<PAGE>


                     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, 1999

                                       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.

                                  X   Yes         No
                                -----       -----
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not 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 the fiscal year ended August 31, 1999 were $395,197.

The aggregate market value of the issuer's outstanding voting stock held by
non-affiliates on November 17, 1999, based on the closing sale price of its
common stock on the Nasdaq OTC Bulletin Board on such date, was approximately
$2,600,000.

As of November 17, 1999, there were outstanding 3,524,036 shares of the issuer's
Class A and Class B Common Stock, no par value.

Transitional Small Business Disclosure Format (check one):

                                   Yes    X   No
                             -----      -----

                                        1





<PAGE>



                                INTRODUCTORY NOTE

         EchoCath, Inc., a New Jersey Corporation (the "Company or "EchoCath")
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, those listed
under Item 1. Business - Important factors Regarding Forward-Looking Statements.
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," "believes," "estimates," "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.

                                        2






<PAGE>

                                     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 has developed four proprietary
ultrasound technologies: one that characterizes blood flow, two that enable
ultrasound imaging to, among other things, identify devices during
interventional procedures such as needle biopsies and catheterizations, and one
that provides intraluminal imaging. The Company's technologies include: a
proprietary transcutaneous, epivascular, and catheter-based sensor and
electronics system ("EchoFlow'TM'") which is intended to provide data on the
blood flow through internal vessels, 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, a proprietary 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 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 Company believes that products incorporating its technologies can
improve and expand the clinical uses of ultrasound 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 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.
Additionally, the Company has negative working capital and has a net capital
deficiency that raises substantial doubt about its ability to continue as a
going concern. The accompanying financial statements have been prepared assuming
that the Company will continue as a going concern. The financial statements do
not include any adjustments that might result from the outcome of this
uncertainty. 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


                                       3






<PAGE>

that ultrasound's growth results largely from the fact that ultrasound devices
are cost-effective and allows the clinician to see below the surface of body
tissue.

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

The Company's Products and Technology

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

         ECHOFLOW EchoCath is engaged in ongoing research and development of the
EchoFlow technology. The Company plans to commercialize its first product
incorporating the EchoFlow technology, which is intended to provide data on the
blood flow through internal vessels. Small sensors that can be mounted onto
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 can be disposable
products, and will connect to an electronics module.

         The Company has successfully performed bench tests on EchoFlow sensors,
and has conducted preclinical testing on EchoFlow at Mount Sinai Hospital in
1997 and at the University of Louisville in April 1998. In March 1998, at the
national conference of the Society of Clinical Vascular Surgeons ("SCVS") in San
Diego, California, EchoCath demonstrated the EchoFlow system using a sensor,
one-quarter the size of a postage stamp, that when laid directly on or over a
blood vessel, provides the quantitative blood flow measurements required by a
vascular surgeon. At the SCVS conference, the pre-clinical results from
employing an EchoFlow prototype instrument to measure blood flow were also
presented. (Portions of this presentation were published in American Journal of
Surgery in August, 1998, authored by Dr. M. Skladany and associates.) Continued
product definition took place at the Annual Meeting of the Society of Vascular
Surgeons (SVS) in June 1998. (Professor William Abbott of Harvard Medical
School, a member of EchoCath's Medical Advisory Board, was President of the
SVS.)

         The Company applied for 510(k) clearance to market its first EchoFlow
product, the BVM-1 Blood Velocity Meter for inter-operative use, in February,
1999. It received clearance on September 23, 1999. The initial device will be
marketed to vascular surgeons for intraoperative measurements and potentially
for intensive care monitoring of circulatory status. The initial commercial
units of this product are being assembled.

         The Company intends to develop, manufacture and market additional
EchoFlow products that utilize its EchoFlow technology. Planned products include
monitoring systems that will measure blood flow in the circulatory system,
utilizing sensors on the skin above a blood vessel, or placed directly on the
vessel following surgery, or, carried on a catheter, inside the blood stream. As
the status of the circulatory system is crucial, the Company believes such
products have significant potential uses but widespread acceptance of these
products will depend on numerous factors. The commercialization of other
applications of the EchoFlow product will depend on the Company's ability to
obtain additional financing through joint ventures, licensing agreements or
other collaborative arrangements or otherwise. The Company cannot predict, when,
if ever, such products will be successfully developed or available for
commercial sale.


         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


                                       4





<PAGE>


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. To date, the Company has
been unsuccessful in securing an agreement with a joint venture partner or
licensee or any other arrangement. The Company has also developed the EchoMark
Electrophysiology Catheter (the "EchoMark Electrophysiology Catheter") which
consists of a conventional electrophysiology catheter augmented by a piezo
plastic covered brass sensor connected by wire to the EchoMark CSI. The sensor
captures ultrasound signals and relays them back to the EchoMark CSI, which in
turn displays the position of the sensor in the image of the cardiac structures
on the ultrasound-imaging screen. The Company believes that the EchoMark
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. In February 1997, the Company entered into a license
agreement with EP MedSystems Inc., a New Jersey corporation ("EP MedSystems"),
for this use of this technology. On March 31, 1998, EP MedSystems announced
the successful use of EchoMark in connection with guiding electrophysiology
devices under ultrasound imaging. (See "Collaborative Agreements").

         The Company licensed its EchoMark technology to the Pacing Division of
Medtronic, Inc. for pacemaker lead implantation (in conjunction with the
ColorMark technology, as mentioned below), to the MICS Division of Medtronic for
ultrasound guidance in cardiac surgery, December 1996 and in February 1999, that
license was terminated. EP MedSystems, Inc. licensed the EchoMark technology for
electrophysiology applications. (See "Collaborative Agreements").

         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 marketing clearance from the FDA 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 the systems of Acuson,
Inc., Advanced Technology Laboratories, Inc. ("ATL"), Hewlett-Packard Inc.,
Siemens Medical Systems Inc., Toshiba and other ultrasound systems.

         The Company will seek 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.

         COLORMARK The Company has developed 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 piezo ceramic 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 guidewires and can operate with most currently
available color ultrasound systems. The Company has received market clearance
from 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 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.


                                       5






<PAGE>


         The ColorMark technology has also been licensed to Medtronic MICS
Division for cardiac surgery applications, and to EP MedSystems for guided
placement of electrophysiology catheters. Critical Care Concepts, Inc.,
presently holds an option to purchase a license agreement from the Company for
the use of ColorMark technology for soft tissue biopsies and cancer therapy
guidance; that option will expire in February, 2000.

         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.

         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 images and guidance for
minimally invasive ultrasound guided procedures. The Company has successfully
performed preclinical testing on the EchoEye technology.

         The EchoEye technology has been licensed to EP MedSystems for its use
in electrophysiology procedures. Medtronic received an option from the Company
to license the use of EchoEye in cardiac surgery. This option has expired. See
"-Collaborative Agreements."

Further Developments

         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.

         ECHOFLOW Products utilizing the EchoFlow technology are intended to
provide data on the blood flow in vessels. Applications are expected to include
cardiac output, displacing an indirect and non-continuous method, thermal
dilution, with a continuous direct measurement. According to published reports
there are over one 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.

         The Company intends to initially sell its first EchoFlow product, the
BVM-1 Blood Velocity Meter, to vascular surgeons for intraoperative
applications. The full commercialization of this products will depend on the
Company's ability to obtain additional financing through joint ventures,
licensing agreements or other collaborative arrangements or otherwise.
Currently, the Company has no method for generating funds sufficient to complete
commercialization efforts.

         Two distinct, but related, instruments will be developed from the
EchoFlow technology provided that additional financing becomes available: an
"evaluator" instrument, the first EchoFlow product, and a "monitor" instrument.
While the instruments will share signal-processing electronics, each will have
its distinct operating interfaces and displays. The evaluator instrument will be
adapted for surveying an operational site and evaluating the flow, such as
traversing the surface of the heart to find the coronaries, or moving along an
artery to find a change in velocity that indicates a narrowing of the artery. In
contrast, the monitoring system will be used with a static sensor and will
measure the velocity as a function of time (whereas the evaluator instrument
will measure velocity as a function of


                                       6






<PAGE>


location). The monitoring system will need different capabilities, such as
storing, analyzing and displaying the flow data over time, to show trends and
changes. The sensors to be used with the two types of instruments will differ as
well. The evaluator instrument will be equipped with non-disposable hand held or
finger-mounted probes while the monitoring instrument will employ disposable
band aid-like sensors ("patches") that are as thin and light as possible.

         EVALUATOR INSTRUMENT -- The evaluator instrument is expected to be
introduced initially to the vascular surgery market. The vascular surgeon's work
involves restoring circulation and management believes that the evaluator
instrument will be a vital intra-operative tool to ensure the success of any
such revascularization. The Company believes that the vascular surgeon could
also use the evaluator instrument for "graft surveillance", post-operatively
examining the flow in any peripheral graft to ensure its survival. The Company
intends to market the evaluator to the cardiovascular surgeon, particularly the
surgeon involved in the minimally invasive coronary artery bypass graft surgery
("mini-CABG") procedures. This procedure requires a means of measuring the flow
of coronary artery blood. The EchoFlow evaluator instrument is expected to be
used in both the mini-CABG and open-chest coronary artery bypass graft.

         The Company also intends to market the evaluator instruments to plastic
surgeons. An integral part of advanced plastic surgery is moving of tissue
flaps. Ensuring continuous blood supply is a crucial element in the success of
this procedure.

         Many vascular surgical procedures are performed by the "general
surgeon", and with the adoption of the evaluator instrument as part of vascular
surgery, the general surgeon is likely to also utilize the instrument.
Maintaining circulation is a critical part of most surgical procedures and the
evaluator instrument may be used.

         MONITORING INSTRUMENT The monitoring instrument is planned to be
produced in two models: one for use with a transcutaneous patch, to be placed on
the skin above a repaired vessel or graft; the other for use with an epivascular
patch, to be placed internally directly on a vessel, such as on a coronary
artery bypass graft, with the connecting signal cable leaving the body attached
to, or part of, a drainage catheter. These monitoring patches will remain on, or
in place, during the post-operative period, providing the surgeon with valuable
early warning of any complication. Another important monitoring system use is in
dialysis. Since the basic electronic components of the monitoring instrument are
the same as for the evaluator instrument, the major development will be in
creating the appropriate software for the instrument and the materials for the
patches.

ECHOMARK

         INFERTILITY THERAPY -- Infertility therapy generally includes
hysterosalpingography 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 seek an alliance partner 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.


                                       7





<PAGE>

         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 electrophysiology
catheters than present X-ray techniques. As such, this product represents a
potentially significant improvement in this procedure. Pursuant to the terms of
the license agreement between the Company and EP MedSystems, the Company granted
EP MedSystems the exclusive right to make, have made, use and sell products
using 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 the 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.

COLORMARK

         The Company has demonstrated the utility of ColorMark guidance of
biopsies at leading clinical reference sites and is discussing an alliance to
begin 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.

         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 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.

         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 catheterization 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 color flow ultrasound imaging system. While
these systems are common in hospital radiology departments, they


                                       8






<PAGE>


are currently less common in offices and surgical suites where biopsies and
vascular access procedures may be performed.

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; EP MedSystems has the exclusive
license for such use. See "-Collaborative Agreements."

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

OTHER POTENTIAL MARKETS

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

Research and Development

         The Company has incurred an aggregate of approximately $10,386,000
(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, 1999, including approximately
$1,458,000 during the fiscal year ended August 31, 1998 and approximately
$1,217,000 during the fiscal year ended August 31, 1999. Substantially all of
the


                                       9





<PAGE>


Company's research and development expenditures to date has related to the
development of the EchoFlow, EchoMark, ColorMark, and EchoEye technologies and
the products utilizing such technologies and development of manufacturing
techniques for such products.

         The Company conducts all of its research and development on the
premises of its facility in Princeton, New Jersey. The Company has five full
time employees dedicated to research and development activities and one
part-time employee dedicated to regulatory activities.

