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                       SECURITIES AND EXCHANGE COMMISSION
                              Washington, DC 20549

                                   FORM 10-KSB

        (MARK ONE)

        [x]              ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
                   OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
                           For the fiscal year ended August 31, 1996

                                       OR

        [ ]            TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
                   OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
                   For the transition period from ____________ to __________

                         Commission file number 0-27380

                                 ECHOCATH, INC.
                                 --------------
                 (NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)

<TABLE>
<S>                                                      <C>
                      New Jersey                                      22-3273101
                      ----------                                      ----------
            (STATE OR OTHER JURISDICTION OF              (I.R.S. EMPLOYER IDENTIFICATION NO.)
            INCORPORATION OR ORGANIZATION)

            P.O. Box 7224, Princeton, NJ                                 08543
            ----------------------------                                 -----
       (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)                       (ZIP CODE)


</TABLE>


ISSUER'S TELEPHONE NUMBER: (609) 987-8400

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE EXCHANGE ACT:

<TABLE>
<CAPTION>

         (TITLE OF CLASS)              (NAME OF EACH EXCHANGE ON
                                          WHICH REGISTERED)
<S>                                     <C>
             None                              None
          ----------                        ----------

</TABLE>

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE EXCHANGE ACT:

                       Class A Common Stock, no par value
                           Redeemable Class A Warrants
                           Redeemable Class B Warrants
                 Units {each consisting of one share of Class A
                  Common Stock, one Redeemable Class A Warrant
                       and One Redeemable Class B Warrant}

                                (TITLE OF CLASS)

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

        Check if there is no disclosure of delinquent filers pursuant to Item
405 of Regulation S-B contained in this form, and no disclosure will 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 its most recent fiscal year (year ended August
31, 1996) were $108,025.

        The aggregate market value on December 12, 1996 of the publicly trading
voting stock held by non-affiliates (consisting of Class A Common Stock, no par
value) computed using the last sales price on that date was approximately
$6,842,500. As of December 12, 1996, 1,610,000 shares of Class A Common Stock,
no par value, and 1,500,000 shares of Class B Common Stock, no par value, were
outstanding.

Transitional Small Business Disclosure Format (check one) YES         NO   X
                                                              ------     -----

                      DOCUMENTS INCORPORATED BY REFERENCE.

                                      None



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                                INTRODUCTORY NOTE

     Echocath,  Inc., a New Jersey  Corporation (the "Company") is a development
stage Company engaged in developing, manufacturing and marketing medical devices
which  enhance  and  expand  the  use  of  ultrasound   technology  for  medical
applications and procedures.

     On January 17, 1996, the Company  consummated  its initial public  offering
(the  "Offering"),   pursuant  to  which  it  sold  1,610,000  Units  (including
over-allotments)  for gross  proceeds of  $8,050,000.  Each Unit consists of one
share of the Company's  Class A Common Stock,  no par value (the "Class A Common
Stock"),  one  Redeemable  Class A  Warrant  (the  "Class A  Warrants")  and one
Redeemable  Class B Warrant (the "Class B Warrants,"  together  with the Class A
Warrants, the "Warrants").

     Certain   statements  in  this  Report  under  the  caption   "Management's
Discussion and Analysis of Financial  Condition and Results of  Operations"  and
elsewhere  constitute  "forward-looking  statements"  within the  meaning of the
Private Securities Litigation Reform Act of 1995, including, without limitation,
statements regarding future cash requirements.  Such forward-looking  statements
involve known and unknown risks, uncertainties and other factors which may cause
the actual  results,  performance or  achievements  of the Company,  or industry
results,  to be materially  different from any future results,  performance,  or
achievements  expressed  or implied  by such  forward-looking  statements.  Such
factors include,  among others,  the following:  delays in product  development;
problems  or delays  with  clinical  trials;  failure  to  receive  or delays in
receiving regulatory approval; lack of enforceability of patents and proprietary
rights;  lack  of  reimbursement;  general  economic  and  business  conditions;
industry capacity; industry trends; demographic changes;  competition;  material
costs  and  availability;  the loss of any  significant  customers;  changes  in
business  strategy or development  plans;  quality of management;  availability,
terms and deployment of capital;  business  abilities and judgment of personnel;
availability  of qualified  personnel;  changes in, or the failure  comply with,
government regulations; and other factors referenced in this Report.

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                                     PART I

ITEM 1.       DESCRIPTION OF BUSINESS

GENERAL

     The  Company  is  a  development   stage  company  engaged  in  developing,
manufacturing  and marketing medical devices which enhance and expand the use of
ultrasound  technology for medical  applications  and procedures.  The Company's
technologies enable ultrasound imaging to, among other things,  identify devices
during interventional  procedures such as needle biopsies,  catheterizations and
intravascular  imaging.  Such technologies  include a proprietary  visualization
system  ("ColorMark")  which highlights  metallic  objects,  such as needles and
other interventional  instruments,  in color to permit them to be easily seen on
existing  ultrasound  imaging screens,  and a proprietary  catheter  positioning
system  ("EchoMark")  which  electronically  marks and  displays the position of
non-metallic objects, such as catheters,  within the body on existing ultrasound
imaging screens.

     The Company  believes  that products  incorporating  its  technologies  can
improve and expand the clinical uses of ultrasound  imaging for both  diagnostic
and therapeutic  applications and enable clinicians to perform a wide variety of
procedures less invasively,  more safely, more cost-effectively and with greater
precision  than  is  currently  possible  with  conventional   x-ray,   computed
tomography  ("CT"),  magnetic  resonance  imaging  ("MRI")  or  optical  imaging
equipment.  In some cases,  the Company  believes  that its products may make it
possible to perform on an outpatient basis procedures  normally  confined to the
hospital, thus improving patient comfort and reducing costs.

     The Company is also engaged in ongoing research and development of proposed
products utilizing a proprietary transcutaneous, epivascular, and catheter-based
sensor and electronics  system  ("EchoFlow")  which, if successfully  developed,
would  provide  data on the blood volume flow through  internal  vessels,  and a
proprietary imaging system ("EchoEye") which, if successfully  developed,  would
allow clinicians to view tissues and organs inside the body in three-dimensional
real-time  and provide  forward-looking  intravascular  images and  guidance for
minimally  invasive   ultrasound-guided   surgical  procedures.   The  continued
development  of  these   products,   the   commercialization   of  any  products
incorporating  these  technologies,  as  well  as any  other  proposed  products
utilizing the Company's  technologies,  will depend on the Company's  ability to
obtain  additional  financing  through joint ventures,  licensing  agreements or
other collaborative arrangements or otherwise.

     The Company's  operations have not generated  significant revenues to date.
The Company  has  incurred  operating  losses in each of its fiscal  years,  and
expects that  operating  losses will  continue in the  foreseeable  future.  The
Report of the Company's  independent auditors contains an explanatory  paragraph
as to the Company's ability to continue as a going concern.  No assurance can be
given that the Company will  successfully  commercialize  any of its products or
achieve profitable operations.

ULTRASOUND IMAGING BACKGROUND

     Imaging systems are necessary because many medical and surgical  procedures
cannot  be  performed  without  detailed  information  about  conditions  in the
interior  of the body.  Physicians  typically  scan the body  using  ultrasound,
optical, X-ray, CT or MRI equipment. In addition, ultrasound and optical imaging
devices may be mounted onto catheters and inserted directly into arteries, veins
or other  parts of the body.  These  imaging  catheters  may also be used in the
performance of certain  therapeutic  procedures,  such as  angioplasty,  various
obstetric  and  gynecological   procedures,   and  minimally  invasive  surgical
procedures.

     Each of the currently available imaging  technologies,  X-ray, MRI, CT, and
optical  technologies have significant  limitations.  Each of these technologies
are expensive and time consuming to perform.  X-ray imaging cannot provide views
of the  structure of soft tissue or  cross-sectional  views of blood  vessels or
other body lumens.  X-ray  procedures are expensive and can expose both patients
and  clinicians  to  potentially  dangerous  radiation.  Catheter-based  optical
systems are safer and can provide  interior  views of body  structures,  but can
only  view  the  surface  of the body  tissue.  Because  of  these  limitations,
clinicians are increasingly  turning to ultrasound imaging. The Company believes
that ultrasound's  growth results largely from the fact that ultrasound  devices
are  cost-effective  and allow the  clinician  to see below the  surface of body
tissue.

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     Currently available external ultrasound imaging devices, however, also have
certain limitations.  These devices are often unable to record the location of a
catheter  or other  medical  device  inserted  by the  clinician  into the body.
Because the precise placement of such devices is often essential for therapeutic
use, this difficulty can severely impair the potential  usefulness of ultrasound
for guiding interventional procedures.

THE COMPANY'S PRODUCTS AND TECHNOLOGY

     The  following  is a  description  of the  Company's  products and proposed
products utilizing the Company's proprietary technologies.

     COLORMARK The Company has developed,  and is currently marketing, a product
(the "ColorMark  Clip") utilizing the ColorMark  technology.  The ColorMark Clip
consists  of a  disposable  clip and a  non-disposable  drive  box.  The clip is
mounted on the needle or other interventional  device and the drive box produces
a voltage which is transmitted  to a piezoceramic  slab mounted in the clip. The
voltage generates  vibrations which in turn allows the device to appear in color
on the ultrasound  imaging screen which permits  clinicians to more  effectively
guide needles during therapeutic and diagnostic  procedures.  The ColorMark Clip
is  compatible  with a wide  variety of needles  and guide wires and can operate
with most currently available color ultrasound systems. The non-disposable drive
box has a current  selling  price of $5,000  and the  disposable  clips sell for
approximately  $50 each.  The Company has  received  market  clearance  from the
United States Food and Drug  Administration  ("FDA") for the ColorMark  Clip for
needle  placements.  Management  believes that with the ColorMark  Clip,  needle
biopsies  and  vascular  access  procedures  are more  accurate  and  faster for
clinicians  to  administer.  The  ColorMark  Clip has been  introduced  at major
radiology-oriented medical conventions.

     The Company may develop and commercialize additional products utilizing the
ColorMark  technology to address  specialized  procedures  such as  laparoscopic
instrument  guidance.  Such  products are  expected to be subject to  regulatory
approval by the FDA and comparable  foreign agencies or state health departments
prior  to  marketing  and  are  expected  to  require  additional  financing  to
commercialize.

     ECHOMARK  The  Company  has  developed a catheter  utilizing  the  EchoMark
technology to diagnose  fallopian  tube blockage (the  "EchoMark  Salpingography
Catheter").  The  Salpingography  Catheter consists of a disposable  catheter to
which is attached a proprietary  sensor connected by wire to a reusable catheter
system  interface (the "EchoMark  CSI"). The EchoMark CSI, for which the Company
received  FDA market  clearance  in 1992,  provides  the  interface  between the
Company's EchoMark products and most commercially  available  ultrasound imaging
systems. On the EchoMark Salpingography Catheter, the sensor captures ultrasound
signals and relays them back to the  EchoMark  CSI,  which in turn  displays the
position of the sensor on the ultrasound  imaging screen.  The Company  believes
that the EchoMark  Salpingography  Catheter may expand the use of ultrasound for
diagnosing and treating  infertility  problems in women because of the desire to
avoid  x-rays in such  patients  and the desire to reduce  procedure  time.  The
Company has  completed  commercial  prototypes  of the  EchoMark  Salpingography
Catheter and has received  FDA  clearance to market the EchoMark  Salpingography
Catheter.  The Company is  currently  not selling  the  EchoMark  Salpingography
Catheter. It will continue its selling efforts once it receives FDA clearance on
certain  improvements  to such  catheter.  The  Company has also  developed  the
EchoMark  EP  Catheter  which  consists  of  a  conventional  electro-physiology
catheter  augmented by a piezoplastic  covered brass sensor connected by wire to
the EchoMark CSI. The sensor captures ultrasound signals and relays them back to
the EchoMark CSI, which in turn displays the position of the sensor in the image
of the cardiac structures on the ultrasound imaging screen. The Company believes
that the EchoMark EP Catheter  will increase the speed and ease the diagnosis of
arrhythmias in the heart. The Company recently  received FDA clearance to market
the EchoMark EP Catheter to diagnose defective conductive pathways in the heart.
Pursuant  to  an  agreement  effective  as  of  September  21,  1992  (the  "HRT
Agreement") between the Company and Heart Rhythm Technologies, Inc. ("HRT"), HRT
had the exclusive right to market and sell the EchoMark EP Catheter. HRT did not
market  or  sell  any  products  incorporating  the  Company's  technology  and,
therefore, in January 1996, the Company repurchased the rights granted under the
HRT Agreement.

     Additional  products which the Company has developed utilizing the EchoMark
technology  are an  EchoMark  peripheral  angioplasty  catheter  ("EchoMark  PTA
Catheter")  and  EchoMark  guidewire  (the  "EchoMark  Guidewire").  The Company
received FDA marketing clearance under a 510(k) pre-market  notification for the
EchoMark PTA Catheter in 1992 and the  EchoMark  Guidewire in 1993.  The Company
previously  experienced  resistance from the medical community when it attempted
to introduce  the EchoMark PTA Catheter in 1993 because of the conflict over the
administration of such procedures between

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different  medical  specialties.  The  Company  is  currently  determining,  and
exploring  selling  channels  for, the  EchoMark  PTA  Catheter  for  performing
peripheral angioplasty under ultrasound guidance.

     Currently,  the EchoMark CSI may be used with Acuson,  Advanced  Technology
Laboratories, Inc. ("ATL"),  Hewlett-Packard Inc., Siemens Medical Systems Inc.,
Toshiba  and  other  ultrasound  systems.  The  non-disposable  EchoMark  CSI is
currently  being test marketed at a selling price of $15,000 and the  disposable
catheters used in the EchoMark  disposable products are being test marketed in a
range of unit prices from $125 to $500.

     ECHOFLOW The Company is also engaged in ongoing research and development of
the EchoFlow  technology  and  products  incorporating  the EchoFlow  technology
which,  if successfully  developed,  would provide data on the blood volume flow
through internal vessels. Small sensors that can be mounted onto or inside blood
vessels or within the walls of a graft,  and that  provide  crucial  data on the
flow of blood,  have wide  applicability,  including  for  feedback  control  of
pacemakers and implantable  defibrillators.  EchoFlow sensors-will be disposable
products,   and  will  connect  to  an  electronics   module.  The  Company  has
successfully   performed  bench  tests  on  EchoFlow   sensors,   has  commenced
preclinical testing and expects to continue preclinical testing during 1997. The
Company  cannot  predict,  when, if ever,  such  products  will be  successfully
developed or available for commercial sale.

     ECHOEYE The Company is engaged in the research and  development of products
incorporating  the EchoEye  technology which, if successfully  developed,  would
allow clinicians to view tissues and organs inside the body in three-dimensional
real-time  and provide  forward  looking  intravascular  images and guidance for
minimally invasive  ultrasound guided procedures.  One EchoEye product currently
being  developed  will consist of a small  disposable  catheter with a miniature
ultrasound  transducer mounted at its tip. See  "Collaborative  Agreements." The
Company has successfully performed preclinical testing on the EchoEye technology
and expects to continue preclinical testing of EchoEye products in 1997.

     Any further  developments of the Company's  proposed  products,  as well as
other  products  the  Company  wishes to pursue,  will  depend on the  Company's
ability to obtain  substantial  additional  financing  through  joint  ventures,
licensing  agreements  or other  collaborative  arrangements  or  otherwise.  In
addition, such products are expected to be subject to regulatory approval by the
FDA and  comparable  foreign  agencies  or  state  health  departments  prior to
marketing.

MARKETS AND APPLICATIONS

     Set forth below is a description  of the markets and  applications  for the
Company's products and proposed products.

     COLORMARK The Company has commenced  establishing  clinical reference sites
to  begin  direct  marketing  of the  ColorMark  Clip  for  needle  biopsies  to
radiologists  and  breast  surgeons  and  for  vascular  access   procedures  to
interventional  radiologists  and  invasive  cardiologists.  The Company has had
minimal sales of the ColorMark Clip, however, since the Offering it has begun to
develop a sales and marketing organization to commercialize this product.

     Needle  Biopsy  Biopsies,  in which small  pieces of tissue are excised and
examined,  are  performed in order to diagnose  the cause of abnormal  masses of
tissue.  Biopsies are sometimes  performed after the entire tissue mass has been
removed  surgically,  but biopsies can often be performed  before  surgery using
biopsy needles. To successfully perform a needle biopsy, often an imaging device
is needed to guide the biopsy  needle.  Biopsy  procedures  include  fine-needle
aspiration  biopsy,  core biopsy,  and surgical biopsy.  Based upon Management's
analysis  of  American  Cancer  Society  statistics,  physician  interviews  and
published clinical reports,  the Company believes that a significant  portion of
these  procedures  could require guidance using either  ultrasound  imaging,  CT
scanning,  X-ray  imaging or MRI.  Management  believes  ultrasound is generally
considered by clinicians to be the preferred  guidance imaging method,  as it is
less costly and less  time-consuming than other  alternatives.  However,  use of
this method is  currently  hampered by the fact that the biopsy  needle is often
difficult to see on the imaging screen.  The needle may disappear  altogether if
it is not  at a  favorable  reflecting  angle  for  the  ultrasound  transducer.
Clinicians  must master  various  techniques for getting the needle to appear on
the screen by adjusting the alignment of the needle or "jiggling"  it.  Textured
needles provide only a limited solution to this problem,  although they are less
expensive  than the ColorMark  clip. As a result,  only  experienced  clinicians
generally attempt  ultrasound  guided biopsy.  The ColorMark Clip is designed to
eliminate this needle  invisibility  problem in biopsy  procedures.  The Company
believes  that the ColorMark  Clip could enable needle  biopsies to be performed
faster,  easier and more accurately.  The FDA has recently cleared for marketing
the use of an ultrasound  system  manufactured  by ATL for diagnosing  cancerous
lesions in the breast which are larger than 1cm.

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The use of such  ultrasound  system may reduce the number of  surgical  biopsies
performed each year, however,  the Company believes,  that such FDA approval may
lead to an increase in  acceptance  and use of ultrasound  for detecting  breast
cancer.

     Vascular Access Procedures A vascular access procedure, a necessary step in
performing any radiology or cardiology catheterization  procedure,  involves the
insertion of a catheter into the femoral artery,  guided by feel. Poor placement
of the  needle  that  is  used to  puncture  the  artery  can  lead to  bleeding
complications at the puncture site,  particularly where a large-bore catheter is
used or in  situations  where the  patient  is obese,  hypertensive  or using an
anticoagulant agent. Ultrasound imaging potentially can provide guidance for the
exact placement of the puncturing needle quickly and easily,  but until now this
potential was limited by the lack of an effective method for viewing the needle.
Physicians  suggest  that  the  ColorMark  Clip  is  most  likely  to be used in
catheterizations  where  anticoagulants  are involved,  such as angioplasty  and
stenting  procedures.  Additionally,  procedures  involving large bore catheters
(such as placement  of  intra-aortic  balloon  pumps) also  represent  potential
opportunities  for the ColorMark  Clip.  Management  believes that the ColorMark
Clip is well suited for these  patients and that the  ColorMark  Clip makes this
procedure easier to perform  accurately,  and allows  clinicians to delegate the
procedure  to less  skilled  persons,  saving time,  and  increasing  laboratory
volume.  A disadvantage  to using the ColorMark Clip is the  requirement for its
use in  conjunction  with a colorflow  ultrasound  imaging  system.  While these
systems are common in hospital  radiology  departments,  they are currently less
common in offices  and  surgical  suites  where  biopsies  and  vascular  access
procedures may be performed.

ECHOMARK

     Infertility     Therapy     Infertility    therapy    generally    includes
hysterosalpingography  ("HSG")  procedures  which image the uterus and fallopian
tubes and selective salpingography ("SSG") procedures which image each fallopian
tube individually.  Both of these procedures involve X-rays and the injection of
iodinated contrast media into the fallopian tubes and uterine cavity in order to
view  the  condition  of the  cavity  and  determine  whether  lesions  or other
obstructions  exist.  These  examinations  are  expensive,  highly  invasive and
uncomfortable  for  patients,  and they must be performed in the  hospital.  The
procedures  involve  injection of potentially  toxic contrast dyes into the body
and the related risks from exposure to radiation.

     Ultrasound  technology  potentially  can address many of these  concerns by
providing a less  expensive  outpatient  procedure  that  eliminates  the use of
radiation  and  removes the risk of  irritation  caused by the  contrast  media.
However,  ultrasound  also  has  limitations  since  it is  often  difficult  or
impossible to identify the position of catheters and instruments used during the
procedure. The EchoMark Salpingography Catheter is designed to make the position
of the catheter or other  instrument  easier to  determine,  independent  of the
angle of the catheter.  The Company  believes  that the EchoMark  Salpingography
Catheter  should expand the usefulness of ultrasound for diagnosing and treating
infertility  problems,  reduce procedure time, eliminate the use of radiation to
provide guidance, and also make possible the transfer of the procedure to a less
expensive  and  more  comfortable  outpatient  setting.  However,  the  EchoMark
procedure will require the medical  community to change the traditional  methods
of diagnosis and treatment.  The Company intends to market and sell the EchoMark
Salpingography Catheter for the diagnosis and treatment of infertility to OB/GYN
doctors. To date no EchoMark Salpingography Catheters have been sold.

     Cardiac  Electrophysiology  The  EchoMark EP Catheter  was designed for the
diagnosis and treatment of cardiac  arrhythmias.  The Company  believes that the
EchoMark EP Catheter  allows more rapid  placement of EP catheters  than present
X-ray  techniques.  As such, this product  represents a potentially  significant
improvement in this procedure.

