<PAGE>

                      SECURITIES AND EXCHANGE COMMISSION

                            WASHINGTON D.C.  20549
                             _____________________

                                   FORM 10-K

                 FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO

          SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

     (X)   Annual report pursuant to Section 13 or 15(d) of the Securities
           Exchange Act of 1934
           For the year fiscal year ended December 31, 1999

     ( )  Transition report pursuant to Section 13 or 15(d) of the
          Securities Exchange Act of 1934
          For the transition period from     to

                        Commission file number 0-23791

                                SONOSITE, INC.

            (Exact name of registrant as specified in its charter)

          Washington                                    91-1405022
--------------------------------------------------------------------------------
   (State or other jurisdiction of       (I.R.S. Employer Identification Number)
   incorporation or organization)


                           19807 North Creek Parkway
                            Bothell, WA  98011-8214
                                (425) 951-1200

  (Address and telephone number of registrant's principal executive offices)
                             _____________________

          Securities registered pursuant to Section 12(b) of the Act:


      Title of each class                 Name of exchange on which registered
      -------------------                 ------------------------------------
            None                                     Not applicable

          Securities registered pursuant to Section 12(g) of the Act:
                         Common stock, $0.01 par value

Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes   (X)   No   ( )

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. ( )

The aggregate market value of the voting stock held by nonaffiliates of the
registrant, based on the closing sale price of the registrant's Common Stock on
March 23, 2000, as reported on the Nasdaq National Market, was $290,107,597.

As of March 23, 2000, there were 9,320,726 shares of the registrant's Common
Stock outstanding.

Portions of the registrant's Proxy Statement relating to its 2000 annual meeting
of stockholders are incorporated by reference into Part III hereof.  Such Proxy
Statement will be filed with the Securities and Exchange Commission no later
than 120 days after the registrant's fiscal year ended December 31, 1999.
<PAGE>

                                SONOSITE, INC.

                          ANNUAL REPORT ON FORM 10-K

                                   CONTENTS

<TABLE>
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                                                                        Page No.
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<S>                                                                     <C>
PART I..................................................................     1
          Item 1.   Business............................................     1
                    Factors Affecting our Operating Results, Our
                    Business and Our Stock Price........................    14
          Item 2.   Properties..........................................    24
          Item 3.   Legal Proceedings...................................    24
          Item 4.   Submission of Matters to a Vote of Security Holders.    24

PART II.................................................................    25
          Item 5.   Market for Registrant's Common Equity and Related
                      Stockholder Matters...............................    25
          Item 6.   Selected Financial Data.............................    26
          Item 7.   Management's Discussion and Analysis of Financial
                      Condition and Results of Operations...............    27
          Item 7A.  Quantitative and Qualitative Disclosures About
                      Market Risk.......................................    30
          Item 8.   Financial Statements and Supplementary Data.........    31
          Item 9.   Changes in and Disagreements With Accountants on
                      Accounting and Financial Disclosure...............    51

PART III................................................................    52
          Item 10.  Directors and Executive Officers of the Registrant..    52
          Item 11.  Executive Compensation..............................    52
          Item 12.  Security Ownership of Certain Beneficial Owners and
                      Management........................................    52
          Item 13.  Certain Relationships and Related Transactions......    52
          Item 14.  Exhibits, Financial Statement Schedules, and Reports
                      on Form 8-K.......................................    53
</TABLE>

                                      -i-
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                                     PART I

Item 1.   Business

     Our disclosure and analysis in this report contain some forward-looking
statements.  When used in the discussion, the words "believes," "expects,"
"intends," "anticipates" and similar expressions are intended to identify
forward-looking statements, but the absence of such statements does not mean
that a statement is not forward-looking.  Such statements include, but are not
limited to, statements about our plans objectives, expectations and intentions
and are subject to certain risks and uncertainties that could cause actual
results to differ materially from those expected or implied by these forward-
looking statements.  See "Factors Affecting our Operating Results, Our Business
and Our Stock Price."  Readers are cautioned not to place undue reliance on
these forward-looking statements, which speak only as of the date of this
report. SonoSite undertakes no obligation to publicly release the results of any
revisions to these forward-looking statements that may be made to reflect events
or circumstances after the date of this report or to reflect the occurrences of
unanticipated events. Readers are urged, however, to review the factors set
forth in reports we file from time to time with the Securities and Exchange
Commission.

Overview

     SonoSite is a leader in the design, development and commercialization of
miniaturized, high-performance, digital ultrasound imaging devices. We received
Section 510(k) clearance to market our first products, the SonoSite 180/TM/
highly portable ultrasound machine, the C60 curved-array abdominal transducer
and the ICT intra-cavital transvaginal transducer, in May 1999, and began
commercial shipments in September 1999. The SonoSite 180/TM/, together with one
transducer, weighs only 5.4 pounds and generates high-quality images comparable
to those produced by larger, more expensive ultrasound machines. We believe our
products expand access to high-quality ultrasound imaging by targeting the
replacement market for lower-priced ultrasound machines characterized by low-
quality images. In addition, the SonoSite 180/TM/ makes high-quality ultrasound
imaging available as a diagnostic tool to physicians at the point of care,
enabling physicians to bring ultrasound directly to the patient, instead of
requiring referral to an ultrasound specialist. Our initial products target
obstetricians and gynecologists who currently use ultrasound imaging within a
well-established reimbursement framework as well as radiologists and emergency
medicine physicians for whom the use of ultrasound is a recognized clinical
advantage. We intend to introduce subsequent products, based on the SonoSite 180
platform, which will be designed to target markets for ultrasound in clinical
specialties such as cardiology, emergency medicine, vascular medicine and
internal medicine.

     Physicians utilize ultrasound imaging as an effective tool for the
noninvasive visual examination of soft tissue.  However, they do not have
immediate point-of-care access to high-quality ultrasound imaging due to the
cost, size and complexity of existing high-quality ultrasound machines.  These
machines are typically operated in centralized locations by specialists who
produce ultrasound images on a referral basis.  We believe that our products put
the power of high-quality ultrasound imaging directly in the hands of the front-
line physicians who have utilized ultrasound as part of their diagnostic
procedures but either outsourced ultrasound imaging or have been required to
rely on lower-quality ultrasound imaging performed at the point of care.  We
believe our products offer the following advantages:

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     .  easy-to-use, affordable, highly portable, high-quality ultrasound
        imaging at the point of care;

     .  physicians can use ultrasound imaging more frequently to identify
        earlier those patients requiring more comprehensive diagnostic
        procedures or specialist intervention;

     .  physicians can improve patient healthcare by beginning any required
        treatments earlier;

     .  patients will not experience the "waiting trauma" associated with the
        delay in obtaining ultrasound image results conducted on a referral
        basis; and

     .  for symptomatic patients, physicians can utilize existing reimbursement
        codes.

     Just as personal computers enabled the effective use of computing power
beyond the mainframe computer and computer technicians, we believe our devices
will enable the expanded use of high-quality ultrasound imaging by front-line
physicians and in new clinical settings.

     According to industry sources, the annual worldwide market for all
ultrasound imaging devices is approximately $2.7 billion and growing between 4%
and 6% annually.  Initially, we are targeting our products at current users of
ultrasound imaging who purchase lower-end ultrasound machines and are attracted
to the high image quality and low cost of our products.  We estimate that this
segment represents approximately 22% of the existing market or $590 million
annually.  In addition, we are finding that our products are attractive to
physicians, such as cardiologists and emergency medicine physicians who seek
portable ultrasound imaging with high image quality. We believe that our
products are also attractive to physicians such as gynecologists, internists and
pediatricians who currently outsource ultrasound imaging because existing high-
performance devices are too costly and difficult to use.

     We entered into distribution agreements covering the United States and more
than 50 other countries. In late 1999, to more effectively address the large
institutional buyers of medical products in the United States, we decided to
utilize a direct sales force by contracting with a third party. These large
institutional buyers include large hospitals, managed care organizations and the
various departments of the military. We expect to utilize this direct sales
force of more than 25 trained sonographers at least through 2000.

     We were formerly the handheld ultrasound device division of ATL Ultrasound,
Inc., a leader in high-end, digital ultrasound machines. We were spun off as a
separate Washington corporation in April 1998 to focus on further development
and commercialization of high-performance, miniaturized ultrasound devices. Our
products are based on research and development begun at ATL Ultrasound twelve
years ago. Most of the key engineers responsible for the development of our
technology at ATL Ultrasound joined SonoSite. Under an agreement with ATL
Ultrasound, we have exclusive rights through 2003 to use all applicable ATL
Ultrasound technology in the area of miniaturized digital ultrasound imaging. In
addition, ATL Ultrasound agreed to manufacture our products through 2003;
however, we intend to transfer some of the manufacturing of our products to
other third parties and assume some of the manufacturing ourselves during that
time.

                                       2
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Industry Background

  The Use of Ultrasound Imaging

     Medical imaging has been an important element of medical diagnosis since
the introduction of X-ray technology.  As imaging technology advanced in recent
decades, applications of medical imaging expanded to address increasingly
complex disease states and conditions involving soft tissues and internal body
organs.  While X-ray technology is the dominant method used for visual analysis
of hard tissue such as bone material, the most widely used imaging methods for
visual analysis of soft tissues and organs include computed tomography (CT),
magnetic resonance imaging (MRI), nuclear medicine, X-ray angiography and
ultrasound.  Each method of soft tissue imaging requires specialized equipment
and has different patterns of use and applications.  A physician selects the
soft tissue imaging method to be used based on a variety of factors, including:

      .  the particular disease state or condition to be studied;

      .  the status of the patient;

      .  image quality; and

      .  the cost of the procedure.

     Ultrasound was introduced for medical imaging purposes in the late 1950s as
a safe and noninvasive method to provide real-time, dynamic images of most major
soft tissues and organs.  Initially, physicians used ultrasound imaging to
assess the general shape, size and structure of internal soft tissues and
organs.  Obstetricians were among the first physicians outside of radiologists
to adopt widespread use of ultrasound imaging.  As advances in technology
improved the image quality of ultrasound devices, the use of ultrasound imaging
expanded to other clinical applications, including examinations for
gynecological abnormalities.

     Ultrasound systems use low-power, high-frequency sound waves emitted by a
transducer to produce soft tissue images.  The physician places the transducer
on the skin or in a body cavity near the targeted area.  Tissues and fluids
reflect these sound waves and the transducer detects these reflections.  Based
on these reflections, the ultrasound system's beamformer organizes the sound
waves and produces an image for visual examination, using digital or analog
signal processing or a combination of the two.  Digital signal processing
technology allows an ultrasound device to process greater amounts of
information.  As such, digital ultrasound machines produce higher resolution
images than analog and analog/digital ultrasound machines.

     Standard ultrasound imaging produces a two-dimensional image that
physicians use to diagnose and monitor disease states and conditions by
analyzing the relative shading of tissues or organs.  This is known as grayscale
imaging, or two-dimensional imaging when used in cardiology applications.  Color
power Doppler ultrasound imaging expands standard ultrasound imaging to enable
physicians to image the direction and velocity of blood flow through the body,
including the chambers and valves of the heart.

     Physicians currently use ultrasound imaging in a variety of clinical
applications.  In addition to obstetric and gynecological applications,
ultrasound imaging is increasingly used in cardiac imaging.  Ultrasound imaging
for cardiac function indications, otherwise known as echocardiography, provides
the physician an enhanced real-time image of the internal heart structure,
including the valves and chambers.  The physician uses this image to diagnose

                                       3
<PAGE>

coronary artery disease, valvular disease and congenital heart defects. In
vascular medicine, physicians determine the presence of a disease state or
condition using color power Doppler ultrasound to image blood flow in soft
tissues, organs and the vascular system.

  Limitations of Current Ultrasound Technology

     Users of ultrasound imaging have traditionally faced a tradeoff between
image quality on the one hand and price and portability on the other.  High-
performance machines are based on digital signal processing technology and
provide a high-quality image, but they require a large capital investment of
greater than $100,000 plus significant operating costs.  These ultrasound
machines typically weigh approximately 200-300 pounds and require specially
trained technologists to operate them.  Ultrasound machines based on the less
precise analog/digital hybrid imaging technology are less expensive, but they
suffer from poorer image quality.  They are not easily portable and cost from
$30,000 to $100,000.  "Luggable" analog ultrasound machines have even lower
prices, but they suffer from poor image quality that limits their diagnostic
utility.

     Advances in technology have greatly improved the image quality of
ultrasound systems and substantially increased their diagnostic utility,
resulting in the growth in the use of ultrasound.  However, prior to our
products being available, high-quality images have only been able to be produced
by large, high-performance, digital ultrasound systems.  Because of the high
cost, size and complexity of these systems, ultrasound imaging is generally
performed in diagnostic imaging centers and radiology departments in hospitals.
These imaging centers typically have several high-performance ultrasound systems
operated by a team of specially trained technologists and radiology specialists
who interpret the ultrasound images.  Patients requiring ultrasound imaging are
generally referred to these centers.  This traditional referral model for
ultrasound imaging results in significant disadvantages for physicians and their
patients.  The physicians who make these referrals lose reimbursement income and
relinquish control of their patients during primary diagnosis.  The patient must
schedule a separate appointment for the ultrasound imaging procedure, travel to
the diagnostic center and experience the inconvenience and uncertainty of a
delayed primary diagnosis.

     We believe patient care is significantly improved if high-quality
ultrasound imaging is readily available at the point of care.  We believe that
early diagnosis will prove to be beneficial clinically and economically.  In
addition, physicians can easily and more frequently monitor patient progress
during subsequent office visits, readily obtaining the information necessary to
enable more timely adjustments to treatment.  Patient care also can be improved
significantly if high-quality ultrasound imaging is available in settings where
the use of high-end ultrasound systems generally is not feasible due to their
high cost, complexity of operation and limited portability.  These unserved or
underserved settings have included emergency rooms and vehicles, athletic
arenas, battlefields and even the patient's bedside.

The SonoSite Solution

     In much the same way that today's personal computers provide the computing
power of earlier-generation mainframe computers, we believe our products achieve
the high-quality imaging performance of existing, larger ultrasound machines on
a highly portable, generally more affordable platform.  Our products feature
high-quality, digitally formed imaging comparable to that generated by larger,
significantly more expensive ultrasound machines in a handheld device that is
easy to use.  We believe our products offer the following advantages to
physicians and their patients:

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<TABLE>
<S>                      <C>
High-Quality             Our products break out of the traditional continuum of ultrasound systems
 Ultrasound              where cost and size are directly related to image quality.  We possess
 Imaging in an           proprietary technology in three important areas:  (1) custom-designed
 Affordable              computer chips that achieve high performance while enabling reduced size and
 Handheld Device         power consumption, (2) process technology that allows the production of
                         transducers with performance comparable to high-performance devices at
                         significantly reduced costs, and (3) ergonomic and design-engineering
                         advances that enable physicians to use our products with little effort and
                         training and to integrate our products into their existing workflow.

Substantial Value for    For current diagnostic ultrasound procedures with established third-party
 Existing Users of       reimbursement codes, our products provide a low-cost, high-quality
 Ultrasound Imaging      alternative.  For example, our first product, the SonoSite 180/TM/, includes in
                         its target markets the gynecologists and obstetricians who together currently
                         perform 12.3 million ultrasound procedures annually in the United States,
                         typically using large, more expensive ultrasound machines.

Substantial              The combination of the portability, ease of use and quality of our products
 Opportunity to Expand   allows physicians to perform established ultrasound examinations more
 Uses of Ultrasound      routinely.  The SonoSite 180/TM/ can be used in the gynecology market, where we
 Imaging                 believe ultrasound imaging has been traditionally underutilized due to the
                         high cost and low availability of high-quality imaging.  For example,
                         gynecologists are now able to perform a transvaginal ultrasound procedure as
                         part of a patient's routine pelvic examination to obtain valuable visual
                         information.  Our products also facilitate the use of ultrasound in other
                         clinical settings that benefit from point-of-care imaging, such as
                         cardiology, emergency medicine and internal medicine.

Improved Patient Care    Our products enable physicians to deliver immediate primary diagnosis by
 Through Earlier         avoiding the delay associated with the referral of ultrasound imaging
 Diagnosis               procedures.  The immediate primary diagnosis results in earlier detection and
                         treatment cycles when appropriate.  In addition, the reduced time to
                         diagnosis can substantially reduce the inconvenience and uncertainty
                         resulting from the delay in obtaining ultrasound imaging results.

