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


                                   FORM 10-Q

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

                 For the quarterly period ended September 30, 1997

                                      or

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
    EXCHANGE ACT OF 1934

           For the transition period from ___________ to ___________
                      Commission File Number____________

                         SUMMIT MEDICAL SYSTEMS, INC.

            (Exact name of registrant as specified in its charter)


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

                            10900 Red Circle Drive
                                   Suite 100
                             Minnetonka, MN  55343
                                 612-939-2200
                 (Address including zip code, of  Registrant's
                   principal executive offices and telephone
                         number, including area code)


Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and has been subject to such filing requirements
for the past 90 days.  X  Yes      No
                      ---      ---

The number of shares outstanding of the Registrant's Common Stock on September
30, 1997 was

                       10,114,921 shares $.01 Par Value
<PAGE>
 
INDEX


Part I.  Financial Information

Item 1.  Financial Statements (Unaudited)

         Consolidated statements of financial position--September, 30 1997 and
         December 31, 1996

         Consolidated statements of operations -- Three months ended September 
                                                  30, 1997 and 1996
                                                  Nine months ended September 
                                                  30, 1997 and 1996
                                                  

         Consolidated statements of cash flows -- Nine months ended September 
                                                  30, 1997 and 1996

         Notes to consolidated financial statements -- September 30, 1997

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

Item 3.  Quantitative and Qualitative Disclosures About Market Risk

Part II. Other Information
Item 1.  Legal Proceedings
Item 2.  Changes in Securities
Item 3.  Defaults upon Senior Securities
Item 4.  Submission of Matters to a Vote of Security Holders
Item 5.  Other Information
Item 6.  Exhibits and Reports on Form 8-K
         (a)  Exhibits
         10.1 Agreement dated as of July 31, 1997 By and Between Summit Medical
              Systems, Inc., Duke University, DR Ware LLC, Donald F. Fortin, 
              M.D., Robert M. Califf, M.D. and Harry Phillips, M.D.
         11.1 Computation of Earnings per Share
         27   Financial Data Schedule
         (b)  Reports on Form 8-K

Signatures

Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995

This Quarterly Report on Form 10-Q contains forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended
and Section 21E of the Securities Exchange Act of 1934, as amended. These
forward-looking statements include statements regarding intent, belief or
current expectations of Summit Medical Systems, Inc. (the "Company") and its
management. Such forward-looking statements are not guarantees of future
performance and involve risks and uncertainties that may cause the Company's
actual results to differ materially from the results discussed in the forward-
looking statements. Factors that might cause such differences include, but are
not limited to, failure of the Company's client/server database products or on-
line registries to achieve market acceptance, significant delays in 
developing and implementing system interfaces related to the Company's
client/server database products, discovery of technical difficulties or
defects in the client/server products and on-line registries, and failure of the
Company's initiatives to increase Vista product sales, expand its data
management services and reduce its expense base. The forward-looking
statements herein are qualified in their entirety by the cautions and risk
factors set forth in Exhibit 99, under the caption "Cautionary Statement," to
the Company's Annual Report on Form 10-K, as amended pursuant to amendments
filed on April 4, 1997 and April 30, 1997, respectively. A copy of the Form 10-
K may be obtained from the Public Reference Branch of the SEC at 450 Fifth
Street NW, Washington, DC at prescribed rates.
<PAGE>
 
SUMMIT MEDICAL SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

<TABLE> 
<CAPTION> 
                                                                September 30,   December 31,
                                                                     1997            1996
                                                                  (unaudited)  
                                                               ----------------------------
<S>                                                            <C>             <C> 
        ASSETS

CURRENT ASSETS
        Cash and cash equivalents                                 $ 5,397,897   $ 9,386,069
        Short-term investments                                     25,986,493    35,243,624
        Accounts receivable (net of allowance of $1,162,000 at      3,227,954     3,776,351
           September 30, 1997; $650,000 at December 31, 1996)              
        Other current assets                                        1,409,251       678,627
                                                               ----------------------------
                Total current assets                               36,021,595    49,084,671

        Equipment and fixtures, net                                 1,630,075     3,203,931
        Computer software costs, net                                        -     1,198,573
                                                               ----------------------------
                Total assets                                      $37,651,670   $53,487,175
                                                               ============================

        LIABILITIES AND SHAREHOLDERS' EQUITY

CURRENT LIABILITIES
        Accounts payable and accrued expenses                      $2,886,622    $3,617,718
        Accrued compensation                                        1,268,916     1,236,118
        Accrued royalties                                             113,835       375,332
        Deferred revenue & payables                                 3,164,174     1,867,006
        Income taxes payable                                           26,248         7,648
        Notes payable and convertible debentures                            -       100,000
        Line of credit                                                      -       150,000
        Current portion of long-term debt                               9,542        23,628
                                                               ----------------------------
                Total current liabilities                           7,469,337     7,377,450

LONG-TERM DEBT                                                         23,553        26,525

SHAREHOLDERS' EQUITY
        Common stock, $.01 par value:
          Authorized shares - 38,933,333
          Issued and outstanding shares - 10,114,921
          at September 30, 1997;  10,343,830  at
          December 31, 1996                                           101,149       103,438
        Additional paid-in capital                                 69,149,190    69,700,376
        Accumulated deficit                                       (39,091,559)  (23,720,614)
                                                               ----------------------------
                Total shareholders' equity                         30,158,780    46,083,200
                                                               ---------------------------- 
                Total liabilities and shareholders' equity        $37,651,670   $53,487,175
                                                               ============================
</TABLE> 
The accompanying notes are an integral part of these financial statements.

                                            Page 1



<PAGE>
 
SUMMIT MEDICAL SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)

<TABLE> 
<CAPTION> 
                                                          THREE MONTHS ENDED                      NINE MONTHS ENDED
                                                             SEPTEMBER 30,                          SEPTEMBER 30,
                                                    --------------------------------------------------------------------
                                                          1997         1996                      1997           1996
                                                      (unaudited)   (restated)                (unaudited)    (restated)
                                                    --------------------------------------------------------------------
<S>                                                   <C>           <C>                      <C>           <C> 
Revenue
  Software license                                    $   537,038   $1,507,511                $ 1,831,650   $ 5,515,445
  Support and service                                     947,892      989,117                  2,806,427     3,965,497
  Research & consulting services                        2,025,022    1,530,734                  6,008,081     4,578,074
                                                    ---------------------------            ----------------------------
         Total revenue                                  3,509,952    4,027,362                 10,646,158    14,059,016

Cost of Sales
  Software license                                      1,208,695      186,375                  2,065,010       715,342
  Support and service                                   1,133,793      587,677                  3,045,555     1,806,722
  Research & consulting services                          987,154    1,137,724                  3,807,406     2,932,775
                                                    ---------------------------             ----------------------------
         Total cost of sales                            3,329,642    1,911,776                  8,917,971     5,454,839

         Gross profit                                     180,310    2,115,586                  1,728,187     8,604,177

Operating expenses
  Selling and marketing                                 1,393,689    1,944,595                  4,997,199     6,070,668
  Research and development                                955,614      950,684                  2,772,676     1,969,639
  General and administrative                            3,884,758    1,561,955                 11,908,380     3,959,044
                                                    ---------------------------             ----------------------------

         Total operating expenses                       6,234,061    4,457,234                 19,678,255    11,999,351
                                                    ----------------------------            ----------------------------

Loss from operations                                   (6,053,751)  (2,341,648)               (17,950,068)   (3,395,174)

Gain on Sale of Subsidiaries                            1,072,699            -                  1,072,699             -
Interest income, net                                      430,936      628,586                  1,524,847     1,225,802
                                                    ---------------------------             ----------------------------
Loss before income taxes                               (4,550,116)  (1,713,062)               (15,352,522)   (2,169,372)

Income tax expense                                         13,715          500                     18,423        17,804
                                                    ---------------------------             ----------------------------
Net loss                                              ($4,563,831) ($1,713,562)              ($15,370,945)  ($2,187,176)
                                                    ===========================             ============================
Net loss per share:
Primary & fully diluted                                    ($0.44)      ($0.17)                    ($1.49)       ($0.24)
                                                    ===========================             ============================
Weighted average shares outstanding:
Primary & fully diluted                                10,343,790   10,226,856                 10,350,129     9,088,043
                                                    ---------------------------             ----------------------------
</TABLE> 

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

                                                  Page 2


<PAGE>
 
<TABLE>
<CAPTION>

SUMMIT MEDICAL SYSTEM, INC.
CONSOLIDATED STATEMENTS OF CASH FLOW
(UNAUDITED)
                                                                                     NINE MONTHS ENDED
                                                                                       SEPTEMBER  30,
                                                                           --------------------------------------
                                                                                     1997          1996
                                                                                 (unaudited)    (restated)
                                                                           --------------------------------------
<S>                                                                        <C>                   <C> 
Operating activities:
  Net loss                                                                      $  (15,370,945) $ (2,187,176)
  Adjustments to reconcile net loss to net cash                                                            -
     provided by (used in) operating activities:                                                           -
     Depreciation                                                                    1,667,443       548,632
     Amortization                                                                    1,200,653        68,769
     Loss on disposal of equipment                                                     465,405        60,343
     Gain on sale of subsidiaries                                                   (1,072,699)            -
     Changes in operating assets and liabilities:                                                          
     Accounts receivable (net of allowance of $1,161,993 and $110,331                  239,829     1,180,869
        in 1997 and 1996, respectively)
     Advances to officers                                                                    -        47,500
     Other current assets                                                             (401,959)     (412,366)
     Accounts payable and accrued expenses                                              10,054      (230,581)
     Accrued compensation                                                              139,746       661,821
     Accrued royalties                                                                (261,497)      (27,382)
     Income tax payable                                                                 18,600             -
     Deferred revenue                                                                1,412,168      (232,111)
                                                                           --------------------------------------
        Net cash used in operating activities                                      (11,953,202)     (521,682)

Investing activities:                                                                                      -
  Purchase of short-term investments                                               (19,308,976)  (52,891,425)
  Sales and maturities of short-term investments                                    28,566,107    37,891,271
  Purchases of equipment and fixtures                                                 (743,755)   (1,455,673)
  Net proceeds on sale of subsidiaries                                                 436,540             -
  Cash distributed in sale of subsidiaries                                            (280,298)            -
  Capitalized software cost                                                             (2,080)      (33,297)
                                                                           -------------------------------------
        Net cash provided by (used in) investing activities                          8,667,538   (16,489,124)

Financing activities:
  Proceeds from long-term debt                                                               -        51,431
  Principal payments on long-term debt                                                (17,058)      (47,996)
  Principal payments on notes payable and convertible debentures                      (100,000)      (15,000)
  Net proceeds from line of credit                                                    (150,000)      (20,000)
  Payments on note payable - officer                                                         -       (17,991)
  Distributions to shareholders                                                              -      (262,784)
  Net proceeds from common stock transactions                                           53,135    29,450,282
  Repurchase of common stock                                                          (563,750)            -
  Net proceeds from exercise of common stock options                                    75,165       122,756
                                                                           -------------------------------------
        Net cash provided by (used in) financing activities                           (702,508)   29,260,698

Increase (decrease) in cash and cash equivalents                                    (3,988,172)   12,249,892
Cash and cash equivalents at beginning of period                                     9,386,069     2,202,004
                                                                           -------------------------------------
Cash and cash equivalents at end of period                                         $ 5,397,897   $14,451,896
                                                                           =====================================

Supplemental disclosures of cash flow information:
  Cash paid during the year for interest                                           $     5,352   $    10,015

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

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

                                          Page 3


<PAGE>
 
Summit Medical Systems, Inc.