     Peripheral  Angioplasty  Peripheral  angioplasty  procedures  are currently
performed with X-ray contrast  media and in X-ray suites.  The Company  believes
that ultrasound-guidance using EchoMark PTA Catheter will save significant costs
with as good or superior clinical  outcomes.  Market resistance from traditional
practitioners  was  encountered  in 1993  when the  EchoMark  PTA  Catheter  was
introduced  into the United States  market.  Management  believes that increased
cost-consciousness coupled with increased marketing by the Company could lead to
increased  acceptance of the EchoMark PTA Catheter in the United States  despite
the need to change the imaging procedure from X-ray to ultrasound.

ECHOFLOW

     Products   utilizing  the  EchoFlow   technology,   will,  if  successfully
developed,  provide data on the blood flow in vessels.  Early  applications  are
expected to include  cardiac  output,  displacing an indirect and  noncontinuous
method,  thermal dilution,  with a continuous direct  measurement.  According to
published reports there are over 1 million thermal-dilution catheters used

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each year in the United States.  Management  believes that the EchoFlow products
will, if successfully  developed,  provide accurate beat-to-beat  measurement of
cardiac flow, a currently desired and unmet need.  Additional  potential uses of
EchoFlow  include  monitoring of bypass grafts  (artificial  or natural),  stent
placement, and measurement of hemodynamic status.

     In April  1996,  the  Company  received  a $98,000  Phase I Small  Business
Innovation  Research  ("SBIR")  grant from the  National  Institute of Health to
demonstrate the feasibility of EchoFlow technology.

     The Company  anticipates  that,  subject to  completing  its  research  and
development,  obtaining  the necessary  FDA and other  regulatory  approvals and
developing a commercial prototype,  it will market and sell EchoFlow products to
cardiologists  and surgeons for  applications in cardiac output,  post-operative
cardiac bypass graft  monitoring,  stents,  and  potentially  for intensive care
monitoring of circulatory  status. The  commercialization  of such products will
depend on the Company's  ability to obtain  additional  financing  through joint
ventures, licensing agreements or other collaborative arrangements or otherwise.

ECHOEYE

     Intravascular  Imaging  Intravascular imaging catheters are used to inspect
the condition of blood vessels,  allowing  clinicians to identify the extent and
locations of vascular lesions and identify the most effective treatment. The two
leading types of  intravascular  imaging  catheters are optical  angioscopes and
ultrasound  catheters.  Currently available  intravascular  ultrasound catheters
operate by scanning  around the catheter's axis as it passes through the imaging
site. The usefulness of optical systems is limited because they cannot see below
the surface of lesions,  thus  failing to capture  important  information  about
their composition.  Current ultrasound systems, on the other hand, are unable to
scan the area ahead of the catheter,  and cannot view  obstructions that totally
block the artery or otherwise prevent the catheter from passing through. EchoEye
products will combine  features of optical  angioscopes and existing  ultrasound
imaging   catheters   and  will  be   designed   to  provide   detailed   tissue
characterization  like any other  intravascular  ultrasound  catheter.  Like the
angioscope,  EchoEye  products  will be designed to scan  forward,  ahead of the
catheter   tip.   This   forward-looking    capability   also   makes   possible
ultrasound-guided  minimally  invasive surgical  procedures,  giving the surgeon
more information than is available using traditional endoscopes.

     Intravascular  imaging  catheters are primarily used by  cardiologists  and
radiologists during cardiac and peripheral angioplasty procedures where standard
balloon  dilation  yields  poor  results  or  where  alternative  recanalization
procedures (using stents,  lasers or atherectomy  devices) are being considered.
Percutaneous  insertion  of a  vascular  stent  and  or  graft  is a  developing
procedure in which it is imperative that the graft or stent device be guided and
placed with a degree of accuracy beyond the capability of current technology. In
addition, cardiac electrophysiologists could potentially use EchoEye products to
guide therapeutic cardiac ablation procedures.

     Minimally  Invasive Surgery Minimally  invasive  (laparoscopic)  surgery is
designed to reduce surgical complications and recovery time by reducing the size
of incisions used to access the part of the body being treated.  Small incisions
are  made and  trocars  (short  tubes  through  which  various  instruments  and
endoscopes may be introduced) are inserted.  The instruments are guided using an
optical endoscope (laparoscope) introduced through another trocar.  Laparoscopic
surgery is currently  hampered by the fact that the procedure can only be guided
visually.  There is no opportunity for tactile  feedback to provide  information
about details below the tissue surface.  Ultrasound  imaging offers surgeons the
opportunity to identify these subsurface conditions, expanding the usefulness of
the  minimally  invasive  surgical  technique.  EchoEye  products may be used to
improve laparoscopic surgical procedures. In some procedures, ultrasound imaging
catheters  may be used to identify the location of major blood  vessels prior to
initiating treatment, or to scan the operating field for cancer lesions or other
small diseased areas at the end of a procedure. In other procedures,  ultrasound
visualization is necessary to guide micro-invasive surgical therapy in a complex
anatomical environment.

     Other  Potential  Markets The Company has  identified  a number of clinical
applications,  for which the Company's technologies may be used but which do not
as yet represent  markets on which the Company has chosen to concentrate.  These
potential  applications  include  central venous pressure  catheters,  chorionic
villi  sampling/amniocentesis,  intrauterine  ultrasound  imaging,  percutaneous
drainage,  percutaneous transluminal  angioplasty,  percutaneous umbilical blood
sampling, temporary pacing wires and thermal dilution catheters. The Company may
seek to address these markets through strategic alliances with other entities.

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RESEARCH AND DEVELOPMENT

     The  Company  has  incurred  an  aggregate  of   approximately   $6,432,000
(excluding  the value of the  technology  contributed  at inception by Ultramed,
Inc., a  privately-held  corporation  ("Ultramed"))  of research and development
expenses from its inception  through  August 31, 1996,  including  approximately
$711,000  during  the  fiscal  year  ended  August  31,  1995 and  approximately
$1,052,000  during fiscal year ended August 31, 1996.  Substantially  all of the
Company's  research  and  development  expenditures  to date have related to the
development of the ColorMark,  EchoMark,  EchoEye, and EchoFlow technologies and
the products  utilizing  such  technologies  and  development  of  manufacturing
techniques for such products.

     In addition,  $575,000 was paid to reaquire  the  technology  rights to the
electrophysiology market.

     The Company conducts all of its research and development on the premises of
its facility in Princeton, New Jersey. The Company has seven full-time engineers
dedicated to research and development  activities and one engineer  dedicated to
regulatory  activities.  Prototype  manufacturing  is  performed  by an  outside
manufacturing firm with specific expertise in fabricating catheter devices.

COLLABORATIVE AGREEMENTS

     Bard Agreement

     Pursuant to an agreement dated  September 29, 1993 (the "Bard  Agreement"),
between the Company and Bard Radiology Division of C.R. Bard, Inc. ("Bard"), the
Company granted Bard (i) the exclusive right to distribute  modified needles and
retrofitted  biopsy gun devices throughout the world, and (ii) the non-exclusive
right to distribute the Company's  driver boxes  throughout the world.  Bard and
the Company are in negotiations  for the repurchase by the Company of its rights
for biopsy gun products from Bard.

     In  consideration of the license grant, the Company received from Bard: (i)
$25,000 for research and  development;  (ii) a $540,000 advance on the Company's
future  receivables  from Bard  evidenced by a promissory  note in the principal
amount of $540,000 (the "Bard Note"),  payable as set forth below and secured by
all of the Company's inventory and equipment; (iii) Bard's agreement to purchase
minimum  amounts of the modified  needles and  retrofitted  biopsy guns from the
Company;  (iv) Bard's agreement to distribute the Company's drive boxes; and (v)
Bard's  agreement to make  royalty  payments to the Company on sales of modified
needles.

     The Bard Note does not bear interest during the four year period commencing
with the  first  purchase  order  issued  by Bard,  which  purchase  has not yet
occurred.  If the Bard Agreement is terminated prior to the full satisfaction of
the Bard  Note,  the  Company  has the  option to either  repay the  outstanding
principal  balance on the Bard Note  within 60 days or to repay the  outstanding
principal  balance,  together  with  interest at prime plus 1%, within 24 months
following such termination.

     The  Bard  Agreement  provides  that  it will  terminate  on the  later  of
September  23,1998 or the date on which the last issued  patent  included in the
ColorMark  technology  expires.  The  Bard  Agreement  provides  that  it may be
terminated  by the  Company  if Bard  decides  to  terminate  the  research  and
development program provided for in the Bard Agreement.

     HRT Agreement

     The Company  entered  into the HRT  Agreement,  effective  as of  September
21,1992, pursuant to which the Company granted HRT (formerly a subsidiary of Eli
Lilly and  currently a subsidiary  of Guidant  Corporation),  for the purpose of
mapping cardiac rhythm abnormalities and disorders,  (i) the exclusive worldwide
license  to  all  of  the   Company's   technology   and  know  how  to  cardiac
electrophysiology  products  and (ii) the right to  negotiate  for and  obtain a
worldwide   exclusive   license  to  all  future  products  other  than  cardiac
electrophysiology   products  based  on  such  technology  for   cardiovascular,
peripheral,  angioplasty and atherectomy, and laparoscopic applications. HRT did
not market or sell any products incorporating the Company's technology under the
HRT  Agreement.  Accordingly,  in January  1996,  the  Company  entered  into an
agreement to repurchase  the rights granted under the HRT Agreement for $575,000
($250,000 had  previously  been paid to the Company under the HRT  Agreement) Of
such amount, $500,000 was paid from the proceeds of the Offering and $75,000 was
paid by certain existing stockholders of the Company, which $75,000 is reflected
as a capital  contribution.  The  Company  intends  to seek a new  licensing  or
collaborative  arrangement  with a  corporate  partner in order to exploit  this
technology, although there can be no assurance that any such arrangement will be
entered into.

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MANUFACTURING AND SUPPLIERS

     The Company currently manufactures EchoMark sensors,  EchoMark CSI systems,
ColorMark  disposable clips, and ColorMark drivers at its own facility.  Outside
vendors  are  used  to  fabricate  catheters  and to  mount  sensors.  Prototype
manufacturing  is  performed  by an  outside  manufacturing  firm with  specific
expertise in fabricating  catheter  devices.  The Company intends to continue to
manufacture  certain unique elements of its products.  The Company believes that
with its current facilities and vendor  arrangements,  it can manufacture enough
of its products to meet its  anticipated  needs  through 1997.  Thereafter,  the
Company will be required to raise significant  additional  capital,  attract and
retain experienced personnel,  purchase or lease additional equipment and comply
with extensive government  regulations with respect to its facilities.  Further,
even if the Company  manufactures  its products  directly,  it will  continue to
depend upon  subcontractors to manufacture and deliver certain components of its
products  in  a  timely  and  satisfactory   manner.  The  Company  has  limited
manufacturing capability and depending upon the volume of its products sold, the
Company may determine to enter into arrangements with others for the manufacture
and assembly of its products, in which event it will be substantially  dependent
upon such third  parties to deliver  such  products in a timely  manner and on a
competitive basis. There can be no assurance that the Company will be successful
in entering into any arrangements with others on acceptable terms or at all.

     The Company  believes  that its products are  manufactured  in  substantial
compliance with FDA Good Manufacturing Practices ("GMP") regulations. At various
assembly  stages  each  component  undergoes  testing to check  compliance  with
Company  specifications.  Third-party  manufacturers  generally  are required to
verify that product  fabrication and inspection process steps meet the Company's
specifications   and  applicable   regulatory   requirements.   Upon  successful
completion of these tests, the products are packaged,  sterilized,  prepared for
shipment and subject to final inspection.  If the Company enters into agreements
with contract manufacturers for producing its products, these manufacturers will
be required to operate under FDA GMP regulations  and other relevant  regulatory
standards and produce materials to the Company's specifications.

MARKETING AND SALES

     To date the Company has had minimal sales of its  products.  The Company is
currently in the process of developing a sales  organization  to market and sell
its  products  and has used a portion of the proceeds of the Offering to develop
its in-house  marketing staff. Sales and marketing efforts are currently focused
on the ColorMark Clip for guiding needle biopsies and vascular access procedures
and  the  EchoCath  PTA  Catheter  for  peripheral   angioplasty.   The  Company
anticipates  that  it  will,  assuming  it  obtains  the  requisite   regulatory
approvals,  begin marketing and selling the EchoMark Salpingography Catheter for
ultrasound-guided procedures involving the female reproductive system.

     The  Company  intends  to enter  into joint  venture,  licensing,  or other
collaborative  arrangements  to market and sell its products.  When, and if, the
Company enters into these  arrangements,  these  arrangements  may result in the
lack of control by the Company over the  marketing  and selling of the Company's
products.

     Because use of the Company's products will require changes from traditional
methods and procedures, their acceptance by the medical community will require a
significant educational effort to be undertaken by or on behalf of the  Company.
Educational  and  promotional  materials  will be  produced to support the sales
effort.

COMPETITION

     The Company  monitors  clinical  trial reports and patent  applications  to
assess its  competition  and is not aware of any products on the market or under
development  that,  in  management's  opinion,  can  match  the  ability  of the
Company's technologies to guide medical devices using ultrasound.

     COLORMARK  Management  is aware of only two  companies  that market or have
marketed  products that compete with the ColorMark  Clip. ATL sold or may in the
future sell  Biosponder(TM),  a biopsy  needle  mounted  with a flat  ultrasound
sensor;  its  principle  of  operation  is  similar  to the  Company's  EchoMark
technology.  Management  believes that its needle  visualization  technology has
advantages over the ATL product since Biosponder(TM) is confined to use with one
particular  ATL  scanhead  and is made in only one needle  size.  It is thus not
usable  with  other  systems  already  in the field or  adaptable  for all uses.
Furthermore,  the sensor has a limited "angle of acceptance"  (meaning the range
of needle positions relative to the ultrasound

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imaging  transducer  that will produce usable images)  relative to the Company's
technology,  although  its  range is  broader  than that of an  ordinary  biopsy
needle.

     The  second  competing  product  is the Smart  Needle(TM)  marketed  by the
Peripheral  Systems  Group  ("PSG")  of  Advanced   Cardiovascular   Systems,  a
subsidiary of Guidant.  The Smart Needle(TM) is a  Doppler-guided  needle useful
for assisting  vascular access. To date, the product has been directed primarily
to interventional radiologists.  Unlike the ColorMark Clip, the Smart Needle(TM)
is not guided by ultrasound  visualization of the target artery,  so it does not
eliminate all of the difficulties of vascular access.

     In addition,  several biopsy needle  manufacturers market needles that have
been  specially  resurfaced  to  enhance  their  echogenicity  (and  thus  their
visibility  under  ultrasound).  Although  helpful and less  expensive  than the
Company's  technology,  Management  believes  these  modifications  do not fully
improve  visualization  sufficiently  during needle  biopsy and vascular  access
procedures.

     ECHOMARK  Management  believes there are no companies that compete directly
with its EchoMark  technology  for guiding  catheters  under  ultrasound.  ATL's
Biosponder(TM)  technology,  although  in  some  ways  similar  to the  EchoMark
technology, is not designed to be mounted onto a catheter.

     Management  believes  that several  companies  are  developing  alternative
technologies  that are  designed to address the  infertility  market both from a
diagnostic  and a  therapeutic  standpoint.  These  products  typically  rely on
optical technology.  Although these products may not be directly comparable with
the  Company's  ultrasound  technology,  they present a potential  threat to the
commercial success of the Company's products. For example, several companies are
developing  miniature flexible fiber optic endoscopes  (falloposcopes)  that can
provide  direct   visualization  of  the  fallopian  tubes  for  diagnostic  and
therapeutic purposes. To guide falloposcopes to the fallopian tubes, OvaMed Inc.
and others have initiated  development of  self-guiding  (pre-curved)  catheters
that are designed to find the opening of the fallopian  tubes without  direct or
ultrasound  visualization.  Other infertility  market  competitors such as Bard,
Cook Medical Company, and Boston Scientific  Corporation  ("Boston  Scientific")
all  have  the  catheter  technology  and  expertise  to  develop  X-ray  guided
catheters.  While these  catheters  have the advantage of using the  traditional
method of X-ray guidance,  they have the  disadvantage  of exposing  potentially
fertile reproductive systems to radiation.

     ECHOFLOW  There  are other  hemodynamic  sensing  systems  that are used in
animal studies, utilizing Doppler or transit-time ultrasound, or electromagnetic
flowmeters,  to  measure  bloodflow.  However,  Management  believes  that these
laboratory devices, if successfully developed, may not be feasible for long-term
implantation,  unlike the small,  flexible, and inert structures of its proposed
products  utilizing  the  EchoFlow  technology.  However,  long-term  successful
implantation of EchoFlow devices has also not been determined.

     For acute  measurements,  thermal-dilution  is a standard in the  operating
room  and in  the  intensive  care  unit  and  coronary  care  unit  market.  As
thermal-dilution  is  a  non-continuous  and  intrinsically  unreliable  method,
Management believes it could be displaced by products incorporating the EchoFlow
technology.  Other acute uses include Doppler guide wires, such as those made by
CardioMetrics,  Inc.  ("CardioMetrics")  for  use in  coronary  angioplasty  and
diagnostic  use.  Management  believes that more accurate and reliable data will
result from products utilizing the EchoFlow technology units, used either within
the artery, like the CardioMetrics guidewire, or as an epivascular sensor.

     ECHOEYE Management believes that several companies including Cardiovascular
Imaging  Systems,  Inc.  ("CVIS"),  a  subsidiary  of  Boston  Scientific,   and
Endosonics  Corporation  are marketing  and  developing  miniaturized  catheters
mounted   with   ultrasound    transducers   for    visualization   and   tissue
characterization   within  peripheral  and  coronary   arteries.   Each  of  the
competitive devices known to Management is a "side-looking"  imaging device that
views a doughnut-shaped  area perpendicular to the axis of the catheter.  With a
side-looking  catheter,  the scanned area is behind the  catheter's  tip.  These
devices  provide useful  ultrasound  diagnostic  information  but are limited by
their  inability  to scan  vascular  occlusions  that prevent the passage of the
catheter as well as the areas beyond such obstructions.

     Management is aware of one company, CVIS, that is reportedly pursuing early
stage  development of  forward-looking  catheter  designs.  Management  does not
believe that this  competitor  has yet produced an  operational  forward-looking
catheter.

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However,  this  company has access to  substantial  resources  and is capable of
moving  forward  rapidly with its  development  efforts.  The products from this
potential  competitor  would have the  advantage  of being  compatible  with its
currently placed ultrasound imaging systems.

     Management  believes  that  several  companies  have  developed  ultrasound
imaging products for minimally invasive surgery applications. Endomedix Inc. and
Aloka  Inc.   have  imaging   systems   that  are   approved  for   laparoscopic
cholecystectomy.  However, unlike EchoEye, if successfully developed, neither of
these systems  provide  real-time,  three-dimensional  images of the  visualized
area.  At least two other  manufacturers,  Multigon  Inc. and Tetrad  Inc.,  are
seeking to develop their own ultrasound  imaging  systems.  Management  does not
believe  that any  competing  three-dimensional,  real-time  ultrasound  imaging
systems  are   currently  in   development   for  minimally   invasive   surgery
applications. However, many of the companies that are undertaking development of
imaging systems that may compete with products  utilizing the EchoEye technology
have greater financial,  manufacturing,  marketing,  distribution, and technical
resources than the Company.

     GENERAL The health care  industry is  characterized  by extensive  research
efforts and rapid  technological  change.  Future  innovations  could render the
Company's current and proposed products obsolete.  Competition in the market for
imaging catheters is intense and is expected to increase.  The Company's current
and proposed  products are  expected to compete  against  other types of imaging
systems  (such  as CT,  optical  scanning,  X-ray  and  MRI) as  well  as  other
ultrasound imaging products.  Manufacturers of non-imaging therapeutic catheters
or  external  ultrasound  imaging  devices  could  also  enter the  market  with
competitive products. Such companies may succeed in developing products that are
more  effective  or less costly than those  developed  by the Company and may be
more successful than the Company in manufacturing  and marketing their products.
Many  companies are engaged in research and  development of new devices that may
address the same clinical  applications  as the Company's  products.  The future
success  of the  Company  will  depend,  in  part,  on the  degree  of  clinical
acceptance of ultrasound imaging as opposed to competing technologies as well as
on acceptance of the Company's  products for  ultrasound  imaging  applications.
Many of the Company's  competitors and potential  competitors have substantially
greater  financial,  technological,   manufacturing,   marketing,  distribution,
operating,   technical,   and  other   resources  than  the  Company.   Academic
institutions,  hospitals,  governmental  agencies,  and other public and private
research   organizations  are  also  conducting   research  and  seeking  patent
protection and may develop  competing  products or  technologies on their own or
through joint ventures. There can be no assurance that the Company's competitors
will not succeed in developing technologies and products that are more effective
and/or less costly  than those  developed  or being  developed  by the  Company,
thereby rendering the Company's technologies not competitive or obsolete.

PATENTS AND PROPRIETARY RIGHTS

     PATENTS AND PATENT APPLICATIONS All of the Company's technologies have been
invented by officers  and  employees  of the Company or  employees  of Ultramed,
which was founded to manufacture ultrasonic duplex vascular imaging systems, and
the rights to such technologies were assigned to the Company.

     The Company holds four issued United States  patents  related to aspects of
the ColorMark technology,  has 2 issued United States patents related to aspects
of the  EchoMark  technology,  has  received  two  patents in the United  States
covering  aspects of the EchoFlow  technology and holds one issued United States
patent for the EchoEye technology. The Company is in the process of applying for
foreign patent approvals for all of its technologies.

     Two of the Company's  ColorMark  technology U.S.  patents,  which expire in
2013,  relate to the use of  flexural  vibration  waves on  needles  to  enhance
ultrasound  visualization as well as claims on the technology used to create the
vibrations. Applications corresponding to both U.S. patents have also been filed
in Europe and Japan under the Patent Cooperation Treaty ("PCT") provisions.