COLLABORATIVE AGREEMENTS

         MEDTRONIC AGREEMENTS

         DECEMBER 1996 MEDTRONIC AGREEMENT Pursuant to the terms of the
Medtronic Agreement entered into in December 1996 between the Company and
Medtronic (the "December 1996 Medtronic Agreement"), the Company granted
Medtronic Pacing Division 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. The total
payments to the Company under the December 1996 Medtronic Agreement were
$200,000 as of August 31, 1999 which was recognized in fiscal 1998.. The
agreement provided for certain other payments. However, in February 1999, this
agreement was terminated. Certain provisions relating to rights of last refusal
related to pacing, however, survived the termination.

         OCTOBER 1997 MEDTRONIC AGREEMENT Pursuant to the terms of the Medtronic
Agreement entered into in October 1997 between the Company and Medtronic (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 EchoMark or ColorMark
technologies in guiding devices during cardiothoracic surgical procedures; (ii)
received a $250,000 payment from Medtronic MICS Division (for completion of
"Concept Design Validation" for an EchoFlow instrument to be used in mini-CABG
procedures to determine if adequate flow has been established in coronary
arteries after a bypass procedure). Medtronic acquired the exclusive option at
any time until October 31, 1998, for a payment of at least $1.5 million for a
worldwide exclusive license to the Company's EchoEye and EchoFlow technologies
for use in guiding devices during cardiothoracic surgical procedures. While the
option has expired, the Company and Medtronic have continued to engage in
discussions regarding a potential license agreement relating to EchoFlow
technologies. However no additional agreements have been reached.

         In consideration of the grant of the exclusive rights to Medtronic,
Medtronic agreed to pay to the Company a combined total of $1,750,000, which
amount includes: (i) $750,000 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 is capped
at $20,000,000. To date, the Company has not received any royalties or payments
from the sale of products under either agreement with Medtronic.

         EP MEDSYSTEMS AGREEMENT Pursuant to the terms of the EP MedSystems
Agreement signed in February 1997, the Company granted EP MedSystems the
exclusive right and license to make, have made, use sell and have sold, products
utilizing the Company's EchoMark, ColorMark, and EchoEye proprietary
technologies for use in the field of electrophysiology. The license granted to
EP MedSystems specifically excludes use of the Company's EchoMark, ColorMark,
and EchoEye technologies on permanently implantable defibrillators and pacemaker
leads.


                                       10






<PAGE>

         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 EP Catheters; and (ii) make royalty
payments to the Company on the sale of products utilizing the Company's
EchoMark, ColorMark, 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."

         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
certain modified needles and retrofitted Bard biopsy guns for ColorMark use
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 $715,030. Bard had extended the maturity date to December
31, 1998.

         On November 23, 1999, the Company reached an agreement to refinance its
Bard Debt. The Company is required to pay $75,000 immediately, 10% of net funds
that are received from subsequent financing activity through December 31, 2000
with a minimum payment of $150,000, and beginning with the first quarter of 2001
and continuing thereafter 7.5% of net revenue and financing received in that
quarter, with a minimum payment of $75,000 every six months until the
indebtedness is repaid. Interest on the unpaid balance of the debt shall accrue
at the rate of prime plus 1%.


Manufacturing and Suppliers

         The Company plans to subcontract the production of component parts of
the EchoFlow instrument systems, and intends to assemble and test EchoFlow
instrument systems at the Company's facility in Princeton, New Jersey. The
Company currently has the capability to manufacture 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 the next four years.
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.

                                       11





<PAGE>


         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 distribution network to market and
sell certain of its products. The Company initially intends to focus its
marketing efforts on the EchoFlow product line.

         Provided the Company secures the necessary financing, the Company
intends to position a distribution network, application specialists, and create
promotional media for the introduction of the EchoFlow product during 2000.

         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".

         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. In addition, the Company intends to develop training
seminars, exhibit its technologies at medical conferences and build market
support for providing extensive customer training.

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.

         ECHOFLOW As EchoFlow measures blood flow, the most significant
competitor is the human finger. Checking for blood flow by feeling for a pulse
is among the most common "procedures" in medicine. The obvious limitation to
using the tactile method for blood flow determination is that it is not
quantitative, nor even very qualitative. It is possible to feel a pressure pulse
when there is no flow, and if there is a lot of fat over an artery, to feel no
pulse when there is plenty of flow. Another useful device is a "pen dop", a
small Doppler system that fits into a pen-sized case. However, a pen dop is not
accurate in measuring absolute blood velocity. At present, it is impossible to
measure Doppler blood flow without adding an extensive ultrasound imaging system
to a Doppler system, a large, bulky system at a great expense, requiring a
specialized technician to operate and containing a probe which is roughly
fist-sized and therefore, difficult to use intra-operatively. The Company
believes these systems are not actually competitive with EchoFlow
instrumentation.

         There are other hemodynamic sensing systems that are used in animal
studies, utilizing Doppler or transit-time ultrasound, or electromagnetic
flowmeters, to measure blood flow. However, management believes that these


                                       12




<PAGE>


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 not yet 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., a division of Endosonics Corporation ("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.

         There are ultrasound devices that have found a place in vascular
surgery laboratories. These are the Electromagnetic Flow Meter ("EMF") and the
Transit-time Flowmeter ("TTF"). The EMF operates by placing a magnet around a
blood vessel and measuring the voltage developed across the vessel, from which
an indication of velocity can be obtained. If in addition the diameter is known
(such as knowing the size of probe used to encircle the vessel) the flow can be
calculated. However, the need to obtain good electrical contact on a slippery
small vessel, the need to measure small voltages in the presence of a variety of
electrical connections to the patient, the need to have exactly the right size
probe to fit snugly enough to get good contact, all have caused the EMF system
not to be considered reliable enough to be used routinely in human surgery.

         The TTF measures blood flow by comparing the difference in time between
the time interval for a pulse to travel between two transducers. The most
important drawback of the TTF is that it must surround the vessel to be
measured. That requires the vessel to be dissected out of its bed and the proper
sized sensor placed around it. Vessels so treated frequently spasm, causing a
measurement error, and there are cases of the vessels being injured as they are
clipped into the sensor. In addition, unless uniformly good ultrasound contact
is made, the TTF may give inaccurate results. Finally, the TTF can only be used
intra-operatively, so there is no possibility of comparing flow readings during
the operation with those afterward.

         The Company believes that by using the EchoFlow instrument, the
physician will be able to make a quantitative measurement with the ease of
moving a fingertip-sized sensor over the vessel.

         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.

         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


                                       13




<PAGE>


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 P.D. Access'TM' marketed by
Escalon. The P.D. Access'TM' is a Doppler-guided needle useful for assisting
vascular access. To date, the product has been directed primarily to
interventional radiologists. Unlike the ColorMark Clip, the P.D. Access'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.

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

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

         GENERAL The health care industry is characterized by extensive research
efforts and rapid technological change. Future innovations could render the
Company's current and proposed products obsolete. Competition in the market for
imaging catheters is intense and is expected to increase. The Company's current
and proposed products are expected to compete against other types of imaging
systems (such as CT, optical scanning, X-ray and MRI) as well as other
ultrasound imaging products. Manufacturers of non-imaging therapeutic catheters
or external ultrasound imaging devices could also enter the market with
competitive products. Such companies may succeed in developing products that are
more effective or less costly than those developed by the Company and may be
more successful than the Company in manufacturing and marketing their products.
Many companies are engaged in research and development of new devices that may
address the same clinical applications as the Company's products. The future
success of the Company will depend, in part, on the degree of clinical
acceptance of ultrasound imaging as opposed to competing technologies as well as
on acceptance of the Company's products for ultrasound imaging applications.
Many of the Company's competitors and potential competitors have substantially
greater financial, technological, manufacturing, marketing, distribution,
operating, technical, and other resources than the Company. Academic
institutions, hospitals, governmental agencies, and other public and private
research organizations are also conducting research and seeking patent
protection and may develop competing products or technologies on their own or
through joint ventures. There


                                       14




<PAGE>


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

         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, the third patent in 2017 and the fourth in 2018.

         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 the Patent Cooperation Treaty ("PCT")
provisions.

         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 PCT provisions.

         The Company has received two aditional 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. In October
1999 an additional U.S. patent on an integrated means of driving needles for
detection by ColorMark technology was issued; that patent will expire in 2016.

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

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

         TRADENAME, TRADEMARK AND SERVICE MARK RIGHTS The Company is the owner
of the registered trademarks EchoMark'r', ColorMark'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, record keeping, approval,
distribution, reporting, advertising and promotion of such products.
Noncompliance with applicable requirements can result in civil penalties,
recall, injunction or seizure of


                                       15




<PAGE>


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 it grants. 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 record keeping regulations, GMP, 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. Although the FDA has no specific time limit by which it must respond to a
510(k) pre-market notification, it 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.


                                       16




<PAGE>


         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 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
non-approved 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 began animal trials with EchoFlow products in early 1997.
Clinical trials began in early 1999, and received 510(k) clearance to market the
BVM-1 Blood Velocity Meter on September 23, 1999. The Company has also received
510(k) authorization for the ColorMark Clip and Driver, the EchoMark EP
Catheter, the EchoMark PTA Catheter and the EchoMark Guidewire.

         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.

         Currently, the Company may not sell its products in Europe because it
has not yet received regulatory approval of its products (the "CE Mark") now
required for such sales. The Company is exploring such registration, however,
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 payers such as Medicare, Medicaid, and private insurance
plans. Reimbursement rules vary from payer to payer, and reimbursement also may
depend upon the setting in which a particular item or service is furnished.

         In general, payers 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, payers 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 payers 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.


                                       17




<PAGE>


         FDA clearance or approval to begin marketing a device generally is
required by payers as a condition of coverage, but such clearance or approval
alone does not assure that the payer 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 Company's products, physicians now
must use appropriate existing procedure codes for physician services involving
the use of such products.

         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 Company's current and
proposed products will be cost-effective and that hospitals will have an
incentive to use the Company's 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 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.

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

         ANTI-RENUMERATION 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


                                       18




<PAGE>


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 distributors based on volume of sales.
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 may sponsor educational programs at
which Company representatives, or a physician, who has used EchoFlow, 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) are 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. In addition, 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.

Human Resources

         As of November 15, 1999, the Company employed 14 full time employees.
Five employees provide research and development services, three work in
production, six employees provide management and administrative services and one
part-time employee provides services related to compliance with regulatory
requirements.

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


                                       19




<PAGE>


Medical Advisors

         The following is a list of the medical advisors (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.


<TABLE>
<S>                            <C>
Dr. William Abbott              Professor of Surgery, Harvard Medical School, Boston, Massachusetts, Chief of Vascular
                                Surgery at the Massachusetts General Hospital, Boston, Massachusetts.
-----------------------------------------------------------------------------------------------------------------------
Dr. Valentin Fuster             Professor of Medicine of Mount Sinai School of Medicine, New York, New York, Director
                                Cardiovascular Institute, Mount Sinai Medical Center.
-----------------------------------------------------------------------------------------------------------------------
Dr. Lawrence H. Hollier         Chairman and Franz W. Sichel Professor, Department of Surgery, The Mount Sinai Medical
                                Center, New York, New York
-----------------------------------------------------------------------------------------------------------------------
Dr. Kurt Isselbacher            Mallinckrodt Professor of Medicine, Harvard Medical School, Boston, Massachusetts;
                                Director, MGH Cancer Center, The Massachusetts General Hospital, Boston, Massachusetts.
-----------------------------------------------------------------------------------------------------------------------
</TABLE>


         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 the research,
development, operations and commercialization of its technology, to consult on
the Company's projects and to attend meetings of the Medical Advisors.
Generally, any further activities, if requested, are on an as available basis
and at the agreed upon fee. The 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 rendered under
the Medical Advisory Agreements, Dr. Abbott, and Dr. Isselbacher receives 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 that was reset to $3.325
per share on April 29, 1997, 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. In October 1998, Dr. Hollier was
granted options to purchase 25,000 shares of Class A Common Stock under the
Option Plan at the current market price, all of which options vested immediately
and are exercisable for a period of ten 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 become the property of
their respective hospitals pursuant to agreements between the Medical Advisors
and their respective hospitals.


