Everest Medical Corporation – ‘10KSB’ for 12/31/97

As of:  Tuesday, 3/31/98   ·   For:  12/31/97   ·   Accession #:  914190-98-139   ·   File #:  0-18900

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Annual Report — Small Business   —   Form 10-KSB
Filing Table of Contents

Document/Exhibit                   Description                      Pages   Size 

 1: 10KSB       Form 10-Ksb for Year Ending 12/31/97                  24    114K 
 2: EX-10.24    Amendment to Lease                                     2     11K 
 3: EX-13.1     Portions of Annual Report                             17     85K 
 4: EX-23.1     Consent of Independent Auditors                        1      6K 
 5: EX-27       FDS for Fiscal 1997                                    1      6K 

10KSB   —   Form 10-Ksb for Year Ending 12/31/97
Document Table of Contents

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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

 FORM 10-KSB

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

For the fiscal year ended:                             Commission file number:  
December 31, 1997                                           0-18900     

 EVEREST MEDICAL CORPORATION
(Name of small business issuer in its charter)

Minnesota                                          41-1454928   
(State of Incorporation)                    (I.R.S. Employer Identification No.)
13755 First Avenue North
Minneapolis, Minnesota 55441
(Address of principal executive offices)

 Issuer's telephone number: (612) 473-6262

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

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

Common Stock, par value $.01 per share

Check  whether the Issuer (1) filed all reports  required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or
for such shorter period that the Issuer was required to file such reports),  and
(2) has been  subject to such filing  requirements  for the past 90 days.       
Yes  X  No___                                                                   

Check if there is no disclosure of delinquent  filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure  will be contained,  to
the best of Issuer'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 fiscal year 1997 were $7,365,380.                     

As of March 16, 1998,  there were 7,457,274 shares of Common Stock of the Issuer
outstanding.                                                                    

The  aggregate  market value of the Common  Stock of the Issuer  (based upon the
closing  sale  price of the  Common  Stock on March 16,  1998,  as  reported  by
NASDAQ),   excluding  shares  owned   beneficially  by  executive  officers  and
directors, was approximately $17,136,367.                                       

Part  II of  this  Annual  Report  on  Form  10-KSB  incorporates  by  reference
information  (to the extent  specific  sections are referred to herein) from the
Issuer's Annual Report to Shareholders for the year ended December 31, 1997 (the
"1997  Annual  Report").   Part  III  of  this  Annual  Report  on  Form  10-KSB
incorporates  by  reference  information  (to the extent  specific  sections are
referred to herein) from the Issuer's Proxy  Statement for its annual meeting to
be held April 28, 1998 (the "1998 Proxy Statement").                            

Transitional Small Business Disclosure Format (check one)  Yes         No  X    

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PART I

ITEM 1   DESCRIPTION OF BUSINESS                                                

General Development of Business                                                 

         Everest  Medical  Corporation  (the  "Company" or "Everest") is engaged
primarily  in  the   development,   manufacturing   and   marketing  of  bipolar
electrosurgical  devices  for use in  minimally  invasive  surgical  procedures.
Minimally invasive procedures are being utilized for a growing range of surgical
specialties  such as gynecology,  gastroenterology,  cardiovascular  and general
surgery.                                                                        

         The  Company  commenced  commercial  sales  of  laparoscopic   surgical
products  in October  1991.  The first  product  sold was the  BiLAP(R)  Bipolar
Cutting/Coagulating  Probes.  The Company added the BiCOAG(R) Bipolar Forceps in
September 1992, the EVERSHEARS(R) Straight Bipolar Scissors in November 1992 and
the EVERSHEARS Curved Bipolar Scissors in September 1993. The Company introduced
three  additional  products to the  laparoscopic  market in 1994,  including the
EVERSHEARS  II  Bipolar  Metal-on-Metal  Curved  Scissors,  the  BiCOAG  Bipolar
Dissecting Forceps and the BiLAP Bipolar Needle Electrode.  In 1995, the Company
commenced sales of the  innovative,  patented,  multi-functional  BiCOAG Cutting
Forceps, and in 1996 added additional  versions,  including a 5mm version of the
BiCOAG Cutting  Forceps.  In December  1996,  the Company  introduced the BiCOAG
Forceps in a 3mm version for the emerging  microlaparoscopy  market. The Company
is targeting these existing and new products to the laparoscopic general surgery
and gynecology markets.                                                         

         As minimally invasive surgical  techniques have evolved to increasingly
complex  surgery in  anatomically  crowded areas of the human body, the need for
safer instrumentation has become more evident. The Company believes that bipolar
electrosurgery is gaining  increasing  scientific  recognition and acceptance in
the growing  minimally  invasive  surgery  ("MIS")  markets which  predominately
utilize monopolar energy.  Bipolar energy offers the surgeon more control,  less
tissue damage,  effective  hemostasis and  performance,  eliminating the dangers
associated with monopolar energy.  The Company believes that bipolar  technology
will become the standard in  electrosurgery  in advanced MIS  procedures and the
Company will be a beneficiary of this trend.                                    

         The Company  continues to market a line of disposable  products for use
in  selected  gastrointestinal   endoscopic  interventional  procedures.   These
procedures are performed by  gastroenterologists  using endoscopes through which
Everest's products are inserted into the body. These products are the BiSNARE(R)
Polypectomy   Snare  for   removing   colon   polyps   and  the   BiCOAG   Probe
Gastrointestinal Coagulator for treating intestinal bleeding.                   

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         The  electrosurgical  products  currently  under  development  or being
marketed by Everest  operate in a bipolar mode  providing an improved  margin of
patient  safety  in  minimally  invasive  surgical  procedures.  Many  of  these
procedures are typically  performed  using  monopolar  electrosurgery  which has
inherent   characteristics  that  may  pose  certain  risks  for  patients.   In
electrosurgery, radio frequency (or RF energy) is used both to cut and coagulate
tissue.  With  monopolar  devices,  the RF energy  must  pass from the  surgical
instrument through the patient's body to a separate return electrode attached to
a  large  surface  area,   generally  the  buttocks  or  thigh.  With  monopolar
electrosurgery,  there is a greater  potential for injury to body tissues as the
electrical current passes through to the surface or return electrode  (grounding
pad) where skin burns may also occur.  With  bipolar  devices,  the RF energy is
contained at the surgical site because both the active and return electrodes are
located on the surgical instrument. In minimally invasive surgery, there is even
greater potential for complications when using monopolar  instruments due to the
combined  effects of the  surgeon's  limited  field of vision,  the proximity of
other organs and the inherent  tendency of the surgical  instruments  to conduct
monopolar RF energy.                                                            

         The  Company  has  developed  extensive  expertise  in the  control and
containment of bipolar radio  frequency  energy to affect both surgical  cutting
and coagulation of blood in a variety of surgical and interventional procedures.
The  Company's  strategy is to leverage  its  expertise  to design,  develop and
manufacture  proprietary  surgical  instruments  for use in  selected  minimally
invasive  surgical  procedures  where the safety and other  features  of bipolar
electrosurgery have demonstrable advantages.                                    

