<PAGE>
                                       
               UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, DC  20549
                                       
                                  FORM 10-KSB
                                       
[X]   ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
      OF 1934
                    For the fiscal year ended December 31, 1997

[ ]   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 Nasdaq SmallCap Market
                                        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. [ ]

State issuer's revenues for its most recent fiscal year: $5,713,000.

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: $7,957,000 as of March 19, 1998.

State the number of shares outstanding of each of the issuer's classes of 
common equity, as of the latest practicable date: 3,693,822 shares of common 
stock, no par value, were outstanding on March 11, 1997.

                      DOCUMENTS INCORPORATED BY REFERENCE

Incorporated by reference into Part III of this report is the information 
contained in the Image Guided Technologies, Inc. Proxy Statement for the 
annual meeting of shareholders proposed to be held May 19, 1998, which will 
be filed with the Securities and Exchange Commission within 120 days after 
December 31, 1997.

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

<PAGE>
<TABLE>
<CAPTION>

                               Table of Contents

       Item                                                               Page
<S>    <C>                                                                <C>

Part I   1.    Description of Business                                       1

         2.    Description of Property                                       6

         3.    Legal Proceedings                                             7

         4.    Submission of Matters to a Vote of Security Holders           7

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 Financial Disclosure                         29

         9.    Directors, Executive Officers, Promoters and Control
                Persons; Compliance With Section 16(a) of the Exchange
                Act.                                                        29

        10.    Executive Compensation                                       29

        11.    Security Ownership of Certain Beneficial Owners and
                Management                                                  29

        12.    Certain Relationships and Related Transactions               29

        13.    Exhibits and Reports on Form 8-K                             29
</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 manufactures surgical instruments and implants.

     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 various industrial applications to measure the position or shape 
of objects in 3D space.

     SURGICAL INSTRUMENTS AND IMPLANTS.  BPI is a contract manufacturer of 
stainless steel surgical instruments and titanium and cobalt-chrome implants 
for various medical supply companies.  Its surgical instruments are used for 
implant procedures, minimally invasive surgery and other surgical procedures. 
The Company plans to combine IGT's expertise in image guided surgery with 
BPI's instrument manufacturing skills to develop, manufacture and market 
surgical instruments for image guided surgery.

     The Company's overall business strategy is to increase market share in its
core markets and to acquire companies and/or licenses in related markets.


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).

     Image guided surgery couples recent advances in imaging with the 
instruments used in the course of surgery.  While image guided surgery has 
been most extensively used in neurosurgery, the Company anticipates that 
image guided surgery will provide benefits for ear, nose and throat surgery, 
needle biopsies, orthopedics (e.g., hip replacement surgery), maxillofacial 
surgery and radiosurgery.

                                      1

<PAGE>

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

     IGT, in conjunction with custom fabricators and surgical instrument
manufacturers, 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 plans to
manufacture image guided instruments at its Brimfield facility.

     SURGICAL INSTRUMENTS AND IMPLANTS.  BPI's instruments are used in implant
procedures, minimally invasive surgery and other surgical procedures.  BPI's
implants are used in orthopedic, cardiovascular and dental procedures.  BPI
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 1997, approximately 81% 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 currently being integrated into several medical
devices.  Sales of localizers and related components to medical customers
constituted approximately 78% of IGT sales in 1997.  Current 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.

SPINEX MEDICAL TECHNOLOGIES INC., MONTREAL, QUEBEC.  Spinex has developed a
spine motion diagnostic system which gives physical therapists and health
insurance providers an accurate indication of the presence and extent of back
injuries.  The Company's FlashPoint system provides the motion tracking means
for observing the patient.

                                      2

<PAGE>

     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 22% of
IGT's sales in 1997.  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.

     SURGICAL IMPLANTS AND INSTRUMENTS.  The two largest customers for surgical
implants and instruments in 1997 were Johnson & Johnson and Exactech, which,
when combined, represented approximately 50% of Brimfield's 1997 sales.  Other
significant BPI customers in 1997 were Encore Orthopedics, Xomed, Stryker, and
Imagyn Medical Technologies.


MARKETING AND SALES

     IGT's marketing strategy focuses on selling its localizers to OEM
customers.  BPI 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, 1997, the Company's backlog was approximately $3,658,000.
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 implants and surgical
instruments provided by BPI 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 price,
quality 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.

     BPI's implants and 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.

                                      3

<PAGE>

     BPI manufactures orthopedic, dental and cardiovascular implants,
instruments used in implant procedures, and minimally invasive instruments and
mechanisms suitable for use through small incisions.

     BPI 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.  BPI also
utilizes electron beam welding within a vacuum chamber to minimize weld
contamination and assure quality welds on small parts.


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, four of which were acquired in
the acquisition of BPI.

     U.S. Patent #5,198,877 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.  An application to reissue this patent has been
filed which, if granted, may broaden its claims.

     U.S. Patent #5,617,857 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 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 which 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 a 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, which currently is subject to an
interference claim, 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.

     BPI is registered as an original equipment manufacturer and contract
manufacturer with the FDA.  The scope of BPI manufacturing includes FDA Class
III Orthopedic Implants, and general surgical instrumentation.  BPI 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, 1997 and 1996, the Company
expended $1,098,000 and $618,000, 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 is currently developing a set of cordless instruments for use by its
medical customers.  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 improve the accuracy of the
system.

     BPI's research and development activities are generally paid for by the
customer as part of its manufacturing activities for such customer.

     Although the Company intends to build upon, and expand its current
technical competencies to introduce new products and product enhancements, it
also intends to review compatible, complimentary technology for possible
acquisition or licensing.


EMPLOYEES

     At December 31, 1997, the Company had 118 employees, of which 115 are full-
time and 3 are part-time.  37 employees were employed at IGT and 81 at BPI.

                                      5

<PAGE>

EXECUTIVE OFFICERS OF REGISTRANT

Paul L. Ray, age 51                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, D.B.A.,
age 55                             Vice President of the Company and Chief
                                   Operating Officer of the Boulder, Colorado
                                   operations since March 1998; 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 since November 1996.

Waldean A. Schulz, Ph.D., age 52   Vice President of Technology and Secretary
                                   of the Company since December 1990; Founded
                                   the Company and served as its President from
                                   inception until December 1990; Director of
                                   the Company since 1990.