                                       20






<PAGE>


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, 1999, the Company has incurred a cumulative net
loss of $(18,174,000). At August 31, 1999, the Company had working capital of
$(2,061,000) and a shareholders' deficit of $(2,193,000). Net losses for the
years ended August 31, 1998 and 1999 were $(1,780,000) and $(2,107,000),
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 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 will require substantial
additional financing in the future to fully implement its proposed business
plan. Former sources of capital are not obligated, but may 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 while it
anticipates funding from various sources, there can be no assurance that
additional financing will be available on terms favorable or acceptable to the
Company, if at all. See "Market for Common Equity and Related Shareholder
Matters - Recent Sales of Unregistered Securities."

         ABILITY TO FUNCTION AS A GOING CONCERN The Company's auditors have
reported that recurring losses from operations, negative working capital and net
capital deficiency raise substantial doubt about the Company's ability to
continue as a going concern. The Company's financial statements do not include
any adjustments, which may result from the outcome of this uncertainty.

         UNCERTAINTY OF MARKET ACCEPTANCE The commercial success of the
Company's EchoFlow, EchoMark, ColorMark Clip 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


                                       21






<PAGE>


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 sublicense and/or
sub-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 in such territories 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 could
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 others.
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. To date the
Company has not received any royalty payments from any licensing agreement,
which it has entered into with any licensee. See "Description of Business."

         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 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. See "Description of
Business-Competition."

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


                                       22






<PAGE>

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 is in the process of developing a
distribution network to market and sell certain of its products and is currently
developing its in-house marketing support 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 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. The Company also relies on its licensees to perform under
the various licensing agreements to which the Company is a party. There can be
no assurance that such relationships will result in revenue to the Company. In
addition to domestic sales, the Company intends to sell its products outside of
the United States. 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 "Risks Inherent in International Transactions."

         RISKS 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 the CE Mark, but it has not done so, and
there can be no assurance that any of the Company's products will receive the CE
Mark, which would restrict international sales of such products.

         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. 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.

         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 EchoFlow technology, has two issued United States patents related to aspects
of the EchoMark technology, has received five patents in the United States
covering aspects of the ColorMark technology and holds one issued United States
patent for the EchoEye technology. Applications corresponding to the EchoFlow,
EchoMark, ColorMark and EchoEye 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


                                       23






<PAGE>


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 federally, from various state governments 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, record keeping 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 any of the EchoCath products. There
is no assurance that efforts by the Company to obtain a separate code for any of
the EchoCath products 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 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. See
"Description of Business-Government Regulation-Anti-Remuneration Laws."

         POTENTIAL PRODUCT LIABILITY; LIMITED INSURANCE; POTENTIAL RECALL The
testing, clinical trials, manufacturing and sale of the Company's products
involve the inherent risk of product liability claims against the Company. The


                                       24






<PAGE>


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.

         HAZARDOUS MATERIALS; COMPLIANCE WITH ENVIRONMENTAL REGULATIONS The
Company's research and development may involve the controlled use of hazardous
materials, chemicals and various radioactive compounds. Although the Company
believes that its safety procedures for handling and disposing of such materials
comply with the standards prescribed by federal, state and local regulations,
the risk of accidental contamination or injury from these materials cannot be
completely eliminated. In the event of such an accident, the Company could be
held liable for any damages that result and any switch liability could exceed
the resources of the Company. The Company may incur substantial costs to comply
with environmental regulations if the Company develops manufacturing capacity.
In addition, there can be no assurance that current or future environmental
laws, rules, regulations or policies will not have a material adverse effect on
the Company.

         POSSIBLE "YEAR 2000" PROBLEMS The "Year 2000" Problem is the result of
computer programs written to recognize the applicable year with two digits
rather than four digits. A computer program written in such manner would
recognize the entry of "00" in a date field as referring to the year 1900 and
not the year 2000. Although the Company believes that its computer systems and
software products are fully Year 2000 compatible, it is possible that certain
computer systems or software products of the Company's suppliers and contractors
may not accept input of, store, manipulate and output dates prior to the Year
2000 or thereafter without error or interruption. The Company is requesting
assurances from all software vendors from which it has purchased or from which
it may purchase software that such software will correctly process all date
information at all times. Furthermore, the Company is querying its suppliers and
contractors as to their progress in identifying and addressing problems that
their computer and other technological systems will face in correct processing
date information as the Year 2000 approaches. However, there can be no assurance
that the Company will identify all date-handling problems of its suppliers and
contractors in advance of their occurrence, or that the Company will be able to
successfully remedy problems that are discovered. The expense of the Company's
efforts to identify and address such problems, or the expenses or liabilities to
which the Company may become subject as a result of such problems, could have a
material adverse effect on the Company. The Company has completed its assessment
of its systems and product and the costs of addressing this issue have not had
an adverse impact on the Company's financial condition. The Company believes
that it is Year 2000 Compliant.

         CHARGE TO INCOME IN THE EVENT OF RELEASE OF RESTRICTIONS ON SHARES In
the event the restrictions on any Forfeitable Shares (See "Management's
Discussion and Analysis-General") issued in connection with the Company's
initial public offering of securities in January 1996 (the "Initial Public
Offering") (which 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 has changed as a result of the closing
of the 6 1/2% Convertible Notes for the Private Placement Financing as of
November 1, 1999. As a condition to the offering, holders of a minimum of
900,000


                                       25







<PAGE>


shares of the Company's Class B Common Stock were required to convert their
shares into Class A Common Stock. The Class B Common Stock is essentially
identical to the Class A Common Stock, except that the Class B Common Stock is
entitled to 5 votes per share and the Class A Common Stock is entitled to 1 vote
per share. An aggregate of 1,080,767 shares of Class B Common Stock have
converted into Class A Common Stock. The Company has agreed to grant to the
converting Class B Common Stockholders five-year warrants, exercisable at $0.75
per share, to purchase a number of shares of Class A Common Stock equal to the
number of shares converted of Class B Common Stock.

         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 sold 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.

         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 per quarter 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 shareholders.

         DELISTING FROM THE NASDAQ SMALLCAP MARKET Effective November 16, 1998,
the Company's securities were delisted from The Nasdaq SmallCap Market'sm' (the
"Nasdaq-SMC") and are now listed on the NASD OTC Bulletin Board". Because the
Company has been delisted from the Nasdaq-SMC, trading, if any, in the Company's
securities must be conducted in the over-the-counter market. As a result, an
investor will find it more difficult to dispose of, and to obtain accurate
quotations as to the value of, such securities.

         In addition, trading in the Class A Common Stock is now subject to the
requirements of Rule 15g-9 promulgated under the Securities Exchange Act of
1934, as amended (the "Exchange Act"). Under such rule, broker/dealers who
recommend such low-priced securities to persons other than established customers
and accredited investors (generally, individuals with net worth in excess of
$1,000,000 or annual incomes exceeding $200,000 individually, or $300,000
together with their spouses) must satisfy special sales practice requirements,
including a requirement that they make an individualized written suitability
determination for the purchaser and receive the purchaser's written consent
prior to the transaction. The Securities Enforcement Remedies and Penny Stock
Reform Act of 1990 also requires additional disclosure in connection with any
trades involving a stock defined as a penny stock (generally, according to
recent regulations adopted by the SEC, any equity security not traded on an
exchange or


                                       26






<PAGE>


quoted on Nasdaq-SMC that has a market price of less than $5.00 per share,
subject to certain exceptions), including the delivery, prior to any penny stock
transaction, of a disclosure schedule explaining the penny stock market and the
risks associated therewith. Such requirements could severely limit the market
liquidity of the Company's securities and the ability of purchasers to sell
their securities in the secondary market.

ITEM 2. DESCRIPTION OF PROPERTY.

         The Company currently leases an approximately 20,000 square foot
facility on U.S. Route 1 in Monmouth Junction, 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
$259,000 for the fiscal year ended August 31, 1999 and approximately $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 consumer price index 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 April
2002. 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. The Environmental Protection
Agency has denied the NJTA's request to carry out such development and, upon
appeal by the NJTA, the Army Corps of Engineers (the "Corps") is currently
evaluating whether the development plan should be carried out. The Company has
been informed that such an evaluation could take several years. If the Corps
does decide that the project should be carried out, the final determination to
develop Route 92 will have to be made by the Office of Environmental Affairs. If
the project is approved in any event, 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 the opinion of the Management of the Company, the property described
herein is adequately covered by insurance.

         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
subsequently amended (the "Complaint") filed in the United States District Court
for the District of New Jersey (the "Court") 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 Section 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 October 20, 1998, the Court dismissed the suit with
prejudice, but did not decide on the Company's outstanding counterclaims against
EP MedSystems. On June 9, 1999 EP MedSystems filed an appeal of that dismissal.
If the appeal is successful, the suit will be reinstated. The appellate court
has set December 7, 1999 as the date for oral argument of the appeal.

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, 1999.


                                       27






<PAGE>


                                     PART II

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

Market Information

         From January 22, 1996 through November 16, 1998, shares of the Class A
Common Stock were traded on the Nasdaq-SMC. On November 16, 1998, the Company's
securities were delisted from the Nasdaq-SMC and are currently trading on the
NASD's OTC Bulletin Board'r'. 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. The quotations following reflect
inter-dealer prices, without retail mark-up, markdown or commission and may not
represent actual transactions.


<TABLE>
<CAPTION>

         QUARTER ENDED                                                        HIGH                      LOW
         -------------------------------------------------- ----------------------- ------------------------

               <S>                                                            <C>                       <C>
         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
         November 30, 1997                                                   4 1/4                    1 3/4
         February 29, 1998                                                   3 3/4                    2 3/4
         May 31, 1998                                                        3 5/8                    1 3/4
         August 31, 1998                                                     3 1/8                        2
         November 30, 1998                                                   2 7/8                        1
         February 28, 1999                                                   1 1/4                      3/4
         May 31, 1999                                                          1/2                      3/8
         August 31, 1999                                                       7/8                      1/2
         September 1, 1999 through November 19, 1999                        1 1/16                      3/8


</TABLE>


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 November 12, 1999 was approximately 18 and 10 respectively. The
Company believes that there is in excess of 550 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.


                                      28






<PAGE>


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 registration
under the Securities Act of 1933, as amended (the "Securities Act"). Pursuant to
the exemption provided by Section 42 thereunder each of the purchasers
represented that it was an accredited investor and the offer did not involve a
general solicitation.

         CONVERTIBLE DEBENTURES On October 29, 1999 the Company completed a
private placement offering. The offering consisted of Units of (i) a $25,000
convertible promissory note and (ii) a three-year warrant to purchase 33,333
shares of Class A Common Stock. The notes bear interest at 6.5% per annum
and matures three years from the date of the final closing (October 29, 1999),
unless previously converted into Class A Common Stock. A total of $2,525,000
notes were issued through the private placement, of which $1,250,000 are
convertible into shares of Common Stock (i) at the option of the holder,
at any time prior to the maturity date, at a rate of one share of Class A
Common Stock for each $0.75 of debt (plus accrued and unpaid interest) and
$1,275,000 of which are convertible at the market price on the date of
conversion, but not less than $0.25 (plus accrued and unpaid interest),
(ii) at the option of the Company, on the maturity date, at a conversion price
equal to the lesser of $0.75 or the average closing sale price of the share of
Class A Common Stock over the five day period immediately prior to the maturity
date, but not less than $0.25 per share. Each warrant entitles the holder to
purchase one share of Class A Common Stock at an exercise price of $0.75 per
share. The offering resulted in net proceeds of $1,684,358 and the conversion
of $525,000 of 6.5% convertible debentures into the same convertible debt
offered under the private placement described above. In connection with the
warrants issued, the Company recorded debt issuance costs totaling $225,000.
The warrants were valued at $.20 per share using the Black-Scholes pricing
model. The debt issuance costs will be amortized over the life of the debt.

         A total of 101 units were sold and exchanged for previously issued
debt.

         As a condition to the offering, holders of a minimum of 900,000 shares
of the Company's Class B Common Stock were required to convert their shares into
Class A Common Stock.

         Pursuant to the terms of the private placement, the Company has agreed
to a rights offering to its Common Stockholders for the purchase of additional
Company securities. Any such offering will require that the Company prepare and
file with the Securities and Exchange Commission the referred Registration
Statement.

         The Placement Agents for the offering are entitled to cash compensation
equal to 10% of the gross proceeds of the offering and five year warrants to
purchase up to 400,000 shares of Class A Common Stock at $0.75 per share.