         The  Company was  incorporated  in  Minnesota  on April 19,  1983.  The
Company's address is 13755 First Avenue North, Minneapolis, Minnesota 55441, and
its telephone number is (612) 473-6262.                                         

Business                                                                        

Laparoscopic Surgical Products                                

         The Company  believes  laparoscopy  is a rapidly  growing market in the
United  States.   Laparoscopic   procedures,   such  as  gall  bladder  removal,
hysterectomies and hernia repair can now be routinely performed through a trocar
cannula. The cutting and coagulating  instruments most often utilized are either
electrosurgical or lasers. Each of these methods involves certain patient risks.
With  monopolar  electrosurgical  devices,  there is a risk that the  passage of
electrical  current  through the body will result in unintended  lateral  tissue
damage.  Tissue  damage  can occur in  laparoscopic  procedures  performed  with
monopolar  instruments due to RF current from the monopolar  instrument inducing
current on one of the trocar cannulas or other surgical instruments. This tissue
damage,  which can  include  severe  burning,  may not be visible to the surgeon
during surgery,  but may result in  post-operative  complications  such as bowel
perforation.  Lasers  are  sometimes  difficult  to  control  and  have  limited
coagulation  effect,  particularly  in the closed  conditions of a  laparoscopic
procedure.  They are also expensive to acquire and may be  inconvenient  for the
clinician due to the problems of scheduling  the limited  number  available in a
hospital and the high level of expertise required.  To the Company's  knowledge,
the  EVERSHEARS  Bipolar  Scissors  and the BiLAP  Probe were the first  bipolar
electrosurgical  devices  commercially  available  for the purpose of  providing
cutting and  coagulation in  laparoscopic  procedures.  In the past three years,
there have been additional products introduced to the market by competitors that
may address the need for cutting and coagulation during laparoscopic procedures.

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Current Laparoscopic Surgical Products                        

         EVERSHEARS Bipolar Scissors. The EVERSHEARS II Bipolar Scissors is used
to cut and coagulate tissue during laparoscopic  surgery,  combining  mechanical
cutting with  electrosurgical  coagulation.  The EVERSHEARS II Bipolar  Scissors
consists  of a handle  and a long  tube  with  blades  at the  distal  end.  The
EVERSHEARS  II also  contains a spindle which allows the physician to rotate the
device.  The patented  EVERSHEARS II design consists of metal cutting blades and
stainless steel support member which serves as the coagulation  electrodes.  The
conductive  metal  cutting  blade is  isolated  from  the  support  member  by a
non-conductive  adhesive.  The  EVERSHEARS  II Bipolar  Scissors  is designed to
utilize  the  bipolar  coagulating  output  of  most  standard   electrosurgical
generators on the market.  The EVERSHEARS II Bipolar  Scissors is available in a
dual action curved design which allow the physician better  visualization of the
surgical site.                                                                  

         The Company currently distributes the EVERSHEARS II Bipolar scissors to
hospitals  and  physicians  only  through  its  network  of   distributors   and
independent  marketing  representatives.  Sales of EVERSHEARS  Bipolar  Scissors
exceeded $1,200,000 for 1997.                                                   

         BiCOAG Bipolar Forceps.  The BiCOAG Forceps is used to coagulate tissue
and blood vessels during laparoscopic  surgery. The BiCOAG Forceps consists of a
handle and a long tube  containing two electrodes and a spindle which allows the
physician  to rotate the device to more  easily  accomplish  its  function.  The
forceps is  available in two models,  a macro  version  which has large  paddles
attached to the end of the electrodes for coagulating large areas, and the micro
version which has a small electrode  surface for more precise  coagulation.  The
BiCOAG Forceps is designed to operate on the bipolar  coagulating output of most
standard electrosurgical generators on the market.                              

         The BiCOAG Forceps were reintroduced to the Company's independent sales
channel in September 1995 after an 18-month hiatus.  Sales of the BiCOAG Forceps
were previously restricted from the Company's independent sales channel due to a
now-terminated  exclusivity  provision  in the  product  supply  agreement  with
Ethicon  Endo-Surgery,  a division of Johnson & Johnson. The sales impact of the
reintroduction of the BiCOAG Forceps for 1995 was nominal,  but in 1996 revenues
exceeded $200,000 and in 1997 they grew almost 15% from the prior year.         

         In addition to the  Company's  independent  sales  channel,  the BiCOAG
Forceps are also marketed and  distributed  by Ethicon  Endo-Surgery  and Origin
MedSystems,  a subsidiary of Guidant  Corporation.  Sales to these OEM customers
represented 19% of the Company's revenue in 1996 and 10% in 1997.               

         BiLAP Bipolar  Probes.  The BiLAP Probe consists of a handle and a long
rigid tube.  The probe contains  cutting  electrodes and an area to provide spot
coagulation on the distal end, and features suction and irrigation  capabilities
to the  operative  site.  The BiLAP Probe was  released  for general sale in the
United States in October 1991.  Initially the BiLAP Probes were designed to work
only on an Everest-made Bipolar generator; however, due to product modifications
made in 1996,  the device is now  compatible  with most  common  electrosurgical
generators,  eliminating the need for an Everest  Generator.  Sales of the BiLAP
System to date have been  minimal,  and the Company does not believe  sales will
increase significantly in the future.                                           

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         BiCOAG Dissecting Forceps.  The BiCOAG Dissecting Forceps is similar to
the bipolar  forceps  described  above,  but  combines  the ability to grasp and
dissect  tissue  in  the  surgical   procedure  with  the  benefits  of  bipolar
coagulation. This product provides the surgeon with a versatile and high-utility
instrument,  and is compatible with most  electrosurgical  generators.  Sales of
this product in 1997 exceeded $400,000, an increase of 26% from 1996.           

         BiLAP Bipolar Needle  Electrode.  The BiLAP Bipolar Needle Electrode is
similar in design to the BiLAP  product line but features an  adjustable  needle
electrode  that  advances  and  retracts  for  precise  cutting  that  preserves
surrounding  tissues.  The device  utilizes  the  safety of  bipolar  energy and
provides  the  surgeon  with  precision  cutting  performance.  This  device  is
compatible with most common electrosurgical generators.                         

         Sales  of the  BiLAP  Needle  Electrode  in  1997  were  in  line  with
expectations.  The sales of this product are not  expected to reach  significant
levels  since this  product  has a small  niche of the  market  based on current
surgical techniques.                                                            

         BiCOAG Bipolar Cutting  Forceps.  The Company  introduced this patented
new  product  in  September  1995 in a 10mm  version.  This  innovative  product
incorporates a precision  bipolar forceps for grasping and coagulation of tissue
with a surgical  cutting  blade  positioned  between the  forceps  jaws to allow
transection  of  coagulated  tissue.  The  Company  was issued a patent from the
United States Patent Office on August 29, 1995 for this design.                 

         The BiCOAG Cutting Forceps allows the laparoscopic  surgeon the ability
to grasp and coagulate  safely with bipolar energy and transect  tissue with one
instrument. This product minimizes the number of surgical instruments needed and
the need for  instrument  exchanges,  resulting in a reduction of surgical time.
Additionally,  the use of bipolar energy to safely and effectively  seal vessels
may result in the  elimination of costly stapling  devices in many  laparoscopic
procedures.                                                                     

         In the second quarter of 1996,  the Company added a locking  feature to
the device  which  enables the device to be used for  retraction  and  increases
surgeon ease and comfort.  The Company also  commenced  shipments of the new 5mm
version of the BiCOAG Cutting  Forceps during the last half of 1996. The Company
believes this device is the first  commercially  available 5mm cutting  forceps.
The 5mm  version of the BiCOAG  Cutting  Forceps  complements  the 10mm  device,
offering  surgeons the advantage of using  smaller  trocars,  reducing  incision
size, cost and potential complications.                                         

         The Company  realized a  significant  portion of its growth in 1996 and
1997 from the revenues  generated  from this product  line.  Revenues  grew from
under  $200,000 in 1995 to in excess of  $1,000,000  and  $2,000,000 in 1996 and
1997,  respectively.  The Company  expects this product line to continue to be a
source of revenue growth in 1998.                                               

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         BiCOAG 3mm Bipolar  Forceps.  In December 1996, the Company  introduced
what it  believes  to be the  world's  first 3mm  Bipolar  laparoscopic  forceps
targeted for the emerging microlaparoscopy market. This device allows for secure
grasping,  effective  coagulation,  the use of smaller trocar ports and improved
outcomes.  Procedures  such as  diagnostic  laparoscopy  are being  moved out of
traditional hospital settings to alternate sites, including surgical-centers and
physicians' offices.  The Company believes smaller  instrumentation will improve
the  success  rate of these  procedures  by allowing  the use of smaller  ports,
reducing  complications.  Revenues  from this product line in 1997 were limited.
The Company also plans to introduce a 3mm Bipolar scissors in 1998 to complement
the 3mm Bipolar  forceps,  thereby  providing  additional  functionality  to the
clinician in the area of microlaparoscopy.                                      

