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                     U.S. 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
     For the fiscal year ended August 31, 1997

                                       OR

[ ]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
     EXCHANGE ACT OF 1934
     For the transition period from ____________ to __________

                         Commission file number 0-27380

                                  ----------

                                 ECHOCATH, INC.
                 (Name of small business issuer in its charter)

<TABLE>
<S>                                                                               <C>       
                         NEW JERSEY 
                                                                                              22-3273101   
(State or other jurisdiction of incorporation or organization)                   (I.R.S. Employer Identification No.)

            P.O. BOX 7224, PRINCETON, NEW JERSEY                                                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: None

      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) 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, 1997) were $310,910.

      The aggregate market value on December 4, 1997 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
$7,208,000.

      As of December 4, 1997, 2,306,254 shares of Class A Common Stock, no par
value, and 1,217,382 shares of Class B Common Stock, no par value, were
outstanding.

DOCUMENTS INCORPORATED BY REFERENCE.
None

Transitional Small Business Disclosure Format (check one):  YES [ ]  NO [X]


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                                INTRODUCTORY NOTE

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

      Certain statements in this Report on Form 10-KSB ("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:
limited commercial operations; no assurance of success; need for additional
financing; uncertainty of market acceptance; reliance on collaborative
agreements; competition and rapid technological change; failure to receive or
delays in receiving regulatory approval; limited manufacturing and assembly
experience; limited marketing and sales experience; dependence upon, and need
for, key personnel; uncertain protection of patent and proprietary rights; lack
of reimbursement; general economic and business conditions; industry capacity;
industry trends; demographic changes; changes in business strategy or
development plans; quality of management; availability, terms and deployment of
capital; potential adverse impact of FDA and other government regulations;
limitations on third-party reimbursement; potential adverse impact of
anti-renumeration laws; potential product liability; risk of loss in lawsuit;
risk of low priced stocks; and other factors referenced in this Report. When
used in this Report, statements that are not statements of material fact may be
deemed to be forward-looking statements. Without limiting the foregoing, the
words "anticipates," "plans," "intends," "expects" and similar expressions are
intended to identify such forward-looking statements. Readers are cautioned not
to place undue reliance on these forward-looking statements, which speak only as
of the date hereof. The Company undertakes no obligation to publicly release the
result of any revisions to these forward-looking statements that may be made to
reflect events or circumstances after the date hereof or to reflect the
occurrence of unanticipated events.


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                                                          PART I

ITEM 1. DESCRIPTION OF BUSINESS.

GENERAL

      The Company is 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'r'")
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'r'")
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'tm'") which, if
successfully developed, would provide data on the blood volume flow through
internal vessels, and a proprietary imaging system ("EchoEye'r'") 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, may depend on
the Company's continued 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. 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.

      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.


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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 (the "FDA") for the ColorMark Clip
for needle placements. The Company 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.

      Pursuant to a License and Development Agreement dated December 30, 1996
(the "December 1996 Medtronic Agreement"), between the Company and Medtronic,
Inc. ("Medtronic"), the Company granted Medtronic a worldwide exclusive license
to make, have made, use, sell and have sold products utilizing the Company's
proprietary ColorMark technology to enable the precise positioning, with
conventional ultrasound imaging systems, of pacemaker leads within the heart.
See "--Collaborative Agreements."

      Pursuant to a License and Development Agreement dated as of October 30,
1997 (the "October 1997 Medtronic Agreement"), between the Company and
Medtronic, the Company granted Medtronic a worldwide exclusive license to make,
have made, use, sell and have sold products utilizing the Company's proprietary
ColorMark technology in guiding devices during cardiothoracic surgical
procedures. See "--Collaborative Agreements."

      Pursuant to an Exclusive Licensing Agreement dated February 27, 1997 (the
"EP MedSystems Agreement" ), between the Company and EP MedSystems, Inc. ("EP
MedSystems"), the Company granted EP MedSystems the exclusive right and license
to make, have made, use and sell products utilizing the Company's proprietary
ColorMark technology in the field of electrophysiology. See "--Collaborative
Agreements"; and "Item 3--Legal Proceedings."

      Pursuant to an International Distribution Agreement dated as of April 1,
1997 (the "Medison Agreement"), between the Company and Medison Co., Ltd.
("Medison"), the Company granted Medison the exclusive right to promote, sell
and distribute certain products utilizing the Company's proprietary ColorMark
technology throughout the Far East and a non-exclusive right to promote, sell
and distribute certain products utilizing the Company's proprietary ColorMark
technology throughout other parts of the world. See "--Collaborative
Agreements."

      The Company will seek to enter into additional joint venture, licensing or
other collaborative agreements for, among other things, the distribution,
marketing, sale and/or use of the Company's proprietary ColorMark technology.

      ECHOMARK The Company's EchoMark system electronically marks and displays
the position of non-metallic objects, such as catheters within the body on
existing ultrasound imaging screens, eliminating the need to use X-ray to
confirm the position of such objects. The Company has developed a catheter
utilizing the EchoMark technology to diagnose fallopian tube blockage (the
"EchoMark Salpingography Catheter"). The EchoMark 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 intends to
enter into joint venture, licensing or other collaborative arrangements to
market and sell the EchoMark Salpingography Catheters. The Company has also
developed the EchoMark Electrophysiology Catheter which consists of a
conventional electrophysiology catheter augmented by a piezoplastic covered
brass sensor connected by wire to the EchoMark CSI (the "EchoMark
Electrophysiology Catheter"). 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


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believes that the EchoMark Electrophysiology Catheter will increase the speed
and ease the diagnosis of arrhythmias in the heart. The Company received FDA
clearance in May 1995 to market the EchoMark Electrophysiology Catheter to
diagnose defective conductive pathways in the heart.

      Pursuant to the terms of the December 1996 Medtronic Agreement, the
Company granted Medtronic a worldwide exclusive license to make, have made, use,
sell and have sold products utilizing the Company's EchoMark proprietary
technology to enable the precise positioning, with conventional ultrasound
imaging systems, of pacemaker leads within the heart. See "--Collaborative
Agreements."

      Pursuant to the terms of the October 1997 Medtronic Agreement, the Company
granted Medtronic a worldwide exclusive license to make, have made, use, sell
and have sold products utilizing the Company's proprietary EchoMark technology
in guiding devices during cardiothoracic surgical procedures. See
"--Collaborative Agreements."

      Pursuant to the terms of the EP MedSystems Agreement, the Company granted
EP MedSystems the exclusive right and license to make, have made, use and sell
products utilizing the Company's proprietary EchoMark technology in the field of
electrophysiology. See "--Collaborative Agreements"; and "Item 3--Legal
Proceedings."

      The Company intends to enter into joint venture, licensing or other
collaborative arrangements for, among other things, the distribution, marketing,
sale and/or use of the Company's salpingography ("SSG") fertility procedures.

      Additional products which the Company has developed utilizing the EchoMark
technology are an EchoMark peripheral angioplasty catheter (the "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 different medical specialties. The
Company is continuing to explore means of introducing the EchoMark PTA Catheter
to be utilized in the actual performance of 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 Company intends to enter into additional joint venture, licensing or
other collaborative arrangements for the distribution, marketing sale and/or use
of the Company's proprietary EchoMark technology.

      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 1998. The
Company cannot predict, when, if ever, such products will be successfully
developed or available for commercial sale.

      The Company has initiated pre-clinical trials for EchoFlow. The trials
will study EchoFlow for use during cardiovascular procedures and for
post-operative examinations of the circulatory system. The trials are being
conducted at Mt. Sinai Hospital in New York City under the direction of Larry
Hollier, M.D., Chairman, Department of Surgery, and are expected to be completed
by the first half of 1998. Assuming positive results of the trials, clinical
trials are expected to begin in the second half of 1998.

      Pursuant to the terms of the October 1997 Medtronic Agreement, Medtronic
received a six-month option to evaluate the uses of the Company's proprietary
EchoFlow technology for cardiovascular surgery for possible future licensing.
See "Collaborative Agreements."

      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. The Company has successfully
performed preclinical testing on the EchoEye technology and expects to continue
preclinical testing of EchoEye products in 1998.

      Pursuant to the terms of the October 1997 Medtronic Agreement, Medtronic
received a six-month option to evaluate the uses of the Company's proprietary
EchoEye technology for cardiovascular surgery for possible future licensing. See
"--Collaborative Agreements."



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      Pursuant to the terms of the EP MedSystems Agreement, the Company granted
EP MedSystems the exclusive right and license to make, have made, use and sell
products utilizing the Company's proprietary EchoEye technology in the field of
electrophysiology. See "--Collaborative Agreements"; and "Item 3--Legal
Proceedings."

         GENERAL Any further developments of the Company's proposed products, as
well as other products the Company wishes to pursue, may depend on the Company's
continued 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. Pursuant to the terms of the Medison Agreement, the Company
granted an exclusive distributorship to Medison with regard to the ColorMark
Clip throughout the Far East, and a non-exclusive distributorship with regard to
the ColorMark Clip throughout other parts of the world. See "--Collaborative
Agreements."

      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 1 cm. 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.




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      Collaborative Agreements Relating to the ColorMark Technology

      Pursuant to the terms of the December 1996 Medtronic Agreement, the
Company granted Medtronic a worldwide exclusive license to make, have made, use,
sell and have sold products utilizing the Company's proprietary ColorMark
technology to enable the precise positioning, with conventional ultrasound
imaging systems, of pacemaker leads within the heart. See "--Collaborative
Agreements."

      Pursuant to the terms of the October 1997 Medtronic Agreement, the Company
granted Medtronic a worldwide exclusive license to make, have made, use, sell
and have sold products utilizing the Company's proprietary ColorMark technology
in guiding devices during cardiothoracic surgical procedures. See
"--Collaborative Agreements."

      Pursuant to the terms of the EP MedSystems Agreement, the Company granted
EP MedSystems the exclusive right and license to make, have made, use and sell
products utilizing the Company's proprietary ColorMark technology in the field
of electrophysiology. See "--Collaborative Agreements"; and "Item 3--Legal
Proceedings."

ECHOMARK

      Infertility Therapy Infertility therapy generally includes
hysterosalpingography ("HSG") procedures which image the uterus and fallopian
tubes and 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. Pursuant to the terms of the EP MedSystems
Agreement, the Company granted EP MedSystems the exclusive right to make, have
made, use and sell products the Company's proprietary EchoMark technology in the
field of cardiac electrophysiology. See "--Collaborative Agreements"; and
"Item 3--Legal Proceedings."

      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.

      Collaborative Agreements with Regard to the EchoMark Technology

      Pursuant to the terms of the December 1996 Medtronic Agreement, the
Company granted Medtronic a worldwide exclusive license to make, have made, use,
sell and have sold products utilizing the Company's proprietary EchoMark
technology to enable the precise positioning, with conventional ultrasound
imaging systems, of pacemaker leads within the heart. See "--Collaborative
Agreements."

      Pursuant to the terms of the October 1997 Medtronic Agreement, the Company
granted Medtronic a worldwide exclusive license to make, have made, use, sell
and have sold products utilizing the application of the Company's proprietary
EchoMark technology in guiding devices during cardiothoracic surgical
procedures. See "--Collaborative Agreements."



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      Pursuant to the terms of the EP MedSystems Agreement, the Company granted
EP MedSystems the exclusive right and license to make, have made, use and sell
products utilizing the Company's proprietary EchoMark technology in the field of
electrophysiology. See "--Collaborative Agreements"; and "Item 3--Legal
Proceedings."

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 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 may
depend on the Company's ability to obtain additional financing through joint
ventures, licensing agreements or other collaborative arrangements or otherwise.

      Pursuant to the terms of the October 1997 Medtronic Agreement, Medtronic
received a six-month option to evaluate the uses of the Company's proprietary
EchoFlow technology for cardiovascular surgery for possible future licensing.
See "--Collaborative Agreements."

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.



                                       8

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      Pursuant to the terms of the EP MedSystems Agreement, the Company granted
EP MedSystems the exclusive right and license to make, have made, use and sell
products utilizing the Company's proprietary EchoEye technology in the field of
electrophysiology. See "--Collaborative Agreements"; and "Item 3--Legal
Proceedings."

      Pursuant to the terms of the October 1997 Medtronic Agreement, Medtronic
received a six-month option to evaluate the uses of the Company's proprietary
EchoEye technology for cardiovascular surgery for possible future licensing.

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.

RESEARCH AND DEVELOPMENT

      The Company has incurred an aggregate of approximately $7,903,000
(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, 1997, including approximately
$1,052,000 during the fiscal year ended August 31, 1996 and approximately
$1,471,000 during the fiscal year ended August 31, 1997. 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 February 1996, $575,000 was paid by the Company to Heart Rhythm
Technologies, Inc. ("HRT"), a subsidiary of Guidant Corporation ("Guidant") to
reacquire the technology rights to the Company's EchoMark and EchoEye
technologies in connection with an exclusive licensing and development agreement
between the Company and HRT dated September 21, 1992. Such licensing and
development agreement was terminated in February 1996.

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

COLLABORATIVE AGREEMENTS

      Medtronic Agreements

         December 1996 Medtronic Agreement

      Pursuant to the terms of the December 1996 Medtronic Agreement, the
Company granted Medtronic a worldwide exclusive license to make, have made, use,
sell and have sold products utilizing the Company's EchoMark and ColorMark
proprietary technologies to enable the precise positioning, with conventional
ultrasound imaging systems, of pacemaker leads within the heart.

      In consideration of the grant of the exclusive license to Medtronic,
Medtronic agreed, among other things, to pay to the Company: (i) $150,000 which
was paid upon execution of the December 1996 Medtronic Agreement; (ii) $800,000
consisting of payments in installments as certain development milestones and
initial sales are achieved on the ColorMark products; (iii) annual minimum
royalties beginning two (2) years after FDA approval of the first product
commercialized by Medtronic which utilizes the Company's ColorMark
visualization; and (iv) when commercially available, royalties on the sale by
Medtronic of products utilizing the Company's ColorMark or EchoMark
technologies. The total cumulative royalties payable to the Company under the
terms of the December 1996 Medtronic Agreement are capped at $20,000,000.