Superior Efficiency      Our products enable physicians and healthcare providers to (1) reduce the use
 for Healthcare          of downstream ultrasound referral services, (2) shorten patient care cycle
 Providers               times, and (3) increase the quality of patient care.  Front-line physicians
                         can use our products to reduce the number of patients unnecessarily referred
                         for additional testing.  In addition, healthcare organizations can use our
                         products to increase their diagnostic imaging capacity at low incremental
                         cost, without expanding existing facilities and personnel.  As a result,
                         these organizations are able to more efficiently use their existing labor
                         pools related to the delivery of ultrasound services.
</TABLE>

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<PAGE>

Strategy

     Our objective is to maintain our position as a leader in the design,
development and successful commercialization of miniaturized, high-performance,
digital ultrasound imaging devices.  To achieve this objective, we developed a
strategy with the following key elements:

<TABLE>
<S>                      <C>
Capitalize on Our        We intend to build on the significant technological lead we achieved in
 Technology              developing miniaturized, high-performance, digital ultrasound devices.  Our
 Advantage               proprietary technology is the subject of three issued and several pending
                         patents.  We intend to utilize our advantage in blending ultrasound
                         performance, size and cost to develop additional, innovative products for new
                         and existing markets and applications.

Position Our Products    Our strategy is to penetrate existing markets by positioning our products as
 as a Superior Value     a superior value alternative to both lower-priced machines that lack high
 Alternative to          image quality and higher-priced machines that lack portability and ease of
 Existing Ultrasound     use.  To facilitate early and rapid market acceptance, we targeted our
 Products                initial products for traditional use within existing clinical applications
                         for ultrasound imaging, including:

                         .  gynecology and obstetrics;
                         .  cardiology; and
                         .  radiology.

Offer Customized         We offer customized education programs to help teach physicians not currently
 Education to Increase   utilizing ultrasound imaging various clinical applications of our products.
 Number of Users of      We are working with clinical opinion leaders to demonstrate and communicate
 Ultrasound Imaging      the efficacy and cost-effectiveness of our ultrasound technology.  We are
                         targeting physicians that can benefit from our products, including:

                         .  emergency medicine physicians;
                         .  general practitioners;
                         .  sports orthopedists;
                         .  general and specialty surgeons; and
                         .  gastroenterologists.

Establish Strategic      We formed strategic partnerships with companies in established positions and
 Partnerships in Key     with distribution channels in clinical segments where our products and
 Clinical Segments       proprietary technology may benefit new users.  These clinical segments
                         currently include cardiology and may in the future include surgery, emergency
                         medicine and gastroenterology.
</TABLE>

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<PAGE>

<TABLE>
<S>                      <C>
Utilize Outside          We are using ATL Ultrasound to initially manufacture our products.  This
 Manufacturing           relationship enables us to benefit from ATL Ultrasound's ultrasound
 Expertise               production expertise and manufacturing facilities that comply with
                         International Standards Organization (ISO) requirements.  This arrangement
                         also reduced risks and capital costs in 1999 during the start-up phase of our
                         first products.  We intend to continue to outsource selected manufacturing
                         functions to recognized leaders in those functions and focus our operational
                         activities on a limited number of customer service and order management
                         functions.

Expand Domestic Sales    We are beginning to use a direct, contracted sales force to target the large
 Effort With Direct      hospital, managed care and military markets in the United States.  The sales
 Presence                representatives are trained sonographers who are able to effectively
                         demonstrate our product performance to this large and important market.

Leverage Third-Party     We established alliances with leading independent medical equipment
 Distribution            distributors.  We are utilizing their expertise to reach both customary
 Capabilities            purchasers of ultrasound systems and a wide variety of medical practitioners
                         who do not currently use ultrasound imaging.
</TABLE>

Our Products

  SonoSite 180/TM/, SonoHeart/TM/, C60 transducer, ICT transducer and C15
  transducer

     General Specifications.  These products consist of a handheld display unit
comprised of an integrated color display and control panel, the SonoSite 180/TM/
or the SonoHeart/TM/, together with the application-specific transducer, either
the C60 for abdominal imaging, the ICT for intra-cavital imaging or the C15
transducer for cardiac imaging. The SonoSite 180/TM/ and the SonoHeart/TM/
display units are comprised of the same hardware platform. These display units
are able to store 50 images in memory and allow cine storage of a limited number
of motion images, a diagnostic capability that is used in many ultrasound exams,
including obstetrics and cardiology. The SonoSite 180/TM/ and SonoHeart/TM/
contain numerous clinically useful diagnostic capabilities including two
dimensional and color power Doppler imaging and a proprietary auto-focus
capability that enables the user to quickly complete the ultrasound exam. These
products can be powered by conventional alternating current or by an 11.1-volt
rechargeable lithium ion battery, which will operate the machine for two to four
hours of normal clinical use.

     SonoSite 180/TM/ and SonoHeart/TM/.  Our handheld display units weigh less
than five pounds and measure 13 inches long, 7.5 inches wide and 2.5 inches
thick. The display unit houses circuitry built around four custom Application
Specific Integrated Circuit ("ASIC") designs and circuitry with digital signal
processing that can generate up to 100 image frames per second. These real-time
images can be transmitted to industry-standard monitors and printers or shown on
the five-inch articulated high-resolution liquid crystal display panel that is
integrated in the display unit. Imaging functions are controlled through a small
alphanumeric keyboard immediately below the display panel and a navigational
'trackball.' We use injection-molded plastic for the outer shell of the display
unit and its built-in handle. We designed the display unit to be durable,
visually appealing and easy to handle.

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     Transducers.  We offer a variety of transducers that are specific to
particular clinical applications, including the C60 abdominal
transducer, the ICT intra-cavital transducer and the C15 cardiac transducer.
The C60 is a 60-millimeter 2-5 megaHertz curved array broadband transducer for
general abdominal and obstetrics applications.  The ICT is an 11 millimeter 4-7
megaHertz broadband transducer for gynecological ultrasound scanning.  The C15
is a 15 millimeter 2-4 megaHertz broadband transducer for transthoracic
scanning. ATL ultrasound manufactures the C60 and ICT on our behalf using a
SonoSite proprietary manufacturing process that lowers manufacturing costs
compared to traditional transducer-production techniques. We believe that this
new process also increases the acoustic capability of the transducer in the
important area of contrast resolution. The C15 is outsourced to another
independent OEM transducer-manufacturing company. Each transducer is attached to
the display unit by a cable with an innovative, compact, pinless connecting
device. This connecting device reduces the weight of the transducer and cable
assembly and allows the physician to make a rapid connection between the display
unit and transducer. We continue to develop transducers for additional clinical
applications. Within the next twelve months, we anticipate releasing a linear
array unit that will have utility for the radiologist and internist in shallow
ultrasound imaging applications and a neonatal cranial transducer for use in
ultrasound scanning on newly born infants.

     SiteStand/TM/.  To enhance the utility and efficiency of our products, we
offer the SiteStand/TM/, which provides the following customer benefits:

     .  interface capabilities between our products and third-party output
        devices, such as printers and storage devices;

     .  recharging of the battery in the base unit;

     .  storage of our products when not in use and a stand for our products
        when they are in use; and

     .  portability and minimal space requirements.

  Customized Education and Training - SonoKnowledge/TM/

     We are providing product training and clinical education to help enable
physicians who do not currently use ultrasound imaging to be competent in both
the fundamental operation of our products and in the clinical skills required to
use them responsibly and efficiently.  Renowned ultrasound clinicians
collaborated in the production of an educational package, the SonoKnowledge/TM/
package, consisting of six CDs, video tapes in multiple languages and selected
information on course work. Utilizing leading-edge multimedia technology, we are
delivering innovative programs in multiple languages for

     .  ultrasound knowledge assessments,

     .  product operation training, and

     .  Continuing Medical Education (CME) accredited clinical education.

     The SonoKnowledge/TM/ package is included in every SonoSite 180/TM/ and
SonoHeart/TM/ shipment and is focused on delivering clinically specific and
relevant information to our customers.

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<PAGE>

  Additional Product Development

     We continue to invest heavily in further research and development.  We are
focused on

     .  enhancement of the existing products, including products that we expect
        will be targeted at additional clinical applications, such as general
        and specialty surgery;

     .  further enhancing image quality; and

     .  further reducing the size, weight and manufacturing costs of our
        products.

     By accomplishing these objectives, we hope to both extend the effective
product lives of our current products and develop other, potentially smaller,
less costly product platforms for our ultrasound imaging technology and expand
the use of ultrasound imaging and our products.

Technology

     Our product development efforts enabled us to achieve the performance of a
large, high-quality ultrasound imaging system in a smaller, less expensive
device that is simple to use.  Our proprietary technology is the subject of
three issued and several pending patents.  The key components in our technology
platform include the following:

     Custom-Designed Computer Chips.  We built on extensive ATL Ultrasound
experience in high-end digital ultrasound and ASIC technology to develop four
proprietary custom-designed computer chips that implement most of the functions
required in a completely digital ultrasound imaging system.  We made significant
advances in the integration of ultrasound functions onto customized chip
designs, including the integration of a complete ultrasound beamformer onto a
single computer chip.  Our proprietary chip technology allows our products to
share many of the architectural and signal-processing attributes of a high-end
ultrasound imaging system in a significantly smaller device.

     Transducers.  Using proprietary technology, we developed high-performance
transducers and advanced pinless cable connections.  We designed our display
units to also utilize transducers manufactured by a variety of third-party
suppliers, increasing the versatility of our platform.

     Modular Design.  Our products are developed in a building-block fashion,
which allows us to develop future products based on a single platform, with each
product possessing specific attributes for particular clinical applications.
This modular design enables us to integrate new technological advances into our
platform by modifying only a part of the platform, rather than the entire
platform itself.

     Human Factors Engineering.  We conducted research regarding the utility of
our products and their use in clinical settings.  Based on these observations,
we designed our products to be compatible with a variety of printing, recording
and support devices.  We developed the SiteStand/TM/ in response to the
particular needs of physicians who use our products.

     Development Infrastructure.  We possess a sophisticated infrastructure to
facilitate rapid development of new high-performance products and features.
Specific features of this infrastructure include:

     .  Advanced acoustic beam simulation. We developed the ability to simulate
        the emission, propagation, reflection and reception of simulated
        acoustic waves in a Computer Aided Design (CAD) environment. This allows
        us to evaluate the characteristics of acoustic waveforms and to test
        various product configurations and transducer geometrics without having
        to produce physical prototypes.

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<PAGE>

     .  Transducer finite element modeling.  We use sophisticated finite element
        modeling techniques to model the detailed physical characteristics and
        acoustic performance of selected transducer designs. This enables rapid
        product development, changes and improvements without having to produce
        hardware prototypes.

     .  Fully integrated system simulation.  We use state-of-the-art engineering
        CAD tools to assess the performance of a proposed ultrasound system
        solution relative to its design targets. Based on this assessment, we
        can rapidly simulate design revisions to attain targeted performance
        levels.

     .  High-speed ASIC behavioral modeling.  We developed sophisticated,
        proprietary engineering design software to simulate the architecture and
        performance of our custom computer chip designs. We are able to test and
        debug our computer chip designs before committing to their manufacture.
        This reduces development time and the cost of materials.

     .  Object-oriented system and software.  We utilize sophisticated system
        and software development practices that include the use of object-
        oriented building blocks to eliminate time and cost during software
        development and to allow for more robust and reusable software designs.

Research and Development

     Product development activities comprised the majority of our activities and
expenditures since we were formed as a division within ATL Ultrasound.  See
"Management's Discussion and Analysis of Financial Conditions and Results of
Operations."  We continue to conduct extensive research, development and
engineering activities although we expect that, as a percentage of our total
expenditures, spending on these activities will decline in the future.

     We currently have 50 engineers and support staff members that are dedicated
to the technical support of the SonoSite180/TM/ and SonoHeart/TM/ and the
development of new generations of handheld ultrasound products.  The majority of
these individuals joined our Company from ATL Ultrasound.  We expect research
and development expenditures to increase moderately during 2000, at a rate
slower than the 1999 increase as compared to 1998, due to a decrease in final
product verification and validation activities and a reduction in manufacturing
development expenditures in 2000 as compared to 1999.  We invested $14.5
million, $9.5 million and $7.1 million in research and development for the years
ended December 31, 1999, 1998 and 1997, respectively.

Sales and Marketing, Clinical Training and Customer Education

     We utilize a worldwide distribution network for our products. As of
December 31, 1999, there were approximately 50 such distribution agreements
executed.  In addition, we are deploying a team of direct sales contractors in
the United States to target large institutional customers, including hospitals,
managed care organizations and government organizations.  We expect to field a
force of at least 25 direct sales contractors during 2000.  We anticipate the
combination of distribution partners and direct sales contractors to reach the
hospitals, clinics and medical practices that customarily purchase

                                       10
<PAGE>

ultrasound equipment. We also expect our distribution network to reach a wide
variety of medical practitioners who do not presently use ultrasonic imaging.

     We believe that maintaining product and Company awareness on the part of
our customers and distributors is critical to market acceptance and product
adoption rates and, consequently product sales. We employ professional public
relations organizations and advertising and corporate communications firms to
assist in the preparation of materials designed to raise awareness about our
Company and our products. We also established an education and training program
to teach basic ultrasound techniques to those unfamiliar with ultrasonic
imaging. We believe our delivery of this customer education and training service
is unique, giving us a competitive advantage compared to commonly available
industry training programs. Additionally, we are supporting customers through
ongoing training and clinical support.

Service and Warranty

     A one-year warranty is included with the original purchase of SonoSite
products.  Additional warranty protection is available for a fee.  All returned
products are diagnosed for cause of failure and, if applicable and if possible,
design improvements to incorporate into future products.  We do not have
significant warranty or service business at this time and we do not expect
significant warranty or service businesses in the next year.

Manufacturing

     ATL Ultrasound manufactures the SonoSite 180/TM/, the SonoHeart/TM/, the
C60 transducer and the ICT transducer; another third party OEM transducer
manufacturing company manufactures the C15 transducer. We plan to maintain the
current supply arrangements for our transducers. During 2000, we expect to add a
second source for the manufacture of the SonoSite 180/TM/ and the SonoHeart/TM/
ultrasound machines.

Patents, Trademarks and Licenses

     We are committed to developing and protecting our intellectual property.
We file patent applications to protect innovative technology, inventions and
innovative improvements that are significant to the development of our business.
As of December 31, 1999, we filed a number of patent applications in the
United States and other countries on our handheld ultrasound device.  We
received our first U.S. patent, No. 5,722,412, in March 1998, our second U.S.
patent, No. 5,817,024, in November 1998 and our third U.S. patent, No. 5,893,363
in April 1999.  U.S. Pat. No. 5,722,412 has a term extending to June 28, 2016
and covers handheld ultrasound systems with digital beamformers weighing less
than ten pounds, including those that we are developing. U.S. Pat. No. 5,817,024
has a term extending to December 31, 2017 and covers integrated circuits that
incorporate analog to digital conversion circuitry and ultrasound beamforming
capability on the same integrated circuit.  This technology also pertains to the
products that we are developing.  U.S. patent, No. 5,893,363 has a term
extending to April 13, 2017 and covers handheld systems with integrated
transducer transceiver circuits, including those that we are developing. We also
have a license from ATL Ultrasound to use ATL Ultrasound technology in existence
at the time of our formation, such as ASIC technology, in our handheld products
and to continue to have access to ATL Ultrasound's technological developments up
to April 5, 2001.

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<PAGE>

     We intend to register the trademarks and trade names through which we will
conduct our business in the United States and abroad.  We also intend to seek
protection for the software contained in our ultrasound products under patent,
copyright and trade-secret laws where, in our judgment, significant advantages
may be obtained from such protection.  Patent, copyright and trade secret
protection is subject to limitations and uncertainties and may not provide
significant competitive advantages to us. See "Factors Affecting our Operating
Results, Our Business and Our Stock Price."

     We do not know of any infringement by our products of any intellectual
property rights of others, nor have we received notice from any third party of
any claimed infringement.  We are unaware of any competitive products that
infringe on our intellectual property rights.

Competition

     We know of no current direct competition in the marketplace for handheld
ultrasound imaging products.  A number of companies today offer portable
ultrasound systems, which are low-performance desktop units often resembling
portable black and white televisions.

