<PAGE>   1
                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                              WASHINGTON, DC 20549

                                    FORM 10-Q

     [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
                              EXCHANGE ACT OF 1934

                For the quarterly period ended September 30, 1998

                                       Or


     [ ] 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____________


                          SUMMIT MEDICAL SYSTEMS, INC.
             (Exact name of registrant as specified in its charter)


              MINNESOTA                                  41-1545493
   (State or other jurisdiction of                   (IRS Employer ID No.)
    incorporation or organization)                               
                  


                              1801 WEST END AVENUE
                                    SUITE 750
                               NASHVILLE, TN 37203
                                  615-341-0223
                  (Address including zip code, of Registrant's
                    principal executive offices and telephone
                          number, including area code)


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 has been subject to such filing requirements
for the past 90 days. [X] Yes [ ] No


As of October 31, 1998 there were 9,419,429 shares of Summit Medical Systems,
Inc. common stock outstanding.


<PAGE>   2


                          SUMMIT MEDICAL SYSTEMS, INC.

                                TABLE OF CONTENTS

PART I.  FINANCIAL INFORMATION

<TABLE>
<S>                                                                          <C>
Item 1.  Financial Statements (Unaudited)                                      1
         Condensed Consolidated Statements of Financial Position               1
         Condensed Consolidated Statements of Operations -
         Three months ended September 30, 1998 and 1997                        2
         Condensed Consolidated Statements of Operations -
         Nine months ended September 30, 1998 and 1997                         3
         Condensed Consolidated Statements of Cash Flows -
         Nine months ended September 30, 1998 and 1997                         4
         Notes to Condensed Consolidated Financial Statements                  5

Item 2.  Management's Discussion and Analysis of Financial Condition
         and Results of Operations                                             7

Item 3.  Quantitative and Qualitative Disclosures about Market Risks          10

PART II. OTHER INFORMATION

Item 1.  Legal Proceedings                                                    11
Item 2.  Changes in Securities                                                11
Item 3.  Defaults upon Senior Securities                                      11
Item 4.  Submission of Matters to a Vote of Security Holders                  11
Item 5.  Other Information                                                    11
Item 6.  Exhibits and Reports on Form 8-K                                     12

Signatures                                                                    13
</TABLE>

SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION 
REFORM ACT OF 1995.

         This Quarterly Report on Form 10-Q contains forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended and
Section 21E of the Securities Exchange Act of 1934, as amended. These
forward-looking statements include statements regarding intent, belief or
current expectations of Summit Medical Systems, Inc. (the "Company") and its
management. Such forward-looking statements are not guarantees of future
performance and involve risks and uncertainties that may cause the Company's
actual results to differ materially from the results discussed in the
forward-looking statements. Risks and uncertainties that might cause such
differences include, but are not limited to: (1) the Company's lack of an
operating history in the clinical research services market on which to base
expectations for future performance; (2) uncertainty of market acceptance of the
Company's clinical research services; (3) intense competition in the market for
clinical research services; (4) the Company's dependence on the amount of
research and development activities, particularly clinical trials, of
pharmaceutical, medical device and biologic companies; (5) the Company's
dependence on regulation of the pharmaceutical, medical device and biologic
industries; (6) challenges presented by the Company's new clinical research
operations, which will require the Company to attract and integrate new key
employees and to develop new operational and financial systems, procedures and
controls; (7) risks associated with the Company's decision to exit from the
provider software market, including the failure to realize the Company's
assumptions regarding estimated charges; and (8) the possibility of adverse
outcomes related to the Company's shareholder lawsuits, SEC investigation or
declaratory action by the underwriters of the Company's directors' and officers'
insurance policies. The forward-looking statements herein are qualified in their
entirety by the cautions and risk factors set forth in Exhibit 99, under the
caption "Cautionary Statement," to the Company's Annual Report on Form 10-K,
dated March 27, 1998. A copy of the Form 10-K may be obtained from the Public
Reference Branch of the SEC at 450 Fifth Street NW, Washington, DC at prescribed
rates.


<PAGE>   3


ITEM 1.  FINANCIAL STATEMENTS (UNAUDITED)

SUMMIT MEDICAL SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(UNAUDITED)


<TABLE>
<CAPTION>

                                                                    September 30,    December 31,
                                                                        1998             1997
                                                                  ---------------------------------
<S>                                                               <C>                <C>

  ASSETS
CURRENT ASSETS:
  Cash and cash equivalents                                       $  6,969,633        $  5,949,478
  Short-term investments                                            12,164,540          22,046,671
  Accounts receivable (net of allowance of $148,334 at
    September 30, 1998 and $59,425 at December 31, 1997)             1,197,357           1,103,555
  Other current assets                                                 432,900             199,487
                                                                  ---------------------------------
    Total current assets                                            20,764,430          29,299,191

