PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY

The Company's Common Stock is traded in the SmallCap Stock Market,  as quoted on
the National  Association of Securities  Dealers  Automated  Quotation  (Nasdaq)
System under the symbol EVMD.  The following  table sets forth,  for the periods
indicated,  the high and low closing bid prices for the Common Stock as reported
by Nasdaq. Such quotations represent interdealer prices,  without retail markup,
markdown or commission, and may not represent actual transactions.

         As of December 31, 1996, there were approximately 310 holders of record
of the Company's Common Stock, 7 holders of record of Series A Preferred  Stock,
29  holders  of record of  Series B  Preferred  Stock,  14  holders  of Series C
Preferred  Stock and 31  holders  of record of  Series D  Preferred  Stock.

         The Company has not  declared or paid any cash  dividends on its Common
Stock or its Series A Preferred Stock since inception.  The Company has paid its
Series B  Preferred  Stockholders  its  current  dividend of $0.22 per share per
annum (8% of the  purchase  price  per  share)  plus its  dividends  in  arrears
commencing  in September  1994.  Cash  dividend  paid on this Series C Preferred
Stock  was  $133,435  in 1996.  The  Series C  Preferred  Stock is  entitled  to
dividends  of $0.165  per share per annum (6% of the  purchase  price per share)
plus its dividends in arrears  commencing  August 1995.  Cash  dividends paid on
this Series C Preferred  Stock was $67,800 in 1996. The Series D Preferred Stock
is entitled  to  dividends  of $0.2875 per share per annum (10% of the  purchase
price per share) plus its dividends in arrears  commencing  September 1995. Cash
dividends paid on this Series D Preferred Stock was $187,500 in 1996.

        The Board of Directors  presently  intends to retain all other  earnings
for use in the business for the  foreseeable  future.  The Company is prohibited
from paying  dividends on its common stock without consent of the holders of (a)
a  majority  of  preferred  shares  of  Preferred  stock  and (b)  the Company's
convertible promissory notes and the warrants issued in connection therewith.

                                    High       Low

1996
First Quarter                     3 1/8       2 5/8
Second Quarter                    6           3
Third Quarter                     4 3/4       2 7/8
Fourth Quarter                    4           2 1/4

1995
First Quarter                     1 13/16     1 3/8
Second Quarter                    2 5/8       1 3/4
Third Quarter                     3 1/16      2 1/4
Fourth Quarter                    3 1/8       2 3/4




<PAGE>

                      MANAGEMENT'S DISCUSSION AND ANALYSIS

Results of Operations

Net Revenues

         Net revenues in 1996 were  $6,001,779,  an increase of  $1,723,238,  or
40%, from net revenues in 1995. The increase in revenues  primarily reflects new
product  introductions  and the benefits of the change in distribution  strategy
the Company  implemented in 1995.  Revenues of the Company's branded laparoscopy
product line  increased  to  $3,224,631,  or 64%,  from 1995.  This  increase in
revenues was a result of successful  introduction  of the BiCOAG Bipolar Cutting
Forceps in a 10mm version  (October 1995) and 5mm version (June 1996).  Revenues
from these  products  exceeded  $1,000,000  in 1996. A  significant  increase in
revenue was also  experienced  in sales of the  EVERSHEARS  II Bipolar  Scissors
which  increased 14% from 1995, and sales of the BiCOAG  Dissecting  Forceps and
the BiCOAG  Classic Tip  Forceps,  which  increased  49% from 1995.  The Company
expects revenues from the Everest-branded  laparoscopic product line to increase
in 1997 as a result of ongoing investments in sales and marketing. Additionally,
the Company expects to benefit from the growing acceptance of the BiCOAG Bipolar
Cutting  Forceps as  surgeons  continue  to respond to the  greater  versatility
afforded them, and the cost savings  associated  with the product as compared to
alternative  technologies.  Revenues from the Company's laparoscopic products to
its OEM customers increased 62%. The Company experienced an increase in sales of
a version of its bipolar forceps to Ethicon  Endo-Surgery,  but expects shipment
of these  bipolar  forceps to  decrease in 1997.  Net  revenues  from  endoscopy
products  decreased  12% for the year.  Revenue  declines  were  experienced  in
shipments of coagulating  probes to C.R. Bard, in the amount of 9%, and in sales
of  the  Company's  bipolar   polypectomy   snare  to  the  Company's   Japanese
distributor,  which  declined  18%.  These  decreases in revenues  resulted from
increased  competitive  products  which eroded  existing  business and delays in
obtaining  regulatory approval in Japan for the Company's new distributor.  Such
delays allowed  competitive  products to gain market share.  The Company expects
revenues  from this segment of the business for 1997 to increase  marginally  as
both products benefit from planned product improvements.

         Net revenues in 1995 were  $4,278,541,  a decrease of $244,754,  or 5%,
over net  revenues  in 1994.  The  decline  in  revenues  was a result  of a 51%
decrease in sales of the Company's laparoscopic products to its OEM customers as
these customers attempted to balance the inventory levels after  over-purchasing
in 1994.  The Company did  experience a 42% increase in revenues for its Everest
branded  laparoscopic  product line resulting from the ongoing emphasis to focus
sales and marketing,  and product  development  efforts to benefit the Company's
independent sales channel.  The revenues from the Company's  endoscopy  products
grew 7% for the year, with strong growth in sales of coagulating  probes to C.R.
Bard offsetting a decline in sales of endoscopy products in Japan.