     Other companies are planning to develop highly portable devices to address
the market opportunity that we believe exists for hand-carried ultrasound
imaging products. We expect Acuson Corporation to introduce, by mid-2000, a
small, 20 pounds in weight, ultrasound machine that we believe will be targeted
at the echocardiography markets. Medison Co., Ltd, Agilent Technologies, Inc.
and Esaote S.p.A. announced that they are developing highly portable ultrasound
machines that may be introduced in 2000. A number of other groups are being, or
have been, funded by government grants to develop small ultrasound devices or
select components of such a system.

     Competition in the marketplace for hand-carried ultrasound imaging products
is based on several factors. We believe we can successfully compete with other
companies based on our products' certain unique advantages. First, we have a
head start in the development of hand-carried ultrasound imaging products and
were first to commercialize a product. We also believe we possess fundamental
technological advantages including the broadband transducer and digital ASIC
expertise we brought with us from ATL Ultrasound, both of which provide a
proprietary foundation for high-quality image performance and ongoing cost
reduction. Competitors may gain market advantage over us if their products are
more inexpensive or have a more widely known brand name.

Government Regulation

     Our ultrasound products are subject to extensive regulation by numerous
governmental authorities, principally the U.S. Food and Drug Administration
("FDA"), as well as numerous other state and foreign agencies.  Our products are
also subject to various domestic and foreign electrical safety and emission
standards. The U.S. FDA has broad regulatory powers with respect to preclinical
and clinical testing of new medical products and the manufacturing, marketing
and advertising of medical products.  The manufacture of our products is subject
to U.S. FDA regulations governing registration of manufacturing facilities and
compliance with the U.S. FDA's Quality System Regulations.  We are subject to
periodic on-site inspection from the U.S. FDA for compliance with such
regulations.  As of December 31, 1999, we have not had an on-site inspection
from the U.S. FDA.

     The U.S. FDA requires that all medical devices introduced to the market be
preceded either by a premarket notification clearance order under Section 510(k)
of the Federal Food, Drug & Cosmetic Acts Act, or an approved premarket approval

                                       12
<PAGE>

application. A 510(k) premarket notification clearance order indicates U.S. FDA
agreement with an applicant's determination that the product for which clearance
has been sought is substantially equivalent to medical devices that were on the
market prior to 1976 or have subsequently received clearance. A premarket
approval indicates that the U.S. FDA has determined the Company must submit
clinical trial data and manufacturing quality assurance information, to prove it
is safe and effective for its labeled indications. The process of obtaining
510(k) clearance typically takes approximately six to nine months, while a
premarket approval process typically takes more than a year.

     We received 510(k) clearance on our initial product in May 1998 based upon
substantial equivalence to current ultrasound products being marketed by ATL
Ultrasound.  We received additional 510(k) clearance on the SonoSite 180/TM/
for ten clinical applications in April 1999 and 510(k) clearance on our latest
product, the SonoHeart/TM/, in December 1999.  We believe that our future
generation handheld ultrasound devices will also require only 510(k) clearance.

     On September 15, 1999, we received Conformite Europeene (CE) Marking
approval, signifying European Certification to the international quality system
standards and to the Medical Device Directive.  The Certification allows us to
distribute the SonoSite 180/TM/ system to the 19 countries of the European Union
and the European Free Trade Association.

     Our products are designed to comply generally with applicable electrical
safety standards, such as those of Underwriters Laboratories and non-U.S. safety
standards authorities.  Several countries have, in recent years, changed the
electronic emission requirement that must be met by ultrasound equipment.  There
can be no assurances that we will be able to continue to respond to these
continually changing regulatory requirements in a timely manner.

     Our regulatory compliance programs encompass verification of our compliance
with international standards for medical device design, manufacture,
installation, and servicing.  These international standards are known as ISO
9001 standards. The Medical Device Directives, which encompass ISO 9001
standards, became mandatory in Europe in 1998.  The U.S. FDA has adopted the ISO
9001 standards as the basis for its Quality System Regulations for the United
States, and these standards went into full effect for U.S. manufacturers of
medical devices in June 1998.

Reimbursement

     Our products are used as diagnostic ultrasound imaging tools for healthcare
providers.  These providers may seek reimbursement from third-party payors for
the services they provide while using our products.  In the United States, the
third-party payors include Medicare, Medicaid and private health insurance
plans.  Reimbursement from these organizations is subject to the regulations and
policies of governmental agencies and other third-party payors. For example, the
Medicare program, which reimburses hospitals and physicians for services
provided to a significant percentage of hospital patients, places certain
limitations on the methods and levels of reimbursement of hospitals for
procedure costs and for capital expenditures made to purchase equipment such as
ours. The Medicare program also limits the level of reimbursement to physicians
for diagnostic tests. The state-administered Medicaid programs and private
payors also place limitations on the reimbursement of both facilities and
physicians for services provided in connection with diagnostic and clinical
procedures. Reduced governmental expenditures in the United States and many
other countries continue to put pressure on diagnostic procedure reimbursement.
We cannot predict what changes may be forthcoming in these policies and
procedures, or the effect of any such changes on our business.

                                       13
<PAGE>

     Third-party payors worldwide, including governmental agencies, are under
increasing pressure to contain medical costs.  Limits on reimbursement or other
cost containment measures imposed by third-party payors may adversely affect the
financial condition and ability of hospitals and other users to purchase
products, such as ours, by reducing funds available for capital expenditures or
otherwise.  We cannot forecast what additional legislation or regulation, if
any, relating to the healthcare industry or third-party reimbursement may be
enacted in the future or what effect such legislation or regulation would have
on us.

Employees

     As of December 31, 1999, we had 100 full-time employees, 50 of these who
were engaged in research and product development activities, 24 in sales and
marketing activities, 14 in administrative capacities and 12 in manufacturing
and regulatory activities. We have never had a work stoppage and no employees
are covered by collective bargaining agreements.  We believe our employee
relations are good.

Facilities

     Our principal offices are in approximately 22,000 square feet of leased
space in Bothell, Washington.  These facilities contain approximately 5,000
square feet used for research and lab space with the remainder comprising
administrative offices. The facilities are leased through mid-year 2000. We also
lease approximately 3,000 square feet of warehouse space in another facility
that is used for finished goods storage. This warehouse space is leased through
August 2000. Our space requirements, as expected, exceeded our current
facilities by the end of 1999. Consequently, in December 1999, we entered into a
lease for a new, larger facility also in Bothell, Washington. The new facility
has approximately 65,000 square feet of space. Our current plans will utilize
approximately 40,000 square feet for administrative offices and the remaining
25,000 for engineering labs, manufacturing and warehouse space.

     We expect to take occupancy of our new building by mid-2000.  We believe
that these facilities will be adequate to meet our needs through 2002 and that
we will be able to find additional space for manufacturing and research and
administrative offices as needed, without an adverse impact on our operations.

Factors Affecting Our Operating Results, Our Business and Our Stock Price

We have a limited operating history and there are numerous reasons why we may
not be successful

     We commenced operations as a separate company in April 1998. Prior to that,
we operated as a business unit of ATL Ultrasound. We have only recently begun to
ship our first products. Accordingly, we have a limited operating history and
our prospects for success are difficult to determine.  You should consider our
business and prospects in light of the risks and uncertainties encountered by
new technology companies in evaluating whether to invest in our common stock.
There are many reasons why we may be unsuccessful in implementing our strategy,
including:

     .  any inability to manufacture our products with the quality and quantity
        necessary to achieve profitability;

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<PAGE>

     .  our dependence on the market acceptance of a new platform for ultrasound
        imaging procedures;

     .  our inability to achieve market acceptance of our products for any other
        reason;

     .  our reliance on third-party manufacturing of our products;

     .  our need to maintain and expand distribution networks;

     .  our need to obtain governmental approvals in key foreign markets;

     .  any loss of key personnel;

     .  any inability to respond effectively to competitive pressures;

     .  any inability to manage rapid growth and expanding operations; and

     .  any failure to comply with governmental regulations.

We have a history of losses, we expect future losses and we may never be
profitable

     We have incurred net losses in each quarter since we started operations and
have only recently begun product sales.  As of December 31, 1999, we had an
accumulated deficit of approximately $42.5 million, including approximately
$10.3 million that was accumulated prior to our commencing operations as a
separate company in April 1998.  We expect to incur substantial additional
expenses in the future as we continue to conduct research and development
efforts on newer generation products and increase sales and marketing efforts on
our recently released first generation products. We will need to generate
significant additional revenues in the future before we will be able to achieve
and maintain profitability. Our business strategies may not be successful and we
may not be profitable in any future period. If we do become profitable, we
cannot be certain that we can sustain or increase profitability on a quarterly
or annual basis.

Demand for our products may fluctuate, is subject to numerous uncertainties and
may not support a profitable business

     Our products represent a new platform for ultrasound imaging procedures and
we have only sold our products in limited quantities.  The market for hand
carried, high-performance ultrasound devices is new and largely untested. We do
not know the rate at which physicians or other healthcare providers will adopt
our products or the rate at which they will purchase them in the future.
Acceptance of our products by physicians, including physicians who do not
currently use ultrasound, is essential to our success and may require us to
overcome resistance to a new platform for ultrasound imaging. Use of our
products will require training for physicians who currently do not use
ultrasound imaging instruments. The time required to complete such training may
be substantial and could result in a delay or decrease in market acceptance.
Currently, patients requiring an ultrasound examination are generally referred
to a centralized testing location. Radiologists and other specialized providers
of ultrasound at these locations may have an incentive to discourage market
acceptance for our products in order to maintain these referrals.

                                       15
<PAGE>

     Physicians and other healthcare providers will not purchase our products
unless they determine that they are preferable to other means of obtaining an
ultrasound examination and that the benefits to the patient and physician
outweigh the costs of purchasing our products. This determination will depend on
our products' image quality, cost-effectiveness, ease of use, reliability and
portability. Furthermore, acceptance of our products by physicians and other
healthcare providers may be more difficult if they are unable to obtain adequate
reimbursement from third-party payors for tests performed using our products. In
addition, while we priced our products to be competitive in the marketplace for
lower-end ultrasound machines, our pricing policies could limit market
acceptance compared to competing products or alternative testing methods.

We rely on ATL Ultrasound for manufacturing our products and any interruption or
delay at ATL Ultrasound could harm our business

     We have contracts with ATL Ultrasound for manufacturing services for many
of our ultrasound products. These services are critical to our ability to
deliver our products to customers. ATL Ultrasound may be unable to provide all
the manufacturing capacity we will need to meet our planned objectives. Although
we believe that we will ultimately develop alternative sources for the services
provided by ATL Ultrasound, we may lose future sales and incur additional
expenses as a result of any interruption or delay by ATL Ultrasound in
manufacturing our products.  Additionally, ATL Ultrasound has the right to
terminate our manufacturing contract on 180 days notice after December 31, 2000
or sooner if for cause.

We intend to assume some or all of the manufacture and assembly of our products
but we have no manufacturing experience or capability

     Within the next two years, we intend to assume some or all of the
manufacture and assembly of our products. To do so, we will be required to
develop our own manufacturing capability. We may be unable to comply with
regulations applicable to manufacturers of ultrasound devices or manufacture our
products at a cost or in quantities necessary to achieve or maintain
profitability. In addition to compliance with regulatory requirements, we may
encounter difficulties in scaling up production of our products, including
problems involving manufacturing yields, quality control and assurance and
shortages of qualified personnel.  We will also need to effectively manage raw
material inventories to minimize shortages that would disrupt manufacturing of
our products. We have no experience with manufacturing and assembly and we may
be unable to successfully meet these challenges.

If our third-party vendors fail to supply us with the highly specialized parts
and other components we need for our products, we will be unable to effectively
ship our products

     We depend on third-party vendors to supply highly specialized parts, such
as custom-designed integrated circuits and some transducer components.  These
vendors may experience difficulty in manufacturing these parts, or in meeting
our high quality standards.  In addition, these parts generally have long order
lead-times which restrict our ability to respond quickly to changing market
conditions. If we are required to switch vendors, the manufacture and delivery
of our products could be interrupted for an extended period.  We also rely on
third-party vendors to supply essential parts and components that are in high
demand in other industries such as electronics manufacturing and
telecommunications equipment manufacturing.  Our ability to manufacture and
deliver products in a timely manner could be harmed if these vendors fail to
maintain an adequate supply of these components.

                                       16
<PAGE>

We depend on single-source vendors for some of our components that may be
difficult and costly to replace

     We depend on single-source vendors for some key components for our
products, including custom-designed integrated circuits, image displays,
batteries, capacitors and transformers. There are relatively few alternative
sources of supply for some of these components. While these vendors have
generally produced our components with acceptable quality, quantity and cost in
the past, they have experienced periodic problems that have caused us delays in
production.  To date, these problems have not been material. These suppliers may
be unable to meet our future demands or may continue to experience quality and
specification problems which might cause us to experience delays, incur
additional costs and possibly miss customer deliveries. Establishing additional
or replacement suppliers for these components may take a substantial amount of
time. If we have to switch to a replacement vendor, the manufacture and delivery
of our products could be interrupted for an extended period.

Our future success could be impaired if the perception of our products is based
on any early performance problems

     We will not succeed unless the marketplace is confident that we can provide
high-quality products and deliver them in a timely manner.  We only recently
began to ship our products.  If these initial shipments fail to perform as
advertised or if they are perceived as being difficult to use or causing
discomfort to patients, the public image of our products may be impaired.
Public perception may also be impaired if we fail to deliver our products in a
timely manner due to difficulties with our suppliers and vendors or due to our
inability to efficiently manufacture and assemble products in-house.  A
tarnished reputation could result in the failure of our products to gain market
acceptance even after any quality or delivery problems are resolved.

We may be unable to manage our growth, which could strain our resources and
impair our ability to deliver our products

     We expect significant growth in all areas of operations as we develop and
market our products. We will need to add personnel and expand our capabilities,
which may strain our existing management, operational, financial and other
resources. To compete effectively and manage future growth, we must

     .  accurately forecast demand for our products;

     .  train, manage and motivate a growing employee base; and

     .  improve existing operational, financial and management information
        systems.

     We may be unable to complete necessary improvements to our systems,
procedures and controls to support our future operations in a timely manner. In
addition, we may be unable to attract or retain required personnel and our
management may be unable to develop the additional expertise required to manage
any future growth.

                                       17
<PAGE>

Our quarterly operating results are uncertain and may fluctuate significantly,
which could impair the value of your investment

     Our future operating results will depend on numerous factors, many of which
we do not control.  Changes in any or all of these factors could cause our
operating results to fluctuate and increase the volatility of our stock.  Some
of these factors are

     .  demand for our products;

     .  product and price competition;

     .  changes in the costs of components;

     .  success of our indirect sales and distribution channels;

     .  successful development and commercialization of new and enhanced
        products on a timely basis;

     .  timing of new product introductions and product enhancements by us or
        our competitors; and

     .  timing and magnitude of our expenditures.

     In addition, we intend to have our products manufactured based on forecasts
of sales in future periods. Our forecast in any particular period may prove
inaccurate, which could cause fluctuations in our manufacturing costs and our
operating results. Our future operating results could fall below the
expectations of securities analysts or investors and reduce the market price of
our stock. We believe that there may be some fluctuations caused by year-end
budgetary pressures on our customers, customer buying patterns and the efforts
of our indirect sales and distribution network to meet or exceed annual sales
quotas. These factors make it difficult to forecast our revenues and operating
results.

The market for ultrasound imaging products is highly competitive and we may be
unable to compete effectively

     The existing market for ultrasound imaging products is well established and
intensely competitive. In addition, we are seeking to develop new markets for
our hand-carried ultrasound imaging products. In response, we expect competition
to increase as potential and existing competitors begin to enter these new
markets or modify their existing products to compete directly with ours. Our
primary competitors have

     .  better name recognition;

     .  significantly greater financial resources; and

     .  existing relationships with some of our potential customers.

     Our competitors may be able to use their existing relationships to
discourage customers from purchasing our products. In addition, our competitors
may be able to devote greater resources to the development, promotion and sale
of new or existing products, thereby allowing them to respond more quickly to
new or emerging technologies and changes in customer requirements.

