<PAGE>

                UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                              WASHINGTON, DC 20549

                                   FORM 10-KSB-A

[X]  ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
     1934
                  For the fiscal year ended December 31, 1998

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

         For the transition period from _____________ to______________

                        Commission file number: 001-12189

                         IMAGE GUIDED TECHNOLOGIES, INC.
                         -------------------------------
                 (name of small business issuer in its charter)

           COLORADO                                   84-1139082
           --------                                   ----------
(State or other jurisdiction of          (I.R.S. Employer Identification No.)
incorporation or organization)

  5710-B FLATIRON PARKWAY, BOULDER, CO                   80301
  ------------------------------------                   -----
(Address of principal executive offices)               (Zip Code)

Issuer's telephone number: (303) 447-0248

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

      Title of each class              Name of each exchange on which registered
      -------------------              -----------------------------------------
   Common Stock, no par value                  The Boston Stock Exchange


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

Check whether Image Guided Technologies, Inc. (1) filed all reports required to
be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months
(or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. Yes [X] No [ ]

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

State issuer's revenues for its most recent fiscal year: $7,154,000.

State the aggregate market value of the voting stock held by non-affiliates
computed by reference to the price at which the stock was sold, or the average
bid and asked prices of such stock, as of a specified date within the past 60
days: $1,127,870 as of April 12, 1999.

State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: 3,803,020 shares of common stock, no
par value, were outstanding on April 12, 1999.

                       DOCUMENTS INCORPORATED BY REFERENCE
None

Transitional Small Business Disclosure Format (Check one):  Yes   ; No X
                                                               ---    ---
<PAGE>

                                           Table of Contents
<TABLE>
<CAPTION>
            Item                                                                         Page
<S>         <C>                                                                          <C>
Part I        1.     Description of Business                                               1

              2.     Description of Property                                               6

              3.     Legal Proceedings                                                     6

              4.     Submission of Matters to a Vote of Security Holders                   6

Part II       5.     Market for Common Equity and Related Stockholder Matters              7

              6.     Management's Discussion and Analysis or Plan of Operation             8

              7.     Financial Statements                                                 13

Part III      8.     Changes In and Disagreements With Accountants on Accounting and      30
                         Financial Disclosure

              9.     Directors, Executive Officers, Promoters and Control Persons;        30
                         Compliance With Section 16(a) of the Exchange Act.

             10.     Executive Compensation                                               32

             11.     Security Ownership of Certain Beneficial Owners and Management       35

             12.     Certain Relationships and Related Transactions                       37

             13.     Exhibits and Reports on Form 8-K                                     38
</TABLE>

<PAGE>

                                     PART I

ITEM 1. DESCRIPTION OF BUSINESS.

GENERAL

        Image Guided Technologies, Inc. (the "Company") was incorporated in
Colorado in 1990, and until December 1997, substantially all its revenues were
derived from sales of 3D optical measurement devices ("optical localizers")
manufactured at the Company's Boulder, Colorado facility (the Company's Boulder,
Colorado operations are sometimes referred to as "IGT"). In December 1997, the
Company purchased all the stock of Brimfield Precision, Inc. ("BPI"). BPI
manufactured general instruments and orthopedic implants and orthopedic
instrumentation at its Brimfield, Massachusetts facility and minimally invasive
surgical instruments at its Springfield, Massachusetts facility.

        On September 24, the Company adopted a plan to sell the net assets of
the general instrument and implant business units of Brimfield and to retain
the surgical instruments operation in Springfield, Mass. The plan was
effected on March 30, 1999 with the closing of the sale and changing of the
name of the retained operation to Springfield Surgical Instruments, Inc.
("Springfield"). The Company plans to continue the Springfield operations
which will continue to manufacture minimally invasive surgical instruments.
The general instrument and implant business units of Brimfield represent a
separate major line of business, and, accordingly, are reflected in the
accompanying consolidated financial statements as a discontinued operation
for all periods presented.

        OPTICAL LOCALIZERS. IGT's optical localizers have both medical and
industrial applications and typically consist of the following: a proprietary
microprocessor-based control system, proprietary software to calculate the
digital coordinate location of light emitting diodes ("LEDs"), a multi-camera
array for detecting the LED emissions, a relative position dynamic reference
device connected to the measured object, and a number of custom-manufactured
LEDs mounted on the device or instrument to be tracked in 3D space.

        IGT's FlashPoint-Registered Trademark- localizer is a key component
of the anatomical image display workstation used by physicians to perform
image guided surgery, a specialty procedure in the field of minimally
invasive surgery. When the FlashPoint localizer is combined with the imaging
software provided by IGT's customers, the location of specially designed
surgical instruments can be tracked in relation to the patient's anatomy
during surgical procedures by display as an overlay on a magnetic resonance
imaging ("MRI") or computerized tomography ("CT") image. IGT's Pixsys-TM-
localizer is used in industrial applications to measure the position or shape
of objects in 3D space.

IMAGE GUIDED SURGERY

        In image guided surgery, a surgeon tracks the location of specially
designed surgical instruments on the medical image (such as CT or MRI). Image
guided surgery requires a method for registering (i.e., mapping) the points in
the medical image onto the patient's anatomical physical space and a method for
localizing (i.e., determining the position in 3D space) the surgical instrument.
Knowing the exact position of the probe or pointer is key to the successful
completion of a surgical procedure.

        Image guided surgery, by allowing the patient's CT, MRI or other medical
image to be used as a map, provides the surgeon with a real-time visual
representation of the surgical probe or pointing device on the interactive
medical image. It allows the spatial position of the instrument to be tracked
during the surgical procedure and to be displayed as an overlay on the medical
image shown on the workstation. The medical image may either be historical
(i.e., pre-operative), or real-time (i.e., intraoperative).

PRODUCTS

        OPTICAL LOCALIZERS. The FlashPoint and Pixsys localizers consist of a
number of LEDs used as markers mounted on a pointer device or surgical
instrument, a relative position dynamic reference device (the "Dynamic
Reference Frame-Registered Trademark-") connected to the measured object (a
patient in a medical application or a part in an industrial application), a
multi-camera array for detecting the X, Y and Z positions of the LEDs, a
proprietary microprocessor based control system, and a proprietary,
internally developed, software package. IGT's optical localizer is an input
subsystem providing real-time mathematical coordinates to a host computer.
IGT's optical localizer determines the position of the hand-held probe or
surgical instrument and the patient reference device by tracking the X, Y and
Z coordinates of each infrared light emitting diode mounted on the probe or
surgical instrument and reference device. It then communicates this position
in the form of


                                       1
<PAGE>

X, Y and Z coordinates to the host computer. Most localizer models sold by the
Company are customized to satisfy customer requirements.

        IGT has provided various instruments, such as probes and pointers,
containing LEDs and Dynamic Reference Frames as component parts to its optical
localizers. For both medical and industrial applications, the LEDs are placed on
the instrument, and the distance between the LED and the tip of the instrument
is precisely calibrated. The medical instruments are designed to be reused on a
limited basis, while an industrial instrument can normally be reused until it no
longer fulfills its intended use. The Company has begun to manufacture image
guided instruments at its Springfield, Massachusetts facility.

        MINIMALLY INVASIVE SURGICAL INSTRUMENTS. Springfield's instruments are
used in minimally invasive surgical procedures. Springfield controls all aspects
of the manufacturing process from machining through finishing, including
in-house passivation and laser marking.

CUSTOMERS AND USE

        OPTICAL LOCALIZERS. IGT sells most of its optical localizers to original
equipment manufacturers ("OEMs"). During 1998, approximately 88% of IGT's total
revenues were derived from its six largest customers.

         IGT's FlashPoint product is used to determine the position in 3D space
of the surgical probe or instrument. The FlashPoint 5000 medical optical
localizer is a component integrated into several medical devices. Sales of
localizers and related components to medical customers constituted approximately
82% of IGT sales in 1998. Some medical customers and illustrative uses are set
forth below.

CARL ZEISS, OBERKOCHEN, GERMANY. The Company's FlashPoint product is an integral
and key component of the Zeiss Stereotactic System. By combining imaging
diagnostic data with powerful computers, precision optics and finely crafted
hand-held instrumentation, Zeiss has created a product enhancement to its
operating microscope line.

GE MEDICAL SYSTEMS, MILWAUKEE, WISCONSIN. In 1993, GEMS introduced its magnetic
resonance guided therapy ("MRT") system which provides direct physician access
to the patient during imaging, giving a real-time, internal view of patients for
procedures such as needle biopsies. MRT is currently used to plan, guide and
monitor surgical procedures in a minimally invasive manner. FlashPoint is being
used by GEMS for the guidance system in its MRT device.

RADIONICS SOFTWARE APPLICATIONS, INC., A SUBSIDIARY OF RADIONICS, INC.,
BURLINGTON, MASSACHUSETTS. Radionics employs the FlashPoint in the Radionics
Optical Tracking System for Frameless Stereotaxy. This real-time, free-hand
stereotaxy system is primarily used in neurosurgical applications.

SOFMAR DANEK-A SUBSIDIARY OF MEDTRONIC, HEADQUARTERED IN MEMPHIS, TENNESSEE.
Sofmar Danek incorporates IGT's Flashpoint system into an image guided system
which is marketed through Xomed, Inc., for use in Functional Endoscopic Sinus
Surgery (FESS). They also employs the Flashpoint in their Frameless Stereotaxy.
This real-time, free-hand stereotaxy system is primarily used in neurosurgical
applications.

        IGT's Pixsys product is used to determine the shape or position of an
object by rapidly collecting a large number of points on the object's surface or
locating a particular location on the object. Sales of localizers and related
accessories to industrial customers constituted approximately 18% of IGT's sales
in 1998. A key industrial customer and illustrative use is set forth below.

 NU-TECH INDUSTRIES, INC. ("BREWCO"), CENTRAL CITY, KENTUCKY (A WHOLLY-OWNED
SUBSIDIARY OF SNAP-ON INCORPORATED). In a variation of its standard product
offering for automobile collision repair, Brewco has created the Wolf frame
straightening system. The Wolf incorporates a Pixsys localizer into its system
to measure the extent of damage caused by a collision and indicate to the system
operator the progress of the straightening operation.

        MINIMALLY INVASIVE SURGICAL INSTRUMENTS. The two largest customers for
minimally invasive surgical instruments in 1998 were Davol, Inc., a subsidiary
of Bard International, and Stryker Endoscopy. Neither company is expected to be
a significant customer in 1999.


                                       2
<PAGE>

MARKETING AND SALES

        IGT's marketing strategy focuses on selling its localizers to OEM
customers. Springfield is a contract manufacturer for medical supply companies.
None of the Company's customers has entered into a long-term minimum purchase
agreement with the Company. Accordingly, purchases from the Company by customers
in any prior period may not be indicative of orders or purchases in any future
period, and there can be no assurance that these companies will remain customers
of the Company.

BACKLOG

        At December 31, 1998, the Company's backlog was approximately
$1,526,000. Since backlog fluctuates depending on how customers order their
products and over what period of time, the Company currently does not consider
backlog to be a meaningful indicator of future sales.

COMPETITION

        IGT's primary competitor in the medical OEM localizer market is Northern
Digital Inc. ("NDI"). NDI markets a localizer to the medical OEM marketplace
named the Polaris, an infrared based optical localizer using two two-dimensional
CCD cameras. Medical device companies have also developed their own optical
localization devices for their image guided surgery systems. Companies have also
attempted to use other systems as localization devices for medical applications.

        The competition for the contract manufacturing of surgical instruments
provided by Springfield is, in general, from other machine shops that can
manufacture product to a customer's design specifications.

        The methods of competition for the Company are in general based on
quality, price and delivery.

MANUFACTURING AND SUPPLIERS

        IGT's localizer manufacturing activities primarily consist of assembling
and testing components and subassemblies acquired from qualified vendors, as
well as final assembly and testing of the Company's fully-configured systems.
Components are generally available from several sources, although the order
lead-time for the semi-custom isolated power supply used in the FlashPoint 5000
varies from four to six months.

        IGT uses a coordinate measurement machine ("CMM") to improve the
calibration process for products being shipped to its customers. The CMM gives
IGT a final calibration tool which is traceable to National Institute of
Standards and Technology standards. The CMM system is also used by IGT for
research and development projects.

        Springfield's surgical instruments manufacturing activities primarily
consist of assembling components, machining high quality titanium and cobalt
chrome alloys, or some combination thereof, and finishing the product to
include passivation and laser marking. Raw materials are generally available
from many suppliers.

        Springfield utilizes several types of high-technology machine tools in
its manufacturing operations. Its computer numerically controlled ("CNC")
machines are programmable milling and turning machines used to remove metal
according to pre-programmed specifications. CNC machines typically require less
machine operator time and produce less variation in the final product. Its
electrical discharge machines ("EDMs") typically produce contoured shapes to
very close manufacturing tolerances through programmed procedures. EDMs minimize
the secondary finishing operations required on the final product.

INTELLECTUAL PROPERTY

        IGT's optical localizer is a complex measuring device. Its software
contains elaborate mathematical modeling and its manufacture requires precise
production and careful calibration. IGT primarily relies on a combination of
trade secret and copyright laws, together with non-disclosure agreements, to
establish and protect proprietary rights in its localizer.

        The Company currently has seven patents.


                                       3
<PAGE>

        U.S. Patent #5,198,877 issued in 1997 is a non-contact, laser based,
hand-held 3D localizer that allows the user to acquire simply and easily a
multitude of points on the surface of an object or anatomy by sweeping a
hand-held scanner over the desired target. This patent does not cover any
product currently being sold by the Company. U.S. Patent RE35,816 is a reissue
of this patent, which broadens its claims and was issued in 1998.

        U.S. Patent #5,617,857 issued in 1997 describes a "smart" 3-D probe
(such as a medical instrument) which contains a memory module which can store
its serial number, calibration data, and similar information in a
computer-readable form. The patent also provides for interchangeable tips or
other workpieces which can be identified electronically.

        U.S. Patent #5,622,170 issued in 1993 describes an optical system for
determining the location and orientation of one object (such as a medical probe)
relative to another object (such as a patient), where the first object has an
invasive portion which is partially inside the second. A display device
connected to a computer graphically indicates the location of a representation
of the probe with respect to a model of the second object.

        U.S. Patent #4,499,899 issued in 1985 describes a fiber-optic
illuminated microsurgical scissors used in surgery to illuminate the surgical
site so that the surgeon can more clearly see the site.

        U.S. Patent #4,770,174 issued in 1988 describes rotary cutting scissors
used for surgical procedures in which soft tissue needs to be cut. The inner
blade rotates against the outer blade through the use of a unique helical drive
mechanism.