Notes to Consolidated Financial Statements
September 30, 1997
(Unaudited)


Note A - Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the nine month period ended September 30,
1997 are not necessarily indicative of the results that may be expected for the
year ended December 31, 1997. For further information, refer to the consolidated
financial statements and footnotes thereto for the year ended December 31, 1996
included in the Annual Report of the Company.

Note B - Cash, Cash Equivalents and Investments

Cash in excess of current operating needs is invested in highly liquid money
market and/or marketable debt securities in accordance with the Company's
investment policy.  Cash equivalents are highly liquid investments with
remaining maturities of 90 days or less at the time of purchase.  Other highly
liquid investments with remaining maturities of one year or less at the time of
purchase are considered short-term investments.

Note C - New Accounting Pronouncement

In March 1997, the Financial Accounting Standards Board released Statement of 
Financial Accounting Standards No. 128 ("SFAS 128"), "Earnings per Share," which
requires the disclosure of basic earnings per share and diluted earnings per
share information. The Company expects to adopt SFAS 128 at the end of 1997 and
anticipates it will not have a material impact on previously reported earnings
per share.

Note D - Significant Transactions

During the third quarter of 1997, the Company sold two wholly owned 
subsidiaries originally acquired in 1995, the BSM Consulting Group ("BSM") and
Medical Information Systems Company, Inc. ("MIS"), in separate transactions. 
Proceeds on the sale of these two subsidiaries, less related fees and 
commissions, totaled $1.6 million, including cash in the amount of $575,000 
received October 1997 and the return of 137,000 shares of Company common stock
by the principal of BSM. The Company recorded a one-time gain of $1.1 million 
in third quarter 1997 related to these transactions.

In August 1997, the Board of Directors authorized a stock repurchase program
under which up to 1.0 million shares of Common Stock may be repurchased.

The Company incurred certain special charges and reserves amounting to 
approximately $3.5 million during the three months ended September 30, 1997. 
These charges and reserves included:

    (i)    A $1.0 million charge to write off the unamortized balance on
           capitalized software primarily related to Crescendo! Forte
           originally recorded in connection with the acquisition of 100% of
           the equity interest in Cordillera L.L.C. ("Cordillera") joint
           venture in December 1996. The Company has ceased marketing
           Crescendo! Forte.

    (ii)   Severance and outplacement services of $450,000 related primarily 
           to a downsizing in September 1997.

    (iii)  Depreciation expense of $1,000,000 to reduce surplus personal
           computers and office furniture to net realizable value following
           significant reductions in the Company's workforce in 1997.

    (iv)   An expected cost of $325,000 to renegotiate the lease on the
           Company's headquarters facility with the intention of reducing the
           lease obligation by approximately 20,000 square feet, or 40% of
           total space. Costs related to this reduction in space include
           writing off unamortized leasehold improvements, related broker
           commissions and penalties and an estimate of accrued lease expense
           on the excess space over the period pending final settlement.

    (v)    A $600,000 increase in allowance for bad debts primarily to cover
           uncollected accounts dating back to 1996 on annual support and
           maintenance agreements.

    (vi)   Payment of approximately $120,000 to the Society of Thoracic
           Surgeons (STS) covering an underpayment of prior year royalties
           stipulated under the STS National Database Agreement.

                                       4
<PAGE>
 
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

OVERVIEW
--------

     Summit Medical Systems, Inc. (the "Company") is a leading provider of
outcomes management systems and regulatory consulting services to the
healthcare industry. Database technology and research and consultive services
offered by the Company give healthcare providers and manufacturers information
tools to capture, manage and report clinical, economic and patient-reported
outcomes. Regulatory consulting services assist medical device manufacturers
in meeting stringent regulatory requirements for approval on new products. 


      The Company currently offers database products primarily on two
technology platforms, Crescendo! and Vista. The Crescendo! platform is
designed for use in hospital cardiac and cardiovascular surgery centers. In
the second half of 1996, the Company introduced Crescendo! Forte, a
client/server, relational database product for use in high volume cardiac and
cardiovascular surgery centers. In 1997, the Company ceased marketing
Crescendo! Forte after concluding that the market for this product was limited
and that supporting and servicing the product was prohibitively expensive for
the Company. In the third quarter of 1997, the Company began beta testing the
first release of a Crescendo! product for medium and low volume centers
("Crescendo! 1.0"), which provides core functionality, simplified installation
and reduced pricing compared to Crescendo! Forte. The Vista platform is a
Windows based, flat file application, covering a product line of over 40
database software modules that is primarily used in four medical specialties:
cardiac and thoracic surgery, cardiology, ophthalmology, and orthopedics. The
Company also provides a range of regulatory and research consulting services
through its C.L. McIntosh & Associates ("CLMA") subsidiary. In late 1996, the
Company introduced registry services designed to evaluate the efficacy of
specific medical devices or drug therapies utilizing on-line data collection
through the World Wide Web.

     During the third quarter of 1997,  the Company sold two wholly-owned
subsidiaries originally acquired in 1995, the BSM Consulting Group (BSM) and
Medical Information Systems Company, Inc. (MIS), in separate transactions. BSM
was sold back to its original owner, Bruce Maller.  The Company sold these
subsidiaries as part of its strategy to focus on information systems and
services in the cardiovascular arena and research and data management services
provided through it's C.L.McIntosh & Associates subsidiary (CLMA).  BSM provides
strategic, financial and systems planning services to healthcare providers and
vendors in various areas, such as opthalmology, which fall outside this focus.
MIS develops and markets WELLCAST R.O.I., an information system that enables
healthcare purchasers to develop cost-effective preventive care and occupational
health, medical and pharmacological intervention strategies.  Proceeds on the
sale of these two subsidiaries, less related fees and commissions, totaled $1.6
million including return of 137,000 shares of Company common stock by the
principal of BSM.  The Company recorded a one-time gain of $1.1 million in
third quarter 1997 related to these transactions.

     Combined quarterly financial results for the BSM and MIS subsidiaries for
1995, 1996 and nine months ending September 30, 1997 are summarized below:

<TABLE>
<CAPTION>
Amounts in Thousands                          1995                            1996                       1997
                               -------------------------------- ------------------------------- ------------------------
                                 Qtr 1   Qtr 2   Qtr 3   Qtr 4   Qtr 1   Qtr 2   Qtr 3   Qtr 4   Qtr 1   Qtr 2   Qtr 3
<S>                              <C>     <C>     <C>     <C>     <C>     <C>     <C>     <C>     <C>     <C>     <C>
Revenue
 Software License                 $ 19   $  32    $109    $ 30    $ 56    $ 25    $ 54   $ (21)  $  99   $ (11)   $129
 Support and Service                51      30      49      42     113      97      34      14      14      17      54
 Research and Consulting Services  466     435     404     520     530     541     749     611     571     724     614
                                  ----   -----    ----    ----    ----    ----    ----   -----   -----   -----    ----
   Total Revenue                   536     497     562     592     699     663     837     604     684     730     797
 
Cost of Sales
 Software License                    4      15      24     (10)     31      31       2       0       9      13       7
 Support and Service                17      19      20      31      25      22      41      68      64      97      48
 Research and Consulting Services  349     299     280     311     277     526     616     612     465     606     254
                                  ----   -----    ----    ----    ----    ----    ----   -----   -----   -----    ----
 Total Cost of Sales               370     333     324     332     333     579     659     680     538     716     309
 
Operating Expenses
 Selling and Marketing              40      53      46      38      53      50      67     102      46       1       1
 Research and Development           40      29      44      68      61      57      72      94      83       7      11
 General and Administrative        162     261     220     246     257      18     128     171     249     200     271
                                  ----   -----    ----    ----    ----    ----    ----   -----   -----   -----    ----
 Total Operating Expense           242     343     310     352     371     125     267     367     378     208     283
 
Income (loss) from Operations      (76)   (179)    (72)    (92)     (5)    (41)    (89)   (443)   (232)   (194)    205
 
Interest Income, Net               -0-      (1)    -0-      (7)     (1)      2       3       2       1       2       2
                                  ----   -----    ----    ----    ----    ----    ----   -----   -----   -----    ----
Income (loss) Before Taxes         (76)   (180)    (72)    (99)     (6)    (39)    (86)   (441)   (231)   (192)    207
 
Income Tax Expense                 -0-     -0-     -0-     -0-      16      (1)    -0-       1     -0-     -0-       1
                                  ----   -----    ----    ----    ----    ----    ----   -----   -----   -----    ----
Net Income (Loss)                 $(76)  $(180)   $(72)   $(99)   $(22)   $(38)   $(86)  $(442)  $(231)  $(192)   $206
</TABLE>

                                      -5-
<PAGE>
 
          THIRD QUARTER 1997 RESULTS. The Company incurred an operating loss of
$6.1 million during the three months ended September 30, 1997, which included
special charges and reserves amounting to approximately $3.5 million. These
charges and reserves included:

     (i)       A $1.0 million charge to write off the unamortized balance on
               capitalized software primarily related to Crescendo! Forte
               originally recorded in connection with the acquisition of 100% of
               the equity interest in Cordillera L.L.C. ("Cordillera") joint
               venture in December 1996. As discussed above, the Company has
               ceased marketing Crescendo! Forte.

     (ii)      Severance and outplacement services of $450,000 related primarily
               to a downsizing in September 1997.

     (iii)     Depreciation expense of $1,000,000 to reduce surplus personal
               computers and office furniture to net realizable value following
               significant reductions in the Company's workforce in 1997.

     (iv)      An expected cost of $325,000 to renegotiate the lease on the
               Company's headquarters facility with the intention of reducing
               the lease obligation by approximately 20,000 square feet, or 40%
               of total space. Reductions in the work force have created excess
               space since the lease was negotiated in late 1996. Through this
               renegotiation process, the Company seeks to save $2.6 million in
               lease payment over the next eight years. Costs related to this
               reduction in space include writing off unamortized leasehold
               improvements, related broker commissions and penalties and an
               estimate of accrued lease expense on the excess space over the
               period pending final settlement.

     (v)       A $600,000 increase in allowance for bad debts primarily to
               cover uncollected accounts dating back to 1996 on annual
               support and maintenance agreements.

     (vi)      Payment of approximately $120,000 to the Society of Thoracic
               Surgeons (STS) covering an underpayment of prior year royalties
               stipulated under the STS National Database Agreement.


          Revenues in the third quarter 1997 continued to be adversely impacted
by the transition from the Vista product line to the Crescendo! product line.
Software license revenue for the third quarter of 1997 was lower than the
comparable period of 1996, reflecting the Company's termination of direct
marketing of its Windows-based Vista product line in early 1997, and the lack
of revenue from contracts for Crescendo! products.