                                       18
<PAGE>

We have limited sales and marketing experience and rely on an indirect sales and
distribution network to sell our products, which we may be unable to
successfully maintain or replace

     We established an indirect sales and distribution network to sell our
products domestically and internationally and we established a direct contract
sales group to augment sales efforts in the United States.  Our future revenue
growth will depend in large part on our success in maintaining and expanding
these indirect and limited direct, sales and distribution channels.  We depend
on these distributors to help promote market acceptance and demand for our
products.  In the United States, our indirect sales and distribution network
include agreements with each of PSS World Medical, Inc. and its subsidiary,
Diagnostic Imaging, Inc.  In the future, we may elect to expand our own direct
sales and distribution capabilities domestically or internationally or we may be
required to do so if our existing third-party distribution network fails to
produce satisfactory results.  Efforts to expand our own direct sales and
distribution capabilities will be expensive and time-consuming, particularly if
we undertake such activities outside of the United States. We may be unable to
expand our own distribution capabilities in a timely manner, if at all, which
would have an adverse effect on our ability to sell our products.

     Many of our third-party distributors will be in the business of
distributing other, sometimes competing, medical products.  In particular, in
the important ultrasound markets of Italy, France and Germany, our distribution
partner, Esaote S.p.A., manufactures and sells ultrasound products similarly
priced to ours.  As a result, our products may not receive the resources and
support required within these countries to meet our sales objectives.

     We manage our third-party distribution network and direct sales contractors
with several sales directors. These sales directors possess a high level of
technical expertise and knowledge regarding our products' capabilities and
ultrasound imaging products in general and their use. We face intense
competition for qualified sales directors and may be unable to retain such
personnel, which would adversely affect our ability to expand and maintain our
third-party distribution network.

If we do not retain key employees and attract additional highly skilled
employees, we will not be successful

     Our future performance will depend largely on the efforts and abilities of
our key technical, marketing and managerial personnel and our ability to retain
them. Our success depends on our ability to attract and retain additional key
personnel in the future. The loss of any of our key employees could adversely
affect our business, particularly the loss of any of our key engineering
personnel. We do not have any employment agreements with any of our employees.
We do not maintain key-person insurance on any of our employees.

We may be unable to adequately protect our intellectual property rights, which
could harm our business

     Our success and ability to compete depend on our licensed and internally
developed technology. We protect our proprietary technology through a
combination of patent, copyright, trade secret and trademark law. We also enter
into confidentiality or license agreements with our employees, consultants and
corporate partners, and generally control access to, and the distribution of,
our product designs, documentation and other proprietary information, as well as
the designs, documentation and other information we license from others. Despite
our efforts to protect these proprietary rights, unauthorized parties may copy,
develop independently or otherwise obtain and use our products or technology.

                                       19
<PAGE>

     We cannot be sure that our pending patent applications will result in
issued patents. In addition, our issued patents or pending applications may be
challenged or circumvented by our competitors. Policing unauthorized use of our
intellectual property will be difficult and we cannot be certain that we will be
able to prevent misappropriation of our technology, particularly in countries
where the laws may not protect our proprietary rights as fully as in the United
States.

Our products may infringe on the intellectual property rights of others, which
could subject us to significant liability

     Many of our competitors in the ultrasound imaging business hold issued
patents and have filed, or may file, patent applications. Our competitors may
claim that our technology or products infringe upon the technology covered by
these patents or patent applications. Any such claims, with or without merit,
could

     .  be time-consuming to defend;

     .  result in costly litigation;

     .  divert management's attention and resources;

     .  cause product shipment delays;

     .  require us to enter into royalty or licensing agreements;

     .  prevent us from manufacturing or selling some or all of our products; or

     .  result in our liability to one or more of these competitors.

     If a third party makes a successful claim of patent infringement against
us, we may be unable to license the infringed or similar technology on
acceptable terms, if at all.

Our products may become obsolete

     Our competitors may develop and market ultrasound products that render our
products obsolete or noncompetitive. In addition, although diagnostic ultrasound
imaging products may have price and/or performance advantages over competing
medical imaging equipment, such as computed tomography and magnetic resonance
imaging, any price or performance advantages may not continue. Our products
could become obsolete or unmarketable if other products utilizing new
technologies are introduced or new industry standards emerge. As a result, the
life cycles of our products are difficult to estimate. To be successful, we will
need to continually enhance our products and to design, develop and market new
products that successfully respond to any competitive developments. In addition,
because our products are based on a single platform, we may be more vulnerable
to adverse events affecting the healthcare industry generally, and the medical
ultrasound market specifically, than we would be if we offered products based on
more than one platform.

We may incur tax liability in connection with our spin-off from ATL Ultrasound

     Our spin-off was treated by ATL Ultrasound as a tax-free spin-off under
Section 355 of the Internal Revenue Code of 1986. However, if ATL Ultrasound

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<PAGE>

were to recognize taxable gain from the spin-off, the Internal Revenue Service
could impose that liability on any member of the ATL Ultrasound consolidated
group as constituted prior to the spinoff, including us. ATL Ultrasound agreed
to cover 85% of any such liability (unless the tax is imposed due to the actions
by ATL Ultrasound solely or SonoSite solely, in which case we and ATL Ultrasound
agreed that the party who is solely at fault shall bear all of the tax
liability). We cannot guarantee that ATL Ultrasound would indemnify us or agree
that it caused the liability to be imposed. If we were required to pay all or a
portion of any taxes related to the spin-off, our business would be adversely
affected.

Governmental regulation of our business could prevent us from introducing new
products in a timely manner

     All of our planned products and our manufacturing activities and the
manufacturing activities of our third-party medical device manufacturers are
subject to extensive regulation by a number of governmental agencies, including
the U.S. FDA and comparable international agencies. We and such third-party
manufacturers are or will be required to

     .  undergo rigorous inspections by domestic and international agencies;

     .  obtain the prior approval of these agencies before we can market and
        sell our products; and

     .  satisfy content requirements for all of our sales and promotional
        materials.

     Compliance with the regulations of these agencies may delay or prevent us
from introducing new or improved products. We may be subject to sanctions,
including the temporary or permanent suspension of operations, product recalls
and marketing restrictions, if we fail to comply with the laws and regulations
pertaining to our business.  Our third-party medical device manufacturers may
also be subject to the same sanctions and, as a result, may be unable to supply
our products.

We need to establish international markets for our products and our prospects of
doing so successfully are uncertain

     Our current business strategy depends on our ability to establish
international markets for our products. We will need to devote significant
management attention and financial resources to obtain any necessary foreign
governmental approvals. International sales are subject to inherent risks,
including

     .  the costs of localizing products for foreign markets;

     .  longer receivables collection periods and greater difficulty in
        receivables collection, as compared to those experienced in the United
        States;

     .  reduced protection for intellectual property rights in some countries;

     .  fluctuations in the value of the U.S. dollar relative to other
        currencies; and

     .  delays or failures in obtaining necessary regulatory approvals.

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<PAGE>

We may face product liability and warranty claims which could result in
significant costs

     The sale and support of our products entails the risk of product liability
or warranty claims, such as those based on claims that the failure of one of our
products resulted in a misdiagnosis. The medical instrument industry in general
has been subject to significant medical malpractice litigation. We may incur
significant liability in the event of such litigation. Although we maintain
product liability insurance, we cannot be sure that this coverage is adequate or
that it will continue to be available on acceptable terms, if at all.

     We also face warranty exposure, which could adversely affect our
operating results. Our products carry a one-year warranty against defects in
materials and workmanship. We are responsible for all claims, actions, damages,
liens, liabilities, costs and expenses under our manufacturing contract with ATL
Ultrasound for all product recalls, returns and defects attributable to
manufacturing. We established accruals for the costs associated with product
warranties. However, any unforeseen warranty exposure could adversely affect our
operating results.

We may require additional funding to satisfy our future capital expenditure
needs and our prospects of obtaining such funding are uncertain

     Our future revenues may not be sufficient to support the expenses of our
operations and the expansion of our business. We may therefore need additional
equity or debt capital to finance our operations as we develop our products and
expand our sales internationally. To date, our capital requirements have been
met primarily by the sale of equity, contributions by ATL Ultrasound in
connection with our spin-off and by grant revenue from the U.S. Office of Naval
Research under a U.S. Government Defense Advanced Research Projects Agency
grant. ATL Ultrasound's funding obligations have been met and any future grant
revenue is not expected. As such, if we need additional financing we would need
to explore other sources of financing, including public equity or debt
offerings, private placements of equity or debt and collaborative or other
arrangements with corporate partners. Financing may not be available when needed
or may not be available on acceptable terms. If we are unable to obtain
financing, we may be required to delay, reduce or eliminate some or all of our
research and development and/or sales and marketing efforts.

Our stock price has been and is likely to continue to be volatile

     The market price for our common stock and for securities of medical
technology companies generally has been volatile in the past and is likely to
continue to be volatile in the future. If you decide to purchase our shares, you
may not be able to resell them at or above the price you paid due to a number of
factors, including

     .  actual or anticipated variations in quarterly operating results;

     .  the loss of significant orders;

     .  changes in earnings estimates by analysts;

     .  announcements of technological innovations or new products by our
        competitors;

     .  changes in the structure of the healthcare financing and payment
        systems;

                                       22
<PAGE>

     .  general conditions in the medical industry; and

     .  significant sales of our common stock by one or more of our principal
        shareholders.

Our restated articles of incorporation, our bylaws, Washington law and some of
our agreements contain provisions that could discourage a takeover that may be
beneficial to shareholders

     There are provisions in our restated articles of incorporation, our bylaws
and Washington law that make it more difficult for a third party to obtain
control of us, even if doing so would be beneficial to our shareholders.
Additionally, our acquisition may be made more difficult or expensive by the
following:

     .  a provision in our license agreement with ATL Ultrasound requiring a
        significant cash payment to ATL Ultrasound upon a change in our control;

     .  a shareholder rights agreement; and

     .  acceleration provisions in benefit plans and change-in-control
        agreements with all of our employees.

                                       23
<PAGE>

Item 2.   Properties

     The Company leases approximately 22,000 square feet in Bothell, Washington.
These facilities contain approximately 5,000 square feet used for research and
lab space with the remainder comprising administrative offices. The facilities
are leased through mid-year 2000. As anticipated, the space is no longer
adequate for our needs. Consequently, we negotiated a termination to our
existing lease and entered into a new lease in another facility. The terms of
the lease termination have no adverse impact on our operations.

     Our new facility comprises approximately 65,000 square feet, also in
Bothell, Washington.  We anticipate occupying the new building by mid-year 2000.
The new facility is leased through 2007. We believe that these facilities will
be adequate to meet our needs through the foreseeable future.

Item 3.   Legal Proceedings

     There are no suits or claims pending against us, nor are we aware of any
threatened suits or claims.

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

     No matters were submitted to a vote of the Company's shareholders during
the fourth quarter of the year ended December 31, 1999.

                                       24
<PAGE>

                                    PART II

Item 5.   Market for Registrant's Common Equity and Related Stockholder Matters

     Our common stock is traded on the Nasdaq National Market under the symbol
SONO.  As of March 15, 2000, there were 5,625 holders of record of the common
stock.  This figure does not include the number of shareholders whose shares are
held of record by a broker or clearing agency, but does include each such a
brokerage house or clearing agency as one holder of record.

     The high and low sales prices for the our common stock for each of the
second, third and fourth quarters of 1998 and each quarter of 1999 are as
follows.  These prices reflect interdealer prices, without retail mark-up or
commission, and may not necessarily represent actual transactions.


<TABLE>
<CAPTION>
              Year                                     High                Low
--------------------------------------------------------------------------------
1998
<S>                                                   <C>                 <C>
  Second quarter (from April 7, 1998)                  $10.50             $ 6.13
  Third quarter                                        $ 8.13             $ 4.50
  Fourth quarter                                       $13.75             $ 5.88
1999
  First quarter                                        $14.50             $ 9.75
  Second quarter                                       $22.63             $12.63
  Third quarter                                        $30.88             $15.50
  Fourth quarter                                       $37.75             $25.31
</TABLE>

     The Company has never declared or paid cash dividends on its Common Stock.
The Company currently intends to retain all earnings, if any, for future growth
and, therefore, does not intend to pay cash dividends on its Common Stock in the
foreseeable future.

     On November 30, 1999, the Company issued 1,250,000 shares of unregistered
Common Stock to fifteen investors, generating gross proceeds to the Company of
$31,250,000.  Prudential Vector Healthcare Group, a unit of Prudential
Securities Incorporated, served as placement agent and received a commission of
$1,875,000 in connection with the transaction.  The shares of common stock were
sold pursuant to Regulation D promulgated under the 1933 Securities Act and the
investors represented to SonoSite that they were accredited investors as the
term is defined in Regulation D.  The offer and sale of the securities were not
made by any formal general solicitation or general advertising.  Concurrent with
the completion of the sale, SonoSite filed a registration statement covering the
resale of the Common Stock sold in the financing.

                                       25
<PAGE>

Item 6.   Selected Financial Data

     The selected financial data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Financial Statements and Notes thereto included elsewhere in
this Form 10-K.

<TABLE>
<CAPTION>
                                                            Years Ended December 31,
                                 -----------------------------------------------------------------------------
                                       1999            1998             1997            1996            1995
                                     ---------       ---------        --------         -------        --------
                                                     (in thousands, except per share data)
<S>                                  <C>             <C>              <C>              <C>             <C>
Statement of Operations Data
Grant revenues                        $    125        $    973         $ 2,948         $ 1,029           $  --

Sales revenues                          10,132              --              --              --              --
Cost of sales                            6,445              --              --              --              --
                                      --------        --------         -------         -------          ------
Gross margin on sales revenue            3,687              --              --              --              --

Operating expenses:
   Research and development             14,533           9,474           7,064           2,576              75
   Sales and marketing                   9,767           3,120           1,268              --              --
   General and administrative            2,637           1,904             610             217               9
                                      --------        --------         -------         -------          ------
                                        26,937          14,498           8,942           2,793              84

Interest income                          1,600             541
Interest expense                           117              41
Other income                                30              --
                                      --------        --------         -------         -------          ------
Net loss                              $(21,612)       $(13,025)        $(5,994)        $(1,764)         $  (84)

Net loss per share (1)                  $(3.08)         $(2.72)         $(1.28)         $(0.38)         $(0.02)
Shares used in computation of
 net loss per share (1)                  7,025           4,796           4,684           4,633           4,409
</TABLE>

<TABLE>
<CAPTION>
                                                        As of December 31,
                                 ----------------------------------------------------------------
                                       1999             1998             1997           1996
                                    -----------      -----------      ----------     ----------
                                                         (in thousands)
<S>                                    <C>            <C>               <C>             <C>
Balance Sheet Data (2)
Cash and cash equivalents              $33,252         $ 7,526           $  --          $  --
Working capital (deficiency) (3)        55,323          16,934            (170)           (53)
Total assets                            69,726          23,290             410            157
Long-term obligations, less
 current portion                           135             481              --             --

Total shareholders' equity              63,709          19,833             240            104
</TABLE>
------------------------
(1)  Net loss per share amounts are computed on the basis described in Note 2 of
     Notes to the Financial Statements.
(2)  Balance sheet data prior to 1996 is not meaningful, as it was incorporated
     into the books and records of ATL Ultrasound and is not considered
     material.
(3)  The amount reported for December 31, 1998 includes a receivable from ATL
     Ultrasound of $12.0 million, which was paid on January 15, 1999.


                                       26
<PAGE>

Item 7.   Management's Discussion and Analysis of Financial Condition and
          Results of  Operations Overview

     Our company, SonoSite, Inc., commenced operations in 1994 as a project of
ATL Ultrasound, Inc.  We were chartered to develop the design and specifications
for a highly portable ultrasound device and other highly portable ultrasound
products for potential use for diagnostic imaging in a multitude of clinical and
field settings.  From the time we started on this project until we became an
independent company, we were organized as a separate division within ATL
Ultrasound.  On February 2, 1998, the ATL Board of Directors approved a plan to
spin-off our division as an independent, publicly owned company.  This
transaction was completed through the tax-free distribution of one new share in
SonoSite, Inc. for every three shares of ATL Ultrasound stock held on April 6,
1998. ATL Ultrasound retained no ownership in our company following the spin-
off.

     We finalized the development and commercialization of our first products in
1999, recognizing our initial product sales in September 1999.  At December 31,
1999, our products comprised a highly portable ultrasound machine, the SonoSite
180/TM/, and two transducers.

     Since we started operations, we have incurred losses.  We expect to
continue to incur operating losses until our product sales generate sufficient
revenue to fund our continuing operations.  We may not generate sufficient
revenue to fund our operations in future periods.