     The Company has received two further U.S. patents, which expire in 2014, on
an  extension  of the  ColorMark  technology  relating to how to perform  needle
guidance from a black and white ultrasound  system and relating to the method of
attaching needles to a universal ColorMark Clip system.

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     The Company's two EchoMark  technology U.S.  patents,  which expire in 2010
and 2011, are directed to the technology  underlying the piezoelectric sensor as
well as the  EchoMark CSI used to produce the  guidance  mark on the  ultrasound
imaging console.  Applications corresponding to both U.S. patents have also been
filed in Europe and Japan under PCT provisions.

     The EchoFlow patents are directed to the use of diffractive transducers and
their use in phase or  frequency  modulation  to  measure  fluid  flow;  the two
patents will expire in 2016.  Two  additional  patent  applications  relating to
EchoFlow technology are currently pending.

     The Company's EchoEye technology U.S. patent, which expires in 2012, covers
the  forward-looking  scanning  for the EchoEye  technology.  The  Company  also
intends  to seek  claims  on the  controls  designed  for the  scanhead,  on the
scanning  pattern  performed by the transducer and to cover the programming used
in the system to control the mechanics and to interpret and  manipulate the data
gathered from the transducer.

     The  Company  intends  to file  other  patent  applications  on  inventions
developed in the course of continuing  research and  development  efforts.  Such
applications will either be owned by or licensed to the Company.

     TRADENAME,  TRADEMARK  AND SERVICE  MARK RIGHTS The Company is the owner of
the registered trademarks ColorMark(R), EchoMark(R) and EchoEye(R) in the United
States and registration is pending for EchoFlow(TM).

GOVERNMENT REGULATION

     FDA AND CERTAIN OTHER REGULATORY  REQUIREMENTS  The Company's  research and
development  activities  and  the  production  and  marketing  of the  Company's
products are subject to regulation for safety,  efficacy and  compliance  with a
wide range of regulatory  requirements by numerous  governmental  authorities in
the United States and in other countries.  In the United States, medical devices
are subject to rigorous FDA review. The Federal Food, Drug, and Cosmetic Act and
other  Federal  statutes  and  regulations  govern or  influence  the  research,
testing,  manufacture,  safety,  labeling,  storage,  recordkeeping,   approval,
distribution,   reporting,   advertising   and   promotion  of  such   products.
Noncompliance  with  applicable  requirements  can  result  in civil  penalties,
recall,  injunction  or seizure of  products,  refusal to permit  products to be
imported into the United  States,  refusal of the government to approve or clear
product  approval  applications or to allow the Company to enter into government
supply contracts,  withdrawal of previously  approved  applications and criminal
prosecution.

     In order to obtain FDA approval of a new device,  companies  must generally
submit proof of safety and efficacy.  In some cases such proof entails extensive
clinical and preclinical laboratory tests. The testing, preparation of necessary
applications  and processing of those  applications  by the FDA is expensive and
may take several years to complete.  There is no assurance that the FDA will act
favorably or in a timely  manner in reviewing  submitted  applications,  and the
Company may encounter significant difficulties or costs in its efforts to obtain
FDA  approvals  which could delay or preclude  the Company  from  marketing  any
products it may  develop.  The FDA may also  require  postmarketing  testing and
surveillance of approved  products,  or place other conditions on the approvals.
These  requirements could cause it to be more difficult or expensive to sell the
products,  and could  therefore  restrict the  commercial  applications  of such
products.  Product  approvals  may be withdrawn if  compliance  with  regulatory
standards is not maintained or if problems occur  following  initial  marketing.
For  patented  products  or  technologies,  delays  imposed by the  governmental
approval process may materially  reduce the period during which the Company will
have the exclusive right to exploit such  technologies;  however,  an additional
period  of up to five  years  may be  added to the  term of the  patent  in such
circumstance.

     The FDA categorizes devices into three regulatory  classifications  subject
to varying degrees of regulatory  control.  In general,  Class I devices require
compliance with labeling and recordkeeping  regulations,  GMPs, 510(k) premarket
notification, and are subject to other general controls. Class II devices may be
subject to additional  regulatory controls,  including performance standards and
other special controls, such as postmarket surveillance.  New Class III devices,
which are either  invasive or  life-sustaining  products,  or new products never
before marketed (for example, non- "substantially  equivalent" devices), require
clinical  testing to assure safety and  effectiveness  and FDA approval prior to
marketing and  distribution.  The FDA also has the authority to require clinical
testing of Class I and Class II devices.

     If a medical  device  manufacturer  can  establish  that a newly  developed
device is  "substantially  equivalent"  to a Class I or Class II device that was
legally  marketed  prior  to May  1976,  the date on which  the  Medical  Device
Amendments of 1976

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were enacted, or to a device that was legally introduced to the market after the
FDA has found it to be  substantially  equivalent to a legally  marketed device,
the  manufacturer may seek clearance from the FDA to market the device by filing
a 510(k) pre-market notification.  Substantial equivalence also can be found for
pre-1976 Class III devices for which premarket  approval  applications ( "PMA" )
have  not  been  required.  The  510k)  pre-market  notification  may need to be
supported by appropriate data establishing the claim of substantial  equivalence
to the satisfaction of the FDA.  Following  submission of the 510(k)  pre-market
notification,  the  manufacturer  or  distributor  may not place the device into
commercial  distribution  until an order is  issued  by the FDA.  The FDA has no
specific   time  limit  by  which  it  must  respond  to  a  510(k)   pre-market
notification,  however, the FDA currently responds to the submission of a 510(k)
pre-market notification within approximately 130 days. The FDA order may declare
that the device is  substantially  equivalent to another legally marketed device
and allow the proposed device to be marketed in the United States.  The FDA may,
however,  determine that the proposed device is not substantially equivalent, or
require further  information,  such as additional  test data,  before the FDA is
able  to  make  a  determination   regarding   substantial   equivalence.   Such
determination  or request for additional  information  could delay the Company's
market  introduction of its products and could have a material adverse effect on
the Company.

     If a manufacturer or distributor of medical devices cannot establish that a
proposed device is  substantially  equivalent,  the  manufacturer or distributor
must seek pre-market approval of the proposed device through the submission of a
PMA  application.  A PMA  application  must  be  supported  by  extensive  data,
including  preclinical  and human  clinical  trial data, to prove the safety and
efficacy of the device.  Upon receipt,  the FDA conducts a preliminary review of
the PMA application.  If sufficiently complete, the submission is declared filed
by the FDA. By regulation, the FDA has 180 days to review a PMA application once
it  is  filed,  although  PMA  application  reviews  more  often  occur  over  a
significantly protracted time period, and generally take approximately two years
or more from the date of filing to complete.

     If human clinical  trials of a proposed  device are required and the device
presents  "significant risk," the manufacturer or distributor of the device will
have to file an  Investigational  Device Exemption ("IDE")  application with the
FDA prior to commencing  human  clinical  trials.  The IDE  application  must be
supported  by data,  typically  including  the results of animal and  laboratory
testing. If the IDE application is approved,  human clinical trials may begin at
a specified number of investigational sites with the number of patients approved
by the FDA.

     Sales  of  devices  outside  the  United  States  are  subject  to  foreign
regulatory requirements that vary widely from country to country. Whether or not
FDA approval has been obtained,  approval of a device by a comparable regulatory
authority  of a  foreign  country  must  generally  be  obtained  prior  to  the
commencement of marketing in those  countries.  The time required to obtain such
approval may be longer or shorter than that required for FDA approval.

     The conduct of laboratory studies must be done in conformity with the FDA's
good laboratory practice ("GLP") regulations.  Clinical studies must comply with
the FDA's regulations for  institutional  review board approval and for informed
consent.  In addition,  a variety of state and local permits are required  under
regulations relating to the Company's proposed laboratory activity.

     The Company is registered as a medical device manufacturer with the FDA. As
such, the Company and its contract  manufacturer  will be inspected on a routine
basis  by  the  FDA  for  compliance  with  the  FDA's  GMP  regulations.  These
regulations  require that the Company  manufacture its products and maintain its
documents  in a  prescribed  manner  with  respect  to  manufacturing,  testing,
distribution,  storage, and control activities. Foreign manufacturing facilities
that produce devices for sale in the United States are also subject to these GMP
requirements  and to  periodic  FDA  inspections.  On October  7, 1996,  the FDA
revised the GMP regulations to include,  among other things, design controls and
service. These revised regulations become effective on June 1, 1997. The Medical
Device Reporting regulation requires that the Company provide information to the
FDA on deaths or serious  injuries  alleged to have been associated with the use
of its  devices,  as well as  product  malfunctions  that are likely to cause or
contribute  to death or  serious  injury if the  malfunction  were to recur.  In
addition,  the FDA  prohibits a company from  promoting  an approved  device for
unapproved applications and reviews company labeling for accuracy.

     The Company has received  510(k)  authorization  for the ColorMark Clip and
Driver,  the  EchoMark EP  Catheter,  the EchoMark PTA Catheter and the EchoMark
Guidewire and is awaiting FDA clearance on certain  improvements to the EchoMark
Salpingography  Catheter.  It is anticipated that additional 510(k) applications
may be  submitted  in the near  future  for  other  diagnostic  and  therapeutic
applications of the EchoMark technology.

                                       13



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     The Company will begin animal trials with  EchoFlow  products in late 1996.
It is anticipated that clinical trials will begin in 1997. EchoEye is still in a
preclinical phase of development.  An operational prototype of an EchoEye device
was successfully tested in an animal trial in 1993.  Additional in vitro testing
is  currently  underway.  After  refining  its working  prototype  of an EchoEye
product,  the Company plans to perform  several  clinical trials and then file a
510(k) application for permission to market such product in peripheral  vascular
applications.  Coronary  vascular  applications and minimally  invasive surgical
applications for which a PMA or other more extensive regulatory process would be
required may be pursued at a later date.

     Currently,  the Company may sell its  ColorMark  and  EchoMark  products in
Europe;  however,  to continue to sell such  products in Europe,  the  Company's
products  must bear the CE Mark by June 14,  1998.  The  Company  has begun this
registration  process.  There  can be no  assurance  that  any of the  Company's
products will receive a CE Mark.

     THIRD-PARTY  REIMBURSEMENT  Successful  commercialization  of the Company's
products may depend in part on the availability of adequate  reimbursement  from
third-party health care payors such as Medicare, Medicaid, and private insurance
plans.  Reimbursement rules vary from payor to payor, and reimbursement also may
depend upon the setting in which a particular item or service is furnished.

     In general,  payors exclude  payment for items and services that are deemed
to be not medically  "reasonable  and  necessary," or which are considered to be
not  safe  and  effective,  experimental  or  investigative,  or  not  medically
appropriate for the patient.  In making these  determinations,  payors typically
rely on studies  published in peer-reviewed  medical  journals,  the opinions of
recognized medical specialty  societies,  and the practices of physicians in the
local medical community.  Some payors are also beginning to consider the cost of
a new item or service in  comparison  to existing  alternatives  in  determining
whether and how much they will reimburse for a new technology.

     FDA clearance or approval to begin marketing a device generally is required
by payors as a condition of coverage,  but such clearance or approval alone does
not assure that the payor will reimburse for the device.

     Most medical  procedures  involve payment for the physician service and, in
cases where the service is provided outside of the physician's  office,  payment
for the facility  costs,  including  supplies,  furnished in connection with the
procedure.  Medicare,  which is a  federal  government  program  that  primarily
reimburses health care furnished to the elderly and disabled, pays for physician
services  based on a physician fee schedule,  which assigns a payment weight for
each  covered  physician  procedure.  Because  there  currently  is no  separate
physician  procedure code for the use of the ColorMark Clip  physicians now must
use appropriate  existing  procedure codes for physician  services involving the
use of the ColorMark Clip.

     Medicare   reimburses  hospital  inpatient  services  on  the  basis  of  a
prospective  payment  system in which the  reimbursement  to the  hospital for a
particular  patient is  determined  by the  particular  diagnosis-related  group
("DRG") to which the patient is assigned. Generally, such reimbursement will not
depend on the specific  items or services  furnished  to the patient  during the
hospital   stay.   As  a  result,   hospitals   have  an  incentive  to  provide
cost-effective  treatments  that will  reduce  hospital  costs and  shorten  the
patient's  length of stay. The Company  believes that the ColorMark Clip is, and
the Company's  current and proposed  products will be,  cost-effective  and that
hospitals  will have an incentive to use the  ColorMark  Clip and the  Company's
other proposed products.  Medicare reimburses  nonsurgical  therapeutic services
furnished  in the  hospital  outpatient  setting on the basis of the  reasonable
costs of those  services.  For services that Medicare has  determined  should be
covered in ambulatory surgery centers,  Medicare reimbursement to the ambulatory
surgery  center  is  based  on  a  fee  schedule.  Medicare  has  not  made  any
determination  concerning  whether  use of  either  the  ColorMark  Clip  or the
Company's  current and proposed products will or should be covered in ambulatory
surgery  centers  and,  if so,  how much the  procedure  should  be  reimbursed.
Generally,  Medicare does not separately  reimburse  physicians for the facility
costs associated with furnishing a therapeutic  procedure in their offices; such
reimbursement  is  considered  to be bundled  into the  physician  fee  schedule
payment for the  physician  service.  In some cases,  however,  where  expensive
supplies are required for procedures that generally are furnished in hospital or
other  facility  settings  but which can be safely  performed  in a  physician's
office,  Medicare will make an additional payment to help defray the cost of the
supplies.  Currently, Medicare makes no additional payment to physicians for the
supply costs  associated with use of the ColorMark Clip in the physician  office
setting.

     Medicaid (which is a joint  federal-state  program to reimburse health care
costs of the poor),  Blue Cross and Blue Shield plans,  and commercial  insurers
have  their own  reimbursement  rules,  which can vary  substantially  from each
other. Some of

                                       14



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these payors have adopted  reimbursement  systems that are based on the Medicare
physician  fee  schedule  or  Medicare  DRG  system  for  hospital   inpatients.
Increasingly,  payors are instituting  reimbursement  methodologies that give an
incentive to providers to reduce costs and furnish cost-effective care.

     ANTI-REMUNERATION  LAWS The  Medicare and  Medicaid  anti-kickback  statute
prohibits financial  relationships designed to induce the purchase (or arranging
or  recommending  the  purchase) of items or services,  or patient  referrals to
providers of services,  for which payment may be made under Medicare,  Medicaid,
or other  federally  funded health care  programs.  These  provisions  have been
broadly  interpreted to apply to certain  relationships  between  manufacturers,
such as the Company, and hospitals, physicians, or other potential purchasers or
sources of  referral.  Under  current  law,  courts and the Office of  Inspector
General of the  Department of Health and Human Service  ("HHS") have stated that
the statute is violated  where even one purpose (as opposed to a primary or sole
purpose) of the arrangement is to induce  purchases or referrals.  However,  the
HHS Departmental Appeals Board has stated that some financial  inducements (such
as drug  samples or  recruitment  lunches)  may not be  subject  to  prosecution
because they are de minimis,  and therefore  are unlikely to affect  referral or
purchase decisions.

     The  anti-kickback  statute  contains  exceptions  for, among other things,
properly  reported  discounts  and  compensation  of  bona  fide  employees.  In
addition,  federal  regulations  establish certain "safe harbors" from liability
under the anti-kickback statute, including further refinements of the exceptions
for discounts and employee compensation, and a safe harbor for personal services
contracts.  While  failure to satisfy all the  criteria  for a  particular  safe
harbor does not necessarily mean that an arrangement is unlawful, practices that
are of the same generic kind as those for which there is a safe harbor available
(for example, discounts, personal services contracts) may be subject to scrutiny
if they do not qualify for the safe harbor. Several states also have statutes or
regulations  prohibiting financial  relationships with referral sources that are
not limited to  services  for which  Medicare  or Medicaid  payment may be made.
State laws vary and have been  infrequently  interpreted by courts or regulatory
agencies.  Sanctions  under these federal and state  anti-remuneration  laws may
include civil money penalties,  license  suspension or revocation,  exclusion of
providers  or  practitioners  (but under  current  law not  manufacturers)  from
participation in Medicare and Medicaid, and criminal fines or imprisonment.

     The Company will compensate its domestic sales representatives (all of whom
will be employees of the Company) with a combination  of salary and a commission
based on volume of sales,  and offers  discounts on certain volume  purchases of
the ColorMark Clip. The Company also compensates physicians for certain services
(consulting on the development of the Company's technologies,  and participation
as investigators in clinical trials of the Company's  products) furnished to the
Company.  In  addition,  the  Company  from  time to time  sponsors  educational
programs  at which  Company  representatives,  or a  physician  who has used the
ColorMark  Clip,  may make a  presentation  to physicians or hospital  personnel
concerning the product. A presenting physician may receive travel expenses,  and
attending  physicians  or  other  personnel  may  receive  a free  meal or other
refreshments.  These practices may not in all cases meet all of the criteria for
a safe harbor from  anti-kickback  law liability.  Because of the breadth of the
statutory  provisions described above, it is possible that these or other of the
Company's  business  practices  could be subject to challenge  under one or more
such laws.

     While there can be no assurance that the Company's position would be upheld
if challenged,  the Company  believes that:  (i) its  compensation  of its sales
force  satisfies the criteria for the safe harbor for  compensation of bona fide
employees; (ii) its discounting practice either meets, or may easily be modified
to meet, the requirements of the discount safe harbor; (iii) its compensation of
physicians  for  consulting  or  participation  in  clinical  trials  represents
reasonable  compensation for legitimate and needed services actually provided to
the Company, and is not intended to induce purchase of the Company's products or
the  referral  of  patients  for  use  thereof;  and  (iv)  any  free  meals  or
refreshments  provided to  physicians or others in  connection  with  presenting
information  concerning the Company's products (and any travel expenses provided
to a speaker  at such a  presentation)  is too de  minimis  to affect a decision
concerning whether to purchase (or arrange for or recommend the purchase of) the
Company's products,  or to refer patients for use thereof,  and therefore should
not be viewed as remuneration within the meaning of the anti-kickback law.

PRODUCT LIABILITY AND INSURANCE

     The testing,  clinical  trials,  manufacturing,  and sale of the  Company's
products  involves the inherent  risks of product  liability  claims against the
Company. The Company currently maintains product liability insurance coverage of
$6,000,000,  however, such insurance is expensive, subject to various exclusions
and may not be obtainable by the Company in the future

                                       15



<PAGE>
 
<PAGE>



on terms  acceptable to the Company.  There can be no assurance  that the amount
and scope of any  coverage  will be adequate to protect the Company in the event
that a product liability claim is successfully  asserted against the Company.  A
product  liability  claim or  judgment  against  the  Company  in  excess of the
Company's  insurance  coverage  could have a material  adverse  effect  upon the
Company's  business,  financial  condition,  and results of  operations.  If the
Company  enters into a joint  venture or other  arrangement  with respect to its
products or if the Company  licenses its products to a third party,  the Company
intends to require such joint venturer or licensee to maintain product liability
insurance.  Conversely,  such third party may  require,  as a  condition  to the
arrangement, that the Company obtain product liability insurance. However, there
can be no assurance that such joint venturers or licensees will agree or will be
able to  obtain or  maintain  insurance  on  acceptable  terms,  or that if such
insurance  is  obtained,  it will be adequate to cover the  Company's  potential
liability.  Products,  such as those sold or proposed to be sold by the Company,
may be subject  to recall for  unforeseen  reasons.  Such a recall  could have a
material adverse effect on the Company and its reputation.

HUMAN RESOURCES

     The  Company  employs  17 full  time  employees.  Eight  employees  provide
research and development  services,  five work in production,  two provide sales
and marketing services,  and two employees provide management and administrative
services. The Company has one part-time clerical employee.

     The  Company's  employees  are not a  party  to any  collective  bargaining
agreements. The Company believes that it has good relations with its employees.

MEDICAL ADVISORS

     The following is a list of the Medical  Advisors of the Company and,  based
upon information  supplied by each of them, the institutions with which they are
affiliated.  The affiliations are provided for information  purposes only and do
not indicate a relationship between such institution and the Company.

     Dr. William Abbott        Professor  of Surgery,  Harvard  Medical  School,
                               Boston, Massachusetts,  Chief of Vascular Surgery
                               at the Massachusetts  General  Hospital,  Boston,
                               Massachusetts.

     Dr. Valentin Fuster       Professor  of Medicine  of Mount Sinai  School of
                               Medicine,    New   York,   New   York,   Director
                               Cardiovascular  Institute,  Mount  Sinai  Medical
                               Center.

     Dr. Kurt Isselbacher      Mallinckrodt   Professor  of  Medicine,   Harvard
                               Medical School, Boston, Massachusetts;  Director,
                               MGH  Cancer  Center,  The  Massachusetts  General
                               Hospital, Boston, Massachusetts.

     Each of the Medical Advisors has entered into a medical advisory  agreement
("Medical Advisory Agreements"),  pursuant to which the Medical Advisors meet up
to four days  annually  to advise the  Company  of  advances  in their  field of
expertise  and to consult  with the  Company  and to assess the  feasibility  of
research and development  programs under  consideration  by the Company in their
field,  and to offer guidance for future  research and clinical  applications of
the  Company's  technology  in their  field.  The  Medical  Advisors  also  meet
individually  and in groups to advise the Company on its research,  development,
operations  and  commercialization  of  its  technology  and to  consult  on the
Company's  projects and to attend meetings of the Medical  Advisors.  Generally,
any further  activities,  if requested,  are on an as available basis and at the
agreed  upon  fee.   The   agreements   with  each   Medical   Advisor   contain
confidentiality provisions.

