPTION>
 
CURRENT LIABILITIES:
<S>                                                  <C>            <C>      
  Notes payable                                      $    25,000    $    25,000
  Accounts payable and accrued expenses                  125,748        192,736
  Accrued payroll and related expenses                   674,669        924,079
  Capital lease obligation                                     -         18,668
  Customer deposit                                        32,235              -
                                                     -----------    -----------
        Total current liabilities                        857,652      1,160,483
                                                     -----------    -----------
 
COMMITMENTS (Note 5)
 
STOCKHOLDERS' EQUITY:
  Preferred stock, 10,000,000 shares
    authorized, no shares issued or
    outstanding at December 31, 1997 and 1996                  -              -
  Common stock, $.001 par value-                                               
    50,000,000 shares authorized, 33,754,903                                   
    and 33,529,903 shares issued and outstanding                               
    at December 31, 1997 and 1996, respectively           33,755         33,530
  Additional paid-in capital                          11,909,699     11,865,799
  Deficit accumulated during the development stage   (11,294,703)    (9,547,289)
                                                    ------------    -----------
                                                         648,751      2,352,040
                                                    ------------    -----------
                                                    $  1,506,403    $ 3,512,523
                                                    ============    ===========
</TABLE>

      The accompanying notes are an integral part of these balance sheets.

                                    - F-2 -
<PAGE>
 
                                  AMDL, INC.
                                  ----------
                         (A development stage company)

                           STATEMENTS OF OPERATIONS
                           ------------------------
     FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995, AND THE PERIOD
     --------------------------------------------------------------------
              FROM INCEPTION (JULY 10, 1987) TO DECEMBER 31, 1997
              ---------------------------------------------------
<TABLE>
<CAPTION>
 
                                                                            Inception
                                                                         (July 10, 1987)
                          Year Ended      Year Ended      Year Ended           To
                         December 31,    December 31,    December 31,     December 31,
                             1997            1996            1995             1997
                         -------------   -------------   -------------   ---------------
<S>                      <C>             <C>             <C>             <C>
 
REVENUES                  $    42,436     $         -     $         -      $     42,436
COST OF SALES                  23,039               -               -            23,039
                          -----------     -----------     -----------      ------------
    Gross Profit               19,397               -               -            19,397
                          -----------     -----------     -----------      ------------
OPERATING EXPENSES:
  Research and
   development                906,814         863,875         574,845         5,893,638
  General and
   administrative             981,929         886,777       1,159,182         6,720,698
                          -----------     -----------     -----------      ------------
                            1,888,743       1,750,652       1,734,027        12,614,336
                          -----------     -----------     -----------      ------------
LOSS FROM
 OPERATIONS                (1,869,346)     (1,750,652)     (1,734,027)      (12,594,939)
                          -----------     -----------     -----------      ------------
OTHER INCOME
 (EXPENSE):
  Interest expense                  -               -         (47,558)         (561,016)
  Interest income             121,932          85,134               -           209,716
  Other                             -          43,138         324,115         1,651,536
                          -----------     -----------     -----------      ------------
                              121,932         128,272         276,557         1,300,236
                          -----------     -----------     -----------      ------------
    Net Loss              $(1,747,414)    $(1,622,380)    $(1,457,470)     $(11,294,703)
                          ===========     ===========     ===========      ============
 
 
BASIC AND DILUTED
 LOSS PER SHARE           $     (0.05)    $     (0.06)    $     (0.07)
                          ===========     ===========     ===========
 
WEIGHTED AVERAGE
 SHARES OUTSTANDING        33,660,588      29,134,105      20,041,548
                          ===========     ===========     ===========
 
</TABLE>

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

                                    - F-3 -
<PAGE>
 
                                  AMDL, INC.
                                  ----------
                         (A development stage company)

                 STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
                 --------------------------------------------
              FROM INCEPTION (JULY 10, 1987) TO DECEMBER 31, 1997
              ---------------------------------------------------
<TABLE>
<CAPTION>
                                                                                                            
                                                                      Common Stock                         
                                                   Common Stock        Subscribed             Additional   
                                               -------------------    -----------              Paid-in     
                                                 Shares     Amount       Shares      Amount    Capital     
                                               ----------   -------   ------------   ------   ----------   
<S>                                            <C>          <C>       <C>            <C>      <C>          
BALANCE, Inception (July, 10, 1987)                     -   $     -              -   $    -     $      -    
  Common stock issued                               1,275     1,275              -        -            -   
  Net loss                                              -         -              -        -            -   
                                               ----------   -------   ------------   ------     --------   
BALANCE, December 31, 1988                          1,275     1,275              -        -            -  
  Restatement due to merger                     8,865,307     7,591              -        -       48,201  
  Common stock issued                           1,347,880     1,348              -        -       54,994   
  Net loss                                              -         -              -        -            -   
                                               ----------   -------   ------------   ------     --------   
BALANCE, December 31, 1989                     10,214,462    10,214              -        -      103,195   
  Common stock issued for cash at $0.114          451,000       451              -        -      217,676   
  Common stock issued at $0.25 to three
   officers in lieu of salary                     300,000       300              -        -       74,700   
  Common stock issued for services at $1.00        30,000        30              -        -       29,970   
  Common stock issued for services at $0.50        14,000        14              -        -        6,986   
  Common stock issued for cash at $0.25           230,000       230              -        -       57,270          
  Common stock issued at $0.04 to a member
   of the board of directors                       90,000        90              -        -        3,510          
  Common stock issued for cash at $0.04            15,000        15              -        -          585          
  Common stock issued for services at $0.25       500,000       500              -        -      124,500        
  Common stock issued for consulting
   services at $1.00                               50,000        50              -        -       49,950        
  Net loss                                              -         -              -        -            -    
                                               ----------   -------   ------------   ------     --------   
BALANCE, December 31, 1990                     11,894,462    11,894              -        -      668,342   
  Common stock issued for consulting
   services at $0.12                               50,000        50              -        -        5,950   
  Common stock issued at $0.25 for payment
   of loan                                         10,000        10              -        -        2,490   
  Net loss                                              -         -              -        -            -   
                                               ----------   -------   ------------   ------     -------- 
BALANCE, December 31, 1991                     11,954,462    11,954              -        -      676,782 