        U.S. Patent #5,054,906 issued in 1991 describes an indirectly
illuminating ophthalmological speculum used for opening the eyelids to permit
access to the eye and for illuminating the eye. This device is primarily suited
for procedures upon the surface of the eye.

        U.S. Patent #5,263,967 issued in 1993 describes a medical instrument
utilizing a dual action drive mechanism that actuates two jaws or blades that in
turn move rotationally relative to each other and a center pivot point. This
instrument is particularly useful in procedures performed through small
incisions such as laparoscopy, arthroscopy and endoscopy.


                                       4
<PAGE>

GOVERNMENT REGULATION

        IGT's FlashPoint localizer is incorporated into medical devices that are
subject to extensive regulation by the United States Food and Drug
Administration (the "FDA") and corresponding foreign organizations in the
countries to which the devices are exported. The FDA regulates the processes of
design, manufacture, labeling, clinical testing, distribution and promotion of
medical devices. Before a new device or significantly modified device can be
introduced into the market, the manufacturer must generally obtain clearance
through either the 510(k) premarket notification process or the more rigorous
premarket approval application process. Medical device customers that
incorporate the Company's products may be subject to regulation by the FDA.

        Medical devices which incorporate IGT products, and are sold into the
European Union and other international markets, must comply with additional
standards and regulations. Some of the compliance requirements include the
European Economic Community Medical Device Directive (MDD), International
Electrotechnical Commission (IEC), conformity assessment (CE MARK), and
ISO9000/EN46001 guidelines.

        Springfield is registered as an original equipment manufacturer and
contract manufacturer with the FDA. The scope of Springfield manufacturing
includes FDA Class III general surgical instrumentation. Springfield is a
certified ISO 9001 organization.

        IGT is currently preparing the necessary quality systems and controls to
become certified at its Boulder, Colorado facility under the requirements of ISO
9001.

RESEARCH AND DEVELOPMENT

        For the fiscal years ended December 31, 1998 and 1997, the Company
expended $1,470,000 and $1,093,000, respectively, on research and development
activities. Some of the Company's customers may at times pay for research and
development activities related to specific applications of the Company's
localizer technology.

        IGT has developed core competencies in software development,
mathematical modeling of the 3D measurement process, digital signal processing,
circuit design, computer system integration, and 3D optical sensor system
development. Outside consultants and contract engineering are employed, when
needed, for optical system design, surgical instrument development and safety
engineering. IGT's engineers work closely with its OEMs to assist in the
integration of IGT's products with customer systems and to identify new
applications for IGT's products.

        IGT began offering a set of cordless instruments for use by its medical
customers in early 1999. These instruments should allow the surgeon greater
freedom of movement and ease of use.

        In addition to improving functionality, IGT's product development
engineering staff continues to refine the overall accuracy of its localizer.
Improvements in the sensor array design, emitter technology, calibration and
position calculation algorithms are expected to continue to improve the accuracy
of the system.

EMPLOYEES

        At December 31, 1998, the Company (excluding its Brimfield,
Massachusetts facility) had 46 employees, of which 44 were full-time, 1
temporary, and 1 part-time. IGT employs thirty two employees and Springfield
employs fourteen employees.


                                       5
<PAGE>

ITEM 2. DESCRIPTION OF PROPERTY.

        The Company leases approximately 18,000 square feet within a 133,000
square foot multi-tenant facility in Boulder, Colorado, where it performs all
development, manufacturing and marketing activities related to its optical
localizers. The current lease has approximately one year remaining. In addition
to base rent, the Company pays its pro-rata share of building operating
expenses, insurance and taxes and its own utilities. Monthly base rent is as
follows: $15,709 through March 1999, and $16,406 from April 1999 through March
2000.

        Springfield leases approximately 14,000 square feet in a facility in
Springfield, Massachusetts. The current lease for the Springfield facility has
approximately 3 years remaining. In addition to base rent, Springfield pays its
pro-rata share of building operating expenses, taxes and utilities. Monthly base
rent is $4,927 through December 2001.

ITEM 3. LEGAL PROCEEDINGS.

        The Company is a party to two lawsuits and one threatened lawsuit,
which, while the outcome cannot be predicted with certainty, management expects
will not have a materially adverse affect on the consolidated financial position
or results of operations of the Company.


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

        During the fourth quarter of 1998, no matters were submitted to a vote
of security holders.


                  [Remainder of page intentionally left blank.]


                                       6
<PAGE>

                                     PART II

ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

        The Company's common stock currently trades on the over-the-counter
market under the symbol "IGTI" and on the Boston Stock Exchange under the symbol
"IGK." The Company's common stock was delisted from the Nasdaq SmallCap Market
on December 28, 1998 because the Company did not meet the requirement of at
least $2,000,000 in net tangible assets and a minimum bid stock price of $1.00
per share.

The following table sets forth, for the quarters indicated, the range of high
and low bid prices of the shares of the Company's common stock as reported by
Nasdaq, except the "low" for the fourth quarter of 1998 is from the
over-the-counter market. Such bid prices reflect inter-dealer quotations,
without retail mark-up, mark-down or commission, and may not represent actual
transactions.

<TABLE>
<CAPTION>
                                                 HIGH             LOW
            <S>                                 <C>             <C>
            1997
            First quarter..................     $ 7.00          $ 5.50
            Second quarter.................     $ 6.38          $ 4.50
            Third quarter..................     $ 6.38          $ 3.50
            Fourth quarter.................     $ 4.63          $ 1.50

            1998
            First quarter..................     $ 3.63          $ 2.00
            Second quarter.................     $ 3.13          $ 1.63
            Third quarter..................     $ 2.56          $ 0.50
            Fourth quarter.................     $ 0.88          $ 0.09
</TABLE>

        No dividends were declared on the Company's Common Stock during the
fiscal years ended December 31, 1998 and 1997. The Company expects that it will
retain any available earnings generated by its operations for the development
and growth of its business and does not anticipate paying any cash dividends on
its Common Stock in the foreseeable future. Any future determination as to
dividend policy will be made at the discretion of the Company's Board of
Directors and will depend on a number of factors, including the future earnings,
capital requirements, financial condition and business prospects of the Company.

        On March 31, 1999, the Company had approximately 78 shareholders of
record.


                                       7
<PAGE>

ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.

OVERVIEW

        The following table sets forth for the periods indicated certain line
items derived from the Company's statement of operations as a percentage of the
Company's revenues.

<TABLE>
<CAPTION>
                                                                        YEAR ENDED
                                                                       DECEMBER 31,
                                                                   --------------------
                                                                     1998        1997
                                                                   --------    --------
        <S>                                                        <C>         <C>
        Revenue                                                     100.0%      100.0%
        Cost of Goods Sold                                           61.4%       44.6%
                                                                   --------    --------
                Gross Profit                                         38.6%       55.4%
                                                                   --------    --------
        Operating Expenses:
                Research and Development                             20.6%       20.7%
                Selling and Marketing                                10.1%       12.4%
                General and Administrative                           25.4%       20.8%
                                                                   --------    --------
                       Total Operating Expenses                      56.1%       53.9%
                                                                   --------    --------
        Operating Income (Loss)                                    (17.5%)        1.5%
        Other Income (Expense)                                      (8.3%)        3.9%
                                                                   --------    --------
        Income (Loss) from Continuing Operations                   (25.8%)        5.4%
        Income (Loss) from Discontinued Operations                   2.6%       (0.5%)
        Loss on disposal of Discontinued Operations                (61.6%)         ---
        Extraordinary item--loss on early extinguishment of debt    (3.5%)         ---
                                                                   --------    --------
                                                                   --------    --------
        Net Income (Loss)                                          (88.3%)        4.9%
                                                                   --------    --------
                                                                   --------    --------
</TABLE>

RESULTS OF OPERATIONS

        YEARS ENDED DECEMBER 31, 1998 AND 1997. Revenue increased by $1,848,000,
or approximately 35%, to $7,154,000 for the year ended December 31, 1998, as
compared to $5,306,000 for the year ended December 31, 1997. The increase was
primarily due to the increased level of sales of surgical instruments partially
offset by lower sales of optical localizer systems.

        Cost of goods sold increased by $2,027,000, or approximately 86%, to
$4,395,000 for the year ended December 31, 1998, compared to $2,368,000 for the
year ended December 31, 1997. Cost of goods sold as a percentage of revenue
increased to 61% for the year ended December 31, 1998, as compared to 45% for
the year ended December 31, 1997. The increase in cost of goods sold was
primarily attributable to the additional sales of surgical instruments. The
increase in cost of goods sold as a percentage of revenue was primarily
attributable to higher sales of surgical instruments which earn a lower margin
compared to other Company products.

        Gross profit decreased by $179,000, or approximately 6%, to $2,759,000
for the year ended December 31, 1998, compared to $2,938,000 for the year ended
December 31, 1997.

        Research and development expenses increased by $377,000, or
approximately 35%, to $1,470,000 for the year ended December 31, 1998, compared
to $1,093,000 for the year ended December 31, 1997. This increase was
principally due to expenses for image guided surgery product development.

        Selling and marketing expenses increased by $63,000, or approximately
10%, to $723,000 for the year ended December 31, 1998, compared to $660,000 for
the year ended December 31, 1997. This increase was primarily attributable to
expanded marketing activities to generate increases in revenue and to introduce
new products to customers.


                                       8
<PAGE>

        General and administrative expenses increased by $710,000, or
approximately 64%, to $1,816,000 for the year ended December 31, 1998, compared
to $1,106,000 for the year ended December 31, 1997. This increase was primarily
due to increased legal expenses, severance payments to a former officer and
increased expenses associated with the acquisition and integration of the
surgical instrument division of Brimfield Precision.

        Operating income (loss) decreased by $1,329,000 to ($1,250,000) for the
year ended December 31, 1998, compared to $79,000 for the year ended December
31, 1997. This decrease was primarily attributable to reduced sales of optical
localizer systems, to product development costs, and to increased personnel
expense.

        Other income (expense), net, decreased by $799,000 to ($591,000) for the
year ended December 31, 1998, compared to $208,000 for the year ended December
31, 1997. This change was primarily due to interest expense on debt and loss of
interest income on cash reserves.

        As a result of the foregoing, the loss from continuing operations
decreased to ($1,841,000) for the year ended December 31, 1998, compared to
an income of $287,000 for the year ended December 31, 1997.

        The Company realized an extraordinary loss of $253,000 during the period
for warrants associated with the early extinguishment of debt.

        The net loss for the year ended December 31, 1998 was $(6,320,000)
compared to a net income of $260,000 for the year ended December 31, 1997.
The change was due primarily to the Company recording an estimated net loss
of $(4,411,000) on the disposal of the BPI's general surgical instrument
orthopedic implant and orthopedic instrumentation businesses and to the
Company recording a net loss of $(1,841,000) from continuing operations
before taxes. These matters are more fully discussed in Notes 11 and 14 of
Notes to Consolidated Financial Statements. Note 14 of the Notes to
Consolidated Financial Statements describes a restatement of the Company's
1998 financial statements related to the discontinued operations.

LIQUIDITY AND CAPITAL RESOURCES

        As a result of the sale of BPI's general surgical instrument, orthopedic
implant and orthopedic instrumentation businesses located at Brimfield,
Massachusetts, the Company paid off amounts outstanding under its equipment
leases, paid off its term loan with BankBoston and paid down its revolving loan
with BankBoston. On April 9, 1999, the Company owed BankBoston $505,000 on its
revolving loan. On April 9, 1999, BankBoston assigned its loan to Silicon Valley
Financial Services, a division of Silicon Valley Bank. After the assignment,
Silicon and the Company amended and restated the loan to provide for a loan
facility under which Silicon would purchase certain of the Company's
receivables, initially at rates of 90% and subsequently decreasing to 80% of
their face amount. Under the facility, the Company will repurchase from Silicon
any uncollected receivables and pay Silicon a finance charge equal to 2% per
month on the face amount of all purchased receivables and an administrative fee
of 1.5% of the face amount of each purchased receivable. Silicon has no
obligation to purchase any receivable under the facility and in no event shall
the aggregate amount of all purchased receivables outstanding exceed $1,500,000.
On April 12, 1999, the Company had received $886,000 from Silicon from the sale
of outstanding receivables.

        The Company is currently in default under its $500,000, 12% subordinated
promissory note payable to Cruttenden Roth, Inc. While interest has been paid to
date, the Company owes the $500,000 principal amount in full. The note is
subordinated to the Company's bank debt and the holders of the note are not
permitted under the terms of the subordination agreement with the bank to sue
upon or collect, nor to make any demand for, nor to exercise any rights or
remedies to enforce, the not so long as any bank obligation remains outstanding.

ISSUANCE OF STATEMENTS OF FINANCIAL ACCOUNTING STANDARDS

        In June 1998, Statement of Financial Accounting Standards (SFAS) No.
133, "Accounting for Derivative Instruments and Hedging Activities," was issued.
This statement establishes accounting and reporting standards for derivative
instruments and for hedging activities. It requires the recognition of all
derivatives as either assets or liabilities in the statement of financial
position at fair value. This statement is effective for the Company's financial
statements for the year ending December 31, 2000 and the adoption of this
standard is not expected to have a material effect on the Company's financial
statements.

                                       9
<PAGE>

OTHER MATTERS

        On December 12, 1997, the Company finalized the acquisition of all the
outstanding stock of Brimfield Precision, Inc. ("BPI") for a purchase price of
approximately $9,844,000 (including expenses related to the acquisition),
consisting of approximately $8,069,000 in cash, $500,000 in a subordinated note
payable to Cruttenden Roth, Inc. ("Cruttenden") and 579,710 shares of the
Company's common stock. BPI sells surgical instruments and implants to medical
supply companies. Prior to its sale to the Company, BPI was owned by William and
Matthew Lyons. William Lyons had a one-year employment contract, which expired
in December 1998, with BPI as its President and is a director of the Company.

        To finance the acquisition, the Company entered into a secured loan
agreement with Imperial Bank under which Imperial Bank loaned the Company
$4,000,000 pursuant to a three-year term loan and up to $2,000,000 pursuant to a
revolving loan payable on or before June 30, 1999. The Company paid Cruttenden a
$300,000 finder's fee for introducing the Company to, and advising the Company
in negotiations with, Imperial Bank. The Company issued a one-year $500,000
subordinated note to Cruttenden to pay the finder's fee and an additional
$200,000 advisory fee owed to Cruttenden. In connection with the loan and
subordinated note, the Company issued a seven-year warrant for 160,000 shares of
the Company's common stock with an exercise price of $2.92 per share to Imperial
Bank and a seven-year warrant for 100,000 shares of the Company's common stock
with an exercise price of $2.92 per share to Cruttenden. On March 15, 1998, the
Company issued to Imperial Bank an additional seven-year warrant for 80,000
shares of the Company's common stock with an exercise price of $2.65 per share
and on March 31, 1998 a seven-year warrant for 10,000 shares of the Company's
common stock with an exercise price of $2.86 per share.