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, 1999 COMPARED TO FISCAL YEAR ENDED AUGUST
31, 1998: The Company had sales revenue for the fiscal year ended August 31,
1999 ("fiscal 1999") of $25,197 and revenue of $370,000 from options of
technology, license and development fees. Option fees totaled $225,000 with two
different companies and two different technologies. One company did not exercise
the option and the other company has extended its option to February 28, 2000
subject to a final license agreement. Other license fees totaling $145,000 were
recorded during fiscal 1999.

         The 1998 license and development fees are principally related to an
$800,000 upfront nonrefundable license fee from Medtronic.

         Product sales for fiscal 1999 were $25,197 as compared to fiscal year
ended August 31, 1998 ("fiscal 1998") product sales of $20,985.




                                     29






<PAGE>


         The cost of products sold was $142,746 for fiscal 1999 and $9,357 in
fiscal 1998. Fiscal 1999 included a charge of $127,043 for a write-off of
work in process and finished goods inventory. The reserve was a result of the
discontinuance of two product lines, but the Company plans to continue to
license the technology.

         The Company incurred research and development expenses for fiscal 1999
of $1,217,838. Research and development expenses decreased 16.5% during the
fiscal 1999 when compared to the fiscal 1998, in which such expenses were
$1,457,699, and is primarily attributable to a $165,000 reimbursement of certain
development expenses under the terms of a joint venture partnership with a
related company. Additionally, the Company experienced reduced consultants'
expenses in fiscal 1999 due to both a reduction in raw materials purchases, due
to reduced activity, and a reduction in computer costs due to the conversion
of a new computer system in the prior year.

         The Company had marketing, general and administrative expenses of
$1,045,588 for fiscal 1999. Selling, general and administrative expenses
decreased 50.5% during the fiscal 1999 when compared to fiscal 1998, in which
such expenses were $1,380,935. The decline in marketing, general and
administrative expenses from fiscal 1998 is primarily attributable to a decline
in legal expenses resulting from the EP MedSystems litigation, attempting to
satisfy the listing requirements of Nasdaq, a license agreement entered into
with Medtronic in October 1997 and an agreement with Alliance Partners
("Alliance") to reclassify a contingent liability to permanent capital. The
Company also recognized $49,000 of compensation expense associated with issuance
of Class A Common Stock to Alliance in fiscal 1998. Other factors that reduced
marketing, general and administration expenses to a lesser extent were
reductions in insurance and travel expenses because of reduced insurance
premiums and decreased activity.

         The increase in interest expense was the result of the issuance of the
6.5% convertible debentures in fiscal 1999.

         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 a certain minimum earnings threshold 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.

Net Income

       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.

         As of October 20, 1999 the Company announced the completion of its
Private Placement. As a condition to the Private Placement, holders of a minimum
of 900,000 shares of the Company's Class B Common Stock were required to convert
their shares into Class A Common Stock. Subsequent to August 29, 1999, an
aggregate of 1,080,767 shares of Class B Common Stock have converted into
Class A Common Stock, and are still subject to the underwriting agreement and
terms subject to forfeiture.

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 $(18,174,000) through August 31,
1999. These losses resulted primarily from research and development expenses
aggregating approximately $11,154,000 relating to the Company's technologies and
products, and expenses aggregating approximately $8,854,000 incurred in
connection with marketing, and general and administrative activities, including
legal and professional activities relating thereto, which are continuing since
inception (February 14, 1990). The Company has funded its activities through
equity and debt


                                     30






<PAGE>


financing, representing an aggregate of $17,568,000. As of August 31, 1999, the
Company had negative working capital of approximately $(2,061,000), an
accumulated deficit of approximately $(15,084,000) and a shareholders' deficit
of approximately $(2,193,000).

         In December 1996, the Company entered into the Medtronic Agreement, for
certain proprietary technologies.

         In February 1997, the Company entered into the EP MedSystems Agreement
and Preferred Stock Subscription Agreement with EP MedSystems. 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." On October 22, 1998, EP MedSystems served a notice upon the
Company demanding registration of the Series B Preferred Stock, which EP
MedSystems holds.

         On October 29, 1999 the Company completed its private placement
offering. The offering resulted in cash proceeds of $2,000,000 and the
cancellation of $525,000 of principal amount of indebtedness plus, $36,329 in
interest owed to one of the placement agents. The notes and warrants were
offered in the form of units, each unit consisting of a 6 1/2 % convertible
three-year promissory note in the principal amount of $25,000 and a three-year
warrant to purchase 33,333 shares of Class A Common Stock of the Company at
$0.75 per share. In general, the principal and accrued interest on the notes
are convertible at the option of the holder into shares of Class A Common Stock
at the rate of $0.75 per share at the time beginning ninety days after October
29,1999. A portion of the notes sold in the offering are convertible by the
holder at the lesser of $0.75 per share or the market price at the time of
conversion, but at not less than $0.25 per share. The notes are also convertible
at the option of the Company at any time beginning one year after October 29,
1999 at the lesser of $0.75 per share or market, but not less than $0.25 per
share. The cancellation of the indebtedness to the placement agent resulted in
the conversion of the debt into the purchase of 21 units in the offering and
the issuance of 48,426 shares of the Company's Class A Common Stock as full
payment of the interest.

         As a condition to the Private Placement Offering, holders of a minimum
of 900,000 shares of the Company's Class B Common Stock were required to convert
their shares into Class A Common Stock.

         The Placement Agents for the Private Placement Offering are entitled to
cash compensation equal to 10% of the gross proceeds of the offering and five
year warrants to purchase up to 400,000 shares of Class A Common Stock at $0.75
per share.

         Pursuant to the terms of the Private Placement, the Company has agreed
to a rights offering (the "Rights Offering") to its Common Stockholders for the
purchase of additional Company securities. Any such offering will require that
the Company prepare and file with the Securities and Exchange Commission the
required negotiation statement.

         The Placement Agents for the Rights Offering are entitled to cash
compensation equal to 11.25% of the gross proceeds of the offering and five year
warrants to purchase up to 11.25% of the shares issued in the Offering

         During the 12-month period following the date of this Report, the
Company intends to focus its efforts on marketing and production of its EchoFlow
products. (The Federal Food and Drug Administration cleared for marketing the
first EchoFlow product, the BVM-1, on September 23, 1999.) During such period,
the Company will also continue its efforts in exploiting the ColorMark and
EchoMark technologies, will continue the testing of its EchoEye technology, and
will seek support of an alliance partner or partners for all of its
technologies. The Company may also commence research and development of other
products utilizing its technologies, and seek the requisite regulatory approvals
for certain of the Company's other proposed products during this time period.

         The report of the Company's independent auditors on the Company's
financial statements includes an explanatory paragraph which states that the
Company's recurring losses from operations, its net capital deficiency, and
negative working capital raise substantial doubt about the Company's ability to
continue as



                                     31






<PAGE>


a going concern. The financial statements do not include any adjustments that
might result from the outcome of this uncertainty. The Company's ability to
continue with its plans is contingent upon its ability to obtain sufficient cash
flow from operations or to obtain additional financing from external sources.
The Company's current cash balance is only sufficient to meet its cash
requirements through December 31, 1999 and is therefore in need of immediate
additional funds. The Company expects that additional cash resources will be
available either through financing provided by the completion of license
agreements (see "Description of Business-Collaborative Agreements") and
strategic alliances, the sale of its New Jersey tax benefits under the State of
New Jersey Tax Benefit Certificate Transfer Program 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. The Company will 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.
While the Company anticipates funding from private equity placements and other
sources, there can be no assurance that the Company will be able to obtain
financing from any other sources on acceptable terms or at all.

         YEAR 2000 COMPATIBILITY The Company has determined the potential impact
of the Year 2000 on its computerized information systems to accurately process
information that may be date-sensitive. Any of the Company's programs or
computer-assisted systems that recognize a date using "00" as the year 1900
rather than the Year 2000 could result in errors or systems failures. It is also
possible that certain computer systems or software products of the Company's
suppliers and contractors may not be year 2000 compatible. The Company is
requesting assurances from all software vendors from which it has purchased or
from which it may purchase software that such software will correctly process
all date information at all times. Furthermore, the Company has requested its
suppliers and contractors to notify EchoCath of their progress in identifying
and addressing problems that their computer and other technological systems will
face in correctly processing date information as the Year 2000 approaches. The
Company has completed its assessment, and believes that it is Year 2000
Compliant. The costs associated with the Year 2000 assessment, remediation and
testing have not had a material impact on the Company's operating results.

ITEM 7. FINANCIAL STATEMENTS. F-1 to F-27


                                    32




<PAGE>

                                 ECHOCATH, INC.

                              Financial Statements

                                 August 31, 1999


                   (With Independent Auditors' Report Thereon)



<PAGE>

                          Independent Auditors' Report

The Board of Directors and Stockholders
EchoCath, Inc.:

We have audited the accompanying balance sheet of EchoCath, Inc. as of August
31, 1999, and the related statements of operations, stockholders' deficit, and
cash flows for each of the years in the two-year period ended August 31, 1999.
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,
1999, and the results of its operations and its cash flows for each of the years
in the two-year period ended August 31, 1999 in conformity with generally
accepted accounting principles.

The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in note 1 to the
financial statements, the Company has suffered recurring losses from operations,
has negative working capital and has a net capital deficiency that raise
substantial doubt about its ability to continue as a going concern. Management's
plans in regard to these matters are also described in note 1. The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.


                                             /s/ KPMG LLP

November 23, 1999


                                      F-1



<PAGE>

                                 ECHOCATH, INC.

                                  Balance Sheet

                                 August 31, 1999

<TABLE>
<CAPTION>
                                     Assets
<S>                                                                 <C>
Current assets:
   Cash and cash equivalents                                        $     26,264
   Inventory                                                              44,325
   Prepaid expenses and other assets                                      71,903
                                                                    ------------
            Total current assets                                         142,492

Furniture, equipment and leasehold improvements, net                     184,575
Intangible assets, net                                                   287,384
Debt issuance cost, net                                                  340,642
Other assets                                                              61,403
                                                                    ------------

            Total assets                                            $  1,016,496
                                                                    ============

                                  Liabilities

Current liabilities:
   Notes payable-Bard                                                    540,000
   6.5% Convertible Debentures-IPA                                       525,000
   Accounts payable                                                      177,066
   Accrued expenses                                                      943,390
   Obligations under capital leases - current portion                     17,863
                                                                    ------------

            Total current liabilities                                  2,203,319

6.5% Convertible notes                                                   850,000
Obligations under capital leases, less current portion                    19,271
Other liabilities                                                        136,750
                                                                    ------------

            Total liabilities                                          3,209,340
                                                                    ------------

Stockholders' deficit:
</TABLE>


                                      F-2



<PAGE>

<TABLE>
<S>                                                                 <C>
   Preferred stock, no par value, 5,000,000 shares
     authorized; 280,000 shares of Series B cumulative
     convertible issued and outstanding, 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; 2,352,018 shares issued and outstanding              7,473,834
   Class B common stock, no par value, 1,500,000 shares
     authorized; 1,172,018 shares issued and outstanding
     327,982 shares retired; convertible into one share of
     Class A common stock                                             4,023,470
   Accumulated deficit                                              (15,084,037)
                                                                   ------------

            Total stockholders' deficit                              (2,192,844)

Commitments and contingencies
                                                                   ------------

                                                                   $  1,016,496
                                                                   ============
</TABLE>

See accompanying notes to financial statements.


                                      F-3



<PAGE>

                                 ECHOCATH, INC.

