<PAGE>
                   SECURITIES AND EXCHANGE COMMISSION
                         Washington, D.C. 20549

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

                               FORM 10-KSB/A

                             AMENDMENT NO. 2

/X/  Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange 
     Act of 1934 for the fiscal year ended December 31, 1996
  
     OR

/ / Transition Report Pursuant to Section 13 or 15(d) of the Securities 
     Exchange Act of 1934


                                0-25828
                          --------------------
                          (Commission File No.)

                        ELECTROPHARMACOLOGY, INC.
    -----------------------------------------------------------------
    (Exact name of Small Business Issuer as specified in its charter)

            Delaware                                954315412 
   ----------------------------                ---------------------
   (State or other jurisdiction                (I.R.S. Employer
   of incorporation)                           Identification No.)

      2301 N.W. 33RD COURT, SUITE 102, POMPANO BEACH, FLORIDA 33069
       (Address of principal executive offices including zip code)

       Registrant's telephone number, including area code:  (954) 975-9818

       Securities registered pursuant to Section 12(b) of the Act: None

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

                        COMMON STOCK, $.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-B is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB.  / /

The issuer's revenues for the fiscal year ended December 31, 1996 is 2,149,011.

The aggregate market value of the registrant's Common Stock held by non-
affiliates as of July 2, 1997 was approximately $4,686,450.20.  As of July 2, 
1997 there were 3,732,376 shares of the registrant's Common Stock 
outstanding.

                      Documents Incorporated by Reference:
                                      NONE

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

<PAGE>
                                       
                     AMENDMENT TO APPLICATION OR REPORT
               FILED PURSUANT TO SECTION 12, 13 OR 15(D) OF THE
                      SECURITIES EXCHANGE ACT OF 1934



                         ELECTROPHARMACOLOGY, INC.

                              FORM 10-KSB/A
                             AMENDMENT NO. 2
                  FOR THE YEAR ENDED DECEMBER 31, 1996


     The undersigned registrant hereby amends the following items, financial 
statements, exhibits or other portions of its Annual Report on Form 10-KSB 
for the fiscal year ended December 31, 1996 as set forth in the pages 
attached hereto:

     Item 6.  Management's Discussion and Analysis of Financial Condition and 
Results of Operations.

     Item 7.  Financial Statements.


                                       1
<PAGE>


                                       PART II


ITEM 6.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND 
         RESULTS OF OPERATIONS

GENERAL

    The Company was organized in August 1990 and commenced commercially 
marketing the SofPulse-TM- device in early 1992.  To date, the Company has 
generated only modest revenue from sales and rentals of the SofPulse-TM-, 
which has achieved only limited market acceptance.  Since inception, the 
Company's expenses have exceeded revenue, resulting in losses of $3,069,586 
and $2,927,990, respectively, for the years ended December 31, 1995 and 1996. 
As of December 31, 1996, the Company had an accumulated deficit of 
$13,599,257. Losses incurred since inception have been primarily attributable 
to costs incurred in connection with the design and development of the 
Company's products, research and clinical studies on the SofPulse-TM-, 
manufacturing, marketing literature and advertisement for the SofPulse-TM-, 
and the hiring of personnel necessary to support the Company's operations.  
The Company continues to have high levels of operating expenses (including 
salaries of management, research and development, manufacturing and marketing 
personnel) and will be required to incur significant expenses in connection 
with research and clinical studies and the purchase of materials to 
manufacture the SofPulse-TM- devices. Once manufactured, it may take several 
months for a SofPulse-TM- device to produce any rental revenue for the 
Company.  Accordingly, the Company anticipates that it will continue to incur 
significant losses until, at the earliest, the Company generates sufficient 
revenue to support its operations. The Company believes that generation of a 
level of revenue sufficient to support operations is dependent upon, among 
other things, the Company's ability to demonstrate successfully and 
objectively SofPulse's-TM- clinical utility through controlled clinical 
studies; build an effective sales and marketing infrastructure to increase 
significantly the sale and rental of the SofPulse-TM- devices in the existing 
and the target markets; continue to obtain reimbursement for the SofPulse-TM- 
treatment by third party payors; and develop and introduce new products and 
enhance existing products.  There can be no assurance that the Company will 
be able to achieve any of the foregoing, which could have a material adverse 
effect on the Company's business, financial condition, cash flows, results of 
operations and prospects.

RESULTS OF OPERATIONS

YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995

    Revenue for 1996 was $2,149,011 compared to $1,996,663 for 1995, or an 
increase of $152,348.  This 7.6% increase was primarily attributable to 
increased SofPulse-TM- rental revenue during the last half of 1996.  Revenue 
growth during the first half of 1996 was adversely affected by the 
reorganization of the Company's sales organization.  That reorganization has 
been completed and the Company began to experience improvement from those 
changes beginning in October 1996.  The Company then expanded its domestic 
geographic coverage and contracted with four additional independent 
representative organizations.  As a result, during the second half of 1996, 
monthly rental revenue increased from $112,000 in June 1996 to $202,000 in 
December 1996, an increase of $90,000, or 80.4%.  By the end of 1996, there 
were 278 units under rental contracts, compared to 168 units at the end of 
1995.  

    Revenue from the sale of units decreased 33.1% from $612,846 in 1995 to 
$409,818 in 1996.  The Company is placing more emphasis on expanding the 
rental base of its SofPulse-TM- device.

    Cost of revenue in 1996 increased $152,042 to $376,197, compared to 
$224,155 in 1995.  This 67.8% increase reflects additional depreciation 
associated with the expanded SofPulse-TM- rental base in addition to charges 
of approximately $52,000 recorded in the fourth quarter of 1996 for obsolete 
SofPulse-TM- Model 911 devices.

    Selling general and administrative expenses were $3,941,235 in 1996, 
compared to $2,813,389 in 1995, an increase of $1,127,846, or 40.1%.  This 
cost increase reflects the salaries and related benefits for additional 
personnel to support the Company's operations.  In the first half of 1996, 
the Company redirected its focus from research and development to sales and 
marketing. Three full-time physical therapists, a product manager, a national 
sales director and two regional sales directors joined the Company, adding to 
the Company's payroll 

                                       -2-

<PAGE>

expenses.  Later in 1996, Joseph Mooibroek joined the Company as its new 
Chairman of the Board, President and Chief Executive Officer.  (See 
"Description of Business -- Recent Developments" regarding Mr. Mooibroek's 
recent resignation).  Mr. Mooibroek received as compensation during fiscal 
1996 an aggregate of $224,404 in cash compensation, 32,903 shares of Common 
Stock valued on the date of grant at $94,596, and 592,086 options to purchase 
shares of Common Stock of the Company.  Selling general and administrative 
expenses also include fourth quarter 1996 adjustments of approximately 
$251,000 primarily to increase the allowance for doubtful accounts ($56,000) 
and to record legal ($67,000), consulting ($47,000) and other liabilities 
($81,000) which arose in the fourth quarter.  Such costs are associated with 
events and transactions which occurred during 1996 and are not expected to be 
recurring expenses of the Company.  (See last paragraph of Note 
11--Contingencies and Note 13--Fourth Quarter Adjustments in the Notes to 
Financial Statements.)