<CAPTION>
                                                  Deficit
                                                Accumulated
                                                during the
                                                Development
                                                  Stage             Total
                                              -------------      ----------
BALANCE, Inception (July, 10, 1987)           $         -        $        - 
<S>         
  Common stock issued                                   -             1,275
  Net loss                                        (37,323)          (37,323)
                                              -----------        ----------- 
BALANCE, December 31, 1988                        (37,323)          (36,048)
  RestatEment due to merger                             -            55,792
  Common stock issued                                   -            56,342
  Net loss                                       (241,479)         (241,479)
                                              -----------        -----------
BALANCE, December 31, 1989                       (278,802)         (165,393)
  Common stock issued for cash at $0.114                -           218,127
  Common stock issued at $0.25 to three       
   officers in lieu of salary                           -            75,000
  Common stock issued for services at $1.00             -            30,000
  Common stock issued for services at $0.50             -             7,000
  Common stock issued for cash at $0.25                 -            57,500
  Common stock issued at $0.04 to a member         
   of the board of directors                            -             3,600
  Common stock issued for cash at $0.04                 -               600
  Common stock issued for services at $0.25             -           125,000
  Common stock issued for consulting   
   services at $1.00                                    -            50,000
  Net loss                                       (107,415)         (107,415)
                                              -----------       -----------
BALANCE, December 31, 1990                       (386,217)          294,019
  Common stock issued for consulting                     
   services at $0.12                                    -             6,000
  Common stock issued at $0.25 for payment                           
   of loan                                              -             2,500
  Net loss                                     (1,044,395)       (1,044,395)
                                              -----------       -----------
BALANCE, December 31, 1991                     (1,430,612)         (741,876)
</TABLE>                      

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

                                    - F-4 -
<PAGE>
 
<TABLE>
<CAPTION>
 
                                                                                                            Deficit
                                                                     Common Stock                         Accumulated
                                                  Common Stock        Subscribed             Additional    during the
                                              -------------------    -----------              Paid-in     Development
                                                Shares     Amount       Shares      Amount    Capital        Stage         Total
                                              ----------   -------   ------------   ------   ----------   ------------  -----------

<S>                                           <C>          <C>       <C>            <C>      <C>          <C>           <C>
  Common stock issued in exchange for
   notes payable and accrued interest
   at $0.25                                    1,363,019   $ 1,363              -   $    -   $  339,393   $         -   $   340,756
  Exercise of warrants at $0.001                   1,422         1              -        -            -             -             1
  Exercise of warrants at $0.500                  57,140        58              -        -       28,512             -        28,570
  Common stock issued to related party
   pursuant to private placement
   at $0.894                                     640,000       640              -        -      571,520             -       572,160
  Warrants issued in connection with debt
   offering                                            -         -              -        -      312,000             -       312,000
  Warrants issued for services                         -         -              -        -      518,285             -       518,285
  Net loss                                             -         -              -        -            -    (2,083,984)   (2,083,984)
                                              ----------   -------   ------------   ------   ----------   -----------   -----------

BALANCE, December 31, 1992                    14,016,043    14,016              -        -    2,446,492    (3,514,596)   (1,054,088)

  Common stock issued to related party and
   others pursuant to a private placement
   at $0.894                                   1,478,185     1,479              -        -    1,320,012             -     1,321,491
  Exercise of warrants at $0.894                  11,184        11              -        -        9,989             -        10,000
  Common stock issued in exchange for
   notes payable and accrued interest
   at $0.894                                     243,147       243              -        -      217,135             -       217,378
  Net loss                                             -         -              -        -            -    (1,348,254)   (1,348,254)
                                              ----------   -------   ------------   ------   ----------   -----------   -----------

BALANCE, December 31, 1993                    15,748,559    15,749              -        -    3,993,628    (4,862,850)     (853,473)

  Common stock issued to related party
   pursuant to a private placement
   at $0.894                                     500,000       500              -        -      446,500             -       447,000
  Exercise of warrants at $0.25                  150,000       150              -        -       37,350             -        37,500
  Common stock issued to various creditors
   at $0.894                                     158,728       158              -        -      141,744             -       141,902
  Exercise of options at $0.05                   535,000       535              -        -       26,215             -        26,750
  Exercise of options at $1.00                    16,000        16              -        -       15,984             -        16,000
  Common stock issued for note payable and
   accrued interest at $0.894                    346,011       346              -        -      305,249             -       305,595
  Exercise of warrants at $1.00                   40,000        40              -        -       39,960             -        40,000
  Common stock issued to related party
   pursuant to a private placement at $0.25      180,000       180              -        -       44,820             -        45,000
  Net loss                                             -         -              -        -            -    (1,604,589)   (1,604,589)
                                              ----------   -------   ------------   ------   ----------   -----------   -----------