Gross Margin.  Gross margin for 1996 was 44% of sales  compared to 39% for 1995.
This  improvement  was a result  of  increased  sales  from the  Everest-branded
product offering which allows for increasing the average selling price. With the
sale of such  products  the  Company  is also  able to  develop  and  execute  a
realistic  inventory build schedule to better manage its production  costs.  The
average selling price increased by 7% and the number of units produced increased
by 23% in 1996 as compared to 1995. Start-up costs and production inefficiencies
related to the 5mm BiCOAG Bipolar Cutting Forceps (introduced in the second half
of 1996) offset the gross margin improvements  resulting from the changing sales
mix.

         Gross Margin for 1995 was 39% of sales  compared to 26% for 1994.  This
improvement resulted from the Company's changing  distribution  strategies which
produced a 27% increase in the average selling price for the Company's  products
in 1995. The improved  margins from such change in distribution  were negatively
impacted by a decline in  production  volume for the year  causing the  overhead
burden to be absorbed over fewer units.  The Company also  experienced  start-up
costs and production  inefficiencies  related to the new BiCOAG Cutting  Forceps
which adversely affected its gross margin in 1995.


<PAGE>

Sales And Marketing.  Sales and marketing expenses for 1996 were $1,531,276,  an
increase  of  $330,548,  or 28% from 1995.  This  increase  in expense  resulted
primarily  from the ongoing change in  distribution  channels,  which  generated
higher commissions,  increased promotional and advertising  activities to create
brand awareness and continued use of product  samples for clinical  evaluations.
The Company expects that sales and marketing  expenses will increase in 1997 due
to continued  emphasis on the  Everest-branded  laparoscopy  product line and an
anticipated  increase in sales of this product line.  Also, in 1997, the Company
expects to  experience  a cost  increase  with the  initial  marketing  research
efforts associated with the minimally invasive cardiovascular opportunity.

        Sales and  marketing  expenses in 1995 were  $1,200,728,  an increase of
$459,884, or 62%, from 1994. This expense increase reflects the additional costs
associated with the distribution  changes implemented by the Company,  including
increased  commissions,  increased  staff to support the network of  independent
distributors and manufacturing representatives,  and increased promotion expense
(specifically the use of product samples for clinical evaluations).

Research  And  Development. Research  and  development  expenses  for 1996  were
$606,970, an increase of $51,166, or 9% from 1995. This expense increase was, in
part,  a result of  development  issues with the July 1996  introduction  of the
BiCOAG  Bipolar  Cutting  Forceps in a 5mm version.  The Company  also  incurred
increased expenses related to its patent portfolio,  including responding to the
patent  interference and re-examination  issues which arose in 1996. The Company
expects  research  and  development  expenses to increase in 1997 as the Company
increases  staff in an attempt to  capitalize  on certain  opportunities  in the
minimally invasive  cardiovascular  arena,  microlaparoscopy  and other surgical
specialties.  The Company  also  expects  expenses to increase as it pursues ISO
9000 and CE Mark  certifications in 1997.  Additionally,  the Company expects to
continue  to incur  expenses in  relation  to its patent  portfolio  and related
issues.

         Research and development  expenses for 1995 were $555,804,  an increase
of $108,479, or 24%, from 1994. This expense increase was primarily attributable
to the  development  efforts  related to the September 1995 launch of the BiCOAG
Bipolar Cutting Forceps. The 1995 expense also reflects the Company's efforts to
capture that portion of  manufacturing  engineering  expenses which  represented
research and development expense on new products.

General And Administrative.  General and  administrative  expenses for 1996 were
$739,953,  an  increase  of  $80,197,  or  12%  over  1995.  This  increase  was
attributable  to higher  expenses  relating  to the  purchase of  directors  and
officers  insurance  coverage and the increased  cost  associated  with investor
communication.  The Company expects that its general and administrative expenses
will increase in 1997 due the full year impact of additional  insurance  limits,
the  planned  retention  of outside  investor  relations  counsel,  and  overall
activity  increases  from the growth in the  business  and the  expansion in new
market opportunities.


<PAGE>

        General and administrative  expenses for 1995 were $659,756,  a decrease
of $39,522, or 6%, over 1994. This decrease were resulted from continued expense
and staffing control.

Net Loss.  The net loss in 1996 was $339,056  compared to a net loss of $773,251
in 1995 and  $788,335 in 1994.  The net loss for 1996 was a result of  increased
sales and marketing  efforts to continue to change the Company's  revenue mix to
the more profitable  Everest-branded  business and the increasing  gross margin.
The loss for 1995 was a result of a decline in revenue, an increase in sales and
marketing efforts to facilitate the change in distribution strategy and the lack
of unit growth to leverage the Company's  manufacturing  overhead.  The net loss
for 1994 was the  result of  strong  cost  control  efforts,  the  impact of the
organizational  restructuring  in 1993,  continued  increases  in  revenues  and
improving gross margins. The Company believes that it will achieve profitability
in 1997 as it increases  market share in its core  business of  laparoscopy  and
works towards the creation of a market  presence in minimally  invasive  cardiac
surgery.