          In third quarter 1997, the Company resumed marketing its Vista product
line on a limited basis with a sales campaign aimed at cross-selling additional
Vista modules to existing Vista customers. Beginning in fourth quarter 1997, the
Company plans on targeting users of its DOS product in an effort to upgrade them
to Vista. This campaign is expected to continue into the first half of 1998, and
is not expected to generate additional revenues until first quarter 1998. The
Company currently plans to discontinue support of its DOS product at the end of
1998. Also in the fourth quarter, the Company expects to introduce two
predefined consulting services to its Vista customers, with a price point in the
$5,000 range. The initiatives outlined above represent forward-looking
statements of intentions that are not yet fully developed and have not been
tested in the market. Accordingly, there can be no assurance that these
initiatives will result in increased revenues.

          The Company has been selling Crescendo! 1.0 since early 1997 in
order to provide reference sites and validation of the technology. Installation
and training on the first three beta sites for Crescendo! 1.0 commenced in July
1997, and installation of six additional sites is underway at this time. The
Company has closed nineteen contracts for Crescendo! 1.0 to date, for a total
contract value of approximately $2.0 million which includes support and
maintenance revenues that will be recognized over the next three years. A full-
scale marketing and promotional effort for Crescendo! 1.0 did not commence
until mid-November.

                                      -6-
<PAGE>
 
          No revenues will be recorded on Crescendo! 1.0 contracts until all
significant contractual obligations have been met, including installation of
related system interfaces and customization of the data set.  No installations
have been completed to date,  and it is uncertain whether any will be completed
in the fourth quarter 1997.  In general, the Company anticipates that revenues
from Crescendo! 1.0 will be affected by a longer sales and implementation cycle
associated with more complex, higher priced client/server products, uncertainty
as to the market demand for such products and lack of referenceable accounts.

          The Company has not recorded any revenue on its four Crescendo! Forte
installations due to outstanding obligations to develop additional modules and
interfaces.  In light of the Company's decision to cease marketing the
Crescendo! Forte product,  the Company is seeking to renegotiate its agreement
with each of the four installed Crescendo! Forte customers to reduce the scope
of its deliverables. These deliverables are expected to be replaced by a
combination of available products including Crescendo! 1.0, Vista and limited
versions of Crescendo! Forte.  It is not known at this time what the value of
these revised agreements will be, or when any related revenues will be recorded.
In accordance with Company policy,  no revenue will be recorded on these
contracts until all obligations are substantially fulfilled.

          With respect to other initiatives to improve overall profitability,
the Company's CLMA subsidiary plans on expanding into data management services
for medical device manufacturers, and has begun to respond to related request
for proposals (RFP's). It is too early to determine if this initiative will be
successful.

          The Company has also taken additional measures to reduce its expense
base, including a September 1997 downsizing which eliminated 25 positions, or
15% of the workforce.


          YEAR TO DATE RESULTS.  The $18.0 million loss from operations for the
nine months ended September 30, 1997 included special charges for payments and
reserves amounting to approximately $8.7 million. This amount included $3.5
million recorded in the third quarter, as summarized above, and $5.2 million
recorded in the first half of 1997 covering primarily:

     (i)       A charge of $2.8 million covering agreements reached with the
               parties, including members of management, who received Company
               stock, options or warrants in connection with the Company's
               December 1996 acquisitions of CLMA and 100% of the equity
               interest in the Cordillera joint venture. The agreements
               involve cash payments to these parties and repricing of
               warrants issued in connection with the Cordillera acquisition.
               In return, the Company has received, or will receive, a general
               release from these parties against certain possible claims
               arising since the acquisitions, primarily related to the
               Company's restatement of revenues. The Board of Directors
               authorized the agreements based on the importance and unique
               position of CLMA and the Crescendo! technology developed by
               Cordillera to the Company's future operations. In order to
               preserve the value to the Company of the CLMA and Cordillera
               operations and their assets, the Board determined that it was
               in the best interest of the Company and its shareholders to
               resolve these issues promptly. The agreement with the CLMA
               parties was concluded, and related payments made in June 1997.
               The Company has reached an agreement with the Cordillera
               parties.

     (ii)      Accounting fees incurred in connection with the Company's
               restatement of revenues.

     (iii)     Reserves for legal fees expected to be incurred in connection
               with various shareholder lawsuits and investigations by the
               Securities and Exchange Commission ("SEC").

     (iv)      The cost of renegotiating various development contracts involving
               certain medical specialties. In April 1997, the Company decided
               to significantly reduce its involvement in a number of medical
               specialty markets that were not central to its near term
               strategy, and to focus more directly on the cardiology and
               cardiovascular medical specialty markets. The Company determined
               that the near term revenue potential associated with these
               medical specialties, including vascular, electrophysiology (EP),
               urology and critical care, did not warrant the related
               development and marketing expenses. The Company has revised or
               terminated commitments made in 1995 and 1996 under development
               and support agreements with various subsidiaries of Boston
               Scientific Corporation related to these specialty markets, and
               has partially refunded amounts received under these agreements,
               including amounts received for contract development work
               performed in prior years. In June, 1997, The Company executed an
               agreement with Boston Scientific 

                                      -7-
<PAGE>
 
               Corporation to market the Company's Crescendo! product line on a
               non-exclusive basis.

     (v)       Severance costs, including those associated with a downsizing
               that occurred in March 1997 and the departure of the Company's
               former Chief Executive Officer.

     (vi)      A reserve for an obligation included in the Company's
               headquarters lease requiring the Company to make a $350,000
               penalty payment if it fails to exercise an option to lease
               additional space at such facility by mid 1998, a currently
               unoccupied portion of the building. The Company will not require
               this additional space, and will settle this obligation in
               connection with the current lease renegotiations.


          Revenues in the first three quarters of 1997 suffered due to the
transition from the Vista to Crescendo! product line as discussed in "Third
Quarter 1997 Results" above.

          Expenses in the first three quarters of 1997 increased, in part,
because of the additional cost of developing, marketing, implementing and
supporting the more complex Crescendo! 1.0 and Crescendo! Forte products. In
various cost reduction initiatives taken throughout the year, the Company has
reduce its headcount from 208 full-time employees at December 31, 1996 to 140 at
September 30, 1997. Following the sale of BSM, the number of full-time employees
was approximately 115.

RESULT OF OPERATIONS
--------------------

          TOTAL REVENUE. The Company's revenue for the third quarter of 1997 was
derived primarily from software license fees, annual support and maintenance
services related to its Vista products and consulting services provided by its
BSM and CLMA subsidiaries. Revenues totaled $3.5 million for the third quarter
of 1997, a decrease of $517,000, or 13%, as compared with third quarter of 1996,
reflecting (i) termination of direct marketing efforts for Vista products and
(ii) lack of revenues arising from sales of Crescendo! 1.0, which was not
officially launched until November 1997. Revenue of $10.6 million for the first
nine months ending September 30, 1997 represented a 24% decrease over the same
period in 1996 that was also largely due to these factors. Software license
revenue was $1.8 million in the first nine months of 1997, $3.7 million or 67%
below the first nine months of 1996 as a result of the various factors discussed
above.

          SOFTWARE LICENSE REVENUE.  The Company's software license revenue
primarily consists of sales of database software licenses, software upgrades and
networking fees.  Sales of software licenses were $537,000 for the third quarter
of 1997, consisting primarily of sales of additional Vista modules to existing
Vista customers and sale of the Wellcast R.O.I. product.   This represents a
decline of $1.0 million, or 64%, from the third quarter of 1996 as a result of
the various factors discussed previously.  Software license revenue was $1.8
million in the first nine months of 1997, $3.7 million or 67% below the first
three quarters of 1996 as a result of these same factors.

          Software license revenue from sales to marketing partners comprised
30% of total software revenue in the first three quarters of 1997, largely
related to sales made through Boston Scientific Corporation in the first
quarter.

          SUPPORT AND SERVICE REVENUE.   Support and service revenue primarily
includes fees from annual support and service agreements, training, consulting,
module development and hardware.  Support and service revenue was $948,000 for
the third quarter of 1997, down slightly from third quarter 1996.  Support and
service revenue for the nine months ended September 30, 1997 was $2.8 million, a
29% decrease over the same period in 1996 which was attributable to fewer new
customers and attrition among existing customers.

          RESEARCH AND CONSULTING SERVICES REVENUE.  Research and consulting
services revenue consists of  (i) fees received by BSM for providing strategic
development, financial analysis and systems planning services to health care
providers and vendors,  (ii) fees received by CLMA for regulatory affairs and
data management services provided primarily to manufacturers of new medical
device and biologic products in order to secure Food and Drug Administration
("FDA") approval and (iii) revenues from pharmaceutical companies and device
manufacturers for registry programs involving collection of outcomes data
related to specific in-market drugs or medical devices.  Research and consulting
services revenue was $2.0 million for the third quarter of 1997, an increase of
$495,000, or 32% over the third quarter of 1996.  This increase was primary due
to revenue generated from completing the software development phase of a pilot
registry program with Eli Lilly Company ("Eli Lilly"), as described below, and a
newly 

                                      -8-
<PAGE>
 
established biologics division of CLMA. Consulting revenues for the first nine
months of 1997 were $6.0 million, a 31% increase over the first nine months of
1996 due primarily to CLMA'S newly established biologics division.

          In February 1997, the Company entered into an agreement with Eli Lilly
to participate in a pilot program for a registry to collect, analyze and report
on the use of a platelet aggregation inhibitor during coronary interventions.
This agreement has a contract value of $400,000, and involves installation of an
on-line data capture system at ten pilot catheterization labs, utilizing
Crescendo! technology. During August 1997, the Company successfully completed
development of an internet version of this on-line system, which utilizes a
World Wide Web-based front-end installed at the lab site. The Company recorded
revenues of $250,000 in third quarter 1997 upon completion of the development
phase of this on-line system, in accordance with the contract. Three labs have
signed participation agreements as pilot sites to date, which is less than
originally planned. It has been more difficult than originally expected to find
sites willing to participate in the registry program, and the Company is
reviewing its approach towards motivating sites to participate in the program.
It is now expected that all ten sites will be selected and installed during
fourth quarter 1997 and first quarter 1998. The Company will record the
remaining revenue under this contract over a six month period following the 
installation of the pilot sites.

          Effective September 30, 1997, the Company sold its BSM subsidiary as
discussed in the "Overview" section above.

          TOTAL COST OF SALES.  Cost of sales as a percentage of total revenue
was 95% in third quarter 1997, compared to 47% in third quarter 1996, reflecting
a $1.0 million charge to write off the unamortized balance on capitalized
Crescendo! Forte Software, as discussed in "Overview", severance payments,
the impact of fixed personnel costs on a lower revenue base and the addition of
support and implementation personnel to support the Crescendo! product line. A
portion of this increase reflected personnel costs in the implementation area
that were classified as operating expense in third quarter 1996 rather than cost
of sales. For the first nine months of 1997, cost of sales was 84% of revenues
as compared to 39% in the same period of 1996 for these same reasons.