BALANCE, December 31, 1994                    17,674,298    17,674              -        -    5,051,450    (6,467,439)   (1,398,315)

</TABLE>

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

                                    - F-5 -
<PAGE>
 
<TABLE>
<CAPTION>
 
 
                                                                                                           Deficit
                                                                     Common Stock                       Accumulated
                                            Common Stock              Subscribed           Additional    during the
                                        -------------------    --------------------------   Paid-in     Development
                                          Shares     Amount       Shares         Amount     Capital        Stage         Total
                                        ----------   -------   -------------   ---------- ------------  ------------  -------------
<S>                                     <C>          <C>       <C>             <C>        <C>           <C>           <C>
 
 
  Common stock issued for cash at
   $0.25                                1,000,000   $ 1,000              -    $       -   $   249,000  $          -   $   250,000
  Exercise of warrants at $0.45           500,000       500              -            -       224,500             -       225,000
  Common stock issued for cash at                                                                                 
   $0.30                                1,000,000     1,000              -            -       299,000             -       300,000
  Exercise of warrants at $0.50           500,000       500              -            -       249,500             -       250,000
  Exercise of warrants at $0.986           32,737        33              -            -        32,233             -        32,266
  Exercise of options at $0.05             65,000        65              -            -         3,185             -         3,250
  Common stock issued for cash at                                                                                 
   $0.752                                 133,000       133              -            -        99,867             -       100,000
  Exercise of warrants at $0.25            10,000        10              -            -         2,490             -         2,500
  Common stock issued for cash at                                                                                 
   $0.40                                  750,000       750              -            -       299,250             -       300,000
  Common stock issued in exchange                                                                                 
   for convertible notes                                                                                          
    payable and accrued interest at                                                                               
     $0.25                                543,246       543              -            -       135,268             -       135,811
  Common stock subscribed at $0.60                                                                                
   (Note 9)                                     -         -        500,000      300,000             -             -       300,000
  Net loss                                      -         -              -            -             -    (1,457,470)   (1,457,470)
                                       ----------   -------   ------------    ----------- -----------    ----------    ----------

BALANCE, December 31, 1995             22,208,281    22,208        500,000      300,000     6,645,743    (7,924,909)     (956,958)
  Common stock issued for cash at
   $0.35                                4,500,000     4,500              -            -     1,570,500             -     1,575,000
  Common stock issued for cash at                                                                                      
   $0.40                                1,000,000     1,000              -            -       399,000             -       400,000
  Common stock issued for cash at                                                                                      
   $0.475                               4,000,000     4,000              -            -     1,896,000             -     1,900,000
  Exercise of warrants at $0.62         1,125,000     1,125              -            -       696,375             -       697,500
  Common stock issued for cash at                                                                                      
   $0.35                                  500,000       500              -            -       174,500             -       175,000
  Exercise of warrants at $0.25            10,500        11              -            -         2,614             -         2,625
  Exercise of warrants at $0.25            19,500        20              -            -         4,855             -         4,875
  Common stock issued to various                                                                                       
   creditors at $0.894                     30,162        30              -            -        26,903             -        26,933
  Common stock issued at $0.25 for                                                                                     
   converted notes payable                                                                                             
    and accrued interest                  136,460       136              -            -        33,979             -        34,115
  Warrants issued for services                  -         -              -            -       115,330             -       115,330
  Common stock subscribed at $0.60                                                                                     
   (Note 9)                                     -         -       (500,000)    (300,000)      300,000             -             -
  Net loss                                      -         -              -            -             -    (1,622,380)   (1,622,380)
                                       ----------   -------   ------------    ---------    -----------   ----------    ----------

BALANCE, December 31, 1996             33,529,903   $33,530              -            -     11,865,799   (9,547,289)    2,352,040
 
</TABLE>

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

                                    - F-6 -
<PAGE>
 
<TABLE>
<CAPTION>
 
                                                                                                          Deficit
                                                                       Common Stock                     Accumulated
                                                 Common Stock           Subscribed        Additional     during the
                                             --------------------   -------------------    Paid-in      Development
                                               Shares     Amount      Shares     Amount    Capital         Stage           Total
                                             ----------   -------   ----------   ------  -----------   -------------   ------------
<S>                                          <C>          <C>       <C>          <C>     <C>           <C>             <C>
  Exercise of warrants at $0.25                 100,000   $   100            -   $    -   $   24,900    $          -    $    25,000
  Common stock issued for services at
   $0.17                                        100,000       100            -        -       16,900               -         17,000
  Common stock issued as settlement with
   former option holder                          25,000        25            -        -        2,100               -          2,125
  Net loss                                            -         -            -        -           -       (1,747,414)    (1,747,414)
                                             ----------   -------   ----------   ------  -----------    ------------    -----------

BALANCE, December 31, 1997                   33,754,903   $33,755            -   $    -  $11,909,699    $(11,294,703)   $   648,751
                                             ==========   =======   ==========   ======  ===========    ============    ===========
</TABLE>