Liquidity and Capital Resources

Cash and cash  equivalents  were  $712,810 on  December  31,  1996,  compared to
$1,028,476 on December 31, 1995.  The Company  expended  $570,827,  on operating
activities  in 1996 compared to $782,876 in 1995.  Operating  activities in 1996
included  growth in accounts  receivable  due primarily to the  increased  sales
volume in the  fourth  quarter  of 1996,  growth  in  inventory  as the  Company
expanded its product line with the  introduction of new products,  and repayment
of $150,000  in customer  advances as the  Company's  Japanese  distributor  met
certain  milestones.  In 1996, the Company spent $121,641 on capital  equipment.
The Company raised  $1,470,967  from the sale of a convertible  note of $500,000
and $970,967 from the exercise of stock  options and warrants in 1996.  The note
was later converted to 200,000 shares of the Company's common stock. The Company
met its  obligations  on its preferred  stock  dividends of $388,737 and retired
convertible notes,  originally issued in 1992, in February 1996 in the amount of
$645,228.  While the Company does not have excess working  capital,  the Company
believes it has sufficient  capital to fund  operations  through 1997,  assuming
that  its  sales  goals  are  met  and  there  are  no  significant   unexpected
expenditures.

Outlook

The statements  contained in this management's discussion and analysis are based
on current  expectations.  These  statements  are  forward  looking,  and actual
results may differ materially.

        The  Company  expects  that as it  continues  to  invest  in  sales  and
marketing   support   programs   increased   revenues   will   result  from  the
Everest-branded  laparoscopy as it gains market share.  The Company also expects
that surgeons will increase their use of bipolar technology as an alternative to
existing  monopolar  and  ultrasonic  technologies  because  bipolar  technology
provides a safe and effective way of cutting and coagulating tissue in minimally
invasive laparoscopy and gynecology procedures. There are no assurances that the
Company will be successful  in  increasing  its market share as it competes with
large,  well-capitalized  companies  who have the ability to enter into  contact
purchasing  agreements  with  large  institutions  due to  their  broad  product
offerings which may exclude the Company's products.


<PAGE>

        The Company  also faces issues  regarding  the status of two key patents
that are currently undergoing patent office actions.  Based on advice of counsel
and published statistics,  the Company believes that it will prevail in the both
the patent  re-examination  of its Bipolar Cutting Forceps patent and the patent
interference action involving its metal-on-metal  bipolar scissors patent. There
can be no  assurances,  however,  that the  Company's patents may not be limited
based on these  actions or other  unknown  actions  that may arise.  Unfavorable
outcomes  may limit gain in market  share that the Company may be expects in the
future.

        The  Company  also plans to expand its  efforts  relating  to  minimally
invasive  cardiac  surgery,  an emerging market segment.  Although,  the Company
intends to  investigate  and commence  market  activities in 1997,  there are no
assurances that it will be successful in  demonstrating  its bipolar products as
superior in this market.  In addition,  the Company  cannot  guarantee that this
market segment will evolve to a significant market size.

        The Company also faces  ongoing  issues  related to its working  capital
needs. The capital structure under which the Company operates requires quarterly
dividend payments to three outstanding  series of preferred  convertible  stock.
These requirements,  necessary capital expenditures,  growth in inventory as the
Company expands its product offering and increased operating expenses due to its
exploration of the minimally  invasive cardiac market opportunity will challenge
the  Company to meet its  capital  needs for 1997.  The  Company  has a $300,000
revolving line of credit that matures on March 31, 1997. There are no assurances
that this credit  facility will be renewed on terms favorable to the Company nor
that the Company  would be able to receive  other sources of capital it may need
should there be any significant deviations from the plan in 1997.

Effect of Inflation

The Company does not believe that  inflation  will have a significant  effect on
operations.



<PAGE>

STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>


                                                          Year ended December 31,
                                                    1996           1995           1994
                                                -----------    -----------    -----------
<S>                                             <C>            <C>            <C>        
Net sales                                       $ 6,001,772    $ 4,278,541    $ 4,523,295
Cost of goods sold                                3,364,885      2,622,993      3,344,351
                                                -----------    -----------    -----------
Gross margin                                      2,636,887      1,655,549      1,178,944


Cost and expenses:
        Sales and marketing                       1,531,276      1,200,728        740,844
        Research and development                    606,970        555,804        447,325
        General and administrative                  739,953        659,756        699,278
                                                -----------    -----------    -----------
Total operating expenses                          2,878,199      2,416,288      1,887,447
                                                -----------    -----------    -----------
Operating loss                                     (241,312)      (760,739)      (708,503)
Interest income                                     (62,702)      (109,078)       (38,993)
Interest expense                                    160,446        121,589        118,825
                                                -----------    -----------    -----------
Net loss                                           (339,056)      (773,251)      (788,335)

Less preferred stock dividends                      354,848        283,405        182,600
                                                -----------    -----------    -----------
Loss applicable to common stock                 $  (693,904)   $(1,056,656)   $  (970,935)

Net loss per common share                       $     (0.11)   $     (0.18)   $     (0.17)
                                                ===========    ===========    ===========
Weighted average number of shares outstanding
        during the period                         6,349,775      5,789,275      5,679,959
                                                ===========    ===========    ===========
</TABLE>