         October 1997 Medtronic Agreement

      Pursuant to the terms of the October 1997 Medtronic Agreement, the
Company, among other things: (i) granted Medtronic a worldwide exclusive license
to make, have made, use, sell and have sold products utilizing the Company's
ColorMark and EchoMark technologies in guiding devices during cardiothoracic
surgical procedures; and (ii) granted Medtronic the exclusive right and option
at any time within six (6) months of the effective date of the October 1997
Medtronic Agreement, to acquire a worldwide exclusive license to the Company's
EchoEye and EchoFlow technologies for use in guiding devices during
cardiothoracic surgical procedures.



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      In consideration of the grant of the exclusive rights to Medtronic,
Medtronic agreed to pay to the Company a combined total of $1,800,000 million,
which amount includes, among other things: (i) $800,000 paid to the Company in
upfront licensing fees; (ii) $1,000,000 from the purchase of 363,636 restricted
shares of the Company's Class A Common Stock, no par value (the "Class A Common
Stock"), issued to Medtronic Asset Management, Inc., a wholly-owned subsidiary
of Medtronic; and (iii) future payments by Medtronic to the Company which
include minimum annual royalties upon product commercialization. The total
cumulative royalties payable to the Company under the terms of the October 1997
Medtronic Agreement are capped at $20,000,000. The total payments to the Company
under the December 1996 Medtronic Agreement are $150,000 as of December 4, 1997.

      As of October 30, 1997, the Company entered into a Subscription Agreement
with Medtronic Asset Management, Inc. whereby Medtronic Asset Management, Inc.
purchased 363,636 restricted shares of Class A Common Stock, at a purchase price
of $2.75 per share. Medtronic Asset Management, Inc. is a wholly-owned
subsidiary of Medtronic through which Medtronic holds certain investments.

      EP MedSystems Agreement

      Pursuant to the terms of the EP MedSystems Agreement, the Company granted
EP MedSystems the exclusive right and license to make, have made, use and sell
products utilizing the Company's ColorMark, EchoMark and EchoEye proprietary
technologies for use in the field of electrophysiology. The license granted to
EP MedSystems specifically excludes use of the Company's ColorMark, EchoMark and
EchoEye technologies on permanently implantable defribillators and pacemaker
leads.

      In consideration of the license grant, EP MedSystems agreed to: (i) pay to
the Company an initial license fee of $700,000, payable in installments as
certain development milestones and initial sales are achieved on the EchoMark
and EchoEye technologies, including (a) completion of the testing of a limited
series of patients, (b) completion of a development program for EchoEye, and (c)
the sale of a limited quantity of EchoMark Electrophysiology Catheters; (ii) EP
MedSystems' agreement to make royalty payments to the Company on the sale of
products utilizing the Company's ColorMark, EchoMark and EchoEye technologies in
the field of electrophysiology. The total cumulative royalties payable to the
Company under the terms of the EP MedSystems Agreement are not to exceed
$30,000,000.

      As of February 17, 1997, the Company entered into a Subscription Agreement
with EP MedSystems whereby EP MedSystems purchased 280,000 shares of the
Company's Series B Cumulative Convertible Preferred Stock (the "Series B
Cumulative Convertible Preferred Stock") for $1,400,000. The EP MedSystems
Agreement provides that any royalties payable to the Company pursuant to the
terms of the EP MedSystems Agreement can be reduced, but not to an amount below
zero, by an amount equal to the amount of any dividends under the Series B
Cumulative Convertible Preferred Stock which are accrued but not paid as of the
date such royalty payment is due. See "Item 3--Legal Proceedings."

      Medison Agreement

      Pursuant to the terms of the Medison Agreement, the Company granted
Medison the exclusive right to promote, sell and distribute certain products
utilizing the Company's ColorMark proprietary technologies throughout the Far
East. The Medison Agreement specifically excludes the sale by Medison of
products utilizing the Company's ColorMark technology for use in cardiac
ablation of pacemaker lead implantation or removal or procedures related
thereto. The Company and Medison have also agreed to collaborate on certain
ultrasound technologies for the development of future products.

      Bard Agreement

      Pursuant to an agreement dated September 24, 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. In
consideration of the license grant, the Company received, among other things, 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 Agreement was
terminated on October 28, 1996. In April 1997, the Company agreed to pay
$598,000, representing the full amount of principal and interest owing as of
April 1997 by the Company to Bard under the Bard Agreement, at any time prior to
July 1998. The amount due as of August 31, 1997 was $615,000.



                                       10

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MANUFACTURING AND SUPPLIERS

      The Company currently manufactures 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 1999. 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 the FDA's Good Manufacturing Practices ("GMP") regulations. In
April 1997, the FDA conducted an inspection of the Company's facilities and
subsequently notified the Company that it was in compliance with the FDA's 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 is currently developing its in-house marketing staff. Sales and
marketing efforts are currently focused on the ColorMark Clip for guiding needle
biopsies and vascular access procedures.

      The Company has entered into collaborative agreements for the marketing
and sale of certain of its products. Such collaborative agreements include the
December 1996 Medtronic Agreement, the October 1997 Medtronic Agreement, the EP
MedSystems Agreement and the Medison Agreement. See "--Collaborative
Agreements"; and "Item 3--Legal Proceedings."

      The Company intends to enter into additional 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 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.



                                       11

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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. 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.



                                       12

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      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 two issued United States patents related to
aspects of the EchoMark technology, has received three 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.

      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; two
patents will expire in 2016 and the third patent will expire in 2017. One
additional patent application relating to EchoFlow technology is 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.



                                       13

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      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 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 510(k) 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.



                                       14

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      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 became 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.

      In April 1997, the FDA conducted an inspection of the Company's
facilities. Subsequent to such inspection, the FDA notified the Company that it
was in compliance with the FDA's GMP regulations.

      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.

      The Company began animal trials with EchoFlow products in late 1996. It is
anticipated that clinical trials will begin in 1998. 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.



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<PAGE>


      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 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



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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 involve 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 on terms acceptable to
the Company. See "Risk Factors--Potential Product Liability; Limited Insurance."

HUMAN RESOURCES

      As of December 4, 1997, the Company employed 15 full time employees. Seven
employees provide research and development services, three work in production,
four employees provide management and administrative services and one employee
provides regulatory services. The Company has one part-time employee who
provides research and development services and one part-time employee who
provides administrative services.

      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 Abott      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



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activities, if requested, are on an as available basis and at the agreed upon
fee. The Medical Advisory Agreements 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, 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 1995 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)
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.

HISTORY, REORGANIZATION AND RECAPITALIZATION

      The Company is a New Jersey corporation which was incorporated in
September 1992 as the successor to the business and assets of EchoCath, Ltd., a
New Jersey general partnership (the "Partnership"). The Partnership was formed
in February 1990 under the name Catheter Technology, Ltd., and in June 1991,
changed its name to EchoCath, Ltd.

      In August 1995, the Company effected a .848 for 1 reverse stock split of
its common stock. The resulting shares were then converted and reclassified as
848,000 shares of Class B Common Stock, no par value (the "Class B Common
Stock") (together with the Class A Common Stock, the "Common Stock"). Shortly
thereafter, the Company's outstanding shares of preferred stock and warrants to
purchase preferred stock were canceled in exchange for the issuance of 127,000
shares of Class B Common Stock.

IMPORTANT FACTORS REGARDING FORWARD-LOOKING STATEMENTS

      The following factors, among others, could cause the Company's actual
results, performance or achievements, or industry results, to differ materially
from those expressed in the Company's forward-looking statements in this Report
and presented elsewhere by management from time to time.

      LIMITED COMMERCIAL OPERATIONS; NO ASSURANCE OF SUCCESS

      Potential investors should be aware of the problems, delays, expenses and
difficulties frequently encountered by an enterprise in the Company's early
stage of development which include unanticipated problems relating to
development of proposed products, testing, regulatory compliance, manufacturing
and assembly, the competitive environment in which the Company will operate,
marketing problems and additional costs and expenses that may exceed current
estimates. Certain of the Company's proposed products will require significant
additional research, development, testing and financing, and may need to
overcome significant regulatory burdens prior to commercialization. There can be
no assurance that after the expenditure of substantial funds and efforts, the
Company's proposed products will be successfully developed.

      SHAREHOLDERS' DEFICIT; EXPECTATION OF SUBSTANTIAL FUTURE LOSSES

      From its inception through August 31, 1997, the Company has incurred a
cumulative net loss of $(14,211,289). At August 31, 1997, Company had working
capital of $70,225 and a shareholders' deficit of ($179,850). Operating losses
for the years ended August 31, 1996 and 1997 were ($2,921,575) and ($2,839,049),
respectively. The Company intends to conduct significant additional research,
development and testing activities which, together with expenses incurred for
the establishment of a marketing and



                                       18

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<PAGE>


distribution presence and other general and administrative expenses, are
expected to result in continuing operating losses for the foreseeable future.
There can be no assurance that the Company will ever achieve profitable
operations.

      NEED FOR ADDITIONAL FINANCING

      The Company believes that the net proceeds from various licencing
agreements and private equity placements together with funds expected to be
generated from operations will be sufficient to meet its cash requirements
through December 1998; however, there can be no assurance that the Company will
not require additional financing prior to that time or that, if required,
additional financing will be available on acceptable terms or at all. In any
event, the Company will require substantial additional financing in the future
to fully implement its proposed business plan. Former sources of capital are not
obligated, and are not expected to contribute, loan or provide any additional
financing to the Company. The Company has no binding commitments from any third
parties to provide funds to the Company and there can be no assurance that
additional financing will be available on terms favorable or acceptable to the
Company, if at all. Failure to obtain such additional financing would have a
material adverse effect on the Company's business and prospects and could
require the Company to severely limit or cease its operations.

      UNCERTAINTY OF MARKET ACCEPTANCE

      The commercial success of the Company's ColorMark Clip, EchoMark, EchoFlow
and EchoEye, as well as the Company's other products and proposed products, will
depend upon acceptance of such products by the medical community as safe, useful
and cost-effective. There can be no assurance that the benefits of utilizing
ultrasound technology for the Company's intended applications will gain
acceptance by the medical community to enable such products to gain commercial
acceptance. There can be no assurance that the Company will not experience
resistance from the medical community with respect to any of its products in the
future. The Company may be required to expend substantial additional funds and
time in order to demonstrate the safety, efficacy and reliability of its
products to potential customers.

      RELIANCE ON COLLABORATIVE ARRANGEMENTS; RESTRICTIONS

      The Company has granted certain companies the exclusive right to market
and distribute, in certain territories, selected technologies of the Company
pursuant to certain collaborative agreements. Such collaborative agreements
contain certain provisions restricting the Company, among other things, to
license and/or distribute its technologies. As a result, the Company may not
market products or proposed products that are covered by those agreements
independently and may not enter into strategic alliances or collaborative
agreements with other parties relating to any products covered by any such
exclusivity agreements. Restrictions regarding exclusivity limit the Company's
ability to pursue and negotiate collaborative agreements with other entities on
terms which may be more favorable to the Company. In addition, the amount of
resources and the time that any of these collaborators devote toward marketing
the Company's products or proposed products are not within the Company's
control. There can be no assurance that any marketing, sales or other efforts
undertaken by the Company or its collaborators will be successful. Each of these
agreements terminates under specified circumstances and any termination would
have a material adverse effect on the Company.

      Consistent with its business strategy, the Company intends to pursue
licensing, joint development and other collaborative arrangements with other
strategic partners. There can be no assurance, however, that the Company will be
able to find additional collaborators or negotiate additional collaborative
agreements on terms acceptable to the Company, if at all, that the collaborative
agreements with the Company will be successful, or that collaborators will
devote sufficient resources to the Company's products, proposed products or
technologies. In addition, there can be no assurance that future collaborative
arrangements will not allow others to enter into arrangements with the Company's
collaborators for the commercialization of the same product or that
collaborators will not pursue alternative products either on their own or in
collaboration with others, including the Company's competition. See
"Business-Collaborative Agreements."

      COMPETITION AND RAPID TECHNOLOGICAL CHANGE

      The health care industry is characterized by extensive research efforts
and rapid technological change. Competition for imaging catheters is intense and
is expected to increase. Certain of the Company's 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. In addition, many companies are
engaged in research and development of new devices that may address the same
clinical applications as the Company's products. 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. The



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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, and
other resources than the Company. There can be no assurance that the Company's
competitors will not succeed in developing technologies and products that are
more effective and less costly than those developed or being developed by the
Company, thereby rendering the Company's technologies not competitive or
obsolete.

      LIMITED MANUFACTURING AND ASSEMBLY EXPERIENCE; POTENTIAL DEPENDENCE ON
      OUTSIDE PARTIES FOR MANUFACTURING AND ASSEMBLY OF THE COMPANY'S PRODUCTS;
      DEPENDENCE UPON KEY SUPPLIERS

      The Company has limited manufacturing and assembly experience and to date
has not yet manufactured any of its products in significant quantity. No
assurance can be given that the Company will ever be able to establish
commercial scale manufacturing operations. The Company is dependent upon
subcontractors to manufacture and deliver certain components of its products in
a timely and satisfactory manner and any interruption in the supply of such
components could have a materially adverse effect on the manufacturing and
assembly of the Company's products. If the Company retains third parties for
manufacturing and assembly of its products, 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 manufacturing arrangements with others on acceptable terms
or at all.