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

                                    - F-7 -
<PAGE>
 
                                  AMDL, INC.
                                  ----------
                         (A development stage company)
                           STATEMENTS OF CASH FLOWS
                           ------------------------
             FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
             ----------------------------------------------------
      AND THE PERIOD FROM INCEPTION (JULY 10, 1987) TO DECEMBER 31, 1997
      ------------------------------------------------------------------
<TABLE>
<CAPTION>
                                                                                                                        Inception
                                                                                                                     (July 10, 1987)
                                                                       Year Ended       Year Ended      Year Ended          To
                                                                      December 31,     December 31,    December 31,    December 31,
                                                                          1997             1996            1995            1997
                                                                     ---------------   -------------   -------------   -------------

<S>                                                                  <C>               <C>             <C>             <C>
 
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net loss                                                              $(1,747,414)    $(1,622,380)    $(1,457,470)   $(11,294,703)

  Adjustments to reconcile net loss to net cash used in operating
   activities-
    Depreciation and amortization                                                 -          10,000         267,265         497,288
    Amortization of deferred interest                                             -               -               -         312,000
    Common stock subscribed                                                       -               -         300,000         300,000
    Common stock issued for services                                         19,125               -               -         312,541
    Warrants issued for services                                                  -         115,330               -         661,529
    Increase in other assets                                                      -          (7,863)              -          (7,863)
    Increase (decrease) in accounts payable and accrued expenses            (66,988)        (31,084)        (28,052)        151,203
    Increase (decrease) in accrued payroll and related expenses            (249,410)        (31,531)         87,610         674,669
    Increase in customer deposit                                             32,235               -               -          32,235
    Decrease in due to related party                                              -         (43,646)         (7,860)              -
    Increase (decrease) in accrued interest                                       -         (97,808)         30,925               -
                                                                        -----------     -----------     -----------    ------------
          Net cash used in operating activities                          (2,012,452)     (1,708,982)       (807,582)     (8,361,101)
                                                                        -----------     -----------     -----------    ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
  Purchases of equipment                                                          -         (10,000)        (18,517)       (225,930)
  Expenditures for patents                                                        -               -               -        (154,682)
                                                                        -----------     -----------     -----------    ------------
          Net cash used in investing activities                                   -         (10,000)        (18,517)       (380,612)
                                                                        -----------     -----------     -----------    ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
  Borrowings (repayments) under notes payable, net                                -        (222,385)        (44,500)         59,115
  Repayments under capital lease obligation                                 (18,668)        (35,379)        (32,404)       (116,676)
  Proceeds from issuance of common stock                                     25,000       4,755,000       1,598,827      10,240,747
  Net effect of merger with CVI                                                   -               -               -          57,067
                                                                        -----------     -----------     -----------    ------------
          Net cash provided by financing activities                           6,332       4,497,236       1,521,923      10,240,253
                                                                        -----------     -----------     -----------    ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                     (2,006,120)      2,778,254         695,824       1,498,540
CASH AND CASH EQUIVALENTS, beginning of period                            3,504,660         726,406          30,582               -
                                                                        -----------     -----------     -----------    ------------
CASH AND CASH EQUIVALENTS, end of period                                $ 1,498,540     $ 3,504,660     $   726,406    $  1,498,540
                                                                        ===========     ===========     ===========    ============
</TABLE>

SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:

  During the year ended December 31, 1997, the Company issued 125,000 shares of
     common stock to non-employees for services. The fair value of the stock
     issued was $19,125.

  During the years ended December 31, 1996 and 1995, the Company issued 136,460
     and 543,246 shares of common stock, respectively, to cancel notes payable
     and related accrued interest.

  During the year ended December 31, 1996, the Company issued 225,000 warrants
     to non-employees for services.  The fair value of the warrants issued was
     $115,330.

  During the year ended December 31, 1996, the Company repaid $26,933 of
     accounts payable through the issuance of common stock.

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

                                    - F-8 -
<PAGE>
 
                                  AMDL, INC.
                                  ----------
                         (A development stage company)

                         NOTES TO FINANCIAL STATEMENTS
                         -----------------------------

                               DECEMBER 31, 1997
                               -----------------



1.   Nature of Business and Summary of Significant Accounting Policies
     -----------------------------------------------------------------

     a.   Organization and Nature of Business
          -----------------------------------

     AMDL, INC. (formerly Advanced Medical Diagnostic, Ltd.) (the Company) was
     incorporated July 10, 1987, in the state of Delaware; however, no financial
     activity occurred until 1988.

     On January 16, 1989, the officers/stockholders of the Company entered into
     a share exchange agreement (the Agreement) with California Ventures, Inc.
     (CVI) and its officers which provides for the combining of the two
     companies in a transaction accounted for as a reverse acquisition.  CVI was
     a development stage enterprise located in Colorado that was formed on May
     3, 1988, for the purpose of engaging in mergers with or acquiring a single
     or small number of private firms.

     Under the Agreement, the principal officers/stockholders of the Company
     exchanged all of their shares of common stock for 113,000,000 shares
     (shares indicated do not reflect the reverse stock split on a 1-for-15
     basis in 1989) of previously unissued and unregistered shares of CVI common
     stock.  Subsequently, the domicile of CVI was changed to Delaware and its
     name was changed to AMDL, Inc.

     Even though CVI is the legal entity surviving the transaction, the Company
     is considered to be the acquiring company for accounting purposes because
     the former stockholders of the Company hold the majority of the outstanding
     shares of the combined companies.  This transaction was treated as a
     reverse acquisition for financial reporting purposes, wherein substantively
     the Company acquired CVI.  No goodwill arose as a result of the
     transaction.

     In connection with the transaction, the Company received approximately
     $57,000 in cash.