Jeffrey J. Hiller, age 45          Chief Financial Officer and Vice President
                                   of Finance of the Company from January 1994
                                   (CFO) and May 1994 (VP); Chief Financial
                                   Officer and Vice President of BI
                                   Incorporated, an electronic monitoring
                                   equipment company, from 1989 through 1993.

William G. Lyons, age 42           Director of the Company since December 1997;
                                   President, CEO and Chairman of Brimfield
                                   Precision, Inc. since 1995; served as
                                   President of Brimfield Precision, Inc. from
                                   1987 through 1995, and as Vice President and
                                   General Manager from 1981 through 1987.


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 two years 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: $15,046 through March 1998, $15,709 from April 1998 through
March 1999, and $16,406 from April 1999 through March 2000.

     BPI owns a manufacturing facility in Brimfield, Massachusetts containing
approximately 30,000 square feet and leases approximately 14,000 square feet in
a facility in Springfield, Massachusetts.  The current lease for the
Springfield facility has approximately 4 years remaining.  In addition to base
rent, BPI pays its pro-rata share of building operating expenses, taxes and
utilities.  Monthly base rent is $4,927 through December 2001.

                                      6

<PAGE>

ITEM 3. LEGAL PROCEEDINGS.

     BPI is a party to two lawsuits, which, while the outcome cannot be
predicted with certainty, the Company's 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 1997, no matters were submitted to a vote of
security holders.


                                    PART II

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

     The Company's common stock was sold in its initial public offering ("IPO")
on October 21, 1996 for $5.00 per share.  The shares began trading immediately
on the Nasdaq SmallCap Market under the symbol "IGTI" and on the Boston Stock
Exchange under the symbol "IGK."  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.  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>
           1996
           Fourth quarter.........................          $  7.00        $  5.00
           
           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
</TABLE>

     No dividends were declared on the Company's Common Stock during the fiscal
years ended December 31, 1997 and 1996.  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 February 27, the Company had approximately 754 shareholders of record.

     On December 12, 1997, the Company sold a total of 579,710 shares of its
Common Stock to William G. Lyons and Matthew Lyons in connection with the
Company's purchase from the two Lyons of all the stock of Brimfield Precision,
Inc. ("BPI").  See "Management's Discussion and Analysis or Plan of Operation -
Other Matters."  Such shares were sold to the Lyons under the exemption from
registration provided by Section 4(2) of the Securities Act of 1933 and
Regulation D promulgated thereunder.  In connection with financing the
acquisition of BPI, the Company issued a warrant for 160,000 shares of the
Company's Common Stock to Imperial Bank and a warrant for 100,000 shares of the
Company's Common Stock to Cruttenden Roth, Inc.  Both Warrants have seven-year
terms and are exercisable at $2.92 per share.

                                      7

<PAGE>

USE OF PROCEEDS

     The Company's first registration statement with the SEC was declared
effective October 21, 1996.  The commission file number assigned to this
registration is 1-12189.  The net offering proceeds to the Company after
deducting the total expenses were approximately $5,687,000.
     
     The following table lists an estimate of the amount of net offering
proceeds used from October 21, 1996 through December 31, 1997:

<TABLE>
<CAPTION>
                                                     Direct or indirect payments to others*
                                                     --------------------------------------
     <S>                                             <C>
     Construction of plant, building and facilities                 $      ---
     Purchase and installation of machinery and
       equipment                                                       150,000
     Purchase of real estate                                               ---
     Acquisition of other business(es)                                 800,000
     Repayment of indebtedness                                         889,000
     Working capital                                                 1,727,000
     Short-term temporary investments                                      ---
     Research and development                                        1,207,000
     Marketing and technical support                                   914,000
                                                                    ----------
       Total                                                        $5,687,000
                                                                    ----------
                                                                    ----------
</TABLE>

* Except for approximately $373,000 of the $889,000 repayment of indebtedness,
there were no direct or indirect payments to directors, officers, or to persons
owning ten percent or more of any class of equity securities of the Company.


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,
                                                           --------------------
                                                            1997           1996
                                                           ------        ------
     <S>                                                   <C>           <C>
     Revenue                                               100.0%        100.0%
     Cost of Goods Sold                                     46.5%         45.0%
                                                           ------        ------
              Gross Profit                                  53.5%         55.0%
                                                           ------        ------
     Operating Expenses:
              Research and Development                      19.2%         15.1%
              Selling and Marketing                         11.8%         13.6%
              General and Administrative                    20.8%         17.3%
                                                           ------        ------
                       Total Operating Expenses             51.8%         46.0%
                                                           ------        ------
     Income (Loss) from Operations                           1.7%          9.0%
     Other Income (Expense)                                  2.9%        (0.3)%
                                                           ------        ------
     Net Income (Loss)                                       4.6%          8.7%
                                                           ------        ------
                                                           ------        ------
</TABLE>

                                      8
<PAGE>

RESULTS OF OPERATIONS

     YEARS ENDED DECEMBER 31, 1997 AND 1996.  Revenue increased by $1,633,000,
or approximately 40%, to $5,713,000 for the year ended December 31, 1997, as
compared to $4,080,000 for the year ended December 31, 1996.  The increase was
primarily due to the increased level of sales of the FlashPoint 5000 and Pixsys
5000 products.

     Cost of goods sold increased by $821,000, or approximately 45%, to
$2,657,000 for the year ended December 31, 1997, compared to $1,836,000 for the
year ended December 31, 1996.  Cost of goods sold as a percentage of revenue
increased to 47% for the year ended December 31, 1997, as compared to 45% for
the year ended December 31, 1996.  The increase in cost of goods sold was
primarily attributable to the increase in the number of systems sold.  The
increase in cost of goods sold as a percentage of revenue was attributable to
increased costs associated with improvements in the reliability and durability
of certain components, as well as changes in the mix of products sold.

     Gross profit increased by $812,000, or approximately 36%, to $3,056,000
for the year ended December 31, 1997, compared to $2,244,000 for the year ended
December 31, 1996.  Such increase was principally a result of the increase in
revenue.

     Research and development expenses increased by $480,000, or approximately
78%, to $1,098,000 for the year ended December 31, 1997, compared to $618,000
for the year ended December 31, 1996.  This increase was principally due to the
addition of engineering personnel and related expenses, to increased testing of
product to meet regulatory requirements and to product development.