      LIMITED MARKETING AND SALES EXPERIENCE; POTENTIAL DEPENDENCE ON OUTSIDE
      PARTIES FOR MARKETING AND SALES

      The Company as is currently structured in the process of developing a
sales organization to market and sell its products and is currently developing
its in-house marketing staff. There can be no assurance that the Company will be
successful in establishing such sales organization or in-house marketing staff
or as to the effectiveness of such sales organization or in-house marketing
staff. The Company also intends to rely upon a network of distributors or enter
into joint venture, licensing, or other collaborative arrangements to market and
sell its products. Such arrangements may result in a lack of control by the
Company over the marketing and selling of its products. There can be no
assurance that the Company will be successful in entering into any such
arrangements or be able to effectively manage and maintain its relationships
with others, or that any marketing and sales efforts undertaken by or on behalf
of the Company by others will be successful. In addition to domestic sales, the
Company intends to sell its products outside of the United States. In June 1997,
pursuant to the terms of the Medison Agreement, the Company granted Medison the
exclusive right to promote, sell and distribute certain products utilizing the
application of the Company's proprietary ColorMark technology throughout the Far
East. There can be no assurance that the Company will be successful in entering
into other such arrangements to sell its products outside of the United States.
See "--Collaborative Agreements."

      RISK INHERENT IN INTERNATIONAL TRANSACTIONS

      A number of risks are inherent in international transactions, such as the
imposition of governmental controls, fluctuations in foreign currency exchange
rates, regulation of medical devices and other medical products, export license
requirements, political and economic instability, trade restrictions, changes in
tariffs, and difficulties and expenses in managing international operations. In
order to sell its products in Europe, the Company must obtain regulatory
approval of its products (the "CEMark") by June 14, 1998. There can be no
assurance that any of the Company's products will receive the CE Mark.

      DEPENDENCE UPON, AND NEED FOR, KEY PERSONNEL

      The Company is dependent upon a limited number of key personnel,
particularly Frank A. DeBernardis, its Chief Executive Officer and President,
and David Vilkomerson, Ph.D., its Executive Vice President. The loss of these
individuals or a reduction in the time devoted by such persons to the Company's
business could have a material adverse effect on the Company's business. The
Company's future success will depend in part upon its ability to attract and
retain highly qualified personnel. The Company faces competition for such
personnel from other companies, academic institutions, government entities, and
other organizations, many of which have significantly greater resources than the
Company. There can be no assurance that the Company will be able to attract and
retain the necessary personnel on acceptable terms or at all.



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      UNCERTAIN PROTECTION OF PATENT AND PROPRIETARY RIGHTS; NO ASSURANCE OF
      ENFORCEABILITY OR SIGNIFICANT COMPETITIVE ADVANTAGE

      The Company considers patent protection of its technologies to be critical
to its business prospects. The Company currently holds four issued United States
patents related to aspects of the ColorMark technology, has two issued United
States patents related to aspects of the EchoMark technology, has received three
patents in the United States covering aspects of the EchoFlow technology and
holds one issued United States patent for the EchoEye technology. Applications
corresponding to the ColorMark, EchoMark, EchoEye and EchoFlow technology
patents have been filed in Europe and Japan under PCT provisions. The Company
intends to file other patent applications on inventions developed in the course
of continuing research and development efforts and is in the process of applying
for foreign patent approvals for all of its technologies. There can be no
assurance that the Company's pending patent applications will issue as patents,
that any issued patents will provide the Company with significant competitive
advantages or that challenges will not be instituted against the validity or
enforceability of any patent owned by the Company. The cost of litigation to
uphold the validity and prevent infringement of patents can be substantial.
Furthermore, there can be no assurance that others will not independently
develop similar or more advanced technologies or design around aspects of the
Company's technologies which may be patented or duplicate the Company's trade
secrets. The Company may in some cases be required to obtain licenses from third
parties or to redesign its products or processes to avoid infringement. There
can he no assurance that such licenses would be available or, if available,
would be on terms acceptable to the Company or that the Company would be
successful in any attempt to redesign its products or processes to avoid
infringement. The Company also relies on trade secrets and proprietary
technology and enters into confidentiality agreements with its employees and
consultants. There can be no assurance that the obligation to maintain the
confidentiality of such trade secrets or proprietary information will not be
breached by employees or consultants or that the Company's trade secrets or
proprietary technology will not otherwise become known or be independently
developed by competitors in such a manner that the Company has no practical
recourse.

      POTENTIAL ADVERSE IMPACT OF FDA AND OTHER GOVERNMENT REGULATIONS

      The manufacturing and marketing of the Company's products is subject to
extensive and rigorous government regulation in the United States, in various
states and in foreign countries. In the United States and certain other
countries, the process of obtaining and maintaining regulatory approvals is
lengthy, expensive and uncertain. In the United States, the FDA enforces, where
applicable, development, testing, labeling, manufacturing, registration,
notification, clearance or approval, marketing, distribution, recordkeeping and
reporting requirements for medical devices. Although the Company has received
FDA clearance for marketing certain of its products, there can be no assurance
that any of the Company's other products or proposed products will ever obtain
the regulatory clearance or approval required for marketing, or that the Company
will be able to comply with any additional FDA, state or foreign regulatory
requirement. In addition, there can be no assurance that government regulations
applicable to the Company's products or the interpretation of those regulations
will not change, including those related to the products currently cleared for
marketing, and thereby prevent the Company from marketing some or all of its
products temporarily or permanently. The Company is also subject to other
federal, state, and local laws, regulations and recommendations relating to
laboratory and manufacturing practices as well as Medicare, Medicaid and
anti-kickback laws of certain states. Noncompliance with applicable requirements
can result in civil penalties, the recall, injunction or seizure of products, an
inability to import products into the United States, the refusal by the
government to approve or clear product approval applications or to allow the
Company to enter into government supply contracts, the withdrawal of previously
approved product applications and criminal prosecution. The extent of
potentially adverse government regulation that might arise from future
legislation or administrative action cannot be predicted.

      LIMITATIONS ON THIRD-PARTY REIMBURSEMENT

      In the United States, the Company anticipates that its products will be
purchased primarily by medical institutions and physicians which will then bill
various third-party payers, such as Medicare, Medicaid, other government
programs, and private insurance plans, for the health care services provided to
their patients. Payers may deny reimbursement if they determine that the device
used in a treatment was unnecessary, inappropriate, experimental, used for a
non-approved indication or not cost-effective. No separate code has yet been
established to bill for the physician procedure involved in the use of the
ColorMark Clip or for the cost of the ColorMark Clip. Currently, the ColorMark
Clip is billed using other existing procedure codes, which do not fully
reimburse physicians for the cost of the product. There is no assurance that
efforts by the Company to obtain a separate code for the ColorMark Clip will be
successful or, if successful, that third-party payers will cover the procedure
and reimburse it at an adequate level. Third-party payers are increasing their
level of scrutiny of new medical technologies with respect to whether such
technologies should be covered and, if so, how much they should be reimbursed.
In addition, Congress is currently considering several health care reform
proposals which, if enacted, could significantly affect the availability of
reimbursement for medical products and services. There can be no assurance that
reimbursement for procedures utilizing the Company's products will be sufficient
to cover the additional cost of the Company's



                                       21

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products, or that future reimbursement policies of payers will not adversely
affect the Company's ability to sell its products on a profitable basis.

      POTENTIAL ADVERSE IMPACT OF ANTI-REMUNERATION LAWS

      The Medicare and Medicaid anti-kickback status prohibits financial
relationships designed to induce the purchase (or arranging for 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. Several states also have statutes or
regulations prohibiting financial relationships with referral sources that are
not limited to services for which Medicare and Medicaid payments may be made.
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. Because of the
breadth of the statutory provisions described above, it is possible that some of
the Company's business practices could be subject to challenge under one or more
such laws.

      POTENTIAL PRODUCT LIABILITY; LIMITED INSURANCE

      The testing, clinical trials, manufacturing and sale of the Company's
products involve the inherent risk of product liability claims against the
Company. The Company's product liability insurance coverage is expensive,
subject to various exclusions and may not be obtainable by the Company in the
future 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 on the
Company. 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, 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.

      CHARGE TO INCOME IN THE EVENT OF RELEASE OF RESTRICTIONS ON SHARES

      In the event the restrictions on any Forfeitable Shares issued in
connection with the Company's initial public offering of securities in January
1996 (the "Initial Public Offering") (includes 833,000 shares of Class B Common
Stock (approximately 56% of the shares outstanding prior to the Company's
Initial Public Offering) which will be transferred to the Company for no
consideration if certain earnings or Class A Common Stock minimum bid price
levels are not attained) are released, compensation expense will be recorded for
financial reporting purposes in an amount equal to the value of the shares at
the time such restrictions lapse. Therefore, in the event the Company attains
any of the earnings thresholds or the Company's Class A Common Stock meets the
minimum bid prices required for the release of the restrictions, the Company
will recognize during the period in which such restrictions lapse, what could be
a substantial charge to earnings, as compensation expense to the Company, which
would have the effect of increasing the Company's loss or reducing or
eliminating earnings, if any, at such time. The amount of compensation expense
recognized by the Company may have a depressive effect on the market price of
the Company's securities.

      CONTROL BY EXISTING SHAREHOLDERS; OWNERSHIP OF SHARES HAVING
      DISPROPORTIONATE VOTING RIGHTS; POSSIBLE DEPRESSIVE EFFECT ON THE
      COMPANY'S SECURITIES

      As of December 4, 1997, the Company's existing Class B Common Stock
shareholders own 1,217,382 shares of Class B Common Stock, representing
approximately 36% of the Company's outstanding capital stock and approximately
73.8% of the total voting power of the Class A Common Stock and Class B Common
Stock currently outstanding. As a result, the Company's existing Class B Common
Stock shareholders will be able to elect all of the Company's directors and
otherwise control the Company. Furthermore, the disproportionate vote afforded
the shares of Class B Common Stock could also serve to impede or prevent a
change of control of the Company. As a result, potential acquirors may be
discouraged from seeking to acquire control of the Company through the purchase
of Class A Common Stock, which could have a depressive effect on the market
price of the Company's securities.


                                       22

<PAGE>
<PAGE>


      POSSIBLE ADVERSE EFFECTS OF AUTHORIZATION OF PREFERRED STOCK;
      ANTI-TAKEOVER PROVISIONS

      The Company's Certificate of Amendment to the Restated Certificate of
Incorporation (the "Certificate of Incorporation") and By-Laws and New Jersey's
Business Corporation Act contain certain provisions that could have the effect
of making it more difficult for a third party to acquire, or of discouraging a
third party from attempting to acquire, control of the Company. Such provisions
could limit the price that certain investors might be willing to pay in the
future for shares of the Company's Class A Common Stock. Certain of such
provisions impose various procedural and other requirements which could make it
more difficult for shareholders to effect certain corporate actions.
Furthermore, the Company's Certificate of Incorporation authorizes the issuance
of a maximum of 5,000,000 shares of preferred stock on terms which may be fixed
by the Company's Board of Directors without further shareholder action. The
terms of any series of preferred stock, which may include priority claims to
assets and dividends and special voting rights, could adversely affect the
rights of holders of the Class A Common Stock. In February 1997, in connection
with the EP MedSystems Agreement, the Company issued 280,000 shares of the
Series B Cumulative Convertible Preferred Stock to EP MedSystems that contains
certain priority claims to assets and dividends and special voting rights. The
Series B Cumulative Convertible Preferred Stock and the issuance of other shares
of preferred stock could make the possible takeover of the Company or the
removal of management of the Company more difficult, discourage hostile bids for
control of the Company in which shareholders may receive premiums for their
shares of Class A Common Stock or otherwise dilute the rights of holders of
Class A Common Stock and the market price of the Class A Common Stock.

      POTENTIAL ADVERSE EFFECT OF REDEMPTION OF WARRANTS

      The Class A Warrants and Class B Warrants may be redeemed by the Company
at a redemption price of $.05 per Warrant upon 30 days' notice if the average
closing bid price of the Class A Common Stock exceeds $9.80 and $12.80 per share
(subject to adjustment), respectively, for 30 consecutive business days ending
within 15 days of the notice of redemption. Redemption of the Warrants could
force the holders to exercise the Warrants and pay the exercise price at a time
when it may be disadvantageous for the holders to do so, to sell the Warrants at
the then current market price when they might otherwise wish to hold the
Warrants or to accept the redemption price, which, at the time the Warrants are
called for redemption, is likely to be substantially less than the market value
of the Warrants.

      RISK OF LOSS IN LAWSUIT

      The Company is named as the defendant in a lawsuit against the Company for
violations of ss. 10(b) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), and for common law fraud in connection with the Subscription
Agreement, dated February 27, 1997, between the Company and EP MedSystems. The
Company believes that the EP MedSystems Complaint is without merit and intends
to defend itself vigorously. See "Item 3--Legal Proceedings."

      NO DIVIDENDS ANTICIPATED

      The Company has never paid any dividends on its Common Stock and does not
anticipate the payment of dividends on the Common Stock in the foreseeable
future. If a dividend on the Common Stock is declared by the Company's Board of
Directors, the Board of Directors must simultaneously declare a dividend on the
Series B Cumulative Convertible Preferred Stock in an amount per share equal to
(a) the product of (i) the dividend per share of Common Stock, multiplied by
(ii) the number of shares of Common Stock into which all of the outstanding
Series B Cumulative Convertible Preferred Stock could then be converted, divided
by (b) the number of Series B Cumulative Convertible Preferred Stock then
outstanding, rounded to the nearest cent, each such determination to be made as
of the record date for the determination of the dividend. Holders of the Series
B Cumulative Convertible Preferred Stock are also entitled to dividends equal to
$.0675 per share to the extent the Company has earnings and funds legally
available to pay such dividends. To the extent that the Company does not have
earnings or funds are not legally available to pay a dividend to the holder of
the Series B Cumulative Convertible Preferred Stock, then such funds will be
accrued as a liability on the books of the Company and be cumulative for the
benefit of the shareholder.

      RISK OF LOW PRICED STOCKS

      If the Company's securities were to be removed from The Nasdaq SmallCap
Market (the "Nasdaq"), they could become subject to Rule 15g-9 under the
Exchange Act, which imposes additional sales practice requirements on
broker-dealers which sell such securities to persons other than established
customers and "accredited investors" (generally, individuals with net worth
excess of $1,000,000 or annual incomes exceeding $200,000, or $300,000 together
with their spouses). For transactions covered by this rule, a broker-dealer must
make a special suitability determination for the purchaser and have received the
purchaser's written consent to the transaction prior to sale. Consequently, the
rule may adversely affect the ability of broker-dealers to sell the Company's
securities and may affect the ability of purchasers to sell any of their
acquired securities in the secondary market.