          COST OF SOFTWARE LICENSE REVENUE.  Cost of software license revenue
consists of expenses directly related to sales of software licenses, including
royalties, freight, user guides, diskettes, amortization of capitalized software
and an allocation of costs incurred by the client relations department for
various software related activities. The following table sets forth, for the
periods indicated, the relationship of cost of software license revenue to
software license revenue:

<TABLE>
<CAPTION>
                                        THREE MONTHS ENDED    NINE MONTHS ENDED
                                           SEPTEMBER 30,        SEPTEMBER 30,
                                           (IN THOUSANDS)      (IN THOUSANDS)
                                        -------------------  ------------------
                                             1997     1996     1997     1996
<S>                                     <C>         <C>      <C>      <C>
Software license revenue                   $  537   $1,508   $1,832   $5,515
Cost of software license revenue            1,209      186    2,065      715
Cost of software license revenue as 
  a percentage of software license revenue    225%      12%     113%      13%
</TABLE>

          The increase in cost of software license revenue as a percent of
software license revenue during third quarter and first nine months of 1997
primarily reflects the $1.0 million third quarter charge to write off the
unamortized balance on capitalized Crescendo! Forte software and a reduction
in software license revenue in those periods as compared to the same periods
in 1996.

          COST OF SUPPORT AND SERVICE REVENUE.  Cost of support and service
revenue consists of expenses directly related to sales of support and service,
including royalties, customer service personnel costs, and expenses for training
and clinical data services. The following table sets forth, for the periods
indicated, the relationship of cost of support and services revenue to support
and service revenue:

                                      -9-
<PAGE>
 
<TABLE>
<CAPTION>
                                          THREE MONTHS ENDED  NINE MONTHS ENDED
                                             SEPTEMBER 30,      SEPTEMBER 30,
                                            (IN THOUSANDS)     (IN THOUSANDS)
                                          ------------------  ----------------- 
                                            1997      1996      1997     1996
<S>                                         <C>       <C>       <C>      <C>
Support and service revenue                 $  948    $ 989     $2,806   $3,965
Cost of support and service revenue          1,134      588      3,045    1,807
Cost of support and service revenue 
   as a percentage of support and 
   service revenue                             120%      59%       109%      46%
</TABLE>

          The increase in cost of support and service revenue as a percent of
support and service revenue during third quarter reflects increased staffing
in the implementation and technical services departments and a $120,000
payment to the STS to correct an underpayment of prior years royalties as
discussed in "Overview." The increase in cost of support and service revenue
as a percent of support and service revenue during the first nine months of
1997 also reflects a reduction in support and service revenue in that quarter
as compared to the same periods in 1996. Support and service costs in 1997
also included personnel costs for eight employees in the implementation and
technical services areas that were classified as operating expense in nine
months of 1996 rather than cost of sales.


          COST OF RESEARCH AND CONSULTING SERVICES REVENUE.  Cost of research
and consulting services revenue consists of personnel costs and related expenses
associated with thE BSM, CLMA and the Company's registry product line.  The
following table sets forth, for the periods indicated, the relationship of the
cost of research and consulting services revenue to research and consulting 
services revenue:

<TABLE>
<CAPTION>
                                                  THREE MONTHS ENDED  NINE MONTHS ENDED 
                                                     SEPTEMBER 30,      SEPTEMBER 30,   
                                                    (IN THOUSANDS)     (IN THOUSANDS)   
                                                  ------------------  ----------------- 
                                                    1997      1996      1997     1996   
<S>                                                 <C>       <C>       <C>      <C>     
Research and consulting services revenue            $2,025    $1,531    $6,008   $4,578
Cost of research and consulting services revenue       987     1,138     3,807    2,933
Cost of research and consulting services revenue
  as a percentage of research and consulting 
  services revenue                                      49%       74%       63%      64%
</TABLE>

          Cost of research and consulting services revenue decreased to 49% of
related revenue in third quarter 1997 from 74% in third quarter 1996, due to
higher revenue, including recognition of a portion of the Eli Lilly registry
contract, and reduction of expenses at BSM following layoffs.

          SELLING AND MARKETING EXPENSES.  Selling and marketing expenses were
$1.4 million during the third quarter of 1997, a decrease of $552,000, or 28%,
compared to the same quarter of 1996 due primarily to personnel costs in the
implementation area that were classified as marketing expense in third quarter
1996 and cost of sales in 1997. This reclassification also accounts for a 18%
decline in selling and marketing expenses during the first nine months of 1997
as compared to the same period in 1996.

          RESEARCH AND DEVELOPMENT EXPENSES.  Research and development expense
was $955,000 in the third quarter of 1997, essentially the same as the third
quarter 1996 expense.  Research and development expense for the first nine
months of 1997 amounted to $2.8 million as compared to $2.0 million for the
comparable period in 1996 as the Company increased its development staff and its
use of outside consultants to develop its Crescendo! product line. The dual
development of the Crescendo! products and Vista Elite also resulted in greater
research and development expense during the early part of 1997. As discussed
previously, efforts to develop Vista Elite were discontinued in first quarter
1997.

                                      -10-
<PAGE>
 
          GENERAL AND ADMINISTRATIVE EXPENSES.  General and administrative
expense was $3.9 million for third quarter 1997, an increase of $2.3  million
over third quarter 1996. the increase is due primarily to charges amounting to
approximately $2.2 million to cover costs discussed under "Overview", including
write down of surplus office furniture and equipment, renegotiation of the
headquarters lease, severance and reserves for bad debt.  General and
administrative expense was $11.9 million for the nine months ended September 30,
1997 as compared to $4.0 million for the first nine months of 1996. The $7.9
million increase related to special reserves and charges detailed in "Overview -
Year To Date Results".  Of $8.7 million in total reserves and charges detailed
therein, approximately $7.4 million was recorded in general and administrative
expense.

          GAIN ON SALE OF SUBSIDIARIES.  During third quarter 1997, the Company
recorded gains totaling $1.1 million on the sale of its BSM and MIS subsidiaries
as discussed in the "Overview" section above.  Proceeds from the sale of these
subsidiaries, less related fees and commissions,  totaled $1.6 million
including return of 137,000 shares of Company common stock by the principal of
BSM.

          INTEREST INCOME.  Interest income, net, decreased to $431,000 in third
quarter 1997 from $629,000 in third quarter 1996 as operating losses in 1997
have depleted cash available for investment.  Interest income, net, for the
three quarters of 1997 amounted to $1.5 million as compared to $1.2 million in
the same period of 1996 as proceeds from the Company's July 1996 secondary stock
offering were invested in short term securities.

          INCOME TAX EXPENSE.  To date, the Company has not incurred any
substantial income tax liability because of its historical operating losses.
The deferred tax asset related to operating loss carry forwards generated in the
first half of 1997 and 1996 were fully offset by an increase in the valuation
allowance because of the Company's history of operating losses.

LIQUIDITY AND CAPITAL RESOURCES
--------------------------------

          During the nine months ended September 30, 1997, the Company's cash
and cash equivalents decreased by $4.0 million reflecting $12.0 million used in
operating activities and $744,000 used for the purchase of computer and
networking equipment, offset by net reduction in investments of $9.3 million
and proceeds of $437,000 (net of commissions) on the sale of MIS. The sale of
BSM involved cash proceeds of $575,000 which were not received until October
1997.

          Cash provided by investing activities was $8.7 million in the first
nine months of 1997 which consisted primarily of the sale or maturity of short-
term investments of $28.6 million partially offset by the purchase of short-
term investments in the amount of $19.3 million. Cash used in financing
activities of $703,000 primarily represented repurchase of shares of the
Company's common stock and repayment of long term debt.

          As of September 30, 1997, the Company had net working capital of $28.5
million, compared to $41.7 million at December 31, 1996. The $13.2 million
decrease in working capital resulted primarily from operating losses, excluding
depreciation and amortization, of $15.4 million during the first nine months of
1997.

          The Company believes that the continued expenditure of funds will be
necessary to support its future operations, and that cash and short-term
investments of $31.4 million on hand at September 30, 1997 will be sufficient to
fund its operations, capital requirements, potential settlement payments as
discussed above and expansion needs for the foreseeable future.

          As of November 3, 1997, cash and short term investments totaled $30.9
million.

     In August 1997, the Board of Directors authorized a stock repurchase
program under which up to 1.0 million shares of the Company's common stock may
be repurchased. The Company may purchase such common stock from time to time at
prevailing prices in the open market, by purchases or in private transactions.
Through November 3, the Company has repurchased 251,000 shares of common stock
for approximately $564,000. In addition, in October 1997, 137,000 shares of
common stock were returned to the Company as part of the proceeds received on
the sale of BSM. Partially offsetting these reductions, 88,888 additional shares
of common stock were issued in August as part of the settlement agreement
with the principals of CLMA discussed above and 109,091 shares of stock were
issued in October to the new CEO in return for a cash payment of $100,000 and a
promissory note for $200,000. As of November 3, 1997, there were approximately
10.2 million shares of the Company's common stock issued and outstanding.

                                      -11-
<PAGE>
 
Item 3.  Quantitative and Qualitative Disclosures About Market Risk.
         
         None
 
Part II. Other Information

Item 1.  Legal Proceedings
 
     The Company is a defendant in In re Summit Medical Systems, Inc.
Securities Litigation, a consolidated federal court securities action venued
in the United States District Court, District of Minnesota. The putative class
action was filed on March 10, 1997 and alleges violations of Section 10(b) of
the Securities and Exchange Act of 1934, as amended (the "Exchange Act") and
Rule 10b-5, Section 20(a) of the Exchange Act, Section 11 of the Securities
Act of 1933, as amended (the "Securities Act"), and Section 15 of the
Securities Act. The Company is also a defendant in a federal court securities
action captioned Teachers' Retirement System of Louisiana v. Summit Medical
Systems, Inc. et. al. The Teachers' Retirement action was filed on April 16,
1997 in the United States District Court, District of Minnesota and is not a
class action. In addition to the claims alleged in the consolidated action,
the Teachers' Retirement complaint alleges a claim under Section 18(a) of the
Exchange Act, common law fraud, and negligent misrepresentation. Each action
alleges, in essence, that the Company made misleading public disclosures
relating to its financial statements and seeks compensatory damages for losses
incurred as a result of each alleged misleading public disclosure. As to
federal securities law claims, both actions are subject to the Private
Securities Litigation Reform Act of 1995 (the "Reform Act"). The Company has
made a motion to dismiss certain claims and intends to defend against these
actions vigorously.