                            Statements of Operations

                      Years ended August 31, 1998 and 1999

<TABLE>
<CAPTION>
                                                        1998            1999
                                                        ----            ----
<S>                                                 <C>              <C>
Revenues:
   License and development fees                     $ 1,054,414         370,000
   Product sales                                         20,985          25,197
                                                    -----------     -----------

                                                      1,075,399         395,197
                                                    -----------     -----------

Operating expenses:
   Cost of sales                                          9,357         142,746
   Research and development                           1,457,699       1,217,838
   Marketing, general and administrative              1,380,935       1,045,588
                                                    -----------     -----------

                                                      2,847,991       2,406,172
                                                    -----------     -----------

            Loss from operations                     (1,772,592)     (2,010,975)
                                                    -----------     -----------

Other income (expense):
   Interest income                                       51,228           5,109
   Interest expense                                     (59,100)       (100,687)
                                                    -----------     -----------

                                                         (7,872)        (95,578)
                                                    -----------     -----------

            Net loss                                 (1,780,464)     (2,106,553)
                                                    ===========     ===========

Preferred dividends                                     (75,600)        (75,600)
                                                    -----------     -----------

            Net loss to common stockholders         $(1,856,064)     (2,182,153)
                                                    ===========     ===========

Basic and diluted net loss per common share         $      (.71)           (.81)
                                                    ===========     ===========

Weighted average shares outstanding                   2,625,000       2,691,000
                                                    ===========     ===========
</TABLE>


See accompanying notes to financial statements.


                                      F-4



<PAGE>

                                 ECHOCATH, INC.

                       Statements of Stockholders' Deficit

                      Years ended August 31, 1998 and 1999

<TABLE>
<CAPTION>
                                                Class B     Class A     Class B
                                               preferred     common      common    Accumulated
                                                 stock       stock       stock       deficit        Total
                                                 -----       -----       -----       -------        -----
<S>                                           <C>          <C>         <C>         <C>            <C>
Balance (deficit) at August 31, 1997           1,393,889   6,198,611   3,273,470   (11,045,820)     (179,850)

Issuance of Class A common stock                      --   1,049,000          --            --     1,049,000
Employee stock purchase plan                          --         608          --            --           608
Capital contribution from Alliance Partners           --          --     750,000            --       750,000
Dividends on preferred stock                          --          --          --       (75,600)      (75,600)
Net loss                                              --          --          --    (1,780,464)   (1,780,464)
                                              ----------   ---------   ---------   -----------    ----------

Balance (deficit) at August 31, 1998          $1,393,889   7,248,219   4,023,470   (12,901,884)     (236,306)
                                              ==========   =========   =========   ===========    ==========

Employee stock purchase plan                          --         615          --            --           615
Issuance of Class A common stock
  warrants in connection with debt
  financing                                           --     225,000          --            --       225,000

Dividends on preferred stock                          --          --          --       (75,600)      (75,600)

Net loss                                              --          --          --    (2,106,553)   (2,106,553)
                                              ----------   ---------   ---------   -----------    ----------

Balance (deficit) at August 31, 1999          $1,393,889   7,473,834   4,023,470   (15,084,037)   (2,192,844)
                                              ==========   =========   =========   ===========    ==========
</TABLE>

See accompanying notes to financial statements.


                                      F-5



<PAGE>

                                 ECHOCATH, INC.

                            Statements of Cash Flows

                      Years ended August 31, 1998 and 1999

<TABLE>
<CAPTION>
                                                                      1998          1999
                                                                      ----          ----
<S>                                                               <C>            <C>
Cash flows from operating activities:
   Net loss                                                       $(1,780,464)   (2,106,553)
   Adjustments to reconcile net loss to net cash used in
     operating activities:
       Depreciation and amortization                                  118,639       111,456
       Change in operating assets and liabilities:
         (Increase) decrease in trade accounts receivable              (4,905)        4,905
         Decrease in inventory, net                                    11,444       144,796
         Decrease in prepaid expenses and other current assets         18,544        19,546
         Decrease (increase) in other assets                            8,096       (41,672)
         Increase in accounts payable                                  10,271       106,005
         Increase in accrued expenses                                 147,673       393,091
         Increase (decrease) in other liabilities                      61,725       (12,494)
                                                                  -----------    ----------
            Net cash used in operating activities                  (1,408,977)   (1,380,920)
                                                                  -----------    ----------

Cash flows from investing activities:
   Purchases of furniture, equipment and leasehold improvements       (29,552)      (19,391)
   Purchases of intangible assets                                     (37,092)      (27,699)
                                                                  -----------    ----------
            Net cash used in investing activities                     (66,644)      (47,090)
                                                                  -----------    ----------

Cash flows from financing activities:
   Principal payments on capital lease obligations                    (16,086)       (1,333)
   Proceeds from employee stock purchase plan                             608           615
   Issuance of Class A common stock                                 1,049,000
   Class B preferred dividends                                        (75,600)      (75,600)
   Proceeds from IPA notes                                                 --       525,000
   Debt issuance costs                                                (15,000)     (100,642)
   Net proceeds from 6.5% convertible notes                                --       850,000
                                                                  -----------    ----------
            Net cash provided by financing activities                 942,922     1,198,040
                                                                  -----------    ----------
            Net decrease in cash and cash equivalents                (532,699)     (229,970)

Cash and cash equivalents at beginning of year                        788,933       256,234
                                                                  -----------    ----------

Cash and cash equivalents at end of year                          $   256,234        26,264
                                                                  ===========    ==========

Supplemental disclosure of cash flow information-
</TABLE>


                                      F-6



<PAGE>

                                 ECHOCATH, INC.

                          Notes to Financial Statements

                                 August 31,1999

<TABLE>
<S>                                                               <C>            <C>
   interest paid                                                  $    58,750       100,387
                                                                  ===========    ==========

Supplemental disclosure of noncash information-
   equipment acquired under capital lease                         $     8,190        13,337

Debt issuance costs incurred in connection with
issuance of Class A Common Stock warrants                         $       --        225,000
                                                                  ===========    ==========
</TABLE>

See accompanying notes to financial statements

(1)   Organization, Liquidity 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 General 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.

      Liquidity

      The accompanying financial statements have been prepared on a going
      concern basis, which contemplates the continuation of operations,
      realization of assets and liquidation of liabilities in the ordinary
      course of business.

      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 $2,106,553 for the year
      ended August 31, 1999, and as of August 31, 1999 had a working capital
      deficiency of $2,060,827 and an accumulated deficit of $15,084,037. The
      Company expects to incur additional expenditures for further development
      and expand its product lines. Subsequent to August 1999, the Company
      completed a private placement of $2,000,000 of convertible securities and
      received net proceeds of $1,684,358 from this offering. As a result of
      liquidity problems, the Company has experienced delays and other problems
      with vendors and suppliers. The Company believes that these problems and
      the threat of and the possible initiation of legal action to collect on
      outstanding debts will continue until cash flow problems have been
      alleviated. The Company anticipates that its current cash should be
      sufficient to fund research, development, testing, regulatory
      requirements, operating and other capital needs through December 1999.
      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


                                      F-7



<PAGE>

                                 ECHOCATH, INC.

                          Notes to Financial Statements

                                 August 31,1999

      agreements with entities interested in and resources to support the
      Company's research and development and product commercialization, the sale
      of its New Jersey Tax Benefits under the State of New Jersey tax benefit
      certificate transfer program which is subject to certain limitations 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. The Company has suffered recurring losses from
      operations, has negative working capital, and has a net capital deficiency
      that raises substantial doubt about its ability to continue as a going
      concern. The accompanying financial statements do not include any
      adjustments that might result from the outcome of this uncertainty.

      Following December 31, 1999, 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.

(1),  Continued

      On February 26, 1998 the Company was notified by NASDAQ that, based on the
      Company's current equity level, it did not satisfy NASDAQ's minimum equity
      requirement of $2 million and would be scheduled for delisting. The
      Company appealed the delisting decision but ultimately was informed that
      it was delisted from the NASDAQ Small Cap Market effective November 16,
      1998. The Company is now listed on the NASDOTC Bulletin Board.

      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. A total of $39,000 is restricted as collateral for long-term
      obligations and is included as a component of other 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 license and development fees is
      recognized when earned.

      Intangibles


                                      F-8



<PAGE>

                                 ECHOCATH, INC.

                          Notes to Financial Statements

                                 August 31,1999

      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.

(1),  Continued

      Accounting for Income Taxes

      Deferred income tax assets and liabilities are determined based on
      differences between the financial statement reporting and tax basis 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


                                      F-9



<PAGE>

                                 ECHOCATH, INC.

                          Notes to Financial Statements

                                 August 31,1999

      reported in the financial statements and accompanying notes. Actual
      results could differ from those estimates.

      Stock-based Compensation

      The Company accounts for its stock option plan in accordance with the
      provisions of Accounting Principles Board (APB) Opinion No. 25, Accounting
      for Stock Issued to Employees, and related interpretations. As such,
      compensation expense would be recorded on the date of grant only if the
      current market price of the underlying stock exceeded the exercise price.
      On September 1, 1996, the Company adopted Statements of Financial
      Accounting Standards (SFAS) No. 123, Accounting for Stock-Based
      Compensation, which permits entities to recognize as expense over the
      vesting period the fair value of all stock-based awards on the date of
      grant. Alternatively, SFAS No. 123, also allows entities to continue to
      apply the provisions of APB Opinion No. 25 and provide pro forma net
      income and pro forma earnings per share disclosures for employee stock
      option grants made in 1996 and future years as if the fair-value-based
      method defined in SFAS No. 123 had been applied. The Company has elected
      to continue to apply the provisions of APB Opinion No. 25 and provide the
      pro forma disclosure provisions of SFAS No. 123.

      Long-Lived Assets

      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 not 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.

      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.

(1),  Continued

      Research and Development Costs

      Research and development costs are expensed as incurred.

      Net Loss Per Share


                                      F-10



<PAGE>

                                 ECHOCATH, INC.

                          Notes to Financial Statements

                                 August 31,1999

      Basic and dilutive net loss per common share for fiscal 1998 and 1999 is
      calculated based upon net loss after cumulative Series B preferred stock
      dividends of $75,600 in both years, divided by the weighted average number
      of shares of common stock outstanding during that period. For purposes of
      the diluted loss per share calculation, the exercise or conversion of all
      potential common shares is not included since their effect would be
      antidilutive for all periods presented.

      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. The fair value of long-term debt is based
      on the discounted cash flow analysis, based on the Company's current
      incremental borrowing rate for similar type of borrowing arrangements
      which approximates the carrying value of the debt at August 31, 1999.


      Comprehensive Income

      Effective September 1, 1998, the Company adopted Statement of Financial
      Accounting Standards No. 130 ("SFAS 130"), Reporting Comprehensive Income.
      SFAS 130 establishes new rules for the reporting and display of
      comprehensive income and its components. The adoption of SFAS 130 had no
      impact on the Company's results of operations. The net loss of $1,780,000
      and $2,107,000 recorded for the year ended August 31, 1998 and 1999,
      respectively, is equal to the comprehensive loss for those periods

(2)   Inventory

      Inventory as of August 31, 1999 consists of the following:

<TABLE>
               <S>                                      <C>
               Raw materials                            $44,325
               Work in progress                               -
               Finished goods                                 -
                                                        -------
                                                        $44,325
                                                        =======
</TABLE>

(3)   Furniture, Equipment and Leasehold Improvements

      Furniture, equipment and leasehold improvements as of August 31, 1999
      consist of the following:

<TABLE>
      <S>                                                       <C>
      Laboratory and production equipment                        $361,424
      Office equipment                                            328,633
      Leasehold improvements                                       19,347
                                                                 --------
                                                                  709,404
      Less accumulated depreciation and amortization              524,829
                                                                 --------
      Furniture, equipment and leasehold improvements, net       $184,575
                                                                 ========
</TABLE>


                                      F-11



<PAGE>

                                 ECHOCATH, INC.

                          Notes to Financial Statements

                                 August 31,1999

(3),  Continued

      As of August 31, 1999, equipment acquired under capital leases (see note
      6) amounted to $156,357 and related accumulated depreciation is $120,571.
      The Company recognized depreciation expense of $97,945 and $87,325 for the
      fiscal years ended August 31, 1998 and 1999, respectively.

(4)   Intangible Assets

      Intangible assets components as of August 31, 1999 consist of the
      following:

<TABLE>
          <S>                                                 <C>
          Patents and trademarks                              $344,980
          Patent application costs                              39,822
                                                              --------
                                                               384,802

          Less accumulated amortization                         97,418
                                                              --------

                                                              $287,384
                                                              ========
</TABLE>

(5)   Debt

      Bard Debt

      On September 24, 1993, the Company entered into an exclusive worldwide
      development, supply and license agreement with Bard Radiology, C.R. Bard,
      Inc. (Bard). 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 is secured by virtually all of the Company's
      inventory, furniture and equipment. The development, supply and license
      agreement was terminated on October 28, 1996. The note bears interest of
      prime plus 1% and was due December 31, 1998. The carrying amount of this
      note approximates its fair value due to the variable nature of interest
      rates. The principal and accrued interest due as of August 31, 1999 is
      $715,030.