                                       23

<PAGE>
<PAGE>


      The Securities and Exchange Commission (the "Commission") regulations
define a "penny stock" to be any non-Nasdaq equity security that has a market
price (as therein defined) of less than $5.00 per share or with an exercise
price of less than $5.00 per share, subject to certain exceptions. For any
transaction involving a penny stock, unless exempt, the rules require delivery,
prior to any transaction in a penny stock, of a disclosure schedule prepared by
the Commission relating to the penny stock market. Disclosure is also required
to be made about commissions payable to both the broker-dealer and the
registered representative and current quotations for the securities. Finally,
monthly statements are required to be sent disclosing recent price information
for the penny stock held in the account and information on the limited market in
penny stocks.

      The foregoing required penny stock restrictions will not apply to the
Company's securities if such securities are included on the Nasdaq and have
certain price and volume information provided on a current and continuing basis
or meet certain pubic float minimum net tangible assets and revenue criteria.
There can be no assurance that the Company's securities will qualify for
exemption from these restrictions. In any event, even if the Company's
securities were exempt from such restrictions, it would remain subject to
Section 15(b)(6) of the Exchange Act, which gives the Commission the authority
to prohibit any person that is engaged in unlawful conduct while participating
in a distribution of penny stock from associating with a broker-dealer or
participating in a distribution of a penny stock, if the Commission finds that
such a restriction would be in the public interest. If the Company's securities
were subject to the rules on penny stocks, the market liquidity for the
Company's securities could be severely adversely affected.

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 $214,000 for the
fiscal year ending August 31, 1997, $222,000 for the fiscal year ending August
31, 1998 and $259,000 for the fiscal year 1999, and $294,000 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 1998. The property that the
Company leases is in good condition.

      The Company has 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 1998. 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.

      On October 16, 1997, EP MedSystems delivered to the Company a complaint
(the "Complaint") filed in the United States District Court for the District of
New Jersey in connection with the Company's sale of securities to EP MedSystems
pursuant to a Subscription Agreement, dated as of February 27, 1997, by and
between the Company and EP MedSystems. See "Collaborative Agreements." In the
Complaint, EP MedSystems alleges that the Company violated ss.10(b) of the
Exchange Act and committed common law fraud in connection with EP MedSystems'
purchase of securities from the Company. EP MedSystems requested unspecified
compensatory damages, costs, attorneys' fees and punitive damages. On November
26, 1997, pursuant to an order of the Court, the Company filed an Answer,
without prejudice to its right to move to dismiss the Complaint, denying the
material allegations of the Complaint, and asserting a counterclaim against EP
MedSystems seeking its costs and expenses in the action, including its
attorneys' fees, based on EP MedSystems' breach of the Subscription Agreement.
On December 3, 1997, EP MedSystems filed an Amended Complaint, also alleging
violations of ss. 10(b) of the Exchange Act, and common law fraud. Pursuant to
Court order, the Company's Answer was due December 10, 1997, also without
prejudice to the Company's right to move to dismiss. On December 10, 1997, the
Company filed an Answer to the Amended Complaint, again denying the material
allegations of the Complaint, and asserting a counterclaim against EP MedSystems
based on EP MedSystems' breach of the Subscription Agreement.

      The Company believes, after discussions with counsel, that the Complaint
is without merit and intends to defend itself vigorously.



                                       24

<PAGE>
<PAGE>


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, 1997.


                                       25

<PAGE>
<PAGE>




                                     PART II

ITEM 5. MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS.

MARKET INFORMATION

      Since January 22, 1996, shares of the Class A Common Stock, have traded on
the 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.

QUARTER ENDED                                        HIGH          LOW
-------------                                        ----          ---
February 29, 1996                                    4 1/4          4
May 31, 1996                                         4 1/2          3
August 31, 1996                                      5 1/2          4
November 30, 1996                                    5              4 1/2
February 28, 1997                                    6              4
May 31, 1997                                         4 1/8          3
August 31, 1997                                      3 5/8          2
September 1, 1997 through November 30, 1997          4 1/4          1 3/4


HOLDERS OF COMMON STOCK

      Based upon information supplied to the Company by its transfer agent, the
number of shareholders of record of the Class A Common Stock and Class B Common
Stock on December 4, 1997 was approximately 5 and 19, respectively. The Company
believes that there are in excess of 600 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.
If a dividend on the Common Stock is declared by the Company's Board of
Directors, the Board of Directors must simultaneously declare a dividend on the
Series B Cumulative Convertible Preferred Stock in an amount per share equal to
(a) the product of (i) the dividend per share of Common Stock, multiplied by
(ii) the number of shares of Common Stock into which all of the outstanding
Series B Cumulative Convertible Preferred Stock could then be converted, divided
by (b) the number of Series B Cumulative Convertible Preferred Stock then
outstanding, rounded to the nearest cent, each such determination to be made as
of the record date for the determination of the dividend.

RECENT SALES OF UNREGISTERED SECURITIES

      During the period covered by this Report, except as previously included on
a Form 10-QSB, the Company sold the following securities without registering the
securities under the Securities Act of 1933, as amended (the "Securities Act"),
all in non-underwritten transactions:

      Class A Common Stock: The Company sold 363,636 restricted shares of Class
A Common Stock to Medtronic Asset Management, Inc., an accredited investor, for
$1,000,000 pursuant to the October 1997 Medtronic Agreement. The sale of
securities was exempt under Section 4(2) of the Securities Act, and the rules
and regulations promulgated thereunder.


                                       26

<PAGE>
<PAGE>



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, 1997 compared to fiscal year ended August 31,
1996.

      The Company had sales revenue for the fiscal year ended August 31, 1997 of
$160,910 from the initial shipment of ColorMark products to Medison under the
terms of a distribution agreement with a Medison and $150,000 from license fees,
whereas the Company had no significant sales revenue in the fiscal year ended
August 31, 1996, but did recognize $98,000 in revenue from a phase one SBIR
grant.

      The Company charged $40,731 to cost of sales related to the above shipment
of ColorMark products to Medison for the fiscal year ended August 31, 1997 and
$38,881 was charged to cost of sales for the fiscal year ended August 31, 1996,
because it was determined that certain inventory should be classified as
research and development inventory. The amount was approximated at 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.

      The Company had research and development expenses for the fiscal year
ended August 31, 1997 of $1,471,568. Research and development expenses increased
39.9% during the fiscal year ended August 31, 1997 when compared to the fiscal
year ended August 31, 1996, after deducting $575,000 from the fiscal year ended
August 31, 1996 because of a one time charge for the repurchase of certain
technology rights. Research and development expenses increased because of the
costs related to new hires; certain consultant expenses were incurred as a
result of FDA compliance reviews; and because the fiscal year ended August 31,
1997 was the first full year after the completion of the Company's Initial
Public Offering.

      The Company had selling, general and administrative expenses of $1,637,660
for the fiscal year ended August 31, 1997. Selling, general and administrative
expenses increased 21.1% during the fiscal year ended August 31, 1997 because of
fees paid to an additional Co-Chairman of the Board of the Company for the
entire fiscal year, compared to fees paid to such Co- Chairman of the Board for
seven months, and because of fees paid to a new hire for a full fiscal year.
Compensation for officers was allocated on a new basis. Directors' and officers'
insurance coverage was for a full year in the fiscal year ended August 31, 1997.

      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 Company's Initial Public Offering, certain of the
existing shareholders 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 shareholders' equity.

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 $(14,211,000) through August 31, 1997. These
losses resulted primarily from research and development expenses aggregating
approximately $8,478,000 relating to the Company's technologies and products,
and expenses aggregating approximately $6,428,000 incurred in connection with
marketing, and general and administrative activities, including legal and
professional activities relating thereto, which are continuing. The Company has
funded



                                       27

<PAGE>
<PAGE>


its activities through private placements of equity and debt securities,
borrowings and the Company's Initial Public Offering. As of August 31, 1997, the
Company had working capital of approximately $70,000, an accumulated deficit of
approximately $(11,008,020) and a shareholders' deficit of approximately
$(180,000).

      Since the date of inception (February 14, 1990) through August 31, 1997,
net cash provided by financing activities totaled approximately $15,235,000
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; (ix) net proceeds of approximately
$6,212,000 from the Company's Initial Public Offering; and (x) 280,000 shares of
Series B Cumulative Convertible Preferred Stock for net proceeds of $1,356,089.
The Company had cash and cash equivalents of $788,933 as of August 31, 1997.

      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 Company's Initial Public Offering and
$75,000 was paid by certain existing shareholders 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.

      In December 1996, the Company entered into the December 1996 Medtronic
Agreement, for certain proprietary technologies. In fiscal 1997, the Company
recognized $150,000 in license fees.

      In February 1997, the Company entered into the EP MedSystems Agreement and
a Preferred Stock Subscription Agreement with EP MedSystems. The Company expects
to receive development milestone payments totaling $700,000 in fiscal years
after August 31, 1997 under the terms of the license agreement. The Company sold
280,000 shares of Series B Cumulative Convertible Preferred Stock for $1,400,000
under the terms of the Subscription Agreement with EP MedSystems. See "Item 3--
Legal Proceedings."

      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
continue pre-clinical testing of the EchoFlow, and if the results of such
testing are successful, commence clinical testing of EchoFlow products. During
such period, the Company will also continue testing of its EchoEye technology
and seek support of an alliance partner. The Company may also commence research
and development of the 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 1998. The Company also
believes that additional cash resources should be available either through
financing provided by the completion of license agreements, see Note 1, 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
at all. Following December 31, 1998, the Company may 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 or at all.

Recently Issued Accounting Standards

     In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128 (SFAS 128), "Earnings Per Share."
SFAS 128 establishes standards for computing and presenting earnings per share.
In accordance with the effective date of SFAS 128, the Company will adopt SFAS
128 as of February 28, 1998. This statement is not expected to have a material
impact on the Company's financial statements.



                                       28

<PAGE>
<PAGE>

ITEM 7.


                                 ECHOCATH, INC.
                            (formerly EchoCath, Ltd.)

                              Financial Statements

                                 August 31, 1997

                   (With Independent Auditors' Report Thereon)






<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.) as of August 31, 1997, and the related statements of operations,
stockholders' deficit, and cash flows for each of the years in the two-year
period ended August 31, 1997. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of EchoCath, Inc. as of August 31,
1997, and the results of operations and its cash flows for each of the years in
the two-year period ended August 31, 1997 in conformity with generally accepted
accounting principles.

Short Hills, New Jersey
October 29, 1997




                                      F-1

<PAGE>
<PAGE>



                                 ECHOCATH, INC.
                            (formerly EchoCath, Ltd.)

                                  Balance Sheet

                                 August 31, 1997
<TABLE>
<CAPTION>

                                     ASSETS

<S>                                                                           <C>
Current assets:
   Cash and cash equivalents                                                  $      788,933
   Inventory (note 2)                                                                200,565
   Prepaid expenses                                                                  109,994
                                                                                ------------
               Total current assets                                                1,099,492

Furniture, equipment and leasehold improvements, net (notes 3 and 5)                 324,243
Intangible assets, net (note 4)                                                      264,076
Other assets                                                                          27,827
                                                                                ------------

                                                                              $    1,715,638
                                                                                ------------
                                                                                ------------

                      LIABILITIES AND STOCKHOLDERS' DEFICIT

Current liabilities:
   Note payable (note 5)                                                             540,000
   Accounts payable                                                                   90,270
   Accrued expenses (note 14)                                                        373,145
   Obligations under capital leases - current portion (note 6)                        25,852
                                                                                ------------
               Total current liabilities                                           1,029,267

Obligations under capital leases, less current portion (note 6)                       28,702
Other liabilities                                                                     87,519
                                                                                ------------

               Total liabilities                                                   1,145,488
                                                                                ------------

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

Stockholders' deficit (notes 7, and 15):
   Preferred stock, no par value, 5,000,000 shares authorized; 280,000
     shares of Series B cumulative convertible issued and outstand-
     ing, senior in liquidation to Class A and Class B common stock
     (liquidation value $1,400,000)                                                1,393,889
   Class A common stock, no par value, 18,500,000 shares authorized;
     1,886,955 shares issued and outstanding                                       6,198,611
   Class B common stock, no par value, 1,500,000 shares authorized;
     1,223,045 shares issued and outstanding 276,955 shares retired;
     convertible into one share of Class A common stock                           3,273,470
   Accumulated deficit                                                           (11,045,820)
                                                                                ------------

               Total stockholders' deficit                                          (179,850)
                                                                                ------------

Commitments and contingencies (note 12).                                        
                                                                               

                                                                              $    1,715,638
                                                                                ------------
                                                                                ------------
</TABLE>

See accompanying notes to financial statements.



                                      F-2

<PAGE>
<PAGE>



                                 ECHOCATH, INC.
                            (formerly EchoCath, Ltd.)

                            Statements of Operations

                      Years ended August 31, 1996 and 1997

<TABLE>
<CAPTION>
                                                                      1996           1997
                                                                      ----           ----
<S>                                                              <C>              <C>
Revenues:
   SBIR grant income                                             $     98,000         -
   License and development fees                                         -            150,000
   Product sales                                                       10,025        160,910
                                                                  -----------    -----------

                                                                      108,025        310,910
                                                                  -----------    -----------
Operating expenses:
   Repurchase of technology rights (note 8)                           575,000         -
   Research and development                                         1,051,942      1,471,568
   Cost of sales                                                       50,314         40,731
   Marketing, general and administrative                            1,352,344      1,637,660
                                                                  -----------    -----------

                                                                    3,029,600      3,149,959
                                                                  -----------    -----------

               Loss from operations                                (2,921,575)    (2,839,049)
                                                                   ----------     ----------

Other income (expense):
   Interest income                                                     88,535         89,271
   Interest expense (notes 5 and 6)                                   (83,751)       (66,134)
                                                                  -----------    -----------

                                                                        4,784         23,137
                                                                  -----------    -----------

               Net loss                                            (2,916,791)    (2,815,912)

Preferred dividends                                                     -            (37,800)
                                                                  -----------    -----------

               Net loss to common stockholders                   $ (2,916,791)    (2,853,712)
                                                                  -----------    -----------
                                                                  -----------    -----------

Net loss per common share                                          $ (1.72)         (1.18)
                                                                     -----          -----
                                                                     -----          -----
Shares used in computing net loss per common share                  1,698,129      2,418,500
                                                                  -----------    -----------
                                                                  -----------    -----------
</TABLE>


See accompanying notes to financial statements.