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

 
Item 2.  Changes in Securities
         None

Item 3.  Defaults upon Senior Securities
         None

Item 4.  Submission of Matters to a Vote of Security Holders
         None

Item 5.  Other Information
         None

Item 6.  Exhibits and Reports on Form 8-K
         (a) Exhibits

     The following exhibits are included herein:
 
     10.1  Agreement dated as of July 31, 1997 By and Between Summit Medical
           Systems, Inc., Duke University, DR Ware LLC, Donald F. Fortin, 
           M.D., Robert M. Califf, M.D. and Harry Phillips, M.D.
     11.1  Computation of Earnings per Share
     27    Financial Data Schedule
     (b)   Reports on From 8-K
           None


                                       12
<PAGE>
 
                                  Signatures

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



                            Summit Medical Systems, Inc.
                            ----------------------------
                       
                       
Date: November 14, 1997     /s/ Richard J. Willemin
-----------------------     ------------------------------------
                            Richard J. Willemin
                            Interim Chief  Executive Officer
                            and Chief Financial Officer

                                       13
[{"type": "10-Q", "sequence": "1", "description": "FORM 10-Q", "secsgml_size_bytes": 63850}]
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UNITED STATES
                      SECURITIES AND EXCHANGE COMMISSION
                             Washington, DC  20549

                                   FORM 10-Q

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

                 For the quarterly period ended September 30, 1997

                                      or

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
    EXCHANGE ACT OF 1934

           For the transition period from ___________ to ___________
                      Commission File Number____________

                         SUMMIT MEDICAL SYSTEMS, INC.

            (Exact name of registrant as specified in its charter)

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

                            10900 Red Circle Drive
                                   Suite 100
                             Minnetonka, MN  55343
                                 612-939-2200
                 (Address including zip code, of  Registrant's
                   principal executive offices and telephone
                         number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and has been subject to such filing requirements
for the past 90 days.  X  Yes      No
                      ---      ---

The number of shares outstanding of the Registrant's Common Stock on September
30, 1997 was

                       10,114,921 shares $.01 Par Value
INDEX

Part I.  Financial Information

Item 1.  Financial Statements (Unaudited)

         Consolidated statements of financial position--September, 30 1997 and
         December 31, 1996

         Consolidated statements of operations -- Three months ended September 
                                                  30, 1997 and 1996
                                                  Nine months ended September 
                                                  30, 1997 and 1996
                                                  

         Consolidated statements of cash flows -- Nine months ended September 
                                                  30, 1997 and 1996

         Notes to consolidated financial statements -- September 30, 1997

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

Item 3.  Quantitative and Qualitative Disclosures About Market Risk

Part II. Other Information
Item 1.  Legal Proceedings
Item 2.  Changes in Securities
Item 3.  Defaults upon Senior Securities
Item 4.  Submission of Matters to a Vote of Security Holders
Item 5.  Other Information
Item 6.  Exhibits and Reports on Form 8-K
         (a)  Exhibits
         10.1 Agreement dated as of July 31, 1997 By and Between Summit Medical
              Systems, Inc., Duke University, DR Ware LLC, Donald F. Fortin, 
              M.D., Robert M. Califf, M.D. and Harry Phillips, M.D.
         11.1 Computation of Earnings per Share
         27   Financial Data Schedule
         (b)  Reports on Form 8-K

Signatures

Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995

This Quarterly Report on Form 10-Q contains forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended
and Section 21E of the Securities Exchange Act of 1934, as amended. These
forward-looking statements include statements regarding intent, belief or
current expectations of Summit Medical Systems, Inc. (the "Company") and its
management. Such forward-looking statements are not guarantees of future
performance and involve risks and uncertainties that may cause the Company's
actual results to differ materially from the results discussed in the forward-
looking statements. Factors that might cause such differences include, but are
not limited to, failure of the Company's client/server database products or on-
line registries to achieve market acceptance, significant delays in 
developing and implementing system interfaces related to the Company's
client/server database products, discovery of technical difficulties or
defects in the client/server products and on-line registries, and failure of the
Company's initiatives to increase Vista product sales, expand its data
management services and reduce its expense base. The forward-looking
statements herein are qualified in their entirety by the cautions and risk
factors set forth in Exhibit 99, under the caption "Cautionary Statement," to
the Company's Annual Report on Form 10-K, as amended pursuant to amendments
filed on April 4, 1997 and April 30, 1997, respectively. A copy of the Form 10-
K may be obtained from the Public Reference Branch of the SEC at 450 Fifth
Street NW, Washington, DC at prescribed rates.
SUMMIT MEDICAL SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
September 30,   December 31,
                                                                     1997            1996
                                                                  (unaudited)  
                                                               ----------------------------
ASSETS

CURRENT ASSETS
        Cash and cash equivalents                                 $ 5,397,897   $ 9,386,069
        Short-term investments                                     25,986,493    35,243,624
        Accounts receivable (net of allowance of $1,162,000 at      3,227,954     3,776,351
           September 30, 1997; $650,000 at December 31, 1996)              
        Other current assets                                        1,409,251       678,627
                                                               ----------------------------
                Total current assets                               36,021,595    49,084,671

        Equipment and fixtures, net                                 1,630,075     3,203,931
        Computer software costs, net                                        -     1,198,573
                                                               ----------------------------
                Total assets                                      $37,651,670   $53,487,175
                                                               ============================

        LIABILITIES AND SHAREHOLDERS' EQUITY

CURRENT LIABILITIES
        Accounts payable and accrued expenses                      $2,886,622    $3,617,718
        Accrued compensation                                        1,268,916     1,236,118
        Accrued royalties                                             113,835       375,332
        Deferred revenue & payables                                 3,164,174     1,867,006
        Income taxes payable                                           26,248         7,648
        Notes payable and convertible debentures                            -       100,000
        Line of credit                                                      -       150,000
        Current portion of long-term debt                               9,542        23,628
                                                               ----------------------------
                Total current liabilities                           7,469,337     7,377,450

LONG-TERM DEBT                                                         23,553        26,525

SHAREHOLDERS' EQUITY
        Common stock, $.01 par value:
          Authorized shares - 38,933,333
          Issued and outstanding shares - 10,114,921
          at September 30, 1997;  10,343,830  at
          December 31, 1996                                           101,149       103,438
        Additional paid-in capital                                 69,149,190    69,700,376
        Accumulated deficit                                       (39,091,559)  (23,720,614)
                                                               ----------------------------
                Total shareholders' equity                         30,158,780    46,083,200
                                                               ---------------------------- 
                Total liabilities and shareholders' equity        $37,651,670   $53,487,175
                                                               ============================
The accompanying notes are an integral part of these financial statements.

                                            Page 1
SUMMIT MEDICAL SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED                      NINE MONTHS ENDED
                                                             SEPTEMBER 30,                          SEPTEMBER 30,
                                                    --------------------------------------------------------------------
                                                          1997         1996                      1997           1996
                                                      (unaudited)   (restated)                (unaudited)    (restated)
                                                    --------------------------------------------------------------------
Revenue
  Software license                                    $   537,038   $1,507,511                $ 1,831,650   $ 5,515,445
  Support and service                                     947,892      989,117                  2,806,427     3,965,497
  Research & consulting services                        2,025,022    1,530,734                  6,008,081     4,578,074
                                                    ---------------------------            ----------------------------
         Total revenue                                  3,509,952    4,027,362                 10,646,158    14,059,016

Cost of Sales
  Software license                                      1,208,695      186,375                  2,065,010       715,342
  Support and service                                   1,133,793      587,677                  3,045,555     1,806,722
  Research & consulting services                          987,154    1,137,724                  3,807,406     2,932,775
                                                    ---------------------------             ----------------------------
         Total cost of sales                            3,329,642    1,911,776                  8,917,971     5,454,839

         Gross profit                                     180,310    2,115,586                  1,728,187     8,604,177

Operating expenses
  Selling and marketing                                 1,393,689    1,944,595                  4,997,199     6,070,668
  Research and development                                955,614      950,684                  2,772,676     1,969,639
  General and administrative                            3,884,758    1,561,955                 11,908,380     3,959,044
                                                    ---------------------------             ----------------------------

         Total operating expenses                       6,234,061    4,457,234                 19,678,255    11,999,351
                                                    ----------------------------            ----------------------------

Loss from operations                                   (6,053,751)  (2,341,648)               (17,950,068)   (3,395,174)

Gain on Sale of Subsidiaries                            1,072,699            -                  1,072,699             -
Interest income, net                                      430,936      628,586                  1,524,847     1,225,802
                                                    ---------------------------             ----------------------------
Loss before income taxes                               (4,550,116)  (1,713,062)               (15,352,522)   (2,169,372)

Income tax expense                                         13,715          500                     18,423        17,804
                                                    ---------------------------             ----------------------------
Net loss                                              ($4,563,831) ($1,713,562)              ($15,370,945)  ($2,187,176)
                                                    ===========================             ============================
Net loss per share:
Primary & fully diluted                                    ($0.44)      ($0.17)                    ($1.49)       ($0.24)
                                                    ===========================             ============================
Weighted average shares outstanding:
Primary & fully diluted                                10,343,790   10,226,856                 10,350,129     9,088,043
                                                    ---------------------------             ----------------------------
The accompanying notes are an integral part of these financial statements.

                                                  Page 2
SUMMIT MEDICAL SYSTEM, INC.
CONSOLIDATED STATEMENTS OF CASH FLOW
(UNAUDITED)
                                                                                     NINE MONTHS ENDED
                                                                                       SEPTEMBER  30,
                                                                           --------------------------------------
                                                                                     1997          1996
                                                                                 (unaudited)    (restated)
                                                                           --------------------------------------
Operating activities:
  Net loss                                                                      $  (15,370,945) $ (2,187,176)
  Adjustments to reconcile net loss to net cash                                                            -
     provided by (used in) operating activities:                                                           -
     Depreciation                                                                    1,667,443       548,632
     Amortization                                                                    1,200,653        68,769
     Loss on disposal of equipment                                                     465,405        60,343
     Gain on sale of subsidiaries                                                   (1,072,699)            -
     Changes in operating assets and liabilities:                                                          
     Accounts receivable (net of allowance of $1,161,993 and $110,331                  239,829     1,180,869
        in 1997 and 1996, respectively)
     Advances to officers                                                                    -        47,500
     Other current assets                                                             (401,959)     (412,366)
     Accounts payable and accrued expenses                                              10,054      (230,581)
     Accrued compensation                                                              139,746       661,821
     Accrued royalties                                                                (261,497)      (27,382)
     Income tax payable                                                                 18,600             -
     Deferred revenue                                                                1,412,168      (232,111)
                                                                           --------------------------------------
        Net cash used in operating activities                                      (11,953,202)     (521,682)

Investing activities:                                                                                      -
  Purchase of short-term investments                                               (19,308,976)  (52,891,425)
  Sales and maturities of short-term investments                                    28,566,107    37,891,271
  Purchases of equipment and fixtures                                                 (743,755)   (1,455,673)
  Net proceeds on sale of subsidiaries                                                 436,540             -
  Cash distributed in sale of subsidiaries                                            (280,298)            -
  Capitalized software cost                                                             (2,080)      (33,297)
                                                                           -------------------------------------
        Net cash provided by (used in) investing activities                          8,667,538   (16,489,124)

Financing activities:
  Proceeds from long-term debt                                                               -        51,431
  Principal payments on long-term debt                                                (17,058)      (47,996)
  Principal payments on notes payable and convertible debentures                      (100,000)      (15,000)
  Net proceeds from line of credit                                                    (150,000)      (20,000)
  Payments on note payable - officer                                                         -       (17,991)
  Distributions to shareholders                                                              -      (262,784)
  Net proceeds from common stock transactions                                           53,135    29,450,282
  Repurchase of common stock                                                          (563,750)            -
  Net proceeds from exercise of common stock options                                    75,165       122,756
                                                                           -------------------------------------
        Net cash provided by (used in) financing activities                           (702,508)   29,260,698

Increase (decrease) in cash and cash equivalents                                    (3,988,172)   12,249,892
Cash and cash equivalents at beginning of period                                     9,386,069     2,202,004
                                                                           -------------------------------------
Cash and cash equivalents at end of period                                         $ 5,397,897   $14,451,896
                                                                           =====================================

Supplemental disclosures of cash flow information:
  Cash paid during the year for interest                                           $     5,352   $    10,015

Supplemental disclosures of noncash financing activities:
  Common stock received in sale of BSM subsidiary                                  $   318,024             -
  Common stock issued in McIntosh settlement                                       $   199,999             -
The accompanying notes are an integral part of these financial statements.