  Net equipment and fixtures                                         1,583,452           1,184,191
  Net long-term assets of discontinued operations                      175,657             187,175
                                                                  ---------------------------------
    Total assets                                                  $ 22,523,539        $ 30,670,557
                                                                  =================================

  LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
  Accounts payable and accrued expenses                           $  1,140,046        $  1,142,098
  Deferred revenue & payables                                          394,765             305,886
  Accrued compensation                                                 266,121             111,756
  Net current liability of discontinued operations                   6,840,789           3,513,527
                                                                  --------------------------------
    Total current liabilities                                        8,641,721           5,073,267

CONTINGENCIES (NOTE E)

SHAREHOLDER'S EQUITY:
  Common stock, $.01 par value:
  Authorized shares - 38,933,333;
  Issued and outstanding shares - 9,419,429 at
    September 30, 1998 and 9,757,429 at December 31, 1997               94,194              97,574
  Additional paid-in capital                                        67,504,845          68,264,965
  Accumulated deficit                                              (53,717,221)        (42,765,249)
                                                                  ----------------------------------
    Total shareholders' equity                                      13,881,818          25,597,290
                                                                  ----------------------------------
    Total liabilities and shareholders' equity                    $ 22,523,539        $ 30,670,557
                                                                  ==================================
</TABLE>


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



                                       1
<PAGE>   4


SUMMIT MEDICAL SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)


<TABLE>
<CAPTION>
                                                        Three Months Ended
                                                           September 30,
                                                 -------------------------------
                                                      1998               1997
                                                 -------------------------------
<S>                                              <C>               <C>
Revenue                                          $  1,457,854      $  1,161,734
Cost of sales                                       1,075,285           733,189
                                                 -------------------------------
Gross profit                                          382,569           428,545
General and administrative                          1,504,659           756,864
                                                 -------------------------------
Loss from continuing operations                    (1,122,090)         (328,319)
Interest income, net                                  289,586           430,936
                                                 -------------------------------
Net income (loss) from continuing operations         (832,504)          102,617
Discontinued operations:
  Loss from discontinued operations                      --          (4,666,448)
  Loss on disposal of discontinued operations            --                --
                                                 -------------------------------
  Total discontinued operations                          --          (4,666,448)
                                                 -------------------------------
Net loss                                         $   (832,504)     $ (4,563,831)
                                                 ===============================

Basic income (loss) per common share:
  Continuing operations                          $      (0.09)     $       0.01
  Discontinued operations                                --               (0.45)
                                                 -------------------------------
                                                 $      (0.09)     $      (0.44)
                                                 ===============================

Diluted income (loss) per common share:
  Continuing operations                          $      (0.09)     $       0.01                
  Discontinued operations                                --               (0.45)
                                                 -------------------------------
                                                 $      (0.09)     $      (0.44)
                                                 ===============================

Weighted average shares outstanding:
  Basic                                             9,559,211        10,343,790
  Diluted                                           9,559,211        10,403,035

</TABLE>

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




                                       2
<PAGE>   5


SUMMIT MEDICAL SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)


<TABLE>
<CAPTION>
                                                            Nine Months Ended
                                                               September 30,
                                                      -------------------------------
                                                           1998              1997
                                                      -------------------------------
<S>                                                   <C>               <C>
Revenue                                               $  4,202,378      $  3,849,768
Cost of sales                                            2,733,344         2,482,069
                                                      -------------------------------
Gross profit                                             1,469,034         1,367,699
General and administrative                               3,337,117         2,077,576
                                                      -------------------------------
Loss from continuing operations                         (1,868,083)         (709,877)
Interest income, net                                       971,747         1,524,847
                                                      -------------------------------
Net income (loss) from continuing operations              (896,336)          814,970
Discontinued operations:
  Loss from discontinued operations                     (4,706,639)      (16,185,915)
  Loss on disposal of discontinued operations           (5,349,000)           --
                                                      -------------------------------
  Total discontinued operations                        (10,055,639)      (16,185,915)
                                                      -------------------------------
Net loss                                              $(10,951,975)     $(15,370,945)
                                                      ===============================

Basic income (loss) per common share:
  Continuing operations                               $      (0.09)     $       0.08
  Discontinued operations                                    (1.05)            (1.56)
                                                      -------------------------------
                                                      $      (1.14)     $      (1.48)
                                                      ===============================

Diluted income (loss) per common share:
  Continuing operations                               $      (0.09)     $       0.07
  Discontinued operations                                    (1.05)            (1.49)
                                                      -------------------------------
                                                      $      (1.14)     $      (1.42)
                                                      ===============================

Weighted average shares outstanding:
  Basic                                                  9,625,041        10,350,129
  Diluted                                                9,625,041        10,857,492

</TABLE>


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




                                       3
<PAGE>   6

SUMMIT MEDICAL SYSTEM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)