     Selling and marketing expenses increased by $121,000, or approximately
22%, to $675,000 for the year ended December 31, 1997, compared to $554,000 for
the year ended December 31, 1996.  This increase was primarily attributable to
the addition of personnel and related expenses, as well as expanded marketing
activities to generate increases in revenue.

     General and administrative expenses increased by $485,000, or
approximately 69%, to $1,190,000 for the year ended December 31, 1997, compared
to $705,000 for the year ended December 31, 1996.  This increase was primarily
attributable to the additional expenses necessary for a public company,
increased salaries, additional personnel and associated costs, and to the
incremental expenses due to the acquisition of BPI.

     Operating income decreased by $274,000 to $93,000 for the year ended
December 31, 1997, compared to $367,000 for the year ended December 31, 1996.
This decrease was primarily attributable to additional personnel and related
expenses, increased testing of products, product development, and to the
expenses necessary to operate as a public company.

     Net other income (expense) increased by $179,000 to $167,000 for the year
ended December 31, 1997, compared to ($12,000) for the year ended December 31,
1996.  This change was primarily due to interest income on net proceeds from
the IPO and to interest expense incurred in 1996 in connection with funds
borrowed by the Company and paid off with a portion of the IPO proceeds.

     As a result of the foregoing, net income decreased to $260,000 for the
year ended December 31, 1997, compared to $355,000 for the year ended
December 31, 1996.

     Income tax expenses were not recognized on the Company's 1997 operating 
income due to utilization of net operating losses generated in prior years. 
Income tax benefits were not recognized on the Company's 1996 pre-tax losses 
due to the uncertainty surrounding the future utilization of such net 
operating losses.  As of December 31, 1997, the Company's net operating loss 
carryforwards were approximately $2,107,000 which expire from the years 2008 
to 2010.  The Company's ability to use the net operating loss carryforwards 
is limited due to certain changes in ownership which occurred in 1994 as 
defined by the Internal Revenue Code.  Due to the Company's history of 
pre-tax losses and the uncertainty surrounding the timing of realizing the 
benefits of net operating loss carryforwards, the Company has placed a 
valuation allowance against its deferred tax assets.  In reaching its 
determination of the need to provide a deferred tax valuation allowance, the 
Company considered all available evidence, both positive and negative, as 
well as the weight and importance given to such evidence.  Specifically, the 
Company has completed only two profitable fiscal years and has an accumulated 
deficit of $2,766,000 at December 31, 1997.  See Note 6 of Notes to Financial 
Statements.

                                       9
<PAGE>

LIQUIDITY AND CAPITAL RESOURCES

     During the year ended December 31, 1997, $378,000 in cash was used by
operating activities, principally by increased accounts receivable and
decreased accounts payable and accrued liabilities, all partially offset by net
income.  The Company used $8,234,000 in cash for investing activities during
the year ended December 31, 1997 to purchase property and equipment and to
acquire Brimfield Precision, Inc.  See Note 10 of Notes to the Financial
Statements.  Also during the year ended December 31, 1997 $4,588,000 in cash
was provided by debt incurred to acquire BPI, offset by payments on capital
leases and debt.

     As of December 31, 1997, the Company had working capital of $2,197,000,
compared to $5,571,000 at December 31, 1996.  The decrease in working capital
was primarily the result of cash used and debt incurred to purchase BPI.

     The Company anticipates making approximately $1,000,000 of capital
purchases during 1998, and plans to finance these purchases using an equipment
lease line of credit with BankBoston.

ISSUANCE OF STATEMENTS OF FINANCIAL ACCOUNTING STANDARDS

     In June 1997, Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income" ("SFAS 130") was issued.  SFAS 130 establishes
standards for the reporting of comprehensive income and its components.  It
requires all items that are required to be recognized as components of
comprehensive income be reported in a financial statement that is displayed
with the same prominence as other income statement information.  SFAS 130 is
effective for financial statements for periods beginning after December 15,
1997.  Reclassification of financial statements for earlier periods presented
for comparative purposes is required upon adoption.

     In June 1997, Statement of Financial Accounting Standards No. 131,
"Disclosure About Segments of an Enterprise and Related Information" ("SFAS
131") was issued.  SFAS 131 establishes standards for the way that public
business enterprises report information about operating segments in annual
financial statements and requires that those enterprises report selected
information about operating segments in annual financial statements and in
interim financial reports issued to shareholders.  SFAS 131 is effective for
financial statements for periods beginning after December 15, 1997.

     The Company anticipates that the adoption of SFAS 130 and SFAS 131 will
not have a significant affect on its 1998 financial statements.


OTHER MATTERS

     On October 24, 1996, the Company closed on its initial public offering
("IPO") of 1,437,500 shares of common stock, including a 187,500 share over-
allotment purchase by the underwriters, at the IPO price of $5.00 per share.
The offering resulted in gross proceeds of $7,187,500.  The aggregate offering
cost was approximately $1,500,000.  A portion of the proceeds was used to
retire approximately $889,000 of 11% secured notes and related interest.

     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 has a one-year employment contract with BPI
as its President and has been elected 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 (the actual
amount to be determined by calculating the borrowing base) 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 

                                       10
<PAGE>

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 (the actual amount to be
determined by calculating the borrowing base) 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.  The Company has agreed to raise $1,000,000 by
July 2, 1998 to pay off the $500,000 note due Cruttenden and to reduce the
principal amount of the term loan by $500,000.

     Many existing computer systems, applications software, and other control
devices, rely on only two digits to identify the year, without considering the
impact of the upcoming change in the century.  As a result, such systems and
applications could fail or create erroneous results unless corrected so that
they can process data related to the year 2000 ("the Year 2000 Issue").  The
Company's current estimate is that the costs associated with the Year 2000
Issue, and the consequences of incomplete or untimely resolution of the Year
2000 Issue, will not have a material adverse effect on the results of
operations or financial position of the Company in any given year.   However,
even if the Company's internal systems, applications and devices are not
materially affected by the Year 2000 Issue, the Company could still be
adversely affected through disruptions in the operations of other enterprises
with which the Company interacts.


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.

     POTENTIAL FLUCTUATIONS IN OPERATING RESULTS.  Since 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, and by increases in the costs of the
components and subassemblies acquired by the Company from vendors.

