U.S. SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-QSB

(Mark One)
[X] QUARTERLY REPORT PURSUANT SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998

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

For the transition period from to
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Commission file number: 001-12189

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

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

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

(303) 447-0248
--------------
(Issuer's telephone number including area code)

Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 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

State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: 3,705,222 shares of common stock, no
par value, were outstanding on October 31, 1998.

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

Table of Contents

Part Item Page

I FINANCIAL INFORMATION

1. Consolidated Financial Statements
Consolidated Balance Sheet - September 30, 1998 ...................................... 1
Consolidated Statement of Operations -- Three Months and Nine Months Ended
September 30, 1998 and 1997 .......................................................... 2
Consolidated Statement of Cash Flows -- Nine Months Ended September 30, 1998
and 1997 ............................................................................. 3
Notes to Consolidated Financial Statements ........................................... 4

2. Management's Discussion and Analysis or Plan of Operation
Financial Condition and Results of Operations ........................................ 5
Liquidity and Capital Resources ...................................................... 6
Other Matters ........................................................................ 7
Forward-Looking Statements ........................................................... 8

II OTHER INFORMATION

1. Legal Proceedings .................................................................... 10

2. Changes in Securities ................................................................ 11

3. Defaults Upon Senior Securities ...................................................... 11

4. Submission of Matters to a Vote of Security Holders .................................. 11

5. Other Information .................................................................... 11

6. Exhibits and Reports on Form 8-K ..................................................... 11

PART I -- FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

IMAGE GUIDED TECHNOLOGIES, INC.

CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1998
(Unaudited)

ASSETS
Current assets:
Cash and cash equivalents ............................................ $ 20,000
Accounts receivable, net of allowance for doubtful accounts of
$196,000 1,091,000
Inventories, net ..................................................... 966,000
Investment- discontinued operations .................................. 792,000
Other current assets ................................................. 172,000
------------
Total current assets ............................................... 3,041,000
Property and equipment, net of accumulated depreciation of
$352,000 745,000
Goodwill, net of $23,000 accumulated amortization ...................... 581,000
Investment- discontinued operations .................................... 3,184,000
Other assets ........................................................... 95,000
------------
Total assets ....................................................... $ 7,646,000
------------
------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable ..................................................... $ 619,000
Accrued liabilities .................................................. 401,000
Current portion of notes payable and capital lease obligations ....... 1,583,000
------------
Total current liabilities .......................................... 2,603,000

Line of credit ........................................................ 2,046,000
Notes payable, net of discount of $116,000 and capital lease obligations 1,500,000
------------
Total liabilities .................................................. 3,546,000

Commitments and contingencies

Shareholders' equity:
Common Stock, no par value; 10,000,000 shares authorized;
3,705,222 shares issued and outstanding .............................. 10,457,000
Accumulated deficit ..................................................... (8,960,000)
------------
Total shareholders' equity ......................................... 1,497,000
------------
------------
Total liabilities and shareholders' equity ......................... $ 7,646,000
------------
------------

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

IMAGE GUIDED TECHNOLOGIES, INC.
STATEMENT OF OPERATIONS
(Unaudited)

Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------

Revenue .............................. $ 2,121,000 $ 1,333,000 $ 5,094,000 $ 3,829,000
Cost of goods sold ................... 1,280,000 556,000 3,273,000 1,670,000
----------- ----------- ----------- -----------
Gross profit ......................... 841,000 777,000 1,821,000 2,159,000
----------- ----------- ----------- -----------
Operating expenses:
Research and development ........... 324,000 372,000 1,070,000 786,000
Selling and marketing .............. 185,000 163,000 669,000 481,000
General and administrative ......... 525,000 300,000 1,392,000 825,000
----------- ----------- ----------- -----------
Total operating expenses ....... 1,034,000 835,000 3,131,000 2,092,000
----------- ----------- ----------- -----------
Operating income (loss) .............. (193,000) (58,000) (1,310,000) 67,000
Other income (expense):
Interest and other expense ......... (153,000) (1,000) (478,000) (12,000)
Interest and other income .......... 9,000 64,000 66,000 188,000
----------- ----------- ----------- -----------
Income (loss) from continuing
operations ........................... (337,000) 5,000 (1,722,000) 243,000
Extraordinary item--loss on early
extinguishment of debt, net of tax ... -- -- (253,000) --