      On November 23, 1999, the Company reached an agreement to refinance its
      Bard debt. In order to satisfy the Bard debt obligation, the Company is
      required to make Principal Payments of $75,000 immediately, 10% of net
      funds that are received from subsequent financing, licensing and royalty
      activity beginning January 1, 2000 with a minimum payment of $150,000, and
      beginning with the first quarter of 2001 and continuing thereafter 7.5%
      of net revenue and financing received in that quarter, with a minimum
      payment of $75,000 every six months until the indebtedness is repaid.
      Interest on the unpaid balance of the debt shall accrue at the rate of
      prime plus 1%.


                                      F-12



<PAGE>

                                 ECHOCATH, INC.

                          Notes to Financial Statements

                                 August 31,1999

      Convertible Debentures

      The Company issued two convertible debentures to Investment Partners of
      America, LP (IPA), a New Jersey limited partnership, in the amounts of
      $250,000 on September 18, 1998 and $275,000 on October 27, 1998. The first
      debenture was issued directly to IPA and the second debenture was issued
      to IPA on behalf of eight of its regular customers, all of whom are
      accredited investors. The debentures pay 6.5% interest. The debentures are
      convertible into shares of the Company's Class A common stock at the
      then-current market

(5),  Continued

      price, but no greater than $2.00 per share and no less than $1.00 per
      share. The shares of Class A common stock issuable upon conversion of the
      debentures carry price protection, in that the holders of such shares will
      receive additional shares equal to the price difference if the Company
      sells shares to a third party at a price less than the conversion price.
      These debentures were converted into 21 units of 6.5% convertible notes
      subsequent to August 1999. (See note 17). In addition, an affiliate of IPA
      received a six-month consulting agreement with the Company for $5,000
      monthly on October 27, 1998.

      6.5% Convertible Notes

      In October 1999, the Company completed a private placement offering. (See
      note 17). In conjunction with the private placement, the Company issued
      $850,000 of 6.5% convertible notes as of August 31, 1999. The Notes bear
      interest at 6.5% per annum and mature three-years from the date of the
      final closing (October 29, 1999), unless previously converted into
      Class A Common Stock. The Notes are convertible into shares of Common
      Stock (i) at the option of the holder, at any time prior to the maturity
      date, at a rate of one share of Class A Common Stock of each $0.75 of
      debt (plus accrued and unpaid interest), (ii) at the option of the
      Company, on the maturity date, at a conversion price equal to the lesser
      of $0.75 or the average closing sales price of the share of Class A
      Common Stock over the five day period immediately prior to the maturity
      date, but not less than $0.25 per share.


(6)   Obligations under Capital Leases

      Equipment under capital leases are capitalized using interest rates
      (ranging from 7.3% to 13.87%) 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, 1999:

<TABLE>
         <S>                                                      <C>
         2000                                                     $19,925
         2001                                                      14,956
         2002                                                       6,972
         2003                                                       1,890
                                                                  -------
                     Total minimum lease payments                  43,743

         Less amount representing interest                          6,609
                                                                  -------
                     Present value of net minimum
                        lease payments                             37,134

         Less current portion of obligations under capital lease   17,863
                                                                  -------

                     Long-term portion of obligations
                        under capital lease                       $19,271
                                                                  =======
</TABLE>

(7)   Stockholders' Deficit

      Voting Rights


                                      F-13



<PAGE>

                                 ECHOCATH, INC.

                          Notes to Financial Statements

                                 August 31,1999

      The holders of the Company's Series B Common Stock maintain "super
      voting" rights, whereby they are entitled to 5 votes per Class B
      Common share. As a condition of the private placement offering, holders
      of a minimum of 900,000 shares of the Company's Class B Common Stock
      were required to convert their shares of Class B Common Stock into
      Class A Common Stock at a ratio of 1 to 1. Additionally, each Class B
      Common shareholder converting their shares received warrants to purchase
      shares of Class A Common Stock for an equal number of shares, exercisable
      at $.75 per share. Subsequent to August 31, 1999, aggregates of 1,080,767
      shares of Class B Common stock have converted into Class A Common Stock.
      (See Note 17.)

      Forfeitable Shares

      In connection with the initial public offering, the underwriter 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

(7),  Continued

      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.


                                      F-14



<PAGE>

                                 ECHOCATH, INC.

                          Notes to Financial Statements

                                 August 31,1999

      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.

      The portion of forfeitable shares that have converted to Class A Common
      Stock are still subject to the underwriting agreement and terms subject to
      forfeiture. (See Note 17.)

      Preferred Stock and Related Litigation

      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 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

(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 for each
      1.3 shares of Series B cumulative preferred stock.

      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. 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'


                                      F-15



<PAGE>

                                 ECHOCATH, INC.

                          Notes to Financial Statements

                                 August 31,1999

      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. On December 17, 1997,
      the Company served on EP MedSystems a motion to dismiss the Complaint. On
      October 20, 1998 the Court dismissed the suit against the Company with
      prejudice, but did not decide on the Company's outstanding counterclaims
      against EP MedSystems. On June 9, 1999, EP MedSystems filed an appeal of
      that dismissal. If the appeal is successful, the lawsuit will be
      reinstated. A court date has been set for December 7, 1999. There can be
      no assurance that the Company will prevail in this matter, which could
      have a material adverse effect on the Company's operations, financial
      position and cash flows.

(8)   Development and License and Distribution Agreements

      On December 30, 1996 the Company announced that it entered into an
      exclusive license agreement with Medtronic, Inc. for the licensing of
      EchoMark'r' and ColorMark'r' proprietary technologies for certain medical
      procedures. The total payments to the Company under the December 1996
      Medtronic Agreement have been $265,000, including a payment of $65,000
      pursuant to a termination agreement in February 1999.

      The Company entered into an exclusive license agreement dated February 27,
      1997 with EP MedSystems, Inc. (EP MedSystems). The agreement provides that
      certain products can be incorporated into the EP MedSystems' diagnostic
      catheter line. The Company may potentially receive development milestone
      payments of up to $150,000. Milestones include the sale of a limited
      quantity of product. When products are commercially available the Company
      will receive royalties under the terms of the agreement. The Company has
      received no milestone payment but it has earned minimum royalties of
      $30,000 per quarter starting with calendar quarter beginning January 1999
      under this agreement. The agreement

(8),  Continued

      provides that any royalty payment can be reduced, but not to an amount
      below zero, by an amount equal to the amount of any dividends under the
      Company's Series B cumulative preferred stock which are accrued but not
      paid as of that date. As of August 31, 1999, $80,000 of royalties due have
      been used to reduce accrued dividends. As of August 31, 1999 the Company
      has $109,000 of accrued preferred stock dividends, which is included as a
      component of other liabilities on the accompanying Balance Sheet.

      On October 30, 1997, the Company announced it had reached a second
      definitive licensing and development agreement with Medtronic, Inc.
      Pursuant to the terms of the October 1997 Medtronic Agreement, the Company
      granted Medtronic (i) a worldwide exclusive license to make, have made,
      use, sell and have sold products utilizing the Company's ColorMark and


                                      F-16



<PAGE>

                                 ECHOCATH, INC.

                          Notes to Financial Statements

                                 August 31,1999

      EchoMark technologies in guiding devices during cardiothoracic surgical
      procedures: and (ii) 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 device during cardiothoracic
      surgical procedures. This option expired on December 31, 1998 after the
      granting of several extensions after the initial six months.

      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,
      which amount included, (i) $800,000 paid to the Company in upfront
      licensing fees which was recognized as revenue during fiscal 1998 and (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.
      Additionally, the Company may receive minimum annual royalties from
      Medtronic upon product commercialization. In fiscal 1998, the Company
      received $250,000 for the completion of "Concept Design Validation" for
      the EchoFlow instrument under this agreement.

      The Company entered into an option agreement on January 11, 1999 with
      another company for the licensing of certain technology. The term of the
      option was three months and the non-refundable consideration received for
      the option was $100,000. The Company extended the option to June 11, 1999
      for additional consideration of $60,000, but did not renew the option
      beyond June 11, 1999. The option has now expired.

      The Company entered into an option agreement on April 16, 1999 with
      another company for the licensing of certain technology. The term of the
      option was three months, and the non-refundable consideration received for
      the option was $35,000. The option has been extended at the election of
      the holder for up to three one-month periods upon payment of a
      non-refundable fee to the Company of $10,000 per month. As of September
      20, 1999 a new agreement was reached extending the term of the option for
      four additional months starting November 1, 1999 upon monthly payments of
      $10,000 per month.

(9)   Income Taxes

      As of August 31, 1999, the Company has available net operating loss
      carryforwards of approximately $13,743,000 for income tax reporting
      purposes, which are available to offset future Federal and state taxable
      income, if any, and expire between 2008 and 2019 and 2000 and 2006,
      respectively. The Company also has research and development tax credit
      carryforwards of approximately $369,000 for Federal income tax purposes
      which are

(9),  Continued

      available to reduce Federal income taxes, if any, through 2012. 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.


                                      F-17



<PAGE>

                                 ECHOCATH, INC.

                          Notes to Financial Statements

                                 August 31,1999

      Accordingly, the Company's ability to use its net operating loss
      carryforwards may be subject to certain limitations or may expire unused.

      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, 1999 are presented below:

<TABLE>
      <S>                                                     <C>
      Deferred tax assets:
        Net operating loss carryforward                       $5,497,000
        Tax credit carryforward                                  369,000
        Accrued expenses                                         377,000
        Inventory                                                 79,000
        Technology rights                                        155,000
                                                              ----------
                  Total gross deferred tax assets              6,477,000

      Less valuation allowance                                 6,462,000
                                                              ----------
                  Net deferred tax assets                         15,000

      Deferred tax liabilities - Furniture, equipment and
        leasehold improvements, primarily due to differences
        in depreciation                                           15,000
                                                              ----------
                   Net deferred tax liability                 $       --
                                                              ==========
</TABLE>

      The valuation allowance for deferred tax assets as of September 1, 1998
      was $5,400,000. The net change in the total valuation allowance for the
      year ended August 31, 1999 was an increase of $1,062,000.

(10)  Related Party Transactions

      During the years ended August 31, 1998 and 1999, the Company incurred
      $9,071 and $26,004, respectively of management and administrative services
      from the parent company of a common stockholder. Management believes that
      the expenses charged approximate those that would have been charged by
      unrelated parties performing similar services.

(11)  401(k) Plan

      The Company maintains a 401(k) profit sharing plan for its employees. 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 $14,805 and
      $13,126 to the plan in 1998 and 1999, respectively.


                                      F-18



<PAGE>

                                 ECHOCATH, INC.

                          Notes to Financial Statements

                                 August 31,1999

(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, 1999
      are as follows:

<TABLE>
                        <S>               <C>
                        2000              $424,089
                        2001               295,948
                        2002               171,427
                                          --------
                                          $891,464
                                          ========
</TABLE>

     Rental expense aggregated $347,754 in 1998 and $328,489 in 1999.

(13)  Stock Option Plans

      On August 24, 1995 and amended March 5, 1998, the Company adopted a stock
      option plan (the 1995 option plan) which provides for the grant of
      incentive stock options, nonqualified stock options and stock appreciation
      rights. The total number of Class A common stock shares eligible for grant
      under the new stock option plan is 1,020,000 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 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>
                                                    1998           1999
                                                    ----           ----
          <S>                                   <C>             <C>
          Net loss to common stockholders -as
             reported                           $(1,856,064)    (2,182,153)
          Net loss to common stockholders -
             pro forma                           (2,012,615)    (2,359,998)
          Net loss per common share- as
             reported                               (.71)          (.81)
          Net loss per common share - pro
             forma                                  (.77)          (.88)
                                                    =====          =====
</TABLE>


                                      F-19



<PAGE>

                                 ECHOCATH, INC.