         In mid-1997  the Company  submitted a 510(k)  submission  to the United
States Food & Drug Administration for clearance to market the 3mm BiCOAG Bipolar
Forceps to be indicated for use in female tubal  sterilization  procedures.  See
"Regulation." An estimated 700,000 tubal sterilization  procedures are performed
yearly in the United  States.  The  Company  has  observed  a movement  of these
procedures to alternate site venues, and the Company believes this may represent
a significant  opportunity for this product.  The Company received  approval for
this procedure's labeling in March 1998.                                        

         Laparoscopic  Surgical  Products  Under  Development.  The  Company has
ongoing  development  projects to optimize the performance of its products,  and
the  reduction  of  its  manufacturing  costs  through  the  benefits  of  value
engineering,  and to offer a lower profile,  higher-quality blade design for its
bipolar scissors.                                                               

GI Endoscopic Products                                        

Current GI Endoscopic Products                                

         BiSNARE  Polypectomy  Snare.  Lower   gastrointestinal   polyp  removal
procedures are performed to reduce the risk of cancerous lesion formation.  When
performed with a monopolar  snare,  this procedure may have the undesirable side
effects  of colon  wall  perforation  and  delayed  hemorrhage.  The  Company is
marketing a device designed to make the removal of polyps easier and safer.  The
BiSNARE  Polypectomy  Snare  consists of a bipolar wire loop on a long  catheter
which is inserted  through an endoscope.  The wire loop is placed over the polyp
by the  endoscopist,  RF energy is activated,  and, as the polyp is cut from the
intestinal wall, the exposed blood vessels are coagulated.  The Company believes
that,  compared  to  competing  monopolar  devices,  the BiSNARE  presents  less
potential for burns and intestinal  perforations  because it requires less power
and the energy is localized to the lesion. In addition,  it is easier to prepare
the patient for the procedure  than with competing  devices  because the BiSNARE
does not require a grounding pad.                                               

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         The BiSNARE  polypectomy  device was  released  for general sale in the
United  States market in August 1990 after  limited  marketing  during the first
half of the year in the United  States and in Japan.  The BiSNARE  experienced a
decline in 1996 sales as the Company transitioned to a new distributor in Japan,
KK Adachi,  in January  1996 and  experienced  a delay in  obtaining  regulatory
approval.  Sales of this product line approached $335,000 in 1996 as compared to
almost $411,000 in 1995. Sales of this product in Japan continued to fall by 25%
in 1997 to a level  of  $255,000.  This  decline  in  sales  resulted  from  the
competitive  products  offered in Japan,  which have eroded the Company's market
share. The Company,  together with its  distribution  partner,  KK Adachi,  have
redesigned  the handle and  instituted  other product  improvements  to meet the
marketplace  needs.  The Company is planning an  introduction  of the redesigned
product in the second quarter of 1998. The Company expects sales of this product
to decrease  marginally in 1998 due to the market conditions and the uncertainty
of market  acceptance  of this  redesigned  BiSNARE.  The  BiSNARE is  currently
offered  in several  models to address  physician  preferences.  The  Company is
currently focusing on increasing its market share in laparoscopy, therefore, the
BiSNARE is sold to  hospitals  and  physicians  in the United  States  through a
limited network of independent marketing representatives and distributors.      

         BiCOAG  Probe  Coagulator.   In  a  common  endoscopic   procedure,   a
coagulating  tip on the  distal end of a  catheter  is used to treat  ulcers and
other  intestinal  bleeding.  The BiCOAG  Coagulator is a catheter with a spiral
electrode  tip  and a  flushing  port  designed  to  facilitate  the  endoscopic
visualization and coagulation of gastrointestinal bleeding. The BiCOAG Probe has
a spiral bipolar electrode designed to permit the endoscopist to use any surface
of the tip for therapy  while  reducing the  incidence of tissue  adhesion.  The
BiCOAG Probe was released for general sale to the United States market in August
1990 and to the Japanese market in September 1990.                              

         The Company has entered into an agreement with Bard  Interventional,  a
division of C.R.  Bard,  Inc.,  and is providing a private  label version of the
coagulating  probe  for  sale in the  United  States  and  Canada.  Bard  has no
obligation  to purchase a minimum  number of units under this  agreement.  Sales
under this agreement in 1997 were unchanged from 1996 levels.                   

GI Endoscopic Products Under Development                      

         Biopsy  Forceps.  The Company has developed a bipolar  instrument  that
will  enable  the  endoscopist  to  obtain a tissue  sample  for  pathology  and
coagulate the site while  maintaining  the  integrity of the sample.  The market
potential  for the product is under  evaluation.  The Company has entered into a
development  agreement  with a leading  international  distributor  of  surgical
instruments to refine the product design and explore the market potential.      

Minimally Invasive Cardiac Surgery                            

         The Company has  identified  the emerging  minimally  invasive  cardiac
surgery market as an opportunity to export its bipolar  technology.  The Company
believes the inherent  safety of bipolar  technology  offers the  cardiovascular
surgeon the  cost-effective  electrosurgical  solution to meet the challenges of
these  new  procedures.   The  Company  also  believes   strongly  that  bipolar
electrosurgery  has the  potential  to become the  standard  of care for the new
minimally invasive cardiac surgery marketplace.                                 

         The Company is exploring  two  applications  for bipolar  technology in
cardiac  surgery--bipolar  dissection  of the  internal  mammary  artery  during
coronary artery bypass surgery,  and bipolar  "ligation and transection" of side
branches  during  minimally  invasive  saphenous  vein  harvesting.  The Company
believes it can leverage its technology to these procedures without  significant
obstacles.  The  applicable  products  include the BiCOAG Cutting  Forceps,  the
EVERSHEARS II Metal-on-Metal  Bipolar Scissors and the new BiSECTOR(TM) Ligating
Forceps.                                                                        

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         In mid-1997,  the Company entered into a product supply  agreement with
Guidant  Corporation  for the  cardiovascular  market.  Under  the terms of this
agreement,  Everest  supplies Guidant with a version of its bipolar scissors and
bipolar cutting forceps to be packaged in the proprietary  Guidant  VasoView(TM)
Balloon Dissection System kit, offering clinicians a complete minimally invasive
solution for saphenous  vein  harvesting  during  cardiovascular  and peripheral
vascular surgical procedures.  Surgeons perform  approximately  600,000 coronary
artery bypass procedures and 200,000 peripheral bypass procedures worldwide each
year.  Guidant introduced the Everest Medical products to their customers during
the third quarter of 1997.  Shipments to Guidant of these  products  represented
over 10% of the Company revenues in the fourth quarter of 1997.                 

         In the first  quarter of 1998,  the  Company  introduced  its  BiSECTOR
Bipolar  Ligating  Forceps  as a tool for  minimally  invasive  sapheneous  vein
harvesting to be included in kits being  introduced  on the market.  The product
provides a one-step  alternative to coagulate and transect vessels,  compared to
the single function, more costly, scissors and clip appliers.                   