Discontinued operations:
Loss from discontinued operations . 21,000 -- 193,000 --
Loss on disposal ................... (4,411,000) -- (4,411,000) --
----------- ----------- ----------- -----------
Net income (loss) .................... $(4,727,000) $ 5,000 $(6,193,000) $ 243,000
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Earnings (loss) per share from
continuing operations
Basic .............................. $ (0.09) $ 0.00 $ (0.46) $ 0.08
Diluted ............................ $ (0.09) $ 0.00 $ (0.46) $ 0.07
Loss per share from extraordinary item
Basic .............................. -- -- $ (0.07) --
Diluted ............................ -- -- $ (0.07) --
Loss per share from discontinued
operations
Basic .............................. $ (1.19) -- $ (1.14) --
Diluted ............................ $ (1.19) -- $ (1.14) --
Earnings (loss) per share
Basic .............................. $ (1.28) $ 0.00 $ (1.67) $ 0.08
Diluted ............................ $ (1.28) $ 0.00 $ (1.67) $ 0.07
Weighted average common shares
outstanding
Basic ............................. 3,705,222 3,108,720 3,705,222 3,106,922
Diluted ........................... 3,705,222 3,520,069 3,705,222 3,549,047

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

IMAGE GUIDED TECHNOLOGIES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)

NINE MONTHS ENDED SEPTEMBER 30,
------------------------------------
1998 1997
--------------- ----------------

OPERATING ACTIVITIES:
Net income (loss) ............................................... $(6,193,000) $ 243,000
Net loss from discontinued operations ........................... (4,218,000) --
Income (loss) from continuing operations ........................ (1,975,000) 243,000
Adjustments to reconcile income (loss) from continuing operations
to net cash provided by (used in) operating activities:
Depreciation and amortization ................................. 505,000 106,000
Extraordinary loss, net of tax ................................ 253,000 --
Loss on disposal of fixed assets .............................. -- 8,000
Provision for doubtful accounts ............................... 20,000 14,000
Provision for inventory obsolescence .......................... 37,000 48,000
Changes in operating assets and liabilities:
Accounts receivable ......................................... 275,000 (478,000)
Inventories ................................................. 93,000 (47,000)
Other current assets and other assets ....................... (183,000) 9,000
Accounts payable ............................................ (59,000) (113,000)
Accrued liabilities ......................................... 6,000 (69,000)
----------- -----------
Net cash used in continuing operations .................... (1,028,000) (279,000)
----------- -----------
Net cash provided by discontinued operations .............. 987,000 --
INVESTING ACTIVITIES:
Additions to property and equipment ............................. (269,000) (195,000)
----------- -----------
Net cash used in investing activities ..................... (269,000) (195,000)
----------- -----------
FINANCING ACTIVITIES:
Proceeds from stock option exercise ............................. 14,000 --
Capital stock repurchases ....................................... -- (26,000)
Principal payments on capital leases ............................ (241,000) (11,000)
Principal payments on term loan ................................. (452,000) --
Proceeds from debt .............................................. 2,700,000 --
Net proceeds from capital line of credit ........................ 2,121,000 --
Principal payments to extinguish term loan ...................... (5,028,000) --
----------- -----------
Net cash used in financing activities ..................... (886,000) (37,000)
----------- -----------
Net decrease in cash and cash equivalents ....................... (1,196,000) (511,000)
Cash and cash equivalents at beginning of period ................ 1,216,000 5,240,000
----------- -----------
Cash and cash equivalents at end of period ...................... $ 20,000 $ 4,729,000
----------- -----------
----------- -----------
SUPPLEMENTAL CASH FLOW DISCLOSURES
Interest paid ................................................... $ 515,000 $ 9,000
SUPPLEMENTAL NON-CASH INVESTING AND FINANCING ACTIVITIES
Warrants issued ................................................. $ 169,000 --

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

IMAGE GUIDED TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

1. Basis of Presentation

The accompanying consolidated financial statements of Image Guided
Technologies, Inc. (the "Company") are unaudited. The term "Company" includes
its wholly owned subsidiary, Brimfield Precision, Inc. ("BPI") unless the
context requires otherwise. In the opinion of management, such statements
reflect all adjustments, consisting of normal recurring adjustments, necessary
for a fair presentation. Interim results of operations are not necessarily
indicative of results for the full year.