See accompanying notes to financial statements.
<PAGE>

BALANCE SHEETS
<TABLE>
<CAPTION>


ASSETS
                                                                     December 31,
                                                                  1996         1995
<S>                                                         <C>             <C>
Current assets
        Cash and cash equivalents                           $    712,810    $  1,028,476
        Accounts receivable, less allowances
        (1996--$46,000; 1995--$16,000)                         1,135,545         916,341
        Inventories                                              780,129         658,754
        Prepaid insurance and deposits                           167,739          51,506
                                                            ------------    ------------
Total current assets                                           2,796,223       2,655,077
Equipment
        Office and display equipment                             396,794         374,278
        Research and development equipment                       188,715         188,715
        Production equipment                                     924,599         825,775
        Equipment under capital lease                            115,535         115,235
                                                            ------------    ------------
                                                               1,625,643       1,504,003
        Less allowance for depreciation                       (1,376,389)     (1,233,782)
                                                            ------------    ------------
                                                                 249,254         270,221
Patents, net of amortization
      (1996--$156,845; 1995--$137,582)                            15,492          34,754
                                                            ------------    ------------
Total assets                                                $  3,060,968    $  2,960,052
                                                            ============    ============

LIABILITIES AND SHAREHOLDERS EQUITY
Current liabilities
        Customer advances                                   $     18,000    $    168,000
        Accounts payable                                         241,766         216,450
        Accrued compensation and related taxes                   165,917         140,889
        Other accrued liabilities                                171,490          85,113
        Convertible notes, current portion                           --         488,975
        Capital lease obligations, current portion                 5,409          28,320
                                                            ------------    ------------
Total current liabilities                                        602,582       1,127,746
        Capital lease obligations, net of current portion          2,496           9,138
        Other long term liabilities                               16,250             --
        Convertible notes, net of current portion                    --          126,700

Shareholder's equity
        Convertible preferred stock series A,
          ($.01 par value, $2.50 liquidation value)
          1,400,000 authorized; outstanding:
          1996--636,937 shares; 1995--1,092,937 shares         1,561,717       2,701,717
        Convertible preferred stock series B,
          ($.01 par value, $2.75 liquidation value)
          authorized and outstanding:
          1996--652,273 shares; 1995--727,273 shares           1,586,563       1,792,813
        Convertible preferred stock series C,
          ($.01 par value, $2.75 liquidation value)
          authorized and outstanding:
          1996--410,906 shares; 1995--410,906 shares           1,002,832       1,002,832
        Convertible preferred stock series D,
          ($.01 par value, $2.875 liquidation value)
          authorized and outstanding:
          1996--471,500 shares; 1995--471,500 shares           1,205,808       1,205,808
        Common stock, ($.01 par value) 12,461,821
          authorized; outstanding:
          1996--6,970,912; 1995--5,806,699                        69,709          58,067
        Additional paid-in capital                            16,240,199      13,659,504
        Retained deficit                                     (19,227,188)    (18,724,274)
                                                            ------------    ------------
                                                               2,439,641       1,696,467
                                                            ------------    ------------
Total liabilities and shareholders equity                   $  3,060,968    $  2,960,052
                                                            ============    ============
</TABLE>

See accompanying notes to financial statements.
<PAGE>

STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY
<TABLE>
<CAPTION>


                                                                                          Common           Additional
                                          Preferred         Common        Preferred         Stock          Paid-in        
                                           Shares           Shares          Stock            Par            Capital       
                                          ---------        ---------      ----------      -------          -----------    

<S>                                       <C>              <C>            <C>             <C>              <C>            
Balance January 1, 1994                   1,965,273        5,620,918      $4,857,187      $56,209          $13,646,937    
                                          =========        =========      ==========      =======          ===========    
Common stock issued under 
        stock purchase plan, exercise 
        of warrants and stock options 
        less related costs                                     2,730                           27                3,085    
Issuance of warrants in 
        connection with extension 
        of convertible notes                                                                                    22,148    
Amortization of unearned 
        compensation under stock 
        option agreement                                                                                        14,544    
Conversion of Series A 
        preferred stock                    (141,063)         141,063        (352,657)       1,411              351,246    
Sale of Series C preferred 
        stock less related costs            410,906                        1,002,832                                      
Dividends on preferred stock                                                                                  (131,325)   
Net loss for the year                                                                                                     
                                          ---------        ---------      ----------      -------          -----------    
Balance December 31, 1994                 2,235,116        5,764,711       5,507,362       57,647           13,906,635    
                                          =========        =========      ==========      =======          ===========    
Common stock issued under 
        stock purchase plan, exercise 
        of warrants and stock options 
        less related costs                                    37,989                          380               50,999    
Issuance of warrants in 
        connection with extension 
        of convertible notes                                                                                    22,308    
Conversion of Series A 
        preferred stock                      (4,000)           4,000         (10,000)          40                9,960    
Sale of Series D preferred 
        stock less related costs            471,500                        1,205,808                                      
Dividends on preferred stock                                                                                  (330,398)   
Net loss for the year                                                                                                     
                                          ---------        ---------      ----------      -------          -----------    
Balance December 31, 1995                 2,702,616        5,806,700       6,703,170       58,067           13,659,504    
                                          =========        =========      ==========      =======          ===========    
Common stock issued under 
        stock purchase plan and stock 
        options less related costs                           107,219                        1,072              253,663    
Common stock issued upon 
        exercise of stock warrants                           325,993                        3,260              876,829    
Conversion of Series A 
        preferred stock                    (456,000)         456,000      (1,140,000)       4,560            1,135,440    
Conversion of Series B 
        preferred stock                     (75,000)          75,000        (206,250)         750              205,500    
Common stock issued upon 
        conversion of 
        convertible note                                     200,000                        2,000              498,000    
Dividends on preferred stock                                                                                  (388,737)   
Net loss for the year                                                                                                     
                                          ---------        ---------      ----------      -------          -----------    
Balance December 31, 1996                 2,171,616        6,970,912      $5,356,920      $69,709          $16,240,199    
                                          =========        =========      ==========      =======          ===========    
</TABLE>

See accompanying notes to financial statements.