                                          Page 3
Summit Medical Systems, Inc.

Notes to Consolidated Financial Statements
September 30, 1997
(Unaudited)

Note A - Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the nine month period ended September 30,
1997 are not necessarily indicative of the results that may be expected for the
year ended December 31, 1997. For further information, refer to the consolidated
financial statements and footnotes thereto for the year ended December 31, 1996
included in the Annual Report of the Company.

Note B - Cash, Cash Equivalents and Investments

Cash in excess of current operating needs is invested in highly liquid money
market and/or marketable debt securities in accordance with the Company's
investment policy.  Cash equivalents are highly liquid investments with
remaining maturities of 90 days or less at the time of purchase.  Other highly
liquid investments with remaining maturities of one year or less at the time of
purchase are considered short-term investments.

Note C - New Accounting Pronouncement

In March 1997, the Financial Accounting Standards Board released Statement of 
Financial Accounting Standards No. 128 ("SFAS 128"), "Earnings per Share," which
requires the disclosure of basic earnings per share and diluted earnings per
share information. The Company expects to adopt SFAS 128 at the end of 1997 and
anticipates it will not have a material impact on previously reported earnings
per share.

Note D - Significant Transactions

During the third quarter of 1997, the Company sold two wholly owned 
subsidiaries originally acquired in 1995, the BSM Consulting Group ("BSM") and
Medical Information Systems Company, Inc. ("MIS"), in separate transactions. 
Proceeds on the sale of these two subsidiaries, less related fees and 
commissions, totaled $1.6 million, including cash in the amount of $575,000 
received October 1997 and the return of 137,000 shares of Company common stock
by the principal of BSM. The Company recorded a one-time gain of $1.1 million 
in third quarter 1997 related to these transactions.

In August 1997, the Board of Directors authorized a stock repurchase program
under which up to 1.0 million shares of Common Stock may be repurchased.

The Company incurred certain special charges and reserves amounting to 
approximately $3.5 million during the three months ended September 30, 1997. 
These charges and reserves included:

    (i)    A $1.0 million charge to write off the unamortized balance on
           capitalized software primarily related to Crescendo! Forte
           originally recorded in connection with the acquisition of 100% of
           the equity interest in Cordillera L.L.C. ("Cordillera") joint
           venture in December 1996. The Company has ceased marketing
           Crescendo! Forte.

    (ii)   Severance and outplacement services of $450,000 related primarily 
           to a downsizing in September 1997.

    (iii)  Depreciation expense of $1,000,000 to reduce surplus personal
           computers and office furniture to net realizable value following
           significant reductions in the Company's workforce in 1997.

    (iv)   An expected cost of $325,000 to renegotiate the lease on the
           Company's headquarters facility with the intention of reducing the
           lease obligation by approximately 20,000 square feet, or 40% of
           total space. Costs related to this reduction in space include
           writing off unamortized leasehold improvements, related broker
           commissions and penalties and an estimate of accrued lease expense
           on the excess space over the period pending final settlement.

    (v)    A $600,000 increase in allowance for bad debts primarily to cover
           uncollected accounts dating back to 1996 on annual support and
           maintenance agreements.

    (vi)   Payment of approximately $120,000 to the Society of Thoracic
           Surgeons (STS) covering an underpayment of prior year royalties
           stipulated under the STS National Database Agreement.

                                       4
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

OVERVIEW
--------

     Summit Medical Systems, Inc. (the "Company") is a leading provider of
outcomes management systems and regulatory consulting services to the
healthcare industry. Database technology and research and consultive services
offered by the Company give healthcare providers and manufacturers information
tools to capture, manage and report clinical, economic and patient-reported
outcomes. Regulatory consulting services assist medical device manufacturers
in meeting stringent regulatory requirements for approval on new products. 

      The Company currently offers database products primarily on two
technology platforms, Crescendo! and Vista. The Crescendo! platform is
designed for use in hospital cardiac and cardiovascular surgery centers. In
the second half of 1996, the Company introduced Crescendo! Forte, a
client/server, relational database product for use in high volume cardiac and
cardiovascular surgery centers. In 1997, the Company ceased marketing
Crescendo! Forte after concluding that the market for this product was limited
and that supporting and servicing the product was prohibitively expensive for
the Company. In the third quarter of 1997, the Company began beta testing the
first release of a Crescendo! product for medium and low volume centers
("Crescendo! 1.0"), which provides core functionality, simplified installation
and reduced pricing compared to Crescendo! Forte. The Vista platform is a
Windows based, flat file application, covering a product line of over 40
database software modules that is primarily used in four medical specialties:
cardiac and thoracic surgery, cardiology, ophthalmology, and orthopedics. The
Company also provides a range of regulatory and research consulting services
through its C.L. McIntosh & Associates ("CLMA") subsidiary. In late 1996, the
Company introduced registry services designed to evaluate the efficacy of
specific medical devices or drug therapies utilizing on-line data collection
through the World Wide Web.

     During the third quarter of 1997,  the Company sold two wholly-owned
subsidiaries originally acquired in 1995, the BSM Consulting Group (BSM) and
Medical Information Systems Company, Inc. (MIS), in separate transactions. BSM
was sold back to its original owner, Bruce Maller.  The Company sold these
subsidiaries as part of its strategy to focus on information systems and
services in the cardiovascular arena and research and data management services
provided through it's C.L.McIntosh & Associates subsidiary (CLMA).  BSM provides
strategic, financial and systems planning services to healthcare providers and
vendors in various areas, such as opthalmology, which fall outside this focus.
MIS develops and markets WELLCAST R.O.I., an information system that enables
healthcare purchasers to develop cost-effective preventive care and occupational
health, medical and pharmacological intervention strategies.  Proceeds on the
sale of these two subsidiaries, less related fees and commissions, totaled $1.6
million including return of 137,000 shares of Company common stock by the
principal of BSM.  The Company recorded a one-time gain of $1.1 million in
third quarter 1997 related to these transactions.

     Combined quarterly financial results for the BSM and MIS subsidiaries for
1995, 1996 and nine months ending September 30, 1997 are summarized below:
Amounts in Thousands                          1995                            1996                       1997
                               -------------------------------- ------------------------------- ------------------------
                                 Qtr 1   Qtr 2   Qtr 3   Qtr 4   Qtr 1   Qtr 2   Qtr 3   Qtr 4   Qtr 1   Qtr 2   Qtr 3
Revenue
 Software License                 $ 19   $  32    $109    $ 30    $ 56    $ 25    $ 54   $ (21)  $  99   $ (11)   $129
 Support and Service                51      30      49      42     113      97      34      14      14      17      54
 Research and Consulting Services  466     435     404     520     530     541     749     611     571     724     614
                                  ----   -----    ----    ----    ----    ----    ----   -----   -----   -----    ----
   Total Revenue                   536     497     562     592     699     663     837     604     684     730     797
 
Cost of Sales
 Software License                    4      15      24     (10)     31      31       2       0       9      13       7
 Support and Service                17      19      20      31      25      22      41      68      64      97      48
 Research and Consulting Services  349     299     280     311     277     526     616     612     465     606     254
                                  ----   -----    ----    ----    ----    ----    ----   -----   -----   -----    ----
 Total Cost of Sales               370     333     324     332     333     579     659     680     538     716     309
 
Operating Expenses
 Selling and Marketing              40      53      46      38      53      50      67     102      46       1       1
 Research and Development           40      29      44      68      61      57      72      94      83       7      11
 General and Administrative        162     261     220     246     257      18     128     171     249     200     271
                                  ----   -----    ----    ----    ----    ----    ----   -----   -----   -----    ----
 Total Operating Expense           242     343     310     352     371     125     267     367     378     208     283
 
Income (loss) from Operations      (76)   (179)    (72)    (92)     (5)    (41)    (89)   (443)   (232)   (194)    205
 
Interest Income, Net               -0-      (1)    -0-      (7)     (1)      2       3       2       1       2       2
                                  ----   -----    ----    ----    ----    ----    ----   -----   -----   -----    ----
Income (loss) Before Taxes         (76)   (180)    (72)    (99)     (6)    (39)    (86)   (441)   (231)   (192)    207
 
Income Tax Expense                 -0-     -0-     -0-     -0-      16      (1)    -0-       1     -0-     -0-       1
                                  ----   -----    ----    ----    ----    ----    ----   -----   -----   -----    ----
Net Income (Loss)                 $(76)  $(180)   $(72)   $(99)   $(22)   $(38)   $(86)  $(442)  $(231)  $(192)   $206
-5-
THIRD QUARTER 1997 RESULTS. The Company incurred an operating loss of
$6.1 million during the three months ended September 30, 1997, which included
special charges and reserves amounting to approximately $3.5 million. These
charges and reserves included:

     (i)       A $1.0 million charge to write off the unamortized balance on
               capitalized software primarily related to Crescendo! Forte
               originally recorded in connection with the acquisition of 100% of
               the equity interest in Cordillera L.L.C. ("Cordillera") joint
               venture in December 1996. As discussed above, the Company has
               ceased marketing Crescendo! Forte.

     (ii)      Severance and outplacement services of $450,000 related primarily
               to a downsizing in September 1997.

     (iii)     Depreciation expense of $1,000,000 to reduce surplus personal
               computers and office furniture to net realizable value following
               significant reductions in the Company's workforce in 1997.

     (iv)      An expected cost of $325,000 to renegotiate the lease on the
               Company's headquarters facility with the intention of reducing
               the lease obligation by approximately 20,000 square feet, or 40%
               of total space. Reductions in the work force have created excess
               space since the lease was negotiated in late 1996. Through this
               renegotiation process, the Company seeks to save $2.6 million in
               lease payment over the next eight years. Costs related to this
               reduction in space include writing off unamortized leasehold
               improvements, related broker commissions and penalties and an
               estimate of accrued lease expense on the excess space over the
               period pending final settlement.

     (v)       A $600,000 increase in allowance for bad debts primarily to
               cover uncollected accounts dating back to 1996 on annual
               support and maintenance agreements.

     (vi)      Payment of approximately $120,000 to the Society of Thoracic
               Surgeons (STS) covering an underpayment of prior year royalties
               stipulated under the STS National Database Agreement.