The consolidated financial statements of the Company have been adjusted
and restated to reflect the results of operations and net assets of the general
instrument and implant business units of BPI as discontinued operations for the
three and nine months ended September 30, 1998. There were no operations of the
general instrument and implant business units during the three and nine months
ended September 30, 1997 as the acquisition date of BPI was December 12, 1997.

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.

2. Inventories

Inventories of continuing operations are comprised of the following at
September 30, 1998:

Raw materials ................. $ 351,000
Work-in-process ............... 263,000
Finished goods ................ 440,000
-----------
1,054,000
Less allowance for obsolescence (88,000)
-----------
$ 966,000
===========

3. Discontinued operations

On September 24, 1998, the Company adopted a plan to sell the net
assets of the general instrument and implant business units of its wholly owned
subsidiary, Brimfield Precision, Inc. The Company anticipates that the business
will be sold by December 31, 1998. Management believes that the general
instrument and implant business units represent a separate and major line of
business. Accordingly, the consolidated financial statements of the Company have
been adjusted and restated to reflect the results of operations and net assets
of the general instrument and implant business units as discontinued operations
for the three and nine months ended September 30, 1998. Net assets of the
discontinued operations consist primarily of accounts receivable, inventories
and property, plant, and equipment. The estimated loss on the disposal of the
net assets is $4,411,000, consisting of an estimated loss on disposal of the
business of $4,348,000 and a provision of $63,000 for anticipated operating
losses until disposal.

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

The following discussion of the results of operations and financial
condition should be read in conjunction with the financial statements and notes
thereto.

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

THREE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997

Revenue increased by $788,000, or approximately 59%, to $2,121,000 for
the three months ended September 30, 1998, as compared to $1,333,000 for the
three months ended September 30, 1997. This increase was primarily due to the
additional revenue provided by sales of instruments from the minimally invasive
surgical instrument business unit of Brimfield Precision, Inc. ("BPI").

Cost of goods sold increased by $724,000, or approximately 130%, to
$1,280,000 for the three months ended September 30, 1998, compared to $556,000
for the three months ended September 30, 1997. Cost of goods sold as a
percentage of revenue increased to 60% for the three months ended September 30,
1998, as compared to 42% for the three months ended September 30, 1997. This
increase in cost of goods sold was attributable to increased sales provided by
the minimally invasive surgical instrument business unit of BPI and the increase
in cost of goods sold as a percentage of revenue was primarily attributable to
lower margins associated with the manufacture of minimally invasive surgical
instruments.

Research and development expenses decreased by $48,000 or approximately
13%, to $324,000 for the three months ended September 30, 1998, compared to
$372,000 for the three months ended September 30, 1997. This decrease was
principally due to the Company reducing engineering personnel and related
expenses associated with its optical localizer business offset by the Company's
continued investment in its image guided surgery product development.

Selling and marketing expenses increased by $22,000 or approximately
13%, to $185,000 for the three months ended September 30, 1998 as compared to
$163,000 for the three months ended September 30, 1997. This increase was due to
the consolidation of the selling and marketing expenses related to BPI's
minimally invasive surgical instrument business unit.

General and administrative expenses increased by $225,000 or
approximately 75%, to $525,000 for the three months ended September 30, 1998, as
compared to $300,000 for the three months ended September 30, 1997. This
increase was primarily attributable to the amortization of goodwill and other
expenses related to the acquisition of BPI and to the consolidation of the
general and administrative expenses for BPI's minimally invasive surgical
instrument business unit.

Operating loss increased by $135,000 to $(193,000) for the three months
ended September 30, 1998 compared to operating loss of $(58,000) for the three
months ended September 30, 1997. This increase was primarily attributable to
increased costs associated with the acquisition and integration of BPI and to
the lower profit margins associated with the sale of minimally invasive surgical
instruments.