     Since inception, the Company has primarily been engaged in the commercial
     development of, and the obtaining of various governmental regulatory
     approvals for the marketing of its proprietary diagnostic tumor-marker test
     kit (DR-70) to detect the presence of lung cancer.  In 1997, the Company
     broadened its scope and product line and has a selection of diagnostic test
     kits for several types of cancer, infectious diseases, endocrinology,
     diabetes, nephrology and allergy.  The Company is in the development stage
     and has not generated significant revenues from product sales.

                                    - F-9 -
<PAGE>
 
     In February 1995, the Company and AMDL Canada Inc. (AMDL Canada), a
     Canadian corporation and a wholly-owned subsidiary of Briana Bio-Tech Inc.
     (a significant shareholder of the Company), executed a joint venture
     agreement forming, ICD, L.L.C. (ICD), to pursue world-wide marketing
     (excluding Canada and the United States) of DR-70.  The operating agreement
     established the initial capital contribution for the Company at 65 percent
     and requires AMDL Canada to pay the Company a marketing rights fee of
     $1,000,000 (see Note 4 for additional discussion of the marketing rights
     fee).  The operations of ICD during fiscal years 1997, 1996 and 1995 were
     insignificant and are therefore not consolidated in the accompanying
     financial statements.

     b.  Development Stage Company
         -------------------------

     The Company is in the development stage and has not generated significant
     revenues from operations and has no assurance of any future revenues.  The
     Company will require substantial additional funding for continuing research
     and development, obtaining regulatory approval, and for the
     commercialization of its products.  There is no assurance that the Company
     will be able to obtain sufficient additional funds when needed, or that
     such funds, if available, will be obtainable on terms satisfactory to the
     Company.

     Management has taken action to address these matters.  They include:

     -  Retention of experienced management personnel with particular skills in
        the commercialization of similar products.

     -  Attainment of technology to develop additional diagnostic products for
        detecting cancer and other diseases.

     -  Raising additional funds through the sale of equity securities at terms
        below market price quotations.

     The Company's products, to the extent they may be deemed medical devices or
     biologics, are governed by the Federal Food, Drug and Cosmetics Act and by
     the regulations of state agencies and various foreign government agencies.
     The Company's proposed diagnostic test systems for use with humans are
     subject to certain clearance procedures administered by the above
     regulatory agencies.  There can be no assurance that the Company will
     receive the regulatory approvals required to market its proposed products
     elsewhere or that the regulatory authorities will review the product within
     the average period of time.

     The Company hopes to obtain revenues from product sales, but there is no
     commitment by any person for purchase of any of the Company's products.  In
     the absence of significant sales and profits, the Company may seek to raise
     additional funds to meet its working capital needs principally through the
     additional sales of its securities.  However, there is no assurance that
     the Company will be able to obtain sufficient additional funds when needed,
     or that such funds, if available, will be obtainable on terms satisfactory
     to the Company.

                                   - F-10 -
<PAGE>
 
     These circumstances raise substantial doubt about the Company's ability to
     continue as a going concern.  The accompanying financial statements do not
     include any adjustments that might result from the outcome of this
     uncertainty.

     c.  Revenue Recognition
         -------------------

     Revenue is recognized upon shipment of products to customers.

     d.   Cash Equivalents
          ----------------

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

     e.   Equipment
          ---------

     Prior to 1995, equipment was depreciated on a straight-line basis over five
     years, which was the estimated useful life of the related assets.  In 1995,
     the Company elected to   depreciate the remaining book value
     (approximately $156,000) on its equipment.  During the years ended December
     31, 1997 and 1996, the Company purchased an insignificant amount of
     equipment.  The Company elected to expense these purchases immediately.

     f.  Patents
         -------

     The Company has expended funds for patents that are in various stages of
     the filing and approval process.  Prior to 1995, patents were amortized on
     the straight-line basis over an estimated useful life of 10 years.  In
     1995, the Company elected to amortize the remaining book value on its
     patents.  During 1997 and 1996, the Company expended approximately $40,000
     each year on patents.  The Company elected to expense these expenditures
     immediately.

     g.   Common Stock Issued for Services Rendered
          -----------------------------------------

     The Company periodically issues common stock for services rendered.  Common
     stock issued is valued at the estimated fair market value, as determined by
     management and the board of directors of the Company.  Management and the
     board of directors consider market price quotations and other factors in
     determining fair market value for purposes of valuing the common stock.

     h.  Accounting for Stock Based Compensation
         ---------------------------------------

     The Company accounts for stock-based compensation issued to employees using
     the intrinsic value based method as prescribed by APB Opinion No. 25
     "Accounting for Stock Issued to Employees" (APB No. 25).  Under the
     intrinsic value based method, compensation is the excess, if any, of the
     fair value of the stock at the grant date or other measurement date over
     the amount an employee must pay to acquire the stock.  Compensation, if
     any, is recognized over the applicable service period, which is usually the
     vesting period.

                                   - F-11 -
<PAGE>
 
     In October 1995, the Financial Accounting Standards Board issued Statement
     of Financial Accounting Standard No. 123 Accounting for Stock-Based
     Compensation (SFAS No. 123).  This standard, if fully adopted, changes the
     method of accounting for employee stock-based compensation plans to the
     fair value based method.  For stock options and warrants, fair value is
     determined using an option pricing model that takes into account the stock
     price at the grant date, the exercise price, the expected life of the
     option or warrant and the annual rate of quarterly dividends.  Compensation
     expense, if any, is recognized over the applicable service period, which is
     usually the vesting period.