         In  addition,   the  Company  will  be  exploring  proprietary  bipolar
technology as an  application  to improve the current  internal  mammary  artery
(IMA) harvesting  technique in minimally  invasive,  beating heart, bypass graft
procedures.  With obvious vital  structures  such as the heart and aorta nearby,
the Company  believes these  relatively new and still evolving heart  procedures
will be more effective due to the added safety and one-step methods that bipolar
technology brings.                                                              

General Market Trends                                         

         The MIS market  continues to grow.  According to MedPro Month  (October
1995),  the  worldwide  laparoscopy  market  experienced a 12% growth in 1995 to
nearly $1 billion. The U.S. sales of laparoscopy related equipment was projected
to  increase  11% in 1996.  Factors  accounting  for this  growth  include:  (a)
increasing  concern by employers and  healthcare  providers  regarding the total
system costs associated with surgery; (b) higher degree of awareness of patients
regarding the benefits of MIS; and (c) improved technology for use by clinicians
in these procedures.                                                            

         At present,  many  physicians,  hospitals and third party payers do not
fully appreciate the favorable economics of MIS. There is a growing body of data
to support the conclusion  that MIS  procedures  will  significantly  reduce the
total system  healthcare-related  costs of surgery. These potential cost savings
include  reduced  hospital stays and patient  recovery time.  From an employer's
perspective,  savings are evident in lower costs of  short-term  disability  and
workers'  compensation.  In  addition,  employers  may realize  savings in costs
associated  with the hiring of replacement  workers--training  expense,  reduced
productivity  and  additional  compensation.  The  Company  believes  that large
employers   will  become  more   aggressive  in  managing   their  total  system
healthcare-related costs and indicate a preference for MIS procedures.  This may
include employers limiting reimbursement to laparoscopic procedures only, unless
clearly contraindicated.                                                        

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         Today,  patients  are better  informed  with respect to the benefits of
MIS--returning to an active lifestyle sooner,  potentially  reduced risks due to
anesthesia and infection,  and obvious cosmetic  advantages--and  are requesting
less invasive procedures.                                                       

         Because of these market trends, the Company believes that the minimally
invasive  surgical  market  should  experience a high rate of growth in the next
several years.  Some industry analysts are predicting that well over one-half of
all general surgical procedures will be performed in this manner within the next
two to five years.  Laparoscopic removal of the gall bladder has experienced the
most dramatic increase in the number of procedures performed. The new method can
reduce the  average  hospital  stay from three or more days to one day,  or even
eliminate an overnight  stay,  and results in as little as one week of lost work
time, compared to up to one month for the open surgical method.                 

         The Company believes  endoscopy also has significant  growth potential.
Gastrointestinal endoscopists are typically internal medicine sub-specialists or
colo-rectal  surgeons.  As the trend toward  minimally  invasive  procedures has
strengthened,  the gastrointestinal  endoscopists have added endoscopic surgical
procedures to their endoscopic  diagnostic  practices.  This therapeutic use has
reduced the need for more invasive surgical procedures.  The Company anticipates
that, as additional  devices  offering  features of safety and  ease-of-use  are
introduced, more procedures will be performed by endoscopists.                  

         The  current  health  care  debate by the  federal  government  has the
potential to  tremendously  impact the system of delivery of health care in this
country. While the ultimate outcome is uncertain at this time, the Company feels
it will be  well-positioned  to take advantage of any change that may occur.  In
order to reduce the overall rate of growth of spending on health  care,  any new
or revised  system will need to  encourage  the ongoing  trend to MIS due to the
overall efficiency of these procedures.  The Company also expects that the trend
towards  managed health care will bring into the procedural  equation  important
factors such as safety,  efficacy,  cost effectiveness and ease of use resulting
in a greater demand for bipolar energy.                                         

Competition                                                                     

         The medical  device  industry is  intensely  competitive  in almost all
segments and tends to be dominated in large, more mature markets by a relatively
small group of large and well-financed companies. The Company also competes with
smaller,  entrepreneurial  companies,  some of which are  better  financed  than
Everest and may have established positions in certain markets.                  

Minimally Invasive Surgical Markets                           

         A number of major medical products  suppliers,  including United States
Surgical Corporation,  Ethicon, Inc. (a subsidiary of Johnson & Johnson,  Inc.),
CONMED   Corporation,   Karl  Storz   Endoscopy-America   Inc.,  Imagyn  Medical
Technologies,  Inc. and Circon  Corporation  are currently  selling  devices for
minimally invasive surgical  procedures.  For the most part, the electrosurgical
products  sold by these  companies  are  monopolar  devices.  The  Company  also
believes  that  a  number  of  companies  are  developing  bipolar  devices  for
laparoscopic  applications.   Competitors  are  selling  a  bipolar  coagulating
forceps.  The  Company  believes,  however,  that  it is the  only  manufacturer
currently  marketing a full line of bipolar  devices  specifically  designed for
laparoscopy.                                                                    

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         Due to the expected  rapid growth in the market for minimally  invasive
surgical  products,  the Company  anticipates  that additional  competitors will
enter the market. It also expects that there will be a consolidation of existing
competitors, including acquisitions of small companies by large medical products
companies. This trend will mean increased competition for the Company.          

Endoscopic Markets                                            

         The  principal  competitors  of  the  BiSNARE  polypectomy  device  are
Microvasive,  Inc. (subsidiary of Boston Scientific Corp.),  Wilson Cook Medical
Inc., Bard  Interventional (a division of C.R. Bard, Inc.) and Olympus Corp. All
of these companies  market  monopolar  systems.  BEI, Inc. makes a bipolar snare
that is currently  sold to customers  at a  significantly  higher price than the
BiSNARE.                                                                        

         The principal  competitors to the BiCOAG Probe are Microvasive,  Circon
Corporation and Olympus. All of these companies market bipolar devices, with the
exception of Olympus, which offers a device using heat for coagulation.         

         The Company believes that the principal competitive factors in both the
MIS and endoscopic markets are product features,  physician familiarity with the
products and their function, the ability of products to address cost containment
issues, product quality, distribution strength and price. Competitors to each of
the Company's products market both disposable and reusable products.  All of the
Company's  current  surgical  instruments are intended for single use, a feature
which the Company  believes  provides  the benefits of less risk of infection to
patients and reduced labor costs to hospitals.                                  

Marketing and Distribution                                                      

         The Company  markets and promotes its products  through  advertising in
medical journals,  publication of scientific papers,  direct mail, attendance at
trade shows and  participation by Everest's  personnel in training  sessions for
physicians.   The  Company  also  provides   promotional   information  for  its
independent sales  representatives and distributors.  In addition,  the Company,
its independent  representatives  and its distributors  provide  physicians with
assistance in learning the proper use of the Company's laparoscopic products.   

         Over the past 4 years,  the  Company  has  focused  on  developing  its
independent  sales  channel  whereby the Company  works with  independent  sales
organizations  which have expertise in the Company's  primary markets of general
surgery and gynecologic laparoscopy.  The Company, in many cases, retains direct
billing to the  hospital  and pays a  commission  based on orders  shipped.  The
Company has seen this  distribution  channel grow to represent  63% of its sales
volume  in 1997 as  compared  to 58% and 54% of its  volume  in 1996  and  1995,
respectively.  The Company  believes that continued  management  focus,  ongoing
product  development and increased sales and marketing  efforts will continue to
grow this independent sales channel in 1998.                                    

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         The Company is approaching the minimally invasive cardiac market with a
dual strategy.  The first is through Guidant Corporation as a strategic marketer
and  distributor  of versions of the Company's  bipolar  products to be packaged
with the VasoView  Balloon  Dissection  System for less invasive  saphenous vein
harvesting.   In   addition,   the  Company   will  market  a  line  of  bipolar
instrumentation for use in non-Guidant saphenous vein harvesting systems through
a network of independent sales representatives.                                 

         The Company  continues to maintain  its  non-exclusive  product  supply
agreement  with  Ethicon  Endo-Surgery,  a division of Johnson & Johnson,  Inc.,
whereby  Ethicon  was  granted a license  to market the  Company's  laparoscopic
forceps. The Company also has a non-exclusive  agreement with Origin MedSystems,
a subsidiary of Guidant Corporation, established in 1993 to market the Company's
laparoscopic forceps.  Sales to Ethicon and Origin declined in 1997 due to these
customers  continuing to balance their  inventory  levels.  The Company  expects
sales to these customers to increase marginally in 1998 as the ordering patterns
reflect the increased demand for these products.                                