                                      F-3

<PAGE>
<PAGE>




                                 ECHOCATH, INC.
                            (formerly EchoCath, Ltd.)

                       Statements of Stockholders' Deficit

                      Years ended August 31, 1996 and 1997



<TABLE>
<CAPTION>
                                                                                             Class B
                                                      Class B      Class A      Class B      common
                                                     preferred     common       common      stock to     Accumulated
                                                       stock        stock        stock      be issued      deficit          Total
                                                       -----        -----        -----      ---------      -------          -----
<S>                                                <C>            <C>        <C>         <C>            <C>              <C>
Balance at August 31, 1995                           $   -            -        2,280,902      975,368    (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                        -            -          975,368     (975,368)        -              -
Capital contributed by Alliance (note 15)                -            -           75,000        -             -             75,000
Adjustment to issuance costs of Class B common
   stock                                                 -            -           17,200        -             -             17,200
Warrants issued                                          -           25,000        -            -             -             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        -            -             -          6,186,661
Net loss                                                 -            -            -            -        (2,916,791)    (2,916,791)
                                                     ----------   ----------   ----------   ----------   ------------   -----------

Balance at August 31, 1996                               -        6,211,661     3,348,470       -        (8,192,111)     1,368,020

Issuance of 280,000 shares of Class B preferred
   to EP MedSystems, Inc. (note 7)                   1,393,889        -            -            -             -          1,393,889
Additional costs associated with initial public
   offering                                              -          (13,050)       -            -             -            (13,050)
Private placement fee                                    -            -           (75,000)      -             -            (75,000)
Dividends on preferred stock                             -            -                         -           (37,800)       (37,800)
Net loss per common share                                -            -            -            -        (2,815,912)    (2,815,912)
                                                     ----------   ----------   ----------   ----------   ------------   -----------

Balance (deficit) at August 31, 1997              $  1,393,889    6,198,611     3,273,470       -       (11,045,820)      (179,850)
                                                     ----------   ----------   ----------   ----------   ------------   -----------
                                                     ----------   ----------   ----------   ----------   ------------   -----------
</TABLE>


See accompanying notes to financial statements.



                                      F-4

<PAGE>
<PAGE>





                                 ECHOCATH, INC.
                            (formerly EchoCath, Ltd.)

                            Statements of Cash Flows

                      Years ended August 31, 1996 and 1997


<TABLE>
<CAPTION>

                                                                      1996           1997
                                                                      ----           ----
<S>                                                            <C>               <C>
Cash flows from operating activities:
   Net loss                                                    $  (2,916,791)    (2,853,712)
   Adjustments to reconcile net loss to net cash used in
     operating activities:
       Depreciation and amortization                                  77,950        119,896
       Change in operating assets and liabilities:
         (Increase) decrease in trade accounts receivable             (6,125)         6,125
         Decrease (increase) in inventory                              3,023        (58,663)
         (Increase) decrease in prepaid expenses                     (80,608)        40,295
         Decrease in deferred offering costs                         328,236          -
         (Increase) decrease in other assets                         (18,600)         2,035
         Decrease in accounts payable                               (144,055)        (4,991)
         Decrease in accrued expenses and due from
            related parties                                         (561,257)       (33,053)
         Increase in other liabilities                                63,594         23,925
                                                                 -----------     ----------

               Net cash used in operating activities              (3,254,633)    (2,758,143)
                                                                 -----------     ----------

Cash flows from investing activities:
   Purchases of furniture, equipment and leasehold
     improvements                                                   (165,916)      (170,258)
   Purchases  of intangible assets                                   (23,371)       (54,442)
                                                                 -----------     ----------
              Net cash used in investing activities                 (189,287)      (224,700)
                                                                 -----------     ----------

Cash flows from financing activities:
   Proceeds from borrowings of notes payable                      1,000,000           -
   Principal payments on borrowings of notes payable             (1,370,000)          -
   Advance to shareholder                                          (101,899)          -
   Repayment from shareholder                                         -             101,899
   Principal payments on capital lease obligations                  (14,537)        (23,653)
   Payment of finder's fee in connection with a 1992
     private placement                                                -             (75,000)
   Net proceeds from issuance of capital stock                       92,200           -
   Net proceeds from initial public offering and over-
     allotment option                                             6,211,661         (13,050)
   Net proceeds from issuance of preferred stock                      -           1,393,889
                                                                 -----------     ----------
              Net cash provided by financing activities           5,817,425       1,384,085
                                                                 -----------     ----------
              Net increase (decrease) in cash and cash
                equivalents                                       2,373,505      (1,598,758)
Cash and cash equivalents at beginning of year                       14,186       2,387,691
                                                                 -----------     ----------
Cash and cash equivalents at end of year                       $  2,387,691         788,933
                                                                 -----------     ----------
                                                                 -----------     ----------
</TABLE>



                                      F-5

<PAGE>
<PAGE>



                                 ECHOCATH, INC.
                            (formerly EchoCath, Ltd.)

                       Statements of Cash Flows. Continued

<TABLE>
<CAPTION>

                                                                     1996           1997
                                                                     ----           ----
<S>                                                            <C>               <C>

Supplemental disclosure of cash flow information:
   Interest expense                                             $     83,751         66,134
                                                                 -----------     ----------
                                                                 -----------     ----------

   Equipment acquired under capital lease                        $    50,000          -
                                                                 -----------     ----------
                                                                 -----------     ----------
</TABLE>

See accompanying notes to financial statements.



                                      F-6



<PAGE>
<PAGE>




                                 ECHOCATH, INC.
                            (formerly EchoCath, Ltd.)

                          Notes to Financial Statements

                                 August 31, 1997

 (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. The Company recognized its first significant product sales
      during fiscal 1997 and, accordingly is no longer considered a development
      stage enterprise.

      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. The Company
      incurred a net loss before preferred dividends of $2,815,912 for the year
      ended August 31, 1997, and as of August 31, 1997 had an accumulated
      deficit of $11,008,020. The Company expects to incur additional
      expenditures for further development and expand its product lines. The
      Company anticipates that its current cash, together with revenue expected
      to be derived from license agreements, strategic alliances and the sale of
      certain of its products, should be sufficient to fund research,
      development, testing, regulatory requirements, operating and other capital
      needs through December 1998. Management's plans for the next 12 months
      include consideration of the sale of additional equity securities under
      appropriate market conditions, alliances or other partnership agreements
      with entities interested in and resources to support the Company's
      research and development and product commercialization, or other business
      transactions which may generate sufficient resources to ensure
      continuation of the Company's operations and research programs. However,
      no assurance can be given that the Company will be successful in raising
      additional capital, entering into a business alliance or realize
      profitable product sales. Further, there can be no assurance, assuming the
      Company successfully raises additional funds or enters into a business
      alliance, that the Company will achieve profitability or positive cash
      flow.

      Following December 31, 1998, the Company may 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 or at all.

      On July 23, 1997, the Company was notified by NASDAQ that based on its May
      31, 1997 Form 10-Q filing, the Company did not satisfy NASDAQ's minimum
      equity requirement of $1 million and that if the Company did not correct
      this matter it would be delisted from the NASDAQ exchange. Subsequently,
      the Company has negotiated two transactions with Alliance Partners and
      Medtronic, Inc. (see notes 15 and 8) which increased the Company's



                                      F-7

<PAGE>
<PAGE>



                                 ECHOCATH, INC.
                            (formerly EchoCath, Ltd.)

                    Notes to Financial Statements, Continued



 (1), CONTINUED

      equity and effectively satisfied NASDAQ's minimum equity requirement.
      There can be no assurance that the Company will continue to meet NASDAQ's
      minimum equity requirements.

      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 $107,000 is restricted as
      collateral for long-term obligations but has not been reclassified to
      long-term assets. The carrying amount of cash and cash equivalents
      approximates its fair value due to its short-term nature.

      REVENUE RECOGNITION

      Revenue from product sales is recognized upon shipment and passage of
      title to the customer. Revenue from SBIR grants and license and
      development fees is recognized when earned.

      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 20
      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
      using 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.



                                      F-8

<PAGE>
<PAGE>





                                 ECHOCATH, INC.
                            (formerly EchoCath, Ltd.)

                    Notes to Financial Statements, Continued


 (1), CONTINUED

      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 in which 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.

      STOCK-BASED COMPENSATION

      In October 1995, the Financial Accounting Standards Board (FASB) issued
      Statement of Financial Accounting Standards No. 123, "Accounting for
      Stock-Based Compensation" (SFAS No. 123). SFAS No. 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.
      Effective August 31, 1997, the Company adopted the disclosure provisions
      of SFAS No. 123. For the fair value of the employee stock options see note
      13.

      LONG-LIVED ASSETS TO BE DISPOSED OF

      In accordance with SFAS No. 121, the Company reviews long-lived assets for
      impairment whenever events or changes in business circumstances occur that
      indicate that the carrying amount of the assets may be recoverable. The
      Company assesses the recoverability of long-lived assets held and to be
      used based on undiscounted cash flows, and measures the impairment, if
      any, using discounted cash flows. Adoption of SFAS No. 121 in fiscal 1997
      did not have a material impact on the Company's financial position,
      operating results or cash flows.

      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.



                                      F-9

<PAGE>
<PAGE>





                                 ECHOCATH, INC.
                            (formerly EchoCath, Ltd.)

                    Notes to Financial Statements, Continued


 (1), CONTINUED

      RESEARCH AND DEVELOPMENT COSTS

      Research and development costs are expensed as incurred.

      NET LOSS PER SHARE

      Net loss per common share for fiscal 1997 is calculated based upon net
      loss after preferred dividend of $37,800 divided by the weighted average
      number of shares of common stock outstanding. The assumed exercise of
      common stock equivalents is not considered, as the effect would be
      anti-dilutive.

      Net loss per common share for fiscal 1996 is computed based upon the
      weighted average number of shares of common stock outstanding during the
      period and gives effect to certain adjustments described below. Pursuant
      to the requirements of the Securities and Exchange Commission (SEC), all
      stock and warrants issued within the 12 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 all periods presented 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. 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 (see note 7).

      FINANCIAL INSTRUMENTS

      The carrying amounts of cash and cash equivalents and other current assets
      and current liabilities approximate fair value due to the short-term
      maturity of these instruments.

 (2)  INVENTORY

      Inventory as of August 31, 1997 consists of the following:

              Raw materials                                 $ 126,868
              Finished goods                                   73,697
                                                             --------

                                                            $ 200,565
                                                             --------
                                                             --------



                                      F-10

<PAGE>
<PAGE>





                                 ECHOCATH, INC.
                            (formerly EchoCath, Ltd.)

                    Notes to Financial Statements, Continued


 (3)  FURNITURE, EQUIPMENT AND LEASEHOLD IMPROVEMENTS

      Furniture, equipment and leasehold improvements as of August 31, 1997
consist of the following:

   Laboratory and production equipment                         $  339,994
   Office equipment                                               301,119
   Leasehold improvements                                          19,347
                                                                 --------
                                                                  660,460

   Less accumulated depreciation and amortization                 336,217
                                                                 --------

               Furniture, equipment and leasehold
                  improvements, net                            $  324,243
                                                                 ========


      As of August 31, 1997, equipment acquired under capital leases (see note
      6) amounted to $134,830 and related accumulated amortization is $80,276.
      The Company recognized depreciation expense of $61,994 and $97,056 for the
      fiscal years ended August 31, 1996 and 1997, respectively.

 (4)  INTANGIBLE ASSETS

      Intangible assets components as of August 31, 1997 consists of the
following:

     Patents and trademarks                                      $  261,182
     Patent application costs                                        58,828
                                                                   --------
                                                                    320,010

     Less accumulated amortization                                   55,934
                                                                   --------
                                                                 $  264,076
                                                                   --------
                                                                   --------

 (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") (see 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 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, 1997 under this agreement.
      The Bard agreement was terminated on October 28, 1996. The note does not



                                      F-11




<PAGE>
<PAGE>



                                 ECHOCATH, INC.
                            (formerly EchoCath, Ltd.)

                    Notes to Financial Statements, Continued


 (5), CONTINUED

      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 60 days or, at the option of the
      Company, within 24 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. Bard has agreed to a maturity date of
      July 24, 1998. The principal and accrued interest due as of August 31,
      1997 is $615,130.

 (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, 1997:

          1998                                             $ 27,615
          1999                                               14,323
          2000                                               11,976
          2001                                                7,941
                                                             -------
                      Total minimum lease payments           61,855

       Less amount representing interest                      7,301
                                                             -------
                      Present value of net minimum
                         lease payment                       54,554

       Less current portion of obligations under capital
         lease                                               25,852
                                                            -------
                      Long-term portion of obligations
                         under capital lease               $ 28,702
                                                            -------
                                                            -------


 (7)  STOCKHOLDERS' DEFICIT

      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. 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.



                                      F-12

<PAGE>
<PAGE>




                                 ECHOCATH, INC.
                            (formerly EchoCath, Ltd.)

                    Notes to Financial Statements, Continued



 (7), CONTINUED

      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

      (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 canceled.
      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 are released.