                          Notes to Financial Statements

                                 August 31,1999

      The fair value of the stock options granted in 1998 and 1999 is estimated
      at grant date using the Black-Scholes option-pricing model with the
      following weighted average assumptions for 1998 and 1999; 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, 1998 and 1999:

(13), Continued

<TABLE>
<CAPTION>
                                            1998               1999
                                     ------------------  -----------------
                                               Weighted           Weighted
                                                average            average
                                               exercise           exercise
                                      Shares     price   Shares     price
                                      ------     -----   ------     -----
            <S>                      <C>       <C>       <C>       <C>
            Options outstanding at
               beginning of year     742,500   $ 3.375   742,500   $ 3.375
            Granted                       --        --   210,000     1.125
            Exercised                     --        --        --        --
            Forfeited/expired             --        --        --        --
            Options outstanding at
               end of year           742,500   $ 3.375   952,500   $ 2.633
                                     =======             =======
</TABLE>

      A total of 815,000 shares are vested as of August 31, 1999.

      On October 9, 1999, the Board of Directors approved a compensation
      committee recommendation and granted options for 500,000 shares to
      management, vesting over three years, 190,000 shares to the non-management
      members of the Board that vest immediately, and 15,000 shares to employees
      and consultants that vest equally over the next three years. These options
      were granted at fair market value as of the date of grant. The grants
      issued to management and the non-management Board members are subject to
      shareholders approval.

(14)  Accrued Expenses

      Accrued expenses as of August 31, 1999 consists of the following:

<TABLE>
           <S>                                                  <C>
           Professional fees                                    $326,737
           Payroll and benefits                                  142,949
           Rent                                                  253,797
           Accrued interest expense on notes payable             219,907
                                                                --------

                                                                $943,390
                                                                --------
</TABLE>


                                      F-20



<PAGE>

                                 ECHOCATH, INC.

                          Notes to Financial Statements

                                 August 31,1999

(15)  Joint Venture Agreement

      In February 1999, the Company entered into a joint venture with Vital
      Signs, Inc., a related party. Certain members of the Company's Board of
      Directors are also members of Vital Signs, Inc. management. The joint
      venture will develop technology related to the use of the Company's
      EchoFlow technology in conjunction with the joint venture partner's
      technology. The joint venture partner received a 50% ownership in return
      for the contribution of certain technology valued at $665,000, as well as
      cash and services valued at $185,000. The Company received 50% ownership
      in the joint venture in return for contribution of its research and
      development efforts on the technology contributed by the partner.
      Additional funding of the joint venture is at the sole discretion of the
      joint venture partners. During 1999, the Company incurred research and
      development expenditures totaling $336,000 on behalf of the joint venture,
      of which it was reimbursed $165,000 by the joint venture for such
      services. This reimbursement was recorded as a decrease to research and
      development expenses on the accompanying statement of operations.

(15), Continued

(16)  Segment Information

      Effective September 1, 1998, The Company adopted SFAS No. 131, Disclosure
      about Segments of an Enterprise and Related Information. The Company is
      managed and operated as one business. A single management team that
      reports to the Chief Executive Officer comprehensively manages the entire
      business. The Company does not operate separate lines of business or
      separate business entities with resect to any of its products. In
      addition, the Company does not directly conduct any of its operations
      outside of the United States. Accordingly, the Company does not prepare
      discreet financial information with respect to separate product areas or
      by location and does not have separately reportable segments as defined by
      SFAS No. 131.

(17)  Subsequent Event

      On October 29, 1999 the Company completed a private placement offering.
      The offering consisted of Units of (i) a $25,000 convertible promissory
      note and (ii) a three-year warrant to purchase 33,333 shares of Class A
      Common Stock. The notes bear interest at 6.5% per annum and matures
      three-years from the date of the final closing (October 29, 1999), unless
      previously converted into Class A Common Stock. A total of $2,525,000
      notes were issued through the private placement, of which $1,250,000 are
      convertible into shares of Common Stock at the option of the holder,
      at any time prior to the maturity date, at a rate of one share of Class A
      Common Stock for each $0.75 of debt (plus accrued and unpaid interest) and
      $1,275,000 of which are convertible at the market price on the date of
      conversion, but not less than $0.25 (plus accrued and unpaid interest),
      the notes are also convertible at the option of the Company, on the
      maturity


                                      F-21



<PAGE>

                                 ECHOCATH, INC.

                          Notes to Financial Statements

                                 August 31,1999

      date, at a conversion price equal to the lesser of $0.75 or the average
      closing sale price of the share of Class A Common Stock over the five day
      period immediately prior to the maturity date, but not less than $0.25 per
      share. Each warrant entitles the holder to purchase one share of Class A
      Common Stock at an exercise price of $0.75 per share. The offering
      resulted in net proceeds of $1,684,358 and the conversion of $525,000 of
      6.5% convertible debentures (see note 5) into the same convertible debt
      offered under the private placement described above. In connection with
      the warrants issued, the Company recorded debt issuance costs totaling
      $225,000. The warrants were valued at $.20 per share using the
      Black-Scholes pricing model. The debt issuance costs will be amortized
      over the life of the debt.

      The holders of the Company's Class B Common Stock maintain super voting
      rights whereby they are entitled to 5 votes per Class B Common Share.

      As a condition to the offering, holders of a minimum of 900,000 shares of
      the Company's Class B Common Stock were required to convert their shares
      into Class A Common Stock at a ratio of 1 to 1. Additionally, each Class
      B Common Shareholder converting their shares received warrants to
      purchase shares of Class A Common Stock for an equal number of shares,
      exercisable at $.75 per share. Subsequent to August 31, 1999, 1,080,767
      shares of Class B Common Stock have converted into Class A Common Stock.

      The Placement Agents for the Private Placement offering are entitled to
      cash compensation equal to 10% of the gross proceeds of the offering and
      five year warrants to purchase up to 400,000 shares of Class A Common
      Stock at $0.75 per share.

      Pursuant to the terms of the private placement, the Company has agreed to
      offer (a "Rights Offering") to its Class A Common Shareholders as soon as
      is practicable and efficacious (i) a right to purchase one share of Class
      A Common Stock at a price per share equal to the market price immediately
      prior to the effective date of a registration statement covering the
      Rights Offering and (ii) a three-year warrant to purchase one share of
      Class A Common Stock at such market price. The Placement Agents are
      entitled to a commission equal to 11.25% of the gross proceeds of the
      Rights Offering and five-year warrants to purchase a number of shares of
      Class A Common Stock equal to 11.25% of the number of shares sold

(17), Continued

      in the Offering, at an exercise price of $.75 per share. The Rights
      Offering, if and when made, will be made only by means of a prospectus.


ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
        FINANCIAL DISCLOSURE.
      Not applicable.


                                      F-22




<PAGE>


                                    PART III


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

Directors and Executive Officers

         The 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)                    57    Chief Executive Officer, President and Director
David Vilkomerson                          58    Executive Vice President, Director of Research and
                                                 Development, Assistant Secretary and Director
Daniel M. Mulvena(1)(2)(3)                 51    Chairman of the Board of Directors
Anthony J. Dimun(2)                        56    Director
Irwin M. Rosenthal(3)                      71    Secretary and 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, Ph.D., 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 co-authored 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, a publicly traded corporation,
which manufactures and sells minimally invasive medical products, beginning in
February 1992. Mr. Mulvena left Boston Scientific in April 1995 as Group Vice
President Cardio/Cardiology responsible for Mansfield, Cardiac Assist and
Mansfield Electrophysiology Divisions of Boston Scientific. Mr. Mulvena formerly
served as Vice Chairman of the Board of Directors of Life Medical Sciences, Inc.
("Life Medical"), a publicly-held 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, since January 1998 has been acting Chairman
of the Board of Magna-Lab Inc. ("Magna-Lab"), and since April 1998, a director
of Zoll Medical, all of which are publicly-held corporations involved in medical
technology.

                                       33






<PAGE>


         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 and Director of Vital Signs, Inc.
("Vital Signs") since March 1991, its Secretary and Treasurer since December
1991 and as a director since August 1987. He is also a director of Bionx
Implants Inc., a publicly traded medical device company.

         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, has served as a director of Life Medical since its
inception in 1990 and currently serves as both its Secretary and Treasurer. Mr.
Rosenthal is an attorney and since 1960 has specialized in securities law. He is
currently a partner at Graham & James LLP. Prior to July 1998, Mr. Rosenthal was
a partner at Rubin Baum Levin Constant & Friedman. Mr. Rosenthal is also a
director of Magna-Lab and Symbollon Corporation, a publicly traded chemical and
medical technology company.

         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.

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, and Daniel M. Mulvena, 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 Daniel M. Mulvena, 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, (51), Vice-President of Engineering, has held this
position with the Company since April 1997. Prior to serving as Vice-President
of Engineering, Mr. Lyons served from 1991 to 1999, as Manager, Electronic R&D
for the Company. 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 signal processing methods. From 1988 to 1991 Mr. Lyons worked for
Ultramed where he conducted similar design and development research.

         Alec Colleoni, (51), Manager of Manufacturing, Mr. Colleoni, a graduate
of Feltrinelli Technical College in Italy, has managed the Company's
manufacturing of a number of medical electronic companies, including Princeton
Electronic Products and Ultramed, with over ten years experience in various FDA
and GMP compliance requirements. He held positions with Johnson & Johnson and PA
Associates and has received several patents in the United States.

                                       34






<PAGE>


         Morton Lefar, Ph.D., (61), has served as Manager, Regulatory Affairs
and Quality Systems at the Company since August 1997. Currently, Dr. Lefar works
on a part-time as needed basis for the Company. Dr. Lefar has worked in both the
pharmaceutical and medical device industries for over 30 years. Following
graduation at Rutgers University. 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 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 a 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

         The Company knows of no late filings pursuant to Section 16(a) of the
Exchange Act.

                                       35






<PAGE>


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, 1999, 1998 and 1997 to Frank A. DeBernardis, the Company's Chief Executive
Officer and David Vilkomerson, the Company's Executive Vice President (the
"Named Executive Officers"). No other executive officer received annual
compensation in excess of $100,000 for the fiscal years ended August 31, 1999,
1998 or 1997.

                           Summary Compensation Table
                               Annual Compensation

<TABLE>
<CAPTION>
                                                                                                Long Term
                                                                                              Compensation
                                                                                        Awards           Payouts
                                                                                     ------------      ------------
                                                                                      Securities
                                                                                      Underlying         All Other
 Name and Principal                                                Other Annual      Options/SARs      Compensation
     Position                   Year       Salary       Bonus      Compensation          ($)               ($)
 ------------------             ----       ------       -----      ------------      ------------      -------------
<S>                              <C>      <C>          <C>          <C>              <C>                <C>
Frank A. DeBernardis             1999      $130,000(3)     --            --               --                --
Chief Executive Officer          1998      $130,000        --            --               --                --
                                 1997      $130,000     $16,000          --          150,000(1)(2)          --
                                                           0

David Vilkomerson                1999      $139,560(3)     --            --               --                --
Executive Vice President         1998      $134,600        --            --               --                --
                                 1997      $130,000     $16,000          --          150,000(1)(2)          --
                                                           0
</TABLE>

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

(1)  The security underlying all options is Class A Common Stock.

(2)  Each option vested as to 50,000 shares on April 29, 1998 and vested as to
     50,000 shares on April 29, 1999 and vests as to 50,000 shares on April 29,
     2000.

(3)  Mr. DeBernardis and Dr. Vilkomerson voluntarily deferred a portion of their
     compensation to preserve cash flow until the completion of the private
     placement. After the completion of the private placement the deferred
     compensation was paid. The table reflects compensation due before the
     voluntary deferral.

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, 1999.
The Company granted 210,000 in stock options during such fiscal year. The
Company has granted options to its directors and certain of its Company's
officers to purchase 50,000 shares of the Class A Common Stock. Such options
were all issued pursuant to the options plan and are exercisable for ten years
following the date of grant. During fiscal year 2000, grants were issued for
665,000 shares subject to shareholder approval to certain directors, officers
and employees.