<PAGE>

STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY (continued)
<TABLE>
<CAPTION>


                                          
                                            Accumulated
                                             Deficit          Total
                                            ------------    ----------

<S>                                         <C>             <C>        
Balance January 1, 1994                     $(17,162,688)   $1,397,645 
                                            ============    ==========
Common stock issued under 
        stock purchase plan, exercise 
        of warrants and stock options 
        less related costs                                       3,112 
Issuance of warrants in 
        connection with extension 
        of convertible notes                                    22,148 
Amortization of unearned 
        compensation under stock 
        option agreement                                        14,544 
Conversion of Series A 
        preferred stock                                             (0)
Sale of Series C preferred 
        stock less related costs                             1,002,832 
Dividends on preferred stock                                  (131,325)
Net loss for the year                           (788,335)     (788,335)
                                            ------------    ----------
Balance December 31, 1994                    (17,951,023)    1,520,621 
                                            ============    ==========
Common stock issued under 
        stock purchase plan, exercise 
        of warrants and stock options 
        less related costs                                      51,379 
Issuance of warrants in 
        connection with extension 
        of convertible notes                                    22,308 
Conversion of Series A 
        preferred stock                                            --
Sale of Series D preferred 
        stock less related costs                             1,205,808 
Dividends on preferred stock                                  (330,398)
Net loss for the year                           (773,251)     (773,251)
                                            ------------    ----------
Balance December 31, 1995                    (18,724,274)    1,696,467 
                                            ============    ==========
Common stock issued under 
        stock purchase plan and stock 
        options less related costs                             254,735 
Common stock issued upon 
        exercise of stock warrants              (163,858)      716,231 
Conversion of Series A 
        preferred stock                                            --
Conversion of Series B 
        preferred stock                                            --
Common stock issued upon 
        conversion of 
        convertible note                                       500,000 
Dividends on preferred stock                                  (388,737)
Net loss for the year                           (339,056)     (339,056)
                                            ------------    ----------
Balance December 31, 1996                   $ (19,227,188) $ 2,439,640 
                                            ============    ==========
</TABLE>

See accompanying notes to financial statements.


<PAGE>
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>


OPERATING ACTIVITIES
                                                                 Year ended December 31,
                                                             1996          1995           1994
                                                        -----------    -----------    -----------
<S>                                                     <C>            <C>            <C>
Net loss                                                $  (339,056)   $  (773,251)   $  (788,335)
Adjustments to reconcile net loss to net
    cash used in operating activities
        Depreciation and amortization                       171,910        217,483        341,577
        Loss on sale and disposal of equipment                  --           7,892         28,813
        Provision for losses on accounts receivable          30,000         15,000         10,400
        Amortization of unearned compensation                   --             --          14,544
        Changes in operating assets and liabilities
                Accounts receivable                        (249,204)      (284,979)       (12,573)
                Inventories                                (121,375)       (77,480)        23,417
                Prepaid expenses                           (126,273)        22,549         67,690
                Customer advances                          (150,000)       (14,810)      (174,050)
                Accounts payable and accrued expenses       152,971        104,720       (195,163)
                                                        -----------    -----------    -----------
Net cash used in operating activities                      (631,027)      (782,876)      (683,680)

INVESTING ACTIVITIES
Purchase of equipment                                      (121,641)       (86,286)       (65,458)
Sale of equipment                                               --           3,000            614
Additions to patents and other assets                           --             --          (3,300)
                                                        -----------    -----------    -----------
Net cash used in investing activities                      (121,641)       (83,286)       (68,144)

FINANCING ACTIVITIES
Dividends paid                                             (388,737)      (330,398)      (131,325)
Principal payments on debt and capital leases              (645,228)      (358,505)      (216,300)
Proceeds from issuance of debt                              500,000
Net proceeds from sale of common stock                      970,967         51,381          3,112
Net proceeds from sale of preferred stock                       --       1,205,807      1,002,832
                                                        -----------    -----------    -----------
Net cash provided by financing activities                   437,002        568,285        658,319
                                                        -----------    -----------    -----------

Decrease in cash and cash equivalents                      (315,666)      (297,877)       (93,505)
Cash and cash equivalents at beginning of period          1,028,476      1,326,353      1,419,858
                                                        -----------    -----------    -----------
Cash and cash equivalents at end of period              $   712,810    $ 1,028,476    $ 1,326,353
                                                        ===========    ===========    ===========
Supplemental cash flow information:
        Conversion of Series A and B preferred
                stock into Common Stock                 $ 1,346,250    $    10,000    $   352,657

Conversion of Convertible note into Common Stocks           500,000            --             --
</TABLE>

See accompanying notes to financial statements.
<PAGE>
NOTES TO FINANCIAL STATEMENTS

December 31, 1996

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Business  Activity  Everest Medical  Corporation (the Company) is engaged in the
development,   manufacturing,   and   marketing   of   bipolar   electrosurgical
instrumentation for the minimally invasive surgery market.