Net other income (expense) decreased by $81,000 to $(144,000) for the
three months ended September 30, 1998 as compared to $63,000 for the three
months ended September 30, 1997. This change was primarily due to interest
expense on debt in connection with the acquisition of BPI and loss of interest
income on cash reserves.

As a result of the foregoing, the Company's net loss from continuing
operations was $(337,000) for the three months ended September 30, 1998,
compared to net income from continuing operations of $5,000 for the three months
ended September 30, 1997.

The Company recorded an estimated net loss of $(4,390,000) on the sale
of the general instrument and implant business units of its subsidiary, BPI and
as a result, had a net loss of $(4,727,000) for the three months ended September
30, 1998 as compared to net income of $5,000 for the three months ended
September 30, 1997.

NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997

Revenue increased by $1,265,000, or approximately 33%, to $5,094,000
for the nine months ended September 30, 1998, as compared to $3,829,000 for the
nine months ended September 30, 1997. This increase was primarily due to the
additional revenue provided by the sale of minimally invasive surgical
instruments by BPI's minimally invasive surgical instrument business unit offset
by significantly lower sales of optical localizer systems during the first six
months of 1998.

Cost of goods sold increased by $1,603,000, or approximately 96%, to
$3,273,000 for the nine months ended September 30, 1998, compared to $1,670,000
for the nine months ended September 30, 1997. Cost of goods sold as a percentage
of revenue increased to 64% for the nine months ended September 30, 1998, as
compared to 44% for the nine months ended September 30, 1997. This increase in
cost of goods sold was attributable to increased sales provided by BPI's
minimally invasive surgical instrument business unit, and the increase in cost
of goods sold as a percentage of revenue was primarily attributable to lower
margins associated with the manufacture of minimally invasive surgical
instruments.

Research and development expenses increased by $284,000, or
approximately 36%, to $1,070,000 for the nine months ended September 30, 1998,
compared to $786,000 for the nine months ended September 30, 1997. This increase
was principally due to expenses for image guided surgery product development.

Selling and marketing expenses increased by $188,000 or approximately
39%, to $669,000 for the nine months ended September 30, 1998 as compared to
$481,000 for the nine months ended September 30, 1997. This increase was
primarily attributable to an increase in bad debt reserves for a potentially
uncollectible receivable and to the consolidation of the selling and marketing
expenses of BPI's minimally invasive surgical instrument business unit.

General and administrative expenses increased by $567,000 or
approximately 69%, to $1,392,000 for the nine months ended September 30, 1998,
as compared to $825,000 for the nine months ended September 30, 1997. This
increase was attributable to the amortization of goodwill related to the
acquisition of BPI, to the additional expenses necessary to acquire and
integrate BPI, to increased salaries, and to the consolidation of BPI's general
and administrative expenses of the general instruments and implant business
units.

Operating income decreased by $1,243,000 to $(1,310,000) for the nine
months ended September 30, 1998 compared to operating income of $67,000 for the
nine months ended September 30, 1997. This increase was primarily attributable
to reduced sales of optical localizer systems, increased costs associated with
the acquisition of BPI, to product development costs, and to the increase in the
bad debt reserve.

Net other income (expense) decreased by $236,000 to $(412,000) for the
nine months ended September 30, 1998 as compared to $176,000 for the nine months
ended September 30, 1997. This change was primarily due to interest expense on
debt in connection with the acquisition of BPI and due to reduced interest
income on cash reserves.

As a result of the foregoing, the Company's net loss from continuing
operations was $(1,722,000) for the nine months ended September 30, 1998,
compared to net income of $243,000 for the nine months ended September 30, 1997.

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

Net loss for the nine months ended September 30, 1998 was $(6,193,000)
as compared to net income of $243,000 for the nine months ended September 30,
1997 principally due to the Company recording an estimated net loss of
$(4,218,000) on the disposal of the general instrument and implant business
units of its subsidiary, BPI.