Results of Operations - Comparison of Years Ended December 31, 1999, 1998 and
1997

Revenues
Product sales

     Initial shipments of our products commenced in the third quarter of 1999.
Product sales in 1999 totaled $10.1 million.  There were no product sales in any
prior periods.  Product sales revenues are generally recognized at the time of
shipment.  At the end of the year, our products included the SonoSite 180/TM/ in
6 language configurations, a curved array transducer for abdominal imaging and
an intra-cavital transducer for transvaginal imaging.  In 2000, we have expanded
our product offering to include the SonoHeart/TM/, an ultrasound machine and
transducer designed for cardiac imaging.  We also expect to release additional
transducers for other clinical applications.  We anticipate that product sales
in 2000 will increase as compared to 1999.

Grant revenues

     Grant revenue was recognized per the terms of our contract with the Defense
Department and has been generally tied to achieving technological milestones.
Grant revenues in 1999 were $125,000 as compared to $973,000 in 1998 and $2.9
million in 1997.  These varying levels of grant revenues were anticipated.  As
of the end of March 1999, we completed the project work and achieved the

                                       27
<PAGE>

technical milestones under the contract. As a result, we received all of the
payments agreed to in the contract. There will be no future grant revenues under
existing or past contracts or agreements. Our future revenues will therefore
depend on product sales.

Gross margin

     The gross margin on product sales was 36.4% for 1999.  We had no product
sales and therefore no reported gross margin in any prior period.  We anticipate
that the gross margin on our product sales will improve in 2000 due primarily
to increasing sales of transducers which we expect will become available during
the year, the higher realized price of sales achieved by our direct sales
consultants and reductions in product costs.

Research and development expense

     Research and development expense for 1999 was $14.5 million as compared to
$9.5 million for 1998 and $7.1 million for 1997.  The 1998 to 1999 increase in
expense was the result of:

     .  a planned increase in basic research and development activities on our
        current and future products, which was partially offset by a decrease in
        engineering services procured from ATL Ultrasound, and

     .  a significant increase in manufacturing development and production
        start-up expenses associated with design finalization, verification and
        validation of our first generation of products.

     The increase in research and development expense from 1997 to 1998 was due
primarily to additional personnel and personnel related expenses and product
development expenses, including increases in engineering services payments to
ATL Ultrasound.  We anticipate that spending levels in research and development
will increase in 2000 as compared to 1999 but at a lower rate than the increase
in 1999 as compared to 1998.

Sales and marketing expense

     Sales and marketing expenses for 1999 were $9.8 million, up significantly
from $3.1 million in 1998 and $1.3 million in 1997.  The rapid rise in expenses
in sales and marketing in 1999 as compared to 1998 was anticipated due to an
increase in personnel as well as activities associated with the worldwide
introduction and promotion of our first products.  Specific expenses included
professional service fees, print media, customer training, customer travel,
trade show fees and expenses and travel expenses for our staff.  The increase in
sales and marketing expenses in 1998 as compared to 1997 is a result of
increases in sales and marketing personnel and increases in consulting and
travel expenditures.  In 2000, we are hiring additional sales and marketing
personnel and we are incurring increased professional service fees in support of
our direct selling efforts in the United States.  We plan to continue to utilize
significant outside promotional and communications agency resources in support
of our current products as well as new product introductions periodically
throughout 2000.  We expect that selling and marketing expenses will again
increase significantly in 2000 as a result of the planned increase in domestic
sales activities.

General and administrative expense

     General and administrative expenses in 1999 were $2.6 million, as compared
to $1.9 million in 1998 and $610,000 in 1997.  The increase in 1999 as compared
to 1998 was the result of a full year of a higher level of expenses and

                                       28
<PAGE>

continued growth in general management, administration, finance, accounting,
information service and human resource departments. The increase in general and
administrative expenses in 1998 as compared to 1997 was a result of an increase
in personnel when we became a stand-alone public company in April 1998. We
expect to add administrative personnel and infrastructure in 2000 and we plan to
move to a larger facility in the middle of the year. Consequently, we anticipate
that general and administrative expenses will increase in 2000.

Net loss

     The net loss for 1999 was $21.6 million, increasing from $13.0 million in
1998 and $6.0 million in 1997.  These increases were expected and are due
primarily to the increases in operating expenses and decreases in grant revenues
as noted above.  These factors were partially offset in 1999 by an increase in
interest income from invested proceeds of equity financings and $3.7 million in
gross margins as a result of the commencement of product shipments.  We expect
to continue to incur quarterly net losses in the near term.

Liquidity and Capital Resources

     Our capital requirements have been funded by $64.7 million raised through
sales of common stock together with the $30 million from ATL Ultrasound received
in connection with our spin-off and development grants of $5.1 million from the
Department of Defense through an award via the Advanced Research Projects
Agency.

     On April 6, 1998, the day we became an independent public company, our
former parent, ATL Ultrasound, contributed to our capital all cumulative
expenditures made by them on our business while we were an operating division
within ATL Ultrasound, net of funds received from the U.S. Navy.  This book
capital contribution totaled $10.6 million.  In addition, ATL Ultrasound
contributed $30 million in cash in two payments; $18 million in April of 1998
and $12 million in January of 1999.

     During 1999, we raised additional cash through two equity offerings.  In
April 1999, we raised net proceeds of $35.4 million through the public issuance
of 2,990,000 shares of our common stock.  In November 1999, we raised additional
net proceeds of $29.3 million through the private placement of 1,250,000 shares
of our common stock.

     As of December 31, 1999, cash and cash equivalents totaled $33.3 million.
This excludes $16.6 million of short-term investment securities and also
excludes $3.2 million of investment securities with terms longer than one year.
While recent quarterly losses have been reduced as described in "Results of
Operations", our cash requirements have increased due primarily to increases in
accounts receivable and inventories.  We expect cash requirements in 2000 to be
significantly less than in 1999 due to anticipated increases in quarterly
revenues that will generate lower losses and increasing collections on trade
receivables.

     We believe the existing cash and cash equivalents and capital which are
available through lease financing and other sources of debt financing should be
sufficient to fund our operations through 2001.  As a result, we are not
expecting to seek additional equity capital in 2000.  However, it is difficult
to accurately predict the amount of cash that we may require during the upcoming
year, which will depend in part upon factors beyond our control, such as lower
than anticipated adoption rates or revenues on the existing and new products,
technical obstacles, cost overruns in research and development programs or
manufacturing activities and greater than anticipated administrative expenses.

                                       29
<PAGE>

If additional capital is required, there can be no assurance that adequate
financing will be available on a timely basis, on favorable terms, or at all.

Year 2000 Information Systems Review and Status

     We did not detect or experience any material failures as a result of the
date change from 1999 to 2000.  We completed all of our planned readiness
reviews by mid October 1999.  We also monitored the status of our internal
systems throughout the month of December and around the clock on the December
31, 1999 and January 1, 2000.  No problems were observed with our internal
systems nor have any occurred up to the time of this filing.  Further, there
have been no reported failures with date recognition or calculations with any of
our products in the field nor do we have any knowledge of problems with any of
our vendors or customers.

     We continue to monitor the situation. We do not anticipate any problems
with the Year 2000 or related potential computer-date driven problems.

New Accounting Pronouncements

     In 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 (FAS 133), "Accounting for Derivative
Instruments and Hedging Activities".  FAS 133, effective for fiscal years
beginning after June 15, 2000, requires that all derivatives be recognized at
their fair value and that corresponding gains or losses be recognized in the
operating statements or as a component of comprehensive income depending on the
specifics of the derivative instrument.  We have no derivative instruments and
expect that adoption of FAS 133 will not have a material impact on our financial
statements.

     In 1999, the Securities and Exchange Commission released Staff Accounting
Bulletin No. 101 (SAB 101), "Revenue Recognition in Financial Statements", which
we must apply in 2000.  We do not believe that SAB 101 will have a material
impact on our financial statements.

Item 7A.  Quantitative and Qualitative Disclosures About Market Risk

     Interest rate risk.  Our exposure to market rate risk, as a result of
changes in interest rates, relates primarily to debt securities held in our
investment portfolio.  At December 31, 1999, we held $33.3 million in cash and
cash equivalents and debt securities of $19.8 million, of which $16.6 million
mature within one year and the remainder within two years.  Although we hold
both fixed and floating rate securities and each carry a certain degree of
interest rate risk, we do not consider this risk to be material to our financial
statements given their relatively short terms.

                                       30
<PAGE>

Item 8.   Financial Statements and Supplementary Data

                       INDEX TO THE FINANCIAL STATEMENTS

                                SonoSite, Inc.


<TABLE>
<CAPTION>
                                                                        Page
                                                                        ----
<S>                                                                    <C>
Independent Auditors' Report                                              32
Balance Sheets                                                            33
Statements of Operations                                                  34
Statements of Cash Flows                                                  35
Statements of Shareholders' Equity and Comprehensive Loss                 36
Notes to the Financial Statements                                         37
</TABLE>


                                       31
<PAGE>

                         INDEPENDENT AUDITORS' REPORT



The Board of Directors and Shareholders
SonoSite, Inc.

     We have audited the accompanying balance sheets of SonoSite, Inc. as of
December 31, 1999 and 1998, and the related statements of operations, cash flows
and shareholders' equity and comprehensive loss for each of the years in the
three-year period ended December 31, 1999.  In connection with our audits of the
financial statements, we also have audited the financial statement schedule
listed in the Index at Item 14(a) for the year ended December 31, 1999.  These
financial statements and the financial statement schedule are the responsibility
of SonoSite, Inc.'s management.  Our responsibility is to express an opinion on
these financial statements and the financial statement schedule 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 SonoSite, Inc. as of
December 31, 1999 and 1998, and the results of its operations and its cash flows
for each of the years in the three-year period ended December 31, 1999, in
conformity with generally accepted accounting principles.  Also, in our opinion,
the related financial statement schedule, when considered in relation to the
basic financial statements taken as a whole, presents fairly, in all material
respects, the information set forth therein.


KPMG LLP

Seattle, Washington
January 29, 2000

                                       32
<PAGE>

                                SonoSite, Inc.
                                Balance Sheets
<TABLE>
<CAPTION>
                                                                                  As of December 31,
                                                                             ---------------------------
                                                                                 1999           1998
                                                                             ------------   ------------
<S>                                                                          <C>            <C>
Assets
Current Assets
   Cash and cash equivalents                                                 $ 33,252,112   $  7,525,762
   Short-term investment securities                                            16,594,050             --
   Accounts receivable, less allowance for doubtful                             7,856,547             --
     accounts of $96,344
   Receivable from affiliate                                                      400,009             --
   Accrued interest receivable                                                    484,684             --
   Receivable from ATL Ultrasound                                                      --     12,000,000
   Inventories                                                                  1,925,977             --
   Prepaid expenses                                                               692,489        304,599
                                                                             ------------   ------------
Total current assets                                                         $ 61,205,868   $ 19,830,361

Property and equipment, net                                                     4,845,860      3,379,815
Long-term investment securities                                                 3,163,501             --
Investment in affiliate                                                           429,843             --
Other assets                                                                       81,157         80,057
                                                                             ------------   ------------
Total assets                                                                 $ 69,726,229   $ 23,290,233
                                                                             ============   ============

Liabilities
Current Liabilities
   Checks drawn in excess of bank balances                                   $         --   $    601,629
   Accounts payable                                                             2,718,276        781,999
   Accrued expenses                                                             2,483,754      1,123,948
   Current portion of long-term obligations                                       387,577        388,795
   Deferred liabilities                                                           292,787             --
                                                                             ------------   ------------
Total current liabilities                                                       5,882,394      2,896,371

Deferred rent                                                                          --         79,923
Long-term obligations, less current portion                                       134,696        480,964
                                                                             ------------   ------------
Total Liabilities                                                               6,017,090      3,457,258

Commitments and contingencies

Shareholders' Equity
   Preferred stock, $1.00 par value
     Authorized shares - 6,000,000
     Issued and outstanding shares - none                                              --             --
   Common stock, $0.01 par value
     Shares authorized - 50,000,000
     Issued and outstanding shares --
       As of December 31, 1999 - 9,209,633
       As of December 31, 1998 - 4,872,193                                         96,096         48,722
   Additional paid-in capital                                                 106,227,784     40,784,377
   Deferred stock compensation                                                    (29,393)       (91,182)
   Accumulated deficit                                                        (42,520,588)   (20,908,942)
   Accumulated other comprehensive loss                                           (60,760)            --
                                                                             ------------   ------------
Total shareholders' equity                                                     63,709,139     19,832,975
                                                                             ------------   ------------
Total liabilities and shareholders' equity                                   $ 69,726,229   $ 23,290,233
                                                                             ============   ============
</TABLE>

               See accompanying notes to the financial statements

                                       33
<PAGE>

                                 SonoSite, Inc.

                            Statements of Operations


<TABLE>
<CAPTION>
                                                               For the Years Ended December 31,
                                                     ---------------------------------------------------
                                                         1999               1998                1997
                                                     ------------       ------------         -----------
<S>                                                  <C>                <C>                  <C>
Grant revenue                                        $    124,506       $    973,107         $ 2,947,700

Sales revenue                                          10,131,767                 --                  --
Cost of sales                                           6,445,101                 --                  --
                                                     ------------       ------------         -----------
Gross margin on sales revenue                           3,686,666                 --                  --

Operating expenses
  Research and development                             14,532,697          9,474,074           7,063,842
  Sales and marketing                                   9,767,299          3,120,238           1,268,272
  General and administrative                            2,637,466          1,903,883             610,037
                                                     ------------       ------------         -----------
Total operating expenses                               26,937,462         14,498,195           8,942,151

Other income (expense)
Equity in income of affiliate                              29,843                 --                  --
Interest income                                         1,600,811            541,100                  --
Interest expense                                         (116,010)           (41,064)                 --
                                                     ------------       ------------         -----------
Total other income                                      1,514,644            500,036                  --

Net loss                                             $(21,611,646)      $(13,025,052)        $(5,994,451)
                                                     ============       ============         ===========

Basic and diluted net loss per share                 $      (3.08)      $      (2.72)        $     (1.28)
                                                     ============       ============         ===========

Shares used in computing net loss per share             7,024,800          4,796,264           4,683,667
                                                     ============       ============         ===========
</TABLE>


               See accompanying notes to the financial statements

                                       34
<PAGE>

                                 SonoSite, Inc.