        On April 3, 1998, Imperial Bank assigned its loan to BankBoston. After
the assignment, BankBoston and the Company amended and restated the loan to
provide for a $2,700,000 sixty-month term loan (payable in 58 installments of
$40,000 in principal with a final principal payment of $380,000) at an interest
rate initially equal to the BankBoston base rate plus one-half of one percent on
the unpaid principal balance, and up to $3,000,000 pursuant to a twenty-four
month revolving loan at an interest rate initially equal to the BankBoston base
rate plus one-quarter of one percent. Due to various loan covenant violations,
BankBoston increased the interest rate on its term loan by two and one-half
basis points, increased the interest rate on its revolving loan by two and
one-quarter basis points. BankBoston assigned its loan to Silicon Valley
Financial Services, a division of Silicon Valley Bank. See "Liquidity and
Capital Resources."

        On September 24, 1998, the Company adopted a plan to sell the net assets
of BPI's general surgical instrument, orthopedic implant and orthopedic
instrumentation businesses located at Brimfield, Massachusetts. The Company sold
the businesses on March 30, 1999. The sale price was $6,000,000 in cash plus
assumption of certain trade payables and accrued liabilities, subject to
adjustment for changes from the period from June 30, 1998 through closing.

FORWARD-LOOKING STATEMENTS

        The Company may, in discussions of its future plans, objectives and
expected performance in periodic reports filed by the Company with the
Securities and Exchange Commission (or documents incorporated by reference
therein) and in written and oral presentations made by the Company, include
projections or other forward-looking statements within the meaning of Section
27A of the Securities Act of 1933 or Section 21E of the Securities Exchange Act
of 1934, as amended. Such projections and forward-looking statements are based
on assumptions which the Company believes are reasonable, but are by their
nature inherently uncertain. In all cases, there can be no assurance that such
assumptions will prove correct or that projected events will occur, and actual
results could differ materially from those projected. Some of the important
factors that could cause actual results to differ from any such projections or
other forward-looking statements follow.

        LOSS DURING 1998; POTENTIAL FLUCTUATIONS IN OPERATING RESULTS. The
Company lost ($1,841,000) from continuing operations in 1998. There can be no
assurance the Company will generate sufficient revenue to attain
profitability. In addition, because the Company generally ships its products
on the basis of purchase orders, operating results in any quarter are highly
dependent on orders booked and shipped in that quarter and, accordingly, may
fluctuate materially from quarter to quarter. The Company's operating expense
levels are based on the Company's internal forecasts of future demand and not
on firm customer orders. Failure by the Company to achieve these internal
forecasts could result in expense levels which are inconsistent with actual
revenues. Moreover, the Company's results may also be affected by fluctuating
demand for the Company's products, declines in the average selling prices for
its products, by changes in product mix sold, by increases in the costs of
the components and subassemblies acquired by the Company from vendors, and by
availability of such component and subassemblies from vendors.


                                      10
<PAGE>

        BANK DEBT. The Company is currently borrowing money from Silicon Valley
Financial Services, a division of Silicon Valley Bank through an arrangement by
which it sells its outstanding accounts receivable to Silicon. The arrangement
is expensive and Silicon has no obligation to purchase any receivable. While the
Company hopes to be able to obtain a more favorable banking arrangement, there
can be no assurance that it will be successful.

        NEED FOR ADDITIONAL CAPITAL. The Company will need additional capital to
satisfy its obligations to Cruttenden Roth, Inc. and to meet its other capital
requirements. There can be no assurance that such capital will be available on
reasonable terms, or at all.

        DEPENDENCE ON FEW CUSTOMERS. The Company realizes a majority of its
revenues by sales to relatively few customers. None of these customers has
entered into any long term minimum purchase agreements with the Company. The
loss of, or substantial diminution of purchases from the Company by, any of
these customers could have a material adverse effect on the Company.

        TECHNOLOGICAL CHANGE IN THE MEDICAL INDUSTRY AND IN THE COMPANY'S
PRODUCT. There can be no assurance that the Company's competitors will not
succeed in developing or marketing products or technologies that are more
effective and/or less costly and which render the Company's products obsolete or
non-competitive. In addition, new technologies and procedures could be developed
for medical and other industries that replace or reduce the value of the
Company's products. The Company's success will depend in part on its ability to
respond quickly to technological changes through the development and improvement
of its products. The Company believes that a substantial amount of capital will
be required to be allocated to such activities in the future.

        PROPERTY RIGHTS. The Company does not have any patents which directly
cover its FlashPoint or Pixsys optical localizers. The Company primarily relies
on a combination of trade secret and copyright laws, together with nondisclosure
agreements to protect its know-how and proprietary rights. There can be no
assurance that such measures will provide adequate protection for the Company's
intellectual property rights, that disputes with respect to ownership of its
intellectual property rights will not arise, that the Company's trade secrets or
proprietary technology will not otherwise become known or be independently
developed by competitors or that the Company can otherwise meaningfully protect
its intellectual property rights. Furthermore, there can be no assurance that
others will not develop similar products or software, duplicate the Company's
products or software or that third parties will not assert intellectual property
infringement claims against the Company . Moreover, there can be no assurance
that any patent owned by, or issued to, the Company will not be invalidated,
circumvented or challenged, or that the rights granted thereunder will provide
meaningful competitive advantages to the Company.

        A patent granted to St. Louis University, and subsequently licensed to a
company acquired by Sofamor Danek, one of the Company's major customers, covers,
in general, a particular technique for determining the position of a surgical
probe within a patient's body on a historical image of that body. Sofamar Danek
has recently sued BrainLab GmbH for infringement of this patent. The Company's
documents have been subpoenaed and Waldean Schulz, Vice President-Technology of
the Company, has had his deposition taken in connection with such lawsuits. The
Company is not in a position to evaluate what effect this lawsuit, or any
further lawsuits, will have on its customers or whether it will become a
defendant in any lawsuit involving this patent or any of the Company's patents.

        Litigation may be necessary to protect the Company's intellectual
property rights and trade secrets, to determine the validity and scope of the
proprietary rights of others or to defend against claims of infringement or
invalidity. Such litigation could result in substantial costs and diversion of
resources, regardless of the outcome of the litigation. If any claims are
asserted against the Company, the Company may be required to obtain a license
under a third party's intellectual property rights. However, such a license may
not be available on reasonable terms or at all.

        COMPETITION BY EXISTING COMPETITORS AND POTENTIAL NEW ENTRANTS INTO THE
MARKETPLACE. Companies with substantially greater financial, technical,
marketing, manufacturing and human resources, as well as name recognition, than
the Company may enter markets currently serviced by the Company. Additionally,
competitors may be able to respond more quickly to new or emerging technologies
and changes in customer requirements and to devote substantially greater
resources to the development, marketing and sale of their products than the
Company. The Company's customers may develop their own products to be able to
differentiate their product or for other reasons. Furthermore, such competitors
may develop technologies and/or products other than that currently offered by
the Company that are more effective or economical.

        REGULATION BY THE FDA. Noncompliance with applicable requirements of FDA
can result in, among other things, fines, injunctions, civil penalties, recall
or seizure of products, total or partial suspension of production, failure of
the government to grant premarket clearance or premarket approval for medical
devices, withdrawal of marketing approvals and criminal prosecution. The FDA
also has the authority to request repair, replacement or refund of the cost of
any


                                      11
<PAGE>

medical device. In addition, international sales of medical devices are subject
to foreign regulatory requirements, which vary from country to country.

        THE RISK OF PRODUCT LIABILITY CLAIMS. The Company faces an inherent
business risk of exposure to product liability claims in the event that the use
of its products is alleged to have resulted in adverse effects. To date, no
product liability claims have been asserted against the Company. The Company
maintains a product liability and commercial general liability insurance policy
with coverage of $1,000,000 per occurrence and an annual aggregate maximum
coverage of $2,000,000 ($1,000,000 for lawsuits outside the United States,
Canada and Puerto Rico). The Company's product liability and general liability
policy is provided on an occurrence basis and is subject to annual renewal.
There can be no assurance that liability claims will not exceed the coverage
limits of such policy or that such insurance will continue to be available on
commercially reasonable terms or at all. If the Company does not or cannot
maintain sufficient liability insurance, its ability to market its products
could be significantly impaired.

        THE COMPANY'S DEPENDENCE ON KEY MANAGEMENT AND TECHNICAL PERSONNEL AND
ITS ABILITY TO ATTRACT NEW PERSONNEL. The Company's success depends in
significant part on the continued contribution of certain key management and
technical personnel. The loss of services of any of these individuals could have
a material adverse effect on the Company. The Company's growth and profitability
also depend on its ability to attract and retain other management and technical
personnel.

        YEAR 2000 ISSUES. The company has in place a program to address Year
2000 readiness in its internal systems and with its key customers and suppliers.
The Year 2000 issue is the result of computer logic that was written using two
digits rather than four to define the applicable year. Any computer logic that
processes date-sensitive information may recognize the date using "00" as the
year 1900 rather than the year 2000, which could result in miscalculations of
system failures.

        Pursuant to the Company's readiness programs, all major categories of
information technology systems and non-information technology systems (i.e.,
equipment with embedded microprocessors) in use by the Company, including
manufacturing, sales, financial and human resources, are being inventoried and
assessed. In addition, plans are being developed for the required systems
modifications or replacements. With respect to its information technology
systems, the Company has completed the entire assessment phase and has complete
90% of the remediation phase as of March 31, 1999. The Company plans to complete
the final 10% of the remediation phase related to its information technology by
May 31, 1999. With respect to its non-information technology systems, the
Company has completed approximately 85% of the assessment phase and has yet to
begin the remediation phase. The remainder of the assessment for non-technology
systems will be complete by April 30, 1999 and remediation is expected to be
completed by June 30, 1999. Selected areas, both internal and external, will be
tested to assure the integrity of the Company's remediation programs. The
testing is expected to be completed by June 30, 1999. The company plans to have
all internal mission-critical information technology and non-information
technology systems Year 2000 compliant by June 30, 1999.

        The Company also plans to communicate with its major customers,
suppliers and financial institutions to assess the potential impact on the
Company's operations if those third parties fail to become Year 2000 compliant
in a timely manner. While a formal survey has not yet begun, preliminary
discussions with customers and suppliers indicate that these parties have in
place Year 2000 readiness programs, without specifically confirming that they
will be Year 2000 compliant in a timely manner. A formal survey of major
customers and suppliers will begin in April 1999. Risk assessment, readiness
evaluation, action plans and contingency plans related to the Company's
significant customers and suppliers are expected to be completed by June 30,
1999.

        The costs incurred to date related to its Year 2000 activities have not
been material to the Company, and, based upon current estimates, the Company
does not believe that the total cost of its Year 2000 readiness programs will
have a material adverse impact on the Company's result of operations or
financial condition.

        The Company's readiness programs will also include the development of
contingency plans to protect its business and operations from Year 2000-related
interruptions. These plans should be complete by June 30, 1999 and, by way of
examples, will include back-up procedures, identification of alternate
suppliers, where possible, and increases in safety inventory levels. There can
be no assurances, however, that any of the Company's contingency plans will be
sufficient to handle all problems or issues which may arise.

        The Company believes that it is taking reasonable steps to identify and
address those matters that could cause serious interruptions in its business and
operations due to Year 2000 issues. However, delays in the implementation of new
systems, a failure to fully identify all Year 2000 dependencies in the Company's
systems and in the systems of its suppliers, customers or financial
institutions, a failure of such third parties to adequately address their
respective Year 2000 issues, or a failure of a contingency plan could have a
material adverse effect on the Company's business, financial condition and
results of operations. For example, the Company would experience a material
adverse impact on its business if significant


                                      12
<PAGE>

suppliers of electrical component parts, semi-conductors, printed circuit
boards, and other raw materials do not timely provide the Company with necessary
inventories or services due to Year 2000 systems failures.

        The statements set forth herein concerning Year 2000 issues which are
not historical facts are forward-looking statements that involve risks and
uncertainties that could cause actual results to differ materially from those in
the forward-looking statements. In particular, the costs associated with the
Company's Year 2000 programs and the time-frame in which the Company plans to
complete Year 2000 modifications are based upon management's best estimate.
These estimates were derived from internal assessments and assumptions of future
events. These estimates may be adversely affected by the continued availability
of personnel and system resources, and by the failure of significant third
parties to properly address Year 2000 issues. Therefore, there can by no
guarantee that any estimates, or other forward-looking statements will be
achieved, and actual results could differ significantly from those contemplated.

ITEM 7. FINANCIAL STATEMENTS.

        Index to Consolidated Financial Statements
<TABLE>
<CAPTION>
                                                                                                 Page
                                                                                                 ----
<S>                                                                                              <C>
Report of Independent Accountants .............................................................   14
Consolidated Balance Sheet as of December 31, 1998 and 1997 ...................................   15
Consolidated Statement of Operations for the Years Ended December 31, 1998 and 1997 ...........   16
Consolidated Statements of Changes in Shareholders' Equity for the Years Ended
  December 31, 1998 and 1997 ..................................................................   17
Consolidated Statement of Cash Flows for the Years Ended December 31, 1998 and 1997 ...........   18
Notes to Consolidated Financial Statements ....................................................   20

</TABLE>


                                      13
<PAGE>

                        REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Shareholders
of Image Guided Technologies, Inc.

In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of income (loss), of changes in shareholders' equity
(deficit) and of cash flows present fairly, in all material respects, the
financial position of Image Guided Technologies, Inc. and its subsidiary at
December 31, 1998 and 1997, and the results of their operations and their
cash flows for each of the two years in the period ended December 31, 1998,
in conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.

As more fully described in Note 14, the accompanying consolidated financial
statements as of and for the year ended December 31, 1998 have been restated
due to errors in accounting for discontinued operations.


/s/ PricewaterhouseCoopers LLP

PricewaterhouseCoopers LLP
Broomfield, Colorado
April 14, 1999, except for Note 14, as to
which the date is November 12, 1999


                                      14
<PAGE>

                         IMAGE GUIDED TECHNOLOGIES, INC.