     DEBT.  The Company has a term loan of $2,700,000 and a revolving loan of
up to $3,000,000 with BankBoston.  The Company also owes BankBoston
approximately $1,300,000 in connection with previous equipment financings and
anticipates financing an additional $1,000,000 of equipment with BankBoston in
1998.  The Company also owes Cruttenden $500,000 pursuant to a one year note
due December 12, 1998 with interest at 12% per annum.  There can be no
assurance that the Company will be able to meet the payment terms of the above
loans, comply with the various loan covenants (including, without limitation,
the obligation to raise $1,000,000 by July 2, 1998), or obtain the necessary
funds to meet its anticipated equipment requirements.


     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.

                                       11
<PAGE>

     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.

     THE COMPANY'S ABILITY TO PROTECT ITS INTELLECTUAL PROPERTY RIGHTS.  IGT
does not have any patents which directly cover its FlashPoint or Pixsys optical
localizers.  IGT 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 IGT's intellectual property rights, that
disputes with respect to ownership of its intellectual property rights will not
arise, that IGT's trade secrets or proprietary technology will not otherwise
become known or be independently developed by competitors or that IGT can
otherwise meaningfully protect its intellectual property rights.  Furthermore,
there can be no assurance that others will not develop similar products or
software, duplicate IGT's products or software or that third parties will not
assert intellectual property infringement claims against IGT.  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.

     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 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.

     POSSIBLE CHANGES TO GOVERNMENT REGULATIONS GOVERNING HEALTH CARE.  The
health care industry is undergoing fundamental changes as a result of
political, economic and regulatory influences.  In the United States,
comprehensive programs have been proposed that seek to increase access to
health care for the uninsured, control the escalation of health care
expenditures within the economy and use health care reimbursement policies to
help control the federal deficit.  The 

                                       12
<PAGE>

Company anticipates that Congress and state legislatures will continue to 
review and assess alternative health care delivery systems and methods of 
payment and public debate of these issues will likely continue.  Due to 
uncertainties regarding the outcome of reform initiatives and their enactment 
and implementation, the Company cannot predict which, if any, of such reform 
proposals will be adopted or when they might be adopted.  Other countries are 
also considering health care reform.  Significant changes in health care 
systems could have a substantial impact on the manner in which the Company 
conducts its business.

     SHORTAGES OF LABOR.  The Company is dependent upon certain labor skills
that may not be readily available.  The shortage of skilled labor could
materially affect the Company's results of operations.

     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, including: Paul L. Ray, Chairman of the Board, Chief Executive
Officer and President; William J. O'Connor, Vice President and Chief Operating
Officer of the Boulder, Colorado operations; Waldean Schulz, Vice President,
Technology and Secretary; and Jeffrey J. Hiller, Vice President, Finance and
Chief Financial Officer.  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.


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, 1997 and 1996 ............   15
Consolidated Statement of Income for the Years Ended
  December 31, 1997 and 1996 ...........................................   16
Consolidated Statements of Changes in Shareholders' Equity
  (Deficit) for the Years Ended  December 31, 1997 and 1996 ............   17
Consolidated Statement of Cash Flows for the Years
  Ended December 31, 1997 and 1996 .....................................   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, 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, 1997 and 1996, and the results of their operations and their 
cash flows for each of the two years in the period ended December 31, 1997 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.

/s/ Price Waterhouse LLP

Price Waterhouse LLP
Boulder, Colorado
April 3, 1998

                                       14
<PAGE>

                          IMAGE GUIDED TECHNOLOGIES, INC.

                            CONSOLIDATED BALANCE SHEET

<TABLE>
<CAPTION>
                                                                                         December 31,
                                                                                    ---------------------
ASSETS                                                                               1997            1996
                                                                                -------------   --------------
  <S>                                                                         <C>               <C>
  Current assets:                                                             
    Cash and cash equivalents                                                   $  1,216,000     $  5,240,000
    Accounts receivable, net of allowance for doubtful accounts of
      $176,000 and $58,000 respectively                                            2,667,000          522,000
    Inventories, net                                                               1,629,000          417,000
    Other current assets                                                             375,000          105,000
                                                                                -------------   --------------
      Total current assets                                                         5,887,000        6,284,000
  Property and equipment, net of accumulated depreciation of
      $298,000 and $145,000 respectively                                           4,405,000          281,000
  Goodwill, net of accumulated amortization of $16,000                             5,732,000              ---
  Other assets                                                                        82,000           17,000
                                                                                -------------   --------------
      Total assets                                                             $  16,106,000     $  6,582,000
                                                                                -------------   --------------
                                                                                -------------   --------------
LIABILITIES AND SHAREHOLDERS' EQUITY
  Current liabilities:
    Accounts payable                                                              $  913,000       $  394,000
    Accrued liabilities                                                              494,000          291,000
    Current portion of capital lease obligations                                     390,000           28,000
    Current portion of notes payable                                               1,893,000              ---
                                                                                -------------   --------------
      Total current liabilities                                                    3,690,000          713,000

  Capital lease obligations                                                        1,114,000           96,000
  Line of  credit                                                                  1,250,000              ---
  Notes payable, net of warrant discount of $227,000                               2,545,000              ---
                                                                                -------------   --------------
      Total liabilities                                                            8,599,000          809,000

Commitments and contingencies

Shareholders' equity:
  Series A Convertible Preferred Stock, no par value; 2,416,668
    shares authorized, no shares issued and outstanding                                  ---              ---
  Common Stock, no par value; 10,000,000 shares authorized;
    3,693,822 and 3,106,024 shares issued and outstanding respectively            10,273,000        8,799,000
 Accumulated deficit                                                             (2,766,000)      (3,026,000)
                                                                                -------------   --------------
      Total shareholders' equity                                                   7,507,000        5,773,000
                                                                                -------------   --------------
      Total liabilities and shareholders' equity                               $  16,106,000     $  6,582,000
                                                                                -------------   --------------
                                                                                -------------   --------------
</TABLE>






                                       
  The accompanying notes are an integral part of these financial statements.
                                       
                                       15
<PAGE>                                       
                                       
  
                            IMAGE GUIDED TECHNOLOGIES, INC.