LIQUIDITY AND CAPITAL RESOURCES

During the nine months ended September 30, 1998, $1,028,000 in cash was
used by operating activities as a result of the Company's loss from continuing
operations offset by depreciation and amortization, the write-off of warrants
associated with debt, and decreases in accounts receivable. The Company used
$269,000 in cash for investing activities during the nine-month period ended
September 30, 1998 to purchase property and equipment. Also during the
nine-month period ended September 30, 1998, $886,000 in cash was used in
financing activities, principally for payments on debt and principal payments on
capital leases.

As a result of the plan to sell the general instrument and implant
business units of BPI, the Company reported net cash provided by discontinued
operations of $987,000. Cash provided is due to net income from these business
units, depreciation, increases in bad debt reserve, decreases in inventories,
and decreases in other assets.

As of September 30, 1998, the Company had working capital of $438,000,
compared to working capital of $2,197,000 at December 31, 1997. The change in
working capital was primarily the result of decreases in cash and accounts
receivable. In order to improve cash flow and working capital, the Company
reduced personnel and associated costs related to the optical localizer business
and BPI during the period (such reduction was somewhat offset by the continuing
salary and associated costs of the former President and Chief Operating
Officer). The Company's increase in localizer sales during the three months
ended September 30, 1998 and increased orders for this product for the three
months ended December 31, 1998 both indicate an upward trend in the sales of
optical localizer products.

On April 3, 1998, Imperial Bank (which had provided the bank loan for
the acquisition of BPI) 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. Due to various loan covenant violations,
BankBoston increased the interest rate on its term loan by 100 basis points,
increased the interest rate on its revolving loan by 100 basis points, and
capped the Company's line of credit at $2,000,000. BankBoston has recently
increased the cap on the revolving loan to $2,250,000. The Company's borrowings
are currently within its borrowing base and the Company believes the increased
amount on the revolver will be adequate to fund the Corporation's operations for
the remainder of 1998. The Company plans to reduce the outstanding balance of
its term loan, revolving loan and capital lease obligations with BankBoston upon
completions of the sale of BPI's general instrument and implant business units.

On September 24, 1998, the Company adopted a plan to sell the net
assets of the general instrument and implant business units of its wholly owned
subsidiary, Brimfield Precision, Inc. The Company anticipates that the business
will be sold by December 31, 1998. Net assets of the discontinued operations
consist primarily of accounts receivable, inventories and property, plant,
and equipment. The estimated loss on the disposal of these business units is
$4,411,000, consisting of an estimated loss on disposal of the business of
$4,348,000 and a provision of $63,000 for anticipated operating losses until
disposal. While the Company has signed a letter of intent with Paragon
Medical, Inc. for the sale of these business units, there can be no assurance
the sale will close, or if it does close, that it will close on the
contemplated terms.

OTHER MATTERS

The Company's common stock is listed on the Nasdaq SmallCap Market and
the Boston Stock Exchange. For continued listing on the Nasdaq SmallCap Market,
a company must maintain, among other things, at least $2,000,000 in net tangible
assets and a minimum bid price of $1.00. For continued listing on the Boston
Stock Exchange, a company must maintain, among other things, at least $1,000,000
in total assets and stockholders' equity of $500,000. On November 11, 1998, a
Nasdaq listing qualifications panel granted the Company a temporary exemption
from the Nasdaq SmallCap Market's listing requirements to allow the Company's
stock to continue to be listed on the Nasdaq SmallCap Market. This exemption is
subject to certain conditions which the Company cannot guarantee it will meet
and expires on January 15, 1999.

NEW ACCOUNTING PRONOUNCEMENTS

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 reporting of segment
operations in annual financial statements. SFAS 131 is effective for annual
financial statements for periods beginning after December 15, 1997.

The Company anticipates that the adoption of SFAS 131 will not have a
material impact on its 1998 results of operations.

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 that 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 that are
inconsistent with actual revenues. Moreover, the Company's results may also be
affected by fluctuating demand for the Company's products, declines in the
average selling prices for its products, by changes in product mix sold, by
increases in the costs of the components and subassemblies acquired by the
Company from vendors, and by the availability of such components and
subassemblies from vendors.