         Everest  currently  markets  its GI  endoscopic  products in the United
States through a minimum number of independent distributors.  These distributors
do not have  written  agreements  with the Company and serve on a  non-exclusive
basis.  The Company also  services a growing  number of accounts  directly.  The
Company continues to provide Bard Interventional (a division of C.R. Bard, Inc.)
with its gastrointestinal coagulating probe.                                    

         The  Company's  sales and  marketing  department  consists  of the Vice
President of Sales and Marketing,  four regional sales  managers,  one marketing
manager for the  laparoscopic  product  line, a product  manager  focused on the
minimally   invasive  cardiac  market  and  two  sales  and  marketing   support
individuals.  The  Company  expects  to  continue  to  invest  in  this  growing
distribution strategy in 1998.                                                  

         The Company intends to continue to utilize independent distributors for
foreign  sales.  During 1997, the Company  concentrated  its sales and marketing
efforts  primarily in the United  States market and  experienced  an increase in
sales   internationally.   The  Company   expects  sales  in  1998  to  increase
domestically, as well as internationally.                                       

Manufacturing                                                                   

         The  manufacturing  process for the Company's current products consists
primarily  of the  assembly  of parts  and  components  purchased  from  outside
vendors,  final  testing and  packaging.  The  Company  currently  produces  the
majority of its injection  molded plastic parts. It is probable that the Company
primarily  will  assemble  its future  products  from parts  bought from outside
suppliers.  However,  management  may  determine  that  certain  parts should be
produced by the Company due, for instance,  to a desire to control quality or to
reduce cost.  The Company is currently  subcontracting  sterilization  functions
with third parties. During 1993, the Company installed a class 10,000 clean room
in its facility  which gives the Company the  capability to package its products
in house at considerable savings compared to subcontracting that function.      

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         Most of the parts and components used in the Company's current products
are purchased from multiple vendors or are available from additional vendors the
Company has qualified. However, in some instances the Company purchases, and may
in the future purchase, only from a single vendor. Although the Company believes
it would be able to obtain  such parts  from  alternative  vendors if  required,
there could be some  interruption in the Company's ability to supply products to
customers.  If, as in the past, the Company finds itself with a single source of
supply for a critical component,  it will, to the extent possible, take steps to
protect itself from a shortage of supply.  Such steps include  increased  safety
stock,  working to qualify  additional  vendors,  and alternative  designs which
utilize currently available components.                                         

Research and Development                                                        

         The Company's research and development  activities are conducted at its
headquarters  facility  and at  laboratory  and clinical  facilities  at various
universities and hospitals.  The Company attempts to coordinate its research and
development activities with those of its scientific advisors and other physician
contacts. The objective of the Company is to direct those coordinated efforts to
use its  base of  technology  and  expertise  to  develop  products  which  meet
identified  market needs.  For the years ended  December 31, 1997 and 1996,  the
Company's  research and  development  expenditures  were  $633,898 and $606,970,
respectively.  The Company expects spending in the research and development area
to increase as the Company attempts to expand its laparoscopic  product offering
and  to  capitalize  on  certain   opportunities   in  the  minimally   invasive
cardiovascular arena, microlaparoscopy and other surgical specialties.          

Regulation                                                                      

         The  medical  devices  manufactured  and  marketed  by the  Company are
subject to regulation by the U.S. Food and Drug  Administration (the "FDA") and,
in some  instances,  by state and foreign  authorities.  Pursuant to the Medical
Device Amendments of 1976 (the "1976  Amendments") to the Federal Food, Drug and
Cosmetic Act, and regulations promulgated  thereunder,  medical devices intended
for human use are  classified  into three  categories  (Classes I, II, and III),
depending upon the degree of regulatory  control to which they would be subject.
The  Company's  current GI surgical  products  have been  classified as Class II
devices, and the Company believes that its planned  electrosurgical devices will
also be in that class.                                                          

         If a new  device,  irrespective  of  whether  it is a  Class  II or III
device,  is  substantially  equivalent  to an  existing  device  that  has  been
continuously  marketed since the effective date of the 1976  Amendments (May 28,
1976) (a "Substantially  Equivalent Device"),  FDA requirements may be satisfied
through a Premarket Notification Submission (a "510(k) Submission"), under which
the applicant provides product  information  supporting its claim of substantial
equivalence.  In a  510(k)  Submission,  the FDA  may  also  require  that it be
provided with clinical test results demonstrating the safety and efficacy of the
device.  Under  certain  circumstances,  that clinical data can be obtained only
after  submitting  to the  FDA an  application  for  an  Investigational  Device
Exemption  ("IDE").  Marketing may commence when the FDA issues a letter finding
substantial  equivalence.  The Company has received 510(k) marketing  clearances
finding  substantial  equivalence from the FDA,  without  submission of clinical
testing data, for all of its current products.                                  

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         If a  medical  device  does  not  qualify  for  the  510(k)  Submission
procedure,  the manufacturer must file a premarket approval application ("PMA").
This requires more extensive  prefiling  testing than the 510(k)  Submission and
involves a significantly longer FDA review process. FDA approval of a PMA occurs
after the applicant has established the safety and efficacy of the device to the
satisfaction of the FDA under an IDE Procedure requiring preclinical  laboratory
and animal tests and human clinical  studies.  The Company does not believe that
any of its products  currently  under  development  will be subject to this more
time-consuming FDA review process.                                              

         The United States Congress has enacted  legislation which substantially
changes  certain  aspects of the  regulation of the sale of medical  devices and
which,  depending  on  how  it  is  interpreted  and  enforced,  could  make  it
substantially  more  difficult and  time-consuming  to comply with  premarketing
clearance and approval processes.                                               

         As a manufacturer  of medical  devices,  the Company is also subject to
certain other FDA regulations,  and its  manufacturing  processes and facilities
are  subject  to  continuing  review by the FDA to ensure  compliance  with Good
Manufacturing Practices regulations. The Company believes that its manufacturing
and quality control procedures  substantially conform to the requirements of FDA
regulation.                                                                     

         The financial arrangements through which the Company markets, sells and
distributes  its products  may be subject to certain  federal and state laws and
regulations  with  respect to the  provision  of  services  or  products.  These
so-called  "fraud and abuse" laws and  regulations  prohibit  certain  direct or
indirect  payment  arrangements  that are  designed to induce or  encourage  the
purchase or recommendation of products  reimbursable under Medicare or Medicaid.
Violations  of these  laws and  regulations  may  result in civil  and  criminal
penalties,  including  substantial fines and imprisonment.  The Company believes
that  its  operations  and  its  marketing,  sales  and  distribution  practices
currently  comply in all respects with the fraud and abuse laws and regulations,
to the extent they are applicable.                                              

         The  Company's  devices  are also  subject  to  regulation  in  foreign
countries.                                                                      

Third Party Reimbursement                                                       

         In 1983,  Congress  amended  the Social  Security  Act to  establish  a
prospective  reimbursement  system for Medicare  which limits the  reimbursement
that  hospitals  receive for  treating  certain  medical  conditions  by setting
maximum  fees that can be charged  for  Medicare  patients.  Under this  system,
hospitals  are paid a fixed amount for  treating  each patient with a particular
diagnosis.  This differs from the previous system under which Medicare providers
were reimbursed for actual costs of providing services up to a stated maximum on
each procedure performed.  In addition,  certain private insurers have initiated
prospective reimbursement systems designed to slow the escalation of health care
costs.  The Company does not believe that these  reimbursement  limitations will
have a material  adverse  effect on future  sales of its  existing or  currently
proposed  product  lines,  although  the Company has become aware of pressure to
limit reimbursement for single-use devices.                                     