Cash  Equivalents  The Company  considers all highly liquid  investments  with a
maturity of less than three months when  purchased to be cash  equivalents.  The
Companys cash  equivalents  consist of money market  accounts and Treasury Bills
and are carried at cost which  approximates  market value.  The cost of Treasury
Bills was $613,156 and $1,120,472 at December 31, 1996 and 1995, respectively.

Inventories  Inventories are valued at the lower of cost or market determined by
the first-in, first-out (FIFO) method.

Equipment  Equipment is stated at cost. The Company provides for depreciation on
a straight-line  basis over estimated  useful lives of from three to five years.
Maintenance, repairs, and minor renewals are expensed as incurred.

Patents  Patents  employed in current  products  are carried at cost  (primarily
patent legal fees) and are  amortized  over 60 months.  The Company  reviews its
patents periodically to determine whether the patents have continuing value. The
expense of writing off patents is charged to research & development.

Income Taxes The Company accounts for income taxes under the liability method.

Per  Share  Data  Net  loss  per  share is  computed  by  dividing  the net loss
applicable  to common  shareholders  by the  weighted  average  number of common
shares outstanding during the period.

Impairment of  Long-Lived  Assets The Company will record  impairment  losses on
long-lived  assets used in operations  when indicators of impairment are present
and the  undiscounted  cash flows  estimated to be generated by those assets are
less than the assets carrying amount.

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 amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.

2. INVENTORIES

Inventories consisted of:

                                         December 31
                                     1996           1995    
                                   --------        --------
Raw materials                      $447,952        $397,799
Work in process                     292,912         169,167
Finished goods                       39,265          91,788
                                   --------        --------
                                   $780,129        $658,754
                                   ========        ========


<PAGE>

3. DEBT

Debt consisted of:

                                          December 31
                                      1996            1995
                                   --------        --------
Convertible notes, due 
        February 1997. Payable in 
        quarterly installments with
        interest at 8% to 
        February 19, 1995 and
        at 13% thereafter. Secured 
        by all assets of the 
        Company                      $   0         $615,675

Capital leases, payable in monthly 
        installments at various interest 
        rates through 1998.          7,905           37,458
                                   --------        --------
                                                    653,133

Less current portion                 5,409          517,294
                                   --------        --------
                                    $2,496         $135,839
                                   ========        ========
        

         The  convertible  notes  were  originally  issued in 1992 and  included
five-year detachable warrants to purchase 70,181 shares of Common Stock at $2.75
per share. The notes were convertible to Common Stock at a rate of one share for
each $2.75 of principal  outstanding.  In February 1994, the notes were extended
past the original maturity. As part of the agreement, interest accrued was added
to the  principal  balance  and the  Company  issued  warrants  to  purchase  an
additional 61,016 shares of Common Stock at $2.75. In February 1995, the Company
issued  warrants to  purchase an  additional  66,810  shares of Common  Stock at
$2.75.

         A director of the Company held one note with an  outstanding  principal
of $64,165 at December 31, 1995.  The Company valued the warrants at fair market
value  and  amortizes  the  discount  over the term of the  notes as  additional
interest expense.

         The convertible notes were paid off during 1996.

         During  1996,  the Company  entered into a $500,000  convertible  note,
bearing  interest  at 13% per year.  The note was due two years  after its issue
date.  The note was  convertible to Common Stock at a rate of one share for each
$2.50 of  principle  outstanding.  Also during 1996,  the note was  converted in
200,000  shares of Common Stock.  Warrants to purchase  290,909 shares of Common
Stock  originally  issued to the noteholder in 1992 were repriced from $3.50 per
share to $2.75 per share in connection  with the note. The warrants  expire five
years after the date of closing.

         In November 1996, the Company  entered into a line of credit  agreement
with a bank. Under this agreement, the Company is able to borrow up to $300,000.
The line of credit bears interest at the banks  reference rate plus 1%. The line
expires in March 1997. The line is secured by the Company's accounts receivable.
At December 31, 1996, there was no balance outstanding on the line of credit.

         Minimum future payments on debt and capital leases are as follows:

        1997                    5,409
        1998                    2,496
                                7,905

         Interest  paid by the  Company  in 1996,  1995 and 1994,  was  $86,873,
$132,502, and $105,068, respectively.


<PAGE>

4. OPERATING LEASE

The Company  leases its office and  manufacturing  facility  under an  operating
lease that expires in 1998.  Maintenance,  utilities,  and real estate taxes are
paid by the  Company.  Total rent  expense  under this  lease was  $173,067  and
$173,841 for the years ended December 31, 1996 and 1995, respectively.

        Minimum future obligations on the facility lease are as follows:

        1997                    107,910
        1998                    107,910
                               --------
                               $215,820

5. INCOME TAXES

At December 31, 1996,  the Company had net operating  losses for federal  income
tax  purposes  of  approximately  $18,462,000,  plus  credits for  research  and
development cost of  approximately  $298,000 that are available to offset future
taxable income  through the year 2011.  These  carryforwards  are subject to the
limitations  of Internal  Revenue Code section 382.  This section  provides that
limitations  on the  availability  of net  operating  losses to  offset  current
taxable  income  result when an  ownership  change has  occurred for federal tax
purposes.  The  annual  limitation  on net  operating  losses is  calculated  by
multiplying  the value of the  corporation  immediately  prior to the  ownership
change by the long-term federal tax exempt rate.