                                       36






<PAGE>


                                INDIVIDUAL GRANTS

<TABLE>
<CAPTION>
                                                  Percent of
                                 Number of           Total
                                 Securities      Options/SARs                      Market Price as
                                 Underlying       Granted to       Exercise or       Reported on
                                Options/SARs     Employees in          Base       Bulletin Board on    Expiration
            Name                  Granted       Fiscal Year(1)     Price($/Sh)      Date of Grant         Date

<S>                               <C>               <C>               <C>                <C>            <C>
Anthony Dimun
Director                           50,000            23.8%            1.125               1.125         10/23/08

Irwin Rosenthal
Director                           50,000            23.8%            1.125               1.125         10/23/08

Daniel Mulvena                     50,000            23.8%            1.125               1.125         10/23/08

</TABLE>


         AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-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, 1999 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      VALUE OF UNEXERCISED "IN-
                                                       UNEXERCISED OPTIONS/SARs AT FISCAL    THE MONEY" OPTIONS/SARs AT
                                                                    YEAR-END                     FISCAL YEAR END(2)
                                SHARES
                              ACQUIRED ON      VALUE
                              EXERCISE(1)    REALIZED(3)    EXERCISABLE    UNEXERCISABLE     EXERCISABLE    UNEXERCISABLE
<S>                              <C>            <C>         <C>              <C>              <C>             <C>
Frank DeBernardis
Chief Executive Officer            0             0           120,000          50,000             0               0
David Vilkomerson
Executive Vice President           0             0           190,000          50,000             0               0
</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 value
     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 9,1999, was $0.81125 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.

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.

                                       37




<PAGE>


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. Under the terms of the agreement his base salary increased from
$130,000 in the first year of his agreement, ending November 1, 1997, to
$135,000 in the second year of his agreement, ending November 1, 1998, and
$140,600 the last year of his agreement. Dr. David Vilkomerson signed an
extended employment agreement on March 10, 1998. That agreement has expired as
of November 1, 1999. The terms of an extended agreement should be similar to the
original agreement. (See Certain Relationships and Related Transactions).

      Mr. DeBernardis has worked without a contract extension since November
1996, but is currently in discussion with the Compensation Committee to extend
his employment agreement. The terms of an extended agreement should be similar
to the original agreement.

      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 has been
negotiated and Mr. Mulvena will provide for up to four days per quarter, at a
rate of $1,700 per day. (See Certain Relationships and Related Transactions).

Option Plan

      In August 1995, the Board of Directors adopted and the shareholders
approved option plan (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 Board of Directors has approved grants that total 1,657,500. The
additional grants of 690,000 above the authorized total of 1,020,000 will
require shareholder approval.

      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 1,020,000. The shares
subject to and available under the Option Plan may consist, in whole or in part,
of authorized but unissued stock or treasury stock not reserved for any other
purpose. Any shares subject to an option or SAR that terminates, expires or
lapses for any reason, and any shares purchased pursuant to an option and
subsequently repurchased by the Company pursuant to the terms of the option,
shall again be available for grant under the Option Plan.

      The Option Plan is administered by the Board of Directors of the Company,
which will determine, in its discretion, among other things, the recipients of
grants, whether a grant will consist of ISOs, NQSOs or SARs, or a combination
thereof, and the number of shares of Class A Common Stock to be subject to such
options or SARs. The Board of Directors of the Company may, in its discretion,
delegate its power, duties and responsibilities under


                                       38






<PAGE>


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 Daniel Mulvena and Anthony
Dimun. 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.

      On October 9, 1999, the Board of Directors approved a compensation
committee recommendation and granted options for 500,000 shares to management,
vesting over three years, 190,000 shares to the non-management members of the
Board that vest immediately, and 15,000 shares to employees and consultants that
vest equally over the next three years. These options were granted at fair
market value as of the date of grant. The grants issued to management and the
non-management Board members are subject to shareholder approval.

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 $13,126 in the fiscal year
ended August 31, 1999.

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.

      One of the Company's employees participated in the Investment Plan during
the fiscal year ended August 31, 1999. During the fiscal year 1999, no shares of
Class A Common Stock were issued under the Investment Plan.

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

      The following table sets forth, as of November 8, 1999, 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.


                                       39






<PAGE>


<TABLE>
<CAPTION>

                                                             AMOUNT AND NATURE OF
 NAME AND ADDRESS OF                                             BENEFICIAL          PERCENT OF       PERCENT OF
   BENEFICIAL OWNER                     TITLE OF CLASS        OWNERSHIP(1)(2)(3)        CLASS         VOTING POWER
<S>                                 <C>                      <C>                    <C>             <C>
Cathtech Corp.(6)                    Class A Common Stock           311,953             26.6%             18.4%
c/o Vital Signs, Inc.
20 Campus Road
Totowa, New Jersey 07512

Anthony Dimun(7)                     Class A Common Stock            64,372              1.9%              1.6%
c/o Vital Signs, Inc.
20 Campus Road
Totowa, New Jersey 07512

Ultramed, Inc.(8)                    Class A Common Stock           234,544              6.8%              5.9%
c/o Frank Joworisak
EchoCath, Inc.
P.O.  Box 7224
Princeton, New Jersey  08543

David Vilkomerson(9)(13)             Class A Common Stock           284,068              8.2%              7.1%
c/o EchoCath, Inc.
P.O.  Box 7224
Princeton, New Jersey  08543

Frank DeBernardis(10)                Class A Common Stock           164,362              4.7%              4.1%
c/o EchoCath, Inc.
P.O.  Box 7224
Princeton, New Jersey  08543

Terence D.  Wall(5)                  Class A Common Stock           189,607              5.4%              4.8%
c/o Vital Signs, Inc.
20 Campus Road
Totowa, New Jersey 07512

Vital Signs, Inc.(6)                 Class A Common Stock           311,953             26.6%             18.4%
20 Campus Road
Totowa, New Jersey 07512

Medtronic, Inc.(4)                   Class A Common Stock           363,636             40.5%              9.1%
7000 Central Ave. NE
Minneapolis, MN  55482

Irwin M. Rosenthal(11)               Class A Common Stock           162,084              4.7%              4.1%
c/o Irwin Rosenthal
885 Third Avenue
21st Floor
New York, New York  10022

Daniel M.  Mulvena(12)               Class A Common Stock           120,000              3.4%              3.0%
6 Fuller Lane
Marblehead, Mass.  01945

EP MedSystems, Inc.                  Series B Cumulative            280,000            100.0%              7.0%
58 Route 46 West                     Convertible Preferred
Budd Lake, NJ  07828                 Stock


All officers and directors as a      Class A Common Stock           794,886             27.6%             19.9%
group (5 persons)(14)
</TABLE>
----------------
* Denotes less than 1%.


                                       40






<PAGE>


(1)   Unless otherwise set forth herein, all shares set forth are shares of the
      Company's Class A Common Stock. The Class A Common Stock has one vote per
      share and the Class B Common Stock has five votes per share. All shares
      are beneficially owned and sole voting and investment power is held by the
      persons named, except as otherwise noted.
(2)   Certain holders have agreed that up to a portion of his or its shares of
      the Class B Common Stock now converted to A Shares pursuant to the terms
      of the Private Placement completed October 29, 1999, 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 November 22, 1999.
(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 Corp., a privately-held corporation and
      wholly-owned subsidiary of Vital Signs ("Cathtech"). Such shares include
      139,607 shares of Class A 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 November 22, 1999. These shares also include
      the 311,953 shares of Class A Common Stock owned by Cathtech.
(6)   Cathtech 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 A 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 A 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 November 22, 1999.
(8)   All of the shares have been pledged to Vital Signs 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 A Common Stock, which options are
      exercisable within 60 days following November 22, 1999, 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
      November 22, 1999. Excludes (i) options granted by Ultramed to Dr.
      Vilkomerson to purchase from Ultramed 1,882 shares of Class A Common Stock
      of the Company, which options are not exercisable within 60 days following
      November 22, 1999, and (ii) 234,544 shares of Class A 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 vested as to 50,000 shares on April 29, 1998, and
      vests as to 50,000 on April 29, 1999, and as to 50,000 shares on April 29,
      2000.
(10)  Includes options granted by the Company to Mr. DeBernardis to purchase
      116,000 shares of Class A Common Stock, which options are exercisable
      within 60 days following November 22, 1999. Excludes (i) 10,006 shares of
      Class A 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 4,000 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 50,000 shares on April 29, 1999, April 29, 1999, and as to
      50,000 shares on April 29, 2000.
(11)  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
      November 22, 1999. These shares also include an option to purchase 50,000
      shares of Class A Common Stock, which option is exercisable within 60 days
      following November 22, 1999.
(12)  Includes options granted by the Company to Mr. Mulvena to purchase 70,000
      shares of Class A Common Stock, which options are exercisable within 60
      days following November 22, 1999. These shares also include an option to
      purchase 50,000 shares of Class A Common Stock, which option is
      exercisable within 60 days following November 22, 1999.


                                       41






<PAGE>


(13)  Includes 107,526 shares of Class A Common Stock and issuable upon exercise
      of options exercisable within 60 days following November 22, 1999.
      Excludes (i) 1,882 shares of Class B Common Stock underlying options that
      are not exercisable within 60 days following November 22, 1999 and (ii)
      options to purchase 104,000 shares of Class A Common Stock which are not
      yet vested.
(14)  Options were issued to Dr. Vilkomerson and Mr. DeBernardis each in the
      amount of 250,000 shares of Class A Common Stock. These options however,
      are still awaiting shareholder approval and therefore, are not included in
      the Compensation Table or the Beneficial Ownership Table. Mr. Dimun, Mr.
      Rosenthal, and Mr. Mulvena were also issued options in the amount of
      50,000 shares each of Class A Common Stock. These shares were not included
      because they are subject to shareholder approval and therefore, are not
      included in the Beneficial Ownership Tables.


                                       42






<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 fiscal 1999, the Company paid Vital Signs approximately $26,004
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. Vital Signs provided legal services to the Company
for a portion of the fiscal year ended August 31, 1999.

      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 $750,000 by certain of the Company's existing shareholders to repay a
demand note due by the Company to a bank in connection with the Company's
repurchase of rights under the HRT Agreement. Alliance paid $75,000 of the
$575,000.

      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, is a director,and a partner of Alliance. Irwin M.
Rosenthal is also a partner of Graham & James LLP, counsel to the Company.

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

<TABLE>
<S>   <C>
(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)
</TABLE>


                                       43






<PAGE>


<TABLE>
<C>   <C>
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)

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, effective 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)

10.25 Employment Agreement, dated as of March 10, 1998, between the Company and
      David Vilkomerson.*(9)

10.26 Form of 6 1/2% Convertible Promissory Note.

10.27 Form of Warrant to purchase Shares of Class A Common Stock.

24    Power of Attorney (included in signature page hereto).*
</TABLE>


                                       44






<PAGE>


<TABLE>
<S>   <C>
27    Financial Data Schedule.*

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

*     Filed herewith.

**    A management contract or compensatory plan or arrangement.

(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.

(9)   Incorporated by reference to Exhibit 10.25 of the Company's Form 10-QSB
      for the quarter ended February 28, 1998.

(b)   Reports on Form 8-K

      During the quarter ended August 31, 1999, no reports on Form 8-K were
filed by the Company.
</TABLE>

                                   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)

                                      November 29, 1999




                                       45






<PAGE>


                                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       November 29, 1999
-------------------------------           Director (principal executive officer and
         Frank A. DeBernardis             principal financial and accounting officer)


        /s/ David Vilkomerson             Executive Vice President and Director        November 29, 1999
-----------------------------
         David Vilkomerson

        /s/ Anthony J. Dimun              Treasurer and Director                       November 29, 1999
----------------------------
         Anthony J. Dimun

        /s/ Irwin M. Rosenthal            Secretary and Director                       November 29, 1999
------------------------------
         Irwin M. Rosenthal

        /s/ Daniel M. Mulvena             Chairman of the Board and Director           November 29 , 1999
-----------------------------
         Daniel M. Mulvena
</TABLE>




                                       46




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

The registered trademark symbol shall be expressed as.....................'r'
The trademark symbol shall be expressed as................................'TM'
The service mark symbol shall be expressed as.............................'sm'
The section symbol shall be expressed as..................................'SS'