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Intellectual Property                                                           

         Due to the rapid  technology  change  that  characterizes  the  medical
device industry, the Company believes that the improvement of existing products,
reliance  upon  trade  secrets  and  unpatented  proprietary  know-how  and  the
development  of new products are generally as important as patent  protection in
establishing and maintaining a competitive advantage.  Nevertheless, the Company
has made, and continues to make, efforts to obtain patents,  when available,  in
connection  with its product  development  program.  There can be no  assurance,
however, that any patents obtained will provide substantial  protection or be of
commercial  benefit  to  the  Company,  or  that  their  validity  will  not  be
successfully challenged.                                                        

         In 1994,  the Company  was  awarded a patent for its second  generation
bipolar scissors design, EVERSHEARS II. Although there were two opposing patents
issued to another  company  in 1994  involving  ceramic  bipolar  scissors,  the
Company  believes  that  the  patented  EVERSHEARS  II  is  a  strong  marketing
alternative in the bipolar scissors  market.  After review of the allowed claims
of the two opposing  patents and the related  files,  the Company,  based on the
advice  of  its  patent  counsel,   believes  that  its  metal-on-metal   design
incorporated  in the  EVERSHEARS  II does not infringe on either of the opposing
patents issued. The Company commenced shipment of the EVERSHEARS II on a limited
basis in the third quarter of 1994 and full market introduction in January 1995.

         In 1995,  the Company was awarded  patents for its  dissecting  forceps
design and its bipolar  cutting  forceps  design.  The Company was awarded three
additional  patents  in  1996,  two of  which  relate  to the  bipolar  scissors
technology. The third patent, a methods patent, was granted to the Company which
allows for the  interchangeability  of  monopolar  and  bipolar  currents  to an
instrument.                                                                     

         In November 1997, the Company received  official notice from the United
States  Patent  and  Trademark  Office  ("PTO")  that  it  intends  to  issue  a
reexamination  certificate for the Company's bipolar cutting forceps patent. The
Company had requested  this  reexamination  in an effort to ensure the long-term
viability of the bipolar cutting forceps patent. This reexamination  certificate
will state that the essential  claims of the bipolar cutting forceps patent have
been upheld by the PTO.  The  bipolar  cutting  forceps  design  incorporates  a
precision bipolar forceps for grasping and coagulation of tissue with a passive,
reciprocally-moveable surgical cutting blade positioned between the forceps jaws
to allow  transection  of the coagulated  tissue.  The Company was issued a U.S.
patent for this device on August 29,  1995. A  reexamination  is a PTO action to
review an issued patent in the context of newly discovered prior art.           

         The Company currently has one patent issue outstanding. The Company was
notified of a declared patent interference action--an action to determine who is
entitled to the patent on the same  invention--that  has been filed with the PTO
on the Company's metal-on-metal bipolar scissors patent by an unknown party. The
Company  believes  it will  ultimately  prevail  in  this  action;  however,  an
unfavorable  result  could  adversely  affect to the  Company's  ability  to use
certain of its technology in the manner expected.                               

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         The  Company  generally  requires  its  consultants  and  each  of  its
employees to agree in writing to keep its proprietary  information  confidential
and,  within  certain  limitations,  to assign all  inventions  relating  to the
Company's business to the Company.                                              

         The Company has registered its trademark logo, Everest Medical, and the
trademarks BiSNARE, BiTOME, BiCOAG, EVERSHEARS,  BiLAP and BiBx on the principal
register in the PTO. In addition,  the Company has filed trademark  applications
on some of its other products.                                                  

Employees                                                                       

         As of March 14,  1998,  the Company had 79  employees,  of which 78 are
full-time  and one is  part-time.  The  employees  include three in research and
development,  42 in production,  18 in  manufacturing  support,  10 in sales and
marketing  and  six in  general  and  administrative  functions.  The  Company's
employees  are not  represented  by a  union,  and  the  Company  considers  its
relationship with its employees to be good.                                     

Outlook and Risks                                                               

         Certain statements made in this annual report on Form 10-KSB, which are
summarized   here,  are   forward-looking   statements  that  involve  risk  and
uncertainties,  and actual  results may be  materially  different.  Factors that
could  cause  actual  results to differ  include,  but are not  limited to those
identified:                                                                     

-    The  expectation  that as the  Company  continues  to  invest  in sales and
     marketing  support  programs,  increased  revenues  will  result  from  the
     Everest-branded  laparoscopy  depends on surgeons  increasing  their use of
     bipolar  technology as an alternative to existing  monopolar and ultrasonic
     technologies, and upon general market conditions and competitive conditions
     within this market, including the introduction of products by both U.S. and
European competitors.                                                 

-    The  expectation  that the Company will prevail in the patent  interference
     action involving its metal-on-metal  bipolar scissors patent depends on the
strength of the other party's claims and on the PTO's judgment.       

-    The  expectation  that  the  shipment  of  bipolar  forceps  will  increase
     marginally  depends on the demand for such products  continuing despite the
maturing of this product line for the Company's OEM customers.        

-    The Company's expectation that it will experience sales growth domestically
     and  internationally  depends on general market  conditions and competitive
     conditions  that may be encountered in both such markets,  and on Everest's
     ability  both (i) to  increase  its market  share in its core  business  of
     laparoscopy  given  that  Everest  competes  with  large,  well-capitalized
     companies who have the ability to enter into contact purchasing  agreements
     with large  institutions,  and (ii) to  establish a market  presence in the
minimally invasive cardiac surgery market.                            

-    The  expectation  that the MIS market in  general  will  experience  growth
     depends on demand and on  acceptance  by  physicians,  hospitals  and third
  party payers of the believe that MIS procedures result in reduced costs.

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-    The expectation that the Company will increase its research and development
     spending in order to achieve  ultimate  sales growth depends on the Company
     having  sufficient  capital.  The belief that the Company's current capital
     resources  will be  sufficient  to fund  current and  anticipated  business
     operations could be adversely impacted by changes in anticipated  operating
     results or the Company's  inability to obtain  financing on favorable terms
 and to meet the Company's obligations on its preferred stock dividends.

ITEM 2.  DESCRIPTION OF PROPERTY                                                

         The Company  currently  rents  facilities  consisting of  approximately
23,485 square feet located at Carlson Technical  Center,  Suite 500, 13755 First
Avenue North,  Minneapolis,  Minnesota  55441.  The Company pays monthly rent of
approximately  $13,650, plus operating expenses and taxes, under the lease which
extends through December 2004. The Company uses  approximately  65% of the space
for  production,  15% for research and development and 10% for each of sales and
marketing and  administration.  The Company  believes this space will adequately
meet its needs for the foreseeable  future,  and, in management's  opinion,  the
property is adequately covered by insurance.                                    

ITEM 3.  LEGAL PROCEEDINGS                                                      

         The Company is not a party to, nor is its  property the subject of, any
material pending legal proceeding.                                              

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

         No matter was submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this report.                              

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Executive Officers of the Company                                               

         The Company's executive  officers,  along with their ages and positions
as of March 16, 1998, are as follows:                                           

Name                    Age                      Position               
John L. Shannon, Jr.       44       President, Chief Executive Officer and    
                   Chairman of the Board
Michael E. Geraghty        50       Vice President, Sales and Marketing       
Steven M. Blakemore        43       Vice President, Operations and Engineering
Thomas F. Murphy           38       Vice President, Finance and Administration
                     and Assistant Secretary

         John L.  Shannon,  Jr. Mr.  Shannon has served as Chairman of the Board
since May 1997 and as President and Chief  Executive  Officer since August 1993.
From May 1989 to June  1993,  Mr.  Shannon  was  President  and Chief  Executive
Officer of EdenTec  Corporation,  a medical device  manufacturer.  From November
1985 to May 1989,  Mr.  Shannon was  employed by  Threshold  Ventures,  Inc.,  a
venture  capital  firm,  most  recently as  President.  From  September  1984 to
November 1985, Mr. Shannon was Marketing Manager for SciMed Life Systems,  Inc.,
a medical device manufacturer. From June 1979 to September 1984, Mr. Shannon was
employed by The Toro Company,  a lawn and garden  manufacturer,  in a variety of
financial, planning and marketing positions, most recently as Marketing Manager.