     The Medical Advisors are not expected to otherwise actively  participate in
the development of the Company's technology. The Medical Advisory Agreements are
for a term of five years. In consideration for the services to be rendered under
the Medical Advisory Agreements,  Dr. Abbott and Dr. Isselbacher each receive an
amount of $15,000 per annum,  and Dr.  Fuster  receives an amount of $25,000 per
annum and each is reimbursed for reasonable  expenses.  In addition,  in January
1996,  Dr.  Abbott and Dr.  Isselbacher  were each  granted  options to purchase
10,000 shares of Class A Common Stock under the Company's 1996 Stock Option Plan
(the "Option Plan") at an exercise price of $5.00 per share,  which options will
vest in five equal  annual  installments  commencing  January  17,  1996 and are
exercisable  for a period  of five  years  following  the date of  vesting.  The
Medical  Advisory  Agreements also provide for  indemnification  of each Medical
Advisor, his successors, heirs and assigns against any liabilities, damage, loss
and expense (including reasonable attorneys fees and expenses of litigation)

                                       16



<PAGE>
 
<PAGE>



incurred or imposed upon  indemnities or any one of them in connection  with any
class action suits,  demands or judgments arising from their good faith services
under the Medical Advisory Agreements.

     The  Company's  Medical  Advisors  are  employed  on a  full-time  basis by
employers  other  than  the  Company,  and  certain  of  such  individuals  have
consulting or other advisory  arrangements  with others.  Accordingly,  they are
expected  to  devote  only a  small  portion  of  their  time  to  the  Company.
Regulations  or  policies  of the  institutions  of  which  they  are  full-time
employees  may adversely  affect the rights of the Medical  Advisors to own such
options and stock and to serve as Medical Advisors. Generally, any inventions or
processes  discovered  by the  Medical  Advisors  which  are made  solely in the
performance  of services to the Company will become the property of the Company,
but  inventions  which  relate  to  the  Medical  Advisor's  research  at  their
respective hospitals may not become the property of the Company if the rights to
such inventions will become the property of their respective  hospitals pursuant
to agreements between the Medical Advisors and their respective hospitals.

ITEM 2.       DESCRIPTION OF PROPERTY

     The Company  currently leases an approximately  20,000 square foot facility
on U.S.  Route 1 in Monmouth  Jct.,  New Jersey  pursuant  to a five-year  lease
expiring on March 31, 2002. Currently the Company utilizes 15,000 square feet of
such  facility,   however,   the  facility   contains  space   appropriate   for
approximately   4,000  square  feet  of  offices  for  planned  personnel,   and
approximately  16,000 square feet appropriate for  manufacturing  and laboratory
use.  The lease  provides for an annual rent of  approximately  $236,000 for the
fiscal year ending  August 31, 1997,  234,000 for the fiscal year ending  August
31, 1998 and $299,000 for each fiscal year  thereafter  through March 2002. Such
lease also  provides for payment by the Company of real estate taxes and certain
operating  expenses.  The Company has an option to purchase the entire  facility
for a purchase price of $2,000,000 plus certain CPI  adjustments,  which expires
on March 31, 2002. The Company  believes that these  facilities are adequate for
its current  administrative and manufacturing  needs and that this facility will
be  sufficient  to meet the Company's  anticipated  manufacturing  needs through
1997.

     The Company has  recently  been  informed  that the current plan of the New
Jersey  Turnpike  Authority  ("NJTA")  is  that it will  require  the  Company's
facility to be taken as part of the  development of Route 92. This plan could be
implemented  as early as the summer of 1997.  The Company  believes that it will
have adequate time to locate new facilities at a reasonable rental rate and that
any possible  action by the NJTA will not have a material  adverse effect on the
Company.

     In addition, research and development activities are currently conducted on
behalf of the Company in the United States and Europe at various hospitals.

ITEM 3.       LEGAL PROCEEDINGS

     The  Company  is not  currently  a  party  to any  pending  material  legal
proceeding.

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

     No matters were submitted to a vote of security  holders during the quarter
ended August 31, 1996.






                                       17



<PAGE>
 
<PAGE>




                                     PART II

ITEM 5.       MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

MARKET INFORMATION

     Since January 22, 1996,  shares of the Class A Common Stock, have traded on
the Nasdaq SmallCap Market  ("Nasdaq").  The following table sets forth, for the
periods indicated and as reported by Nasdaq,  the high and low last sales prices
for shares of the Class A Common Stock.



<TABLE>
<CAPTION>

QUARTER ENDED                                      HIGH                 LOW
----------------------------------------------------------------------------
<S>                                                <C>                  <C>
February 29, 1996                                  4 1/4                4
May 31, 1996                                       4 1/2                3
August 31, 1996                                    5 1/2                4
September 1, 1996 through December 12, 1996        5 1/2                4 1/4

</TABLE>

HOLDERS OF COMMON STOCK

     Based upon  information  supplied to the Company by its transfer agent, the
number of  stockholders of record of the Class A Common Stock and Class B Common
Stock on December 12, 1996 was approximately 5 and 13, respectively. The Company
believes that there are in excess of 300 beneficial owners of the Class A Common
Stock whose shares are held in "Street Name."

DIVIDENDS

     The  Company  has never  paid cash  dividends  with  respect to the Class A
Common Stock. The Company intends to retain future earnings, if any, that may be
generated  from the  Company's  operations  to help finance the  operations  and
expansion  of the Company and  accordingly  does not plan,  for the  foreseeable
future, to pay dividends to holders of the Class A Common Stock. Any decision as
to the future  payment of  dividends  on Class A Common Stock will depend on the
results of  operations  and  financial  position  of the  Company and such other
factors as the Company's Board of Directors, in its discretion, deems relevant.

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

GENERAL

     The following  discussion and analysis  should be read in conjunction  with
the financial statements and notes thereto appearing elsewhere in this Report.

RESULTS OF OPERATIONS

     Fiscal Year ended August 31, 1996  compared to fiscal year ended August 31,
1995.

     The Company had no  significant  sales  revenue for the fiscal  years ended
August 31, 1996 and 1995,  but the Company did  recognize  revenue of $98,000 in
fiscal year 1996 from a phase one SBIR grant.

     The Company  charged $38,881 to operations for the fiscal year ended August
31, 1996 because it determined  that certain  inventory  should be classified as
development inventory for research and development. The amount was approximately
22% of all inventory.  The balance of the cost of sales of $11,433 was inventory
that was classified as demonstration inventory during the fiscal year.

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<PAGE>



     Research  and  development  expenses  increased  48% during the fiscal year
ended  August 31, 1996  because of the  establishment  of the  Medical  Advisors
Board, the addition of new personnel, SBIR grant related expenses and additional
materials  purchased  as a result  of an  increase  in  activity  following  the
Offering.  Research and  Development  expenses also  included the  repurchase of
certain technology rights for $575,000 that is set out in a separate line in the
statement of operations without a comparable expense for August 31, 1995.

     Selling,  general,  and  administrative  expenses increased 104% during the
fiscal year ended  August 31, 1996  because of a  significant  increase in legal
expense relating to various corporate  matters,  the addition of the Co-Chairman
of the Board of  Directors,  an increase in  insurance  expenses  because of the
addition  of  directors  and  officers  insurance  coverage,  and an increase in
consultant  expenses  because  of  various  corporate  matters.   Following  the
Offering,  expenses for the payment of salaries to officers and  employees,  and
consulting fees increased and are expected to continue to increase. In addition,
the Company plans to increase its expenditures in the sales and marketing areas.

     The Company  anticipates  that  revenues will be  insufficient  to meet all
operating expenses for the foreseeable future even if there is market acceptance
of its products,  and accordingly,  it expects to incur substantially  increased
operating losses for the foreseeable future.  There can be no assurance that the
Company will ever achieve profitable operations.

     In connection  with the Offering,  certain of the existing  stockholders of
the  Company,  primarily  officers,  directors  and other  employees,  agreed to
transfer a portion of their  shares of the  Company's  Class B Common Stock (the
"Forfeitable  Shares")  to the Company if the  Company  does not attain  certain
minimum  earnings  thresholds or if the Company's  Class A Common Stock does not
meet certain  minimum bid prices.  The Company  believes that the release of the
restrictions on the Forfeitable  Shares held by officers,  directors,  employees
and  consultants  will  be  treated,   for  financial  reporting  purposes,   as
compensation expense to the Company. Accordingly, the Company will, in the event
of the  release of the  restrictions,  recognize  during the period in which the
earnings  thresholds  are met or probable of being met or the Company's  Class A
Common Stock meets or is probable of meeting the minimum bid prices,  what could
be a substantial charge which would have the effect of substantially  increasing
the Company's  loss or reducing or eliminating  earnings,  if any, at such time.
The amount of compensation expense recognized by the Company will not affect the
Company's  total  stockholders'  equity.  See  Note  7  of  Notes  to  Financial
Statements.

FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES

     Since its inception, the Company's efforts have been principally devoted to
research and  development  and raising  capital,  and the Company has  sustained
cumulative losses of approximately  $(11,395,000) through August 31, 1996. These
losses  resulted  primarily from research and development  expenses  aggregating
approximately  $6,432,000  relating to the Company's  technologies and products,
and expenses  aggregating  approximately  $4,495,000 incurred in connection with
marketing,  and  general  and  administrative  activities,  including  legal and
professional activities relating thereto, which are continuing.  The Company has
funded its activities  through private placements of equity and debt securities,
borrowings  and the  Offering.  As of August 31,  1996,  the Company had working
capital of  approximately  $2,263,000,  an accumulated  deficit of approximately
$(8,192,000) and a stockholders' equity of approximately 1,368,000.

     Since the date of inception  (February 14, 1990)  through  August 31, 1996,
net cash provided by financing  activities  totalled  approximately  $13,889,000
which consists of the following:  (i) approximately  $2,700,000 from the sale to
several investors of 752,600 shares of Class B Common Stock; (ii)  approximately
$2,191,000  from the sale of  95,400  shares  of  Class B  Common  Stock;  (iii)
approximately  $593,000  from the sale of 32,250  shares of Series A Convertible
Preferred Stock and 32,250  warrants to purchase Series A Convertible  Preferred
Stock to three investors which were subsequently exchanged for 127,000 shares of
Class B Common Stock;  (iv)  approximately  $ 1,725,000,  including  $750,000 of
capital contributed by Alliance Partners ("Alliance");  (v) $540,000,  evidenced
by the Bard Note; (vi) $250,000 evidenced by a note which has been repaid; (vii)
net  proceeds  of  approximately  $838,000  from a  bridge  financing;  (viii) a
$100,000  loan which has been  repaid  and (ix) net  proceeds  of  approximately
$6,212,000  from the  Offering.  The  Company had cash and cash  equivalents  of
$2,387,691 as of August 31, 1996.

     In January 1996, the Company  entered into an agreement to repurchase,  for
$575,000, the rights previously granted under the HRT Agreement.  Of such amount
$500,000  was paid from the  proceeds  of the  Offering  and $75,000 was paid by
certain

                                       19



<PAGE>
 
<PAGE>



existing  stockholders  of the Company,  which $75,000 is reflected as a capital
contribution. The Company recognized a $575,000 charge to operations relating to
this agreement.

     Since the date of  inception  through  August 31,  1996,  expenditures  for
investing activities,  including patents costs and purchases of equipment,  were
approximately  $582,000.  The  Company  expects to  continue  to incur  costs in
connection with such activities.

     At August 31, 1996, the Company had a net operating loss  carryforward  for
state and Federal income tax purposes of  approximately  $7,716,000 which expire
through  2003 and  2011,  respectively.  See  Note 9 of  Notes to the  Financial
Statements.

     During the 12-month period  following the date of this Report,  the Company
intends to focus its efforts on marketing  and sales of the  ColorMark  Clip and
the EchoMark PTA Catheter in the United  States and certain  countries in Europe
and on commencing marketing and sales of the EchoMark Salpingography Catheter in
the United States and in foreign  countries.  During such 12-month  period,  the
Company intends to continue preclinical testing of EchoFlow,  and if the results
of such testing are successful,  commence clinical testing of EchoFlow products.
During  such  period,  the Company  will also  continue  preclinical  testing of
EchoEye.  The  Company  may also  commence  research  and  development  of other
products utilizing ColorMark and EchoMark technologies. The Company also intends
to seek the requisite regulatory approvals for certain of the Company's proposed
products during such time period.

     The  Company  anticipates that  its  current cash,  together  with revenues
expected to  be  derived  from sales  of  certain  of its  products,  should  be
sufficient  to  fund  research, development,  testing,  regulatory requirements,
operating and  other  capital needs  through  December 1997.  The  Company  also
believes  that  additional cash  resources  should be  available  either through
financing provided  by  the  completion  of  license  agreements  and  strategic
alliances  or, if necessary, by reducing the  level of its operating expenses by
deferring certain research and development  or marketing expenses. There can  be
no  assurance  that the  Company  will be  able  to complete  the aforementioned
license  agreements  and  strategic  alliances  on  acceptable terms.  Following
December   31,  1997,   the   Company  may   well  need  substantial  additional
financing in order to continue development of and commercialize  certain  of its
proposed  products and other  potential  products. The Company  has  no  binding
commitments from any third parties to provide funds to the Company. There can be
no assurance that the Company will be able to obtain financing  from  any  other
sources on acceptable terms.

ACCOUNTING FOR EMPLOYEE STOCK OPTIONS

     In October 1995, the Financial  Accounting Standards Board issued Statement
of Accounting  Standards No. 123,  "Accounting  for  Stock-Based  Compensation,"
which established  financial  accounting and reporting standards for stock-based
employee  compensation  plans.  Companies are encouraged,  but not required,  to
adopt a new method that  accounts for stock  compensation  awards based on their
fair value using an option pricing  model.  Companies that do not adopt this new
standard are required to make pro forma disclosures of net income as if the fair
value-based method of accounting required by this standard had been applied. The
requirements  of this standard are  effective for fiscal year 1997.  The Company
expects to adopt the pro forma  disclosure  requirements.  The Company cannot at
this time predict the impact of the adoption of such requirements.






                                       20



<PAGE>
 
<PAGE>




ITEM 7.       FINANCIAL STATEMENTS

                          INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>

                                                                                                        PAGE
                                                                                                        ----
<S>                                                                                                      <C>
Report of Independent Auditors...........................................................................F-2

Balance Sheet at August 31, 1996.........................................................................F-3

Statements of Operations for the years ended August 31, 1995 and 1996 and the period from
   February 14, 1990 (date of inception) to August 31, 1996..............................................F-4

Statements of  Stockholders'  Equity for the period from February 14, 1990 (date
of inception) to August 31, 1996F-5

Statements of Cash Flows for the years ended August 31, 1995 and 1996 and the period from
   February 14, 1990 (date of inception) to August 31, 1996..............................................F-6

Notes to Financial Statements............................................................................F-7

</TABLE>


All  schedules  are omitted for the reason that they are not required or are not
applicable,  or the required information is shown in the financial statements on
notes thereto.






                                       F-1



<PAGE>
 
<PAGE>



                          INDEPENDENT AUDITORS' REPORT

The Board of Directors and Stockholders
EchoCath, Inc.:

We have  audited the  accompanying  balance  sheet of EchoCath,  Inc.  (formerly
EchoCath,  Ltd.) (a development  stage enterprise) as of August 31, 1996 and the
related statements of operations,  stockholders'  equity and cash flows for each
of the years in the  two-year  period  ended  August 31, 1996 and for the period
from February 14, 1990 (date of inception) to August 31, 1996.  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. The cumulative  statements of operations,  stockholders' equity, and
cash flows for the period  February 14, 1990 (date of  inception)  to August 31,
1996 include  amounts for the period from  February 14, 1990 (date of inception)
to August 31, 1990 and for each of the years in the two-year period ended August
31, 1992,  which were audited by other  auditors whose report dated February 15,
1993 has been  furnished  to us, and our  opinion,  insofar as it relates to the
amounts  included for the period from  February 14, 1990 (date of  inception) to
August 31, 1992 is based solely on the report of the other auditors which report
expressed an unqualified opinion.

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,  based on our audits  and,  for the  effect on the period  from
February 14, 1990 (date of  inception) to August 31, 1996 of the amounts for the
period  from  February  14, 1990 (date of  inception)  to August 31, 1992 on the
report of the other auditors, the financial statements referred to above present
fairly,  in all material  respects,  the  financial  position of EchoCath,  Inc.
(formerly  EchoCath,  Ltd.) (a  development  stage  enterprise) as of August 31,
1996, and the results of its operations and its cash flows for each of the years
in the two-year  period  ended August 31, 1996 and for the period from  February
14, 1990 (date of  inception) to August 31, 1996 in  conformity  with  generally
accepted accounting principles.



KPMG PEAT MARWICK LLP
Princeton, New Jersey
October 4, 1996, except as to the last
     paragraph of note 7, which is as of
     November 25, 1996





                                       F-2



<PAGE>
 
<PAGE>




                                 ECHOCATH, INC.
                            (FORMERLY ECHOCATH, LTD.)
                        (A DEVELOPMENT STAGE ENTERPRISE)
                                  BALANCE SHEET
                                 AUGUST 31, 1996


<TABLE>

<S>                                                                       <C>
                                             Assets (note 5)

Current assets:
   Cash ..............................................................    $ 2,387,691
   Trade accounts receivable .........................................          6,125
   Shareholder advance (note 7) ......................................        101,899
   Inventory (notes 2 and 5) .........................................        141,903
   Prepaid expenses ..................................................        150,288
                                                                          -----------
       Total current assets ..........................................      2,787,906
   Furniture, equipment and leasehold improvements, net (notes 3
      and 5) .........................................................        254,604
   Intangible assets, net (note 4) ...................................        228,912
   Other assets ......................................................         29,862
                                                                          -----------
                                                                          $ 3,301,284
                                                                          -----------
                                                                          -----------

                                  Liabilities and Stockholders' Equity

Current liabilities:
   Accounts payable ..................................................        149,178
   Accrued expenses (note 14) ........................................        352,286
   Obligations under capital leases, current portion (note 6) ........         23,015
                                                                          -----------
       Total current liabilities .....................................        524,479
   Obligations under capital leases, less current portion (note 6) ...         55,191
   Note payable (notes 5 and 8) ......................................        540,000
   Other liabilities .................................................         63,594
                                                                          -----------
       Total liabilities .............................................      1,183,264
                                                                          -----------

Capital contribution subject to repayment (note 15) ..................        750,000
                                                                          -----------

Stockholders' equity (notes 7, 15 and 17):
   Preferred stock, no par value, 5,000,000 shares authoriized; no
   shares issued and outstanding .....................................           --
   Class A common stock, no par value, 18,500,000 shares
     authorized; 1,610,000 shares issued and outstanding .............      6,211,661
   Class B common stock, no par value, 1,500,000 shares
     authorized; 1,500,000 shares issued and outstanding;
     convertible into one share of Class A common stock ..............      3,348,470
   Deficit accumulated during the development stage ..................     (8,192,111)
                                                                          -----------
       Total stockholders' equity ....................................      1,368,020
                                                                          -----------

Commitments and contingencies (notes 12, 15 and 16) ..................      3,301,284
                                                                          -----------
                                                                          -----------

</TABLE>


See accompanying notes to financial statements.



                                       F-3



<PAGE>
 
<PAGE>




                                 ECHOCATH, INC.
                            (FORMERLY ECHOCATH, LTD.)
                        (A DEVELOPMENT STAGE ENTERPRISE)
                            STATEMENTS OF OPERATIONS
                    YEARS ENDED AUGUST 31, 1995 AND 1996 AND
                     THE PERIOD FROM FEBRUARY 14, 1990 (DATE
                          INCEPTION) TO AUGUST 31, 1996

<TABLE>
<CAPTION>

                                                                                         FEBRUARY 14, 1990
                                                                                         (DATE OF INCEPTION)
                                                                                           TO AUGUST 31,
                                                           1995              1996              1996
                                                         ------------     ------------     ------------

<S>                                                      <C>              <C>              <C>          
Revenues:
   SBIR grant income ................................    $       --             98,000           98,000
   License and development fees .....................            --               --            275,000
  Product sales (including related party amount of
     $40,250 since inception) .......................          31,097           10,025           87,872
                                                         ------------     ------------     ------------
                                                               31,097          108,025          460,872
                                                         ------------     ------------     ------------
Operating expenses:
   Repurchase of technology rights (note 8) .........            --            575,000          575,000
   Research and development (including related party
     amount of $960,680 since inception) (note 10) ..         711,082        1,051,942        6,432,261
   Cost of sales (including related party amount of
     $14,650 since inception) (note 10) .............          76,366           50,314          254,297
   Marketing, general and administrative (including
     related party amounts of $70,426, $31,500 and
     $506,270, respectively note 10) ................         661,893        1,352,344        4,495,361
                                                         ------------     ------------     ------------
                                                            1,449,341        3,029,600       11,756,919
                                                         ------------     ------------     ------------


     Loss from operations ...........................      (1,418,244)      (2,921,575)     (11,296,047)

Other income (expense):

   Interest income ..................................             202           88,535          149,145
   Interest expense (including related party amounts
     none,  of $1,899 and $26,527, respectively)
     (notes 5 and 6) ................................         (82,558)         (83,751)        (248,475)
                                                         ------------     ------------     ------------
                                                              (82,356)           4,784          (99,330)
                                                         ------------     ------------     ------------

     Net loss .......................................    $ (1,500,600)    $ (2,916,791)    $(11,395,377)
                                                         ------------     ------------     ------------
                                                         ------------     ------------     ------------
  Net loss per common and common equivalent share ...    $      (2.88)    $      (1.72)
                                                         ============     ============
  Shares used in computing net loss per share amounts         521,000        1,698,129
                                                         ============     ============

</TABLE>


See accompanying notes to financial statements.