                           CONSOLIDATED STATEMENT OF INCOME
  
<TABLE>
<CAPTION>  
                                                       Years Ended December 31,
                                                    ------------------------------
                                                         1997           1996
                                                    -------------   --------------
<S>                                                 <C>             <C>
  Revenue                                             $5,713,000     $4,080,000
  Cost of goods sold                                   2,657,000      1,836,000
                                                    -------------   --------------
  Gross profit                                         3,056,000      2,244,000
                                                    -------------   --------------
  Operating expenses:
    Research and development                           1,098,000        618,000
    Selling and marketing                                675,000        554,000
    General and administrative                         1,190,000        705,000
                                                    -------------   --------------
        Total operating expenses                       2,963,000      1,877,000
                                                    -------------   --------------
  Operating income (loss)                                 93,000        367,000
  Other income (expense):
    Interest and other expense                          (72,000)       (74,000)
    Interest and other income                            239,000         62,000
                                                    -------------   --------------
  Net income (loss)                                   $  260,000     $  355,000
                                                    -------------   --------------
                                                    -------------   --------------
  Earnings per share:
    Basic                                                  $0.08          $0.21
    Diluted                                                $0.07          $0.16
  
  Weighted average common shares outstanding:
    Basic                                              3,138,267      1,726,324
    Diluted                                            3,557,298      2,171,639
</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 (DEFICIT)

<TABLE>
<CAPTION>
                                 Series A Convertible
                                    Preferred Stock                     Common Stock
                                    ---------------                     ------------             Accumulated      Total Equity
                                 Shares           Amount          Shares            Amount         Deficit          (Deficit)
                                 ------           ------          ------            ------         -------          ---------
<S>                              <C>           <C>                <C>               <C>          <C>              <C>
Balance at December 31, 1995      83,332       $1,000,000         1,093,451         $1,777,000   $(3,381,000)     $(604,000)

Exercise of stock options 
  and warrants                                                      270,783            338,000                      338,000

Conversion of  Series A 
  convertible preferred stock    (83,332)      (1,000,000)          304,290          1,000,000                          ---

Initial public offering, net                                      1,437,500          5,684,000                    5,684,000

Net income                                                                                           355,000        355,000
                                ---------      -----------       ----------        -----------   -----------     ----------
Balance at December 31, 1996         ---              ---         3,106,024          8,799,000    (3,026,000)     5,773,000

Exercise of stock options                                            20,000             33,000                       33,000

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 debt                                                              227,000                      227,000
                               
Net income                                                                                           260,000        260,000     
                                ---------      -----------       ----------        -----------   -----------     ----------
                                     ---          $   ---         3,693,822        $10,273,000   $(2,766,000)    $7,507,000
                                ---------      -----------       ----------        -----------   -----------     ----------
                                ---------      -----------       ----------        -----------   -----------     ----------
</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>
                                                                            Years Ended December 31,
                                                                           ---------------------------
                                                                                1997         1996
                                                                           -------------  ------------
<S>                                                                        <C>            <C>
OPERATING ACTIVITIES:
Net income                                                                  $  260,000     $   355,000
Adjustments to reconcile net income to net
 cash provided by (used in) operating activities:
  Depreciation and amortization                                                191,000          90,000
  Provision for doubtful accounts                                               19,000          34,000
  Loss on disposition of assets                                                 13,000             ---
  Provision for inventory obsolescence                                          45,000          45,000
  Changes in operating assets and liabilities, net of acquired
        assets and liabilities:
    Accounts receivable                                                       (535,000)        (34,000)
    Inventories                                                                (75,000)       (287,000)
    Other current assets and other assets                                      (20,000)        (84,000)
    Accounts payable                                                           (51,000)         91,000
    Accrued liabilities                                                       (225,000)        (93,000)
                                                                            -----------     -----------
      Net cash provided by (used in) operating activities                     (378,000)        117,000
                                                                            -----------     -----------
INVESTING ACTIVITIES:
Additions to property and equipment                                           (257,000)       (154,000)
Cash received from sales of property                                            42,000             ---
Acquisition of Brimfield Precision, Inc., net of cash acquired              (8,019,000)            ---
                                                                            -----------     -----------
      Net cash used in investing activities                                 (8,234,000)       (154,000)
                                                                            -----------     -----------
FINANCING ACTIVITIES:
Proceeds from debt                                                           4,000,000             ---
Payments of debt                                                              (390,000)       (775,000)
Net proceeds from the issuance of common stock                                     ---       6,022,000
Principal payments on capital leases                                           (73,000)         (2,000)
Retire common stock                                                            (28,000)           ---
Retire loan to officer                                                        (171,000)           ---
Proceeds from line of credit                                                 1,250,000            ---
                                                                            -----------     -----------
      Net cash provided by financing activities                              4,588,000      5,245,000
                                                                            -----------     -----------
Net increase (decrease) in cash and cash equivalents                        (4,024,000)     5,208,000
Cash and cash equivalents at beginning of period                             5,240,000         32,000
                                                                            -----------     -----------
Cash and cash equivalents at end of period                                  $1,216,000     $5,240,000
                                                                            -----------     -----------
                                                                            -----------     -----------
</TABLE>

                                       18

<PAGE>

<TABLE>
<S>                                                                        <C>            <C>
SUPPLEMENTAL CASH FLOW DISCLOSURES
Interest paid                                                                   54,000        114,000
SUPPLEMENTAL NON-CASH INVESTING AND FINANCING ACTIVITIES
Equipment acquired under capital lease                                             ---        126,000
Common stock issued in connection with acquisition                           1,275,000            ---
Promissory note issued in connection with acquisition                          500,000            ---
Warrants issued with debt                                                      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.

PRINCIPLES OF CONSOLIDATION

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

REVENUE RECOGNITION AND WARRANTY

     Revenue is recognized upon shipment of product to 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 the net 
assets acquired in the Brimfield purchase.  The goodwill is being amortized 
on a straight-line basis over 20 years.  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.

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.


                                      20
<PAGE>

CONCENTRATION OF CREDIT RISK

The majority of the Company's revenues during 1997 and 1996 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 1997 and 1996 are as follows:

<TABLE>
<CAPTION>
                                               1997           1996
                                               ----           ----
     <S>                                       <C>            <C>
     Customer A                                 41 %           38 %
     Customer B                                  3 %           25 %
     Customer C                                 14 %           12 %
</TABLE>

     At December 31, 1997, 28%, 1%, and 7% of accounts receivable were with 
customers A, B, and C, respectively.  At December 31, 1996, 18%, 21% and 18% 
of accounts receivable were with customers A, B, and C, respectively.