     The adoption of the accounting methodology of SFAS No. 123 is optional and
     the Company has elected to continue accounting for stock-based compensation
     issued to employees using APB No. 25; however, pro forma disclosures, as if
     the Company adopted the cost recognition requirements under SFAS No. 123,
     are required to be presented (see Note 6).

     i.   Basic and Diluted Loss Per Share
          --------------------------------

     The Company has adopted Financial Accounting Standard No. 128 "Earnings Per
     Share" (SFAS No. 128).  SFAS No. 128 changes the methodology of calculating
     earnings per share and renamed the two calculations, basic earnings per
     share (formally primary) and diluted earnings per share (formally fully
     diluted).  The calculations differ by eliminating any common stock
     equivalents (such as stock options, warrants, etc.) from basic earnings per
     share and changes certain calculations when computing diluted earnings per
     share.  The adoption of SFAS No. 128 has not materially impacted the
     Company's financial position or results of operations.

     Basic and diluted loss per share were computed based on the weighted
     average number of shares outstanding for the period.  Basic and diluted
     loss per share are the same as the effect of stock options and warrants on
     loss per share are antidilutive and thus not included in the diluted loss
     per share calculation.

     j.   Income Taxes
          ------------

     The Company accounts for income taxes using the liability method as
     prescribed by Statement of Financial Accounting Standards (SFAS) No. 109
     "Accounting for Income Taxes".

     k.  Licensing Agreements
         --------------------

     The Company recognized as other income the sale of options to Briana Bio
     Tech Inc. and/or AMDL Canada to purchase the marketing rights of its
     proposed cancer detection products.

                                   - F-12 -
<PAGE>
 
     l.  Use of Estimates
         ----------------

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

     m.  Reclassifications
         -----------------

     Certain reclassifications have been made to the 1996 financial statements
     in order to conform to classifications used in the current year.

2.   Income Taxes
     ------------

The Company has experienced net losses since inception.  As such, no provision
for income tax has been made for the three years ended December 31, 1997.  At
December 31, 1997, the Company has available for federal and state income tax
purposes, net operating loss carryforwards of approximately $11,100,000 and
$3,800,000 which expire in the years 2003 through 2012 and 1998 through 2002,
respectively.  The net operating loss carryforward is also available for
financial reporting purposes.  Events which may cause limitations in the amount
of net operating losses that the Company may utilize in any one year include,
but are not limited to, a cumulative ownership change of more than 50 percent
over a three year period.  At December 31, 1997, the effect of such limitations
if imposed, has not been determined.

3.   Licensing Agreements
     --------------------

Effective January 1989 and revised in May and October 1989, the Company entered
into a licensing agreement with AMDL Canada to market and sell the Company's DR-
70 in Canada, directly or through agents, distributors, etc.  The Company has
the right to receive $1.00 for each of the first 500,000 DR-70 test kits sold
for a maximum of $500,000 in licensing fees.  The Company received approximately
$120,000 as an initial, nonrefundable licensing fee in 1989.

ICD is responsible for marketing DR-70 worldwide with the exception of the
United States and Canada (the Company and AMDL Canada retains the marketing
rights for the United States and Canada, respectively).  As of December 31,
1997, ICD has six agreements for the distribution of DR-70 to the following
countries: Indonesia, China, Philippines, Poland, Taiwan and Malaysia.

4.   Related-Party Transactions
     --------------------------

In 1995, the Company received $324,115 from Briana Bio-Tech Inc. (parent of AMDL
Canada) as partial payment for the $1,000,000 marketing rights fee (with respect
to the ICD joint venture, see Note 1).  In 1996, the Company received an
additional installment of $43,138 from Briana Bio-Tech Inc.  These amounts were
included in other income in the accompanying statements of operations.

                                   - F-13 -
<PAGE>
 
On January 13, 1997, the Company provided AMDL Canada with written notice of
default in payment of a marketing fee affecting percentage ownership interest in
ICD.  In accordance with terms of the joint venture agreement, AMDL Canada's
percentage ownership interest in ICD has been reduced from 35 percent to 12.85
percent.  The Company's percentage ownership interest in ICD has subsequently
been increased from 65 percent to 87.15 percent.  This change had no material
effect on the financial statements for the Company for the years ended December
31, 1997.

Axel J. Kutscher became a Director of the Company in January 1997.  Mr. Kutscher
is a sales manager and Vice President of Euro-American GMBH (Euro-America), a
German investment banking firm.  During the year ended December 31, 1996 and
1995, the Company received $4,572,500 and $1,625,000 from the sale of 10,625,000
and 4,250,000 shares, respectively, of common stock to Euro-America.  There were
no sales of common stock to Euro-America during the year ended December 31,
1997.

5.   Commitments
     -----------

     a.   Operating Lease
          ---------------

     In October 1996, the Company executed a three year real estate lease of
     6,547 square feet of office, laboratory and manufacturing space at its
     facility in Tustin, California.  The lease commenced December 1, 1996 and
     ends November 30, 1999.  The minimum lease payments are as follows:

                         Year
                         ----
                         1998                    $ 94,359
                         1999                      86,495
                                                 --------
                                                 $180,854
                                                 ========

     Rent expense was approximately $113,000, $106,000 and $92,000 for the years
     ended December 31, 1997, 1996 and 1995, respectively.

     b.   Employment Agreements
          ---------------------

     In October 1996, the Company entered into a two year employment agreement
     with Dr. Ngo.  The agreement specifies an annual base salary of $222,000.
     Among other provisions, Dr. Ngo received options to purchase up to
     1,500,000 shares of the Company's common stock at the exercise price of
     $0.657 per share exercisable until September 2001.  The options vest over a
     two year period.  The agreement contains a severance provision which
     provides a severance payment equal to six months salary.