          Revenues in the third quarter 1997 continued to be adversely impacted
by the transition from the Vista product line to the Crescendo! product line.
Software license revenue for the third quarter of 1997 was lower than the
comparable period of 1996, reflecting the Company's termination of direct
marketing of its Windows-based Vista product line in early 1997, and the lack
of revenue from contracts for Crescendo! products.

          In third quarter 1997, the Company resumed marketing its Vista product
line on a limited basis with a sales campaign aimed at cross-selling additional
Vista modules to existing Vista customers. Beginning in fourth quarter 1997, the
Company plans on targeting users of its DOS product in an effort to upgrade them
to Vista. This campaign is expected to continue into the first half of 1998, and
is not expected to generate additional revenues until first quarter 1998. The
Company currently plans to discontinue support of its DOS product at the end of
1998. Also in the fourth quarter, the Company expects to introduce two
predefined consulting services to its Vista customers, with a price point in the
$5,000 range. The initiatives outlined above represent forward-looking
statements of intentions that are not yet fully developed and have not been
tested in the market. Accordingly, there can be no assurance that these
initiatives will result in increased revenues.

          The Company has been selling Crescendo! 1.0 since early 1997 in
order to provide reference sites and validation of the technology. Installation
and training on the first three beta sites for Crescendo! 1.0 commenced in July
1997, and installation of six additional sites is underway at this time. The
Company has closed nineteen contracts for Crescendo! 1.0 to date, for a total
contract value of approximately $2.0 million which includes support and
maintenance revenues that will be recognized over the next three years. A full-
scale marketing and promotional effort for Crescendo! 1.0 did not commence
until mid-November.

                                      -6-
No revenues will be recorded on Crescendo! 1.0 contracts until all
significant contractual obligations have been met, including installation of
related system interfaces and customization of the data set.  No installations
have been completed to date,  and it is uncertain whether any will be completed
in the fourth quarter 1997.  In general, the Company anticipates that revenues
from Crescendo! 1.0 will be affected by a longer sales and implementation cycle
associated with more complex, higher priced client/server products, uncertainty
as to the market demand for such products and lack of referenceable accounts.

          The Company has not recorded any revenue on its four Crescendo! Forte
installations due to outstanding obligations to develop additional modules and
interfaces.  In light of the Company's decision to cease marketing the
Crescendo! Forte product,  the Company is seeking to renegotiate its agreement
with each of the four installed Crescendo! Forte customers to reduce the scope
of its deliverables. These deliverables are expected to be replaced by a
combination of available products including Crescendo! 1.0, Vista and limited
versions of Crescendo! Forte.  It is not known at this time what the value of
these revised agreements will be, or when any related revenues will be recorded.
In accordance with Company policy,  no revenue will be recorded on these
contracts until all obligations are substantially fulfilled.

          With respect to other initiatives to improve overall profitability,
the Company's CLMA subsidiary plans on expanding into data management services
for medical device manufacturers, and has begun to respond to related request
for proposals (RFP's). It is too early to determine if this initiative will be
successful.

          The Company has also taken additional measures to reduce its expense
base, including a September 1997 downsizing which eliminated 25 positions, or
15% of the workforce.

          YEAR TO DATE RESULTS.  The $18.0 million loss from operations for the
nine months ended September 30, 1997 included special charges for payments and
reserves amounting to approximately $8.7 million. This amount included $3.5
million recorded in the third quarter, as summarized above, and $5.2 million
recorded in the first half of 1997 covering primarily:

     (i)       A charge of $2.8 million covering agreements reached with the
               parties, including members of management, who received Company
               stock, options or warrants in connection with the Company's
               December 1996 acquisitions of CLMA and 100% of the equity
               interest in the Cordillera joint venture. The agreements
               involve cash payments to these parties and repricing of
               warrants issued in connection with the Cordillera acquisition.
               In return, the Company has received, or will receive, a general
               release from these parties against certain possible claims
               arising since the acquisitions, primarily related to the
               Company's restatement of revenues. The Board of Directors
               authorized the agreements based on the importance and unique
               position of CLMA and the Crescendo! technology developed by
               Cordillera to the Company's future operations. In order to
               preserve the value to the Company of the CLMA and Cordillera
               operations and their assets, the Board determined that it was
               in the best interest of the Company and its shareholders to
               resolve these issues promptly. The agreement with the CLMA
               parties was concluded, and related payments made in June 1997.
               The Company has reached an agreement with the Cordillera
               parties.

     (ii)      Accounting fees incurred in connection with the Company's
               restatement of revenues.

     (iii)     Reserves for legal fees expected to be incurred in connection
               with various shareholder lawsuits and investigations by the
               Securities and Exchange Commission ("SEC").

     (iv)      The cost of renegotiating various development contracts involving
               certain medical specialties. In April 1997, the Company decided
               to significantly reduce its involvement in a number of medical
               specialty markets that were not central to its near term
               strategy, and to focus more directly on the cardiology and
               cardiovascular medical specialty markets. The Company determined
               that the near term revenue potential associated with these
               medical specialties, including vascular, electrophysiology (EP),
               urology and critical care, did not warrant the related
               development and marketing expenses. The Company has revised or
               terminated commitments made in 1995 and 1996 under development
               and support agreements with various subsidiaries of Boston
               Scientific Corporation related to these specialty markets, and
               has partially refunded amounts received under these agreements,
               including amounts received for contract development work
               performed in prior years. In June, 1997, The Company executed an
               agreement with Boston Scientific 

                                      -7-
Corporation to market the Company's Crescendo! product line on a
               non-exclusive basis.

     (v)       Severance costs, including those associated with a downsizing
               that occurred in March 1997 and the departure of the Company's
               former Chief Executive Officer.

     (vi)      A reserve for an obligation included in the Company's
               headquarters lease requiring the Company to make a $350,000
               penalty payment if it fails to exercise an option to lease
               additional space at such facility by mid 1998, a currently
               unoccupied portion of the building. The Company will not require
               this additional space, and will settle this obligation in
               connection with the current lease renegotiations.

          Revenues in the first three quarters of 1997 suffered due to the
transition from the Vista to Crescendo! product line as discussed in "Third
Quarter 1997 Results" above.

          Expenses in the first three quarters of 1997 increased, in part,
because of the additional cost of developing, marketing, implementing and
supporting the more complex Crescendo! 1.0 and Crescendo! Forte products. In
various cost reduction initiatives taken throughout the year, the Company has
reduce its headcount from 208 full-time employees at December 31, 1996 to 140 at
September 30, 1997. Following the sale of BSM, the number of full-time employees
was approximately 115.

RESULT OF OPERATIONS
--------------------

          TOTAL REVENUE. The Company's revenue for the third quarter of 1997 was
derived primarily from software license fees, annual support and maintenance
services related to its Vista products and consulting services provided by its
BSM and CLMA subsidiaries. Revenues totaled $3.5 million for the third quarter
of 1997, a decrease of $517,000, or 13%, as compared with third quarter of 1996,
reflecting (i) termination of direct marketing efforts for Vista products and
(ii) lack of revenues arising from sales of Crescendo! 1.0, which was not
officially launched until November 1997. Revenue of $10.6 million for the first
nine months ending September 30, 1997 represented a 24% decrease over the same
period in 1996 that was also largely due to these factors. Software license
revenue was $1.8 million in the first nine months of 1997, $3.7 million or 67%
below the first nine months of 1996 as a result of the various factors discussed
above.

          SOFTWARE LICENSE REVENUE.  The Company's software license revenue
primarily consists of sales of database software licenses, software upgrades and
networking fees.  Sales of software licenses were $537,000 for the third quarter
of 1997, consisting primarily of sales of additional Vista modules to existing
Vista customers and sale of the Wellcast R.O.I. product.   This represents a
decline of $1.0 million, or 64%, from the third quarter of 1996 as a result of
the various factors discussed previously.  Software license revenue was $1.8
million in the first nine months of 1997, $3.7 million or 67% below the first
three quarters of 1996 as a result of these same factors.

          Software license revenue from sales to marketing partners comprised
30% of total software revenue in the first three quarters of 1997, largely
related to sales made through Boston Scientific Corporation in the first
quarter.

          SUPPORT AND SERVICE REVENUE.   Support and service revenue primarily
includes fees from annual support and service agreements, training, consulting,
module development and hardware.  Support and service revenue was $948,000 for
the third quarter of 1997, down slightly from third quarter 1996.  Support and
service revenue for the nine months ended September 30, 1997 was $2.8 million, a
29% decrease over the same period in 1996 which was attributable to fewer new
customers and attrition among existing customers.

          RESEARCH AND CONSULTING SERVICES REVENUE.  Research and consulting
services revenue consists of  (i) fees received by BSM for providing strategic
development, financial analysis and systems planning services to health care
providers and vendors,  (ii) fees received by CLMA for regulatory affairs and
data management services provided primarily to manufacturers of new medical
device and biologic products in order to secure Food and Drug Administration
("FDA") approval and (iii) revenues from pharmaceutical companies and device
manufacturers for registry programs involving collection of outcomes data
related to specific in-market drugs or medical devices.  Research and consulting
services revenue was $2.0 million for the third quarter of 1997, an increase of
$495,000, or 32% over the third quarter of 1996.  This increase was primary due
to revenue generated from completing the software development phase of a pilot
registry program with Eli Lilly Company ("Eli Lilly"), as described below, and a
newly 

                                      -8-
established biologics division of CLMA. Consulting revenues for the first nine
months of 1997 were $6.0 million, a 31% increase over the first nine months of
1996 due primarily to CLMA'S newly established biologics division.

          In February 1997, the Company entered into an agreement with Eli Lilly
to participate in a pilot program for a registry to collect, analyze and report
on the use of a platelet aggregation inhibitor during coronary interventions.
This agreement has a contract value of $400,000, and involves installation of an
on-line data capture system at ten pilot catheterization labs, utilizing
Crescendo! technology. During August 1997, the Company successfully completed
development of an internet version of this on-line system, which utilizes a
World Wide Web-based front-end installed at the lab site. The Company recorded
revenues of $250,000 in third quarter 1997 upon completion of the development
phase of this on-line system, in accordance with the contract. Three labs have
signed participation agreements as pilot sites to date, which is less than
originally planned. It has been more difficult than originally expected to find
sites willing to participate in the registry program, and the Company is
reviewing its approach towards motivating sites to participate in the program.
It is now expected that all ten sites will be selected and installed during
fourth quarter 1997 and first quarter 1998. The Company will record the
remaining revenue under this contract over a six month period following the 
installation of the pilot sites.

          Effective September 30, 1997, the Company sold its BSM subsidiary as
discussed in the "Overview" section above.

          TOTAL COST OF SALES.  Cost of sales as a percentage of total revenue
was 95% in third quarter 1997, compared to 47% in third quarter 1996, reflecting
a $1.0 million charge to write off the unamortized balance on capitalized
Crescendo! Forte Software, as discussed in "Overview", severance payments,
the impact of fixed personnel costs on a lower revenue base and the addition of
support and implementation personnel to support the Crescendo! product line. A
portion of this increase reflected personnel costs in the implementation area
that were classified as operating expense in third quarter 1996 rather than cost
of sales. For the first nine months of 1997, cost of sales was 84% of revenues
as compared to 39% in the same period of 1996 for these same reasons.