    Research and development expenses decreased to $815,722 in 1996, compared 
to $1,690,163 in 1995, a decrease of $874,441, or 51.7%.  This decrease was 
primarily attributable to the completion in early 1996 of the Company's 
initial clinical trials in connection with the Company's PMA application (see 
"Description of Business -- Research and Development"), as well as the 
reduction of basic scientific research involving PRF and PEMS-TM- 
technologies.  The Company incurred employment related expenses of 
approximately $49,000 in connection with the hiring of Dr. Arup Sen as 
Executive Vice President of Research, Development, Regulatory, and Clinical 
Studies in November 1996.  Dr. Sen has served as Chairman of the Board, 
President, Chief Executive Officer and Secretary since April 1, 1997.  (See 
"Description of Business--Recent Developments" regarding Dr. Sen's recent 
appointment to his current positions.)

    Interest expense in 1996 decreased to $8,933 from $463,172 in 1995.  This 
$454,239 or 98.1% decrease resulted from eliminating substantially all 
outstanding debt after the Company completed its initial public stock 
offering in May 1995 and changed its capital structure by issuing Preferred 
Stock and converting $1,000,000 of debt to Common Stock in November 1995.  
With the exception of obligations under capital equipment leases, the Company 
had no debt outstanding at December 31, 1996.

    Interest income in 1996 decreased to $65,086, compared to $124,630 in 
1995, a decrease of $59,544, or 47.8%.  This decrease resulted from the lack 
of funds of the Company available for short term investment.

    As a consequence of the Company's deteriorating cash position and its 
unsuccessful efforts to consummate a financing in late 1996 and early 1997, 
in March 1997 the Company underwent a reduction in personnel from 27 to 18 
employees, or 33%.  In order to minimize the adverse effect such reduction in 
personnel may have on the Company's ability to generate revenue from 
marketing and sales activities, the Company has reallocated three of its 
research and development personnel to provide marketing support until 
additional funds are available. The Company also is focusing its sales 
efforts mostly in geographic areas where the Company has achieved reasonable 
market presence.  The Company intends to redistribute the approximately 200 
SofPulse-TM- devices in its rental fleet that are not generating sufficient 
rental revenue to areas where higher utilization of the devices is expected.  
The Company also has in its current inventory about 60 finished devices with 
which it can fill future orders for the sale or rental of the product.  If 
the Company receives orders for more than the approximately 260 devices that 
are being re-distributed or are in current inventory, the Company will have 
to manufacture additional devices.  (See "Description of the Business -- 
Manufacturing and Suppliers").  The Company cannot predict the results these 
changes will have on its ongoing revenue and intends to replace terminated 
employees and expand its operations when, and if, new financing is 
consummated.  

LIQUIDITY AND CAPITAL RESOURCES 

    The Company's cash requirements have been and will continue to be 
significant.  Since its inception, the Company has satisfied its operating 
requirements primarily through the issuance of equity and debt securities and 
loans from stockholders.  At December 31, 1996, the Company had working 
capital of $192,837.

    Net cash used in 1996 operating activities was $2,630,218, as compared to 
$3,193,078 in 1995.  Net cash was used primarily to fund the losses from 
operations.  Net cash used in 1996 investing activities was $49,690,


                                       -3-

<PAGE>

which was used to purchase equipment.  At December 31, 1996, the Company did 
not have any material commitments for capital expenditures.  Net cash used in 
financing activities was $166,317 for 1996, compared to $5,937,555 of cash 
provided by these activities in 1995.  Financing activities in 1996 included 
repayment of notes payable to related parties and payments of capital lease 
obligations.  At December 31, 1996, the Company had cash of $223,523.

    At December 31, 1996, the Company had a net operating loss ("NOL") 
carryforward of $9,013,000 available to offset future taxable income, if any, 
through the year 2011.  In the event a 50% or greater change in ownership 
occurs, a substantial annual limitation would be imposed upon the future 
utilization of these loss carryforwards.  At this point in time, the Company 
has not completed a change in ownership study and any limitations are not 
known.  

    Under the present circumstances, the Company's ability to continue as a 
going concern depends on its ability to restructure, improve its operations, 
and ultimately, to obtain additional financing.  The Company has taken steps 
that include reductions in operating costs, including stringent cost 
controls, personnel reductions and redeployments, and the deferral of the 
majority of research and development activities until after 1997.  There can 
be no assurance that these measures will be successful.  Moreover, deferring 
research and development activities will delay the development of new 
products.  The Company will also defer, until after 1997, conducting 
definitive clinical studies that document the effectiveness of the 
SofPulse-TM- treatment for its intended use. This deferral of clinical 
studies may adversely affect the continued acceptance or use of the 
SofPulse-TM- device and negatively affect the Company in the longer term.  
However, at the present time, the Company believes these actions are 
necessary to reduce near term cash requirements and to fund other operating 
activities.

    The Company is continuing to expand the number of SofPulse-TM- devices 
that are under rental agreements generating revenue and will continue to 
allocate more devices to those geographic areas where it believes it can 
produce higher monthly revenue per device based on higher utilization.  The 
Company believes that these efforts will increase its monthly revenue, 
although there can be no assurance whether sufficient revenue growth can be 
achieved over the long-term.

    The Company is also exploring alternative sources of additional 
financing. No definitive sources of additional financing have been identified 
at this time, nor can there be any assurance that additional financing will 
be obtained or obtained on favorable terms.  There are certain capital and 
other requirements that the Company must exceed or maintain in order for the 
Company's Common Stock to continue to be listed on Nasdaq.  If the Company is 
unable to obtain additional financing or otherwise find ways to meet its cash 
requirements (see "Management's Discussion and Analysis of Financial 
Condition and Results of Operations -- Liquidity and Capital Resources,") the 
Company will soon be in violation of the Nasdaq listing requirements and 
Nasdaq may de-list the Common Stock of the Company.  Accordingly, there can 
be no assurance that a public trading market for the Company's Common Stock 
will continue to exist.

    The Company cannot predict whether the operating and financing strategies 
described above will be successful.  If the Company is unable to restructure 
and improve its operations and is unable to ultimately obtain additional 
financing, it may not be able to continue as a going concern.


                                       -4-
<PAGE>

ITEM 7.  FINANCIAL STATEMENTS


                           Electropharmacology, Inc.


                          Audited Financial Statements


                          Year ended December 31, 1996


                                    CONTENTS

Report of Independent Certified Public Accountants . . . . . . 6

Audited Financial Statements

Balance Sheet. . . . . . . . . . . . . . . . . . . . . . . . . 8
Statements of Operations . . . . . . . . . . . . . . . . . . . 9
Statements of Shareholders' Equity . . . . . . . . . . . . . .10
Statements of Cash Flows . . . . . . . . . . . . . . . . . . .11
Notes to Financial Statements. . . . . . . . . . . . . . . . .13




                                     -5-

<PAGE>

               Report of Independent Certified Public Accountants

Board of Directors
Electropharmacology, Inc.