     In October 1996, the Company entered into a two year employment agreement
     with Dr. Ronald J. Moore, Vice President of Operations.  The agreement
     specifies an annual base salary of $80,000.  Among other provisions, Dr.
     Moore received options to purchase up to 100,000 shares of the Company's
     common stock at the exercise price of $0.563 per share exercisable until
     September 2001.  The options vest over a two year period.  The agreement
     contains a severance provision which provides a severance payment equal to
     two months salary.

                                   - F-14 -
<PAGE>
 
     In May 1997, the Company entered into an employment agreement with Donald
     C. Swanson as Director of Manufacturing.  The agreement specifies an annual
     base salary of $70,000.  Among other provision, Mr. Swanson received
     options to purchase up to 50,000 shares of the Company's common stock at
     the exercise price of $0.35 per share exercisable until May 2000.  The
     agreement contains a severance provision which provides a severance payment
     equal to two months salary if employment is terminated, as defined, before
     May 1998.

     The stock options granted in the above employment agreements did not result
     in compensation expense as the exercise price of the stock options was
     equal to the quoted market price of the Company's stock on the date of
     grant.

     c.  Accrued Payroll and Related Expenses
         ------------------------------------

     Accrued payroll and related expenses consists primarily of amounts incurred
     during the years ended December 31, 1995, 1994 and 1993 by officers and
     other employees and former employees (collectively referred to as
     "employees").  The Company has made payment arrangements with most of these
     employees by agreeing to pay each employee their proportionate share of
     five percent of sales revenues, if any, of the Company, but not less than
     $500 per month per employee.  In addition, if an employee currently
     employed by the Company is terminated under certain circumstances, the
     minimum monthly payment would be increased.  All amounts must be paid no
     later than February 28, 2001.

6.   Stock Based Compensation Plans
     ------------------------------

In 1992, the Company adopted the 1992 Stock Option Plan (the Plan).  Under the
Plan, incentive stock options and nonqualified options may be granted to
officers and key employees of the company for the purchase of up to 2,622,500
shares of the Company's common stock.  Additionally, specific option grants may
also be made.  Expiration dates for the grants may not exceed 10 years from the
date of grant.  In October 1994, the Company terminated the Plan.  However,
380,000 options to purchase common stock were outstanding under the Plan and the
Company elected not to cancel these options prior to their expiration dates.

From time to time, the Company issues stock options pursuant to various
employment agreements (see Notes 5 and 10) and other compensatory arrangements.
The following is a status of the stock options outstanding at December 31, 1997,
1996 and 1995 and the changes during the years then ended:

                                   - F-15 -
<PAGE>
 
<TABLE>
<CAPTION>
 
                                1997                 1996                 1995
                         ------------------   ------------------   ------------------
                         Shares    Wtd Avg    Shares    Wtd Avg    Shares    Wtd Avg
                          (000)    Ex Price    (000)    Ex Price    (000)    Ex Price
                         ------    --------   ------    --------   ------    --------
<S>                      <C>       <C>        <C>       <C>        <C>       <C>
Outstanding, beg.
 of year                  5,610      $0.915    3,910      $1.022    7,033      $0.801
  Granted                   150       0.410    1,700       0.670        -           -
  Exercised                   -           -        -           -      (65)      0.050
  Expired/forfeited      (1,110)      1.230        -           -   (3,058)      0.533
                         ------      ------    -----      ------   ------      ------
Outstanding, end
 of year                  4,650      $0.824    5,610      $0.915    3,910      $1.022
                         ======      ======    =====      ======   ======      ======
Exercisable at
 end of year              4,263      $0.843    4,850      $0.958    3,760      $1.008
                         ======      ======    =====      ======   ======      ======
Wtd avg fair value
 of options granted                  $0.312               $0.507
                                     ======               ======
</TABLE>


3,830,000 of the options outstanding at December 31, 1997 have exercise prices
between $0.25 and $1.00, with a weighted average exercise price of $0.712 and a
weighted average remaining contractual life of 2.7 years. 3,443,000 stock
options are exercisable and have a weighted average exercise price of $0.723.
The remaining 820,000 options have exercise prices between $1.01 and $1.50, with
a weighted average exercise price of $1.349 and a weighted average remaining
contractual life of 1.5 years.  All of these options are exercisable.

The fair value of each option granted during 1997 and 1996 to employees and
directors is estimated using the Black-Scholes option-pricing model on the date
of grant using the following assumptions: (i) no dividend yield, (ii) average
volatility of 105.2 percent and 96.7 percent, respectively, (iii) weighted-
average risk-free interest rate of approximately 6.3 percent, and (iv) expected
life of 5 years.