                           CONSOLIDATED BALANCE SHEET

<TABLE>
<CAPTION>
                                                                             DECEMBER 31,
                                                                    ------------------------------
                                                                        1998               1997
                                                                    ------------       -----------
<S>                                                                 <C>                <C>
ASSETS
  Current assets:
    Cash and cash equivalents                                           $ 23,000      $  1,216,000
    Accounts receivable, net of allowance for doubtful accounts of
      $76,000 and $176,000 respectively                                1,710,000         1,340,000
    Inventories, net                                                     921,000         1,111,000
    Investment - Discontinued operations                               1,187,000         1,320,000
    Other current assets                                                 174,000           326,000
                                                                    ------------      ------------
      Total current assets                                             4,015,000         5,313,000
  Property and equipment, net of accumulated depreciation of
      $602,000 and $273,000 respectively                                 650,000         1,209,000
  Goodwill, net of accumulated amortization of $31,000
       and $2,000 respectively                                           550,000           575,000
  Investment - Discontinued operations                                 4,076,000         8,354,000
  Other assets                                                           222,000            82,000
                                                                    ------------      ------------
      Total assets                                                  $  9,513,000      $ 15,533,000
                                                                    ------------      ------------
                                                                    ------------      ------------

LIABILITIES AND SHAREHOLDERS' EQUITY
  Current liabilities:
    Accounts payable                                                 $   860,000       $   538,000
    Accrued liabilities                                                  403,000           325,000
    Line of Credit                                                     2,524,000               ---
    Current portion of capital lease obligations                       1,332,000           390,000
    Current portion of notes payable                                   2,986,000         1,893,000
                                                                    ------------      ------------
      Total current liabilities                                        8,105,000         3,146,000

  Capital lease obligations                                               38,000         1,128,000
  Line of  credit                                                            ---         1,250,000
  Notes payable, net of warrant discount of $227,000                         ---         2,530,000
                                                                    ------------      ------------
      Total liabilities                                                8,143,000         8,054,000

Commitments and contingencies

Shareholders' equity:
  Common Stock, no par value; 10,000,000 shares authorized;
    3,705,222 and 3,693,822 shares issued and outstanding
    respectively                                                      10,456,000        10,273,000
 Accumulated deficit                                                  (9,086,000)       (2,794,000)
                                                                    ------------      ------------
      Total shareholders' equity                                       1,370,000         7,479,000
                                                                    ------------      ------------
      Total liabilities and shareholders' equity                    $  9,513,000      $ 15,533,000
                                                                    ------------      ------------
                                                                    ------------      ------------
</TABLE>

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


                                      15
<PAGE>

                         IMAGE GUIDED TECHNOLOGIES, INC.

                       CONSOLIDATED STATEMENT OF OPERATIONS

<TABLE>
<CAPTION>
                                                               YEAR ENDED DECEMBER 31,
                                                           ------------------------------
                                                              1998               1997
                                                           -----------         ----------
<S>                                                        <C>                 <C>
   Revenue                                                  $7,154,000         $5,306,000
   Cost of goods sold                                        4,395,000          2,368,000
                                                           -----------         ----------
   Gross profit                                              2,759,000          2,938,000
                                                           -----------         ----------
   Operating expenses:
     Research and development                                1,470,000          1,093,000
     Selling and marketing                                     723,000            660,000
     General and administrative                              1,816,000          1,106,000
                                                           -----------         ----------
         Total operating expenses                            4,009,000          2,859,000
                                                           -----------         ----------
   Operating income (loss)                                  (1,250,000)            79,000
   Other income (expense):
     Interest and other expense                               (681,000)           (31,000)
     Interest and other income                                  90,000            239,000
                                                           -----------         ----------
   Income (Loss) from continuing operations
   before taxes                                             (1,841,000)           287,000
     Income Taxes                                                  ---                ---
                                                           -----------         ----------
     Income (Loss) from continuing operations               (1,841,000)           287,000
     Discontinued operations
       Gain, (Loss) from discontinued operations               185,000            (27,000)
       Loss on disposal                                     (4,411,000)               ---
     Extraordinary item--loss on early
     extinguishment of debt                                   (253,000)               ---
                                                           -----------         ----------
   Net income (loss)                                       $(6,320,000)        $  260,000
                                                           -----------         ----------
                                                           -----------         ----------
   Earnings (loss) per share from continuing
   operations
     Basic                                                     $(0.50)              $0.09
     Diluted                                                   $(0.50)              $0.08
   Loss per share from discontinued
   operations
     Basic                                                     $(1.14)            $(0.01)
     Diluted                                                   $(1.14)            $(0.01)
   Loss per share from extraordinary item
     Basic                                                     $(0.07)               ----
     Diluted                                                   $(0.07)               ----
   Earnings (loss) per share
     Basic                                                     $(1.71)            $(0.08)
     Diluted                                                   $(1.71)            $(0.07)
   Weighted average common shares outstanding
      Basic                                                  3,705,222           3,138,267
      Diluted                                                3,705,222           3,557,298
</TABLE>

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



                                      16
<PAGE>

                         IMAGE GUIDED TECHNOLOGIES, INC.

      CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

<TABLE>
<CAPTION>

                                 COMMON                       ACCUMULATED       TOTAL
                                 SHARES          AMOUNT         DEFICIT        EQUITY
                                 ------          ------       ------------    ---------
<S>                             <C>           <C>             <C>             <C>
   Balance at
      December 31, 1996          3,106,024    $ 8,799,000     $(3,026,000)    $5,773,000

   Exercise of stock                20,000         33,000                         33,000
      options
   Repurchase of common
      stock                        (11,912)       (61,000)                       (61,000)
   Common stock issued for
        Acquisition                579,710      1,275,000                      1,275,000


   Warrants issued with                           227,000                        227,000
      debt

   Net income                                                     260,000        260,000
                                ----------     ----------     -----------     ----------
   Balance at
      December 31, 1997          3,693,822     10,273,000      (2,766,000)     7,507,000

   Exercise of stock                11,400         14,000                         14,000
      options

   Warrants issued                                169,000                        169,000

   Net loss                                                    (6,320,000)    (6,320,000)
                                ----------     ----------     -----------     ----------
   Balance at
      December 31, 1998          3,705,222    $10,456,000     $(9,086,000)    $1,370,000
                                ----------     ----------     -----------     ----------
                                ----------     ----------     -----------     ----------
</TABLE>

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


                                      17

<PAGE>

                         IMAGE GUIDED TECHNOLOGIES, INC.
                      CONSOLIDATED STATEMENT OF CASH FLOWS

<TABLE>
<CAPTION>
                                                              YEAR ENDED DECEMBER 31,
                                                           -----------------------------
                                                              1998              1997
                                                           -----------       -----------
<S>                                                        <C>               <C>
OPERATING ACTIVITIES:
Net income (loss)                                          $(6,320,000)      $   260,000
Net loss from discontinued operations                       (4,226,000)           27,000
Income (loss) from continuing operations after              (2,094,000)          287,000
extraordinary item
Adjustments to reconcile income (loss) from
  continuing to net cash provided by (used in)
  operating activities:
  Extraordinary loss, net of tax                               253,000               ---
  Depreciation and amortization                                440,000           164,000
  Provision for doubtful accounts                             (100,000)           19,000
  Loss (gain) on disposition of assets                         (14,000)           18,000
  Provision for inventory obsolescence                          70,000            45,000
  Changes in operating assets and liabilities, net of
    acquired assets and liabilities:
    Accounts receivable                                       (270,000)         (620,000)
    Inventories                                                119,000          (142,000)
    Other current assets and other assets                       13,000            (4,000)
    Accounts payable                                           322,000            63,000
    Accrued liabilities                                         78,000            18,000
                                                           -----------       -----------
      Net cash used in operating activities                 (1,183,000)         (152,000)
                                                           -----------       -----------

      Net cash provided by (used in) discontinued
        operations                                             923,000          (226,000)

INVESTING ACTIVITIES:
Additions to property and equipment                           (165,000)         (253,000)
Cash received from sales of property                            64,000               ---
Acquisition of Brimfield Precision, Inc., net of cash              ---        (8,019,000)
  acquired
                                                           -----------       -----------
      Net cash used in investing activities                   (101,000)       (8,272,000)
                                                           -----------       -----------
      Net cash provided by (used in) discontinued
        operations                                            (336,000)           38,000

FINANCING ACTIVITIES:
Proceeds from stock option exercise                             14,000               ---
Proceeds from debt                                           2,700,000         4,000,000
Principal Payments on term loan                               (587,000)         (390,000)
Principal payments on capital leases                          (194,000)          (73,000)
Retire common stock                                                ---           (28,000)
Retire loan to officer                                             ---          (171,000)


                                             18

<PAGE>


Proceeds from line of credit                                 2,524,000         1,250,000
Proceeds from capital line of credit                            75,000               ---
Principal Payment to retire Imperial debt                   (5,028,000)              ---
                                                           -----------       -----------
      Net cash provided by (used in) financing
        activities                                            (496,000)        4,588,000
                                                           -----------       -----------
Net increase (decrease) in cash and cash equivalents        (1,193,000)       (4,024,000)
Cash and cash equivalents at beginning of period             1,216,000         5,240,000
                                                           -----------       -----------
Cash and cash equivalents at end of period                     $23,000        $1,216,000
                                                           -----------       -----------
                                                           -----------       -----------
SUPPLEMENTAL CASH FLOW DISCLOSURES
Interest paid                                                 $512,000           $54,000

SUPPLEMENTAL NON-CASH INVESTING AND FINANCING ACTIVITIES
Common stock issued in connection with acquisition                 ---         1,275,000
Promissory note issued in connection with acquisition              ---           500,000
Warrants issued                                                169,000           227,000

</TABLE>

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


                                         19

<PAGE>


                         IMAGE GUIDED TECHNOLOGIES, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.      ACCOUNTING POLICIES

DESCRIPTION OF BUSINESS

        Image Guided Technologies, Inc. (the "Company") was incorporated in 1990
in the State of Colorado to design, develop, manufacture and market proprietary,
hand-held electro-optical 3-dimensional position input devices for medical and
industrial applications. In December 1997, the Company acquired Brimfield
Precision, Inc. ("Brimfield" or "BPI") which designs, manufactures, and markets
surgical instruments and implants.

        As more fully described in Notes 11 and 14, in September 1998, the
Company adopted a plan to sell the net assets of the general instrument and
implant business units of its wholly owned subsidiary, BPI. Management
believes that the general instrument and implant business units represent a
separate and major line of business.

PRINCIPLES OF CONSOLIDATION

        The consolidated financial statements include the accounts of the
Company and its wholly owned subsidiary from the date of acquisition. The
consolidated financial statements of the Company have been adjusted and restated
to reflect the results of operations and net assets of the general instrument
and implant business units of BPI as discontinued operations for the years ended
December 31, 1998 and 1997. All significant intercompany accounts and
transactions have been eliminated in consolidation.

REVENUE RECOGNITION AND WARRANTY

        Revenue is recognized upon shipment of product to the customer. The
Company offers a one-year warranty on certain of its products. The costs of
product warranties are accrued at the time sales are recorded based upon
estimates of costs to be incurred to repair or replace items under warranty.

INVENTORIES

        Inventories are carried at the lower of cost or market. Cost is
determined using the first-in, first-out ("FIFO") method. Cost includes
materials, labor and manufacturing overhead.

PROPERTY AND EQUIPMENT

        Property and equipment is stated at cost and depreciated on a
straight-line basis over their estimated useful lives of two to twenty years.

GOODWILL

        Goodwill represents the excess of cost over the fair value of those net
assets acquired in the Brimfield purchase that are to be retained by the
Company. The goodwill is being amortized on a straight-line basis over 20 years.
Amortization expense of goodwill related to continuing operations was $28,960
and $1,554 in 1998 and 1997, respectively. The Company analyzes the
recoverability of the goodwill based on the estimated future undiscounted cash
flows of the acquired company. If the Company determines that the goodwill is
impaired, the goodwill is then written down to its estimated fair value based on
discounted cash flows.

CASH EQUIVALENTS

        The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents. Cash
equivalents are carried at cost which approximates fair value.

USE OF ESTIMATES

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


                                       20

<PAGE>


FAIR VALUE OF FINANCIAL INSTRUMENTS

        The carrying amounts of the Company's financial instruments, including
cash, short-term trade receivables and payables, and notes payable approximate
their fair values.

CONCENTRATION OF CREDIT RISK

The majority of the Company's revenues during 1998 and 1997 resulted from sales
of a single product which is used to determine the location of a surgical
instrument in a three dimensional space. Customers accounting for 10% or more of
total revenues during 1998 and 1997 are as follows:

<TABLE>
<CAPTION>
                                                              1998      1997
                                                              ----      ----
<S>                                                           <C>       <C>
Customer A                                                     32%       41%
Customer B                                                     11%       14%
Customer C                                                     10%        2%
Customer D                                                     15%        1%
Customer E                                                     15%        1%

</TABLE>

        At December 31, 1998, 21%, 26%, 12%, 7%, and 7% of accounts receivable
were with customers A, B, C, D and E, respectively. At December 31, 1997, 28%,
7%, 3%, 6% and 7% of accounts receivable were with customers A, B, C, D and E,
respectively.

EXPORT SALES

        The Company had export sales totaling approximately $1,679,000 and
$3,333,000 for the years ended December 31, 1998 and 1997, respectively,
principally to Germany, Israel and Canada.

EARNINGS PER SHARE

        The Company has adopted Financial Accounting Standards Board ("FASB")
Statement of Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS
128") for all periods presented. Basic earnings per share excludes any dilution
from common stock equivalents and is based on the weighted average common shares
outstanding. Diluted earnings per share includes dilution from the Company's
stock options and warrants, calculated under the treasury stock method. The
difference between weighted average common shares outstanding - basic and
weighted average common shares outstanding - diluted is due to the dilutive
effect of outstanding stock options and warrants.