We have audited the accompanying balance sheet of Electropharmacology, Inc.
(the Company) as of December 31, 1996 and the related statements of
operations, shareholders' equity and cash flows for the year then ended.
These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit. The financial statements of
Electropharmacology, Inc. for the year ended December 31, 1995, were audited
by other auditors whose report dated April 2, 1996, expressed an unqualified
opinion on those statements.

We conducted our audit 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 audit provides a
reasonable basis for our opinion.

In our opinion, the 1996 financial statements referred to above present
fairly, in all material respects, the financial position of
Electropharmacology, Inc. at December 31, 1996 and the results of its
operations and its cash flows for the year then ended, in conformity with
generally accepted accounting principles.

The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As more fully described in Note 2
to the financial statements, the Company incurred significant recurring
operating losses and negative operating cash flows. These conditions raise
substantial doubt about the Company's ability to continue as a going concern.
Management's plans regarding these matters are also described in Note 2.
The financial statements do not include any adjustments to reflect the
possible future effects on the recoverability and classification of assets or
the amounts and classification of liabilities that might result from the
outcome of this uncertainty.


/s/ ERNST & YOUNG LLP
-----------------------------
    Ernst & Young LLP



West Palm Beach, Florida
February 9, 1997, except for the last paragraph of
  Note 2, as to which the  date is April 7, 1997,
  the third paragraph of Note 10, as to which the
  date is April 12, 1997, and the sixth paragraph
  of Note 11, as to which the date is March 27,
  1997



                                       -6-
<PAGE>

Report of Independent Certified Public Accountants

The Board of Directors
Electropharmacology, Inc.

We have audited the accompanying balance sheet of Electropharmacology, Inc. 
as of December 31, 1995, and the related statements of operations, 
shareholders' equity (capital deficit) and cash flows of Electropharmacology, 
Inc. for each of the two years in the period ended December 31, 1995. These 
financial statements are the responsibility of the Company's management. Our 
responsibility is to express an opinion on these financial statements based 
on our audits.

We conducted our audits 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 results of operations, changes in shareholders' 
equity (capital deficit) and cash flows of Electropharmacology, Inc. for the 
year ended December 31, 1995 in conformity with generally accepted accounting 
principles.

As discussed in the Note 1 to the financial statements, to conform to a 
Securities and Exchange Commission Staff position announced in March 1997, 
the loss attributable to common stock was restated for 1995.

                                       /s/ BDO Seidman, LLP
                                       --------------------------------
                                       BDO Seidman, LLP

Miami, Florida
April 2, 1996


                                      -7-
<PAGE>

                            Electropharmacology, Inc.

                                 Balance Sheet

                               December 31, 1996
                                  (Restated)
ASSETS
Current assets:
  Cash                                                  $  223,523
  Trade accounts receivable, net of allowance
   for doubtful accounts of $134,000                       572,202
  Inventory                                                 94,164
  Trade notes receivable                                   248,190
  Prepaid expenses                                          50,127
                                                        ----------
Total current assets                                     1,188,206

Rental and other equipment, net                            945,058
Deposits and other assets                                   79,816
                                                        ----------
Total assets                                            $2,213,080
                                                        ==========

LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
  Accounts payable                                      $  316,746
  Accrued expenses                                         513,130
  Accrued commissions                                       30,845
  Accrued payroll                                          104,701
  Customer deposits                                          7,561
  Current maturities of obligations under
   capital leases                                           22,386
                                                        ----------
Total current liabilities                                  995,369

Obligations under capital leases, less current
 maturities                                                  3,336
                                                        ----------
Total liabilities                                          998,705

Commitments and contingencies

Shareholders' equity:
  Preferred stock, $.01 par value--10,000,000
   authorized shares; issued and outstanding 421,950
   (entitled to $2,000,043 in liquidation)                   4,220
  Common stock, $.01 par value--30,000,000 authorized
   shares; 3,540,165 shares issued and 3,529,672
   outstanding                                              35,402
  Additional paid-in capital                            14,834,010
  Treasury stock, at cost, 10,493 common shares            (60,000)
  Deficit                                              (13,599,257)
                                                        ----------
Total shareholders' equity                               1,214,375
                                                        ----------
Total liabilities and shareholders' equity              $2,213,080
                                                        ==========


SEE ACCOMPANYING NOTES.

                                       -8-

<PAGE>

                             Electropharmacology, Inc.

                             Statements of Operations


                                                  YEAR ENDED DECEMBER 31
                                                   1996             1995
                                               -----------------------------
                                                                  (Restated)
Revenue:
  Rentals                                      $ 1,739,193       $ 1,383,817
  Sales                                            409,818           612,846
                                               -----------------------------
Total revenue                                    2,149,011         1,996,663

Operating expenses:
  Cost of revenue                                  376,197           224,155
  Selling, general and administrative            3,941,235         2,813,389
  Research and development                         815,722         1,690,163
                                               -----------------------------
Total operating expenses                         5,133,154         4,727,707
                                               -----------------------------
Loss from operations                            (2,984,143)       (2,731,044)
Other income (expense):
  Interest expense                                  (8,933)         (463,172)
  Interest income                                   65,086           124,630
                                               -----------------------------
Total other income (expense)                        56,153          (338,542)
                                               -----------------------------
Net loss                                        (2,927,990)       (3,069,586)

Deduct assumed dividends on convertible
 preferred stock and warrants                           -         (3,481,088)
                                               -----------------------------
Loss attributable to common stock              $(2,927,990)      $(6,550,674)
                                               =============================

Net loss per common share after deduction  
 for required dividends on convertible
 preferred stock and warrants                  $      (.89)      $     (2.70)
                                               =============================

Weighted average number of common shares
 outstanding                                     3,298,849         2,429,880
                                               =============================

SEE ACCOMPANYING NOTES.

                                       -9-
<PAGE>

                              Electropharmacology, Inc.