<TABLE>
<CAPTION>
                                                                     Nine Months Ended
                                                                       September 30,
                                                              ------------------------------------
                                                                   1998                   1997
                                                              ------------------------------------
<S>                                                           <C>                    <C>
OPERATING ACTIVITIES:
Net loss                                                      $(10,951,975)          $(15,370,945)
Adjustments to reconcile net loss to net cash used
   in continuing operating activities:
   Depreciation and amortization                                    95,676                121,749
   Provision for bad debts                                          87,361                  --
   Loss from discontinued operations                             4,706,639             16,185,915
   Loss on disposal of discontinued operations                   5,349,000                  --
Changes in operating assets and liabilities:
   Accounts receivable                                            (181,163)              (343,432)
   Other current assets                                           (233,413)                12,590
   Accounts payable and accrued expenses                            (2,052)            (1,879,789)
   Accrued compensation                                            154,365               (151,777)
   Deferred revenue and payables                                    88,879                146,663
                                                              ------------------------------------
Net cash used in continuing operating activities                  (886,683)            (1,279,026)

INVESTING ACTIVITIES:
Purchase of short-term investments                              (9,453,057)           (19,308,976)
Sales and maturities of short-term investments                  19,335,188             28,566,107
Purchases of equipment and fixtures                             (1,089,520)              (743,755)
                                                              ------------------------------------
Net cash provided by investing activities                        8,792,611              8,513,376

FINANCING ACTIVITIES:
Principal payments on long-term debt                                 --                    (6,920)
Payments on notes payable and convertible debentures                 --                  (100,000)
Payments on line of credit                                           --                  (150,000)
Net proceeds from common stock transactions                          --                    53,135
Repurchase of common stock                                        (836,885)              (563,750)
Net proceeds from exercise of common stock options                  48,000                 75,165
                                                              ------------------------------------
Net cash used in financing activities                             (788,885)              (692,370)
Cash used in discontinued operations                            (6,096,888)           (10,530,152)
                                                              ------------------------------------
Increase (decrease) in cash and cash equivalents                 1,020,155             (3,988,172)
Cash and cash equivalents at beginning of period                 5,949,478              9,386,069
                                                              ------------------------------------
Cash and cash equivalents at end of period                    $  6,969,633           $  5,397,897
                                                              ====================================

Supplemental disclosures of cash flow information:
   Cash paid during the period for interest                   $      4,386           $      5,352

Supplemental disclosures of noncash financing activities:
   Common stock received in sale of BSM subsidiary            $      --              $    318,024
   Common stock issued in McIntosh settlement                 $      --              $    199,999
   
</TABLE>

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






                                       4
<PAGE>   7
SUMMIT MEDICAL SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

NOTE A - BASIS OF PRESENTATION

         The accompanying unaudited condensed consolidated financial statements
of Summit Medical Systems, Inc. (the "Company") have been prepared in accordance
with generally accepted accounting principles for interim financial information
and with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (including normal recurring
accruals) considered necessary for a fair presentation have been included.
Certain prior period amounts have been reclassified to conform with current
presentation. Operating results for the three and nine month periods ended
September 30, 1998 are not necessarily indicative of the results that may be
expected for the year ended December 31, 1998. For further information, refer to
the consolidated financial statements and footnotes thereto for the year ended
December 31, 1997 in the Annual Report of the Company on Form 10-K.

NOTE B - INCOME (LOSS) PER COMMON SHARE

         As of December 31, 1997, the Company adopted the Financial Accounting
Standards Board, Statement of Financial Accounting Standards ("SFAS") No. 128,
"Earnings per Share," and all prior income (loss) per common share amounts were
retroactively restated. SFAS No. 128 requires disclosure of basic and diluted
net income (loss) per common share. Under SFAS No. 128, basic income (loss) per
common share replaces primary income (loss) per common share. Basic income
(loss) per common share is computed by dividing income (loss) for the period by
the weighted average number of shares of common stock outstanding during the
period. The computation of diluted income (loss) per common share, formerly
referred to as fully diluted income (loss) per common share, requires that the
number of weighted average shares outstanding be increased for the assumed
exercise of dilutive options using the treasury stock method.

Weighted average shares used in computing income (loss) per share are as
follows:

<TABLE>
<CAPTION>
                                                           Three Months Ended                 Nine Months Ended
                                                              September 30,                     September 30,
                                                       --------------------------------------------------------------
                                                           1998            1997             1998             1997
                                                       --------------------------------------------------------------
<S>                                                    <C>               <C>               <C>            <C>
Weighted average common shares outstanding               9,559,211       10,343,790        9,625,041      10,350,129
Dilutive effect of stock options outstanding
      using treasury stock method                                            59,245                          507,363
                                                                --                                --
                                                       --------------------------------------------------------------
Shares used in computing diluted income
     (loss) per common share                             9,559,211       10,403,035        9,625,041      10,857,492
                                                       ==============================================================
</TABLE>

NOTE C - NEW ACCOUNTING PRONOUNCEMENTS

         The Company adopted SFAS No. 130, "Reporting Comprehensive Income,"
effective for the first quarter of 1998. SFAS No. 130 establishes standards for
reporting and display in the financial statements of total results of operations
and the components of all other nonowner changes in equity, referred to as
comprehensive income. The adoption of SFAS No. 130 did not have an impact on the
Company's interim financial statements, as components of comprehensive income,
other than the net loss from on-going operations, were not material.

         SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," is effective for the year ending December 31, 1998. SFAS No. 131
requires disclosure of business and geographic segments in the consolidated
financial statements of the Company. The Company will adopt SFAS No. 131 at the
end of 1998 and is currently analyzing the impact it will have on the
disclosures in the consolidated financial statements.

NOTE D - DISCONTINUED OPERATIONS

         On June 10, 1998 the Company announced its intent to transition out of
the healthcare provider software market and focus its resources on its clinical
research services segment. In doing so, the Company will no longer 





                                       5
<PAGE>   8


develop or market its software products. The Company will, however, continue to
provide its customers with support and service through June 1999. As a result of
this decision to exit the healthcare provider software market, the Company
recorded a $5.35 million charge in the second quarter of 1998, consisting
primarily of estimated costs related to employee severance and retention,
facility restructuring and fulfillment of remaining contractual obligations. The
components of the charge are estimates made by management from information
available at the time the charge was recorded. The Company will continue to
evaluate the adequacy of the discontinued operations reserves as more
information becomes available. There can be no assurance that the liabilities
recorded will be realized consistent with original estimates. The Company has
also retained an investment banking firm to manage the potential sale, if any,
of all or part of the business segment. There can be no assurance that the
Company can arrange a sale of this business segment on terms acceptable to the
Company. The potential sale, if any, could have a material impact on the amount
recorded for the loss on disposal of discontinued operations. The financial
position and results of operations of the healthcare provider software segment
are reported as discontinued operations and all prior period amounts have been
restated to reflect the discontinued operations. Revenues related to the
healthcare provider software segment were $423,480 and $2,348,218 for the three
months ended September 30, 1998 and 1997 and $2,704,723 and $6,796,390 for the
nine months ended September 30, 1998 and 1997.

NOTE E - CONTINGENCIES

         The Company is a defendant in IN RE SUMMIT MEDICAL SYSTEMS, INC.
SECURITIES LITIGATION, a consolidated federal court securities action venued in
the United States District Court, District of Minnesota. The putative class
action was filed on March 10, 1997 and alleges violations of Section 10(b) of
the Securities and Exchange Act of 1934, as amended (the "Exchange Act") and
Rule 10b-5, Section 20(a) of the Exchange Act, Section 11 of the Securities Act
of 1933, as amended (the "Securities Act"), and Section 15 of the Securities
Act. The Company is also a defendant in a federal court securities action
captioned TEACHERS' RETIREMENT SYSTEM OF LOUISIANA V. SUMMIT MEDICAL SYSTEMS,
INC. ET. AL. The Teachers' Retirement action was filed on April 16, 1997 in the
United States District Court, District of Minnesota and is not a class action.
In addition to the claims alleged in the consolidated action, the Teachers'
Retirement complaint alleges a claim under Section 18(a) of the Exchange Act,
common law fraud, and negligent misrepresentation. Each action alleges, in
essence, that the Company made misleading public disclosures relating to its
financial statements and seeks compensatory damages for losses incurred as a
result of each alleged misleading public disclosure. As to federal securities
law claims, both actions are subject to the Private Securities Litigation Reform
Act of 1995 (the "Reform Act"). The District Court denied the Company's motion
to dismiss alleged violations of Section 10(b) of the Exchange Act and Rule
10b-5. Following a refiling of the complaint to reallege the plaintiffs' claims
under Section 11 of the Securities Act, the actions are proceeding on the
grounds described above. The Company intends to defend against these actions
vigorously.

         The Company has been informed by the Division of Enforcement of the
Securities and Exchange Commission (the "Commission"), through service of
subpoena on March 25, 1997, that the Commission is conducting an investigation
of the Company, relating to the Company's restatement of certain financial
statements. The Company is cooperating fully with the Commission and its
investigation.

         The Company and certain of the Company's directors and officers are 
defendants in a declaratory relief action, DAVID FOSTER ET. AL. V. SUMMIT
MEDICAL SYSTEMS, INC. ET. AL., venued in the District Court of Hennepin County,
Minnesota. The action was initiated on August 7, 1998 and seeks a declaration
that there is no coverage under the Company's directors' and officers' insurance
policies for the Company's pending federal securities actions or the
investigation by the Securities and Exchange Commission. The plaintiffs, the
insurance underwriters of the Company's directors' and officers' insurance
policies, allege that the claims the Company has submitted for coverage involve
matters commenced before the period covered by the policies. Additionally, the
plaintiffs allege that the Commission's investigation does not constitute a
proper claim under the policies. The Company believes the plaintiffs' request
for declaratory judgment misinterprets the Company's directors' and officers'
insurance policy. The Company intends to oppose this action vigorously and has
filed a counterclaim to enforce coverage under the policy, including advancement
of expenses.