                                        21

<PAGE>


2.      INVENTORIES

        Inventories are comprised of the following:

<TABLE>
<CAPTION>
                                                          DECEMBER 31,
                                                    -----------------------
                                                      1998          1997
                                                    ---------    ----------
<S>                                                 <C>          <C>
Raw materials                                        $410,000      $397,000
Work-in-process                                       214,000       207,000
Finished goods                                        428,000       568,000
                                                    ---------    ----------
                                                    1,052,000     1,172,000
Less allowance for obsolescence                      (131,000)      (61,000)
                                                    ---------    ----------
                                                     $921,000    $1,111,000
                                                    ---------    ----------
                                                    ---------    ----------
</TABLE>

3.      PROPERTY AND EQUIPMENT

        Property and equipment consist of the following:

<TABLE>
<CAPTION>
                                                                   DECEMBER 31,
                                      ESTIMATED USEFUL      -------------------------
                                            LIFE               1998           1997
                                      ----------------      ---------      ----------
<S>                                   <C>                   <C>            <C>
Building and Building Improvements      3 - 20 years        $  77,000        $100,000
Production equipment                    1 - 10 years          592,000         813,000
Computer equipment                      1 - 5 years           281,000         295,000
Furniture and fixtures                  2 - 7 years           134,000         138,000
Other                                   1 - 5 years           169,000         136,000
                                                            ---------      ----------
                                                            1,253,000       1,482,000
Less accumulated depreciation                                (603,000)       (273,000)
                                                            ---------      ----------
                                                             $650,000      $1,209,000
                                                            ---------      ----------
                                                            ---------      ----------
</TABLE>

4.      ACCRUED LIABILITIES

        Accrued liabilities consist of the following:

<TABLE>
<CAPTION>
                                                                 DECEMBER 31,
                                                            ---------------------
                                                              1998         1997
                                                            --------     --------
        <S>                                                 <C>          <C>
        Employee accruals                                   $187,000     $194,000
        Warranty reserves                                     56,000       32,000
        Other accrued liabilities                            160,000       99,000
                                                            --------     --------
          Total accrued liabilities                         $403,000     $325,000
                                                            --------     --------
                                                            --------     --------
</TABLE>


                                           22

<PAGE>


5.      DEBT

        NOTES PAYABLE

        Notes payable consist of the following at December 31, 1998:

<TABLE>

        <S>                                                                               <C>
        Senior note payable due April 3, 2003 interest at rate equal                      $2,380,000
        to the bank's base rate plus one-half of one percent, payable in monthly
        installments of $40,000 plus interest, secured by all assets of the
        Company. The interest rate at December 31, 1998 was 10.25%.

        Subordinated note payable due December 12, 1998, interest at a rate of               500,000
        12%, interest paid monthly and principal at maturity, secured by
        all assets of the Company; junior to the senior note payable to bank.

        Note payable, at one-quarter percent in excess of the Prime Rate,                     44,000
        payable in monthly installments of $2,167 plus interest, secured
        by machinery, maturing in August 2000. The interest rate at December 31,
        1998 was 8.5%.

        Note payable, at one-quarter percent in excess of the Prime Rate,                     62,000
        payable in monthly installments of $2,833 plus interest, secured
        by machinery, maturing in October 2000. The interest rate at December
        31, 1998 was 8.5%.
                                                                                          ----------
        Total notes payable                                                               $2,986,000
                                                                                          ----------
                                                                                          ----------


        Notes payable consist of the following at December 31, 1997:


        Senior note payable (net) due December 12, 2000 interest at                       $3,773,000
        rate or one and one-half percent in excess of the Prime Rate, payable in
        monthly installments of $111,111 plus interest, secured by all assets of
        the Company. The interest rate at December 31, 1997 was 10%.

        Subordinated note payable due December 12, 1998, interest at a                       500,000
        rate of 12%, interest paid monthly and principal at maturity, secured by
        all assets of the Company; junior to the senior note payable to bank.

        Note payable, at one-quarter percent in excess of the Prime Rate,                     69,000
        payable in monthly installments of $2,167 plus interest, secured
        by machinery, maturing in August 2000. The interest rate at December 31,
        1997 was 8.5%.

        Note payable, at one-quarter percent in excess of the Prime Rate,                     96,000
        payable in monthly installments of $2,833 plus interest, secured
        by machinery, maturing in October 2000. The interest rate at December
        31, 1997 was 8.5%.



                                                                                           4,438,000
        Less current portion                                                              (1,893,000)
                                                                                          ----------
        Long-term notes payable                                                           $2,545,000
                                                                                          ----------
                                                                                          ----------

</TABLE>

The senior note payable was issued with detachable warrants that were recorded
as debt discount. The discount will be amortized over the term of the notes
payable. See Note 8.


                                    23

<PAGE>

        LINE OF CREDIT

        In December of 1997, the Company entered into an agreement with a
bank for $2,000,000 revolving line of credit secured by all assets of the
Company, maturing on June 30, 1999, and bearing interest at the rate of three
quarters of one percent in excess of the bank's prime lending rate. At
December 31, 1997, $1,250,000 was outstanding under this revolving note
payable and proceeds were used in connection with the acquisition of
Brimfield Precision, Inc. At December 31, 1997, the interest on the revolving
note payable was 9.25%.

        In April 1998, the Company assigned the above $2,000,000 revolving
line of credit to another bank pursuant to a twenty-four month revolving loan
up to $3,000,000 at an interest rate initially equal to the new bank's base
rate plus one-quarter of one percent. Due to various loan covenant violations
at December 31, 1998, the $3,000,000 revolving loan was capped at $2,250,000
with an interest rate of 10% which includes an interest rate increase of
one-quarter of a percent basis points over the original interest rate on
revolving loan. As of December 31, 1998, the balance on the revolving loan
was $2,524,000.

6.      INCOME TAXES

        The Company acquired Brimfield Precision, Inc. on December 12, 1997.
Brimfield was previously an S Corporation for income tax purposes. On the
date of acquisition, under Internal Revenue Code Provisions, Brimfield became
a C-Corporation.

        There is no provision for income taxes in 1997 or 1998 because the
company incurred losses in each year. The components of the Company's
deferred income tax assets and liabilities under FAS 109 are as follows:

<TABLE>
<CAPTION>
                                                               DECEMBER 31,
                                                        -------------------------
                                                           1998           1997
                                                        ----------     ----------
<S>                                                     <C>            <C>
            Net operating loss carryforwards            $1,446,000     $  786,000
            R&D credits                                    141,000         90,000
            Allowance for doubtful accounts                 28,000         28,000
            Employee accruals                               24,000         18,000
            Write-off of fixed assets                       17,000         18,000
            Warranty                                        18,000         15,000
            Depreciation                                  (364,000)      (315,000)
            Deferred revenue                               (18,000)       (18,000)
            Refinancing Costs                             (118,000)           ---
            Inventory Reserves                              50,000            ---
            Other                                            7,000         66,000
                                                        ----------     ----------
                                                         1,231,000        688,000
        Less valuation allowance                        (1,231,000)      (688,000)
                                                        ----------     ----------
        Net deferred tax asset                                 ---            ---
                                                        ----------     ----------
                                                        ----------     ----------
</TABLE>

        During 1998, the Company increased its valuation allowance by $543,000.
The deferred tax asset has been reduced by a valuation allowance because
management believes it is more likely than not that such benefits will not be
realized.

                                       24
<PAGE>

        The following is a reconciliation of the statutory U.S. Federal income
tax rate to the Company's effective income tax rate of continuing operations:

<TABLE>
<CAPTION>
                                                            DECEMBER 31,
                                                         ------------------
                                                          1998        1997
                                                         -------     ------
<S>                                                      <C>         <C>
        Federal income tax rate                           34.0 %      34.0 %
        State income tax, net of federal benefit           3.7 %       3.7 %
        Warrant Expense                                   (0.6)%       --- %
        Goodwill amortization                             (1.3)%       2.0 %
        Meals and entertainment                           (0.2)%       1.9 %
        Effect of change in valuation allowance
          and other items                                (35.6)%     (41.6)%
                                                         -------     ------
        Effective income tax rate                          ---        ---
                                                         -------     ------
                                                         -------     ------
</TABLE>

        No tax benefit is recorded related to the discontinued operations and
the extraordinary item because they are completely offset by nondeductible
goodwill and the change in the valuation allowance.

        At December 31, 1998, the Company had net operating loss
carryforwards of approximately $3,878,000 which expire from 2008 to 2018. As
a result of certain changes in the Company's ownership, the future
utilization of these net operating loss carryforwards will be limited. The
Company also has R&D credits of approximately $141,000, which begin to expire
in 2006.

7.      SHAREHOLDERS' EQUITY

COMMON STOCK

        At December 31, 1998, the Company has reserved an aggregate of
1,976,863 shares of its common stock for stock issuable upon exercise of
outstanding options and warrants.

STOCK OPTIONS AND WARRANTS

        At December 31, 1998, the Company has two stock option plans, one
adopted in 1997 and one adopted in 1994.

        The company has authorized 1,440,000 options to be granted pursuant
to its stock option plans. As of December 31, 1998, 53,137 options were
available for grant under the plans. Options are generally granted at fair
market value as determined by the Board of Directors at the date of grant and
vest over a three-year period. At December 31, 1998, 701,202 options are
exercisable.

        In connection with the acquisition of Brimfield Precision Inc., the
Company financed a portion of the purchase priced with debt and detachable
warrants. The Company issued 260,000 warrants with an exercise price of
$2.92. The warrants are exercisable over seven years. In 1998, the Company
issued 75,000, 80,000, and 10,000 additional warrants of $2.28, $2.65 and
$2.86, respectively, at a term of 5, 7 and 7 years, respectively.

                                       25
<PAGE>

        A summary of the changes in options and warrants during the two years
ended December 31, 1998 is as follows:

<TABLE>
<CAPTION>
                                                      WEIGHTED                   WEIGHTED
                                                      AVERAGE                    AVERAGE
                                        WARRANTS   EXERCISE PRICE    OPTIONS   EXERCISE PRICE
                                        --------   --------------    -------   --------------
<S>                                     <C>        <C>             <C>         <C>
        Outstanding December 31, 1996     165,000      $ 4.66        619,997      $ 1.74
          Granted                         260,000        2.92        214,954        4.44
          Exercised                           ---       ---          (20,000)       1.67
          Forfeited                           ---       ---           (4,000)       5.00
                                         --------                  ---------
        Outstanding December 31, 1997     425,000        2.74        810,951        2.45
           Granted                        165,000        2.50        728,700        1.32
           Exercised                          ---       ---          (11,400)        .99
           Forfeited                          ---       ---         (141,388)       2.79
                                         --------                  ---------
        Outstanding December 31, 1998     590,000        3.92      1,386,863        1.38
                                         --------                  ---------
                                         --------                  ---------
</TABLE>

        The following table summarizes information concerning outstanding and
exercisable options at December 31, 1998:

<TABLE>
<CAPTION>
                                OPTIONS OUTSTANDING                    OPTIONS EXERCISABLE
                --------------------------------------------------------------------------------------
   RANGE OF                         AVERAGE          WEIGHTED
   EXERCISE         NUMBER         REMAINING          AVERAGE          NUMBER       WEIGHTED AVERAGE
    PRICE         OUTSTANDING    CONTRACT LIFE     EXERCISE PRICE     EXERCISABLE    EXERCISE PRICE
------------------------------------------------------------------------------------------------------
<S>               <C>              <C>            <C>                <C>             <C>
  $0.38 - 0.75      526,592           4.31            $ 0.67            133,662          $ 0.75
   1.24 - 1.67      443,855            .69              1.28            443,855            1.28
   2.00 - 2.94      416,416           3.98              2.39            123,685            2.63
                 ----------                                            --------
                  1,386,863                                             701,202
                 ----------                                            --------
                 ----------                                            --------
</TABLE>

        The following table summarizes information concerning outstanding
warrants at December 31, 1998:

<TABLE>
<CAPTION>
                                  WARRANTS OUTSTANDING
                     ----------------------------------------------
                                                         AVERAGE
                                          NUMBER        REMAINING
                     EXERCISE PRICE    OUTSTANDING    CONTRACT LIFE
                     ----------------------------------------------
                     <S>               <C>            <C>
                         $ 1.25           40,000          2.00
                           2.28           75,000          4.00
                           2.83          350,000          6.00
                           5.75          125,000          2.00
                                        --------
                                         590,000
                                        --------
                                        --------
</TABLE>

All warrants are exercisable at December 31, 1998.

        Statement of Financial Accounting Standards No. 123 "Accounting for
Stock-Based Compensation" ("SFAS 123"), issued in October 1995, established
financial accounting and reporting standards for stock-based employee
compensation plans. As permitted by SFAS 123, the Company elected to continue
to use Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees" and related Interpretations, in accounting for its Stock
Option Plan.

                                       26
<PAGE>

        If the Company had elected to recognize compensation cost based on
the fair value of the options granted at the grant date as well as the
vesting provisions under the Stock Option Plan, net loss from continuing
operations for 1998 would have been $(1,532,000), or $(0.41) and $(0.41) per
basic and diluted share, respectively. Income for 1997 would have been
$206,000, or $0.07 and $0.06 per basic and diluted share, respectively. The
weighted average fair value of the options granted during 1998 and 1997 is
estimated at $0.69 and $1.85 per share, respectively. The average fair value
of the warrants granted during 1998 and 1997 is estimated at $.66 and $.87
per share, respectively.

        The options were valued on the date of grant using the Black-Scholes
option pricing model with the following assumptions: volatility of 29% and
34.7% in 1998 and 1997, respectively; risk free interest rates of 5.2% and
5.9% for 1998 and 1997, respectively; expected terms of five years, and no
dividend yield rate.

8.      COMMITMENTS AND CONTINGENCIES

        The Company leases certain equipment under capital leases. Future
minimum payments under the equipment lease are as follows:

<TABLE>
<S>                                                     <C>
        1999                                           $ 1,332,000
        2000                                                38,000
                                                       --------------
        Total minimum lease payments                     1,370,000
          Less current portion                          (1,332,000)
                                                       --------------
        Total capital lease obligation                 $    38,000
                                                       --------------
                                                       --------------
</TABLE>

        The Company also leases office space under a non-cancelable operating
lease and the Company has required future minimum rental payments of
$194,000, and $66,000 for the years ended December 31, 1999, and 2000
respectively. A shareholder of the Company was an owner of the facility which
was leased by the Company under a short-term cancelable lease which expired
in February 1996. Rent expense for that facility under that lease for the
year ended December 31, 1996 was $10,000.

        The Company subleases a facility in Springfield, Massachusetts from
an entity, the same stockholders of which, had owned Brimfield Precision,
Inc. The lease agreement requires payments of $5,000 per month until December
2001.

        The Company is a party to two lawsuits and one threatened lawsuit,
which, while the outcome cannot be predicted with certainty, management
expects they will not have a material adverse effect on the consolidated
financial position or results of operations of the Company.