                         Statements of Shareholders' Equity
                                   (Restated)

<TABLE>
                                     PREFERRED STOCK       COMMON STOCK       ADDITIONAL                                 TOTAL
                                    ------------------   ----------------      PAID-IN     TREASURY                   SHAREHOLDERS'
                                     SHARES    AMOUNT    SHARES    AMOUNT      CAPITAL      STOCK        DEFICIT         EQUITY
                                    -----------------------------------------------------------------------------------------------
<S>                                 <C>       <C>      <C>         <C>       <C>           <C>         <C>             <C>
Balance at January 1, 1995                    $    0   1,628,529   $16,285   $ 3,027,824   $     0    $ (4,120,593)   $(1,076,484)
  Issuance of common stock in
   connection with initial
   public offering                                     1,250,000    12,500     5,091,457                                5,103,957
  Note payable to related party
   converted to common stock                             195,945     1,960       998,040                                1,000,000
  Issuance of preferred stock        421,950   4,220                           1,895,780                                1,900,000
  Repurchase of common stock                                                               (60,000)                       (60,000)
  Issuance of warrants to
   consultant for services                                                       214,500                                  214,500
  Assumed dividends on convertible
   preferred stock and warrants                                                3,481,088                (3,481,088)             0
  Net loss                                                                                              (3,069,586)    (3,069,586)
                                    -----------------------------------------------------------------------------------------------
Balance at December 31, 1995         421,950   4,220   3,074,474    30,745    14,708,689   (60,000)    (10,671,267)     4,012,387
  Exercise of warrants                                   421,950     4,220                                                  4,220
  Issuance of common stock for
   services                                               43,741       437       125,321                                  125,758
  Net loss                                                                                              (2,927,990)    (2,927,990)
                                    -----------------------------------------------------------------------------------------------
Balance at December 31, 1996         421,950  $4,220   3,540,165   $35,402   $14,834,010  $(60,000)   $(13,599,257)   $ 1,214,375
                                    ===============================================================================================
</TABLE>


SEE ACCOMPANYING NOTES.


                                      -10-
<PAGE>

                              Electropharmacology, Inc.

                              Statements of Cash Flows

<TABLE>
                                                           YEAR ENDED DECEMBER 31
                                                             1996         1995
                                                        --------------------------
<S>                                                     <C>           <C>
 OPERATING ACTIVITIES
 Net loss                                               $(2,927,990)  $(3,069,586)
 Adjustments to reconcile net loss to net cash 
  used in operating activities:
    Depreciation                                            286,037       221,162
    Amortization                                              3,516       310,335
    Issuance of common stock and warrants for 
     services                                               125,758       214,500
    Loss on disposal of office equipment                      6,426             0
    Provision for doubtful accounts                          93,000        45,728
    Discount on trade note receivable                        21,982             0
    Changes in operating assets and liabilities:
      Trade notes receivable                                273,162      (543,334)
      Inventory                                             (47,893)     (139,271)
      Accounts receivable                                  (315,370)     (110,007)
      Prepaid expenses                                       14,532       (59,291)
      Accounts payable                                       65,537      (175,870)
      Accrued payroll                                        44,369       (24,406)
      Accrued expenses, commissions and customer 
       deposits                                             194,543        85,008
      Rental equipment (SofPulse-TM- units)                (467,827)       51,954
                                                        --------------------------
 Net cash used in operating activities                   (2,630,218)   (3,193,078)
 
 INVESTING ACTIVITIES
 Purchases of property and equipment                        (32,548)     (169,058)
 Deposits and other assets                                  (17,142)       15,426
                                                        --------------------------
 Net cash used in investing activities                      (49,690)     (153,632)
 
 FINANCING ACTIVITIES
 Net proceeds from issuance of preferred stock                    0     1,900,000
 Repayment of long-term notes payable and capitalized
  lease obligations                                         (50,537)      (48,945)
 Net proceeds from issuance of notes payable                      0       400,000
 Repayment of notes payable to related parties             (120,000)   (1,562,000)
 Proceeds from sale of common stock                           4,220     5,248,500
                                                        --------------------------
 Net cash (used in) provided by financing activities       (166,317)    5,937,555
                                                        --------------------------
 Net (decrease) increase in cash                         (2,846,225)    2,590,845
 Cash at beginning of year                                3,069,748       478,903
                                                        --------------------------
 Cash at end of year                                    $   223,523   $ 3,069,748
                                                        ==========================
</TABLE>

                                       -11-
<PAGE>

                            Electropharmacology, Inc.

                            Statements of Cash Flows
<TABLE>
                                                           YEAR ENDED DECEMBER 31
                                                             1996         1995
                                                        --------------------------
<S>                                                     <C>           <C>
 SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
 Cash paid during the period for interest, net           $   6,596    $  162,154
                                                         =======================
 SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND
  FINANCING ACTIVITIES
 Issuance of common stock for services                   $ 125,758    $        0
 Notes payable to related party converted to common 
  stock                                                          0     1,000,000
 Prepaid offering costs reclassified to additional 
  paid-in capital                                                0       144,543
 Liability incurred for the repurchase of common stock           0        60,000
</TABLE>


 SEE ACCOMPANYING NOTES. 

                                       -12-
<PAGE>

                          Electropharmacology, Inc.

                        Notes to Financial Statements

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

NATURE OF BUSINESS AND MAJOR SUPPLIERS

Electropharmacology, Inc. (the Company) was incorporated on August 31, 1990 
under the laws of the State of California under the name Magnetic Resonance 
Therapeutics, Inc. and reorganized through a merger with and into 
Electropharmacology, Inc., a Delaware Corporation, in February 1995. The 
Company is engaged in designing, developing, manufacturing and marketing 
medical devices that deliver pulsed electromagnetic signals in the radio 
frequency range. The Company's current product is SofPulse-TM-.

The Company is dependent on four suppliers to supply all the major components 
of its products. Management believes that alternative sources are presently 
available if the current supply of any of its product's components are 
discontinued, limited or delayed.

REVENUE RECOGNITION

Rental revenue is recognized over the month-to-month period in which the 
related equipment is under lease to a customer, primarily on a per use basis. 
Sales revenue is recognized upon shipment and the transfer of ownership of 
the product.

INVENTORY

Inventory, which consists of raw materials and work-in-process, is valued at 
the lower of cost (average cost method) or market. Upon completion, finished 
goods are transferred to property and equipment.

OTHER ASSETS

Other assets are amortized using the straight-line method and consist 
principally of patent costs, amortized over 17 years from the date of 
issuance of the patent.

                                       -13-
<PAGE>

                          Electropharmacology, Inc.

                  Notes to Financial Statements (continued)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

RENTAL AND OTHER EQUIPMENT AND DEPRECIATION AND AMORTIZATION

Rental and other equipment is carried at cost. Depreciation and amortization is
computed using the straight-line method over the estimated useful lives (or
lease term if shorter life) of the related assets as follows:

     Rental equipment                             5 years
     Leasehold improvements                       3 years
     Office equipment                             4 to 7 years
     Laboratory equipment                         4 to 7 years

COST OF REVENUE

Cost of Revenue for the years ended December 31, 1996 and 1995 includes costs 
associated with rental of the SofPulse-TM- units of approximately $328,000 
and $172,000 respectively.

STOCK BASED COMPENSATION

The Company has elected to follow Accounting Principles Board (APB) Opinion 
No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, and related interpretations 
in accounting for its employee stock options because the alternative fair 
value accounting provided for under Financial Accounting Standards Board 
(FASB) Statement No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION, requires 
use of option valuation models that were not developed for use in valuing 
employee stock options. Under APB No. 25, because the exercise price of the 
Company's employee stock options equals the market price of the underlying 
stock on the date of grant, no compensation expense is recognized.

ADVERTISING COSTS

Advertising costs, included in selling, general and administrative expenses, 
are expensed as incurred and were $62,000 and $36,000 for 1996 and 1995, 
respectively.