      PREFERRED STOCK AND RELATED LITIGATION

      The Company entered into a subscription agreement dated February 27, 1997
      through which EP MedSystems, Inc. (EP) purchased 280,000 shares of Series
      B cumulative convertible preferred stock for $1,400,000. The agreement
      provides for an annual dividend of $.27 per share. The Company can redeem
      the preferred stock if certain performance



                                      F-13

<PAGE>
<PAGE>

 



                                 ECHOCATH, INC.
                            (formerly EchoCath, Ltd.)

                    Notes to Financial Statements, Continued


 (7), CONTINUED

      goals of the Class A Common Stock are achieved. The conversion of Series B
      cumulative convertible preferred stock to Class A common stock will be at
      the conversion rate of one share of Class A common stock for each 1.2
      shares of Series B cumulative preferred stock through 1999. Thereafter,
      the conversion rate shall be one share of Class A common stock usable for
      each 1.3 shares of Series B cumulative preferred stock. On October 16,
      1997, EP delivered to the Company a complaint filed in the United States
      District Court for District of New Jersey in connection with the Company's
      sale of securities to EP pursuant to the subscription agreement dated
      February 27, 1997. EP alleges that the Company violated Section 10(b) of
      the Securities and Exchange Act of 1934 and committed common law fraud in
      connection with EP's purchase of securities from the Company. EP has
      requested unspecified compensatory damages, costs, attorney's fees and
      punitive damages. The Company believes that the EP complaint is without
      merit and intends to defend itself vigorously. Although, if the action is
      not resolved in the Company's favor, it could have a material adverse
      effect on the Company's financial position and results of operation.

 (8)  DEVELOPMENT AND LICENSE AND DISTRIBUTION AGREEMENTS

      On September 21, 1992, the Company entered into an exclusive worldwide
      development and license agreement with Heart Rhythm Technologies, Inc.
      ("HRT") (formerly a wholly-owned subsidiary of Eli Lilly) to design and
      develop the Company's EchoMark'r' and EchoEye'r' 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.

      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


                                      F-14

<PAGE>
<PAGE>



                                 ECHOCATH, INC.
                            (formerly EchoCath, Ltd.)

                    Notes to Financial Statements, Continued



 (8), CONTINUED

      cash in exchange for a secured note in order to assist the Company in its
      manufacturing obligations (see note 5). This development, supply and
      license agreement was terminated on October 20, 1996.

      The Company entered into an agreement dated December 30, 1996 with
      Medtronic, Inc. for the licensing of EchoMark'r' and ColorMark'r'
      proprietary technologies for certain medical procedures. Under the
      agreement, the Company can receive a series of payments up to $950,000
      after the attainment of certain milestones. When the technologies become
      commercially available, the Company will receive royalties under the terms
      of the agreement.

      The Company entered into an agreement dated February 27, 1997 for an
      exclusive license agreement with EP. The Company can to receive
      development milestone payments when achieved, up to $700,000. The
      milestones include the testing of a limited series of patients, system
      capability demonstration, and the sale of a limited quantity of product.
      When EP products utilizing the Company's technology become commercially
      available, the Company will receive royalties under the terms of the
      agreement. As of August 31, 1997 the Company has not earned any fees under
      this agreement. The agreement provides that any royalty payment can be
      offset by an amount equal to the amount of any dividends under the Series
      B cumulative convertible preferred stock which are accrued but not paid as
      of a certain date.

      The Company entered into an agreement dated June 10, 1997 with Medison Co.
      Ltd. (Medison) of Seoul, Korea for the distribution of ColorMark'r'
      systems throughout the Far East. Medison has agreed to order a certain
      minimum number of ColorMark'r' systems within 12 months from the
      agreement date. Subsequently, Medison and the Company have agreed to delay
      Medison's minimum purchase order requirements until early calendar year
      1998.

 (9)  INCOME TAXES

      As of August 31, 1997, the Company has available net operating loss
      carryforwards of approximately $10,408,000 for income tax reporting
      purposes, which are available to offset future Federal and state taxable
      income, if any, through 2012 and 2004, respectively. The Company also has
      research and development tax credit carryforwards of approximately
      $284,000 for Federal income tax purposes which are available to reduce
      Federal income taxes, if any, through 2011. 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.



                                      F-15

<PAGE>
<PAGE>




                                 ECHOCATH, INC.
                            (formerly EchoCath, Ltd.)

                    Notes to Financial Statements, Continued


 (9), CONTINUED

      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, 1997 are presented below:


<TABLE>
             <S>                                                       <C>
               Deferred tax assets:
                  Net operating loss carryforward                         $  4,163,475
                  Tax credit carryforward                                      284,020
                  Accrued expenses                                              23,844
                  Inventory                                                     28,531
                  Technology rights                                            199,334
                                                                            ----------
                             Total gross deferred tax assets                 4,699,204

               Less valuation allowance                                      4,687,942
                                                                            ----------
                             Net deferred tax assets                            11,262

               Deferred tax liabilities - Furniture, equipment and
                  leasehold improvement, primarily due to differ-
                  ences in depreciation                                         11,262
                                                                            ----------
                             Net deferred tax liability                   $         -
                                                                            ----------
                                                                            ----------
</TABLE>

      The valuation allowance for deferred tax assets as of September 1, 1996
      was $3,559,046. The net change in the total valuation allowance for the
      year ended August 31, 1997 was an increase of $1,128,896.

(10)  RELATED PARTY TRANSACTIONS

      During the years ended August 31, 1996 and 1997, the Company incurred
      $24,511 and $12,835, respectively of management and administrative
      services from the parent company of a common stockholder. These services
      relate to the conversion of all outstanding Series A convertible preferred
      stock in September 1995, deferred offering costs and period expenses and
      amounted to $15,000 and none, respectively in 1996 and none and none,
      respectively, in 1997. Management believes that the expenses charged
      approximate those that would have been charged by unrelated parties
      performing similar services.

      Since June 1991, the president of an affiliated company and 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 $8,349 and none during the years
      ended August 31, 1996 and 1997, respectively.



                                      F-16

<PAGE>
<PAGE>



                                 ECHOCATH, INC.
                            (formerly EchoCath, Ltd.)

                    Notes to Financial Statements, Continued



(11)  401(k) PLAN

      In February 1996, the Company established its own 401(k) profit sharing
      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 and $14,491 to the plan in 1996 and 1997, respectively.

 (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, 1997
      are as follows:

                       1998            $     233,695
                       1999                  299,146
                       2000                  299,146
                       2001                  299,146
                                          ----------

                                       $   1,131,133
                                          ----------
                                          ----------

      Rental expense aggregated $280,732 in 1996 and $239,839 in 1997.

      The Company is a party to litigation with EP as discussed in note 7.

(13)  STOCK OPTION PLANS

      On August 24, 1995, the Company adopted a new 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.

      The Company has adopted the disclosure-only provisions of SFAS No. 123,
      and applies APB Opinion No. 25 in accounting for its plans and,
      accordingly, has not recognized compensation cost for stock option plans
      and stock purchase plans in its financial


                                      F-17

<PAGE>
<PAGE>



                                 ECHOCATH, INC.
                            (formerly EchoCath, Ltd.)

                    Notes to Financial Statements, Continued




(13), CONTINUED

      statements. Had the Company determined compensation cost based on the fair
      value at the grant date consistent with the provisions of SFAS No. 123,
      the Company's net income would have been changed to the pro forma amounts
      indicated below:

<TABLE>
<CAPTION>

                                                                  1996           1997
                                                                  ----           ----
<S>                                                        <C>                <C>        
               Net loss less preferred dividend-as
                  reported                                 $   (2,916,791)    (2,853,712)
               Net loss less preferred dividend-
                  pro forma                                    (2,946,504)    (2,979,385)
               Net loss per share less preferred
                  dividend - as reported                        (1.73)         (1.18)
               Net loss per share less preferred
                  dividend - pro forma                          (1.74)         (1.23)
                                                                -----          -----
                                                                -----          -----
</TABLE>


      The fair value of the stock options granted in 1996 and 1997 is estimated
      at grant date using the Black-Scholes option-pricing model with the
      following weighted average assumptions for 1996 and 1997; dividend yield
      of 0%; expected volatility of 50.1%; a risk-free interest rate of 6.5%;
      and expected lives of 7 years.

      Presented below is a summary of the stock option plans for the years ended
August 31, 1996 and 1997:


<TABLE>
<CAPTION>

                                                     1996                   1997
                                            --------------------   -------------
                                                         Weighted               Weighted
                                                         average                 average
                                                         exercise               exercise
                                             Shares       price     Shares        price
                                             ------       -----     ------        -----
<S>                                          <C>            <C>     <C>            <C>
               Options outstanding at
                  beginning of year           -        $   -        150,000   $    5.000
               Granted                       150,000        5.00    742,500        3.625
               Exercised                      -            -         -              -
               Forfeited/expired              -            -        150,000         -
                                            --------               --------

               Options outstanding at
                  end of year                150,000   $    5.00    742,500   $    3.625
                                            --------               --------
                                            --------               --------
</TABLE>



                                      F-18

<PAGE>
<PAGE>




                                ECHOCATH, INC.
                            (formerly EchoCath, Ltd.)

                    Notes to Financial Statements, Continued


(14)  ACCRUED EXPENSES

      Accrued expenses as of August 31, 1997 consists of the following:



<TABLE>
<CAPTION>
<S>                                                                            <C>
               Professional fees                                             $  71,845
               Payroll and benefits                                            122,373
               Rent                                                            103,797
               Interest                                                         75,130
                                                                              --------
                                                                             $ 373,145
                                                                              --------
                                                                              --------
</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 the 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 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 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

                                      F-19


<PAGE>
<PAGE>



                                ECHOCATH, INC.
                            (formerly EchoCath, Ltd.)

                    Notes to Financial Statements, Continued



(15), CONTINUED

      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. On
      October 31, 1997 Alliance released the $750,000 contingent payment in
      exchange for the issuance of 50,000 Shares of Class A common stock and an
      option to purchase 50,000 shares of common stock, thereby converting the
      Company's contingent liability to equity. The option is exercisable at
      $2.00 per common share and has a life of 6 years. This transaction was
      treated as a capital contribution, consistent with the original Alliance
      transaction.


                                      F-20



<PAGE>
<PAGE>

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

      None.

                                    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 following table sets forth the name and positions of the executive
officers and directors of the Company:

<TABLE>
<CAPTION>
             NAME             AGE                    POSITION WITH THE COMPANY
<S>                           <C>       <C> 
Frank A. DeBernardis(1).....  55        Chief Executive Officer, President and Director

                                        Executive Vice President, Director of Research and
David Vilkomerson...........  56        Development, Assistant Secretary and Director

Daniel M. Mulvena(1)(3).....  49        Chairman of the Board of Directors

Anthony J. Dimun(2).........  54        Director

Irwin M. Rosenthal(3).......  69        Secretary and Director

Herbert Moskowitz(1)(2).....  55        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").

      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. Dr. Vilkomerson has authored or coauthored approximately 30 technical
papers and received over 30 United States patents.

      DANIEL M. MULVENA has served as Chairman of the Board since September 1997
and as a Co-Chairman of the Board from August 1995 to September 1997. Mr.
Mulvena is President of Commodore Associates, a private firm providing
consulting services. Mr. Mulvena served as Vice-President and General 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. 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. Since May 1997, Mr. Mulvena
has served on the Board of Directors of Thoratec Laboratories Corporation, a
publicly held corporation. 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, Inc. ("Vital
Signs") since March 1991, its Secretary and Treasurer since December 1991, and
as a director since August 1987.



                                       29

<PAGE>
<PAGE>


      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. 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 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.

      Terence D. Wall resigned his position as Co-Chairman of the Board and as a
director of the Company in September 1997.

      All directors of the Company are elected by the shareholders, or in the
case of a vacancy, by the directors then in office, to hold office until the
next annual meeting of shareholders 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 Company's Initial Public Offering or the respective terms of the
employment agreements between the Company and such officers, whichever period is
longer.

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. Frank A. DeBernardis, Daniel M. Mulvena and Dr. Herbert
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 J.
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 M. Mulvena and Irwin M.
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:

      David Lyons, (49), Vice-President of Engineering--Mr. Lyons has been Vice
President of Engineering at the Company since April 1997. Prior to serving as
Vice-President of Engineering, Mr. Lyons served as Manager, Electronic R&D since
1991 where he was 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.

      Bayard Gardineer, (67), Vice President--Mr. Gardineer has served as a
Vice-President at the Company since September 1992. Currently, Mr. Gardineer
spends 60% of his working time at the Company. Prior to that he was a Vice
President of Ultramed from



                                       30

<PAGE>
<PAGE>


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.

      Morton Lefar, Ph.D., (59), Manager, Regulatory Affairs and Quality Systems
--Dr. Lefar has served as Manager, Regulatory Affairs and Quality Systems at the
Company since August 1997.  Dr. Lefar has worked in both the pharmaceutical
and medical device industries for over 30 years.  Dr. Lefar received his Ph.D.
in chemistry from Rutgers University. Following graduation at Rutgers
University, Dr. Lefar was employed by the FDA.  Dr. Lefar has also held senior
level positions at American Hoechst, National Medical Care and Banner
Pharmacaps.  Dr. Lefar was a founder and partner of Epolin Inc., a research and
development firm.  Dr. Lefar is the former Editor and Chief of the Journal of
Regulatory Affairs and is Regulatory Affairs Certified.

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 shareholders 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.

SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

      Each of Messrs. Frank A. DeBernardis, Chief Executive Officer, President
and a director of the Company and Dr. David Vilkomerson, Executive Vice
President and a director of the Company, failed to timely report a transaction
on Form 5 for the month of April 1997. Mr. Terence Wall, who was a director and
Co-Chairman of the Board of the Company in April 1997 and who is a beneficial
owner of more than ten percent of Common Stock of the Company, failed to timely
report a transaction on Form 5 for the month of April 1997. Each of Messrs.
Anthony J. Dimun, Treasurer and a director of the Company, Irwin M. Rosenthal,
Secretary and a director of the Company and Daniel M. Mulvena, Chairman of the
Board and a director of the Company, and Dr. Herbert Moskowitz, a director of
the Company, failed to timely report a transaction on Form 5 for the month of
April 1997. 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, 1997, 1996 and 1995 to Frank A. DeBernardis, the Company's Chief Executive
Officer, David Vilkomerson, the Company's Executive Vice President, and Daniel
M. Mulvena, the Company's Chairman of the Board (the "Named Executive
Officers"). No other executive officer received annual compensation in excess of
$100,000 for the fiscal years ended August 31, 1997, 1996 or 1995.