EXPORT SALES

     The Company had export sales totaling approximately $3,333,000 and 
$1,601,000 for the years ended December 31, 1996 and 1995, respectively, 
principally to Germany, France and Canada.

EARNINGS PER SHARE

     In February 1997, the Financial Accounting Standards Board ("FASB") 
issued Statement of Financial Accounting Standards No. 128, "Earnings Per 
Share" ("SFAS 128").  The Company's adoption of SFAS 128, on December 31, 
1997, resulted in the restatement of the Company's "primary" earnings per 
share calculations to "basic" earnings per share and "fully diluted" earnings 
per share calculations to "diluted" earning per share 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.

ADDITIONAL STATEMENTS OF FINANCIAL ACCOUNTING STANDARDS

     In June 1997, the FASB issued Statement of Financial Accounting 
Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130"), and 
Statement of Financial Accounting Standards No. 131, "Disclosures about 
Segments of an Enterprise and Related Information" ("SFAS 131"), which are 
effective for financial statements for periods beginning after December 15, 
1997.  The Company anticipates that the adoption of SFAS 130 and SFAS 131 
will not have a significant effect on its 1998 financial statements.

2.   INVENTORIES

     Inventories are comprised of the following:

<TABLE>
<CAPTION>
                                                            December 31,
                                                     -------------------------
                                                        1997            1996
                                                     ----------       --------
     <S>                                             <C>              <C>
     Raw materials                                   $  487,000       $284,000
     Work-in-process                                    435,000         36,000
     Finished goods                                     768,000        113,000
                                                     ----------       --------
                                                      1,690,000        433,000
     Less allowance for obsolescence                   (61,000)        (16,000)
                                                     ----------       --------
                                                     $1,629,000       $417,000
                                                     ----------       --------
                                                     ----------       --------
</TABLE>


                                      21
<PAGE>

3.   PROPERTY AND EQUIPMENT

     Property and equipment consist of the following:

<TABLE>
<CAPTION>
                                                                        December 31,
                                                                        ------------
                                      Estimated Useful Life           1997          1996
                                      ----------------------          ----          ----
<S>                                      <C>                      <C>             <C>
Production equipment                     1 - 10 years             $2,917,000      $ 205,000
Leasehold improvements                   3 - 20 years                878,000         20,000
Computer equipment                       1 - 5 years                 446,000        104,000
Land                                        ---                      169,000           ---
Furniture and fixtures                   2 - 7 years                 149,000         34,000
Other                                    1 - 5 years                 144,000         63,000
                                                                  ----------      ---------
                                                                   4,703,000        426,000
Less accumulated depreciation                                       (298,000)      (145,000)
                                                                  ----------      ---------
                                                                  $4,405,000      $ 281,000
                                                                  ----------      ---------
                                                                  ----------      ---------
</TABLE>


4.   ACCRUED LIABILITIES

     Accrued liabilities consist of the following:

<TABLE>
<CAPTION>
                                                        December 31,
                                                        ------------
                                                    1997           1996
                                                  --------       --------
     <S>                                          <C>            <C>
     Employee accruals                            $297,000       $141,000
     Professional fees                              53,000         39,000
     Warranty reserves                              41,000         82,000
     Other accrued liabilities                     103,000         29,000
                                                  --------       --------
       Total accrued liabilities                  $494,000       $291,000
                                                  --------       --------
                                                  --------       --------
</TABLE>


                                      22
<PAGE>

5.   DEBT

     NOTES PAYABLE

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

<TABLE>
     <S>                                                         <C>
     Senior note payable (net) due December 12,                  $3,773,000
     2000, interest at rate of 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,                     500,000
     1998, interest at a 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                  69,000
     of the Prime Rate, 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                  96,000
     of the Prime Rate, 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, which were 
recorded as debt discount.  The discount will be amortized over the term of 
the notes payable.  See Note 7.
     
     The aggregate maturities of the Company's notes payable are as follows:
     
<TABLE>
          <S>                            <C>
          1998                           $1,893,000
          1999                            1,393,000
          2000                            1,379,000
</TABLE>
     
     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%. 


                                     23
<PAGE>

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 Service Regulations Brimfield 
became a C-Corporation.

     The components of the Company's deferred income tax assets and 
liabilities under FAS 109 are as follows:

<TABLE>
<CAPTION>
                                                              December 31,
                                                              ------------
                                                          1997           1996
                                                      ----------     ----------
         <S>                                          <C>            <C>
         Net operating loss carryforwards             $  786,000     $  900,000
         R&D credits                                      90,000         21,000
         Allowance for doubtful accounts                  28,000         22,000
         Employee accruals                                18,000         53,000
         Write-off of fixed assets                        18,000         19,000
         Warranty                                         15,000         31,000
         Depreciation                                   (315,000)         --
         Deferred revenue                                (18,000)         --
         Other                                            66,000         14,000
                                                      ----------     ----------
                                                         688,000      1,060,000
     Less valuation allowance                           (688,000)    (1,060,000)
                                                      ----------     ----------
     Net deferred tax asset                               --             --
                                                      ----------     ----------
                                                      ----------     ----------
</TABLE>

     During 1996, the Company reduced its valuation allowance by $372,000 
mainly due to the utilization of net operating loss carryforwards to offset 
current taxable income.  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.

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

<TABLE>
<CAPTION>
                                                              December 31,
                                                              ------------
                                                          1997           1996
                                                      ----------     ----------
     <S>                                                <C>            <C>
     Federal income tax rate                             34.0 %         34.0 %
     State income tax, net of federal benefit             3.7 %          3.3 %
     Goodwill amortization                                2.0 %          ---  
     Meals and entertainment                              1.9 %          1.0 %
     Effect of utilization of net operating loss                              
       carryforwards and valuation allowance            (41.6)%        (38.3)%
                                                        -----          -----
         Effective income tax rate                       --              --
                                                        -----          -----
                                                        -----          -----
</TABLE>

     At December 31, 1997, the Company had net operating loss carryforwards 
of approximately $2,107,000 which expire from 2008 to 2010.