USE OF ESTIMATES AND CONCENTRATION OF CREDIT RISK

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

                                       -14-
<PAGE>


                          Electropharmacology, Inc.

                  Notes to Financial Statements (continued)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

The Company sells and/or rents its product to healthcare providers such as 
nursing homes, hospitals and physician practices with no specific geographic 
concentration and extends credit based on an evaluation of the customer's 
financial condition, generally without requiring collateral. Exposure to 
losses on receivables is principally dependent on each customer's financial 
condition. The Company monitors its exposure for credit losses and maintains 
allowances for anticipated losses.

INCOME TAXES

The Company provides for income taxes under the provisions of FASB Statement 
No. 109, ACCOUNTING FOR INCOME TAXES, which requires the asset and liability 
method of accounting for income taxes. Under the asset and liability method 
of FASB Statement No. 109, deferred tax assets and liabilities are recognized 
for the future tax consequences attributable to differences between the 
financial statement carrying amounts of existing assets and liabilities and 
their respective tax bases. Deferred tax assets and liabilities are measured 
using the enacted tax rates expected to apply to taxable income in the years 
in which those temporary differences are expected to be recovered or settled.

DIVIDENDS AND NET LOSS PER COMMON SHARE

For the years ended December 31, 1996 and 1995, options and warrants are 
excluded from the computation of net loss per share because the effect of 
inclusion would be antidilutive due to the Company's net operating losses. 
Additional paid-in capital and deficit were restated for 1996 and 1995 and 
loss attributable to common stock was restated for 1995 to reflect assumed 
dividends arising from convertible preferred stock and warrants issued in 
connection with the convertible preferred stock, at conversion and exercise 
prices that were substantially discounted from the fair market value of the 
Company's common stock at the time the convertible preferred stock and 
warrants were issued.

2. LIQUIDITY AND BASIS OF PRESENTATION

The accompanying financial statements have been prepared on a going-concern 
basis, which contemplates the realization of assets and the satisfaction of 
liabilities and commitments in the normal course of business.

The Company reported a net loss of $2,927,990 for the year ended December 31, 
1996 and has incurred losses aggregating $10,118,169 through December 31, 
1996. At December 31, 1996, the Company had working capital of $192,837 and 
shareholder's equity of $1,214,375.

                                       -15-
<PAGE>


                          Electropharmacology, Inc.

                  Notes to Financial Statements (continued)

2. LIQUIDITY AND BASIS OF PRESENTATION (CONTINUED)

The Company's 1997 operating plan contemplates focusing activities on 
expanding rental revenue by both increasing the number of SofPulse-TM- 
devices in markets where it has achieved reasonable market presence and 
redeploying certain devices into markets where their expected use would be at 
increased levels. It also contemplates stringent cost controls, personnel 
reductions and the deferral of the majority of research and development 
activities until after 1997. The Company is also exploring alternative 
sources of additional financing. No definitive sources of additional 
financing have been identified at this time.

The Company cannot predict whether the operating and financing plans 
described above will be successful. If the Company is unable to restructure 
and improve its operations and is unable to ultimately obtain additional 
financings, it may not be able to continue as a going concern. If the Company 
is unsuccessful in its efforts, it may be unable to meet its obligations, 
making it necessary to undertake such other actions as may be appropriate to 
preserve asset values.

3. INVENTORY

The components of inventory at December 31, 1996 are summarized as follows:

     Work-in-process                                      $24,940
     Raw material                                          69,224
                                                          -------
                                                          $94,164
                                                          =======

4. TRADE NOTES RECEIVABLE

During 1995, the Company received two promissory notes in connection with the 
sale of SofPulse-TM- devices. These trade notes receivable consist of the 
following:

-    Three year noninterest bearing term note in the amount of $218,400 (less
     discount of $27,937 at December 31, 1995), payable at $7,800 monthly,
     interest imputed at 12%, collateralized by equipment sold.

-    Three year noninterest bearing term note in the amount of $392,400 (less
     discount of $39,529 at December 31, 1995), payable at $16,200 monthly,
     interest imputed at 12%, collateralized by equipment sold (the final four
     payments will total $29,700).

                                       -16-
<PAGE>


                          Electropharmacology, Inc.

                  Notes to Financial Statements (continued)

4. TRADE NOTES RECEIVABLE (CONTINUED)

In January 1997, the Company agreed to accept $248,190 in full payment of 
these notes, which had an outstanding balance of $270,172 at the time of the 
agreement. The notes were repaid in 1997, resulting in a discount of $21,982. 
This discount was recognized in the statement of operations for the year 
ended December 31, 1996.

5. RENTAL AND OTHER EQUIPMENT

A summary of rental and other equipment at December 31, 1996 is as follows:

     Rental equipment                                   $1,107,925
     Leasehold improvements                                 68,270
     Office equipment under capital lease                  153,580
     Office equipment                                      118,530
     Lab equipment                                          69,763
                                                        ----------
                                                         1,518,068
     Less accumulated depreciation and amortization       (573,010)
                                                        ----------
     Net rental and other equipment                     $  945,058
                                                        ==========

6. INCOME TAXES 

As of December 31, 1996, the Company has net operating loss carryforwards of 
approximately $9,013,000 available to offset future taxable income. Such 
carryforwards, which may provide future tax benefits, expire as follows: 
2008--$1,206,000; 2009--$2,064,000; 2010--$2,901,000; 2011--$2,842,000. It 
appears that a change in ownership of greater than 50% may have occurred as a 
result of the Company issuing equity securities. As a result, a substantial 
annual limitation may be imposed upon the future utilization of its net 
operating loss carryforwards. At this point in time, the Company has not 
completed a change in ownership study and the exact effects of any such 
limitations are not known. 

                                      -17-
<PAGE>


                          Electropharmacology, Inc.

                  Notes to Financial Statements (continued)

6. INCOME TAXES (CONTINUED)

Significant components of the Company's deferred income taxes at December 31, 
1996 are as follows:

     Net operating loss carryforwards                 $ 3,392,000
     Other, net                                           158,600
                                                      -----------
     Deferred tax assets                                3,550,600
     Deferred tax liabilities--equipment                  (75,300)
                                                      -----------
                                                        3,475,300
     Less valuation allowance                          (3,475,300)
                                                      -----------
     Net deferred tax assets                          $         0
                                                      ===========

The net change in the valuation allowance for the year ended December 31, 
1996 was an increase of approximately $1,075,300.

Income tax expense differs from the expected rate for the year ended 
December 31, 1996, primarily as a result of excluding benefits related 
to net operating loss carryforwards because of the uncertainty of their 
realization at this time.

7. SHAREHOLDERS' EQUITY AND WARRANTS

On November 1, 1996, the Company's stockholders approved proposals to 
increase the Company's authorized capital stock from 10,000,000 to 30,000,000 
shares of $.01 par value common stock and from 1,000,000 to 10,000,000 shares 
of $.01 par value preferred stock.