                                       6
<PAGE>   9


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND 
RESULTS OF OPERATIONS

OVERVIEW

         Summit Medical Systems, Inc. (the "Company") is a provider of specialty
clinical research services to pharmaceutical, medical device, and biologic
manufacturers. Services offered by the Company include regulatory consulting and
strategy, device evaluation, product and manufacturing quality assurance,
statistical analysis, and clinical study design. In addition, the Company is
currently expanding its service offerings to include investigative site
selection and qualification, monitoring staffing services, data management, and
biostatistical consulting.

         On June 10, 1998, the Company announced its plans to transition out of
the healthcare provider software market and focus its resources on its clinical
research services segment. In doing so, the Company will no longer develop or
market its software products. The Company will, however, continue to provide its
customers with support and service through June 1999. As a result of this
decision to exit the healthcare provider software market, the Company recorded a
$5.35 million charge in the second quarter of 1998, consisting primarily of
estimated costs related to employee severance and retention, facility
restructuring and fulfillment of remaining contractual obligations. The
components of the charge are estimates made by management from information
available at the time the charge was recorded. The Company will continue to
evaluate the adequacy of the discontinued operations reserves as more
information becomes available. There can be no assurance that the liabilities
recorded will be realized consistent with original estimates. The Company has
also retained an investment banking firm to manage the potential sale, if any,
of all or part of this business segment. There can be no assurance that the
Company can arrange a sale of this business segment on terms acceptable to the
Company. The potential sale, if any, could have a material impact on the amount
recorded for the loss on disposal of discontinued operations. The financial
position and results of operations of the healthcare provider software segment
are reported as discontinued operations and all prior period amounts have been
restated to reflect the discontinued operations.

         Three months ended September 30, 1998 compared to three months ended
September 30, 1997.

         The Company incurred a net loss of $833,000, or $0.09 per diluted
share, for the three months ended September 30, 1998 as compared to a net loss
of $4.56 million, or $0.44 per diluted share, for the year earlier period. The
1997 results include net income from continuing operations of $103,000, or $0.01
per diluted share, and a loss from discontinued operations of $4.67 million, or
$0.45 per diluted share.

         Continuing operations. Revenue from continuing operations for the three
months ended September 30, 1998 was $1.46 million compared to $1.16 million for
the year earlier period, an increase of 25.5%. This increase in revenue resulted
primarily from a higher volume of consulting services performed.

         Cost of sales were $1.08 million for the 1998 period, or 73.8% of
revenue, compared to $733,000 for the 1997 period, or 63.1% of revenue. This
increase in cost of sales as a percentage of revenue is primarily the result of
the addition of client service personnel related to the Company's expanded
service offerings. As these service offerings remain in a start-up phase, these
personnel did not provide any billable client services in the third quarter of
1998. During the fourth quarter of 1998, the Company intends to transition
certain individuals that were previously focused on the Company's discontinued
healthcare provider software segment into the clinical research services
segment. As a result, the Company anticipates this transition will have a
negative effect on operating margins until such time the individuals are
utilized as billable resources.

         General and administrative expenses, which include salaries and
benefits for administrative management, finance, sales and marketing, rent, and
other overhead, were $1.50 million, or 103.2% of revenue, for the 1998 period
compared to $757,000, or 65.2% of revenue, for the 1997 period. This increase in
general and administrative expenses as a percentage of revenue is primarily due
to the addition of salaries, benefits and other overhead costs associated with
the Company's expanded service offerings. During the fourth quarter of 1998, the
Company intends to transition additional resources from the discontinued
healthcare provider software segment into the clinical research services
segment. As a result of this transition, future general and administrative costs
incurred by the Company will increase from current levels.




                                       7
<PAGE>   10

         Interest income for the 1998 period was $290,000 compared to $431,000
for the 1997 period as the Company's cash and cash equivalents balance,
including short-term investments, decreased to $19.13 million at September 30,
1998 from $31.38 million at September 30, 1997.

         Discontinued operations. Losses for the 1998 period from the
discontinued operations of the healthcare provider software segment had no
effect on the results of operations as these losses were accrued in conjunction
with the $5.35 million charge the Company recorded in the second quarter of 1998
related to the decision to exit the healthcare provider software market. For the
1997 period, the loss from discontinued operations was $4.67 million, which
included $3.50 million in various special charges related the Company's 1996
revenue restatement and 1997 restructuring.

         Nine months ended September 30, 1998 compared to nine months ended
September 30, 1997.