     As a result of certain changes in the Company's ownership, the future 
utilization of these net operating loss carryforwards may be limited.  The 
Company also has R&D credits of approximately $90,000, which may be subject 
to future limitations.


                                      24
<PAGE>

7.   SHAREHOLDERS' EQUITY

STOCK SPLIT

     In September 1996, the Company effected a four-for-five reverse stock 
split of the Company's common stock.  All common stock and stock option 
amounts presented in these financial statements reflect the stock split.

COMMON STOCK

     At December 31, 1997, the Company has reserved an aggregate of 1,235,951 
shares of its common stock for stock issuable upon exercise of outstanding 
options and warrants.

CONVERSION OF PREFERRED STOCK

     In conjunction with the Company's initial public offering on October 21, 
1996, all of the Company's previously outstanding shares of Series A 
Convertible Preferred Stock were converted into shares of the Company's 
common stock.

STOCK OPTIONS AND WARRANTS

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

     The company has authorized 940,000 options to be granted pursuant to its 
stock option plans.  As of December 31, 1997, 108,171 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, 1997,  529,044 options are 
exercisable.

     In connection with the acquisition of Brimfield Precision Inc., the 
Company financed a portion of the purchased priced with debt and attachable 
warrants.  The Company issued 260,000 warrants with an exercise price of 
$2.92. The warrants are exercisable over seven years.
     
     In conjunction with the Company's initial public offering, 125,000 
warrants were issued to the underwriters during 1996.  The warrants were 
issued at 115% of the initial public offering price.

     A summary of the changes in options and warrants during the two years 
ended December 31, 1997 is as follows:

<TABLE>
<CAPTION>
                                                                   Weighted                       Weighted   
                                                                   Average                        Average    
                                                  Warrants      Exercise Price     Options     Exercise Price
                                                 ---------      ---------------    -------     --------------
     <S>                                         <C>               <C>             <C>            <C>        
     Outstanding December 31, 1995                 332,240         $1.38           635,552        $1.30    
       Granted                                     125,000          5.75            72,000         5.03    
       Exercised                                 (270,000)          1.25              (886)        1.25    
       Forfeited                                  (22,240)          3.13           (86,669)        1.25    
                                                 ---------                         -------                 
     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                         810,951         2.45    
                                                 ---------                         -------                 
                                                 ---------                         -------                 
</TABLE>


                                      25
<PAGE>

     The following table summarizes information concerning outstanding and
exercisable options at December 31, 1997:

<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> 
$  1.24 - 1.67         528,001              1.93                $1.31                 483,542           $  1.30     
   3.75 - 5.50         256,929              4.42                 4.45                  40,722              5.12     
   5.88 - 6.25          26,021              4.21                 6.15                   4,780              6.25     
                       --------                                                       -------                       
                       810,951                                                        529,044                       
                       --------                                                       -------                       
                       --------                                                       -------                       
</TABLE>

     The following table summarizes information concerning outstanding 
warrants at December 31, 1997:

                              WARRANTS OUTSTANDING

<TABLE>
<CAPTION>
                                                            AVERAGE   
                                       NUMBER              REMAINING  
           EXERCISE PRICE           OUTSTANDING          CONTRACT LIFE
           --------------           -----------          -------------
              <S>                     <C>                    <C>
              $  1.25                  40,000                3.00
                 2.92                 260,000                7.00
                 5.75                 125,000                3.00
                                      -------
                                      425,000
                                      -------
                                      -------
</TABLE>

All warrants are exercisable at December 31, 1997.

     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.

     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 income for 1997 would have been 
$179,000, or $0.06 and $0.05 per basic and diluted share, respectively.  Net 
income for 1996 would have been $326,000, or $0.19 and $0.15 per basic and 
diluted share, respectively. The weighted average fair value of the options 
granted during 1997 and 1996 is estimated at $1.85 and $2.15 per share, 
respectively.  The average fair value of the warrants granted during 1997 and 
1996 is estimated at $.87 and $1.66 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 34.7% and 
40.4% in 1997 and 1996, respectively; risk free interest rates of 5.9% and 
4.8% for 1997 and 1996, respectively; expected terms of five years, and no 
dividend yield rate.


                                      26
<PAGE>

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>
     1998                                            $  498,000
     1999                                               486,000
     2000                                               417,000
     2001                                               274,000
     2002                                                93,000
                                                     ----------
     Total minimum lease payments                     1,768,000
       Less amounts representing interest              (264,000)
                                                     ----------
     Present value of minimum lease payments          1,504,000
       Less current portion                            (390,000)
                                                     ----------
     Total capital lease obligation                  $1,114,000
                                                     ----------
                                                     ----------

     Equipment under capital lease is as follows:

     Equipment                                       $1,977,000
     Less accumulated depreciation                     (340,000)
                                                     ----------
                                                     ----------
                                                     $1,637,000
                                                     ----------
                                                     ----------
</TABLE>

     The Company also leases office space under a non-cancelable operating 
lease and the Company has required future minimum rental payments of 
$186,000, $194,000, and $66,000 for the years ended December 31, 1998, 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.

     BPI is a party to two lawsuits, which, while the outcome cannot be 
predicted with certainty, the Company's management expects will not have a 
materially adverse affect 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 years ended December 31, 1997 and 
December 31, 1996.  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 


                                      27
<PAGE>

seven-year warrants for a total of 260,000 shares of the Company's common 
stock.  The goodwill of approximately $5,748,000 recorded represents the 
excess of the purchase price over the fair value of the net identifiable 
assets of Brimfield.  Such goodwill will be 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.
     
     The following represents selected pro forma results of operations as if 
Brimfield had been included in the results of operations of the Company as of 
the beginning of each of the periods presented.
     
<TABLE>
<CAPTION>
                                                       Unaudited
                                                      December 31,
                                                --------------------------
                                                   1997           1996
                                                -----------    -----------
     <S>                                        <C>            <C>
     Revenue                                    $15,708,000    $16,717,000
     Net Income                                     366,000      1,785,000
     Earnings per Share
       Basic                                          $0.12          $1.03
       Diluted                                        $0.10          $0.82
</TABLE>

11.  SUBSEQUENT EVENT

     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 (the actual 
amount to be determined by calculating the borrowing base) 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.  The Company has agreed 
to raise $1,000,000 by July 2, 1998 to pay off the $500,000 note due 
Cruttenden and to reduce the principal amount of the term loan by $500,000.