         Michael E. Geraghty.  Mr. Geraghty joined the Company as Vice President
of Sales and  Marketing in January 1997.  From August 1995 to January 1997,  Mr.
Geraghty was Director of Marketing - Advance Products at ArthroCare Corporation,
a start-up bipolar electrosurgical medical device manufacturer.  From March 1994
to  August  1995,  Mr.   Geraghty  was  the  National  Sales  Manager  of  Laser
Peripherals,  and from  December  1990 to October 1993, he was the Sales Manager
for Intramed Labs, Inc., both of which are medical device manufacturers.        

         Steven M.  Blakemore.  Mr.  Blakemore  has been employed by the Company
since  November  1992,  most  recently  as  Vice  President  of  Operations  and
Engineering.  From October 1989 to February 1992, Mr.  Blakemore was employed by
Clarus  Medical  Systems,  a medical device  manufacturer,  as Vice President of
Operations  and Research and  Development.  From March 1986 to October 1989, Mr.
Blakemore  was  employed  by  Medical  Graphics  Corporation,  a medical  device
manufacturer,  most recently as Vice President of Operations.  Mr.  Blakemore is
the inventor on one patent in medical technology.                               

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         Thomas F. Murphy.  Mr.  Murphy has served as Vice  President of Finance
and  Administration  of the Company since January 1997, prior to which he served
as Chief  Financial  Officer since joining the Company in July 1994.  Mr. Murphy
has also served as Assistant  Secretary of the Company since February 1995. From
December  1992 to July  1994,  he was Vice  President  of  Finance  for  DaVinci
Medical, Inc., a manufacturer of laparoscopic surgical instruments. From October
1990 to May 1992, Mr. Murphy was employed by Tsumura  International,  a consumer
goods  manufacturer  of home fragrance and bath  products,  as Vice President of
Finance.  From 1986 to October 1990, Mr. Murphy held various  positions in sales
operations,  administration and finance for Minnetonka  Corporation,  a consumer
goods manufacturer.                                                             

 PART II

ITEM 5.  MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS               

         The  information  required by Item 5 is  incorporated by reference from
the  Company's  1997  Annual  Report,  portions  of which are filed  herewith in
Exhibit 13.1.                                                                   

         On March 6, 1998,  the Company sold  411,765  shares of Common Stock to
Guidant Corporation for a total of $700,000. No commissions were paid as part of
the  transaction.  In issuing  the shares,  the Company  relied upon Rule 506 of
Regulation D and Section 4(2) of the Securities Act of 1933. Guidant Corporation
was the only investor and is accredited.                                        

ITEM 6.  MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION              

         The  information  required by Item 6 is  incorporated by reference from
the  Company's  1997  Annual  Report,  portions  of which are filed  herewith in
Exhibit 13.1.                                                                   

ITEM 7.  FINANCIAL STATEMENTS                                                   

         The Financial Statements of the Company for the year ended December 31,
1997 are  incorporated  by  reference  from the  Company's  1997 Annual  Report,
portions of which are filed herewith in Exhibit 13.1.                           

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

None.                                                         

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PART III

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

         The  information  required by Item 9 regarding the Company's  executive
officers is set forth in Part I of this report.                                 

         The information required by Item 9 regarding the Company's directors is
incorporated  by reference  from the Company's  1998 Proxy  Statement  under the
caption  "Information  About  Nominees." The Company's  proxy  statement will be
filed  pursuant  to Rule 14a within 120 days after the close of the fiscal  year
for which this report is filed.                                                 

         The  information  relating  to  compliance  with  Section  16(a) of the
Exchange  Act is  incorporated  by  reference  from  the  Company's  1998  Proxy
Statement under the caption "Compliance with Section 16(a) of the Exchange Act."
The Company's proxy statement will be filed pursuant to Rule 14a within 120 days
after the close of the fiscal year for which this report is filed.              

ITEM 10. EXECUTIVE COMPENSATION                                                 

         The  information  required by Item 10 is incorporated by reference from
the Company's 1998 Proxy Statement under the caption  "Executive  Compensation."
The Company's proxy statement will be filed pursuant to Rule 14a within 120 days
after the close of the fiscal year for which this report is filed.              

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT         

         The  information  required by Item 11 is incorporated by reference from
the Company's  1998 Proxy  Statement  under the caption  "Security  Ownership of
Management and Certain Beneficial Owners." The Company's proxy statement will be
filed  pursuant  to Rule 14a within 120 days after the close of the fiscal  year
for which this report is filed.                                                 

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS                         

         The  information  required by Item 12 is incorporated by reference from
the Company's 1998 Proxy Statement under the caption "Certain Transactions." The
Company's  proxy  statement  will be filed  pursuant to Rule 14a within 120 days
after the close of the fiscal year for which this report is filed.              

ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K                                       

(a)      Exhibits:  The exhibits to this Report are listed in the Exhibit  Index
immediately following the signature pages to this Report.     

         A copy of any of the  exhibits  listed  or  referred  to above  will be
         furnished at a reasonable  cost to any person who was a shareholder  of
         the Company as of March 16, 1998,  upon receipt from any such person of
         a written request for any such exhibit.  Such request should be sent to
         Everest  Medical  Corporation,  13755 First Avenue North,  Minneapolis,
Minnesota 55441, Attention: Shareholder Information.          

(b)      Reports on Form 8-K: None filed during the fourth quarter of the fiscal
         year ended December 31, 1997; however,  subsequently, the Company filed
         a Form 8-K  dated  March 6,  1998 to  report  the sale of shares of the
Company's Common Stock to Guidant Corporation.                

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SIGNATURES

         Pursuant to the  requirements  of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Issuer has duly caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized.                           

Dated:   March 26, 1998                 EVEREST MEDICAL CORPORATION             

                                 By       /s/ John L. Shannon, Jr.
                    John L. Shannon, Jr.
                                      President, Chief Executive Officer and
                     Chairman of the Board

         Pursuant to the  requirements  of the Securities  Exchange Act of 1934,
this  Report has been  signed  below by the  following  persons on behalf of the
Issuer and in the capacities indicated.                                         

 (Power of Attorney)

         Each person whose signature appears below constitutes and appoints John
L.  Shannon,  Jr. and Thomas F. Murphy as his true and lawful  attorneys-in-fact
and  agents,   each  acting  alone,   with  full  power  of   substitution   and
resubstitution,  for  him  and in his  name,  place  and  stead,  in any and all
capacities,  to sign any or all  amendments to this Annual Report on Form 10-KSB
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, each acting alone, full power and authority
to do and perform  each and every act and thing  requisite  and  necessary 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  said
attorneys-in-fact   and  agents,   each  acting  alone,  or  his  substitute  or
substitutes, may lawfully do or cause to be done by virtue thereof.             