                                       F-4



<PAGE>
 
<PAGE>




                                 ECHOCATH, INC.
                            (FORMERLY ECHOCATH, LTD.)
                        (A DEVELOPMENT STAGE ENTERPRISE)
                       STATEMENTS OF STOCKHOLDERS' EQUITY
      PERIOD FROM FEBRUARY 14, 1990 (DATE OF INCEPTION) TO AUGUST 31, 1996


<TABLE>
<CAPTION>

                                                                   CLASS B                    
                                                                   COMMON                     
                                    CLASS A        CLASS B          STOCK        PARTNER'S    
                                    COMMON         COMMON           TO BE       CONTRIBUTED 
                                    STOCK           STOCK           ISSUED        CAPITAL     
                                   ----------      ---------      ---------      ----------   
<S>                                <C>             <C>            <C>           <C>           
Balance, February 14, 1990
 (date of inception ..........     $     --             --             --              --     
 Initial capital contribution            --             --             --           525,100   
 Net loss ....................           --             --             --              --     
                                   ----------      ---------      ---------      ----------   
Balance (deficit), August 31,
 1990                                    --             --             --           525,100   
                                                                                              
 Capital contributions .......           --             --             --         1,305,000   
                                                                                              
 Net loss ....................           --             --             --              --     
                                   ----------      ---------      ---------      ----------   
Balance August 31, 1991 ......           --             --             --         1,830,100   
                                                                                              
 Capital contributions .......           --             --             --           870,000   
 Net loss ....................           --             --             --              --     
                                   ----------      ---------      ---------      ----------   
Balance (deficit), August 31,
 1992                                    --             --             --         2,700,100   
                                                                                              
 Net loss - September 1, 1992
  through September 21, 1992
 (date of incorporation) .....           --             --             --             --      
                                                                                              
 Incorporation  of Echocath, Inc. --
  issuance of 752,600 shares of Class B
  common stock to former  partners and
  proceeds  from sale of 95,400  shares
  of Class B common stock, net of
  issuance costs (including related
  party issuance costs of $21,800)
  (notes 7 and 10) ...........           --        1,688,102           --        (2,700,100)  
                                                                                              
 Net loss - September 22, 1992
  through August 31, 1993 ....           --             --             --              --     
                                   ----------      ---------      ---------      ----------   
 Balance (deficit), August 31, 1993      --        1,688,102           --              --     

 Issuance  of 127,000 shares of
  Class B common  stock,  net  of
  issuance costs (including related
  party issuance costs of $10,000)
  (notes 7 and 10) ...........           --          592,800           --              --     
 Capital contributed by Alliance
  (note 15) ..................           --             --          50,000             --     
 Net loss ....................           --             --             --              --     
                                   ----------      ---------      ---------      ----------   
 Balance (deficit), August 31,
  1995                                   --        2,280,902         50,000            --     
 Capital contributed by Alliance
  (note 15) ..................           --             --          925,368            --     
 Net loss ....................           --             --             --              --     
                                   ----------      ---------      ---------      ----------   
 Balance, (deficit), August 31, 1995     --        2,280,902        975,368            --     

 Issuance of 525,000 shares of Class B
  common stock to the partners
  of Alliance and certain other
  entities and individuals ...           --          975,368       (975,368)           --     
 Capital contributed by Alliance
  (note 8) ...................           --           75,000           --              --     
 Adjustment to issuance costs
  of Class B common stock ....           --           17,200           --              --     
 Warrants issued (note 17) ...         25,000           --             --              --     
 Issuance of 1,610,000 shares
  of Class A common stock at $5.00
  per share in February 1996,
  net of offering cost .......      6,186,661           --             --              --     
 Net loss ....................           --             --             --              --     
                                   ----------      ---------      ---------      ----------   
 Balance (deficit), August 31,
  1996                             $6,211,661      3,348,470           --              --     
                                   ----------      ---------      ---------      ----------   
                                   ----------      ---------      ---------      ----------   



<CAPTION>

                                           DEFICIT ACCUMULATED DURING
                                             THE DEVELOPMENT STAGE
                                           ---------------------------

                                           PARTNERSHIP     CORPORATION        TOTAL
                                           -----------     -----------      ----------
<S>                                     <C>               <C>              <C>
Balance, February 14, 1990
 (date of inception ..........                  --                --              --
 Initial capital contribution                   --                --           525,100
 Net loss ....................                (545,902)           --          (545,902)
                                            ----------      ----------      ----------
Balance (deficit), August 31,
 1990                                         (545,902)           --           (20,802)
 Capital contributions .......                  --                --         1,305,000
 Net loss ....................              (1,054,526)           --        (1,054,526)
                                                             ----------
Balance August 31, 1991 ......              (1,600,428)           --           229,672
 Capital contributions .......                                    --           870,000
 Net loss ....................              (1,521,924)           --        (1,521,924)
                                            ----------        ----------    ----------
Balance (deficit), August 31,
 1992                                       (3,122,352)           --          (422,252)
 Net loss - September 1, 1992
  through September 21, 1992
 (date of incorporation) .....                 (80,914)           --           (80,914)

 Incorporation  of Echocath, Inc. --
  issuance of 752,600 shares of Class B
  common stock to former  partners and
  proceeds  from sale of 95,400  shares
  of Class B common stock, net of
  issuance costs (including related
  party issuance costs of $21,800)
  (notes 7 and 10) ...........               3,203,266            --           2,191,268
 Net loss - September 22, 1992
  through August 31, 1993 ....                    --         (1,729,624)      (1,729,624)
                                             ----------      ----------       ----------
 Balance (deficit), August 31, 1993               --         (1,729,624)         (41,522)

 Issuance  of 127,000 shares of
  Class B common  stock,  net  of
  issuance costs (including related
  party issuance costs of $10,000)
  (notes 7 and 10) ...........                    --               --            592,800
 Capital contributed by Alliance
  (note 15) ..................                    --              --              50,000
 Net loss ....................                    --        (2,045,096)       (2,045,096)
                                             ----------      ----------       ----------
 Balance (deficit), August 31,
  1995                                            --        (3,774,720)       (1,443,818)
 Capital contributed by Alliance
  (note 15) ..................                    --              --             925,368
 Net loss ....................                    --        (1,500,600)       (1,500,600)
                                             ----------      ----------       ----------
 Balance, (deficit), August 31, 1995              --        (5,275,320)       (2,019,050)

 Issuance of 525,000 shares of Class B
  common stock to the partners
  of Alliance and certain other
  entities and individuals ...                    --              --              --
 Capital contributed by Alliance
  (note 8) ...................                    --              --              75,000
 Adjustment to issuance costs
  of Class B common stock ....                    --              --              17,200
 Warrants issued (note 17) ...                    --              --              25,000
 Issuance of 1,610,000 shares
  of Class A common stock at $5.00
  per share in February 1996,
  net of offering cost .......                    --              --           6,186,661
 Net loss ....................                    --        (2,916,791)       (2,916,791)
                                            ----------      ----------        ----------
 Balance (deficit), August 31,
  1996                                            --        (8,192,111)        1,368,020
                                            ----------      ----------        ----------
                                            ----------      ----------        ----------

</TABLE>

---------------
See accompanying notes to financial statements.



                                       F-5






<PAGE>
 
<PAGE>




                                 ECHOCATH, INC.
                            (FORMERLY ECHOCATH, LTD.)
                        (A DEVELOPMENT STAGE ENTERPRISE)
                            STATEMENTS OF CASH FLOWS
               YEARS ENDED AUGUST 31, 1995 AND 1996 AND THE PERIOD
          FROM FEBRUARY 14, 1990 (DATE OF INCEPTION) TO AUGUST 31, 1996

<TABLE>
<CAPTION>


                                                                                                                    FEBRUARY 14,
                                                                                                                    1990 (DATE
                                                                                                                   OF INCEPTION)
                                                                                                                   TO AUGUST 31,
                                                                                        1995            1996           1996
                                                                                        ----            ----           ----
<S>                                                                                <C>             <C>              <C>
Cash flows from operating activities:
 Net loss ......................................................................   $ (1,500,600)   $ (2,916,791)   $(11,395,377)
 Adjustments to reconcile net loss to net cash used in operating activities:
   Depreciation and amortization ...............................................         49,192          77,950         260,623
   Loss on write-off of intangible assets ......................................           --              --             2,000
   Change in  operating  assets and liabilities:
     Increase in trade accounts receivable .....................................           --            (6,125)         (6,125)
     (Increase) decrease in inventory ..........................................         35,232           3,023        (103,268)
     Increase in prepaid expenses ..............................................        (10,657)        (80,608)       (150,288)
     (Increase) decrease in deferred offering costs ............................       (287,992)        328,236            --
     Increase in other assets ..................................................           --           (18,600)        (29,862)
     Increase (decrease)  in accounts payable ..................................         46,167        (144,055)        149,178
     Increase in accrued expenses and due to (from) related parties ............        446,141        (561,257)        290,553
     Increase in other liabilities .............................................           --            63,594          63,594
                                                                                   ------------    ------------    ------------
   Net cash used in operating activities .......................................     (1,222,517)     (3,254,633)    (10,918,972)
                                                                                   ------------    ------------    ------------
Cash flows from investing activities:
 Purchases of furniture, equipment and leasehold improvements ..................           --          (165,916)       (326,551)
 Purchases of intangible assets ................................................        (48,815)        (23,371)       (255,856)
                                                                                   ------------    ------------    ------------
    Net cash used in investing activities ......................................        (48,815)       (189,287)       (582,407)
                                                                                   ------------    ------------    ------------
Cash flows from financing activities:
 Proceeds from partner borrowings ..............................................           --              --           840,000
 Principal payments on partner borrowings ......................................           --              --          (840,000)
 Proceeds from borrowings of notes payable .....................................        370,000       1,000,000       2,925,000
 Principal payments on borrowings of note payable ..............................       (750,000)     (1,370,000)     (2,385,000)
 Advance to shareholder ........................................................           --          (101,899)       (101,899)
 Principal payments on capital lease obligations ...............................        (11,663)        (14,537)        (62,428)
 Proceeds from obligation to issue common stock ................................        925,368            --           975,368
 Net proceeds from issuance of capital stock ...................................           --            92,200       2,876,268
 Proceeds from partner capital contributions ...................................           --              --         2,700,100
 Net proceeds from initial public offering and over-allotment option ...........           --         6,211,661       6,211,661
 Capital contribution subject to repayment .....................................        750,000            --           750,000
                                                                                   ------------    ------------    ------------
    Net cash provided by financing activities ..................................      1,283,705       5,817,425      13,889,070
                                                                                   ------------    ------------    ------------

Net increase in cash ...........................................................   $     12,373       2,373,505       2,387,691
Cash, beginning of period ......................................................          1,813          14,186            --
                                                                                   ------------    ------------    ------------
Cash, end of period ............................................................   $     14,186       2,387,691       2,387,691
                                                                                   ============    ============    ============

Supplemental disclosure of cash flow information:
 Cash paid during the year for:
  Interest .....................................................................   $     71,505          83,650         221,239
                                                                                   ============    ============    ============

Supplemental disclosure of noncash transaction:
 Equipment transferred from partner ............................................   $       --      $       --      $     48,604
                                                                                   ============    ============    ============
 Inventory transferred from partner ............................................   $               $       --      $     38,635
                                                                                   ============    ============    ============
 Capital lease obligation transferred from partner .............................   $               $       --      $     25,506
                                                                                   ============    ============    ============
 Equipment acquired under capital lease ........................................   $       --      $     50,000    $    115,128
                                                                                   ============    ============    ============

</TABLE>

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


See accompanying notes to financial statements.

                                       F-6



<PAGE>
 
<PAGE>




                                 ECHOCATH, INC.
                            (formerly EchoCath, Ltd.)
                        (A Development Stage Enterprise)
                  Notes to Financial Statements August 31, 1996

 (1) Organization and Summary of Significant Accounting Policies

       Organization:

         EchoCath,  Inc. (the  "Company")  was initially  organized as a general
            partnership  on February  14, 1990 in the State of New Jersey  under
            the name of Catheter Technology Company, which name was subsequently
            changed to EchoCath, Ltd. (the "Partnership"), to develop and market
            medical devices using ultrasound  imaging  technology.  On September
            21,  1992,  the  partners  of  the   Partnership   exchanged   their
            partnership  interests  for  equivalent  ownership  interest  in the
            common stock of the Company.  Since inception,  the Company has been
            engaged primarily in research and development activities. There have
            been no significant  product sales from inception of the partnership
            through August 31, 1996.

         The Company has accumulated net losses for the period from February 14,
            1990 (date of  inception)  to August  31,  1996 of  $11,395,377  and
            anticipates  it will  continue  to incur  substantial  losses in the
            future. The Company has those risks associated with companies in the
            development  stage,  including but not limited to, its dependence on
            key management and the continuing  need for additional  financing to
            fund  research and  development  and  commercialization  activities.
            There can be no assurance that commercially successful products will
            be developed or that the Company will achieve  profitability  at all
            or on a sustained  basis.  See  note  16 for discussion of liquidity
            and operating matters.

       Cash and cash equivalents:

         The Company considers  all highly liquid  investments  with an original
            maturity  of  three  months  or  less  when  purchased  to  be  cash
            equivalents. All cash and cash equivalents are held in United States
            financial  institutions and commercial paper. A total of $109,000 is
            restricted  as  collateral   for  long-term   obligations   but  not
            reclassified  to long-term  assets.  The carrying amount of cash and
            cash  equivalents  approximates its fair value due to its short-term
            nature.

       Research and development:

         All research and development costs are expensed as incurred.

       Revenue recognition:

         Revenue from product sales is  recognized  upon shipment and passage of
            title to the customer.

         Revenue from license and development fees is recognized when earned.

         Revenue from SBIR Grants is recognized when earned.

                                                                     (Continued)

                                       F-7



<PAGE>
 
<PAGE>




                                 ECHOCATH, INC.
                            (formerly EchoCath, Ltd.)
                        (A Development Stage Enterprise)
                    Notes to Financial Statements, Continued

 (1) Organization and Summary of Significant Accounting Policies, cont.

       Intangibles:

         Costs incurred in filing for patents and  trademarks  are  capitalized.
            Capitalized  costs related to unsuccessful  patent  applications are
            expensed when it becomes determinable that such applications will be
            rejected.   Capitalized   costs   related   to   successful   patent
            applications  and  trademarks are amortized on a straight line basis
            over a period not to exceed  twenty years or the  remaining  life of
            the patent or trademark, whichever is shorter.

       Inventory:

         Inventory  is  valued  at the  lower  of cost  or  market,  cost  being
            determined under the first-in, first-out method.

       Furniture, equipment and leasehold improvements:

         Major additions and  replacements  of assets are  capitalized  at cost.
            Maintenance,   repairs  and  minor   replacements  are  expensed  as
            incurred. Equipment acquired under capital leases is recorded at the
            present  value of minimum  lease  payments at the  inception  of the
            lease.   Furniture   and  equipment   are   depreciated   using  the
            straight-line  method over five years.  Leasehold  improvements  and
            equipment  acquired  under capital  leases are  amortized  using the
            straight-line  method over the estimated useful life of the asset or
            the lease term,  whichever is shorter.  Upon retirement or sale, the
            cost  of  the  assets  disposed  of  and  the  related   accumulated
            depreciation are removed from the accounts and any resulting gain or
            loss is credited or charged to operations.

       Accounting for income taxes:

         Deferred  income tax assets and  liabilities  are  determined  based on
            differences  between the financial statement reporting and tax bases
            of assets and  liabilities  and are  measured  using the enacted tax
            rates  and laws  that will be in  effect  when the  differences  are
            expected to reverse.  The  measurement of deferred income tax assets
            is  reduced,  if  necessary,  by a valuation  allowance  for any tax
            benefits  which  are not  expected  to be  realized.  The  effect on
            deferred  income tax assets and liabilities of a change in tax rates
            is recognized in the period that such tax rate changes are enacted.

       Use of estimates:

         The preparation of financial  statements in conformity  with  generally
            accepted accounting principles requires management to make estimates
            and  assumptions  that affect the amounts  reported in the financial
            statements and accompanying notes.  Actual results could differ from
            those estimates.

                                                                     (Continued)

                                       F-8



<PAGE>
 
<PAGE>




                                 ECHOCATH, INC.
                            (formerly EchoCath, Ltd.)
                        (A Development Stage Enterprise)
                    Notes to Financial Statements, Continued

 (1) Organization and Summary of Significant Accounting Policies, cont.

       Stock-based compensation:

         In October 1995, the FASB issued SFAS 123  "Accounting  for Stock-Based
            Compensation"  ("SFAS 123").  SFAS 123 presents  companies  with the
            alternative  of retaining  the current  accounting  for  stock-based
            compensation  or  adopting  a new  accounting  method  based  on the
            estimated  fair value of equity  instruments  granted  to  employees
            during the year.  Companies  that do not adopt the fair value  based
            method  of  accounting  will be  required  to adopt  the  disclosure
            provisions of SFAS 123  commencing in fiscal 1997.  The Company will
            continue  applying  its  current  accounting   principles  and  upon
            adoption  in  fiscal  1997  will  present  the   required   footnote
            disclosures.

       Concentration of credit risk:

         The Company invests  its  excess  cash  in  deposits  with  major  U.S.
            financial  institutions  and money  market  funds.  The  Company has
            established  guidelines  relative to diversification  and maturities
            that maintain  safety and  liquidity.  To date,  the Company has not
            realized any significant gains or losses on its investments.

       Net loss per share:

         Net loss per common and common equivalent  share is computed based upon
            the weighted  average  number of shares of common stock  outstanding
            during the periods and gives effect to certain adjustments described
            below.  Pursuant to the  requirements of the Securities and Exchange
            Commission,  all stock and warrants  issued within the twelve months
            immediately   preceding  the  initial  filing  of  the  registration
            statement for the Company's initial public offering at a price below
            the offering price, totaling 525,000 shares of Class B common stock,
            and 500,000 warrants, have been included in the calculation for 1995
            utilizing the "treasury stock method". Pursuant to the policy of the
            SEC staff,  the calculation of shares used in computing net loss per
            share in 1996,  the fiscal year the initial public  offering  became
            effective,  also includes stock options and warrants as if they were
            outstanding   throughout  the  interim   period   contained  in  the
            prospectus  (November  1995),  utilizing the treasury  stock method.
            Subsequent to the public offering, such options and warrants are not
            included  in the  calculation  as they are  dilutive to net loss per
            share.  The 833,000 shares of  forfeitable  Class B common stock are
            not considered  outstanding for purposes of calculating the net loss
            per share for any period (note 7).

 (2) Inventory

       Inventory consists of the following components as of August 31, 1996:


<TABLE>
                    <S>                          <C>
                    Raw materials                $  83,393
                    Finished goods                  58,510
                                                 ----------
                                                 $ 141,903
                                                 ==========

</TABLE>


                                                                     (Continued)

                                       F-9



<PAGE>
 
<PAGE>




                                 ECHOCATH, INC.
                            (formerly EchoCath, Ltd.)
                        (A Development Stage Enterprise)
                    Notes to Financial Statements, Continued

 (3) Furniture, Equipment and Leasehold Improvements

       Furniture,  equipment and leasehold improvements consist of the following
         components as of August 31, 1996:

<TABLE>

<S>                                                        <C>     
            Laboratory and production equipment            $308,635
            Office equipment                                171,421
            Leasehold improvements                           10,146
                                                           --------
                                                            490,202
            Less accumulated deprecation and
                 amortization                               235,598
                                                          --------
                      Furniture, equipment and leasehold
                      improvements, net                    $254,604
                                                           ========

</TABLE>


       As of August 31, 1996, equipment  acquired  under capital leases (note 6)
         amounted to $134,830 and related accumulated amortization was $62,869.

 (4) Intangible Assets

        Intangible assets  consist of the following  components as of August 31,
           1996:

<TABLE>

<S>                                                 <C>
         Patents and trademarks                     $227,442
         Patent application costs                     38,127
                                                    --------
                                                     265,569
         Less accumulated amortization                36,657
                                                    --------
                                                    $228,912
                                                    ========


</TABLE>


 (5) Notes Payable

       On September  24, 1993, the Company  entered into an exclusive  worldwide
         development,  supply and license  agreement with Bard  Radiology,  C.R.
         Bard, Inc.,  (Bard) (note 8). As part of this agreement,  Bard provided
         to the  Company an advance of  $540,000  in order to assist the Company
         with its  manufacturing  obligations.  This advance was  evidenced by a
         note

                                                                     (Continued)

                                      F-10



<PAGE>
 
<PAGE>




                                 ECHOCATH, INC.
                            (formerly EchoCath, Ltd.)
                        (A Development Stage Enterprise)
                    Notes to Financial Statements, Continued

 (5) Notes Payable, cont.

         payable  issued  by the  Company  to Bard,  which  note is  secured  by
         virtually all of the Company's inventory,  furniture and equipment.  In
         accordance  with the agreement  with Bard, the note is repayable by the
         Company  offsetting future  receivables from Bard arising from the sale
         of certain  products to Bard against the principal  amount of the note.
         There have been no sales made to Bard by the Company through August 31,
         1996 under this agreement.

       The note does not bear interest during the four years commencing with the
         first purchase order issued by Bard.  However, if the Bard agreement is
         terminated  prior to full  satisfaction of the note, then the remaining
         principal balance of the note will become payable within sixty days or,
         at the option of the  Company,  within  twenty-four  months,  including
         interest  at the prime rate plus 1%. The  carrying  amount of this note
         approximates  its fair  value due to the  variable  nature of  interest
         rates.

       On May 23, 1995,  the  Company  received  $250,000  from an  unaffiliated
         company in exchange  for issuing a six-month  promissory  note  bearing
         interest at 8%. The obligation was paid in full in February, 1996.

 (6) Obligations under Capital Leases

        Equipment under capital  leases are  capitalized  using  interest  rates
               (ranging  from 7.3% to 25.26%) in effect at the  inception of the
               lease.