         The Company incurred a net loss of $10.95 million, or $1.14 per diluted
share, for the nine months ended September 30, 1998 as compared to a net loss of
$15.37 million, or $1.42 per diluted share, for the year earlier period. The
1998 results include a net loss from continuing operations of $896,000 or $0.09
per diluted share, and a loss from discontinued operations of $10.06 million, or
$1.05 per diluted share. The 1997 results include net income from continuing
operations of $815,000, or $0.07 per diluted share, and a loss from discontinued
operations of $16.19 million, or $1.49 per diluted share.

         Continuing operations. Revenue from continuing operations for the nine
months ended September 30, 1998 was $4.20 million compared to $3.85 million for
the year earlier period, an increase of 9.2%. This increase in revenue resulted
primarily from a higher volume of consulting services performed. However,
comparison of revenue is impacted by an especially large volume of consulting
contracts during the first quarter of 1997.

         Cost of sales were $2.73 million for the 1998 period, or 65.0% of
revenue, compared to $2.48 million for the 1997 period, or 64.5% of revenue. The
increase in cost of sales as a percentage of revenue is primarily the result of
the addition of client service personnel related to the Company's expanded
service offerings. As these service offerings remain in a start-up phase, these
personnel did not provide any billable client services in the 1998 period.
During the fourth quarter of 1998, the Company intends to transition certain
individuals that were previously focused on the Company's discontinued
healthcare provider software segment into the clinical research services
segment. As a result, the Company anticipates this transition will have a
negative effect on operating margins until such time the individuals are
utilized as billable resources.

         General and administrative expenses, which include salaries and
benefits for administrative management, finance, sales and marketing, rent, and
other overhead, were $3.34 million, or 79.4% of revenue, for the 1998 period
compared to $2.08 million, or 54.0% of revenue, for the 1997 period. This
increase in general and administrative expenses as a percentage of revenue is
primarily due to the addition of salaries, benefits and other overhead costs
associated with the Company's expanded service offerings. During the fourth
quarter of 1998, the Company intends to transition additional resources from the
discontinued healthcare provider software segment into the clinical research
services segment. As a result of this transition, future general and
administrative costs incurred by the Company will increase from current levels.

         Interest income for the 1998 period was $972,000 compared to $1.52
million for the 1997 period as the Company's cash and cash equivalents balance,
including short-term investments, decreased to $19.13 million at September 30,
1998 from $31.38 million at September 30, 1997.

         Discontinued operations. The Company incurred a loss from the
discontinued operations of its healthcare provider software segment of $10.06
million for the 1998 period, which included a charge of $5.35 million recorded
in the second quarter related to the decision to exit the healthcare provider
software market. The loss from discontinued operations recorded in the 1998
period represents results of operations of the discontinued business segment
through June 30, 1998. Losses for the three months ended September 30, 1998 were
accrued in conjunction with the $5.35 million charge discussed above. For the
1997 period, the loss from discontinued operations was $16.19 million, which
included $8.7 million in various special charges related the Company's 1996
revenue restatement and 1997 restructuring.



                                       8
<PAGE>   11

LIQUIDITY AND CAPITAL RESOURCES

         The Company's cash and cash equivalents, including short-term
investments, totaled $19.13 million as of September 30, 1998, a decrease of
$8.86 million from December 31, 1997. This decrease was primarily due to a)
$6.10 million used in discontinued operations, b) $887,000 used in continuing
operating activities, c) $1.09 million used for the purchase of equipment and
fixtures, principally computer and computer systems equipment, and d) $837,000
used to repurchase shares of Company stock.

         As of September 30, 1998 the Company had net working capital of $12.13
million, compared to $24.23 million at December 31, 1997. This decrease resulted
primarily from net losses of $10.95 million incurred during the nine months
ended September 30, 1998 which include a charge of $5.35 million recorded in the
second quarter, consisting primarily of estimated costs related to employee
severance and retention, facility restructuring and fulfillment of remaining
contractual obligations related to the Company's decision to exit the healthcare
provider software market. The components of the charge are estimates made by
management from information available at the time the charge was recorded. The
aforementioned charge will result in a corresponding decrease in the cash
balance through the disposal period. Additionally, management anticipates the
Company will continue to experience operating losses into 1999, and as a result,
believes working capital will continue to decline.

         As of September 30, 1998, the Company had $1.35 million in accounts  
receivable related to continuing operations compared to $1.16 million as of
December 31, 1997. The Company believes its current provision of $148,000 for
bad debts is adequate.

         The Company's Board of Directors has authorized a stock repurchase
program under which up to 2.0 million shares of the Company's common stock may
be repurchased. From inception of the stock repurchase program in August 1997
through September 30, 1998, the Company has repurchased 1,134,600 shares of
common stock for approximately $2.86 million. As of September 30, 1998, there
were 9,419,429 shares of the Company's common stock issued and outstanding.