DEBT. The Company has a term loan of $2,500,000 and a revolving loan of
up to $2,250,000 with BankBoston. The Company also owes BankBoston approximately
$1,300,000 in connection with equipment financings. The Company also owes
Cruttenden Roth, Inc. $500,000 pursuant to a one-year subordinated note due
December 12, 1998 with interest at 12% per annum. See "Part II, Item 3.
Defaults upon Senior Securities".

NEED FOR ADDITIONAL CAPITAL. If BPI's general instrument and implant
business units are not sold by the end of the year, the Company will need
additional capital to meet its obligations with BankBoston, Cruttenden Roth and
to satisfy its other capital needs. Moreover, even if such business units are
sold, the Company may still need additional capital depending on the ultimate
sale price, the Company's cash flow for the quarter and BankBoson's and
Cruttenden Roth's willingness to renegotiate their loans. There can be no
assurance that such capital will be available on reasonable terms or at all. See
"Liquidity and Capital Resources".

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

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

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

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.

YEAR 2000 ISSUES. The company has in place a program to address Year
2000 readiness in its internal systems and with its key customers and
suppliers. The following discussion does not include the general instrument
and implant business units of BPI which are discontinued operations. The
Year 2000 issue is the result of computer logic that was written using two
digits rather than four to define the applicable year. Any computer logic that
processes date-sensitive information may recognize the date using "00" as the
year 1900 rather than the year 2000, which could result in miscalculations of
system failures.

Pursuant to the Company's readiness programs, all major categories of
information technology systems and non-information technology systems (i.e.,
equipment with embedded microprocessors) in use by the Company, including
manufacturing, sales, financial and human resources, are being inventoried and
assessed. In addition, plans are being developed for the required systems
modifications or replacements. With respect to its information technology
systems, the Company has completed the entire assessment phase and plans to
begin and complete the remediation phase by March 31, 1999. With respect to its
non-information technology systems, the Company has completed approximately 70%
of the assessment phase and has yet to begin the remediation phase. Selected
areas, both internal

and external, will be tested to assure the integrity of the Company's
remediation programs. The testing is expected to be completed by June 30, 1999.
The company plans to have all internal mission-critical information technology
and non-information technology systems Year 2000 compliant by June 1999.

The Company also plans to communicate with its major customers,
suppliers and financial institutions to assess the potential impact on the
Company's operations if those third parties fail to become Year 2000 compliant
in a timely manner. While a formal survey has not yet begun, preliminary
discussions with customers and suppliers indicate that these parties have in
place Year 2000 readiness programs, without specifically confirming that they
will be Year 2000 compliant in a timely manner. Risk assessment, readiness
evaluation, action plans and contingency plans related to the Company's
significant customers and suppliers are expected to be completed by June 30,
1999. The Company's key financial institutions have been surveyed and it is the
Company's understanding that they are or will be Year 2000 compliant on or
before December 31, 1999.

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

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

The Company believes that it is taking reasonable steps to identify and
address those matters that could cause serious interruptions in its business and
operations due to Year 2000 issues. However, delays in the implementation of new
systems, a failure to fully identify all Year 2000 dependencies in the Company's
systems and in the systems of its suppliers, customers and financial
institutions, a failure of such third parties to adequately address their
respective Year 2000 issues, or a failure of a contingency plan could have a
material adverse effect on the Company's business, financial condition and
results of operations. For example, the Company would experience a material
adverse impact on its business if significant suppliers of electrical component
parts, semi-conductors, printed circuit boards, and other raw materials do not
timely provide the Company with necessary inventories or services due to Year
2000 systems failures.

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

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

PART II -- OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

BPI is party to a lawsuit, 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 2. CHANGES IN SECURITIES

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

At September 30, 1998, the Company was in default on its cash flow,
total liabilities to net worth and equity covenants with BankBoston. In
addition, the Company has not raised the $1,000,000 in new equity required under
its BankBoston loan. The Company has received a waiver from BankBoston for loan
violations through November 16, 1998. See "Liquidity and Capital Resources."

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

None.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits

Exhibit
Number Description of Document
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27.1 Financial Data Schedule for current year