9.      RETIREMENT PLAN

        In 1996, the Company implemented the Image Guided Technologies, Inc.
401(k) Profit Sharing Plan covering substantially all employees of Image
Guided Technologies, Inc. Employees may contribute up to 15% of compensation
not to exceed Internal Revenue Service limits. The Company made a
discretionary matching contribution for the year ended December 31, 1997. In
connection with the Brimfield Precision Inc. acquisition, the Company also
has the Brimfield Precision, Inc. 401(k) Savings and Retirement Plan covering
substantially all employees of Brimfield Precision, Inc. Employees may
contribute from 2% to 15% of compensation not to exceed the Internal Revenue
Service limits. The Company has not made a matching contribution for the
Brimfield Precision, Inc. 401(k) Savings and Retirement Plan to date.

10.     ACQUISITION OF BRIMFIELD PRECISION, INC.

        On December 12, 1997, the Company acquired all the outstanding stock
of Brimfield, for a purchase price of approximately $9,844,000, including
expenses related to the acquisition. The transaction was recorded using the
purchase method of accounting. The purchase price was paid with a combination
of approximately $8,069,000 in cash, $500,000 in a note payable and 579,710
shares of the Company's common stock. The Company obtained the cash for the
acquisition from bank financing and its own funds. In conjunction with the
bank financing, the Company issued two seven-year warrants for a total of
260,000 shares of the Company's common stock. The goodwill of approximately
$5,748,000 was recorded in connection with the acquisition representing the
excess of the purchase price over the fair

                                       27
<PAGE>

value of the net identifiable assets of Brimfield. As more fully discussed in
Note 11, the Company has discontinued certain of the acquired operations,
resulting in a write off of approximately $5,225,260 of such goodwill. The
remaining goodwill is related to the operations to be retained and is being
amortized over twenty years using the straight-line method.

        In conjunction with the acquisition of Brimfield Precision, Inc., the
Company retired a $171,000 note payable from an officer of Brimfield
Precision, Inc.

11.     DISCONTINUED OPERATIONS

               On September 24, 1998, the Company adopted a plan to sell the
net assets of the general instrument and implant business units of its wholly
owned subsidiary, Brimfield Precision, Inc. Management believes that the
general instrument and implant business units represent a separate and major
line of business. Accordingly, the consolidated financial statements of the
Company have been adjusted and restated to reflect the results of operations
and net assets of the general instrument and implant business units as
discontinued operations for the years ended December 31, 1998 and 1997. Net
assets of the discontinued operations are carried at estimated net realizable
value and are included in the accompanying balance sheet as an Investment in
Discontinued Operations, net of liabilities to be assumed by the buyer. Such
net assets consist primarily of accounts receivable, inventories and
property, plant, and equipment. The original estimated loss on the disposal
of the net assets is $4,411,000, consisting of an estimated loss on disposal
of the business of $4,348,000 and a provision of $63,000 for anticipated
operating losses until disposal. See Note 13, "Subsequent Events."

12.     SEGMENT INFORMATION

        The Company is organized into two reportable segments based on the
definitions of segments provided under SFAS 131: optical localizers and
surgical instruments. The optical localizer segment typically sells a system
which consists of the following: a proprietary microprocessor-based control
system, proprietary software to calculate the digital coordinate location of
light emitting diodes ("LEDs"), a multi-camera array for detecting the LED
emissions, a relative position dynamic reference device connected to the
measured object, and a number of custom-manufactured LEDs mounted on the
device or instrument to be tracked in 3D space. The surgical instrument
segment sells stainless steel surgical instruments used for minimally
invasive surgery and other surgical procedures.

        The accounting policies utilized in reporting these segments are the
same as those described in Note 1, `Summary of Significant Accounting
Policies." The Company does not have any intersegment revenue and evaluates
segment performance based upon revenue and gross profit. The segment gross
profit equals consolidated gross profit and the Company does not allocate
research and product development costs; selling, general, administrative and
other income and expense; interest income; interest expense; provision for
income taxes; or extraordinary items to the segments. The revenue and gross
profit by segment is as follows:

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

         Optical localizers                         $4,712,000              $5,223,000
         Surgical instruments                        2,442,000                  83,000
                                                    ----------              -----------
         Total Revenue                              $7,154,000              $5,306,000
                                                    ----------              -----------
                                                    ----------              -----------
</TABLE>

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

         Optical localizers                         $2,300,000             $ 2,929,000
         Surgical instruments                          459,000                   9,000
                                                    ----------             ------------
         Total Gross Profit                         $2,759,000             $ 2,938,000
                                                    ----------             ------------
                                                    ----------             ------------
</TABLE>

13.     SUBSEQUENT EVENTS

        On March 30, 1999, BPI sold substantially all the assets of its
general surgical instruments, orthopedic implants and orthopedic
instrumentation business located at Brimfield, Massachusetts. The sales price
was $6,000,000 in cash plus assumption of certain trade payables and accrued
liabilities, subject to adjustment for changes from the period from June 30,
1998 through closing.

        The funds received from the sale were used to pay off amounts
outstanding under the BPI's equipment leases (most of which equipment was
sold in the sale noted above), pay off the Company's term loan from
BankBoston and pay down the Company's revolving loan with BankBoston.

        On April 9, 1999, BankBoston assigned its loan to Silicon Valley
Financial Services, a division of Silicon Valley Bank. After the assignment,
Silicon and the Company amended and restated the loan to provide for a loan

                                       28
<PAGE>

facility under which Silicon would purchase certain of the Company's
receivables, initially at the rates of 90% and subsequently decreasing to 80%
of their face amount. Under the facility, the Company will repurchase from
Silicon any uncollected receivables and pay Silicon a finance charge equal to
2% per month on the face amount of all purchased receivables and an
administrative fee of 1.5% of the face amount of each purchased receivable.
Silicon has no obligation to purchase any receivable under the facility and
in not event shall the aggregate amount of all purchased receivables
outstanding exceed $1,500,000.

        The Company is currently in default under its $500,000 12%
subordinated promissory note payable to Cruttenden Roth, Inc. While interest
has been paid to date, the Company owes the $500,000 principal in full. The
note is subordinated to the Company's bank debt and the holders of the note
are not permitted under the terms of the subordination agreement with the
bank to sue upon or collect, nor to make any demand for, nor to exercise any
rights or remedies to enforce, the note so long as any bank obligation
remains outstanding.

14.        RESTATEMENT OF FINANCIAL STATEMENTS

           These consolidated financial statements as of and for the year ended
December 31, 1998 have been restated due to errors in accounting for changes
in the estimated loss on disposal of discontinued operations as well as
classification of expenses between continuing and discontinued operations. On
a cumulative basis, the Company's net loss properly reflects all charges
associated with the disposal of its discontinued operation, as of March 31,
1999. However, the Company's previously reported results of operations for
year ended December 31, 1998 and the three-month period ended March 31, 1999
were overstated in 1998 and understated in 1999 by like amounts due to the
errors described in the following paragraphs.

           On September 24, 1998, the Company adopted a plan to sell the net
assets of the general instrument and implant business units. The loss to be
incurred upon the disposal of such discontinued operation was estimated and
charged to the Company's results of operations for the three- and nine-month
periods ended September 30, 1998. The original estimated loss on the disposal
of the net assets were estimated to be $4,411,000, consisting of an estimated
loss on disposal of the business of $4,348,000 and a provision of $63,000 for
anticipated operating losses during the phase out period. Subsequently,
during 1998 the Company revised the estimated loss on the disposal of the
discontinued operation, which estimate indicated the loss would be
$3,053,000, or $1,358,000 less than originally estimated. The Company's
previous financial statements for the year ended December 31, 1998 reflected
the reduction in the estimated loss with an offsetting increase in the value
of its investment in discontinued operations; however, because final
determination of the loss was contingent upon the closing of the sale
transaction, recognition of the reduction in the estimated loss was not
appropriate.

           Upon closing of the sale transaction in March 1999, the actual
loss on the disposal was determined to be $3,743,000. Because the actual loss
on the disposal exceeded the revised estimate reflected in the 1998 financial
statements, the Company reflected additional losses on disposal of the
discontinued operation in its results of operations for the three-month
period ended March 31, 1999.

           In addition, the Company's previously reported results of
operations for year ended December 31, 1998 and interim information for
the three-month period ended March 31, 1999 financial statements reflected
interest expense of approximately $489,000 and $132,000, respectively, as a
component of the loss on disposal of the discontinued operation; such
interest charges should have been included as a component of the loss from
continuing operations. These interest charges have been reclassified as a
component of the loss from continuing operations in the accompanying
statements of operation for the year ended December 31, 1998.

           These financial statements have been restated to exclude the
previously recognized reduction in the estimated loss on disposal of the
discontinued operation and to reclassify interest charges to continuing
operations. The effect of the restatement is to increase the loss on disposal
of the discontinued operation and the net loss by $1,358,000, as follows:






<TABLE>
<CAPTION>
                                                         Year Ended December 31, 1999
                                                         ----------------------------
                                                       Income/(Loss) from
                                   Loss from              Discontinued          Loss on Disposal of
                             Continuing Operations         Operations          Discontinued Operation          Net Loss
                             ---------------------     ------------------     --------------------------     ------------
<S>                          <C>                       <C>                    <C>                            <C>
Previously reported            $(1,352,000)                $(304,000)                $(3,053,000)            $(4,962,000)
  Per diluted share                  $(.36)                                                                       $(1.34)
Restated                       $(1,841,000)                $ 185,000                 $(4,411,000)            $(6,320,000)
  Per diluted share                  $(.50)                                                                       $(1.71)

</TABLE>

Interim financial information for the three-month period ended March 31, 1999
and the six-month period ended June 30, 1999 (neither of which periods is
presented herein) have also been restated for the factors set forth above.

                  [Remainder of page intentionally left blank.]


                                       29
<PAGE>

                                    PART III


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

         None.


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


                        DIRECTORS AND EXECUTIVE OFFICERS

DIRECTORS

      The Company currently has five Directors, two of whom were officers and
employees of the Company or its subsidiaries during 1998. The Directors are:

<TABLE>
<CAPTION>

     Name & Age of Director          Principal Occupation During Past Five       Director
                                         Years And Other Directorships            Since
------------------------------------------------------------------------------------------
<S>                                <C>                                           <C>
Paul L. Ray, 52                    Chief Executive Officer and Chairman of         1992
                                   the Company since January 1994; President
                                   of the Company from January 1994 through
                                   November 1995 and since March 1998;
                                   Managing Partner and Director of Paradigm
                                   Partners, LLC, a venture investment firm,
                                   from 1992 to January 1995; Chairman of
                                   the Board of Commissioners of the
                                   Colorado Advanced Technology Institute.

Clifford F. Frith, 60              General Manager, Filtration and                 1994
                                   Instrumentation Global Business Unit, a
                                   fluid separations and control division of
                                   Osmonics, Inc.; Vice President of
                                   American Business Advisors, Inc. from
                                   November 1993 until January 1996;
                                   President and Director of Boulder
                                   Intertec, Inc., a business management
                                   advising service, from June 1992 through
                                   December 1996.

William G. Lyons, 43               President of Brimfield Precision, Inc.          1997
                                   from 1987 until December 1998; Co-Founder
                                   of Mechtech of Western Massachusetts, a
                                   non-profit apprenticeship and training
                                   organization.

A. Clinton Allen, 55               Chairman and Chief Executive Officer of         1998
                                   A.C. Allen & Company, Inc., an investment
                                   banking consulting firm; first outside
                                   director of Blockbuster Entertainment and
                                   member of the Board and Chairman of the
                                   Compensation Committee until Blockbuster
                                   was sold in 1994; Director of
                                   Psychemedics Corporation, The DeWolfe
                                   Companies, Inc., Swiss Army Brands, Inc.,
                                   Response, U.S.A., Inc., Diversified
                                   Corporation Resources, and The Legal Club
                                   of America.
</TABLE>


                                      30


<PAGE>

<TABLE>
<CAPTION>

     Name & Age of Director          Principal Occupation During Past Five       Director
                                         Years And Other Directorships            Since
------------------------------------------------------------------------------------------
<S>                                <C>                                           <C>
Terry R. Knapp, M.D., 55           Chairman, CEO and Medical Director of           1998
                                   Conception Technology, Inc., a woman's
                                   healthcare company in the field of
                                   reproductive medicine; from 1995 to 1996
                                   Chief Medical Officer of Collagen
                                   Corporation; from 1992 to 1995, Chairman,
                                   CEO and Medical Director of LipoMatrix,
                                   Inc., a breast implant company; from 1975
                                   to 1992 Dr. Knapp practiced plastic and
                                   reconstructive surgery.
</TABLE>

EXECUTIVE OFFICERS

      The executive officers of the Company are as follows:


<TABLE>

<S>                              <C>
Paul L. Ray, age 52              Chief Executive Officer and Chairman of the Board of the
                                 Company since January 1994; President of the Company from
                                 January 1994 through November 1995, and since March 1998;
                                 Director of the Company since 1992; Managing Partner and
                                 Director of Paradigm Partners, LLC, a venture investment
                                 company, from 1992 to January 1994.

William J. O'Connor, DB.A.,      Vice President of the Company and Chief Operating Officer
  age 56                         of the Boulder, Colorado operations since March 1998
                                 and of all operations since April 1999; Executive Vice
                                 President and Chief Operating Officer of Erbtec
                                 Engineering, Inc., a division of Colorado MEDtech,
                                 Inc., a medical electronics OEM company, from July
                                 1995 through February 1998; Vice President of Sales
                                 and Marketing, Medgraphics, Inc., from July 1994 through
                                 June 1995; Senior Vice President of Sales and
                                 Marketing, Valleylab, Inc., a division of Pfizer, Inc.,
                                 April 1989 through June 1994; Adjunct Professor of
                                 Marketing and Strategy, University of Phoenix, June
                                 1994 through March 1998; Director of the Company
                                 from November 1996 until May 1999.

Waldean A. Schulz, Ph.D,         Vice President of Technology and Secretary of the
  age 53                         Company since December 1990; founded the Company and
                                 served as its President from inception until December
                                 1990; Director of the Company 1990-1998.
</TABLE>

             SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

      Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's officers and directors, and persons who own more than ten percent of a
registered class of the Company's equity securities, to file reports of
ownership and changes in ownership with the SEC. Such persons are also required
by SEC regulation to furnish the Company with copies of all Section 16(a) forms
they file.

      To the best of the Company's knowledge, based solely on review of the
copies of such reports furnished to the Company and written representations that
no other reports were required, its officers, directors and stockholders
beneficially owning greater than ten percent of the Company's stock have
complied with all Section 16(a) filing requirements applicable to transactions
during 1998 except Mr. O'Connor's Form 5 for fiscal year 1998 inadvertently
failed to include two stock option transactions (an amended Form 5 has been
filed).