         The Company believes that continued expenditure of funds will be
necessary to support its future operations, and that cash and cash equivalents
of $19.13 million on hand at September 30, 1998 will be sufficient to fund its
operations, capital requirements, and expansion goals through 1999. However,
there can be no assurances that the Company will generate sufficient revenue, or
adequately control costs, to achieve profitability or positive cash flow for
periods beyond 1998. If the Company cannot achieve profitability or positive
cash flow or its contingencies result in material expenditures, the Company may
require additional external financing in the future. There can be no assurances
that such financing will be available on terms acceptable to the Company.

         The Company has experienced operating losses for each of the past four
years. Net losses for the year ended December 31, 1997 were $19.04 million, and
for the nine months ended September 30, 1998, $10.95 million. The Company had an
accumulated deficit of $53.72 million as of September 30, 1998. The Company's
ability to increase revenue, and to achieve profitability and positive cash flow
will depend on a number of factors as summarized above under "Safe Harbor
Statement under the Private Securities Litigation Reform Act of 1995" and under
"Cautionary Statement" filed as Exhibit 99 to the Company's Annual Report on
Form 10-K, dated March 27, 1998.

         Year 2000 Issue. The Company is currently evaluating the potential
effect of the situation commonly referred to as the "Year 2000 Issue," which
involves the inability of certain software and hardware systems to properly
recognize and process dates for the year 2000 and beyond. The Company, with the
assistance of outside consultants, has developed and is implementing a plan to
evaluate the Company's software products, internal systems and material third
party relationships.

         As part of this evaluation plan, the Company and its consultants are
conducting a review of the Company's software products to determine the nature
and extent of any modifications required to make these software products capable
of processing dates for the year 2000 and beyond. The Company and its
consultants have substantially completed an audit of the Company's Crescendo!
software product. To date, this audit has not identified any material
modifications to the Crescendo! software product which are necessary to make it
Year 2000 compliant. The Company expects to complete the audit of the Crescendo!
software product during the fourth quarter of 1998. The Company intends to make
any modifications or upgrades that are necessary to make Crescendo! Year 2000




                                       9
<PAGE>   12

compliant, except as this intention may be modified if the Crescendo! assets are
sold as part of the Company's announced plan to exit the healthcare provider
software market.

          As a part of its decision to exit the healthcare provider software
market, the Company has ended its development of the Vista software and
announced that it will sunset the software by June 1999. Accordingly, the
Company will not conduct an independent audit of this software for Year 2000
compliance. Although the Company's tests of the Vista software indicate the
software properly processes dates for the year 2000 and beyond, the Company has
advised its customers that it will not take any additional steps to assure Year
2000 compliance of the Vista software, and that customers should consider this
fact when making their own assessments of Year 2000 readiness.

          The Company has spent approximately $149,000 on Year 2000 testing,
auditing, and modifications or upgrades through September 30, 1998. The costs of
Year 2000 compliance have been, and will be expensed as incurred. Additionally,
the Company expects to spend approximately $70,000 on these efforts to complete
its Year 2000 compliance procedures, exclusive of any unknown modifications or
upgrades that may be uncovered in the course of the Company's on-going audit of
Crescendo! software. It is also possible that the Company's software products
may contain undetected errors or defects associated with year 2000 date
functions that may result in material costs to the Company. The costs of any
required modifications or upgrades to the Company's software products could have
a material effect on the business, financial condition or results of operations
of the Company. In addition, if any modifications or upgrades to the Company's
software products are not completed in a timely manner, the Year 2000 issue
could have a material effect on the business, financial condition or results of
operations of the Company. Also, there may be litigation that arises out of Year
2000 compliance issues, and the Company is aware of a growing number of lawsuits
against other software vendors. Because of the recent nature of such litigation,
it is uncertain to what extent the Company may be affected by it.

         The operation of the Company's software requires the use of operating
systems and computer hardware provided by third parties. To the extent that
these operating systems or hardware are not Year 2000 compliant, the Company's
customers may experience difficulties operating the Company's software
regardless of Year 2000 compliance on the part of the Company's products. The
Company is aware that certain operating systems and hardware on which the
Company's software may operate may not be Year 2000 compliant based upon
statements of vendors of the operating systems and hardware. The Company has
advised its customers to conduct an investigation of the system used to run the
Company's software.

         The Company's internal information technology ("IT") systems and non-IT
systems use hardware and software supplied by third party vendors. The Company
is currently evaluating Year 2000 compliance of the third party hardware and
software, including obtaining Year 2000 compliance statements from the vendors.
To date, the Company has substantially completed the review of its hardware
systems. Based on this review, the Company does not expect to incur material
costs to upgrade or replace hardware. The Company's review of third party
software is not yet complete. As a consequence, the Company cannot determine
whether the costs to replace software will be material. Should Year 2000
compliance tests indicate that material expenditures will be required to upgrade
or replace third party software, the estimates of costs to complete Year 2000
compliance procedures set forth above will increase. The Company expects to
complete substantially its Year 2000 readiness preparations by June 1999.
However, unforeseen circumstances could prevent a timely completion of all
necessary Year 2000 compliance measures. The Company believes that adequate
alternatives are available for information processing should necessary upgrades
or replacements not occur in a timely manner.