    Signature                  Title                              Date

/s/ John L. Shannon, Jr.       Chief Executive Officer,           March 26, 1998
John L. Shannon, Jr.           President (Principal Executive                   
          Officer) and Chairman of the
Board             

/s/ David D. Koentopf          Director                           March 26, 1998
David D. Koentopf                                                               

(Signatures continued on following page)                                        

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     Signature                   Title                              Date

/s/ Thomas F. Murphy           Chief Financial Officer            March 26, 1998
Thomas F. Murphy               (Principal Financial and                         
 Accounting Officer)

/s/ Donald R. Brattain         Director                           March 26, 1998
Donald R. Brattain                                                              

/s/ Richard J. Migliori, M.D.  Director                           March 26, 1998
Richard J. Migliori, M.D.                                                       

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 EVEREST MEDICAL CORPORATION

EXHIBIT INDEX TO ANNUAL REPORT
ON FORM 10-KSB
 For the Fiscal Year Ended December 31, 1997

Item No.            Item                                                        

3.1      Restated   Articles  of  Incorporation  of  the  Company,   as  amended
         (Incorporated  by reference to Exhibit 3.1 to the Company's Form 10-KSB
for the fiscal year ended December 31, 1995)                  

3.2      Restated Bylaws of the Company,  as amended  (Incorporated by reference
         to Exhibit 3.2 to the  Company's  Registration  Statement  on Form S-18
(File No. 33-37352-C))                                        

4.1      Specimen form of the Company's Common Stock  Certificate  (Incorporated
         by reference to Exhibit 4.1 to the Company's  Registration Statement on
Form S-18 (File No. 33-37352-C))                              

4.2      Restated  Articles of  Incorporation  of the  Company,  as amended (See
Exhibit 3.1)                                                  

4.3      Restated Bylaws of the Company, as amended (See Exhibit 3.2)           

10.1     1986 Incentive Stock Option Plan, as amended (Incorporated by reference
         to Exhibit 10.6 to the  Company's  Registration  Statement on Form S-18
(File No. 33-37352-C))**                                      

10.2     1986  Non-Statutory  Stock Option  Plan,  as amended  (Incorporated  by
         reference to Exhibit 10.7 to the  Company's  Registration  Statement on
Form S-18 (File No. 33-37352-C))**                            

10.3     Form of Incentive Stock Option Agreement  (Incorporated by reference to
         Exhibit 10.8 to the Company's Registration Statement on Form S-18 (File
No. 33-37352-C))**                                            

10.4     Form of Non-Statutory  Option  Agreement  (Incorporated by reference to
         Exhibit 10.9 to the Company's Registration Statement on Form S-18 (File
No. 33-37352-C))**                                            

10.5     Employee  Stock  Purchase  Plan  (Incorporated  by reference to Exhibit
         10.10 to the  Company's  Registration  Statement on Form S-18 (File No.
33-37352-C))**                                                

10.6     Employee  Incentive  Savings and Profit Sharing Plan  (Incorporated  by
         reference to Exhibit 10.11 to the Company's  Registration  Statement on
Form S-18 (File No. 33-37352-C))**                            

10.7     Employee  Incentive  Savings and Profit Sharing Trust  (Incorporated by
         reference to Exhibit 10.12 to the Company's  Registration  Statement on
Form S-18 (File No. 33-37352-C))**                            

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10.8     1992 Stock Option Plan  (Incorporated  by reference to Exhibit 10.37 to
         the Company's Registration Statement on Form S-1 (File No. 33-45872))**

10.9     Lease  Agreement  dated  September  20,  1989  between  the Company and
         Carlson  Center  Industrial  II Limited  Partnership  (Incorporated  by
         reference to Exhibit 10.36 to the Company's  Registration  Statement on
Form S-18 (File No. 33-37352-C))                              

10.10    Amendment #1 dated December 7, 1992 to Lease  Agreement dated September
         20, 1989 between the Company and Carlson  Center  Industrial II Limited
         Partnership   (Incorporated  by  reference  to  Exhibit  10.13  to  the
    Company's Form 10-KSB for the fiscal year ended December 31, 1994)

10.11    Amendment #2 dated December 9, 1993 to Lease by and between the Company
         and the Estate of James Campbell  (Incorporated by reference to Exhibit
         10.14 to the Company's  Form 10-KSB for the fiscal year ended  December
31, 1994)                                                     

10.12    Supply Agreement dated April 2, 1991 between the Company and C.R. Bard,
         Inc.  (Incorporated  by  reference  to Exhibit  10.36 to the  Company's
Registration Statement on Form S-1 (File No. 33-45872))       

10.13    First  Amendment  to Supply  Agreement  dated April 2, 1991 between the
         Company and C.R. Bard, Inc. (Incorporated by reference to Exhibit 10.36
         to  the  Company's   Registration  Statement  on  Form  S-1  (File  No.
33-45872))                                                    

10.14    Stock  Purchase  Agreement  dated July 15, 1993 between the Company and
         Johnson & Johnson Development  Corporation,  including Distribution and
         License  Agreement   between  the  Company  and  Ethicon   Endo-Surgery
         (Incorporated  by  reference  to Exhibit  10.29 to the  Company's  Form
10-KSB for the fiscal year ended December 31, 1993)           

10.15    Employment  Agreement  with John L.  Shannon,  Jr. dated August 9, 1993
         (Incorporated  by  reference  to Exhibit  10.31 to the  Company's  Form
10-KSB for the fiscal year ended December 31, 1993)**         

10.16    Amendment  to  Employment   Agreement   with  John  L.   Shannon,   Jr.
         (Incorporated  by  reference  to Exhibit  10.25 to the  Company's  Form
10-KSB for the fiscal year ended December 31, 1994)**         

10.17    Amendment  to  Employment  Agreement  with John L.  Shannon,  Jr. dated
         August 25, 1995  (Incorporated  by  reference  to Exhibit  10.19 to the
      Company's Form 10-KSB for the fiscal year ended December 31, 1995)**

10.18    Amendment  to  Employment  Agreement  with John L.  Shannon,  Jr. dated
         December 11, 1996  (Incorporated  by reference to Exhibit  10.18 to the
      Company's Form 10-KSB for the fiscal year ended December 31, 1996)**

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10.19    Form of Warrant dated February 18, 1994 issued pursuant to agreement to
         certain  purchasers  (Incorporated by reference to Exhibit 10.38 to the
    Company's Form 10-KSB for the fiscal year ended December 31, 1993)

10.20    Exclusive  Distribution  Agreement dated January 1, 1996 with KK Adachi
         (Incorporated  by  reference  to Exhibit  10.21 to the  Company's  Form
10-KSB for the fiscal year ended December 31, 1995)           

10.21    Warrant to purchase  290,909  shares of Common Stock dated February 16,
         1996 issued to Okabena  Partnership  K  (Incorporated  by  reference to
         Exhibit  10.25 to the  Company's  Form 10-KSB for the fiscal year ended
December 31, 1995)                                            

10.22    Separation  Agreement dated October 12, 1996 between the Company and R.
         Keith  Poppe  (Incorporated  by  reference  to  Exhibit  10.25  to  the
      Company's Form 10-KSB for the fiscal year ended December 31, 1996)**

10.23    Terms of Employment for Michael Geraghty. (Incorporated by reference to
         Exhibit  10.26 to the  Company's  Form 10-KSB for the fiscal year ended
December 31, 1996)**                                          

10.24*   Amendment  #3 dated  September  11,  1997 to Lease by and  between  the
Company and the Estate of James Campbell, as Landlord         

11.1*    Statement Re Computation of Per Share Loss                             

13.1*    Portions of 1997 Annual Report                                         

23.1*    Consent of Independent Auditors                                        

24.1*    Power of Attorney of John L. Shannon, Jr., David D. Koentopf, Thomas F.
         Murphy,  Donald R.  Brattain and Richard J.  Migliori  (included on the
signature pages of this Form 10-KSB)                          

27.1     Financial Data Schedule (in electronic format only)                    

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

* Filed herewith.                                                             
** Management contract or compensatory plan or arrangement.                     

Dates Referenced Herein   and   Documents Incorporated by Reference

				Referenced-On Page
This ‘10KSB’ Filing		Date		First		Last			Other Filings
		4/28/98		1					DEF 14A
Filed on:		3/31/98							10QSB
		3/26/98		20		21
		3/16/98		1		19			SC 13G
		3/14/98		15
		3/6/98		18		19			8-K
For Period End:		12/31/97		1		22
		9/11/97		24
		12/31/96		12		24			10KSB40
		12/11/96		23
		10/12/96		24
		2/16/96		24
		1/1/96		24
		12/31/95		22		24
		8/29/95		5		14
		8/25/95		23
		12/31/94		23
		2/18/94		24
		12/31/93		23		24
		12/9/93		23
		8/9/93		23
		7/15/93		23
		12/7/92		23
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