                            Statements of Cash Flows


<TABLE>
<CAPTION>
                                                                             For the Years Ended December 31,
                                                                        -------------------------------------------
                                                                            1999            1998           1997
                                                                        ------------    ------------   ------------
<S>                                                                     <C>             <C>            <C>
Operating activities:
Net loss                                                                $(21,611,646)   $(13,025,052)   $(5,994,451)
Adjustments to reconcile net loss to net cash used in operating
 activities:
  Depreciation and amortization                                            1,390,109         410,613        110,698
  Undistributed equity in income of affiliate                                (29,843)             --             --
  Amortization of premium/discount on investment securities                 (69,081)             --             --
  Amortization of deferred compensation                                      197,374          58,914             --
Changes in operating assets and liabilities:
  Increase in accounts receivable                                         (7,856,547)             --             --
  Increase in receivables from affiliate                                    (400,009)             --             --
  Increase in interest receivable                                           (484,684)             --             --
  Increase in inventories                                                 (2,325,977)             --             --
  Increase in prepaid expenses                                              (387,890)       (304,599)            --
  Increase in accounts payable                                             1,936,277         781,999             --
  Increase in accrued expenses                                             1,359,806         954,109        116,985
  Increase in deferred liabilities                                           212,864          79,923             --
                                                                        ------------    ------------   ------------
Net cash used in operating activities                                    (28,069,247)    (11,044,093)    (5,766,768)

Investing activities:
  Purchase of investments                                                (64,844,230)             --             --
  Proceeds from maturities of investments                                 45,095,000              --             --
  Purchase of equipment                                                   (2,856,154)     (2,320,468)      (363,962)
  Increase in other assets                                                    (1,100)        (80,057)            --
                                                                        ------------    ------------   ------------
Net cash used in investing activities                                    (22,606,484)     (2,400,525)      (363,962)

Financing activities:
  (Decrease) increase in bank overdraft                                     (601,629)        601,629             --
  Repayment of long-term obligations                                        (347,486)       (190,234)            --
  Proceeds from the sale of common shares                                 64,734,485              --             --
  Exercise of stock options                                                  616,711           6,728             --
  Contributions from ATL Ultrasound                                       12,000,000      20,552,257      6,130,730
                                                                        ------------    ------------   ------------
Net cash provided by financing activities                                 76,402,081      20,970,380      6,130,730

Net change in cash                                                        25,726,350       7,525,762             --
Cash and cash equivalents at beginning of period                           7,525,762              --             --
                                                                        ------------    ------------   ------------
Cash and cash equivalents at end of period                              $ 33,252,112    $  7,525,762   $         --
                                                                        ============    ============   ============

Supplemental disclosure of cash flow information:
Cash paid for interest                                                  $    116,010    $     41,064   $         --
                                                                        ============    ============   ============

Supplemental disclosure of non-cash investing and financing
 activities:
Investment in affiliate made through inventory shipments                $    400,000    $         --   $         --
                                                                        ============    ============   ============
Equipment acquired through long-term obligations                        $         --    $  1,059,993   $         --
                                                                        ============    ============   ============
Contribution from ATL Ultrasound recorded as receivable                 $         --    $ 12,000,000   $         --
                                                                        ============    ============   ============
</TABLE>

              See accompanying notes to the financial statements

                                       35
<PAGE>

                                SonoSite, Inc.
           Statements of Shareholders' Equity and Comprehensive Loss


<TABLE>
<CAPTION>
                                            Common Stock                              Deferred
                                        --------------------       Additional          Stock        Accumulated
                                         Shares      Amount      paid-in capital    compensation      deficit
                                        ---------   --------    ----------------   -------------   --------------
<S>                                     <C>         <C>         <C>                <C>              <C>
Balance at December 31, 1996                   --   $     --     $            --    $         --    $  (1,889,439)

Net advances from ATL Ultrasound               --         --                  --              --               --
Net Loss                                       --         --                  --              --       (5,994,451)
                                        ---------   --------    ----------------   -------------   --------------
Balance at December 31, 1997                   --         --                  --              --       (7,883,890)

Net advances from ATL Ultrasound
   from January 1, 1998 through
   April 6, 1998                               --         --                  --              --               --
Issuance of common shares               4,870,178     48,702          40,627,573              --               --
Issuance of options/warrants to
   nonemployees                                --         --             214,550        (214,550)              --
Exercise of stock options                   2,015         20               6,708              --               --
Amortization of deferred stock
   compensation                                --         --                  --          58,914               --
Cancellation of stock options
   to nonemployees                             --         --             (64,454)         64,454               --
Net loss                                       --         --                  --              --      (13,025,052)
                                        ---------   --------    ----------------   -------------   --------------
Balance at December 31, 1998            4,872,193     48,722          40,784,377         (91,182)     (20,908,942)

Net Loss                                       --         --                  --              --      (21,611,646)
Net unrealized loss on investment
   securities                                  --         --                  --              --               --
Comprehensive loss

Sales of common shares, net issue
   costs of $5,385,515                  4,240,000     42,400          64,692,085              --               --
Issuance of options/warrants to
   nonemployees                                --         --             174,631        (174,631)              --
Exercise of stock options                  98,418        984             615,727              --               --
Cancellation of restricted stock             (978)       (10)                 10              --               --
Amortization of deferred stock
   compensation                                --         --                  --         197,374               --
Cancellation of stock options
   to nonemployees                             --         --             (39,046)         39,046               --
                                        ---------   --------    ----------------   -------------   --------------
Balance at December 31, 1999            9,209,633   $ 92,096     $   106,227,784    $    (29,393)   $ (42,520,588)
                                        =========   ========    ================   ==============  ==============
</TABLE>
<TABLE>
<CAPTION>
                                                                    Net advances        Total
                                          Accumulated other           from ATL       shareholders'
                                          comprehensive loss        Ultrasound          equity
                                         -------------------      --------------    --------------
<S>                                       <C>                       <C>              <C>
Balance at December 31, 1996                $             --       $   1,993,288      $    103,849

Net advances from ATL Ultrasound                          --           6,130,730         6,130,730
Net Loss                                                  --                  --        (5,994,451)
                                         -------------------      --------------    --------------
Balance at December 31, 1997                              --           8,124,018           240,128

Net advances from ATL Ultrasound
   from January 1, 1998 through
   April 6, 1998                                          --           2,491,086         2,491,086
Issuance of common shares                                 --         (10,615,104)       30,061,171
Issuance of options/warrants to
   nonemployees                                           --                  --                --
Exercise of stock options                                 --                  --             6,728
Amortization of deferred stock
   compensation                                           --                  --            58,914
Cancellation of stock options
   to nonemployees                                        --                  --                --
Net loss                                                  --                  --       (13,025,052)
                                         -------------------      --------------    --------------
Balance at December 31, 1998                              --                  --        19,832,975

Net Loss                                                  --                  --       (21,611,646)
Net unrealized loss on investment
   securities                                        (60,760)                 --           (60,760)
                                                                                    --------------
Comprehensive loss                                                                     (21,672,406)

Sales of common shares, net issue
   costs of $5,385,515                                    --                  --        64,734,485
Issuance of options/warrants to
   nonemployees                                           --                  --                --
Exercise of stock options                                 --                  --           616,711
Cancellation of restricted stock                          --                  --                --
Amortization of deferred stock
   compensation                                           --                  --           197,374
Cancellation of stock options
   to nonemployees                                        --                  --                --
                                         -------------------      --------------    --------------
Balance at December 31, 1999                $        (60,760)      $          --      $ 63,709,139
                                         ===================      ==============    ==============
</TABLE>

              See accompanying notes to the financial statements

                                      36
<PAGE>

                                 SonoSite, Inc.

                       Notes to the Financial Statements

1.   Business Overview

     Our Company, SonoSite, Inc., commenced operations in 1994 as a project of
ATL Ultrasound, Inc.  We were chartered to develop the design and specifications
for a highly portable ultrasound device and other highly portable ultrasound
products for potential use for diagnostic imaging in a multitude of clinical and
field settings.  From the time we started on this project until we became an
independent company, we were organized as a separate division within ATL
Ultrasound.  On February 2, 1998, the ATL Board of Directors approved a plan to
spin-off our division as an independent, publicly owned company.  This
transaction was completed through the tax-free distribution of one new share in
SonoSite, Inc, for every three shares of ATL Ultrasound stock held on April 6,
1998.  ATL Ultrasound retained no ownership in our Company following the spin-
off.

     We finalized the development and commercialization of our first products in
1999, recognizing our initial product sales revenue in September 1999.  At
December 31, 1999, our products were comprised of a highly portable ultrasound
machine, the SonoSite 180/TM/, and two transducers.  We sold these initial
products primarily to medical product distributors worldwide with a small
percentage being sold directly to end customers within the United States.  Our
prospects and ability to grow a profitable business will largely depend on our
ability to effectively market and sell our products to a variety of customers.
Those customers include physicians, hospitals and medical clinics, managed care
organizations, the military, private medical practices and emergency medical
personnel worldwide.

     Since we started operations, we have incurred losses.  We expect to
continue to incur operating losses until our product sales generate sufficient
revenue to fund our continuing operations.  We may not generate sufficient
revenue to fund our operations in future periods.

2.   Summary of Significant Accounting Policies

     Basis of presentation

     The financial statement information for periods prior to April 6, 1998, the
Distribution Date, represents the combination of the handheld ultrasound
division of ATL and the corporate entity, SonoSite, Inc.  Such information has
been derived from the historical books and records of ATL and reflects our
assets, liabilities, revenues and expenses, as we operated as a division of ATL,
at historical cost.  Financial statement information for the period subsequent
to the Distribution Date consists solely of our activity as a separate company.

     For periods prior to the Distribution Date, the statement of operations
included allocations for facilities and certain support services, such as
engineering overhead, administration, accounting, finance, human resources and
regulatory functions.  These allocations were based on estimates of personnel
time and effort spent by ATL on our behalf.  We believe these allocations were
made on a reasonable basis.  Subsequent to the Distribution Date, certain items
noted above were incorporated into agreements with ATL and charges were based
upon actual time spent by ATL on our behalf.

     The portion of our financing requirements funded by ATL prior to the
Distribution Date are shown as net advances from ATL in shareholders' equity.

                                       37
<PAGE>

Activity in the net advances from ATL equity account represents net cash
received from ATL through intercompany advances to fund our operating deficits.

     The financial information included herein is not necessarily indicative of
our financial position, results of operations or cash flows in the future or
what the financial position, results of operations or cash flows would have been
if we had been a separate, independent company during all periods presented.

     Use of estimates

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

     Cash and cash equivalents

     Cash and cash equivalents consist of money market and highly liquid debt
instruments with original or remaining maturities at purchase of three months or
less.

     Investments

     Investment securities consist of high grade corporate debt.  While our
intent is to hold our securities until maturity, we classified all securities as
available-for-sale, as the sale of such securities may be required prior to
maturity to implement management strategies.  These securities are carried at
fair value, with the unrealized gains and losses reported as a component of
other comprehensive loss until realized.  Realized gains and losses from the
sale of available-for-sale securities, if any, are determined on a specific
identification basis.

     A decline in market value of any available-for-sale security below cost
that is determined to be other than temporary results in a revaluation of its
carrying amount to fair value.  The impairment is charged to earnings and a new
cost basis for the security is established.  Premiums and discounts are
amortized or accreted over the life of the related security as an adjustment to
yield using the effective interest method.  Interest income is recognized when
earned.

     Concentrations

     Financial instruments that potentially subject us to concentrations of
credit risk consist principally of cash equivalents, investments and accounts
receivable.  We generally invest in instruments with a credit rating of A or
better.

     In the ordinary course of business, we grant credit to a broad customer
base.  Of the accounts receivable balance at December 31, 1999, 59% and 41% were
receivable from international and domestic parties, respectively.  In addition,
28% and 13% of total accounts receivable were from two individual customers.

     For the year ended December 31, 1999, three single customers accounted for
10% or greater of our total sales revenue as follows: 22% and 15% both located
in the United States and 10% located in Italy.  Combined total sales revenue
represented by these three customers was $4.9 million for the year ended
December 31, 1999.

                                       38
<PAGE>

     Investment in affiliate

     In 1999, we entered into a joint venture agreement with PharmaNet Limited
to form SonoSite China Ltd.  The joint venture was established to distribute our
products in China.  We own 40% of the outstanding shares and use the equity
method of accounting for the joint venture.

     Inventories

     Inventories are stated at the lower of standard cost, which approximates
actual cost on a first-in, first-out method, or market.  Inventories as of
December 31, 1999 consist of the following:

<TABLE>
<S>                                              <C>
     Raw Material                                $  407,307
     Finished Goods                               1,518,670
                                                 ----------
     Total                                       $1,925,977
                                                 ==========
</TABLE>

     Property and equipment

     Property and equipment are stated at cost, less accumulated depreciation
and amortization.  The costs of significant additions and improvements to
property and equipment are capitalized.  Maintenance and repair costs are
expensed as incurred.

     Depreciation and amortization are calculated using the straight-line basis
over estimated useful lives as follows:

<TABLE>
<CAPTION>
                                           Useful Life
<S>                                        <C>
Furniture and fixtures                     5 years
Computer equipment                         3-5 years
Software                                   3 years
Equipment, other than computer             5-10 years
Leasehold improvements                     Lesser of the expected remaining
                                           lease term or 5 years
</TABLE>

     Equipment held under capital lease is amortized using the straight-line
method over the shorter of the lease term or the estimated useful life of the
underlying asset.

     For long-lived assets, including property and equipment, we evaluate the
carrying value of the assets by comparing the estimated future cash flows
generated from the use of the asset and its eventual disposition with the
assets' reported net book value.  The carrying value of assets is evaluated for
impairment when events or changes in circumstances occur which may indicate the
carrying amount of the asset may not be recoverable.

                                       39
<PAGE>

     Property and equipment as of December 31 consist of the following:

<TABLE>
<CAPTION>
                                                           1999           1998
                                                       -----------    ----------
<S>                                                    <C>            <C>
Equipment, other than computer                         $ 2,747,779    $  914,176
Software                                                 2,020,047     1,403,195
Computer equipment                                       1,215,378       957,664
Furniture and fixtures                                     495,842       368,170
Leasehold improvements                                     302,198       281,885
                                                       -----------    ----------
                                                         6,781,244     3,925,090
Less - Accumulated depreciation and amortization        (1,935,384)     (545,275)
                                                       -----------    ----------
Total                                                  $ 4,845,860    $3,379,815
                                                       ===========    ==========
</TABLE>

     Included above are assets acquired under capital leases at December 31 as
follows:

<TABLE>
<CAPTION>
                                                         1999            1998
                                                      ----------      ----------
<S>                                                   <C>             <C>
Software                                              $  991,814      $  991,814
Equipment, other than computer                            68,179          68,179
                                                      ----------      ----------
                                                       1,059,993       1,059,993
Less - Accumulated amortization                         (468,078)       (123,837)
                                                      ----------      ----------
Total                                                 $  591,915      $  936,156
                                                      ==========      ==========
</TABLE>

     Revenue recognition

     Grant revenue

     For periods prior to September 1999, revenue consisted of grant revenue
under a United States Government Defense Advanced Research Projects
Administrative (DARPA) grant (the "Development Contract"). Grant revenue is
recognized consistent with the terms of the Development Contract and is
generally tied to the achievement of technological milestones, the majority of
which were achieved by the second quarter of 1998. Revenue recognition has been
limited to amounts representing assured realization of contractual funding.

     Sales revenue

     We generally recognize sales revenue when a product is shipped, risk of
loss has passed to the customer and collection of the resulting receivable is
probable.  We provide warranty protection for one year from the date of shipment
and accordingly accrue charges for related product warranty expenses based upon
estimated costs to repair or replace products sold.

     Research and development

     Research and development costs are expensed as incurred.

     Income taxes

     Deferred income taxes are provided based on the estimated future tax
effects of temporary differences between financial statement carrying amounts of
existing assets and liabilities and their respective tax bases and operating
loss and tax credit carryforwards arising subsequent to the Distribution Date.

                                       40
<PAGE>

     Deferred tax assets and liabilities are measured using enacted tax rates
that are expected to apply to taxable income in the years in which those
temporary differences and carryforwards are expected to be recovered or settled.
The effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date. A valuation
allowance is established when necessary to reduce deferred tax assets to the
amount, if any, expected to be realized.

     We were not a separate company prior to the Distribution Date.  During this
period, we recorded tax expenses or credits as if we were a separate taxpayer
and consequently due to our cumulative losses since inception, no current or
deferred tax benefit was reported.

     Stock-based compensation

     We apply the principles of APB Opinion No. 25 (APB 25), "Accounting for
Stock Issued to Employees" and related interpretations when measuring
compensation costs for our employee stock option plans.  Pro forma net loss and
net loss per share are presented as if compensation cost had been determined in
accordance with Statement of Financial Accounting Standard No. 123 (FAS 123),
"Accounting for Stock-Based Compensation."

     Net loss per share

     Basic and diluted net loss per share was computed by dividing the net loss
by the weighted average shares outstanding.

     For periods subsequent to the Distribution Date, weighted average shares
outstanding represent our actual weighted average common shares.  For the
periods prior to the Distribution Date, weighted average shares outstanding
represent ATL weighted average shares as adjusted for the exchange ratio
established on the Distribution Date of one of our shares for every three shares
of ATL.  All periods presented have been restated to reflect this distribution.

     Outstanding options to purchase our shares and our unvested restricted
shares issued by ATL and options issued by us were not included in the
computations of diluted net loss per share because to do so would be
antidilutive.  As of December 31, 1999, our outstanding options issued by ATL
through the Distribution totaled 206,983, unvested restricted shares totaled
14,013 and outstanding options we issued totaled 1,905,652.  As of December 31,
1998, our outstanding options and unvested restricted shares issued by ATL
through the Distribution totaled 270,453 and 60,930, respectively, and
outstanding options we issued totaled 1,277,365.  As of December 31, 1997, ATL
issued options and unvested restricted shares totaled 307,833 and 51,788,
respectively.  The ATL issued options as of December 31, 1997 were adjusted for
the exchange ratio of one of our options for every six options of ATL and the
restricted stock was adjusted for the exchange ratio of one of our restricted
shares for every three restricted shares of ATL.