On May 12, 1995, the Company consummated its initial public offering of
securities on the NASDAQ SmallCap Market and sold 1,250,000 shares of common
stock at $5.00 per share. Additionally, 718,750 redeemable warrants to purchase
common stock were issued and sold for $.10 per warrant. Each warrant entitles
the registered holder thereof to purchase one share of common stock at a price
of $6.00, subject to adjustment in certain circumstances, at any time commencing
June 12, 1996 through May 12, 1998. Net proceeds of this offering, after the
underwriter's commissions and all expenses, were $5,103,957.

For an aggregate of $187.50, the underwriter was issued warrants to purchase 
125,000 shares of common stock at $7.00 per share and 62,500 warrants to 
purchase warrants at $.14 each to purchase common stock at $6.00 per share. 
No warrants have been exercised. 

                                      -18-
<PAGE>


                          Electropharmacology, Inc.

                  Notes to Financial Statements (continued)

7. SHAREHOLDERS' EQUITY AND WARRANTS (CONTINUED)

During June 1995, the Company issued warrants to purchase 30,000 shares of 
common stock at $4.00 per share and 12,000 shares of common stock at $5.25 
per share to consultants of the Company for certain investor relations work. 
Each of these warrants vested immediately and expires in five years. Further, 
a four-year warrant to purchase 25,000 shares of common stock at $5.25 per 
share was issued to a consultant to the Company for certain scientific 
contributions to the Company. No warrants have been exercised.

In November 1995, in consideration of $2,000,000, the Company issued to an 
investor (i) 421,950 shares of Series A Convertible Preferred Stock (the 
Preferred Stock) and (ii) warrants to purchase an aggregate of 1,721,950 
shares of common stock. In connection with the transaction, the Company paid 
a $100,000 commission to two investment bankers and issued five-year warrants 
to purchase 100,000 shares of common stock at an exercise price of $5.50 per 
share.

Each share of Preferred Stock is convertible at a conversion price of $4.74 
per share which was at a discount from the market price of $6.50 per share, 
at the option of the holder, into one share of common stock, subject to 
adjustment in certain circumstances, at any time until November 13, 2000, at 
which time outstanding shares of Preferred Stock automatically convert into 
common stock. Shares of Preferred Stock have votes equal to those of common 
stock into which they are convertible and, subject to certain exceptions and 
except as required by law, vote together with the common stock as a single 
class. The Preferred Stock votes as a single class on certain matters 
including the incurrence of secured indebtedness by the Company, changes in 
the number and the terms of the directors of the Company and the issuance of 
cash dividends and redemptions or repurchase of securities by the Company. 
The Preferred Stock is entitled to receive noncumulative cash dividends, 
when, as and if declared by the Board of Directors of the Company and has a 
liquidation preference of $4.74 per share.

The warrants consist of warrants to purchase: (i) 421,950 shares of common stock
at an exercise price of $.01 per share; (ii) 800,000 shares of common stock at
an exercise price of $6.00 per share; (iii) 250,000 shares of common stock at an
exercise price of $7.50 per share; and (iv) 250,000 shares of common stock at an
exercise price of $9.00 per share. The warrants are exercisable at any time
until November 13, 2005. The exercise price and number of shares issuable upon
exercise of the warrants are subject to adjustment in certain circumstances,
including the issuance of securities for a price less than the current market
value of the common stock. In June 1996, for proceeds to the Company of $4,220,
the investor exercised 421,950 warrants to purchase common stock at an exercise
price of $.01 per share. 

                                     -19-
<PAGE>


                          Electropharmacology, Inc.

                  Notes to Financial Statements (continued)

7. SHAREHOLDERS' EQUITY AND WARRANTS (CONTINUED)

In November 1995, a family member of an officer and current member of the 
Board of Directors of the Company, converted an aggregate of $1,000,000 
principle amount of promissory notes into 195,945 shares of common stock. In 
consideration for such conversion, the Company granted five-year warrants to 
purchase 300,000 shares of common stock at a price of $6.25 per share, 
subject to adjustment in certain circumstances. Subject to certain 
limitations and exclusions, the Company agreed to include the shares 
underlying the warrants in an appropriate registration statement filed by the 
Company. No warrants have been exercised.

In December 1995, five-year warrants to purchase 65,000 shares of common 
stock at $1.00 were issued to a consultant of the Company as full 
consideration for a three-year financial consulting agreement. The Company 
recorded an expense of $214,500 in connection with this transaction. Also, 
five-year warrants to purchase 100,000 shares of common stock at $5.79 per 
share were issued to a management consultant to the Company. No warrants have 
been exercised.

In December 1995, the Company repurchased 10,493 shares of common stock for 
$60,000 in connection with the resignation of the Company's chief operating 
officer.

In December 1996, the Company issued 43,741 shares of common stock to 
officers of the Company in lieu of cash for payment of outstanding employment 
related liabilities.

The Company currently has 421,950 shares of Class A Preferred Stock and 
3,540,165 shares of common stock issued and outstanding. Further, warrants to 
purchase an aggregate of 3,012,707 shares of common stock have been issued to 
date. With exception of the 421,950 warrants exercised in June 1996, no 
warrants have been exercised.

At December 31, 1996, shares of the Company's authorized but unissued common 
stock were reserved for issuance as follows:

                                                        NUMBER OF 
                                                         SHARES
                                                       ----------
     Exercise of warrants                               3,012,707
     Employee stock option plans (see Note 8)           1,113,860
     Convertible preferred stock                          421,950
                                                       ----------
                                                        4,548,517
                                                       ==========

Such exercise and conversion would result in gross proceeds of $33,343,211. 

                                      -20-

<PAGE>


                          Electropharmacology, Inc.

                  Notes to Financial Statements (continued)

7. SHAREHOLDERS' EQUITY AND WARRANTS (CONTINUED)

Effective November 1, 1996, the Board of Directors approved an Employee Stock 
Purchase Plan (ESPP) covering all employees who meet service period 
requirements. The ESPP provides for the sale of common stock to employees of 
the Company at a price equal to 85% of the lesser of the market value at the 
end of or beginning of each respective quarter. No shares have been issued 
under the ESPP during 1996 as the plan is pending shareholder approval.

Effective January 1, 1996, the Company established the Electropharmacology, 
Inc. 1996 Non-Employee Director's Equity Compensation Plan (the Compensation 
Plan). The Compensation Plan provides for the issuance of common shares as 
compensation for serving as a director of the Company. No shares were issued 
under the Compensation Plan during 1996.

8. STOCK OPTIONS

The Company has adopted a stock option plan which was amended on November 1, 
1996 (the Plan) for officers, directors, employees and consultants. Under the 
Plan, the options granted may be either "incentive stock options" (for 
officers and employees only) within the meaning of Section 422A of the 
Internal Revenue Code, and/or nonqualified stock options (for officers, 
employees, directors and consultants). The exercise price of incentive stock 
options may not be less than 100% of the fair market value of the Company's 
common stock as of the date of grant (110% of the fair market value if the 
grant is to an employee who owns more than 10% of the outstanding common 
stock). Nonqualified stock options may be granted under the Plan at an 
exercise price less than fair market value of the common stock on the date of 
grant.