         The Company's clinical research services, particularly its data
management services, will depend on the use of third party software. The Company
is obtaining certification of Year 2000 compliance from the vendors of software
used in its services. Any failure of this software to be Year 2000 compliant
could cause a material disruption in the Company's business. In addition, the
Company depends on infrastructure services provided by third parties and
government agencies (e.g. electricity, phone service, water and transportation).
The failure of one or more of these infrastructures services could cause a
material disruption in the Company's business.

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

         None





                                       10
<PAGE>   13

PART II. OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS

         The Company is a defendant in IN RE SUMMIT MEDICAL SYSTEMS, INC.
SECURITIES LITIGATION, a consolidated federal court securities action venued in
the United States District Court, District of Minnesota. The putative class
action was filed on March 10, 1997 and alleges violations of Section 10(b) of
the Securities and Exchange Act of 1934, as amended (the "Exchange Act") and
Rule 10b-5, Section 20(a) of the Exchange Act, Section 11 of the Securities Act
of 1933, as amended (the "Securities Act"), and Section 15 of the Securities
Act. The Company is also a defendant in a federal court securities action
captioned TEACHERS' RETIREMENT SYSTEM OF LOUISIANA V. SUMMIT MEDICAL SYSTEMS,
INC. ET. AL. The Teachers' Retirement action was filed on April 16, 1997 in the
United States District Court, District of Minnesota and is not a class action.
In addition to the claims alleged in the consolidated action, the Teachers'
Retirement complaint alleges a claim under Section 18(a) of the Exchange Act,
common law fraud, and negligent misrepresentation. Each action alleges, in
essence, that the Company made misleading public disclosures relating to its
financial statements and seeks compensatory damages for losses incurred as a
result of each alleged misleading public disclosure. As to federal securities
law claims, both actions are subject to the Private Securities Litigation Reform
Act of 1995 (the "Reform Act"). The District Court denied the Company's motion
to dismiss alleged violations of Section 10(b) of the Exchange Act and Rule
10b-5. Following a refiling of the complaint to reallege the plaintiffs' claims
under Section 11 of the Securities Act, the actions are proceeding on the
grounds described above. The Company intends to defend against these actions
vigorously.

         The Company has been informed by the Division of Enforcement of the
Securities and Exchange Commission (the "Commission"), through service of
subpoena on March 25, 1997, that the Commission is conducting an investigation
of the Company, relating to the Company's restatement of certain financial
statements. The Company is cooperating fully with the Commission and its
investigation.

         The Company and certain of the Company's directors and officers are
defendants in a declaratory relief action, DAVID FOSTER ET. AL. V. SUMMIT
MEDICAL SYSTEMS, INC. ET. AL., venued in the District Court of Hennepin County,
Minnesota. The action was initiated on August 7, 1998 and seeks a declaration
that there is no coverage under the Company's directors' and officers' insurance
policies for the Company's pending federal securities actions or the
investigation by the Commission. The plaintiffs, the insurance underwriters of
the Company's directors' and officers' insurance policies, allege that the
claims the Company has submitted for coverage involve matters commenced before
the period covered by the policies. Additionally, the plaintiffs allege that the
Commission's investigation does not constitute a proper claim under the
policies. The Company believes the plaintiffs' request for declaratory judgment
misinterprets the Company's directors' and officers' insurance policy. The
Company intends to oppose this action vigorously and has filed a counterclaim to
enforce coverage under the policy, including advancement of expenses.

ITEM 2.  CHANGES IN SECURITIES

         None

ITEM 3.  DEFAULTS UPON SENIOR SECURITIES

         None

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

         None

ITEM 5.  OTHER INFORMATION

         Effective January 1, 1999, John W. Robbins will transition from his
responsibilities as Senior Vice President to return to his role as a consultant
to the Company.


                                             11
<PAGE>   14

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

          (a)    Exhibits

          27.1   Financial Data Schedule -Nine Months Ended September 30, 1998


          (b)    Reports on Form 8-K

                 None




















                                       12











<PAGE>   15


SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.




                                           Summit Medical Systems, Inc.


Date:  November 13, 1998              By:  /s/ Barbara A. Cannon
                                           ----------------------
                                           Barbara A. Cannon
                                           President and Chief Executive Officer


Date:  November 13, 1998              By:  /s/ Paul R. Johnson
                                           -------------------
                                           Paul R. Johnson
                                           Vice President and Chief Financial 
                                           Officer





                                       13