                                       41
<PAGE>

     The following is a reconciliation of the numerator and denominator of the
basic loss per share calculations:

(in thousands, except loss per share)
<TABLE>
<CAPTION>
                                     1999                          1998                         1997
                         --------------------------    --------------------------    -------------------------
                           Loss     Shares     LPS       Loss     Shares     LPS      Loss     Shares     LPS
                         --------   ------   ------   ---------   ------   ------   --------   ------   ------
<S>                      <C>         <C>      <C>      <C>         <C>      <C>      <C>        <C>      <C>
Weighted average
 shares outstanding                   7,044                         4,853                        4,726

Weighted average
 unvested restricted
 stock                                  (19)                          (57)                         (42)
                                      -----                         -----                        -----

Basic and diluted loss
 per share                $(21,612)   7,025   $(3.08)   $(13,025)   4,796   $(2.72)   $(5,994)   4,684   $(1.28)
                          ========    =====   ======   =========    =====   ======   ========    =====   ======
</TABLE>

     Reclassification of prior period balances

     Certain amounts reported in previous years have been reclassified to
conform to the 1999 presentation.

     Segment reporting

     We currently have one operating segment.  Sales revenues by geographic
location for the year ended December 31, 1999 are as follows:

                 (in thousands)
                 United States                        $ 4,201
                 Italy                                  1,045
                 Other International                    4,886
                                                      -------
                 Total                                $10,132
                                                      =======

     Development stage enterprise

     For periods prior to December 31, 1999, we were a development stage
enterprise.

     New accounting pronouncements

     In 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 (FAS 133), "Accounting for Derivative
Instruments and Hedging Activities".  FAS 133, effective for fiscal years
beginning after June 15, 2000, requires that all derivatives are recognized at
their fair value and that corresponding gains or losses are recognized in the
operating statements or as a component of comprehensive income depending on the
specifics of the derivative instrument. We have no derivative instruments and do
not expect adoption of this pronouncement to have a material impact on our
financial statements.

     In 1999, the Securities and Exchange Commission released Staff Accounting
Bulletin No. 101 (SAB 101), "Revenue Recognition in Financial Statements," which
we must apply in 2000.  We currently apply provisions discussed in the Bulletin
and therefore do not anticipate that SAB 101 will have a material impact on our
financial statements.

                                       42
<PAGE>

     Liquidity

     As of December 31, 1999, we held cash and cash equivalents of $33.3
million.  In addition, we held $19.8 million of investment securities, of which
$16.6 million were short-term.  We expect our cash needs to increase in future
periods as we continue to fund our research and development activity and
increase spending to accommodate our manufacturing, distribution, education and
marketing plans and provide adequate administrative support for these areas.  We
believe that our existing cash will be sufficient to fund our operations through
2001.

3.   Arrangements with ATL

     We entered into several agreements with ATL effective as of the
Distribution Date.  These agreements were negotiated between the chief executive
officers of SonoSite and ATL.  Both parties consider the terms of these
agreements competitive with the cost of obtaining such rights and services in
arm's length negotiations with third parties. The following is a summary of the
significant agreements:

     Service Agreement

     We have an agreement pursuant to which ATL provides certain engineering
design and development services to us in exchange for payment of actual expenses
incurred, including an overhead component, plus a markup on the actual expense
and overhead costs for these services.  Termination of this agreement may occur
with 90 days prior written notice by either party.

     OEM Supply Agreement

     ATL has agreed to manufacture highly portable ultrasound devices
exclusively for us for a period up to five years.  In return for the
manufacturing services, we agreed to compensate ATL for manufacturing expenses
incurred, including, but not limited to, indirect and direct labor, materials
and nonrecurring engineering expenses, plus a markup.  Beginning in August 1999,
when final production began, manufacturing expenses were factored into a cost
model, based upon material and labor, at a rate of ATL's cost per unit plus a
markup percentage.  This cost was then charged to us on a per unit basis.

     Technology Transfer and License Agreement

     We agreed to a Technology Transfer and License Agreement.  We own certain
highly portable ultrasound technology developed while we were a division of ATL
and have access to certain ATL technology that is necessary or useful in the
development and manufacture of highly portable ultrasound products.  Under this
agreement, we took ownership of the technology developed as part of the
Development Contract and also patent rights which have been established or are
being pursued for that technology. In addition, we received a nonexclusive
license to use any other ATL technology in existence or developed during the
period ending three years after the Distribution Date in our handheld ultrasound
products.

     This license bears a royalty equivalent to a percentage of the net sales of
handheld ultrasound products under fifteen pounds that use ATL technology.  The
license will become paid-in-full after a period of eight years or by a lump-sum
payment which is due ATL if we cease to be an independent, stand-alone company
during the eight year period following the Distribution Date.  The lump-sum
payment is $150 million during the five years following the Distribution Date
and $75 million for the next three years.  For the year ended December 31, 1999,
we incurred a royalty expense to ATL of $297,000, which we classified as a cost
of sales.

     We also entered into a cross-license agreement whereby we have the right to
use technology developed by ATL during the three year period following the
Distribution Date in our handheld products and ATL has the right to use our
developments made during the same period in its full-size ultrasound system

                                       43
<PAGE>

products. We also agreed that we will not engage in the full-size ultrasound
business and ATL will not engage in the handheld ultrasound device business for
five years following the Distribution Date. After this five-year period, each
party's ongoing obligation with respect to the technology of the other will be
to respect the patent and copyright rights of the other, although we will retain
a license to use the previously licensed ATL technology in handheld systems and
ATL will retain a license to use our previously licensed technology in full-size
ultrasound systems.

     For the year ended December 31, 1999, we incurred expenses relating to work
performed by ATL and preproduction manufacturing expenses totaling $3.8 million.
From the Distribution Date through the period ended December 31, 1998, we
incurred expenses relating to work performed by ATL totaling $2.2 million.  We
also purchased inventory totaling $5.6 million and capital equipment totaling
$1.1 million from ATL during 1999.  As of December 31, 1999 and 1998, included
in accounts payable are amounts owed to ATL totaling $1.5 million and $523,000,
respectively.

4.  Investments

     The amortized cost, gross unrealized holding gains and losses and fair
value of available-for-sale debt securities as of December 31, 1999 were as
follows:

     (in thousands)

<TABLE>
<CAPTION>
                                                 Gross             Gross
                                               unrealized        unrealized
                           Amortized cost    holding gains     holding losses   Fair value
                           --------------    -------------     --------------   ----------
<S>                       <C>               <C>               <C>                <C>
Corporate bonds                $19,819             $23               $84          $19,758
                               =======             ===               ===          =======
</TABLE>

     As of December 31, 1999, maturities of debt securities classified as
available-for-sale were as follows:

      (in thousands)
<TABLE>
<CAPTION>
                                           Amortized cost     Fair value
                                           --------------     ----------
<S>                                        <C>                <C>
Due within one year (current)                  $16,618          $16,594
Due after one year through five years            3,201            3,164
                                               -------          -------
                                               $19,819          $19,758
                                               =======          =======
</TABLE>

     Because we sold no securities prior to maturity, we had no realized gains
or losses.  Interest income from securities for the year ended December 31, 1999
was $1.1 million.

5.  Investment in Affiliate

     The investment in affiliate represents our initial capital contribution of
$400,000 and 40% of the net income of SonoSite China Ltd. for the period ended
December 31, 1999.  Receivables from affiliate represents the outstanding amount
owed to us by SonoSite China Ltd. for purchases of inventory.

     For the year ended December 31, 1999, we recognized sales revenue to
SonoSite China Ltd. in the amount of $772,000.  Additionally, our undistributed
earnings of SonoSite China Ltd. were approximately $30,000.

                                       44
<PAGE>

     Summary unaudited financial information of SonoSite China Ltd. as of and
for the year ended December 31, 1999 follows:

<TABLE>
<S>                                                            <C>
Current assets                                                 $1,417,204
Current liabilities                                               507,203
                                                               ----------
Working capital                                                   910,001

Property and equipment, net                                        68,366
Other assets                                                       96,241
                                                               ----------

Shareholders' equity                                           $1,074,608
                                                               ==========

Sales                                                          $1,392,455
                                                               ==========

Net income                                                     $   74,608
                                                               ==========
</TABLE>

                                       45
<PAGE>

6.   Accrued Expenses

     Accrued expenses as of December 31 include the following:

<TABLE>
<CAPTION>
                                         1999          1998
                                      ----------     ----------
<S>                                   <C>           <C>
Payroll and related                   $  916,468     $  480,580
Outside services                         728,875        142,550
Royalties due                            297,403             --
Tooling                                   71,017        350,820
Other                                    469,991        149,998
                                      ----------     ----------
                                      $2,483,754     $1,123,948
                                      ==========     ==========
</TABLE>

7.   Shareholders' Equity

     Stock option plans

     As of December 31, 1999, we had the following stock compensation plans: the
1998 Nonofficer Employee Stock Option Plan ("1998 NOE Plan"), the 1998 Option,
Stock Appreciation Right, Restricted Stock, Stock Grant and Performance Unit
Plan ("1998 Plan"), the Nonemployee Director Stock Option Plan ("Director
Plan"), the Management Incentive Compensation Plan ("MIC Plan") and the
Adjustment Plan.  We account for stock options under provisions of APB 25 and
therefore, to the extent the fair value of the underlying stock is equal to or
less than the exercise price on the measurement date, no compensation expense is
recognized for employee stock option grants.

     Prior to the Distribution Date, all option information represents the
outstanding and issued options of ATL.  Financial data presented relating to
option grants represents the exchange ratio calculated as one of our options for
every six ATL options outstanding.  This exchange ratio provides the basis for
the pro forma presentation for 1997.

     If we accounted for the costs relating to all option grants under the
provisions of FAS 123, our net loss and net loss per share would have been the
following pro forma amounts:

<TABLE>
<CAPTION>
(in thousands, except per share data)
                                              1999           1998         1997
                                            -------        -------       ------
<S>                                         <C>            <C>           <C>
Net loss:
    As reported                             $21,612        $13,025       $5,994
    Pro forma                               $26,962        $14,946       $6,141
Basic and diluted net loss per share:
    As reported                             $ (3.08)       $ (2.72)      $(1.28)
    Pro forma                               $ (3.84)       $ (3.12)      $(1.31)
</TABLE>

     Pro forma compensation expense is recognized for the fair value of each
option estimated on the date of grant using the Black-Scholes multiple option
pricing model.  The following assumptions were used for option grants in 1999,
1998 and 1997, respectively: expected volatility 61%, 67% and 39%; risk-free
interest rates 6.4%, 4.8% and 6.3%; expected terms of 7.39, 9.16 and 4.25 years;
and zero dividend yield.

                                       46
<PAGE>

     Under the 1998 NOE Plan, 1998 Plan, and MIC Plan, as of December 31, 1999,
2,279,309 total shares of common stock are authorized primarily for issuance
upon exercise of stock options at prices equal to the fair market value of our
common shares at the date of grant.  As of December 31, 1999, 373,657 shares
were available for grant under the aforementioned plans.  In most cases, stock
options are exercisable at 25% each year over a four-year vesting period and
have a ten-year term from the grant date.  However, provisions for 377,000
options granted in 1999 allow for potential early vesting to occur upon the
achievement of certain financial targets in 1999 and 2000.  In 1999, these
financial targets were met and therefore 188,500 options vested effective
February 2000.  Tables presented reflect the impact on the weighted average
remaining contractual life of the known early vesting provisions, but do not
reflect the impact of contingent vesting relating to achievement of financial
targets for the year ending December 31, 2000.

     Under the Director Plan, 115,000 shares of common stock are authorized for
issuance of stock options at prices equal to the fair market value of our common
shares at the date of grant.  At December 31, 1999, there were no shares
available for grant under this Plan.  Stock options are exercisable and vest in
full one year following their grant date provided the optionee has continued to
serve as our Director.  Each option expires on the earlier of ten years from the
grant date or ninety days following the termination of a director's service as
our Director.

     We also have an Adjustment Plan, which includes options granted in
connection with the dividend distribution occurring on April 6, 1998.  As part
of the Distribution, existing ATL option holders received one of our options for
every six ATL options held.  There was no change to the intrinsic value of the
option grant, ratio of exercise price to market value, vesting provisions or
option period as a result of the Distribution.  Total options to purchase shares
outstanding under this plan as of December 31, 1999 and 1998 are 206,983 and
270,453, respectively.

     Also as part of the Distribution, restricted shares totaling 14,013 and
60,930, respectively, as determined using the exchange ratio of one of our
restricted shares for every three ATL restricted shares, were outstanding as of
December 31, 1999 and 1998.

     Summary of stock option activity

     Prior to the Distribution Date, we had no stock option plans specifically
identified as our plans.  All stock options granted through that date were part
of ATL options and therefore shares and weighted average exercise prices as of
December 31, 1997 are not included in the following table because it would not
be meaningful.

                                       47
<PAGE>

     The following table presents summary stock option activity for the year
ended December 31:

<TABLE>
<CAPTION>
   (shares presented in thousands)                       1999                                1998
                                                ----------------------------         -----------------------------
                                                                 Weighted                            Weighted
                                                                  average                             average
                                                Shares        exercise price         Shares         exercise price
                                                ------        --------------         ------         --------------
<S>                                             <C>           <C>                    <C>            <C>
Outstanding, beginning of year                   1,548             $ 6.95               --              $  --
  Adjustment Plan grants                            --                 --              289              $5.39
  Non-Adjustment Plan grants                       759             $15.86            1,290              $7.28
  Exercised                                        (98)            $ 6.27               (2)             $3.34
  Cancelled                                        (96)            $10.25              (29)             $6.56
                                                ------             ------           ------              -----
Outstanding, end of year                         2,113             $10.04            1,548              $6.95

Exercisable, end of year                           501             $ 6.38              185              $4.52

Weighted average fair value of
  options granted during the period
  (excluding the Adjustment Plan)               $10.73                               $5.58
                                                ======                              ======
</TABLE>

     The following is a summary of stock options outstanding:

     (shares presented in thousands)


<TABLE>
<CAPTION>
                                             Options outstanding                                Options exercisable
                             ------------------------------------------------------      ---------------------------------
                                              Weighted average
                               Number             remaining        Weighted average        Number         Weighted average
Range of exercise prices     outstanding      contractual life      exercise price       exercisable       exercise price
------------------------     -----------      ----------------     ----------------      -----------      ----------------
<S>                          <C>              <C>                  <C>                   <C>              <C>
$ 1.64  -  $   6.89                212               5.48               $ 4.75                146               $ 4.13
$ 6.94  -  $   6.94                944               8.36               $ 6.94                288               $ 6.94
$ 6.97  -  $  11.44                404               6.66               $10.18                 63               $ 8.66
$11.50  -  $  15.47                326               6.84               $14.45                  4               $12.21
$15.94  -  $  35.44                227               9.58               $21.31                 --                   --
                                 -----               ----               ------                ---               ------
                                 2,113               7.64               $10.04                501               $ 6.38
                                 =====               ====               ======                ===               ======
</TABLE>

     Stock purchase rights

     On April 6, 1998, SonoSite and First Chicago Trust Company of New York
entered into a Rights Agreement.  The Rights Agreement has certain antitakeover
effects which will cause substantial dilution to a person or group that attempts
to acquire us, however, it will not interfere with any merger or other business
combination approved by our Board of Directors ("Board").

     Under the terms of the Rights Agreement, holders of our common stock also
hold rights exercisable in certain circumstances discussed below.  Holders of
these Rights may purchase 1/100th of a share of Series A Participating
Cumulative Preferred Stock, par value of $1.00, at a price equal to four times
the average high and low sales prices of our common stock quoted on the Nasdaq
National Market for each of the ten trading days commencing on the sixth trading
day following April 6, 1998.  Circumstances under which these Rights are

                                       48
<PAGE>
exercisable involve acquisition or knowledge of expected acquisition or tender
of 15% or more of our outstanding common stock. In addition, the Board may
redeem all, but not part, of the Rights outstanding for consideration in cash or
common stock at a price equal to $0.01 per Right.

     Separate certificates for Rights will not be distributed.  Our common stock
certificates serve as evidence of the Rights.  Prior to exercise of the Rights
and in accordance with the terms of the Rights Agreement, the Rights have no
voting or dividend value.  If the Rights are not exercised prior to April 5,
2008, they expire with no consideration for the expiration being provided to the
holder of the Right.

8.  Income Taxes

     For income tax purposes, our results through the Distribution Date were
included in the consolidated Federal income tax return of ATL and, accordingly,
the net operating loss generated prior to the Distribution Date will not be
available to us for use in periods subsequent to the Distribution Date.  In 1999
and the period from the Distribution Date through December 31, 1998, we
accumulated a net operating loss carryforward of approximately $31.7 million.
This carryforward begins expiring in 2018 and will be fully expired in 2019.
Approximately $500,000 of the net operating loss carryforward results from stock
option deductions which, when and if realized, would result in a credit to
shareholders' equity.