Had compensation cost for the Company's 1997 and 1996 options been determined
consistent with SFAS No. 123, the Company's net loss and net loss per share for
the year ended December 31, 1997 and 1996 would approximate the pro forma
amounts below:

<TABLE>
<CAPTION>
                                  1997                         1996
                              ------------                 ------------
                      As Reported     Pro Forma     As Reported     Pro Forma
                      ------------   ------------   ------------   ------------
<S>                   <C>            <C>            <C>            <C>
 
  Net loss            $(1,747,414)   $(1,996,838)   $(1,622,380)   $(2,118,584)
                      ===========    ===========    ===========    ===========
  Basic and
    diluted loss
    per share         $     (0.05)   $     (0.06)   $     (0.06)   $     (0.07)
                      ===========    ===========    ===========    ===========
</TABLE>

                                   - F-16 -
<PAGE>
 
7.      Warrants
        --------

The following represents a summary of the warrants outstanding for the years
ended December 31, 1997, 1996 and 1995:
<TABLE>
<CAPTION>
 
                                1997                 1996                 1995
                         ------------------   ------------------   ------------------
                         Shares    Wtd Avg    Shares    Wtd Avg    Shares    Wtd Avg
                          (000)    Ex Price    (000)    Ex Price    (000)    Ex Price
                         ------    --------   ------    --------   ------    --------
<S>                      <C>       <C>        <C>       <C>        <C>       <C>
Outstanding, beg.
 of year                  2,426      $0.741    5,282      $0.793    5,790      $0.818
  Granted                     -           -    5,272       0.898    1,605       0.580
  Exercised                (100)      0.250   (1,145)      0.614   (1,053)      0.484
  Expired/forfeited        (437)      0.442   (6,983)      0.921   (1,060)      0.918
                          -----      ------   ------      ------   ------      ------
Outstanding, end
 of year                  1,889      $0.836    2,426      $0.741    5,282      $0.793
                          =====      ======   ======      ======   ======      ======
</TABLE>

The warrants outstanding at December 31, 1997 have exercise prices between
$0.250 and $1.375.  All of the warrants are exercisable and have a weighted
average remaining contractual life of 1.1 years.

The outstanding warrants at December 31, 1997 are held by consultants and other
service providers, shareholders, and current and former note holders.

8.   Common Stock Issued
     -------------------

During the year ended December 31, 1997, the Company received $25,000 for the
exercise of 100,000 warrants.  Additionally, the Company issued 125,000 shares
of common stock for services totaling $19,125.

During the year ended December 31, 1996, the Company received $4,050,000 cash
proceeds from the sale of 10,000,000 shares of common stock, subject to certain
restrictions, and warrants to purchase 5,000,000 additional shares of common
stock between $0.62 and $0.70 per share.  The Company received $697,500 for the
exercise of 1,125,000 of these warrants.  The expiration dates of these warrants
were between March 31 and November 26, 1996.

9.   Common Stock Subscribed
     -----------------------

In 1995, the Company and AMDL Canada agreed that in consideration of AMDL
Canada's cancellation of its royalty interest in sales to the United Kingdom for
which it paid $300,000 (under a previous licensing agreement), the Company would
issue 500,000 shares of the Company's common stock.  AMDL Canada had agreed to
reserve these shares for incentives to executive officers of the Company.  For
the year ended December 31, 1995, the Company recorded an expense of $300,000
for this transaction since the amount had previously been recognized as income
in 1993 when the rights were originally sold.  An offsetting entry of $300,000
was recorded to common stock subscribed as the shares had not been issued as of
December 31, 1995.

During 1996, the Company and AMDL Canada agreed not to issue the 500,000 shares
of the Company's common stock to AMDL Canada.  As a result, the Company credited
additional paid-in capital for $300,000 as of December 31, 1996.

                                   - F-17 -
<PAGE>
 
10.  Subsequent Events
     -----------------

In January 1998, the Company entered into a two year employment agreement with
Gary L. Dreher as Vice President of Marketing and Sales.  The agreement
specifies an annual base salary of $100,000 plus commissions, as defined, based
on a percent of net sales receipts.  Among other provisions, Mr. Dreher received
options to purchase up to 250,000 shares of the Company's common stock at the
exercise price of $0.13 per share (quoted market price of the Company's stock on
the date of grant) exercisable until December 31, 2002 or 30 days after
termination of employment, as defined.  The options vest over a two year period.
The agreement contains a severance provision which provides a severance payment
equal to two months salary if terminated, as defined, before January 2000.

In January 1998, the Company issued 50,000 options to an independent contractor
at an exercise price of $0.13 (quoted market price of the Company's stock on the
date of grant).  The options vest quarterly over two years and expire in January
2003.

In February 1998, the Company made a $7,500 investment in a newly formed entity.
This newly formed entity is currently raising capital in order to fund its
operations.

                                   - F-18 -
<PAGE>
 
                                  SIGNATURES

    In accordance with the requirements of Sections 13 or 15(d) of the Exchange
Act of 1934, as amended, the Registrant has caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

                                  "Registrant"

                                  AMDL, INC.



Dated May 26, 1998                By: /s/ That T. Ngo
                                      ------------------------------------
                                      That T. Ngo, Chief Executive Officer


   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.


  /s/ That T. Ngo               Chief Executive Officer           May 26, 1998 
------------------------        President and Director                          
That T. Ngo                                                                     
                                                                                
  /s/ Harry Berk                Vice President Finance and        May 26, 1998  
------------------------        Chief Financial Officer                         
Harry Berk                                                                      



   Supplemental Information To Be Furnished With Reports Filed Pursuant to
Section 15(d) Of The Securities Exchange Act Of 1934, As Amended, By Non-
Reporting Issuers.


  (c)  No annual report or proxy material has been sent to security holders.

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