                                       31

<PAGE>
<PAGE>


                           SUMMARY COMPENSATION TABLE
                               ANNUAL COMPENSATION

<TABLE>
<CAPTION>
                                                                                      LONG TERM COMPENSATION
                                                                                     ------------------------
                                                                                       AWARDS         PAYOUTS
                                                                                     ----------       -------
                                                                      OTHER          SECURITIES         ALL
                                                                      ANNUAL         UNDERLYING        OTHER
                                                                      COMPEN-         OPTIONS/         COMPEN-
                                          SALARY          BONUS       SATION            SARS           SATION
NAME AND PRINCIPAL POSITION   YEAR          ($)            ($)          ($)              (#)            ($)
---------------------------   ----          ----          -----       -------        ----------        -------
<S>                           <C>          <C>           <C>          <C>          <C>                <C>  
Frank A. DeBernardis......... 1997         $130,000     $16,000        _____       150,000(2)(3)       _____
  Chief Executive Officer     1996         $151,000(1)  $25,000        _____        20,000(2)(4)       _____
                              1995         $76,000       _____         _____         _____             _____

David Vilkomerson............ 1997         $130,000      $16,000       _____       150,000(2)(3)       _____
  Executive Vice President    1996         $151,000(1)   $25,000       _____        90,000(2)(5)       _____
                              1995         $76,000       _____         _____         _____             _____

Daniel M. Mulvena............ 1997         $103,667      _____         _____        50,000(2)(6)       _____
   Chairman of the Board      1996         $81,333       _____         _____        20,000(2)(5)       _____
                              1995         $4,667        _____         _____         _____             _____
</TABLE>

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

(1)   Includes $26,000 of back pay.
(2)   The security underlying all options is Class A Common Stock.
(3)   Each option vests as to 50,000 shares on April 29, 1998 and as to 38,750
      shares on April 29, 1999. Each option vests as to an additional 11,250
      shares vesting on April 29, 1999, subject to shareholder approval of an
      amendment to the Option Plan to increase the number of shares available
      for grant thereunder, and as to 50,000 shares on April 29, 2000, subject
      to shareholder approval of an amendment to the Option Plan to increase the
      number of shares available for grant thereunder.
(4)   Such option vests in five equal installments commencing in January 1996.
(5)   Such option vests in three equal installments commencing in January 1996.
(6)   Such option vested as to 25,000 shares in April 1997, and will vest as to
      the remaining 25,000 shares on December 31, 1997.


STOCK OPTION TABLES

                      OPTION/SAR GRANTS IN LAST FISCAL YEAR

      The following table sets forth the options granted to the Named Executive
Officers during the fiscal year ended August 31, 1997. The Company granted no
stock appreciation rights ("SARs").


<TABLE>
<CAPTION>
                                                                INDIVIDUAL GRANTS
                                       ----------------------------------------------------------------
                                         NUMBER OF    PERCENT OF TOTAL                     MARKET PRICE
                                        SECURITIES      OPTIONS/SARS                        AS REPORTED
                                        UNDERLYING       GRANTED TO                        ON BULLETIN
                                       OPTIONS/SARS     EMPLOYEES IN    EXERCISE OR BASE   BOARD ON DATE    EXPIRATION
NAME                                    GRANTED (#)    FISCAL YEAR(1)     PRICE ($/SH)       OF GRANT          DATE
----                                   ------------   ----------------  ----------------   -------------    ----------
<S>                                     <C>                <C>                 <C>            <C>             <C> 
Frank A. DeBernardis................    150,000(2)         25.34%              $3.375         $3.375          4-29-07
  Chief Executive Officer

David Vilkomerson...................    150,000(2)         25.34%              $3.375         $3.375          4-29-07
  Executive Vice President

Daniel M. Mulvena...................     50,000(3)          8.44%              $3.375         $3.375          4-29-07
   Chairman of the Board
</TABLE>

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

(1)  In fiscal 1997, the Company granted a total of 592,500 options under the
     Option Plan. Such number was used in calculating the percentages above.

(2)  Incentive stocks options granted under the Option Plan. Each option vests
     as to 50,000 shares on April 29, 1998 and as to 38,750 shares on April 29,
     1999. Each option vests as to an additional 11,250 shares vesting on April
     29, 1999, subject to shareholder approval of an



                                       32

<PAGE>
<PAGE>


     amendment to the Option Plan to increase the number of shares available for
     grant thereunder, and as to 50,000 shares on April 29, 2000, subject to
     shareholder approval of an amendment to the Option Plan to increase the
     number of shares available for grant thereunder.
(3)  Incentive stock option granted under the Option Plan. Such option vested as
     to 25,000 shares on April 29, 1997, the date of grant, and such option
     vests as to the remaining 25,000 shares on December 31, 1997.

          AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FY-
                             END OPTION/SAR VALUES

      The following table sets forth information (on an aggregate basis)
concerning each exercise of stock options during the fiscal year ended August
31, 1997 by each of the Named Executive Officers and the final year-end value of
unexercised options. The table reflects options exercisable within 60 days of
the date of this Report.

<TABLE>
<CAPTION>
                                                                  NUMBER OF SECURITIES UNDERLYING
                                                                   UNEXERCISED OPTIONS / SARS AT     VALUE OF UNEXERCISED "IN-THE-
                                                                               FISCAL                MONEY" OPTIONS / SARS AT
                                                                             YEAR-END                    FISCAL YEAR END(2)
                                                                  -------------------------------    -----------------------------
                                    SHARES ACQUIRED    VALUE
                                    ON EXERCISE(1)   REALIZED(3)    EXERCISABLE   UNEXERCISABLE       EXERCISABLE   UNEXERCISABLE
                                    ---------------  -----------    -----------   -------------       -----------   -------------
<S>                                       <C>            <C>           <C>           <C>                   <C>            <C>
Frank DeBernardis..................       0              $0            8,000         162,000               $0             $0
  Chief Executive Officer                                                                            
                                                                                                     
David Vilkomerson..................       0              $0           60,000         180,000               $0             $0
  Executive Vice President                                                                           
                                                                                                     
Daniel Mulvena.....................       0              $0            8,000          62,000               $0             $0
  Chairman of the Board                                                                          
</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 price of the
     option. The last sales price of the securities underlying the options on
     November 24, 1997, was $3 7/16 per share, and the exercise price of the
     applicable options has been reset from $5.00 per share to $3.375 per share
     on April 29, 1997.
(3)  Value realized is the closing market price of the stock on the date of
     exercise less the option price, multiplied by the number of shares acquired
     on exercise.


REPORT ON REPRICING OF OPTIONS

      In April 1997, the Company's Board of Directors determined that the
purposes of the Option Plan were not being adequately achieved with respect to
those employees holding options that were above current market value and that is
was essential to the best interests of the Company and the Company's
shareholders that the Company retain and motivate such employees. The Company's
Board or Directors concluded that such retention was particularly important
given the Company's financial situation at that time and that a cost-effective
approach to retention and motivation was required. The Company's Board of
Directors further determined that it would be in the best interests of the
Company and the Company's shareholders to provide such optionees the opportunity
to exchange their above market value options for options exercisable at the
current market value. As of April 29, 1997, upon approval by the Company's Board
of Directors, the Company offered such optionees the opportunity to exchange
such options for new options at an exercise price of $3.375 per share. The last
sales price of a share of Class A Common Stock quoted on the Nasdaq that day was
$3.375. Any holder accepting this offer was required to give up existing
options.

      In April 1997, each of Messrs. DeBernardis and Mulvena, and Dr.
Vilkomerson, agreed to the termination of 20,000, 20,000 and 90,000,
respectively, of their existing options to purchase Class A Common Stock at
$5.00 per share in exchange for 20,000, 20,000 and 90,000, respectively, of new
options with an exercise price of $3.375 per share. Mr. DeBernardis' existing
options had been fully vested with respect to 8,000 shares and the remaining
12,000 options had an additional approximately eight months to 3.7 years
remaining, Dr. Vilkomerson's existing options had been fully vested with respect
to 60,000 shares and the remaining 30,000 options had an additional
approximately eight months to 1.7 years remaining and Mr. Mulvena's options had
been fully vested with respect to 8,000 shares and the remaining 12,000 options
had an additional approximately eight months to 3.7 years remaining. The new
options have the same vesting and expiration terms as the original options.



                                       33

<PAGE>
<PAGE>


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 Messrs. DeBernardis and
Mulvena, and Dr. Vilkomerson, options under the Option Plan to acquire up to
20,000, 20,000, and 90,000 shares of Class A Common Stock, respectively, at an
exercise price of $5.00 per share. As of April 29, 1997, upon approval by the
Company's Board of Directors, the Company offered each of Messrs. DeBernardis
and Mulvena, and Dr. Vilkomerson, the opportunity to exchange such options for
new options at an exercise price of $3.375 per share. Subsequently, the exercise
price of such options was reset to $3.375. 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.

      In April 1997, the Company granted to each of Messrs. Mulvena, Rosenthal,
Dimun and Wall and to Dr. Moskowitz options under the Option Plan to acquire up
to 50,000 shares of Class A Common Stock at an exercise price per share equal to
the fair market value of a share of Class A Common Stock on the date of the
grant ($3.375 per share). Each option vests as to 25,000 shares immediately for
the first year's service of each non-employee director as a member of the Board
of Directors and as to the remaining 25,000 shares on December 31, 1997, and
expires ten (10) years from the date of grant of such options.

EMPLOYMENT AGREEMENTS

      The Company 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, which expired in November 1996. Pursuant to such
agreements, Mr. DeBernardis and Dr. Vilkomerson received a base salary of
$130,000 at the time of expiration of the agreements. The employment agreements
provided that each such agreement could be terminated by the Company only if
such executive officer had materially breached his obligations under the
agreement, engaged in willful misconduct against the Company or was found guilty
of a felony by a court of competent jurisdiction which, in the discretion of the
Board of Directors, would interfere with the performance of such executive
officer's duties and responsibilities or would materially adversely affect the
Company. The agreements also contained confidentiality and non-competition
provisions. It is anticipated that each of Mr. DeBernardis and Dr. Vilkomerson
will enter into new employment agreements with the Company on substantially
similar terms.

      The Company entered into a consulting agreement with Mr. Mulvena which
expired on June 30, 1997. Pursuant to such agreement, Mr. Mulvena provided
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 provided
for Mr. Mulvena to be reimbursed for his reasonable expenses and to be provided
with Company benefits. The agreement also contained confidentiality and
non-compete provisions. An extension of such consulting agreement is currently
being negotiated and it is anticipated that Mr. Mulvena will enter into a new
consulting agreement on substantially similar terms.

OPTION PLAN

      In August 1995, the Board of Directors adopted and the shareholders
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 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 620,000. 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,



                                       34

<PAGE>
<PAGE>


delegate its power, duties and responsibilities under the Option Plan to a
committee consisting of two or more "Non-Employee" directors within the meaning
of (b)(3) 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.

      The Company plans to seek shareholder approval at the next annual meeting
of shareholders of an amendment to the Option Plan to increase the number of
shares of Class A Common Stock available for grant thereunder.

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 $14,000 to the plan in
fiscal year 1997.

INVESTMENT PLAN

      In February 1997, the Company adopted an Investment Plan (the "Investment
Plan") covering 300,000 shares of Class A Common Stock. The Investment Plan
provides eligible employees of the Company with an opportunity to purchase
shares of Class A Common Stock through payroll deductions, or otherwise, and to
receive options to purchase Class A Common Stock. The Investment Plan is
administered by the Company's Compensation and Stock Option Committee, or by a
Plan Administrator appointed by the Company's Compensation and Stock Option
Committee.

      Under the terms of the Investment Plan, options may be granted to
participants upon the purchase of shares under the Investment Plan. The number
of options to be granted in connection with each purchase of shares is a
function of the degree to which the Company attains pre-designated performance
goals.

      Three of the Company's employees participated in the Investment Plan
during the fiscal year ended August 31, 1997. 476 shares of Class A Common Stock
were issued under the Investment Plan during the fiscal year ended August 31,
1997.

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

      The following table sets forth, as of December 4, 1997, certain
information as to the stock ownership and voting power of all persons (or groups
of persons) known by the Company to be the beneficial owner of more than five
percent (5%) of the Common Stock or the Series B Cumulative Convertible
Preferred Stock, each director of the Company, each of the executive officers
included in the Summary Compensation Table and all directors and executive
officers as a group.