     Because we incurred losses since inception, a valuation allowance entirely
offsetting deferred tax assets has been established, thereby eliminating any
deferred tax benefit in 1999 and 1998.  The increase in the valuation allowance
of $8.1 million in 1999 and $3.6 million in 1998 is primarily the result of
increasing net operating loss carryforwards.

     The tax effects of temporary differences and carryforwards that give rise
to significant portions of deferred tax assets and deferred tax liabilities at
December 31 are as follows:

     (in thousands)
<TABLE>
<CAPTION>
                                                               1999        1998
                                                             --------     -------
<S>                                                          <C>          <C>
Deferred tax assets
 Net operating loss carryforwards                            $ 10,770     $ 3,508
 Research and experimentation tax credit carryforwards            564          --
 Allowances not recognized for tax purposes                        67          --
 Other                                                            461          75
                                                             --------     -------
Gross deferred tax assets                                      11,862       3,583

Valuation allowance                                           (11,674)     (3,583)
                                                             --------     -------
                                                                  188          --
Deferred tax liabilities
 Depreciation                                                    (188)         --
                                                             --------     -------

Net deferred tax assets                                      $     --     $    --
                                                             ========     =======
</TABLE>

                                       49
<PAGE>

9.  Employee Benefit Plans

     401(k) Retirement Savings Plan ("401k Plan")

     All our employees are eligible to participate in the 401k Plan.  Terms of
the 401k Plan permit an employee to contribute up to a maximum of 16% of an
employee's annual compensation on a post tax or pretax basis, up to the maximum
permissible by the Internal Revenue Service (IRS) during any plan year.
Contributions exceeding the IRS limitation may be made only on a post-tax basis.
We match each employee's contribution in increments equivalent to 100% for the
first 3% and 50% for the second 3% of the contribution. In 1999 and 1998, we
contributed $207,000 and $98,000, respectively, to the 401k Plan in accordance
with the Plan's terms. Employees immediately vest in the contributions the
employee makes. Vesting in our contribution on behalf of the employee occurs at
equal increments at the end of each year of the first five years of an
employee's service with us.

10.  Commitments and Contingencies

     Operating leases

     We currently lease office space under an operating lease.  In December
1999, we entered into a new agreement to lease office, warehouse, manufacturing
and fabrication laboratory space beginning mid-year 2000.  As a result, we
agreed to terminate our existing office lease, effective June 2000.

     The future minimum payments include payments under the existing office
lease through June 2000, the new office lease beginning in June 2000, and lease
agreements for warehouse space and equipment. As of December 31, 1999, future
minimum lease payments are as follows:

                      2000                   $  599,525
                      2001                      899,330
                      2002                      907,546
                      2003                      947,782
                      2004                      982,572
                      Thereafter              2,568,541
                                             ----------
                                             $6,905,296
                                             ==========

     Prior to November 1998, we utilized facility space within ATL and were
charged rent expense for the space occupied.  Subsequently, we vacated the ATL
facility and moved into a separate facility.  Rent expense for the year ended
December 31, 1999 and 1998 was $329,000 and $243,000, respectively, which
includes ATL charges of $24,000 for warehouse space in 1999 and $128,000 for
office space in 1998.  We did not incur any rent expense prior to the
Distribution Date as our operations were in ATL's owned facility.

     Capital lease obligations

     We entered into certain long-term obligations to finance the purchase of
capital equipment as part of our normal business operations.  Original terms of
the obligations range from eighteen to thirty-six months and have interest rates
ranging between 12% and 16%. Obligations are secured by underlying assets. The
following is a summary of the capital lease obligations and future minimum
payments under capital lease obligations as of December 31, 1999:

                                       50
<PAGE>

        2000                                                     $ 431,330
        2001                                                       139,480
                                                                 ---------
        Total lease payments                                       570,810
        Less amount representing interest                          (48,537)
                                                                 ---------
        Present value of net minimum capital lease payments        522,273
        Less-current portion                                      (387,577)
                                                                 ---------
        Long-term obligations-excluding current portion          $ 134,696
                                                                 =========

     Other Commitments

     As part of our agreements with ATL, ATL may procure resources and material
expected to be used for the manufacture of our product in accordance with our
production schedule provided to them.  In the event these items are not used in
the quantities submitted as part of the production schedule or material becomes
obsolete as a result of production timing, we would be responsible for
compensating ATL for these procurements.

     Contingencies

     We obtained approval from the United States Food and Drug Administration
(FDA) to sell and distribute our product domestically. However, there is no
guarantee the FDA will approve future product submissions. Additionally,
international sales and distribution are dependent upon our obtaining approval
of certain foreign regulatory agencies. We obtained approval from many of these
agencies however, there are no guarantees that approval will be attained on a
timely basis, if at all, in the future.

Item 9.   Changes in and Disagreements With Accountants on Accounting and
          Financial Disclosure

     None.

                                       51
<PAGE>

                                    PART III

Item 10.  Directors and Executive Officers of the Registrant

     Information called for by Part III, Item 10, is included in our proxy
statement relating to our Annual Meeting of shareholders to be held on May 3,
2000, and is incorporated herein by reference.  The information appears in the
proxy statement under the captions "Election of Directors" and "Executive
Officers."  The proxy statement will be filed within 120 days of December 31,
1999, our fiscal year end.

Item 11.  Executive Compensation

     Information called for by Part III, Item 11, is included in our proxy
statement relating to our Annual Meeting of shareholders to be held on May 3,
2000, and is incorporated herein by reference.  The information appears in the
proxy statement under the caption "Executive Compensation."  The proxy statement
will be filed within 120 days of December 31, 1999, our fiscal year end.

Item 12.  Security Ownership of Certain Beneficial Owners and Management

     Information called for by Part III, Item 12, is included in our proxy
statement relating to our Annual Meeting of shareholders to be held on May 3,
2000, and is incorporated herein by reference.  The information appears in the
proxy statement under the caption "Security Ownership of Certain Beneficial
Owners and Management."  The proxy statement will be filed within 120 days of
December 31, 1999, our fiscal year end.

Item 13.  Certain Relationships and Related Transactions

     Information called for by Part III, Item 13, is included in our proxy
statement relating to our Annual Meeting of shareholders to be held on May 3,
2000, and is incorporated herein by reference.  The information appears in the
proxy statement under the caption "Certain Relationships and Related
Transactions."  The proxy statement will be filed within 120 days of December
31, 1999, our fiscal year end.

                                       52
<PAGE>

                                    PART IV

Item 14.  Exhibits, Financial Statement Schedules, and Reports on Form 8-K

     (a)  Documents filed as part of this report:

          (1)  Financial Statements--See "Index to Financial Statements" under
               Item 8 of this Report.

          (2)  Financial Statement Schedules.

<TABLE>
<CAPTION>
                                     Valuation and Qualifying Accounts
                                        Year ended December 31, 1999
                             Balance at       Additions charged to                      Balance at end of
                          beginning of year         expense             Deductions             year
                          -----------------   --------------------      ----------      -----------------
<S>                       <C>                 <C>                       <C>             <C>
Allowance for doubtful         $  --                $96,344               $  --              $96,344
 accounts
</TABLE>

          (3)  Exhibits.

<TABLE>
<CAPTION>
  Exhibit No.                                      Description
  -----------                                      -----------
<C>              <S>
      3.1*       Restated Articles of Incorporation of the registrant
      3.2**      Certificate of Designation of Series A Participating Cumulative Preferred Stock
      3.3**      Bylaws of the registrant
      4.1*       Rights Agreement between First Chicago Trust Company and the registrant, dated April
                 6, 1998
      4.2***     Form of Purchase Agreement
     10.1*       Amended and Restated 1998 Option, Stock Appreciation Right, Restricted Stock, Stock
                 Grant and Performance Unit Plan
     10.2*       Terms of Stock Option Grant Program for Nonemployee Directors under the SonoSite, Inc.
                 1998 Option, Stock Appreciation Right, Restricted Stock, Stock Grant and Performance
                 Unit Plan
     10.3****    1998 Nonofficer Employee Stock Option Plan
     10.4**      Nonemployee Director Stock Option Plan
     10.5****    Management Incentive Compensation Plan
     10.6**      Adjustment Plan
     10.7*       Form of Senior Management Employment Agreement between the registrant and each of
                 Andrew T. Dunn, Kevin M. Goodwin, Allen W. Guisinger, David H. Gusdorf, Jens U.
                 Quistgaard, Ph.D., Donald F. Seaton III and Douglas W. Tefft
     10.8*       Distribution Agreement between ATL Ultrasound, Inc. and the registrant, effective as
                 of April 6, 1998
     10.9*       Technology Transfer and License Agreement between ATL Ultrasound, Inc. and the
                 registrant, effective as of April 6, 1998, as amended
     10.10*      OEM Supply Agreement between ATL Ultrasound, Inc. and the registrant, effective as of
                 April 6, 1998, as amended
     10.11*      Employee Benefits Agreement between ATL Ultrasound, Inc. and the registrant, effective
                 as of April 6, 1998
</TABLE>

                                       53
<PAGE>

<TABLE>
<C>              <S>
     10.12*      Service Agreement between ATL Ultrasound, Inc. and the registrant, effective as of
                 April 6, 1998
     10.13*      Lease Agreement between TMT-Bothell, LLC and the registrant, dated May 9, 1998
     10.14       Lease Agreement between Riggs & Company, a division of Riggs Bank N.A. and the
                 registrant dated December 28, 1999
     10.15*****  Distribution Agreement between Olympus Optical Co. Ltd and the registrant, dated
                 August 1, 1999
     23.1        Consent of KPMG LLP, Independent Auditors
     24.1        Power of Attorney (contained on signature page)
     27.1        Financial Data Schedule
</TABLE>
_________________
     * Incorporated by reference to the designated exhibit included in the
       Company's Registration Statement on Form S-1 (Registration No. 333-
       71457).
    ** Incorporated by reference to the designated exhibit included in the
       Company's report on Form 10 (SEC File No. 000-23791).
   *** Incorporated by reference to the designated exhibit included in the
       Company's Registration Statement on Form S-3 (Registration No. 333-
       91083).
  **** Incorporated by reference to the designated exhibit included in the
       Company's report on Form 10-K for the year ended December 31, 1998 (SEC
       File No. 000-23791).
 ***** Confidential treatment has been requested for portions of this exhibit.
       The copy filed herewith omits the information subject to the
       confidentiality request. Omissions are designated as [*]. A complete
       version of this exhibit has been filed separately with the Securities and
       Exchange Commission.


      (b) Reports on Form 8-K:

      No reports on Form 8-K were filed during the quarter ended December 31,
1999.

                                       54
<PAGE>

                                   SIGNATURES

     Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

                                       SONOSITE, INC.



                                       By: Donald F. Seaton III
                                           --------------------------------
                                           Donald F. Seaton III
                                           Vice President-Operations, Chief
                                           Financial Officer, Secretary and
                                           Treasurer

Date:  March 27, 2000

     Each person whose individual signature appears below hereby authorizes and
appoints Kevin M. Goodwin and Donald F. Seaton III, and each of them, with full
power of substitution and resubstitution and full power to act without the
other, as his or her true and lawful attorney-in-fact and agent to act in his or
her name, place and stead and to execute in the name and on behalf of each
person, individually and in each capacity stated below, and to file, any and all
amendments to this report, and to file the same, with all exhibits thereto, and
other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing,
ratifying and confirming all that said attorneys-in-fact and agents or any of
them or their or his or her substitute or substitutes may lawfully do or cause
to be done by virtue thereof.

     Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the Company
and in the capacities indicated below on the 27th day of March, 2000.

                                       55
<PAGE>

<TABLE>
<CAPTION>
<S>                                             <C>

       /s/ Kirby L. Cramer
_________________________________________       Chairman of the Board
           Kirby L. Cramer

      /s/ Kevin M. Goodwin
________________________________________        President, Chief Executive Officer and
          Kevin M. Goodwin                      Director (Principal Executive Officer)

    /s/ Donald F. Seaton III
_________________________________________       Vice President-Operations, Chief Financial
        Donald F. Seaton III                    Officer, Secretary and Treasurer (Principal
                                                Financial and Accounting Officer)

     /s/ Edward V. Fritzky
_________________________________________       Director
         Edward V. Fritzky

   /s/ Steven R. Goldstein, M.D.
_________________________________________       Director
       Steven R. Goldstein, M.D.

      /s/ Ernest Mario, Ph.D.
_________________________________________       Director
          Ernest Mario, Ph.D.

     /s/ William G. Parzybok, Jr.
_________________________________________       Director
         William G. Parzybok, Jr.

    /s/ Jeffrey Pfeffer, Ph.D.
_________________________________________       Director
        Jeffrey Pfeffer, Ph.D.

     /s/ Dennis A. Sarti, M.D.
_________________________________________       Director
         Dennis A. Sarti, M.D.

     /s/ Jacques Souquet, Ph.D.
_________________________________________       Director
         Jacques Souquet, Ph.D.
</TABLE>

                                       56
<PAGE>

                               INDEX TO EXHIBITS


<TABLE>
<CAPTION>
  Exhibit No.                                       Description
  -----------                                       -----------
<C>              <S>
      3.1*       Restated Articles of Incorporation of the registrant
      3.2**      Certificate of Designation of Series A Participating Cumulative Preferred Stock
      3.3**      Bylaws of the registrant
      4.1*       Rights Agreement between First Chicago Trust Company and the registrant, dated April
                 6, 1998
      4.2***     Form of Purchase Agreement
     10.1*       Amended and Restated 1998 Option, Stock Appreciation Right, Restricted Stock, Stock
                 Grant and Performance Unit Plan
     10.2*       Terms of Stock Option Grant Program for Nonemployee Directors under the SonoSite, Inc.
                 1998 Option, Stock Appreciation Right, Restricted Stock, Stock Grant and Performance
                 Unit Plan
     10.3***     1998 Nonofficer Employee Stock Option Plan
     10.4**      Nonemployee Director Stock Option Plan
     10.5***     Management Incentive Compensation Plan
     10.6**      Adjustment Plan
     10.7*       Form of Senior Management Employment Agreement between the registrant and each of
                 Andrew T. Dunn, Kevin M. Goodwin, Allen W. Guisinger, David H. Gusdorf, Jens U.
                 Quistgaard, Ph.D., Donald F. Seaton III and Douglas W. Tefft
     10.8*       Distribution Agreement between ATL Ultrasound, Inc. and the registrant, effective as
                 of April 6, 1998
     10.9*       Technology Transfer and License Agreement between ATL Ultrasound, Inc. and the
                 registrant, effective as of April 6, 1998, as amended
     10.10*      OEM Supply Agreement between ATL Ultrasound, Inc. and the registrant, effective as of
                 April 6, 1998, as amended
     10.11*      Employee Benefits Agreement between ATL Ultrasound, Inc. and the registrant, effective
                 as of April 6, 1998
     10.12*      Service Agreement between ATL Ultrasound, Inc. and the registrant, effective as of
                 April 6, 1998
     10.13*      Lease Agreement between TMT-Bothell, LLC and the registrant, dated May 9, 1998
     10.14       Lease Agreement between Riggs & Company, a division of Riggs Bank N.A. and the
                 registrant dated December 28, 1999
     10.15*****  Distribution Agreement between Olympus Optical Co. Ltd. and the registrant, dated
                 August 1, 1999.
     23.1        Consent of KPMG LLP, Independent Auditors
     24.1        Power of Attorney (contained on signature page)
     27.1        Financial Data Schedule
</TABLE>
___________________
    * Incorporated by reference to the designated exhibit included in the
      Company's Registration Statement on Form S-1 (Registration No. 333-71457).
   ** Incorporated by reference to the designated exhibit included in the
      Company's report on Form 10 (SEC File No. 000-23791).
  *** Incorporated by reference to the designated exhibit included in the
      Company's Registration Statement on Form S-3 (Registration No. 333-91083).
 **** Incorporated by reference to the designated exhibit included in the
      Company's report on Form 10-K for the year ended December 31, 1998 (SEC
      File No. 000-23791).
***** Confidential treatment has been requested for portions of this exhibit.
      The copy filed herewith omits the information subject to the
      confidentiality request. Omissions are designated as [*]. A complete
      version of this exhibit has been filed separately with the Securities and
      Exchange Commission.