As of December 31, 1996, the Board of Directors has authorized the granting 
of options for up to 1,500,000 shares of common stock. Grants of options to 
purchase 1,113,860 common shares, (1,043,860 of which are considered 
incentive stock options), have been formalized under the Plan. The options 
generally vest with a range from immediately to ratably up to five years on 
differing vesting schedules. The aggregate proceeds to the Company upon 
exercise of all options vested (incentive stock options and nonqualified 
stock options, respectively) as of December 31, 1996 is $1,906,826. The 
aggregate proceeds to the Company upon exercise of all options outstanding as 
of December 31, 1996 is $5,543,616. The options expire at dates ranging from 
two to ten years after date of grant.

                                      -21-

<PAGE>


                          Electropharmacology, Inc.

                  Notes to Financial Statements (continued)

8. STOCK OPTIONS (CONTINUED)

As required by Statement No. 123, pro forma information regarding net income 
and earnings per share has been determined as if the Company had accounted 
for its employee stock options under the fair value method of that statement. 
The fair value for these options was estimated at the date of grant using a 
Black-Scholes option pricing model with the following weighted-average 
assumptions for 1996: risk-free rate of return of 5.200%; dividend yield of 
0.000%; volatility factor of the expected market price of the Company's 
common stock of .775 and a weighted-average expected life of the options of 
ten years.

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

Transactions under the Plan are summarized as follows:
                                                                    WEIGHTED  
                                                                     AVERAGE  
                                                          NUMBER    EXERCISE  
                                                            OF      PRICE PER 
                                                          SHARES     SHARE   
                                                          -------   ---------
     Outstanding January 1, 1995                          203,712         
     Exercised                                                  0         
     Expired                                                    0         
     Forfeited                                                  0         
     Canceled                                             (99,438)         
     Granted                                               87,500         
                                                        ---------          
     Outstanding December 31, 1995                        191,774      $4.87
     Exercised                                                  0          0
     Expired                                                    0          0
     Forfeited                                                  0          0
     Canceled                                             (37,000)     $8.09
     Granted                                              959,086      $5.12
                                                        ---------          
     Outstanding December 31, 1996                      1,113,860      $4.98
                                                        =========      =====

                                      -22-

<PAGE>


                          Electropharmacology, Inc.

                  Notes to Financial Statements (continued)

8. STOCK OPTIONS (CONTINUED)

     Exercisable at December 31, 1996                     397,985          
                                                          =======
     Reserved for future option grants at 
       December 31, 1996                                  386,140          
                                                          =======
     Weighted average for fair value of options 
       granted during 1996                                             $4.26
                                                                       =====

FASB Statement No. 123 requires disclosure of the weighted average exercise 
prices for the current year only in the initial year of adoption.

For the purposes of pro forma disclosures, the estimated fair value of the 
options is amortized to expense over the options' vesting period. The 
Company's 1996 and 1995 pro forma information follows:

                                                   1996             1995     
                                                -----------      ------------
     Net loss                                   $(3,665,506)     $(3,109,269)
                                                ===========      ===========
     Loss per common share                      $     (1.11)     $     (1.28)
                                                ===========      ===========

The 1996 pro forma effect on net loss is not necessarily representative of 
the effect in the future years because it does not take into consideration 
pro forma compensation expense related to grants made prior to 1995.

The exercise price of options outstanding at December 31, 1996, ranged 
between $2.875 and $6.375. The weighted-average remaining contractual life of 
those options for 1996 is 7.8 years.

9. LEASE COMMITMENTS

The Company leases certain office equipment and administrative facilities on 
a month-to-month basis. The administrative facilities are leased at a monthly 
rate of $3,300 under a three-year agreement which expires on March 31, 1997. 
Rent expense under operating leases approximated $62,475 and $51,083 for the 
years ended December 31, 1996 and 1995, respectively.

The Company leases certain equipment under capital leases expiring in July 
1998. 

                                       -23-

<PAGE>

                          Electropharmacology, Inc.

                  Notes to Financial Statements (continued)

9. LEASE COMMITMENTS (CONTINUED)

Future minimum lease payments under capital leases are as follows:

     Year ending December 31,
        1997                                              $23,440
        1998                                                3,706
                                                         --------
     Total minimum lease payments                          27,146
     Less amount representing interest                     (1,424)
     Less current maturities                              (22,386)
                                                         --------
     Long-term obligations                               $  3,336
                                                         ========

10. EMPLOYMENT AGREEMENTS

As of December 31, 1996, the Company has employment agreements with certain 
executive officers, the terms of which expire at various times through 
December 31, 2001.

The President of the Company (the "President") had a five year employment 
agreement expiring on August 4, 2001 which provided for a current annual base 
salary of $275,000, one-fourth of which could be deferred and/or paid in 
stock, at the Board's discretion, an annual increase in the base salary tied 
to the Consumer Price Index, and options to purchase up to 592,086 shares of 
common stock at an exercise price of $5.50 per share.  The agreement also 
provided that, upon the exercise of certain warrants owned by another 
shareholder of the Company, the Company would grant the President an option 
to purchase 10% of the number of shares acquired upon the exercise of such 
warrants by such shareholder. The agreement also provided that if the 
President's employment was terminated other than for cause, he would receive 
an amount equal to the sum of the highest annual base salary and the average 
annual bonus received by him and that he would continue to receive benefits 
pursuant to the Company's welfare programs and perquisite programs for a 
period of two years. 

The President resigned on April 1, 1997.  As of April 12, 1997, the Company and
the President entered into a severance agreement that provides, among other
things, a settlement of all rights under his employment agreement with the
Company, a cash payment by the Company of $128,700 over approximately five
months, the issuance of 5,555 shares of common stock of the Company that were
assigned to the President in lieu of a portion of his salary during 1996, the
grant to the President of a ten-year warrant to purchase 25,000 shares of common
stock of the company at $2.25 per share and the cancellation of 384,850 options
to purchase shares of common stock of the Company that were previously granted
to the President, leaving the 

                                       -24-
<PAGE>

                          Electropharmacology, Inc.

                  Notes to Financial Statements (continued)

President with 207,236 fully vested options to purchase shares of common 
stock of the Company.  The severance agreement also provides for the 
cancellation of the President's right to be granted an option to purchase 
one-tenth of the number of shares of common stock of the Company as to which 
the shareholder referred to above exercised his warrants.  The President 
further agreed to assign to the Company patent protection on inventions made 
by him and to cooperate with the Company in obtaining such patent protection.

The Executive Vice President of Corporate Development of the Company has an 
employment agreement expiring on December 31, 2001, which provides for a 
current annual base salary of $139,000 and options to purchase up to 100,000 
shares of common stock at an exercise price of $5.50 per share. The agreement 
also provides that if employment is terminated other than for cause, this 
individual will receive an amount equal to the sum of his annual base salary 
and the average annual bonus received by him and that he will continue to 
receive benefits pursuant to the Company's welfare programs and perquisite 
programs for a period of one year.