         As a  result  of the  sale of  Series A  Preferred  Stock in 1990,  the
Company had a change of ownership under Section 382. The use of losses, incurred
through the change in ownership  date, to offset future  taxable  income will be
limited to approximately  $300,000 per year during the carryforward  period. The
losses  occurring  after the change in ownership  date are unaffected and can be
used to offset future taxable  income  without  limit.  The credits will also be
subject to limitations under these same rules.

         Deferred  income  taxes  reflect  the  net  tax  effects  of  temporary
differences  between the carrying amounts used for financial  reporting purposes
and the amounts  used for income tax  purposes.  Significant  components  of the
Companys deferred tax assets are as follows:

                                       December 31
                                   1996           1995
                                ----------      ----------
Net operating losses            $7,016,000      $6,917,000
Depreciation                        90,000          92,000
Amortization                        33,000          31,000
Reserve for bad debt                17,000           6,000
Reserve for obsolete inventory      24,000          11,000
Research and development
        credit amount              298,000         298,000
Other                               41,000          41,000
                                ----------      ----------
Total deferred tax asset         7,519,000       7,396,000
Less valuation allowance         7,519,000       7,396,000
                                ----------      ----------
        Net deferred tax asset         $ 0             $ 0 
                                ==========      ==========

6. CONVERTIBLE PREFERRED STOCK

During 1995, the Company sold 471,500  shares of Series D Convertible  Preferred
Stock for $1,205,807.  The Series D Preferred Stock carries a coupon rate of 10%
with dividends payable quarterly.
        
         During 1994,  the Company sold 410,906  units,  each  consisting of one
share of Series C Convertible Preferred Stock and a warrant to purchase one-half
share of Common Stock,  for  $1,129,992.  The Series C Preferred Stock carries a
coupon rate of 6% with dividends  payable  quarterly.  The  conversion  price is
$2.75 per share.


<PAGE>

         The  Company's  Series B Convertible  Preferred  Stock carries a coupon
rate of 8% with dividends payable  quarterly.  The conversion price is $2.75 per
share.  Each share of this  Series was sold with a warrant  attached to purchase
one share of Common Stock at $2.75. The warrants expire in 1998.

         The Series A Convertible  Preferred  Stock is  convertible at $2.50 per
share.  This Series is subject to  automatic  conversion  concurrently  with the
closing of a public  offering  of the  Company's  Common  Stock  with  aggregate
minimum proceeds of $7,500,000 at a minimum price per share of $5.00.

         The Series A, B, C and D Preferred  Stock are  convertible  into Common
Stock on a one-for-one  basis at the option of the holders,  and each holder has
voting rights on all matters  submitted to  shareholders  on an  as-if-converted
basis. Each Series of Preferred Stock provides anti-dilution  provisions for any
sales of Common Stock by the Company at less than each Series  conversion price,
and the  conversion  price is subject to adjustment for stock  dividends,  stock
splits  and  capital  reorganizations.  The  Series B, C and D  Preferred  Stock
agreements  provided that  dividends  would be held in arrears  during the first
year of each issue.

7. STOCK PURCHASE AND OPTION PLANS AND WARRANTS

The Company has adopted the disclosure-only provisions of Statement of Financial
Accounting  Standards No. 123,  Accounting  for  Stock-Based  Compensation,  but
applies Accounting  Principles Board Opinion No. 25 and related  interpretations
in accounting for its plans.

         The Company has a stock purchase plan, nonstatutory and incentive stock
option plans, and compensatory stock options.  Total shares reserved at December
31, 1996 for convertible notes and convertible  preferred stock, future employee
stock purchase plan purchases and options and warrants were 5,152,088.

         Stock  Purchase  Plan.  The Company has an employee stock purchase plan
under which the sale of 200,000 shares of its Common Stock has been  authorized.
The purchase price of the shares under the plan is the lesser of 85% of the fair
market value on the first or last day of the offering  period.  Offering periods
are six months each. Employees may designate up to 10% of their compensation for
the purchase of stock.

         Stock Option Plans.  In 1992, the Company adopted the 1992 Stock Option
Plan under  which  500,000  shares  were  reserved.  Shares  under this plan are
generally  exercisable  beginning  one year from the date of grant in cumulative
amounts of  one-fourth  to  one-third  of the shares under option and expire ten
years from the date of grant.  Incentive and nonstatutory options are granted at
prices not less than market on the date of grant.

         In 1986, the Company adopted an Incentive Stock Option Plan under which
600,000  shares  were  reserved.  Incentive  options are  generally  exercisable
beginning  one year  from the date of grant  in  cumulative  yearly  amounts  of
one-fourth  to one-half of the shares  under option and expire five to ten years
from the date of grant.

         Also, in 1986,  the Company  adopted a  Nonstatutory  Stock Option Plan
under which 300,000 shares were reserved. Shares under this plan are exercisable
beginning  eighteen months from the date of grant.  Additionally,  55,000 shares
were  reserved  during the period from 1986  through  1989 for  directors of the
Company  through  granting  of  individual   non-qualified   option  agreements.
Non-qualified  director  options are  exercisable  beginning six months from the
date of grant. All non-qualified options expire after five years.