          COST OF SOFTWARE LICENSE REVENUE.  Cost of software license revenue
consists of expenses directly related to sales of software licenses, including
royalties, freight, user guides, diskettes, amortization of capitalized software
and an allocation of costs incurred by the client relations department for
various software related activities. The following table sets forth, for the
periods indicated, the relationship of cost of software license revenue to
software license revenue:
THREE MONTHS ENDED    NINE MONTHS ENDED
                                           SEPTEMBER 30,        SEPTEMBER 30,
                                           (IN THOUSANDS)      (IN THOUSANDS)
                                        -------------------  ------------------
                                             1997     1996     1997     1996
Software license revenue                   $  537   $1,508   $1,832   $5,515
Cost of software license revenue            1,209      186    2,065      715
Cost of software license revenue as 
  a percentage of software license revenue    225%      12%     113%      13%
The increase in cost of software license revenue as a percent of
software license revenue during third quarter and first nine months of 1997
primarily reflects the $1.0 million third quarter charge to write off the
unamortized balance on capitalized Crescendo! Forte software and a reduction
in software license revenue in those periods as compared to the same periods
in 1996.

          COST OF SUPPORT AND SERVICE REVENUE.  Cost of support and service
revenue consists of expenses directly related to sales of support and service,
including royalties, customer service personnel costs, and expenses for training
and clinical data services. The following table sets forth, for the periods
indicated, the relationship of cost of support and services revenue to support
and service revenue:

                                      -9-
THREE MONTHS ENDED  NINE MONTHS ENDED
                                             SEPTEMBER 30,      SEPTEMBER 30,
                                            (IN THOUSANDS)     (IN THOUSANDS)
                                          ------------------  ----------------- 
                                            1997      1996      1997     1996
Support and service revenue                 $  948    $ 989     $2,806   $3,965
Cost of support and service revenue          1,134      588      3,045    1,807
Cost of support and service revenue 
   as a percentage of support and 
   service revenue                             120%      59%       109%      46%
The increase in cost of support and service revenue as a percent of
support and service revenue during third quarter reflects increased staffing
in the implementation and technical services departments and a $120,000
payment to the STS to correct an underpayment of prior years royalties as
discussed in "Overview." The increase in cost of support and service revenue
as a percent of support and service revenue during the first nine months of
1997 also reflects a reduction in support and service revenue in that quarter
as compared to the same periods in 1996. Support and service costs in 1997
also included personnel costs for eight employees in the implementation and
technical services areas that were classified as operating expense in nine
months of 1996 rather than cost of sales.

          COST OF RESEARCH AND CONSULTING SERVICES REVENUE.  Cost of research
and consulting services revenue consists of personnel costs and related expenses
associated with thE BSM, CLMA and the Company's registry product line.  The
following table sets forth, for the periods indicated, the relationship of the
cost of research and consulting services revenue to research and consulting 
services revenue:
THREE MONTHS ENDED  NINE MONTHS ENDED 
                                                     SEPTEMBER 30,      SEPTEMBER 30,   
                                                    (IN THOUSANDS)     (IN THOUSANDS)   
                                                  ------------------  ----------------- 
                                                    1997      1996      1997     1996
Research and consulting services revenue            $2,025    $1,531    $6,008   $4,578
Cost of research and consulting services revenue       987     1,138     3,807    2,933
Cost of research and consulting services revenue
  as a percentage of research and consulting 
  services revenue                                      49%       74%       63%      64%
Cost of research and consulting services revenue decreased to 49% of
related revenue in third quarter 1997 from 74% in third quarter 1996, due to
higher revenue, including recognition of a portion of the Eli Lilly registry
contract, and reduction of expenses at BSM following layoffs.

          SELLING AND MARKETING EXPENSES.  Selling and marketing expenses were
$1.4 million during the third quarter of 1997, a decrease of $552,000, or 28%,
compared to the same quarter of 1996 due primarily to personnel costs in the
implementation area that were classified as marketing expense in third quarter
1996 and cost of sales in 1997. This reclassification also accounts for a 18%
decline in selling and marketing expenses during the first nine months of 1997
as compared to the same period in 1996.

          RESEARCH AND DEVELOPMENT EXPENSES.  Research and development expense
was $955,000 in the third quarter of 1997, essentially the same as the third
quarter 1996 expense.  Research and development expense for the first nine
months of 1997 amounted to $2.8 million as compared to $2.0 million for the
comparable period in 1996 as the Company increased its development staff and its
use of outside consultants to develop its Crescendo! product line. The dual
development of the Crescendo! products and Vista Elite also resulted in greater
research and development expense during the early part of 1997. As discussed
previously, efforts to develop Vista Elite were discontinued in first quarter
1997.

                                      -10-
GENERAL AND ADMINISTRATIVE EXPENSES.  General and administrative
expense was $3.9 million for third quarter 1997, an increase of $2.3  million
over third quarter 1996. the increase is due primarily to charges amounting to
approximately $2.2 million to cover costs discussed under "Overview", including
write down of surplus office furniture and equipment, renegotiation of the
headquarters lease, severance and reserves for bad debt.  General and
administrative expense was $11.9 million for the nine months ended September 30,
1997 as compared to $4.0 million for the first nine months of 1996. The $7.9
million increase related to special reserves and charges detailed in "Overview -
Year To Date Results".  Of $8.7 million in total reserves and charges detailed
therein, approximately $7.4 million was recorded in general and administrative
expense.

          GAIN ON SALE OF SUBSIDIARIES.  During third quarter 1997, the Company
recorded gains totaling $1.1 million on the sale of its BSM and MIS subsidiaries
as discussed in the "Overview" section above.  Proceeds from the sale of these
subsidiaries, less related fees and commissions,  totaled $1.6 million
including return of 137,000 shares of Company common stock by the principal of
BSM.

          INTEREST INCOME.  Interest income, net, decreased to $431,000 in third
quarter 1997 from $629,000 in third quarter 1996 as operating losses in 1997
have depleted cash available for investment.  Interest income, net, for the
three quarters of 1997 amounted to $1.5 million as compared to $1.2 million in
the same period of 1996 as proceeds from the Company's July 1996 secondary stock
offering were invested in short term securities.

          INCOME TAX EXPENSE.  To date, the Company has not incurred any
substantial income tax liability because of its historical operating losses.
The deferred tax asset related to operating loss carry forwards generated in the
first half of 1997 and 1996 were fully offset by an increase in the valuation
allowance because of the Company's history of operating losses.

LIQUIDITY AND CAPITAL RESOURCES
--------------------------------

          During the nine months ended September 30, 1997, the Company's cash
and cash equivalents decreased by $4.0 million reflecting $12.0 million used in
operating activities and $744,000 used for the purchase of computer and
networking equipment, offset by net reduction in investments of $9.3 million
and proceeds of $437,000 (net of commissions) on the sale of MIS. The sale of
BSM involved cash proceeds of $575,000 which were not received until October
1997.

          Cash provided by investing activities was $8.7 million in the first
nine months of 1997 which consisted primarily of the sale or maturity of short-
term investments of $28.6 million partially offset by the purchase of short-
term investments in the amount of $19.3 million. Cash used in financing
activities of $703,000 primarily represented repurchase of shares of the
Company's common stock and repayment of long term debt.

          As of September 30, 1997, the Company had net working capital of $28.5
million, compared to $41.7 million at December 31, 1996. The $13.2 million
decrease in working capital resulted primarily from operating losses, excluding
depreciation and amortization, of $15.4 million during the first nine months of
1997.

          The Company believes that the continued expenditure of funds will be
necessary to support its future operations, and that cash and short-term
investments of $31.4 million on hand at September 30, 1997 will be sufficient to
fund its operations, capital requirements, potential settlement payments as
discussed above and expansion needs for the foreseeable future.

          As of November 3, 1997, cash and short term investments totaled $30.9
million.

     In August 1997, the Board of Directors authorized a stock repurchase
program under which up to 1.0 million shares of the Company's common stock may
be repurchased. The Company may purchase such common stock from time to time at
prevailing prices in the open market, by purchases or in private transactions.
Through November 3, the Company has repurchased 251,000 shares of common stock
for approximately $564,000. In addition, in October 1997, 137,000 shares of
common stock were returned to the Company as part of the proceeds received on
the sale of BSM. Partially offsetting these reductions, 88,888 additional shares
of common stock were issued in August as part of the settlement agreement
with the principals of CLMA discussed above and 109,091 shares of stock were
issued in October to the new CEO in return for a cash payment of $100,000 and a
promissory note for $200,000. As of November 3, 1997, there were approximately
10.2 million shares of the Company's common stock issued and outstanding.

                                      -11-
Item 3.  Quantitative and Qualitative Disclosures About Market Risk.
         
         None
 
Part II. Other Information

Item 1.  Legal Proceedings
 
     The Company is a defendant in In re Summit Medical Systems, Inc.
Securities Litigation, a consolidated federal court securities action venued
in the United States District Court, District of Minnesota. The putative class
action was filed on March 10, 1997 and alleges violations of Section 10(b) of
the Securities and Exchange Act of 1934, as amended (the "Exchange Act") and
Rule 10b-5, Section 20(a) of the Exchange Act, Section 11 of the Securities
Act of 1933, as amended (the "Securities Act"), and Section 15 of the
Securities Act. The Company is also a defendant in a federal court securities
action captioned Teachers' Retirement System of Louisiana v. Summit Medical
Systems, Inc. et. al. The Teachers' Retirement action was filed on April 16,
1997 in the United States District Court, District of Minnesota and is not a
class action. In addition to the claims alleged in the consolidated action,
the Teachers' Retirement complaint alleges a claim under Section 18(a) of the
Exchange Act, common law fraud, and negligent misrepresentation. Each action
alleges, in essence, that the Company made misleading public disclosures
relating to its financial statements and seeks compensatory damages for losses
incurred as a result of each alleged misleading public disclosure. As to
federal securities law claims, both actions are subject to the Private
Securities Litigation Reform Act of 1995 (the "Reform Act"). The Company has
made a motion to dismiss certain claims and intends to defend against these
actions vigorously.

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

 
Item 2.  Changes in Securities
         None

Item 3.  Defaults upon Senior Securities
         None

Item 4.  Submission of Matters to a Vote of Security Holders
         None

Item 5.  Other Information
         None

Item 6.  Exhibits and Reports on Form 8-K
         (a) Exhibits

     The following exhibits are included herein:
 
     10.1  Agreement dated as of July 31, 1997 By and Between Summit Medical
           Systems, Inc., Duke University, DR Ware LLC, Donald F. Fortin, 
           M.D., Robert M. Califf, M.D. and Harry Phillips, M.D.
     11.1  Computation of Earnings per Share
     27    Financial Data Schedule
     (b)   Reports on From 8-K
           None

                                       12
Signatures

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

                            Summit Medical Systems, Inc.
                            ----------------------------
                       
                       
Date: November 14, 1997     /s/ Richard J. Willemin
-----------------------     ------------------------------------
                            Richard J. Willemin
                            Interim Chief  Executive Officer
                            and Chief Financial Officer

                                       13