        The    following is a schedule by years of future minimum lease payments
               under capital  leases  together with the present value of the net
               minimum lease payments as of August 31, 1996:

<TABLE>
<CAPTION>

                       YEAR ENDED AUGUST 31:
          -----------------------------------------
<S>                                                           <C>    
          1997 .............................................  $29,734
          1998 .............................................   27,615
          1999 .............................................   14,322
          2000 .............................................   11,976
          2001 .............................................    8,982
                                                              -------
              Total minimum lease payments .................   92,629

          Less amount representing interest ................   14,423
                                                              -------
          Present value of net minimum lease payments ......   78,206
          Less current portion of obligations under capital
            lease ..........................................   23,015

          Long-term portion of obligations under capital
            lease ..........................................  $55,191
                                                              =======


</TABLE>




                                                                     (Continued)

                                      F-11



<PAGE>
 
<PAGE>




                                 ECHOCATH, INC.
                            (formerly EchoCath, Ltd.)
                        (A Development Stage Enterprise)
                    Notes to Financial Statements, Continued

 (7) Stockholders' Equity

       Recapitalization and stock split:

         On August 24, 1995,  the Board of  Directors of the Company  approved a
            .848 for 1 reverse stock split of its common stock. In addition,  on
            August 24, 1995,  the Board of Directors  authorized an amendment to
            the Company's  certificate of  incorporation.  Under such amendment,
            the  Company was  authorized  to issue  20,000,000  shares of common
            stock, of which 18,500,000  shares will be designated Class A common
            stock and 1,500,000  shares will be designated Class B common stock,
            and 5,000,000  shares of preferred  stock, all of which will have no
            par  value.  The  Class A and B common  stock are  identical  in all
            respects  except  each share of Class A common  stock is entitled to
            one vote  per  share  while  each  share of Class B common  stock is
            entitled  to five  votes per  share.  All  shares  of  common  stock
            previously  outstanding have been converted to an equivalent  number
            of Class B  common  stock  shares  on this  date.  In  addition,  in
            September  1995,  all  outstanding  shares of  Series A  convertible
            preferred  stock and all Series A  preferred  stockholders  warrants
            were exchanged for 127,000 shares of Class B common stock.

       Series A convertible preferred stock:

         In December 1993, the Company amended its certificate of  incorporation
            to authorize  250,000 shares of convertible  preferred stock with no
            par value.  Holders  of Series A  convertible  preferred  stock were
            entitled to one vote per common share as if the Series A convertible
            preferred  stock were converted into common stock shares on the date
            of  the  vote.  The  Series  A  convertible  preferred  shares  were
            convertible initially into common stock at $20 per share. Each share
            of Series A convertible  preferred stock was convertible at any time
            at the option of the  stockholder.  Each share was to  automatically
            convert upon the  effectiveness  of a registration  statement of the
            Company  with  respect  to a public  offering  of  securities  which
            results in aggregate  gross proceeds to the Company of not less than
            $10,000,000  or if the Company merges or  consolidates  with another
            entity if such entity has, on such date, securities registered under
            the  Securities  Exchange  Act of 1934,  as  amended,  with a market
            capitalization  in excess of  $10,000,000.  During 1994, the Company
            sold to three  investors  in a private  placement,  an  aggregate of
            32,250  shares of Series A  convertible  preferred  stock at $20 per
            share,  resulting in net proceeds to the Company of $610,000 (net of
            issuance  costs of  $35,000)  (note  10).  All  shares  of  Series A
            convertible  preferred  stock and  Series A  preferred  stockholders
            warrants  described  below were  cancelled and exchanged for 127,000
            shares of Class B common stock in September 1995.

       Initial public offering:

         In January  1996,  the Company  completed its initial  public  offering
            consisting of 1,610,000 units at a price of $5.00 per unit providing
            approximately  $6,200,000  in net  proceeds.  A unit consists of one
            share of Class A Common Stock, one Class A Redeemable  Warrant,  and
            one Class B Redeemable Warrant.

                                                                     (Continued)

                                      F-12



<PAGE>
 
<PAGE>




                                 ECHOCATH, INC.
                            (formerly EchoCath, Ltd.)
                        (A Development Stage Enterprise)
                    Notes to Financial Statements, Continued

 (7) Stockholders' Equity, cont.

       Common stock:

         On September 21, 1992, the Company was  incorporated and issued 752,600
            shares of its Class B common stock in exchange for the net assets of
            the Partnership. In conjunction with this exchange, the Company also
            issued  95,400 shares of Class B common stock at $23.58 per share to
            Eli Lilly and Company ("Eli Lilly") resulting in net proceeds to the
            Company of $2,191,268. The funds the Company received were initially
            restricted in that they were not to be used for any costs related to
            any  potential  environmental  conditions  at the  Company's  former
            facility. In April 1993, the Company received a negative declaration
            from the State of New Jersey Department of Environmental  Protection
            and Energy for the former facility. The Company believes that it has
            no liability with respect to any  environmental  damage found at its
            former facility (note 12).

       Warrants:

         In connection  with the  private  placement  of  Series  A  convertible
            preferred  stock in 1994,  the Company issued an aggregate of 32,250
            warrants  ("Series  A  preferred  stockholders  warrants")  to three
            investors  which give the holders  the right to  purchase  shares of
            Series A convertible preferred stock at an exercise price of $25 per
            share, which price was subject to certain anti-dilution adjustments,
            for a period of three  years from the date of the Series A preferred
            stockholders' warrants issuance. The Series A preferred stockholders
            warrants  did not entitle the holders to any voting  rights or other
            rights as a stockholder  of the Company and could not be transferred
            by the holders  without the prior  written  consent of the  Company.
            These  warrants  were  cancelled  upon  the  exchange  of  Series  A
            Convertible  Preferred  Stock for Class B Common  Stock in September
            1995.

         In connection with the Company's  initial public offering,  the Company
            issued  one Class A warrant  and one Class B  warrant.  Each Class A
            warrant  entitles  the holder to purchase,  at an exercise  price of
            $7.00 (subject to adjustment)  one share of Class A common stock and
            one Class B  warrant.  Each Class B warrant  entitles  the holder to
            purchase,  at an exercise price of $9.15 (subject to adjustment) one
            share of Class A common  stock.  The  Class A  warrants  and Class B
            warrants are exercisable through January 2001.

       Forfeitable shares:

         In connection  with the initial public  offering,  the  underwriter has
            required that certain  stockholders agree to contribute an aggregate
            of 833,000  shares of Class B common  stock to the  Company  without
            consideration  if specified  earnings levels or market price targets
            are not met (the "Forfeitable  Shares").  The Forfeitable Shares are
            not assignable or transferable.  The restrictions on the Forfeitable
            Shares will be released only if any of the following occur:

            a) the Company's  net income before  provision  for income taxes and
                  exclusive of any  extraordinary  earnings (the "Minimum Pretax
                  Income")  amounts to at least $3.4  million  during the fiscal
                  year ending on August 31, 1998; or

                                                                     (Continued)

                                      F-13



<PAGE>
 
<PAGE>




                                 ECHOCATH, INC.
                            (formerly EchoCath, Ltd.)
                        (A Development Stage Enterprise)
                    Notes to Financial Statements, Continued

 (7) Stockholders' Equity, cont.

            b) the minimum pretax income amounts to at least $5.0 million during
                  the fiscal year ending on August 31, 1999; or

            c) the minimum pretax income amounts to at least $6.6 million during
                  the fiscal year ending on August 31, 2000; or

            d) the minimum pretax income amounts to at least $8.5 million during
                  the fiscal year ending on August 31, 2001; or

            e) commencing at the  effective  date and ending 42 months after the
                  effective  date, the bid price of the Company's Class A common
                  stock shall average in excess of $12.50 per share  (subject to
                  adjustment  in the event of any reverse  stock splits or other
                  similar events) for 30 consecutive business days; or

            f) commencing  42 months  from the  effective  date and  ending 60
                 months after the effective date, the bid price shall average in
                 excess of $16.75 per share  (subject to adjustment in the event
                 of any reverse  stock  splits or other  similar  events) for 30
                 consecutive business days.

         If none of the  foregoing  targets are met,  on  November  30, 2001 the
            Forfeitable  Shares  will be placed in the  Company's  treasury  and
            cancelled.  In the event that the  restrictions  on the  Forfeitable
            Shares  are  released,  the  Company  would be  required  to  record
            compensation  expense equal to the fair market value of the stock at
            the date the restrictions were released.

         In January   1996,   the  Company   advanced   $101,899  to  a  certain
            shareholder. This amount was repaid in full on November 25, 1996.

 (8) Development and License Agreements

       On September 21, 1992,  the Company  entered into an exclusive  worldwide
         development and license agreement with Heart Rhythm Technologies,  Inc.
         (formerly a wholly-owned subsidiary of Eli Lilly) ("HRT") to design and
         develop the Company's  EchoMark    and  EchoEye    systems for use with
         HRT's Cardiac  Electrophysiology  Products.  As part of this agreement,
         HRT  paid  the  Company  a  $250,000  nonrefundable  license  fee.  The
         development and license  agreement  requires HRT to pay royalties based
         upon net  sales of  these  products  developed  by the  Company  in the
         future,  if any.  There were no  royalties  required  to be paid to the
         Company  through  January,  1996 in  accordance  with the terms of this
         agreement.  In January 1996,  the Company  entered into an agreement to
         repurchase,  for $575,000,  certain  technology rights. Of such amount,
         $500,000  was paid from  proceeds of the initial  public  offering  and
         $75,000 was reflected as a capital contribution. The Company recognized
         a  $575,000  charge  to  operations   relating  to  this  agreement  to
         repurchase.

                                                                     (Continued)

                                      F-14



<PAGE>
 
<PAGE>




                                 ECHOCATH, INC.
                            (formerly EchoCath, Ltd.)
                        (A Development Stage Enterprise)
                    Notes to Financial Statements, Continued

 (8) Development and License Agreements, cont.

       On September 24, 1993,  the Company  entered into an exclusive  worldwide
         development,  supply and  license  agreement  with Bard to develop  the
         Company's Colormark(R) system for use with Bard's automated core biopsy
         products and supply Bard with the  developed  products  based upon Bard
         purchase orders subject to minimum purchase requirements. The agreement
         requires Bard to pay royalties based upon royalty sales, as defined, of
         these products developed by the Company in the future, if any.

       The agreement also provides for a nonexclusive worldwide right by Bard to
         distribute a certain  electronic driver box manufactured by the Company
         which would be used in conjunction with the developed products.

       Bard funded  $25,000 of the  research  and  development  program  for the
         purpose of developing prototypes of the developed products in order for
         Bard to conduct clinical studies of the developed product. In addition,
         Bard  provided  the Company  $540,000 of cash in exchange for a secured
         note in order to assist the  Company in its  manufacturing  obligations
         (note 5).

       This development,  supply and license agreement terminates upon the later
         of five years or the last expiration of all the Company's patent rights
         covering the developed products.

 (9) Income Taxes

       As of August 31, 1996,  the  Company has  available  net  operating  loss
         carryforwards  of  approximately  $7,716,000  for income tax  reporting
         purposes,  which are  available  to  offset  future  Federal  and state
         taxable  income,  if any,  through  2011 and  2003,  respectively.  The
         Company also has research and development tax credit  carryforwards  of
         approximately  $207,000  for  Federal  income  tax  purposes  which are
         available to reduce  Federal income taxes,  if any,  through 2010. As a
         result of the initial public  offering and private  placements of stock
         in 1996,  the Company  experienced  an  ownership  change as defined by
         rules  enacted  with  the Tax  Reform  Act of  1986.  Accordingly,  the
         Company's  ability to use its net operating loss  carryforwards  may be
         subject to certain limitations.

                                                                     (Continued)

                                      F-15



<PAGE>
 
<PAGE>




                                 ECHOCATH, INC.
                            (formerly EchoCath, Ltd.)
                        (A Development Stage Enterprise)
                    Notes to Financial Statements, Continued

 (9) Income Taxes, cont.

       The tax effects of temporary  differences  that give rise to  significant
         portions of the deferred tax assets and deferred tax  liabilities as of
         August 31, 1996 are presented below:

<TABLE>
<S>                                                         <C>
     Deferred tax assets:

         Net operating loss carryforward                      $ 3,086,502

         Tax credit carryforward                                  206,913

         Accrued expenses                                          23,475

         Inventory                                                 30,381

         Technology rights                                        221,056
                                                              -----------
            Total gross deferred tax assets                     3,568,327

     Less valuation allowance                                  (3,559,046)
                                                              -----------
            Net deferred tax assets                                 9,281

     Deferred tax liabilities:

         Furniture, equipment and leasehold improvement,
            primarily due to differences in depreciation            9,281
                                                              -----------

            Total gross deferred tax liabilities                    9,281

            Net deferred tax liability                        $      --


</TABLE>



       The valuation  allowance for  deferred tax assets as of September 1, 1995
         was $2,233,203. The net change in the total valuation allowance for the
         year ended August 31, 1996 was an increase of $1,325,843.

                                                                     (Continued)

                                      F-16



<PAGE>
 
<PAGE>




                                 ECHOCATH, INC.
                            (formerly EchoCath, Ltd.)
                        (A Development Stage Enterprise)
                    Notes to Financial Statements, Continued

(10) Related Party Transactions

       During each of the years  ended  August 31,  1995 and 1996,  the  Company
         incurred   $25,000  and  $46,500,   respectively   of  management   and
         administrative   services   from  the   parent   company  of  a  common
         stockholder.   These  services  relate  to  the  Series  A  convertible
         preferred  stock  sale  (note 7),  deferred  offering  costs and period
         expenses and amounted to none,  $10,000 and  $15,000,  respectively  in
         1995 and $15,000,  none and $31,500,  respectively in 1996.  Management
         believes that the expenses  charged  approximate  those that would have
         been charged by unrelated parties performing similar services.

       The Company also had several  transactions with two of its partners while
         the Company was in its partnership  form. These  transactions  included
         acquisition of equipment,  assumption of capital lease  obligations and
         marketing,  general and  administrative  and research  and  development
         expenses. There were no such transactions during the years ended August
         31, 1995 and 1996.

       Since  June  1991,   the  President  of  one  of  the  Company's   common
         stockholders has been performing  accounting  services for the Company.
         The cost of such  services has been billed from the common  stockholder
         to the Company and  aggregated  $60,426,  none and $266,476  during the
         years ended  August 31, 1995 and 1996 and the period  February 14, 1990
         (date of inception) through August 31, 1996, respectively.

       Since February 14, 1990 (date of inception)  and through August 31, 1996,
         related party charges for  marketing,  general and  administrative  and
         research and development  expenses  amounted to $1,466,950.  Management
         believes that the expenses  charged  approximate  those that would have
         been charged by unrelated parties performing similar services.

(11) Profit Sharing 401(k) Plan

       In February, 1996,  the  Company  established  its own 401(k)  Plan.  All
         eligible  employees may elect to contribute a portion of their wages to
         the  401(k)  Plan,  subject  to  certain  limitations.  The  Company is
         required to contribute 25% of the employee  contributions  subject to a
         maximum  equal  to  6%  of  the  employees  compensation.  The  Company
         contributed $5,950 to the plan in 1996.

                                                                     (Continued)

                                      F-17



<PAGE>
 
<PAGE>




                                 ECHOCATH, INC.
                            (formerly EchoCath, Ltd.)
                        (A Development Stage Enterprise)
                    Notes to Financial Statements, Continued

(11) Profit Sharing 401(k) Plan, cont.

       The Company previously  participated  in a  401(k)  Plan  of  the  parent
          company  of a  common  stockholder  which  covered  substantially  all
          employees.  All eligible employees could elect to contribute a portion
          of their  wages to the 401(k)  Plan,  subject to certain  limitations.
          Prior to October 1, 1991, the Company  contributed 15% of the employee
          contributions.  Effective  October  1, 1991,  the parent  company of a
          common stockholder  amended the 401(k) Plan which required the Company
          to contribute 25% of the employee  contributions  subject to a maximum
          equal to 6% of the  employees  compensation.  The Company  contributed
          $7,165,  $1,574 and $31,127 to the 401 (k) Plan in 1994,  1995 and the
          period from  February 14, 1990 (date of inception) to August 31, 1996,
          respectively.

       During 1995, the Company discontinued participation in the 401(k) Plan of
         the parent company after having satisfied its  contribution  obligation
         to the aforementioned Plan.

(12) Commitments and Contingencies

       The Company  leases  office  and  laboratory  facilities,  equipment  and
         vehicles under various  noncancellable  operating  lease  arrangements.
         Future minimum rental commitments  required by such leases as of August
         31, 1996 are as follows:

<TABLE>
              <S>                         <C>
                    1997                   $     235,856
                    1998                         233,695
                    1999                         299,146
                    2000                         299,146
                    2001                         299,146
                                             -----------
                                           $   1,366,989

</TABLE>

       Rental expense aggregated $216,356 in 1995, $280,732 in 1996 and $901,711
         during the period  February 14, 1990 (date of  inception) to August 31,
         1996.

       The Company is currently involved in litigation pertaining to the payment
         of a finders  fee in the  amount of  $125,000  related to the Eli Lilly
         stock sale  (note 7).  The  Company  is  planning  to defend  this case
         vigorously  and believes  that the  resolution  of this matter will not
         have a significant  adverse  impact upon the financial  position of the
         Company.

                                                                     (Continued)

                                      F-18



<PAGE>
 
<PAGE>




                                 ECHOCATH, INC.
                           (formerly EchoCath, Ltd.)
                        (A Development Stage Enterprise)
                    Notes to Financial Statements, Continued

(12) Commitments and Contingencies, cont.

       In March 1992,  the Company  ceased  operations  at a leased  facility in
         North   Brunswick,   New  Jersey   that  it  shared  with  one  of  its
         stockholders,   Ultramed,  Inc.  Based  on  a  site  inspection  by  an
         environmental consultant, it appears that the only areas of significant
         environmental  concern  which may have existed were  associated  with a
         septic system and underground  storage tank utilized by the Company and
         other tenants at the site.  The Company was advised by counsel that, at
         the  time  of  such  cessation,  notice  to the  State  of  New  Jersey
         Department of Environmental  Protection and Energy of this cessation of
         operations  should have been filed and potential areas of environmental
         concern,  if any,  addressed pursuant to the New Jersey Industrial Site
         Recovery  Act. The Company  subsequently  filed such a notice,  and, in
         April 1993, the Company  received a negative  declaration  from the New
         Jersey Department of Environmental Protection and Energy for its former
         facility.  Under the relevant  environmental  statute, the owner of the
         property  also was  obligated  to notify the New Jersey  Department  of
         Environmental  Protection and Energy and to take such further action as
         may be required.

       The  Company  believes  that  it has no  liability  with  respect  to any
         environmental damage found at its former facility.

(13) Stock Option Plan

       On August 24, 1995,  the  Company  adopted a stock  option plan (the 1995
         Option Plan) which  provides for the grant of incentive  stock options,
         nonqualified  stock options and stock  appreciation  rights.  The total
         number of Class A common stock shares  eligible for grant under the new
         stock option plan is 220,000 shares.

       A summary of activity  under the 1995  Option  Plan for the years  ending
         August 31, 1995 and 1996 are as follows:

<TABLE>
<CAPTION>
                                                                       COMMON STOCK
                                                                    OPTIONS OUTSTANDING
                                                           ------------------------------------
                                                               SHARES         PRICE PER SHARE
                                                            ------------     -----------------
<S>                                                         <C>                 <C>
Balance, August 31, 1995                                           --
Granted                                                       150,000              5.00
Exercised                                                          --                --
Cancelled                                                          --                --
                                                              -------
Balance, August 31, 1996                                      150,000              5.00
                                                              =======
Shares exercisable at August 31, 1996                          42,000              5.00
                                                              =======

</TABLE>

                                                                     (Continued)

                                      F-19



<PAGE>
 
<PAGE>




                                 ECHOCATH, INC.
                            (formerly EchoCath, Ltd.)
                        (A Development Stage Enterprise)
                    Notes to Financial Statements, Continued

(14) Accrued Expenses

       Accrued  expenses  consist of the  following  components as of August 31,
         1996:

<TABLE>
     <S>                                     <C>
          Professional fees                    $184,422

          Payroll and benefits                   82,220

          Rent                                   60,464

          Interest                               25,180
                                               ---------
                                               $352,286
                                               =========
                                                                     (Continued)

</TABLE>

(15) Alliance Agreement

       On August 10, 1994, the Company  entered into an agreement  with Alliance
         Partners  ("Alliance")  which  provided for the sale of between 15% and
         45% of the  Company's  Class B common stock to Alliance in exchange for
         $425,000 in cash to be paid in installments, the assumption by Alliance
         of a  guarantee  of  outstanding  borrowings  under a bank  demand note
         payable in the amount of $750,000, and Alliance's undertaking to invest
         or cause to be  invested  an  additional  $5,750,000  through a private
         placement or public  offering of not greater than 40% of the  Company's
         Class A common  stock plus  Alliance  arranging  unsecured  bridge loan
         financing for the Company to be provided  through an  underwriter in an
         amount  of not less  than  $1,000,000.  In the  event  that  the  total
         financing provided by and arranged by Alliance was less than $7,000,000
         at the end of the  six-month  period  after the  closing of the private
         placement or public offering,  then Alliance was obligated to return to
         the Company a pro rata portion of the  Company's  common stock owned by
         Alliance equal to the difference  between  $7,000,000 and the amount of
         financing actually invested in the Company.  However, in no event shall
         Alliance  receive less than 10% of the outstanding  common stock of the
         Company.

       As of January,  1996, the Company had  received  $1,050,368  in cash from
         Alliance  under this  agreement.  The agreement  included an additional
         capital contribution of $75,000 as the result of a repurchase agreement
         for certain  technology  rights for $575,000 of which $500,000 was paid
         from the proceeds of the offering and $75,000 was paid by the Alliance.
         The Company charged $575,000 to operations relating to the agreement.