<TABLE>
<CAPTION>
         NAME AND ADDRESS OF                                   AMOUNT AND NATURE OF                           PERCENT OF VOTING
          BENEFICIAL OWNER              TITLE OF CLASS    BENEFICIAL OWNERSHIP(1)(2)(3)   PERCENT OF CLASS          POWER
         -------------------            --------------    -----------------------------   ----------------    -----------------
<S>                                  <C>                              <C>                       <C>                  <C> 
Medtronic, Inc.(4).................. Class A Common Stock             363,636                   15.8%                4.2%
      7000 Central Ave. N.E.                                   
      Minneapolis, Minnesota 55482                             
                                                               
Terence D. Wall(5).................. Class A Common Stock              50,000                    2.2%               26.6%
      c/o Vital Signs, Inc.          Class B Common Stock             451,560                   37.1%
      20 Campus Road                                           
      Totowa, New Jersey 07512                                 
                                                               
Vital Signs, Inc.(6)................ Class B Common Stock             311,953                   25.6%               18.0%
      20 Campus Road                                           
      Totowa, New Jersey 07512                                 
</TABLE>


                                       35

<PAGE>
<PAGE>


<TABLE>
<CAPTION>
         NAME AND ADDRESS OF                                   AMOUNT AND NATURE OF                           PERCENT OF VOTING
          BENEFICIAL OWNER              TITLE OF CLASS    BENEFICIAL OWNERSHIP(1)(2)(3)   PERCENT OF CLASS          POWER
         -------------------            --------------    -----------------------------   ----------------    -----------------
<S>                                  <C>                              <C>                       <C>                  <C> 
Cathtech Corp.(6)................... Class B Common Stock             311,953                   25.6%               18.0%
      c/o Vital Signs, Inc.                                    
      20 Campus Road                                           
      Totowa, New Jersey 07512                                 
                                                               
Anthony Dimun(7).................... Class A Common Stock              50,000                    2.2%                0.9%
      c/o Vital Signs, Inc.          Class B Common Stock               4,366                    0.1%
      20 Campus Road                                           
      Totowa, New Jersey 07512                                 
                                         
Ultramed, Inc.(8)................... Class B Common Stock             239,784                   19.7%               13.8%
      c/o Frank Joworisak                                
      EchoCath, Inc.
      P.O. Box 7224
      Princeton, New Jersey  08543

David Vilkomerson(9)................ Class A Common Stock             90,000                     3.9%                3.6%
      c/o EchoCath, Inc.             Class B Common Stock             44,068                     3.6%
      P.O. Box 7224
      Princeton, New Jersey  08543

Frank DeBernardis(10)............... Class A Common Stock             12,000                     0.1%                2.7%
      c/o EchoCath, Inc.             Class B Common Stock             44,362                     3.6%
      P.O. Box 7224
      Princeton, New Jersey  08543

Guidant Corporation................. Class B Common Stock             95,400                     7.8%                5.5%
      111 Monument Circle
      Suite 2900
      Indianapolis, IN  46204
      Attn: General Counsel

Herbert Moskowitz(11)(12)........... Class A Common Stock             66,666                     2.9%                4.1%
      c/o Irwin Rosenthal            Class B Common Stock             70,750                     5.8%
      30 Rockefeller Plaza
      29th Floor
      New York, New York  10112

Irwin M. Rosenthal(11)(13).......... Class A Common Stock             83,334                     3.6%                5.5%
      c/o Irwin Rosenthal            Class B Common Stock             78,750                     6.5%
      30 Rockefeller Plaza
      29th Floor
      New York, New York  10112

Daniel M. Mulvena(15)............... Class A Common Stock             62,000                     2.7%                1.0%
      6 Fuller Lane                  Class B Common Stock              4,000                     0.1%
      Marblehead, Mass.  01945

Bradley Resources Corporation....... Class B Common Stock             95,810                     7.9%                5.5%
      107 John Street
      Southport, Ct. 06490

EP MedSystems, Inc.................. Series B Cumulative             280,000                     100%                3.3%
      58 Route 46 West               Convertible Preferred Stock
      Budd Lake, New Jersey 07828

All officers and directors as a      Class A Common Stock            364,000                    15.8%
group (6 persons)(16)                Class B Common Stock            246,296                    20.2%               17.1%
</TABLE>

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

* Denotes less than 1%.

(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.



                                       36

<PAGE>
<PAGE>

(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 December 4, 1997. 
(4)  Represents shares of Class A Common Stock held by Medtronic Asset
     Management, Inc., a Minnesota corporation and a wholly-owned subsidiary of
     Medtronic through which Medtronic holds certain investments. The amount
     of shares beneficially owned by Medtronic is based upon a Schedule 13D
     filed by Medtronic and Medtronic Asset Management, Inc. on November 10,
     1997.
(5)  Mr. Wall is a former director of the Company. Mr. Wall is currently an
     officer, a director and a principal stockholder of Vital Signs and an
     officer and director of Cathtech. Such shares include 139,607 shares of
     Class B Common Stock held directly by Mr. Wall, as reported in a Schedule
     13G filed by Mr. Wall on February 14, 1997, and an option to purchase
     50,000 shares of Class A Common Stock, which option is exercisable within
     60 days of December 4, 1997. These shares also include the 311,953 shares
     of Class B Common Stock owned by Cathtech.
(6)  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. The amount of shares beneficially owned by
     Cathtech is based upon a Schedule 13G filed by Cathtech and Vital Signs on
     February 14, 1997.
(7)  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. These shares include
     an option to purchase 50,000 shares of Class A Common Stock, which option
     is exercisable within 60 days following December 4, 1997.
(8)  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. The amount of shares
     beneficially owned by Ultramed is based upon a Schedule 13G filed by
     Ultramed on February 14, 1997.
(9)  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 December 4, 1997, and (ii) an option
     granted by the Company to Dr. Vilkomerson to purchase 90,000 shares of
     Class A Common Stock, which option is exercisable within 60 days following
     December 4, 1997. 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
     December 4, 1997, and (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.
     Also excludes an option to purchase 150,000 shares of Class A Common Stock,
     which option vests as to 50,000 shares on April 29, 1998, as to 38,750
     shares on April 29, 1999, as to 11,250 shares vesting on April 29, 1999
     subject to shareholder approval of an amendment to the Option Plan to
     increase the number of shares available for grant thereunder, and as to
     50,000 shares on April 29, 2000, subject to shareholder approval of an
     amendment to the Option Plan to increase the number of shares available for
     grant thereunder.
(10) Includes options granted by the Company to Mr. DeBernardis to purchase
     12,000 shares of Class A Common Stock, which options are exercisable within
     60 days following December 4, 1997. 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 8,000 shares of Class A Common Stock which are not yet vested.
     Also excludes an option to purchase 150,000 shares of Class A Common Stock,
     which option vests as to 50,000 shares on April 29, 1998, as to 38,750
     shares on April 29, 1999, as to 11,250 shares vesting on April 29, 1999
     subject to shareholder approval of an amendment to the Option Plan to
     increase the number of shares available for grant thereunder, and as to
     50,000 shares on April 29, 2000, subject to shareholder approval of an
     amendment to the Option Plan to increase the number of shares available for
     grant thereunder.
(11) Dr. Moskowitz and Mr. Rosenthal are each partners of Alliance, each holding
     a 50% ownership interest in such partnership. Such shares beneficially
     owned by each of Mr. Rosenthal and Dr. Moskowitz include an option granted
     to each of Mr. Rosenthal and Dr. Moskowitz to purchase 50,000 shares of
     Class A Common Stock, which options are exercisable within 60 days
     following December 4, 1997.
(12) Such shares include 8,333 shares of Class A Common Stock, and an option to
     purchase 8,333 shares of Class A Common Stock, issued to Dr. Moskowitz in
     connection with the Alliance Agreement. The option to purchase 8,333 shares
     of Class A Common Stock is exercisable within 60 days following December 4,
     1997. These shares also include an option to purchase 50,000 shares of
     Class A Common Stock, which option is exercisable within 60 days following
     December 4, 1997.
(13) Such shares include 16,667 shares of Class A Common Stock,and an option to
     purchase 16,667 shares of Class A Common Stock, issued to Mr. Rosenthal in
     connection with the Alliance Agreement. The option to purchase 16,667
     shares of Class A Common Stock is exercisable within 60 days following
     December 4, 1997. These shares also include an option to purchase 50,000
     shares of Class A Common Stock, which option is exercisable within 60 days
     following December 4, 1997.
(14) Such shares include 25,000 shares of Class A Common Stock issued to
     Marathon Investments, L.L.C. in connection with the Alliance Agreement.
(15) Includes options granted by the Company to Mr. Mulvena to purchase 62,000
     shares of Class A Common Stock, which options are exercisable within 60
     days following December 4, 1997 and excludes options to purchase 12,000
     shares of Class A Common Stock which are not yet vested. These shares also
     include an option to purchase 50,000 shares of Class A Common Stock, which
     option is exercisable within 60 days following December 4, 1997.
(16) Includes 176,000 shares of Class A Common Stock and 7,526 shares of Class B
     Common Stock issuable upon exercise of options exercisable within 60 days
     following December 4, 1997. Excludes (i) 1,882 shares of Class B Common
     Stock underlying options that are not exercisable within 60 days following
     December 4, 1997 and (ii) options to purchase 231,500 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.

                                       37

<PAGE>
<PAGE>


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

      As of October 30, 1997, the Company amended certain provisions of the
Alliance Agreement. Under the terms of the Alliance Agreement, the Company had
agreed, among other things, to pay $750,000 to Alliance upon the receipt by the
Company of $23,040,000 in proceeds from the exercise of the Company's
outstanding Class B Warrants. The $750,000 Contingent Payment is reflected on
the Company's balance sheet as a capital contribution subject to repayment.
Under the terms of the Amendment to the Alliance Agreement, Alliance has agreed
to release and discharge the Company from making the Contingent Payment and the
Company has agreed to issue to Alliance (i) 50,000 shares of Class A Common
Stock and (ii) a six-year option to purchase 50,000 shares of Class A Common
Stock at an exercise price of $2.00 per share. Upon the closing of the
Amendment, the Contingent Payment was reclassified as equity of the Company.

      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 own less than one percent (1%) of shares of
Common Stock of the Company.

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

(a)   Exhibits.

3.1   Restated Certificate of Incorporation of the Company.(1)
3.2   Certificate of Amendment to Restated Certificate of Incorporation of the
      Company.(3)
3.3   By-Laws of the Company.(1)
4.1   Subscription Agreement, dated February 27, 1997, by and between the
      Company and EP MedSystems.(2)
4.2   Subscription Agreement, dated October 29, 1997, by and between the Company
      and Medtronic Asset Management, Inc.(4) 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 October 30, 1992 from Catheter Technology to
      the EchoCath, Ltd.(1)
10.9  Patent Assignment dated as of October 30, 1992 from EchoCath, Ltd. to the
      Company.(1)
10.10 Patent Assignment dated as of November 11, 1992 from EchoCath, Ltd. to the
      Company.(1)
10.11 Development and Licensing Agreement, by and 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 by and between
      the Company and Eli Lilly and Company.(1)



                                       38

<PAGE>
<PAGE>


10.13 Development, Supply and License Agreement dated September 24, 1993 by and
      between the Company and Bard Radiology, C.R. Bard, Inc., as amended.(1)
10.14 Lease Agreement, dated as of November 22, 1991, by and between BGS Realty
      and EchoCath, Ltd.(1)
10.15 Agreement, dated as of July 7, 1995 by and between the Company and
      Alliance.(1)
10.16 Agreement, dated as of July 14, 1995 by and between the Company and
      Alliance.(1)
10.17 Agreement, dated as of November 30, 1995, among the Company, 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 D.H. Blair 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 by and between the
      Company and BGS Realty.(5)
10.22 Distribution Agreement, dated as of April 1, 1997, by and between the
      Company and Medison.(6)
10.23 License and Development Agreement, dated as of October 29, 1997, by and
      between the Company and Medtronic.(7)
10.24 Agreement, dated October 30, 1997, by and between the Company and
      Alliance.(8)
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.
(2)   Incorporated by reference to Exhibit 3 of the Company's Form 10-QSB for
      the quarter ended February 28, 1997.
(3)   Incorporated by reference to Exhibit 4 of the Company's Form 10-QSB for
      the quarter ended February 28, 1997.
(4)   Incorporated by reference to Exhibit 99.2 of the Company's Form 8-K dated
      October 31, 1997.
(5)   Incorporated by reference to Exhibit 10.21 of the Company's Form 10-KSB
      for the fiscal year ended August 31, 1996.
(6)   Incorporated by reference to Exhibit 10.22 of the Company's Form 10-QSB
      for the quarter ended May 31, 1997.
(7)   Incorporated by reference to Exhibit 99.3 of the Company's Form 8-K dated
      October 31, 1997.
(8)   Incorporated by reference to Exhibit 99.4 of the Company's Form 8-K dated
      October 31, 1997.

(b)   Reports on Form 8-K

      During the quarter ended August 31, 1997, no reports on Form 8-K were
filed by the Company.

      By letter dated October 2, 1997, the Nasdaq Listing Qualifications Panel
(the "Panel") notified the Company that effective October 6, 1997, the Company's
Common Stock would begin trading on the Nasdaq SmallCap Market via a conditional
exception from the bid price and capital and surplus requirements of the Nasdaq
SmallCap Market. The Panel notified the Company that it had granted the Company
a temporary exception from such requirements subject to the Company's meeting
certain conditions with regard to the Company's balance sheet and business
prospects by October 31, 1997. On October 29, 1997, the Company filed a report
on Form 8-K to announce that the Company and Medtronic entered into the October
1997 Medtronic Agreement and that the Company and Alliance amended certain
provisions of the Alliance Agreement. The Company also announced that the Common
Stock had been restored to unqualified listing on the Nasdaq SmallCap Market
based on the above transactions and other developments which strengthened the
Company's balance sheet and its business prospects.


                                       39

<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, 1997

                                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, President and              December 12, 1997
--------------------------------------- Director (principal executive officer and
         Frank A. DeBernardis           principal financial and accounting officer)

         /s/ David Vilkomerson          Executive Vice President and Director               December 12, 1997
---------------------------------------
           David Vilkomerson

         /s/ Anthony J. Dimun           Treasurer and Director                              December 12, 1997
---------------------------------------
           Anthony J. Dimun

         /s/ Herbert Moskowitz          Director                                            December 12, 1997
---------------------------------------
           Herbert Moskowitz

        /s/ Irwin M. Rosenthal          Secretary and Director                              December 12, 1997
---------------------------------------
          Irwin M. Rosenthal

         /s/ Daniel M. Mulvena          Chairman of the Board and Director                  December 12, 1997
---------------------------------------
           Daniel M. Mulvena
</TABLE>


                                       40




                          STATEMENT OF DIFFERENCES
                          ------------------------

The registered trademark symbol shall be expressed as.................   'r'
The trademark symbol shall be expressed as............................  'tm'

<PAGE>