                                   31


<PAGE>

ITEM 10. EXECUTIVE COMPENSATION.


                   DIRECTOR AND EXECUTIVE COMPENSATION

DIRECTOR COMPENSATION

      Directors who are not employees of the Company are paid $1,000 for each
Board meeting physically attended plus $500 annually for each Committee on which
the director serves. Each outside director at the time was also granted a
nonqualified stock option for 12,000 shares of the Company's Common Stock in May
1998, and a nonqualified stock option for 7,750 shares of the Company's Common
Stock in December 1998. Directors are also reimbursed for expenses incurred in
attending Board or Committee meetings.


EXECUTIVE COMPENSATION

      The following table sets forth certain information regarding the
compensation earned for services rendered in all capacities to the Company by
the Company's Chief Executive Officer and each of the other executive officers
whose compensation from the Company exceeded $100,000 for such fiscal year (the
"Named Executive Officers").

                            SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>                                                          Long-Term
                                                                  Compensation
                                        Annual Compensation       ------------
                                        -------------------        Securities
                                                                   Underlying    All Other
  Name and Principal                                                 Options    Compensation
       Position            Year    Salary ($) Bonus ($) Other ($)  Granted (#)     (1)($)
                           ----    ---------- --------- ---------  -----------  ------------
<S>                        <C>     <C>        <C>       <C>        <C>          <C>
Paul L. Ray .............. 1998      170,000         0      None      276,400           0
Chief Executive            1997      142,657         0      None       70,000       2,260
Officer and Chairman       1996      110,521     8,036      None        6,400       1,593

William O'Connor. ........ 1998      114,019         0      None    111,000(2)          0
Chief Operating Officer

Daniel Hannify ........... 1998      175,000     9,659      None     75,000(3)          0
Vice President, Vice       1997(4)     6,730         0      None            0           0
President of Brimfield
Precision, Inc. until
April 1999

Jeffrey J. Hiller ........ 1998      137,616         0      None       51,400           0
Chief Financial            1997      102,848         0      None       20,000       1,650
Officer and Vice           1996       89,375     6,430      None        6,400       1,231
President of Finance
through December 1998

William G. Lyons. ........ 1998      150,000     2,485      None        7,750           0
President of Brimfield     1997(4)     5,769         0      None            0           0
Precision, Inc. until
December 1998

Robert E. Silligman ...... 1998      154,047         0      None            0           0
President and Chief        1997      117,847         0      None       20,000       1,879
Operating Officer          1996       97,112     7,395      None        6,400       1,416
until March 1998
</TABLE>
------------------------------------------------------------------------------

(1)     Represents the matching contributions made to 401(k) plan account.
(2)     Does not include 100,000 shares underlying options that were cancelled
        December 14, 1998 in connection with the issuance of options for 100,000
        shares of the Company's Common Stock.
(3)     Does not include 25,000 shares underlying options that were cancelled
        October 28, 1998 in connection with the issuance of options for 25,000
        shares of the Company's Common Stock issued earlier in 1998.
(4)     Includes compensation paid from December 12, 1997 until December 31,
        1997.


                                   32


<PAGE>

OPTION GRANTS

      The following table contains information concerning stock options granted
to the Named Executive Officers during the fiscal year ended December 31, 1998.

<TABLE>
<CAPTION>

                                  OPTION GRANTS IN THE LAST FISCAL YEAR
                                            Individual Grants
                           -----------------------------------------------------

                          Number of      Percent of Total
                         Securities     Options Granted to
                         Underlying        Employees in    Exercise of Base   Expiration
         Name          Options Granted      Fiscal Year      Price/Share          Date
         ----          ---------------      -----------      -----------          ----
<S>                    <C>               <C>               <C>                <C>
Paul L. Ray.........       200,000             21.7%             $2.0000         6/1/2005
                             6,400              0.7%             $2.9375         9/3/2003
                            14,121              1.5%             $2.9375        1/29/2004
                            35,879              3.9%             $2.9375        4/23/2004
                            20,000              2.2%             $2.9375       10/30/2004
William O'Connor....         3,000              0.3%             $2.9375        4/23/2002
                             8,000              0.9%             $2.9375       11/20/2001
                          88,850(1)             9.6%             $0.3750        2/25/2003
                          11,150(2)             1.2%             $0.3750        5/18/2003
Daniel Hannify......        50,000              5.4%             $2.2810        5/18/2003
                          25,000(3)             2.7%             $0.7500        5/18/2003
Jeffrey Hiller......         6,400              0.7%             $2.9375       12/31/2003
                            20,000              2.2%             $2.9375       12/31/2003
                            25,000              2.7%             $2.2810       12/31/2003
William G. Lyons....       7,750(4)             0.8%             $0.3750       12/13/2003
Robert E. Silligman.        20,000              2.2%             $2.9375       10/30/2002
                             6,400              0.7%             $2.9375        9/13/2001
</TABLE>

---------------------
(1)     This option was issued in December 1998 in connection with the
        cancellation of an option for 88,850 shares of Common Stock, exercisable
        at $2.50 per share. The cancelled option was issued in February 1998 and
        is not listed in the above table.
(2)     This option was issued in December 1998 in connection with the
        cancellation of an option for 11,150 shares of Common Stock, exercisable
        at $2.281 per share. The cancelled option was issued in May 1998 and is
        not listed in the above table.
(3)     This option was issued in October 1998 in connection with the
        cancellation of an option for 25,000 shares of Common Stock, exercisable
        at $2.281 per share. The cancelled option was issued in May 1998 and is
        not listed in the above table.
(4)     This option was granted to Mr. Lyons as a director. Mr. Lyons was not
        serving as an executive officer of the Company at the time the option
        was granted.


                                   33

<PAGE>

OPTION EXERCISES AND HOLDINGS

      The following table sets forth information concerning option exercises and
option holdings for the fiscal year ended December 31, 1998, with respect to the
Named Executive Officers.

             AGGREGATE OPTIONS EXERCISED IN THE LAST FISCAL YEAR
                      AND FISCAL YEAR END OPTION VALUES

<TABLE>
<CAPTION>

                                                      Number of Shares
                          Number of             Underlying Unexercised Options  Value of Unexercised, In-the-Money
                           Shares                  Held at December 31, 1998      Options at December 31, 1998(1)
                          Acquired       Value   -----------------------------    ------------------------------
          Name           on Exercise   Realized   Exercisable   Unexercisable       Exercisable   Unexercisable
-----------------------  -----------   ---------  -----------   --------------    --------------  --------------
<S>                     <C>           <C>        <C>           <C>               <C>             <C>
Paul L. Ray ..........      None          N/A       220,900        260,499             $0.00          $0.00
William O'Connor......      None          N/A         6,833        104,167             $0.00          $0.00
Dan Hannify...........      None          N/A        12,500         62,500             $0.00          $0.00
Jeffrey Hiller........      None          N/A       131,399              0             $0.00          $0.00
William Lyons.........      None          N/A         7,750              0             $0.00          $0.00
Robert E. Silligman...      None          N/A        91,467         16,933             $0.00          $0.00

</TABLE>

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

(1)   Based on the fair market value of the underlying shares of Common Stock of
      $0.25 per share, the average of the closing bid and the ask price per
      share on December 31, 1998, as reported by Nasdaq over the Counter
      Bulletin Board, less the per share exercise price.


EMPLOYMENT AGREEMENTS

      Paul L. Ray, Chief Executive Officer, Chairman of the Board and President
of the Company, has an employment agreement (the "Ray Agreement") with the
Company that terminates on December 31, 2000, subject to a provision that will
automatically extend the term of the agreement for an additional year. Mr. Ray's
current annual salary is $175,000. Under the Ray Agreement, options granted
prior to 1999 to Mr. Ray expire seven years from the date of grant and remain
exercisable for a seven-year period regardless of whether Mr. Ray's employment
with the Company terminates earlier. In the event of a Change in Control of the
Company (as defined in the Ray Agreement), all options previously granted to Mr.
Ray which remain unvested will vest immediately. If Mr. Ray's employment is
terminated (i) upon his death, (ii) following a Change in Control, (iii) by the
Company due to various described disability circumstances, (iv) by the Company
without cause or (v) by Mr. Ray voluntarily upon the Company's default or
unremedied Adverse Change in Duties (as defined in the Ray Agreement), then the
Company will pay Mr. Ray severance pay equal to the product of the number of
complete years of service times three times Mr. Ray's then current monthly
salary (but not more than 20 times his monthly salary). Such severance pay may
be made, at the Company's option, in one lump sum or in monthly installments,
each equal to Mr. Ray's then current monthly salary. Mr. Ray may terminate his
employment at any time upon at least thirty days written notice to the Company.

      William O'Connor, Vice President and Chief Operating Officer of the
Company, has a one-year employment agreement with the Company which expires on
February 28, 2000, subject to a provision that will automatically extend the
term of the agreement until February 28, 2001 (the "O'Connor Agreement"). Mr.
O'Connor's current annual salary is $135,000. The O'Connor Agreement provides
for vesting of stock options and severance pay upon terms similar to the Ray
Agreement, except the Company would pay O'Connor severance of $11,250 per month
for one year. Mr. O'Connor may terminate his employment at any time upon at
least thirty days written notice to the Company.

      Jeffrey J. Hiller, the former Vice President, Finance and Chief Financial
Officer of the Company, has an employment agreement with the Company to provide,
on request, support for financial matters prior to June 30, 1999 (the "Hiller
Agreement"). Mr. Hiller's current monthly salary is $10,600. The Hiller
Agreement immediately vested all outstanding option agreements held by Mr.
Hiller, and extends the expiration of all such options until December 31, 2003.

                                      34

<PAGE>

      Robert E. Silligman, the former President and Chief Operating Officer of
the Company, had an employment agreement similar to the O'Connor Agreement that
expired on December 31, 1998. In connection with Mr. Silligman's resignation as
President and Chief Operating Officer of the Company, Mr. Silligman's employment
agreement was cancelled and he entered into a new employment agreement with the
Company for the balance of 1998, at his then current salary of $11,250 per
month.

      Daniel T. Hannify, the former Vice President of the Company and Vice
President, Operations of Brimfield Precision, Inc. ("BPI"), had an employment
agreement with BPI (the "Hannify Agreement"). Pursuant to the Hannify Agreement,
Mr. Hannify's base salary was $175,000 per annum. Mr. Hannify began working for
Brimfield Precision, LLC, the entity that purchased the Brimfield, Massachusetts
operation of BPI, and ceased working for BPI, on March 31, 1999.

      William G. Lyons, the former President of BPI, was under a one-year
employment contract which expired on December 11, 1998. Mr. Lyons' annual salary
was $150,000.




ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

         SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

      The following table sets forth certain information concerning the
beneficial ownership of the Company's Common Stock as of December 31, 1998 by
(i) each director and director-nominee, (ii) each Named Executive Officer, (iii)
each shareholder known by the Company to own beneficially five percent or more
of the outstanding shares of Common Stock and (iv) all executive officers and
directors of the Company as a group.

NEED TO COMPLETELY REDO TABLE AND FOOTNOTES.

<TABLE>
<CAPTION>

                Name and Address of                 Number of Shares      Percentage of
                Beneficial Owner(1)                  of Common Stock    Outstanding Common
                -------------------                   Beneficially      Stock Beneficially
                                                        Owned(2)              Owned
                                                    ----------------    ------------------
<S>                                                <C>                 <C>
Paul L. Ray(3)...................................       258,236                6.5%

Ray L. Hauser, Ph.D.(4)..........................       319,126                8.6%

Clifford F. Frith(5).............................        48,156                1.3%

William O'Connor(6)..............................         8,083                 *

William G. Lyons(7)..............................       323,460                8.7%

A. Clinton Allen(8)..............................        94,750                2.5%

Terry R. Knapp, M.D(9)...........................        19,750                 *

Robert E. Silligman(10)..........................        63,200                1.7%

Jeffrey J. Hiller(11)............................       141,899                3.7%

Daniel T. Hannify(12)............................        18,750                 *

John Pappajohn...................................       232,820                6.3%
2116 Financial Center
Des Moines, Iowa 50309

                                       35

<PAGE>

<CAPTION>

                Name and Address of                 Number of Shares      Percentage of
                Beneficial Owner(1)                  of Common Stock    Outstanding Common
                -------------------                   Beneficially      Stock Beneficially
                                                        Owned(2)              Owned
                                                    ----------------    ------------------
<S>                                                <C>                 <C>
Equitable Investment Management Services, Inc. ..       208,685                5.6%
5400 University Avenue
West Des Moines, IA 50266

Matthew Lyons....................................       226,655                6.1%
90 Brookdale Drive
Springfield, MA 01104

Imperial Bank(13)................................       250,000                6.7%
225 Franklin Street, 29th Floor
Boston, MA 02110

Austin W. Marxe and David Greenhouse(14).........       552,700               14.9%
153 East 53rd Street
New York, NY 10022

All executive officers and directors.............       914,984               22.1%
as a group (7 persons)(15)

</TABLE>

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

*Less than one percent.

(1)   Unless otherwise noted, the address for each beneficial owner is c/o the
      Company, 5710-B Flatiron Parkway, Boulder, Colorado 80301.

(2)   Except as otherwise noted, each individual or entity has sole voting and
      investment power with respect to the shares listed. Beneficial ownership
      is determined in accordance with the rules of the Securities and Exchange
      Commission ("SEC") and generally includes voting or investment power with
      respect to securities. In accordance with SEC rules, shares of the Common
      Stock which may be acquired upon exercise of stock options and warrants
      which are currently exercisable or which become exercisable within 60 days
      of December 31, 1998, are deemed beneficially owned by the optionee and
      each beneficial owner's percentage ownership is determined by assuming
      that options or warrants that are held by such person (but not those held
      by any other person) and which are exercisable within 60 days of December
      31, 1998, have been exercised. Except as indicated by footnote, and
      subject to community property laws where applicable, the persons or
      entities named in the table above have sole voting and investment power
      with respect to all shares of Common Stock shown as beneficially owned by
      them.

(3)   Includes 249,650 shares which Mr. Ray has a right to acquire upon exercise
      of stock options currently exercisable or exercisable within 60 days of
      December 31, 1998. Does not include (i) 5,318 shares of Common Stock held
      by Paradigm Partners ("Paradigm"), a limited liability company of which
      Mr. Ray is a member, but not a manager, (ii) 10,000 shares Paradigm has a
      right to acquire upon exercise of stock options currently exercisable, and
      (iii) 14,070 shares of Common Stock held by Paradigm Capital Network,
      Ltd., a Colorado limited partnership of which Paradigm is the general
      partner.