       Amendment to Alliance agreement:

         On July 7, 1995,  the Company  entered  into an  agreement to amend its
            previously existing agreement with Alliance.  In accordance with the
            new  agreement,  the partners of Alliance and certain other entities
            and individuals  became entitled to receive a 35% equity interest in
            the Company in exchange for  Alliance's  repayment of the  Company's
            $750,000 of outstanding  borrowings  under the Company's bank demand
            note  payable,  which was paid in full August  1995.  The payment of
            such  indebtedness  is  to be  treated  as a  capital  contribution;
            however,  if 75% of the Class B warrants to be issued in  connection
            with  the  initial  public  offering  are   subsequently   exercised
            providing the Company with $23,040,000 in proceeds, then $750,000 of
            such  proceeds  will be repaid to  Alliance.  In  addition,  the new
            agreement provides that funds previously  advanced to the Company by
            the  partners of  Alliance  (aggregating  $1,050,368  as of January,
            1996) are to be treated as permanent capital.  On September 7, 1995,
            the Partners of Alliance and certain other entities and  individuals
            received  525,000  shares of Class B common  stock  pursuant to this
            agreement.

                                                                     (Continued)

                                      F-20

<PAGE>

<PAGE>




                                 ECHOCATH, INC.
                            (formerly EchoCath, Ltd.)
                        (A Development Stage Enterprise)
                    Notes to Financial Statements, Continued

(15) Alliance Agreement, cont.

       On July 14, 1995, Alliance and the Company entered into another agreement
         whereby  Alliance  agreed to advance  the  Company up to an  additional
         $200,000  if certain  events had not  occurred by certain  dates.  Such
         advances are treated as loans and aggregated  $120,000 as of August 31,
         1995. These loans were repaid in September 1995.

       One partner of Alliance is also a partner in a law firm that assisted the
         Company with its bridge  financing and initial  public  offering.  Such
         partner became a director of the Company in August 1995.

(16) Liquidity and operating matters

       The Company's operations have not generated significant revenues to date.
         The Company has incurred substantial losses since inception in 1990 and
         expects that losses will continue in the foreseeable future. Also since
         inception,  the  Company's  efforts  have been  principally  devoted to
         research and development activities and raising capital. The Company is
         attempting  to  reduce  operating  losses in the  future  by  obtaining
         contractual  business  arrangements to license the Company's  currently
         developed  technology to outside third parties and intends to focus its
         efforts on marketing and sales of various  products in fiscal 1997. The
         Company will also  continue  preclinical  testing,  and if  successful,
         begin clinical testing of proposed products in fiscal 1997. The Company
         also intends to seek the requisite  regulatory approvals for certain of
         the proposed  products  during fiscal 1997.   The  Company  anticipates
         that its current cash, together with revenues  expected  to  be derived
         from  sales  of   certain   products,   should  be  sufficient to  fund
         research, development,  testing, regulatory requirements, operating and
         other capital needs through  December  1997.  The Company also believes
         that additional cash resources should  be  available   either   through
         financing  provided  by   the  completion of  license  agreements   and
         strategic alliances  or, if necessary, by  reducing  the  level  of its
         operating  expenses  by  deferring certain  research and development or
         marketing expenses. There can be no assurance  that  the  Company  will
         be  able  to  complete  the  aforementioned  license   agreements   and
         strategic alliances on acceptable  terms  or realize  profitable  sales
         following December 31,  1997. The  Company may  well  need  substantial
         additional   financing   in    order  to  continue development  of  and
         commercialize certain  of its  proposed products  and  other  potential
         products.  The  Company  has  no  binding commitments  from  any  third
         parties to provide funds to the  company. There  can  be  no  assurance
         that   the  Company  will  be  able  to  obtain   financing  from other
         sources on acceptable terms.

(17) Bridge Financing

       In September   1995, the  Company   completed  a  private   placement  of
         $1,000,000  principal  amount of promissory  notes and 500,000 warrants
         which raised gross proceeds of $1,000,000 (the Bridge  financing).  The
         promissory  notes bear  interest at 10% per annum,  the Bridge Loan and
         the accrued  interest were paid from the proceeds of the initial public
         offering.  The warrants allow their holders to purchase an aggregate of
         500,000  shares of Class A common  stock at an exercise  price of $3.00
         per share and converted  upon the closing of the Offering into warrants
         identical to the Class A warrants issued in the Offering.

       The  proceeds  from the  Bridge  financing  were  allocated  between  the
         promissory  notes and the warrants.  The difference of $25,000  between
         the principal  amount of the promissory  notes and the amount allocated
         was charged to operations during the year ending August 31, 1996.

                                      F-21



<PAGE>
 
<PAGE>




ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
 FINANCIAL DISCLOSURE

     None.





















                                       22



<PAGE>
 
<PAGE>




                                    PART III

ITEM 9. DIRECTORS, EXECUTIVE OFFICERS; PROMOTERS AND CONTROL PERSONS; COMPLIANCE
 WITH SECTION 16(a) OF THE EXCHANGE ACT

DIRECTORS AND EXECUTIVE OFFICERS

     The Company's directors and executive officers are as follows:

<TABLE>
<CAPTION>

                   NAME                     AGE             POSITION WITH THE COMPANY
------------------------------------------  ---      ---------------------------------------------------
<S>                                         <C>      <C>
Frank A. DeBernardis(1)....................  54      Chief Executive Officer, President and Director

                                                     Executive Vice President, Director of Research and
David Vilkomerson..........................  55      Development, Assistant Secretary and Director
Terence D. Wall(1).........................  54      Co-Chairman of the Board of Directors
Daniel M. Mulvena(1)(3)....................  48      Co-Chairman of the Board of Directors
Anthony J. Dimun(2)........................  53      Director
Irwin M. Rosenthal(3)......................  68      Secretary and Director
Herbert Moskowitz(1)(2)....................  54      Director

</TABLE>


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


(1)    Member of the Executive Committee.
(2)    Member of the Compensation and Stock Option Committee.
(3)    Member of the Audit Committee.

     Frank A. DeBernardis has served as Chief Executive Officer, President and a
director of the Company since its inception.  From 1989 to 1992, Mr. DeBernardis
served  as  President  and  was  the  sole  stockholder  of  Implemed,  Inc.,  a
privately-held  corporation  which provided  consulting  services in the area of
medical device manufacturing ("Implemed").  From July 1984 to December 1988, Mr.
DeBernardis served as Executive Vice President of ElectroCatheter Corporation, a
publicly-traded corporation which is an electrophysiology catheter supplier. Mr.
DeBernardis  was  honored in June 1993 as the  Entrepreneur  of the Year in Life
Sciences for the New Jersey region by Merrill Lynch,  Inc.  Magazine and Ernst &
Young  for his work  with the  Company.  Mr.  DeBernardis  is a  founder  of the
American College of Physician Inventors.

     David  Vilkomerson,  PhD.,  has served as Executive  Vice  President,  Vice
President  Research and Development,  Assistant  Secretary and a director of the
Company since its inception. Dr. Vilkomerson is a founder of Ultramed and served
as President  and Chairman of the Board of Ultramed from March 1982 to September
1992.  From September 1977 to February 1982, Dr.  Vilkomerson  served in various
capacities  including as the Research  Director and the Managing Director of the
Special  Research  Group of  Technicare  Corporation,  a subsidiary of Johnson &
Johnson  Incorporated,  where he guided the development and  manufacturing of an
ultrasonic  breast imaging  system.  Dr.  Vilkomerson has authored or coauthored
approximately 30 technical papers and received over 25 United States patents.

     Terence D. Wall served as Chairman of the Board of Directors of the Company
from inception to August 1995, and currently serves as Co-Chairman of the Board.
Mr. Wall is the founder  of, and since 1972 has served as the  President,  Chief
Executive  Officer and a director  of,  Vital  Signs,  Inc.,  a publicly  traded
corporation   ("Vital  Signs").   Vital  Signs  and  its  subsidiaries   design,
manufacture and market  single-patient  use medical  products for anesthesia and
respiratory  purposes and disposable  medical  products used in critical patient
care. Mr. Wall serves on the board of directors of certain other  privately-held
health care businesses,  and he is a director of Exogen, Inc., a publicly-traded
corporation.

     Daniel M. Mulvena has served as Co-Chairman of the Board of Directors since
August 1995.  Mr. Mulvena is President of Commodore  Associates,  a private firm
providing consulting services. Mr. Mulvena served as Vice-President and General

                                       23



<PAGE>
 
<PAGE>



Manager  of  the  Mansfield  Division  of  Boston  Scientific   Corporation,   a
publicly-traded  corporation  which  manufactures  and sells minimally  invasive
medical  products  ("BSC"),  beginning in February 1992. Mr. Mulvena left BSC in
April 1995 as Group Vice President Cardio/Cardiology  responsible for Mansfield,
Cardiac  Assist and  Mansfield  Electrophysiology  Divisions of BSC. From August
1989  through  October  1991,  Mr.  Mulvena was  Chairman,  President  and Chief
Executive  Officer of Lithox  Systems,  Inc., a developer  and  manufacturer  of
medical devices and from October 1991 through  February 1992 was a consultant to
Lithox Systems,  Inc. On January 20, 1992, Lithox System,  Inc. filed a petition
under Chapter 7 of the United States  Bankruptcy Code. From 1980 to August 1989,
Mr. Mulvena served in various  executive  capacities with Bard Implants and Bard
Cardiosurgery,  all divisions of Bard a leading worldwide manufacture of medical
devices.  Mr. Mulvena formerly served as Vice Chairman of the Board of Directors
of Life Medical Sciences,  Inc. ("Life Medical"),  a corporation  engaged in the
research and development of technologies for use in medical  applications,  from
July  1992  to  May  1995.   Mr.   Mulvena  serves  on  the  boards  of  several
privately-held companies.

     Anthony J.  Dimun has served as  a director of the Company since inception,
served  as  Secretary  of  the  Company  until  August 1995 and served as a Vice
President and Treasurer of the Company until  November 1996. Mr. Dimun has  been
a certified public accountant  since  1968.  Mr.  Dimun has  served as the Chief
Financial  Officer and Executive Vice President of Vital Signs since March 1991,
its Secretary and Treasurer  since December 1991, and as a director since August
1987.  From July 1989 through  February 1991, he served as Senior Vice President
of First Atlantic  Capital Ltd., a United States  affiliate of an  international
merchant banking group. Since January 1988, he has been a principal of Strategic
Concepts,  Inc., a financial  and  acquisition  advisory  firm.  From 1978 until
August 1987, he was a partner in the accounting  firm of Goldstein Golub Kessler
& Company, P.C.

     Irwin M.  Rosenthal  has served as a director of the Company  since  August
1995 and as Secretary of the Company since  September  1995. Mr.  Rosenthal is a
co-founder  of Life  Medical,  and has  served  as  Secretary,  Treasurer  and a
director of Life  Medical  since its  inception  in 1990.  Mr.  Rosenthal  is an
attorney and since 1960 has  specialized  in  securities  law. He is currently a
senior  partner at Rubin Baum Levin  Constant & Friedman.  From  January 1990 to
November 1991, Mr.  Rosenthal was a senior partner at Baer,  Marks and Upham and
prior  thereto he was an  attorney  at various  other law firms.  Mr.  Rosenthal
serves as Secretary  and as a director of Magar Inc. a private  investment  firm
("Magar"),  of which he is a  principal  stockholder.  He is also a director  of
Magna-Lab, Inc., a publicly-traded medical technology company ("Magna-Lab"), and
Symbollon Corporation, a publicly-traded chemical and medical technology company
("Symbollon"), and is a general partner of Alliance which is a partnership which
invests in companies and may take on a management  role in such  companies.  See
"Certain Transactions."

     Dr. Herbert  Moskowitz has served as a director of the Company since August
1995. Dr. Moskowitz,  a former practicing dentist,  has been the Chairman of the
Board of Life  Medical  since  August  1990,  and served as its Chief  Executive
Officer from August 1990 to March 1993 and from December 1994 to May 1996.  From
1986 to June 1990, he served in various  capacities,  including  Chairman of the
Board, Chief Executive Officer and President of Advanced Tissue Sciences,  Inc.,
a  publicly-traded  company  engaged  in the  growth of human  organ  tissue for
potential  therapeutic  and  laboratory  applications.  Dr.  Moskowitz  is  also
President  and a  director  of Magar.  Dr.  Moskowitz  is a general  partner  of
Alliance. See "Certain Transactions."

     Messrs.  DeBernardis,  Wall and Dimun, Dr.  Vilkomerson,  Cathtech Corp., a
privately-held   corporation  and  wholly-owned  subsidiary  of  Vital  Signs  (
"Cathtech"),  Implemed and Ultramed,  may be deemed founders or promoters of the
Company.

     All  directors  of the Company are elected by the  stockholders,  or in the
case of a vacancy,  by the  directors  then in office,  to hold office until the
next annual meeting of  stockholders  of the Company and until their  successors
are elected and qualified or until their earlier resignation or removal.

     The Company has obtained  key-person  life  insurance  coverage in the face
amount of $2,000,000 for each of Messrs.  DeBernardis and Dr. Vilkomerson naming
the  Company as  beneficiary  under such  policies.  The  Company  has agreed to
maintain  such  policies  in force for a minimum  period of three years from the
date of the  Offering  or the  respective  terms  of the  employment  agreements
between the Company and such officers, whichever period is longer.

                                       24



<PAGE>
 
<PAGE>



BOARD COMMITTEES

     The Company has  established an Executive  Committee,  a  Compensation  and
Stock  Option  Committee,  and an  Audit  Committee.  The  Executive  Committee,
consisting of Messrs. DeBernardis,  Wall, Mulvena, and Moskowitz,  exercises all
the power and authority of the Board of Directors in the  management and affairs
of the  Company  between  meetings  of the  Board of  Directors,  to the  extent
permitted by law.

     The  Compensation and Stock Option  Committee,  consisting of Anthony Dimun
and Dr.  Herbert  Moskowitz,  makes  recommendations  to the Board of  Directors
concerning  compensation,  including  incentive  arrangements,  of the Company's
officers and key employees and others, administers the Company's Option Plan and
determines  the officers,  key employees and others to be granted  options under
the Option Plan and the number of shares subject to such options.

     The Audit  Committee,  consisting  of Daniel  Mulvena and Irwin  Rosenthal,
reviews  the  engagement  of  the  Company's  independent  accountants  and  the
independence  of the  accounting  firm,  the  audit  and  non-audit  fees of the
independent  accountants  and the  adequacy of the  Company's  internal  control
procedures.

KEY PERSONNEL

     The Company's Key Personnel are as follows:

     Bayard Gardineer,  (66),  Vice-President of Engineering--Mr.  Gardineer has
been Vice-President of Engineering at the Company since September 1992. Prior to
that he was a Vice  President of Ultramed from 1982 to 1992.  Mr.  Gardineer,  a
graduate of Massachusetts Institute of Technology,  has over 40 years experience
in mechanical  design and  production,  primarily  with  International  Business
Machine and Johnson & Johnson. He has been granted numerous patents.

     David Lyons, (48), Manager,  Electronic  R&D--Since 1991, Mr. Lyon has been
responsible for the Company's design and development of electronics and software
related to real-time three  dimensional  ultrasound  imaging,  ultrasound beacon
systems, Doppler blood flow velocity measurement, and Doppler DSP methods. Prior
to that time,  since 1988,  Mr.  Lyons  worked for  Ultramed  where he conducted
similar design and development research.

LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS

     The Company's Certificate of Incorporation contains provisions to indemnify
its  directors and officers to the fullest  extent  permitted by New Jersey law,
and  also  includes  provisions  to  eliminate  the  personal  liability  of its
directors and officers to the Company and its stockholders to the fullest extent
permitted by New Jersey law. Under current law, such exculpation would extend to
an officer's or director's  breaches of fiduciary duty,  except for (i) breaches
of such  person's  duty of loyalty,  (ii) those  instances  where such person is
found not to have  acted in good  faith and (iii)  those  instances  where  such
person received an improper personal benefit as the result of such breach.

     The  Company's  bylaws  provide that the Company may  indemnify any person,
including officers and directors, with regard to any action or proceeding to the
fullest extent permitted under New Jersey law.

     The Company has entered into Indemnification  Agreements  ("Indemnification
Agreements")  with each of its  directors  and  officers.  Each  Indemnification
Agreement  provides  that the Company  will  indemnify  the  indemnitee  against
expenses, including reasonable attorneys' fees, judgments,  penalties, fines and
amounts paid in  settlement  actually and  reasonably  incurred by him or her in
connection  with any  civil or  criminal  action  or  administrative  proceeding
arising  out of his or her  performance  of his or her duties as a  director  or
officer,  other than an action  instituted  by the  director  or  officer.  Such
indemnification  is  available  if the  indemnitee  acted in good faith and in a
manner  he or she  reasonably  believed  to be in or  not  opposed  to the  best
interests of the Company,  and,  with  respect to any  criminal  action,  had no
reasonable   cause  to  believe   his  or  her  conduct   was   unlawful.   Each
Indemnification  Agreement also requires that the Company indemnify the director
or  other  party  thereto  in all  cases  to the  fullest  extent  permitted  by
applicable law.

     Each  Indemnification  Agreement  permits the  director or officer  that is
party  thereto  to  bring  suit to seek  recovery  of  amounts  due  under  such
Indemnification Agreement and require that the Company indemnify the director or
other party thereto in all cases to the fullest  extent  permitted by applicable
law. The Company has directors' and officers' liability insurance.

                                       25



<PAGE>
 
<PAGE>



SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

     Certain  officers,  directors and/or principal  stockholders of the Company
filed their Form 3 filings several days late following the effective date of the
Offering. The Company is not aware of any other late filings pursuant to Section
16(a) of the Exchange Act.

ITEM 10. EXECUTIVE COMPENSATION

SUMMARY COMPENSATION TABLE

     The  following  summary   compensation   table  sets  forth  the  aggregate
compensation  paid or accrued by the Company for the fiscal  years ended  August
31, 1996, 1995 and 1994 to Frank A.  DeBernardis,  the Company's Chief Executive
Officer,  and to David Vilkomerson,  the Company's Executive Vice President (the
"Named  Executive  Officers").   No  other  executive  officer  received  annual
compensation  in excess of $100,000  for the fiscal years ended August 31, 1996,
1995 and 1994.

<TABLE>
<CAPTION>
                                                                ANNUAL COMPENSATION
NAME AND PRINCIPAL CAPACITIES IN WHICH SERVED          YEAR         ANNUAL SALARY      BONUS
----------------------------------------------         ----         -------------    ---------
<S>                                                    <C>          <C>              <C>
Frank A. DeBernardis............................       1996           $151,000(1)    $     0
       Chief Executive Officer                         1995             76,000        25,000
                                                       1994             98,854        25,000

David Vilkomerson...............................       1996           $151,000(1)    $      0
       Executive Vice President                        1995             76,000         25,000
                                                       1994             98,854         25,000

</TABLE>

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


(1)    Includes $26,000 of back pay.

STOCK OPTION TABLES

     STOCK  OPTIONS  GRANTED  IN FISCAL  1996 The  following  table  sets  forth
information  concerning  individual  grants of stock options made by the Company
during the fiscal year ended  August 31,  1996,  to each of the Named  Executive
Officers.

<TABLE>
<CAPTION>

                                                                 INDIVIDUAL GRANTS
                                          -----------------------------------------------------------------------
                                                          PERCENT OF TOTAL
                                            NUMBER OF     OPTIONS GRANTED
                                           SECURITIES     TO EMPLOYEES IN
                                           UNDERLYING       FISCAL YEAR      EXERCISE OR BASE
NAME                                      OPTIONS GRANTED      1996(1)        PRICE (PER SHARE)   EXPIRATION DATE
----                                      ---------------  ----------------  ------------------   ---------------
<S>                                          <C>              <C>               <C>                <C>
Frank A. DeBernardis.....................      20,000          13.4                $5.00           January 2001
  Chief Executive Officer

David Vilkomerson........................      90,000          60.0                $5.00           January 2001
  Executive Vice President

</TABLE>


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

(1)    In fiscal 1996, the Company granted a total of 150,000  options under the
       Option Plan. Such number was used in calculating the percentages above.


     AGGREGATED  OPTION EXERCISES The following table sets forth information (on
an aggregate basis)  concerning each exercise of stock options during the fiscal
year ended August 31, 1996 by each of the Named Executive Officers and the final
year-end value of unexercised options.

                                       26



<PAGE>
 
<PAGE>


<TABLE>
<CAPTION>


                                                             NUMBER OF SECURITIES UNDERLYING    VALUE OF UNEXERCISED "IN-THE-
                                                              UNEXERCISED OPTIONS AT FISCAL      MONEY" OPTIONS AT FISCAL YEAR-
                                                                    YEAR-END                                END(2)
                                SHARES ACQUIRED      VALUE   ------------------------------    ------------------------------
                                  ON EXERCISE(1)   REALIZED  EXERCISABLE      UNEXERCISABLE     EXERCISABLE     UNEXERCISABLE
                                ----------------   --------  -----------      -------------     -----------     -------------
<S>                                <C>              <C>       <C>              <C>                <C>             <C>
Frank DeBernardis............         0                0       4,000            16,000             0               0
  Chief Executive Officer

David Vilkomerson............         0                0      30,000            60,000             0               0
  Executive Vice President


</TABLE>


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

(1)    As of the date of this Report,  none of the Named Executive Officers have
       exercised any of their options.
(2)    Options are "in-the-money" at the fiscal year-end if the fair market vale
       of the  underlying  securities  on such date exceeds the exercise or base
       price of the option.  The last sales price of the  securities  underlying
       the options on August 31,  1996,  was $4.25 per share,  and the  exercise
       price of the applicable options is $5.00 per share.

COMPENSATION OF DIRECTORS

     The Company  pays all outside  directors  $500 for each board or  committee
meeting attended. Outside directors may also be reimbursed for expenses incurred
by them in acting as a director or as a member of any  committee of the Board of
Directors.

     In January 1996, the Company granted to each of Dr. Vilkomerson and Messrs.
DeBernardis  and Mulvena  options under the Option Plan to acquire up to 90,000,
20,000, and 20,000 shares of Class A Common Stock, respectively,  at an exercise
price of $5.00 per share. Dr.  Vilkomerson's  options vest in three equal annual
installments commencing on the date of grant. Messrs. DeBernardis' and Mulvena's
options vest in five equal annual installments  commencing on the date of grant.
All of such options are  exercisable  for a period of five years  following  the
date of vesting.