The Executive Vice President of Research and Development of the Company has 
an employment agreement expiring on December 31, 1999 which provides for a 
current annual base salary of $180,000, one third of which may be deferred 
and/or paid in stock, at the Board's discretion, an annual increase in the 
base salary tied to the Consumer Price Index, and options to purchase up to 
75,000 shares of common stock at an exercise price of $4.75 per share. The 
agreement also provides that if employment is terminated other than for 
cause, this individual will receive an amount equal to the sum of his annual 
base salary and the average annual bonus received by him and that he will 
continue to receive benefits pursuant to the Company's welfare programs and 
perquisite programs for a period of one year.

The Chief Financial Officer of the Company has an employment agreement 
expiring on December 31, 1997 which provides for a current annual base salary 
of $75,000, one third of which may be deferred and/or paid in stock, at the 
Board's discretion and options to purchase up to 30,000 shares of common 
stock at an exercise price of $2.875 per share. The agreement also provides 
that if employment is terminated other than for cause, this individual will 
receive an amount equal to the sum of his annual base salary and the average 
annual bonus received by him and that he will continue to receive benefits 
pursuant to the Company's welfare programs and perquisite programs for a 
period of one year.

For the year ended December 31, 1996, approximately $37,000 of compensation 
was paid in common stock.

                                     -25-
<PAGE>

                          Electropharmacology, Inc.

                  Notes to Financial Statements (continued)

11. CONTINGENCIES

PROPOSED FEDERAL FOOD AND DRUG ADMINISTRATION REGULATIONS

The Company and its products are regulated by the Federal Food and Drug 
Administration (the "FDA") which has determined that the Company's products 
are Class III medical devices. In April 1994, the FDA proposed the adoption 
of new regulations requiring the submission of premarket approval (the PMA) 
applications for Class III medical devices.

The Company believes that such proposed regulations, if adopted, could require 
a PMA submission in 1998 for continued marketing of the SofPulse-TM- device 
although significant additional events need to occur prior to enactment and 
enforcement of such new regulations. In addition, the Company will be 
provided an opportunity to seek reclassification of its device to Class II.   
The PMA requires medical device manufacturers to provide information 
establishing the safety and effectiveness of medical devices based on 
controlled trials. The PMA process is lengthy, expensive and complex, and 
will require the submission to the FDA of substantial clinical data and 
statistical analysis demonstrating significant effects. The Company plans to 
conduct new clinical trials, as the basis for seeking a PMA from the FDA for 
its SofPulse-TM- device, but there can be no assurance that the Company will 
be able, for financial or other reasons, to successfully complete required 
studies and file its PMA application on a timely basis, or at all.

Failure to file a PMA application within 90 days following the adoption of 
final regulations by the FDA, or failing to be granted a reclassification of 
the Company's device to Class II by the FDA would result in the revocation of 
the Company's Section 510(k) approval and otherwise prevent the Company from 
marketing and, consequently, generating any revenue from sales or rentals of 
the SofPulse-TM- in the United States until a PMA application is filed and 
approved by the FDA. The inability to file and obtain a PMA approval, if and 
when required by the FDA, and the inability to obtain reclassification to 
Class II would have a material adverse effect on the Company, including 
possibly requiring the Company to significantly curtail its operations.

The Company believes that it is taking reasonable measures in order to 
maintain its right to continue to market its product in the United States for 
the foreseeable future.

LITIGATION

In August 1994, a competitor of the Company filed a lawsuit against the Company
and certain of its present and former directors and officers alleging the
defendants had engaged in deceptive acts and practices, false advertising,
unfair competition, breach of contracts of fiduciary duties between the
plaintiff and certain of the Company's employees, and the Company's involvement

                                     -26-
<PAGE>

                          Electropharmacology, Inc.

                  Notes to Financial Statements (continued)

in facilitating or participating in the breach of contracts. The plaintiff is 
seeking an injunction to rectify the effects of the misconduct, an 
unspecified amount of compensatory damages, disgorgement of profits, treble 
damages, punitive damages and attorney's fees. The plaintiff also seeks 
unspecified injunctive relief prohibiting the Company from engaging in the 
alleged acts and ordering the defendants to take remedial action to rectify 
the effects on consumers and the plaintiff caused by the alleged acts. 
Although the Company believes that it has meritorious defenses which it will 
pursue vigorously, there can be no assurance that the ultimate outcome of 
such action will not have a material adverse effect on the Company's 
liquidity, financial condition and results of operations. As of December 31, 
1996, the Company has not accrued any loss contingencies or related expenses 
in connection with this lawsuit.

On March 27, 1997 a former distributor for the Company filed a complaint 
against the Company and other defendants alleging, among other things, 
misappropriation of trade secrets, breach of fiduciary duty, unfair business 
practices, tortious inducement to breach contracts, tortious interference 
with prospective economic advantage and breach of contract. The plaintiff 
seeks unspecified damages, restitution and an injunction prohibiting the 
defendants from contacting or doing business with the plaintiff's customers. 
Although the Company believes that it has meritorious defenses which it will 
pursue vigorously, there can be no assurance that the ultimate outcome of 
such action will not have a material adverse effect on the Company's 
liquidity, financial condition and results of operations. As of December 31, 
1996, the Company has not accrued any loss contingencies or related expenses 
in connection with this lawsuit. 

Management is unable to make a meaningful estimate of the likelihood or 
amount or range of loss that could result from an unfavorable outcome of the 
pending litigation. It is possible that the Company's results of operations 
or cash flows in a particular quarter or annual period or its financial 
position could be materially affected by an unfavorable outcome.

Other claims have been asserted by various claimants. The claims are in 
various stages of processing and may ultimately be brought to trial. Based on 
discussions with counsel, management has accrued its best estimate of the 
ultimate expense of these contingent losses.

12. FINANCIAL INSTRUMENTS

The carrying amount of financial instruments including cash, accounts 
receivable, notes receivable from customers and accounts payable approximate 
fair value as of December 31, 1996 because of the short maturity of these 
items.

                                       -27-
<PAGE>

                          Electropharmacology, Inc.

                  Notes to Financial Statements (continued)

13. FOURTH QUARTER ADJUSTMENTS

Certain adjustments were recorded in the fourth quarter of 1996 which 
included adjustments to provide allowances for doubtful accounts and 
inventory shrinkage as well as adjustments to record consulting, legal and 
employment related liabilities which arose in the fourth quarter.  These 
adjustments resulted in charges against operations aggregating approximately 
$352,000.

                                       -28-

<PAGE>

                                      SIGNATURES

    In accordance with the requirements of the Securities Exchange Act of 
1934, the Registrant has duly caused this Amendment No. 2 to the Registrant's 
Annual Report on Form 10-KSB/A to be signed on its behalf by the undersigned, 
thereunto duly authorized.

                                       ELECTROPHARMACOLOGY, INC.

Dated August 18, 1997


                                       By:           /s/ DR. ARUP SEN
                                          ------------------------------------
                                                      Dr.  Arup Sen
                                                 Chief Executive Officer


                                       -29-