(4)   Includes 28,406 shares of Common Stock Dr. Hauser has a right to acquire
      upon exercise of stock options currently exercisable or exercisable within
      60 days of December 31, 1998, and excludes 2,560 shares of Common Stock
      owned by Dr. Hauser's wife of which Dr. Hauser disclaims beneficial
      ownership.

(5)   Includes 48,156 shares of Common Stock Mr. Frith has a right to acquire
      upon exercise of stock options currently exercisable or exercisable within
      60 days of December 31, 1998.

(6)   Includes 7,083 shares of Common Stock Mr. O'Connor has a right to acquire
      upon exercise of stock options currently exercisable or exercisable within
      60 days of December 31, 1998.

(7)   Includes 7,750 shares of Common Stock Mr. Lyons has a right to acquire
      upon exercise of stock options currently exercisable or exercisable within
      60 days of December 31, 1998.

                                       36

<PAGE>

(8)   Includes 19,750 shares of Common Stock Mr. Allen has a right to acquire
      upon exercise of stock options currently exercisable or exercisable within
      60 days of December 31, 1998, and 75,000 shares of Common Stock underlying
      an exercisable warrant held by A.C. Allen & Company.

(9)   Includes 19,750 shares of Common Stock Mr. Knapp has a right to acquire
      upon exercise of stock options currently exercisable or exercisable within
      60 days of December 31, 1998.

(10)  Includes 63,200 shares of Common Stock Mr. Silligman has a right to
      acquire upon exercise of stock options currently exercisable or
      exercisable within 60 days of December 31, 1998.

(11)  Includes 131,399 shares of Common Stock Mr. Hiller has a right to acquire
      upon exercise of stock options currently exercisable or exercisable within
      60 days of December 31, 1998.

(12)  Includes 18,750 shares of Common Stock Mr. Hannify has a right to acquire
      upon exercise of stock options currently exercisable or exercisable within
      60 days of December 31, 1998.

(13)  Includes 250,000 shares of Common Stock which Imperial Bank has the right
      to acquire upon exercise of warrants currently exercisable.

(14)  Includes 425,700 shares held by Special Situations Fund III, L.P. and
      127,000 shares held by Special Situations Cayman Fund, L.P. The investment
      advisor of both funds is controlled by Mr. Marxe and Mr. Greenhouse. Mr.
      Marxe and Mr. Greenhouse have shared voting power and shared dispositive
      power over all such shares.

(15)  Includes 362,139 shares of Common Stock issuable upon exercise of options
      currently exercisable or exercisable within 60 days of December 31, 1998,
      and 75,000 shares of Common Stock underlying exercisable warrants held by
      A. C. Allen & Company.


ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

                 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

      On December 12, 1997, the Company finalized the acquisition of all the
outstanding shares of BPI from William G. and Matthew Lyons. For their BPI
shares, the Company paid William G. and Matthew Lyons $4,235,465 and $3,049,535
in cash and 337,043 shares and 242,667 shares of the Company's Common Stock,
respectively. In connection with the acquisition of BPI, the Company paid off
approximately $171,000 in principal due on a note to Pasqualina C. Lyons,
William G. and Matthew Lyons' mother.

      The Company subleases 13,821 square feet of a manufacturing facility in
Springfield, Massachusetts from Blackstone Medical, Inc., a corporation
controlled by Matthew Lyons. The lease agreement requires rental payments of
approximately $5,000 per month and expires in December 2001. The Company also
leases equipment and computer network and telephone services to Blackstone
Medical on a month-to-month basis. Blackstone Medical, Inc. also purchases
products from, and sells products to BPI in the ordinary course of its business.
In 1998, the volume of such sales and purchases aggregated approximately
$903,000. William G. Lyons owns an equity interest in, and is a director of,
Blackstone Medical, Inc. William G. Lyons was an executive officer and is a
director of the Company.

      Effective March 2, 1998, the Company entered into a one-year Consulting
Agreement with A. C. Allen & Company, a company controlled by A. Clinton Allen,
a director of the Company, for advise regarding strategic planning issues. The
agreement is automatically renewed each successive year unless either party
elects not to renew it. Pursuant to that agreement, the Company will pay A. C.
Allen & Company $4,000 per month. Effective May 19, 1998, the Company issued to
A. C. Allen & Company a five-year warrant to purchase up to 75,000 shares of the
Company's Common Stock at any time at $2.281 per share.

                                      37

<PAGE>


ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K

 (a) Exhibits

<TABLE>

       Exhibit
        Number                    Description of Document
       -------                    -----------------------
       <S>          <C>
          3.1       Amended and Restated Articles of Incorporation of the
                    Company and Articles of Amendment and Certificate of
                    Correction thereto (incorporated herein by reference to
                    Exhibit 3.1 of the Company's Registration Statement on Form
                    SB-2 (SEC File No. 333-09103)). *, **

          3.2       Bylaws of the Company (incorporated herein by reference to
                    Exhibit 3.2 of the Company's Registration Statement on Form
                    SB-2 (SEC File No. 333-09103)). *, **

          4.1       Specimen Common Stock Certificate (incorporated herein by
                    reference to Exhibit 4.1 of the Company's Registration
                    Statement on Form SB-2 (SEC File No. 333-09103)). *, **

          10.1      1994 Stock Option Plan of the Company, as amended, and after
                    the Company's December 1994 four-for-one stock split
                    (incorporated herein by reference to Exhibit 10.1 of the
                    Company's Registration Statement on Form SB-2 (SEC File No.
                    333-09103)). *, **

          10.2      1998 Stock Option Plan of the Company (incorporated herein
                    by reference from the Company's Proxy Statement for its 1998
                    Annual Meeting of Shareholders). *, **

          10.3      Registration Rights Agreement dated as of July 1994 among
                    the Company and holders of previously issued (and converted)
                    Series A Preferred Stock (incorporated herein by reference
                    to Exhibit 10.3 of the Company's Registration Statement on
                    Form SB-2 (SEC File No. 333-09103)). *, **

          10.4      Form of Promissory Notes payable by the Company to each of
                    the Company's Lenders and form of Extension Agreements
                    thereto (incorporated herein by reference to Exhibit 10.6 of
                    the Company's Registration Statement on Form SB-2 (SEC File
                    No. 333-09103)). *, **

          10.5      Form of Stock Purchase Warrants issued by the Company to
                    each of the Company's Lenders (incorporated herein by
                    reference to Exhibit 10.8 of the Company's Registration
                    Statement on Form SB-2 (SEC File No. 333-09103)). *, **

          10.6      Strategic Alliance Agreement dated as of February 27, 1995,
                    between the Company and Surgical Navigation Technologies,
                    Inc. and letters regarding termination of such agreement
                    (incorporated herein by reference to Exhibit 10.10 of the
                    Company's Registration Statement on Form SB-2 (SEC File No.
                    333-09103)). *, **

          10.7      Equipment Lease Agreement between the Company and Machinery
                    Systems, Inc., for a refurbished Zeiss Coordinate Measuring
                    Machine (incorporated herein by reference to Exhibit 10.11
                    of the Company's Registration Statement on Form SB-2 (SEC
                    File No. 333-09103)). *, **

          10.8      Commercial Industrial Lease dated January 11, 1996, between
                    the Company and Life Investors Company of America
                    (incorporated herein by reference to Exhibit 10.12 of the
                    Company's Registration Statement on Form SB-2 (SEC File No.
                    333-09103)). *, **

          10.9      Amendment dated March 7, 1998 to the Commercial Industrial
                    Lease dated January 11,1996, between the Company and Life
                    Investors Insurance Company of America (incorporated herein
                    by reference to Exhibit 10.10 of the Company's Form 10-QSB
                    report filed May 12, 1998). *, **

          10.10     Employment Agreement between the Company and Paul L. Ray,
                    and amendment thereto (incorporated herein by reference to
                    Exhibit 10.15 of the Company's Registration Statement on
                    Form SB-2 (SEC File No. 333-09103)). *, **


                                     38

<PAGE>


          10.11     Employment Agreement between the Company and Robert E.
                    Silligman (incorporated herein by reference to Exhibit 10.16
                    of the Company's Registration Statement on Form SB-2 (SEC
                    File No. 333-09103)). *, **

          10.12     Employment Agreement between the Company and Waldean A.
                    Schulz (incorporated herein by reference to Exhibit 10.17 of
                    the Company's Registration Statement on Form SB-2 (SEC File
                    No. 333-09103)). *, **

          10.13     Employment Agreement between the Company and Jeffrey J.
                    Hiller (incorporated herein by reference to Exhibit 10.18 of
                    the Company's Registration Statement on Form SB-2 (SEC File
                    No. 333-09103)). *, **

          10.14     Form of Representative's Warrants (incorporated herein by
                    reference to Exhibit 10.20 of the Company's Registration
                    Statement on Form SB-2 (SEC File No. 333-09103)). *, **

          10.15     Agreement of Purchase and Sale Among Image Guided
                    Technologies, Inc. and Stockholders of Brimfield Precision,
                    Inc. dated 11/25/97 (incorporated herein by reference to
                    Exhibit 2.1 of the Company's Form 8-K report filed December
                    29, 1998). *, **

          10.16     Amendment dated December 12, 1998 to Agreement of Purchase
                    and Sale Among Image Guided Technologies, Inc. and
                    Stockholders of Brimfield Precision, Inc. dated November 25,
                    1998 (incorporated herein by reference to Exhibit 2.2 of the
                    Company's Form 8-K report filed December 29, 1998). *, **

          10.17     Loan Agreement between Image Guided Technologies, Inc. and
                    Imperial Bank, dated December 12, 1998 (incorporated herein
                    by reference to Exhibit 2.3 of the Company's Form 8-K report
                    filed December 29, 1998). *, **

          10.18     Subordinated Note from Image Guided Technologies, Inc.
                    payable to Cruttenden Roth, dated December 12, 1998
                    (incorporated herein by reference to Exhibit 2.4 of the
                    Company's Form 8-K report filed December 29, 1998). *, **

          10.19     Warrant from Image Guided Technologies, Inc. to Imperial
                    Bank, dated December 12, 1998 (incorporated herein by
                    reference to Exhibit 2.5 of the Company's Form 8-K report
                    filed December 29, 1998). *, **

          10.20     Warrant from Image Guided Technologies, Inc. to Cruttenden
                    Roth, dated December 12, 1998 (incorporated herein by
                    reference to Exhibit 2.6 of the Company's Form 8-K report
                    filed December 29, 1998). *, **

          10.21     Warrant from Image Guided Technologies to Imperial Bank,
                    dated 3/15/98 (incorporated by reference to Exhibit 10.24 of
                    the Company's Form 10-KSB filed 4/14/98).*, **

          10.22     Warrant from Image Guided Technologies to Imperial Bank,
                    dated 3/31/98 (incorporated by reference to Exhibit 10.25 of
                    the Company's Form 10-KSB filed 4/14/98).*, **

          10.23     Bill Lyons Employment Agreement (incorporated by reference
                    to Exhibit 10.26 of the Company's Form 10-KSB filed
                    4/14/98).*, **

          10.24     Springfield lease (incorporated by reference to Exhibit
                    10.27 of the Company's Form 10-KSB filed 4/14/98).*, **

          10.25     Promissory Note to Pasqualina Lyons from BPI dated 8/19/88
                    (incorporated by reference to Exhibit 10.28 of the Company's
                    Form 10-KSB filed 4/14/98).*, **

          10.26     Employment agreement between the Company and Robert E.
                    Silligman, dated February 21, 1998 (incorporated by
                    reference to Exhibit 10.29 of the Company's Form 10-KSB
                    filed 4/14/98).*, **


                                      39
<PAGE>


          10.27     Amended and Restated Loan Agreement dated 4/3/98 between
                    Image Guided Technologies, Inc. and BankBoston, N.A.
                    (incorporated by reference to Exhibit 10.30 of the Company's
                    Form 10-KSB filed 4/14/98).*, **

          10.28     Common Stock Purchase Warrant issued to A.C. Allen & Company
                    (incorporated herein by reference to Exhibit 10.31 if the
                    Company's Form 10-QSB filed 8/14/98).*, **

          10.29     Consulting Agreement between Image Guided Technologies, Inc.
                    and A.C. Allen & Company (incorporated herein by reference
                    to Exhibit 10.32 of the Company's Form 10-QSB filed
                    8/14/98).*, **

          10.30     Employment Agreement dated 12/15/98 between the Company and
                    Jeffrey J. Hiller.**

          10.31     Employment Agreement dated 1/1/99 between the Company and
                    Paul L. Ray.**

          10.32     Employment Agreement dated 3/1/98 between the Company and
                    William O'Connor.**

          10.33     Asset Purchase Agreement among Brimfield Acquisition Corp.
                    and Brimfield Precision, Inc. and Image Guided Technologies
                    (incorporated herein by reference to Exhibit 2.1 of the
                    Company's Form 8-K filed 4/14/99).*, **

          10.34     Employee Stock Purchase Plan (incorporated herein by
                    reference to the Appendix of the Company's proxy materials
                    filed 4/23/98).*, **

          21.0      Subsidiaries of the Company.*, **

          23.1      Consent of Independent Accountants.

          27.1      Financial Data Schedule.

</TABLE>

--------------------------
*  Incorporated herein by reference.

** Filed previously on April 15, 1999


(b) Form 8-K Reports

         None.


                                    40

<PAGE>


Signatures

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

                                        IMAGE GUIDED TECHNOLOGIES, INC.


Date: November 24, 1999                 By: /s/ Paul L. Ray
                                        ------------------------------------
                                        Paul L. Ray
                                        Chairman of the Board, President and
                                        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.

Date: November 24, 1999                 By: /s/ Paul L. Ray
                                        ------------------------------------
                                        Paul L. Ray
                                        Chairman of the Board, President,
                                        Chief Executive Officer, and
                                        Principal Accounting Officer


Date: November 24, 1999                 By: /s/ Francis E. Lefler
                                        ------------------------------------
                                        Francis E. Lefler
                                        Principal Accounting Officer


Date: November 24, 1999                 By: /s/ Terry Knapp
                                        ------------------------------------
                                        Terry Knapp
                                        Director


Date: November 24, 1999                 By: /s/ Clifford Frith
                                        ------------------------------------
                                        Clifford Frith
                                        Director


Date: November 24, 1999                 By: /s/ William Lyons
                                        ------------------------------------
                                        William Lyons
                                        Director


Date: November 24, 1999                 By: /s/ Tibor Foldvari
                                        ------------------------------------
                                        Tibor Foldvari
                                        Director


                                    41