EMPLOYMENT AGREEMENTS

     The  Company  has  entered  into  employment   agreements  with  Mr.  Frank
DeBernardis,  to serve as President and Chief Executive  Officer of the Company,
and Dr. David Vilkomerson,  to serve as Executive Vice President and Director of
Research  and  Development  of the  Company.  Each  agreement  is for a 13 month
period,  and each  expires  on  January  23,  1997.  Under the  agreements,  Mr.
DeBernardis and Dr. Vilkomerson each receive a base salary of $125,000.

     The employment  agreements with each of Mr. DeBernardis and Dr. Vilkomerson
provide that each such  agreement  may be terminated by the Company only if such
executive  officer has materially  breached his obligations under the agreement,
engaged in willful misconduct against the Company or is found guilty of a felony
by a court of competent  jurisdiction  which,  in the discretion of the Board of
Directors,  will  interfere with the  performance  of such  executive  officer's
duties and responsibilities or will materially adversely affect the Company. The
agreements also contain  confidentiality  and non-competition  provisions.  Upon
expiration of their current employment  agreements,  it is anticipated that each
of Mr. DeBernardis and Dr. Vilkomerson will enter into new employment agreements
with the Company.

     The  Company and Mr.  Mulvena  have  entered  into a  consulting  agreement
pursuant to which Mr. Mulvena provides  consulting  services to the Company from
July 1, 1995  through  June 30, 1997 for, up to 27 days per quarter at a rate of
$1,000 per day. The agreement also provides for Mr. Mulvena to be reimbursed for
his reasonable expenses,  to be provided with Company benefits and also contains
confidentiality and non-compete provisions.

OPTION PLAN

     In  August  1995,  the  Board of  Directors  adopted  and the  stockholders
approved  the Option Plan.  The Option Plan  provides for the grant of incentive
stock Option ("ISOs") (within the meaning of Section 422 of the Internal Revenue
Code of 1986, as amended (the "Code") and non-qualified stock options ( "NQSOs")
to certain  directors,  officers and  employees of the Company.  The Option Plan
further provides for the grant of NQSOs and stock  appreciation  rights ("SARs")
to  directors,  agents  of, and  consultants  to,  the  Company,  whether or not
employees  of the  Company.  The  purpose of the Option  Plan is to attract  and
retain employees,  agents,  consultants and directors.  Options and SARs granted
under the Plan may not

                                       27



<PAGE>
 
<PAGE>



be  exercisable  for  terms in excess  of 10 years  from the date of  grant.  In
addition,  no options or SARs may be granted under the Option Plan later than 10
years after the Option  Plan's  effective  date.  The total  number of shares of
Class A Common  Stock  with  respect to which  options  and SARs will be granted
under the Option Plan is 220,000.  The shares subject to and available under the
Option Plan may consist,  in whole or in part, of authorized  but unissued stock
or treasury stock not reserved for any other  purpose.  Any shares subject to an
option or SAR that terminates,  expires or lapses for any reason, and any shares
purchased  pursuant  to an option and  subsequently  repurchased  by the Company
pursuant to the terms of the option,  shall again be  available  for grant under
the Option Plan.

     The Option Plan is  administered  by the Board of  Directors of the Company
which will determine,  in its discretion,  among other things, the recipients of
grants,  whether a grant will consist of ISOs,  NQSOs or SARs,  or a combination
thereof,  and the number of shares of Class A Common Stock to be subject to such
options or SARs.  The Board of Directors of the Company may, in its  discretion,
delegate  its power,  duties  and  responsibilities  under the Option  Plan to a
committee  consisting of two or more directors who are  "disinterested  persons"
within  the  meaning of Rule  16b-3  promulgated  under the  Exchange  Act.  The
Compensation and Stock Option Committee,  which is responsible for administering
the Option Plan, is composed of Anthony  Dimun and Dr.  Herbert  Moskowitz.  The
exercise price of options granted under the Plan shall not be less than the fair
market  value  per  share on the date of grant,  as  determined  by the Board of
Directors.

     The  Option  Plan  contains  certain  limitations  applicable  only to ISOs
granted  thereunder.  To the extent that the aggregate fair market value,  as of
the date of grant, of the shares to which ISOs become  exercisable for the first
time by an optionee during the calendar year exceeds $ 100,000,  the ISO will be
treated  as a NQSO.  In  addition,  if an  optionee  owns  more  than 10% of the
Company's  stock at the time the  individual is granted an ISO, the option price
per share  cannot be less than 110% of the fair  market  value per share and the
term of the option cannot exceed five years.

     In January  1996,  the Company  granted to each of Dr.  Vilkomerson,  Frank
DeBernardis,  and Daniel Mulvena,  directors of the Company, and Dr. Abbott, and
Dr.  Isselbacher,  Medical Advisors of the Company,  options to purchase,  up to
90,000,  20,000,  20,000,  10,000,  and 10,000  shares of Class A Common  Stock,
respectively, at an exercise price of $5.00 per share.

PROFIT SHARING 401(K) PLAN

     In February  1996,  the Company  established  a 401(k)  plan.  All eligible
employees  may elect to  contribute a portion of their wages to the 401(k) plan,
subject to certain limitations. The Company is required to contribute 25% of the
employee  contributions  subject  to a  maximum  equal  to 6% of  the  employees
compensation. The Company contributed approximately $6,000 to the plan in 1996.

     The Company previously  participated in a 401(k) Plan of the parent company
of a common stockholder which covered  substantially all employees.  The Company
contributed $1,574 and $31,127 to such plan in 1995 and the period from February
14, 1990 (date of inception) to August 31, 1995, respectively.  During 1995, the
Company  discontinued  participation  in such plan after  having  satisfied  its
contribution obligation such plan.

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     The  following  table  sets  forth,  as  of  December 12,   1996,   certain
information as to the stock ownership of (i) each of the Company's directors and
executive  officers,  (ii) directors and executive officers as a group and (iii)
all persons  known by the Company to be the  beneficial  owner of more than five
percent of the outstanding common stock of the Company.

<TABLE>
<CAPTION>
                                          NUMBER OF SHARES OF
           NAME AND ADDRESS OF               COMMON STOCK             PERCENTAGE OWNERSHIP OF ALL       PERCENT OF VOTING
            BENEFICIAL OWNER             BENEFICIALLY OWNED(1)(2)(3)   COMMON STOCK OUTSTANDING             POWER
-------------------------------------    ---------------------------  ---------------------------       -----------------

<S>                                             <C>                             <C>                          <C>  
Terence D. Wall(4)......................        451,560                         15.6%                        25.4%
  c/o Vital Signs, Inc.
  20 Campus Road
  Totowa, New Jersey 07512

Vital Signs, Inc.(5)....................        311,953                         10.8%                        17.5%
  20 Campus Road
  Totowa, New Jersey 07512

</TABLE>


                                       28



<PAGE>
 
<PAGE>

<TABLE>
<CAPTION>
                                          NUMBER OF SHARES OF
           NAME AND ADDRESS OF               COMMON STOCK             PERCENTAGE OWNERSHIP OF ALL       PERCENT OF VOTING
            BENEFICIAL OWNER             BENEFICIALLY OWNED(1)(2)(3)   COMMON STOCK OUTSTANDING             POWER
-------------------------------------    ---------------------------  ---------------------------       -----------------

<S>                                             <C>                             <C>                          <C>  

Cathtech Corp.(5) ......................        311,953                         10.8%                        17.5%
  c/o Vital Signs, Inc. 
  20 Campus Road
  Totowa, New Jersey 07512

Anthony Dimun(6) .......................          4,366                           .2%                          .2%
  c/o Vital Signs, Inc. 
  20 Campus Road
  Totowa, New Jersey 07512

Ultramed, Inc.(7) ......................        239,784                          8.3%                        13.5%
  c/o Frank Joworisak
  Echocath, Inc. 
  P.O. Box 7224
  Princeton, New Jersey  08543

David Vilkomerson(8) ...................         44,068                          1.5%                         1.1%
  c/o Echocath, Inc. 
  P.O. Box 7224
  Princeton, New Jersey 08543

Frank DeBernardis(9) ...................         44,342                          1.5%                         2.3%
  c/o Echocath, Inc. 
  P.O. Box 7224
  Princeton, New Jersey 08543

Guidant Corporation ....................         95,400                          3.3%                         5.4%
  111 Monument Circle
  Suite 2900
  Indianapolis, IN 46204
  Attn: General Counsel

Herbert Moskowitz(10) ..................         78,750                          2.7%                         4.4%
  c/o Irwin Rosenthal
  30 Rockefeller Plaza
  29th Floor
  New York, New York  10112

Irwin M. Rosenthal(10) .................         78,750                          2.7%                         4.4%
  c/o Irwin Rosenthal
  30 Rockefeller Plaza
  29th Floor
  New York, New York  10112

Marathon Investments, L.L.C ............        187,778                          6.5%                        10.5%
  c/o Cindy May
  Saginaw Control and Engineering
  95 Midland Road
  Saginaw, MI 48603

Daniel M. Mulvena(11) ..................          4,000                           .1%                       .04%
  6 Fuller Lane
  Marblehead, Mass 01945

Bradley Resources Corporation ..........         95,810                          3.3%                         5.4%
  107 John Street
  Southport, Ct. 06490

All executive officers and directors as
  a group (including nominees)
  (7 persons)(12) ......................        705,836                         24.0%                        37.8%

</TABLE>


* Denotes less than 1%.

                                       29



<PAGE>
 
<PAGE>



(1)    Unless otherwise set forth herein, all shares set forth are shares of the
       Company's Class B Common Stock. The Class A Common Stock has one vote per
       share and the Class B Common  Stock has five votes per share.  All shares
       are  beneficially  owned and sole voting and investment  power is held by
       the persons named, except as otherwise noted.

(2)    Certain  holders have agreed that up to a portion of his or its shares of
       the Class B Common  Stock are  subject to  transfer to the Company for no
       consideration  upon the failure of certain conditions to occur by certain
       dates. So long as such shares are subject to such conditions,  the holder
       may vote but not dispose of such shares.

(3)    Does not include shares of Class A Common  Stock  underlying  options not
       exercisable within 60 days following the date of this Prospectus.

(4)    Mr. Wall is an officer, a director and a principal stockholder  of  Vital
       Signs and an officer and director of Cathtech.  These shares include  the
       311,953 shares of Class B Common Stock owned by Cathtech.

(5)    Cathtech,  a wholly owned  subsidiary of Vital Signs,  is the  beneficial
       owner of approximately  13% of the common stock of Ultramed.  Vital Signs
       may be deemed to be a beneficial  owner of the 311,953  shares of Class B
       Common Stock owned by Cathtech.

(6)    Mr. Dimun is an officer and a director of Vital Signs and Cathtech. These
       shares do not include the 311,953 shares of Class B Common Stock owned by
       Cathtech, as to which Mr. Dimun disclaims beneficial ownership, since Mr.
       Dimun is not a principal stockholder of Vital Signs.

(7)    A portion of the shares  have been  pledged to Vital Signs and a law firm
       as collateral for a loan and accounts payable, respectively. The pledgees
       disclaim beneficial ownership of such shares.

(8)    Includes (i) options  granted by Ultramed to Dr.  Vilkomerson to purchase
       from  Ultramed  7,526 shares of Class B Common  Stock,  which options are
       exercisable  within 60 days  following the date of this  Prospectus,  and
       (ii) an option  granted by the  Company to Dr.  Vilkomerson  to  purchase
       60,000 shares of Class A Common Stock, which option is exercisable within
       60 days  following  the date of this  Prospectus.  Excludes  (i)  options
       granted by Ultramed to Dr.  Vilkomerson  to purchase from Ultramed  1,882
       shares of Class B Common  Stock of the  Company,  which  options  are not
       exercisable  within 60 days following the date of this  Prospectus,  (ii)
       239,784  shares of Class B Common Stock owned by Ultramed (of which he is
       an officer, director and approximately 13% stockholder),  as to which Dr.
       Vilkomerson  disclaims beneficial ownership and (iii) options to purchase
       30,000 shares of Class A Common Stock which are not yet vested.

(9)    Includes  options  granted by the Company to Mr.  DeBernardis to purchase
       8,000  shares of Class A Common  Stock,  which  options  are  exercisable
       within 60 days following the date of this Prospectus. Excludes (i) 10,006
       shares of Class B Common  Stock  held in a trust for the  benefit  of Mr.
       DeBernardis'  children,  as to which Mr. DeBernardis disclaims beneficial
       ownership  and (ii) options to purchase  12,000  shares of Class A Common
       Stock which are not yet vested.

(10)   Dr.  Moskowitz  and Mr.  Rosenthal  are each  partners of Alliance,  each
       holding a 50% ownership interest in such partnership.

(11)   Includes  options granted by the Company to Mr. Mulvena to purchase 8,000
       shares of Class A Common Stock,  which options are exercisable  within 60
       days  following  the date of this  prospectus  and  excludes  options  to
       purchase 12,000 shares of Class A Common Stock which are not yet vested.

(12)   Includes  76,000 Shares of Class A Common Stock and 7,526 shares of Class
       B Common Stock  issuable upon exercise of options  exercisable  within 60
       days from the date of this Prospectus. Excludes (i) 1,882 shares of Class
       B Common Stock underlying options that are not exercisable within 60 days
       from the date of this  Prospectus  and (ii)  options to  purchase  54,000
       shares of Class A Common Stock which are not yet vested.

     Messrs.  DeBernardis  and Wall,  Dr.  Vilkomerson,  Ultramed,  Implemed and
Cathtech  may be deemed to be founders or  promoters of the Company as that term
is defined under the Securities Act.

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     Since October 1, 1992, Vital Signs has provided certain management services
to the Company and incurred  certain  out-of-  pocket  expenses on behalf of the
Company. In January 1996, the Company paid Vital Signs approximately $82,000 for
such services and costs incurred.  Management believes that the fees incurred by
the  Company  did not  exceed  fees that would  have been  charged by  unrelated
parties for similar services.

     In September  1992,  the Company sold 95,400 shares of Class B Common Stock
of the  Company  to Eli  Lilly  for  $2,250,000.  The  investment  was part of a
strategic  alliance  between the Company and HRT,  pursuant to which HRT and the
Company  entered into the HRT Agreement.  In August 1995, Eli Lilly  transferred
its Class B Common Stock to Guidant  Corporation.  In January 1996,  the Company
entered into an agreement to repurchase  its rights under the HRT Agreement from
Guidant Corporation for $575,000. Of such amount, $75,000 was paid by Alliance.

     Pursuant to an  agreement,  dated July  7,1995,  between  Alliance  and the
Company  (the  "Alliance  Agreement"),  Alliance  satisfied  a bank  loan of the
Company in the principal  amount of $750,000 and in exchange the Company  agreed
to repay Alliance if the Company receives at least $23,040,000 in gross proceeds
from the exercise of the Class B Warrants.

     In November 1995,  Alliance  loaned the Company  $100,000,  which loan bore
interest at a rate of 9% per annum and was repaid in January 1996.

                                       30



<PAGE>
 
<PAGE>



     In January 1996,  Alliance  agreed to arrange for the payment of $75,000 by
certain of the Company's existing  stockholders in connection with the Company's
repurchase of rights under the HRT Agreement. A portion of such payment was made
by Alliance.

     Irwin M.  Rosenthal and Herbert  Moskowitz,  directors of the Company,  are
partners of Alliance.  Irwin M.  Rosenthal is also a partner of Rubin Baum Levin
Constant & Friedman,  counsel to the Company. Other than Mr. Rosenthal,  certain
attorneys  associated with such firm or their relatives own approximately 16,168
shares of Class B Common Stock of the Company and 50,000 Class A Warrants, which
are  exercisable  into 50,000  shares of Class A Common Stock and 50,000 Class B
Warrants which are exercisable into 50,000 shares of Class A Common Stock.

ITEM 13. EXHIBITS, LIST AND REPORTS ON FORM 8-K.

(a)  Exhibits.

3.1    Restated Certificate of Incorporation of the Company.(1)
3.2    By-Laws of the Company.(1)
10.1   1995 Stock Option Plan of the Company.(1)
10.2   Form of Indemnification  Agreement to be entered into between the Company
       and each officer and Director of the Company.(1)
10.3   Employment  Agreement,  dated as of June 11, 1991 between the Company and
       Frank DeBernardis, as extended and amended.(1)
10.4   Employment  Agreement,  dated as of June 11, 1991 between the Company and
       David Vilkomerson, as extended and amended.(1)
10.5   Letter Agreement, dated as of May 12,1995, between the Company and Daniel
       Mulvena.(1)
10.6   Form of Medical  Advisory  Agreement  between  the  Company  and Dr. Kurt
       Isselbacher.(1)
10.7   Form of Consulting Agreement between the Company and Daniel Mulvena(1)
10.8   Patent  Assignment  dated as of 10/30/92 from Catheter  Technology to the
       EchoCath, Ltd.(1)
10.9   Patent  Assignment  dated  as  of  10/30/92  from  EchoCath  Ltd  to  the
       Company.(1)
10.10  Patent  Assignment  dated  as of  11/17/92  from  EchoCath  Ltd.  to  the
       Company.(1)
10.11  Development and Licensing  Agreement  between Heart Rhythm  Technologies,
       Inc. and the Company effective as of September 21, 1992.(1)
10.12  Stock Purchase  Agreement  effective as of September  21,1992 between the
       Company and Eli Lilly and Company.(1)
10.13  Development,  Supply and  License  Agreement  dated  September  24,  1993
       between the Company and Bard Radiology, C.R. Bard, Inc., as amended.(1)
10.14  Lease  Agreement  dated as of November  22,  1991  between BGS Realty and
       EchoCath Ltd.(1)
10.15  Agreement  dated as of July 7, 1995  between  the  Company  and  Alliance
       Partners.(1)
10.16  Agreement  dated as of July 14, 1995  between  the  Company and  Alliance
       Partners.(1)
10.17  Agreement  dated as of November  30, 1995 among  Echocath,  Inc.  Guidant
       Corporation and Heart Rhythm Technologies, Inc.(1)
10.18  Agreement  dated  as  of  January  3,1996  among  the  Company,   Guidant
       Corporation and Heart Rhythm Technologies, Inc.(1)
10.19  Form of Warrant Agreement among the Company, the Underwriter and American
       Stock  Transfer & Trust Company,  including  forms of Class A and Class B
       Warrant Certificates.(1)
10.20  Form of Stock Restriction Agreement among the Company, certain holders of
       the Class B Common Stock and D.H. Blair Investment Banking Corp.(1)
10.21  Second Amendment to Lease effective April 1, 1996 between the Company and
       BGS Realty.
21     Subsidaries of the Company.(1)
24     Power of Attorney (included in signature page hereto).
27     Financial Data Schedule.

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


(1)    Incorporated by reference to Registrant's  Registration Statement on form
       SB-2 (Reg. No.  33-97688) which was declared  effective by the Securities
       and Exchange Commission on January 17, 1996.

(b)    Reports on Form 8-K

         None.

                                       31



<PAGE>
 
<PAGE>



                                   SIGNATURES

     In accordance  with Section 13 or 15(d) of the Exchange Act, the Registrant
caused this Report to be signed on its behalf by the undersigned, thereunto duly
authorized.

                             ECHOCATH, INC.



                             By:    /s/ Frank A. DeBernardis
                                 _______________________________________________
                                 Frank A.  DeBernardis,  Chief Executive Officer
                                 and President  (principal executive officer and
                                 principal financial and accounting officer)

                             December 12, 1996

                                POWER OF ATTORNEY

     KNOW ALL MEN BY THESE PRESENTS,  that each person whose  signature  appears
below hereby  severally  constitutes and appoints Frank A. DeBernardis and David
Vilkomerson, and each of them, his true and lawful attorneys-in-fact and agents,
with full power of  substitution  and  resubstitution,  for him and in his name,
place and stead,  in any and all  capacities,  to sign any and all amendments to
this Report and all documents  relating thereto,  and to file the same, with all
exhibits  thereto,  and  other  documents  in  connection  therewith,  with  the
Securities and Exchange  Commission,  granting unto said  attorneys-in-fact  and
agents,  full power and authority to do and perform each and every act and thing
necessary  or advisable  to be done in and about the  premises,  as fully to all
intents and  purposes as he might or could do in person,  hereby  ratifying  and
confirming  all that said  attorneys-in-fact  and agents,  or his  substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.

     In accordance  with the  requirements  of the Exchange Act, this Report has
been signed by the following persons in the capacities and on the dates stated.

<TABLE>
<CAPTION>

            Signature                            Title                                    Date
            ---------                            -----                                    ----

<S>                              <C>                                                 <C>

    /s/ Frank A. DeBernardis     Chief Executive Officer and President               December 12, 1996
-------------------------------- (principal executive officer and principal
      Frank A. DeBernardis       financial and accounting officer)


      /s/ David Vilkomerson      Executive Vice President and Director               December 12, 1996
--------------------------------
        David Vilkomerson


                                 Co-Chairman of the Board                            December 12, 1996
--------------------------------
         Terence D. Wall


                                 Treasurer and Director                              December 12, 1996
--------------------------------
        Anthony J. Dimun


      /s/ Herbert Moskowitz      Director                                            December 12, 1996
--------------------------------
        Herbert Moskowitz

     /s/ Irwin M. Rosenthal      Secretary and Director                              December 12, 1996
--------------------------------
       Irwin M. Rosenthal


      /s/ Daniel M. Mulvena      Co-Chairman of the Board                            December 12, 1996
--------------------------------
        Daniel M. Mulvena


</TABLE>


                                       32



                     STATEMENT OF DIFFERENCES

The trademark symbol shall be expressed as......................(TM)
The registered trademark symbol shall be expressed as...........(R)
The division symbol shall be expressed as.......................[div]





<PAGE>