         Pro forma  information  regarding  net income and earnings per share is
required  by  Statement  123,  and has been  determined  as if the  Company  had
accounted  for its  employee  stock  options  under the fair value method of the
Statement.  The fair value for these  options was  estimated  at the date of the
grant using a  Black-Scholes  option  pricing model with the following  weighted
average assumptions for 1996 and 1995, respectively: risk free interest rates of
5%;  dividend yields of 0%;  volatility  factors of the expected market price of
the Companys stock of .5164; and a  weighed-average  expected life of the option
of four years.


<PAGE>

         The  Black-Scholes  option  valuation  model was  developed  for use in
estimating the fair value of traded  options which have no vesting  restrictions
and are fully  transferable.  In addition,  option  valuation models require the
input of highly  subjective  assumptions  including  the  expected  stock  price
volatility.  Because the Company's  employee stock options have  characteristics
significantly different than those of traded options, and because changes in the
subjective input assumptions can materially  affect the fair value estimate,  in
managements  opinion,  the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.

         For purposes of pro forma disclosures,  the estimated fair value of the
options is amortized to expense over the options  vesting  period.  The Companys
pro forma information follows:

                                    1996            1995
Pro forma loss applicable to
        common stock            $(780,840)      $(1,129,276)
Pro forma loss per
        common share            $    (.12)      $      (.20)

         The pro forma results may not be representative of the future impact of
applying  Statement  123 due to the phase in  provisions  of the  Statement  and
actual vesting experience.

         A  summary  of  the  Company's  stock  option  activity,   and  related
information for the years ended December 31 follows:

                                     1996                  1995
                                        Weighted-             Weighted-
                                         Average               Average
                         Options     Exercise price  Options Exercise Price

Outstanding beginning
        of year          1,136,500       $2.31       977,450      $2.33 
Granted                     44,500        3.14       189,000       2.09
Exercised                  (94,063)       2.42           --
Canceled                   (30,837)       3.08       (29,950)      1.66
Outstanding
        end of year      1,056,100        2.31     1,136,500       2.31
Exercisable
at end of year             807,620                   621,463
Weighted average
        fair value of options
        granted during the
        year                             $1.59                    $ .87

         Exercise prices for options  outstanding as of December 31, 1996 ranged
from $1.56 to $5.00.  The weighted average  remaining  contractual life of those
options is six years.

         Shares  reserved and  available  for grant at December 31, 1996 for the
option plans were 25,537.

         Warrants  At December  31,  1996,  the  Company  had total  exercisable
warrants  outstanding to purchase shares of its Common Stock as follows:  13,500
shares at $2.25 per share;  1,176,074 shares at $2.75 per share;  247,150 shares
at $2.875 per share;  and 109,091 shares at $3.50 per share. The warrants expire
at various dates from 1998 through 2005.


<PAGE>

8. EMPLOYEE BENEFIT PLAN

In  January  1989,  the  Company  adopted  a  defined   contribution   plan  for
substantially  all employees.  Each employee may elect to contribute  from 1% to
10% of their  compensation  to the plan.  The Company may elect to match 100% of
employees  contributions  up  to  2%  of  the  employees  compensation  and  50%
thereafter  up to 6% of the  employees  compensation.  The Company may also make
additional  contributions  as determined  by the Board of  Directors.  Employees
become 100% vested in Company  contributions after four years of service.  There
was no expense for this plan for the years ended  December  31,  1996,  1995 and
1994.

9. EXPORT SALES AND MAJOR CUSTOMERS

Total sales to foreign  customers  were  $1,310,700,  $894,334 and $960,586,  in
1996, 1995 and 1994, respectively.  Sales to the Company's Japanese distributors
amounted  to  $584,045,   $323,638  and  $671,451,   in  1996,  1995  and  1994,
respectively.  Accounts  receivable from these distributors at December 31, 1996
was $32,980 and at December 31, 1995 included no open balance.
        
         The Company had total sales to OEM customers of $1,863,080,  $1,508,013
and $2,151,634, in 1996, 1995 and 1994, respectively.  Sales to one OEM customer
amounted to $975,094 in 1996.  Sales to another  OEM  customer  was  $749,941 in
1995.  Accounts  receivable at December 31, 1996 and 1995 included  $146,803 and
$137,000 from these customers.

10. CREDIT RISK

The  Company is  subject to credit  risk on its  accounts  receivable  which are
primarily with health care facilities,  original  equipment  manufacturers,  and
medical products  distributors.  The Company performs credit  investigations  to
minimize  credit  risk.  Certain  distributors  have the right to return  unsold
product in the event the distributors agreement is terminated for any cause.

<PAGE>


Report of Independent Auditors


Shareholders and Board of Directors
Everest Medical Corporation

We have audited the accompanying  balance sheets of Everest Medical  Corporation
as of December  31, 1996 and 1995,  and the related  statements  of  operations,
changes in shareholders  equity and cash flows for the three years in the period
ended December 31, 1996. These financial  statements are the  responsibility  of
the Companys  management.  Our  responsibility is to express an opinion on these
financial statements based on our audits.

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

In our opinion,  the financial  statements  referred to above present fairly, in
all material respects,  the financial position of Everest Medical Corporation at
December 31, 1996 and 1995, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1996, in conformity
with generally accepted accounting principles.


                                                      /s/ Ernst & Young LLP
                                                      ERNST & YOUNG LLP
Minneapolis, Minnesota
January 17, 1997