                                      28
<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.

    Information required to be set forth hereunder has been omitted and will 
be incorporated by reference, when filed, from the Sections entitled 
"Election of Directors" and "Section 16(a) Beneficial Ownership Reporting 
Compliance" in the Company's Proxy Statement for its 1997 Annual Meeting of 
Shareholders to be held on or about May 19, 1998.  Executive officers of the 
Company are listed on page 6 of this form 10-KSB.

ITEM 10. EXECUTIVE COMPENSATION.

    Information required to be set forth hereunder has been omitted and will 
be incorporated by reference, when filed, from the Sections entitled 
"Executive Compensation" and "Election of Directors" in the Company's Proxy 
Statement for its 1997 Annual Meeting of Shareholders to be held on or about 
May 19, 1998.

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

    Information required to be set forth hereunder has been omitted and will 
be incorporated by reference, when filed, from the Section entitled "Security 
Ownership of Certain Beneficial Owners and Management" in the Company's Proxy 
Statement for its 1997 Annual Meeting of Shareholders to be held on or about 
May 19, 1998.

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

    Information required to be set forth hereunder has been omitted and will 
be incorporated by reference, when filed, from the Section entitled "Certain 
Relationships and Related Transactions" in the Company's Proxy Statement for 
its 1997 Annual Meeting of Shareholders to be held on or about May 19, 1998.

ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.

(a) Exhibits

<TABLE>
<CAPTION>
EXHIBIT
NUMBER                                DESCRIPTION OF DOCUMENT
-------                               -----------------------
<C>        <S>
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). *

                                      29

<PAGE>

10.2       1997 Stock Option Plan of the Company (incorporated herein by
           reference from the Company's Proxy Statement for its 1997 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 Security Agreement between the Company and each of the
           Company's Lenders (incorporated herein by reference to Exhibit 10.7
           of the Company's Registration Statement on Form SB-2 (SEC File No.
           333-09103). *

10.6       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). *

10.7       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). *

10.8       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). *

10.9       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). *

10.10      Amendment dated March 7, 1997 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,
           1997). *

10.11      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). *

10.12      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). *

10.13      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). *

10.14      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). *

10.15      Lease between the Company and Raycon Properties (incorporated
           herein by reference to Exhibit 10.19 of the Company's Registration
           Statement on Form SB-2 (SEC File No. 333-09103). *

                                      30

<PAGE>

10.16      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). *

10.17      Terms and Conditions of Sale Between the Company and Carl Zeiss
           dated 2/20/97 (incorporated herein by reference to Exhibit 10.20 of
           the Company's Form 10-QSB report filed May 12, 1997). *

10.18      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, 1997). *

10.19      Amendment dated December 12, 1997 to Agreement of Purchase and Sale
           Among Image Guided Technologies, Inc. and Stockholders of Brimfield
           Precision, Inc. dated November 25, 1997 (incorporated herein by
           reference to Exhibit 2.2 of  the Company's Form 8-K report filed
           December 29, 1997). *

10.20      Loan Agreement between Image Guided Technologies, Inc. and Imperial
           Bank, dated December 12, 1997 (incorporated herein by reference to
           Exhibit 2.3 of  the Company's Form  8-K report filed December 29,
           1997). *

10.21      Subordinated Note from Image Guided Technologies, Inc. payable to
           Cruttenden Roth, dated December 12, 1997 (incorporated herein by
           reference to Exhibit 2.4 of  the Company's Form  8-K report filed
           December 29, 1997). *

10.22      Warrant from Image Guided Technologies, Inc. to Imperial Bank,
           dated December 12, 1997 (incorporated herein by reference to
           Exhibit 2.5 of  the Company's Form 8-K report filed December 29,
           1997). *

10.23      Warrant from Image Guided Technologies, Inc. to Cruttenden Roth,
           dated December 12, 1997 (incorporated herein by reference to
           Exhibit 2.6 of  the Company's Form 8-K report filed December 29,
           1997). *

10.24      Warrant from Image Guided Technologies to Imperial Bank, dated
           3/15/98.

10.25      Warrant from Image Guided Technologies to Imperial Bank, dated
           3/31/98.

10.26      Bill Lyons Employment Agreement.

10.27      Springfield lease

10.28      Promissory Note to Pasqualina Lyons from BPI dated 8/19/88

10.29      Employment agreement between the Company and Robert E. Silligman,
           dated February 21, 1998.

10.30      Amended and Restated Loan Agreement dated 4/3/98 between Image
           Guided Technologies, Inc. and BankBoston, N.A.

21.0       Subsidiaries of the Company.

23.1       Consent of Independent Accountants.

27.1       Financial Data Schedule.
</TABLE>

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

                                      31

<PAGE>

(b) Form 8-K Reports

   The Company filed one report on Form 8-K December 29, 1997 (amended on
February 27, 1998) in connection with the acquisition of Brimfield Precision,
Inc.  BPI audited financial statements for the years ended October 31, 1996 and
1997 and pro forma financial statements were filed with respect to the
acquisition.


                                      32

<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.


April 14, 1998                   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.

April 14, 1998                   /s/ Paul L. Ray
                                 -------------------
                                 Paul L. Ray
                                 Chairman of the Board, President and Chief
                                 Executive Officer


April 14, 1998                   /s/ William O'Connor
                                 ----------------------
                                 William O'Connor
                                 Director, Vice President and Chief Operating
                                 Officer


April 14, 1998                   /s/ Jeffrey J. Hiller
                                 ----------------------
                                 Jeffrey J. Hiller
                                 Vice President and Chief Financial Officer
                                 (Principal Accounting Officer)


April 14, 1998                   /s/ Waldean Schulz
                                 ----------------------
                                 Waldean Schulz
                                 Director and Vice President, Technology


April 14, 1998                   /s/ Ray Hauser
                                 ----------------------
                                 Ray Hauser
                                 Director


April 14, 1998                   /s/ Clifford Frith
                                 ----------------------
                                 Clifford Frith
                                 Director


April 14, 1998                   /s/ William Lyons
                                 ----------------------
                                 William Lyons
                                 Director


                                      33