EP MEDSYSTEMS INC, 10KSB, 1999-03-31

EP MEDSYSTEMS INC
10KSB, 1999-03-31
SURGICAL & MEDICAL INSTRUMENTS & APPARATUS

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SILLS CUMMIS RADIN TISCHMAN EPSTEIN & GROSS
A Professional Corporation
One Riverfront Plaza
Newark, New Jersey 07102-5400

Writer's Drect Dial Number:
(973) 643-5213

Writer's Email:
[email protected]

March 31, 1999

VIA EDGAR
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549

Re: EP MedSystems, Inc. (the "Company")
Form 10-KSB for Fiscal Year Ended December 31, 1998
Commission File No. 0-28260

Dear Sir or Madam:

On behalf of the Company, we enclose for filing a Form 10-KSB for the
Fiscal Year Ended December 31, 1998 (the "Form 10-KSB"). Please be advised that
the financial statements in the Form 10-KSB do not reflect a change from the
preceding year in any accounting principles or practices or in the methods of
application of those principles or practices.

If there are any questions regarding the foregoing, please contact the
undersigned of this office.

Very truly yours,

/s/ Jonathan N. Marcus
JONATHAN N. MARCUS
Enclosure

cc: National Association of Securities Dealers, Inc.
David A. Jenkins, Chairman, President and Chief Executive Officer
Joseph M. Turner, Chief Financial Officer

<PAGE>

U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
(Mark one)
_X_ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended: December 31, 1998

____ TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from _________ TO _________

Commission file number 0-28260

EP MedSystems, Inc.
(Name of small business issuer in its charter)

New Jersey 22-3212190
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)

100 Stierli Court, Mount Arlington, NJ 07856
(Address of principal executive offices) (Zip code)

Issuer's telephone number: (973) 398-2800

Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act: Common Stock, no
par value, $.001 stated value per share

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

Check if disclosure of delinquent filers in response to Item 405 of Regulation
S-B is not contained in this form, and no disclosure will be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [ ]

The issuer's revenues for the fiscal year ended December 31, 1998 were
$7,460,324.

The aggregate market value of the issuer's outstanding voting stock held by
non-affiliates on March 19, 1999, based on the closing sale price of its common
stock on the Nasdaq National Market on such date, was approximately $28,300,000.

As of March 19, 1999, there were outstanding 9,872,417 shares of the issuer's
Common Stock, no par value, stated value $.001 per share.

Transitional Small Business Disclosure Format (check one):
____Yes __X__ No

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Forward Looking Statements
In addition to historical information, this Form 10-KSB contains forward looking
statements relating to such matters as anticipated financial and operational
performance, business prospects, technological developments, results of clinical
trials, new products, research and development activities and similar matters.
The Private Securities Litigation Reform Act of 1995 provides a safe harbor for
forward-looking statements. EP MedSystems, Inc. (the "Company") notes that a
variety of factors could cause the Company's actual results and experience to
differ materially from the anticipated results or other expectations expressed
in the Company's forward looking statements. When used in this Form 10-KSB, the
words or phrases "believes," "anticipates," "expects," "intends," "will likely
result," "estimates," "projects" or similar expressions are intended to identify
such forward looking statements, but are not the exclusive means of identifying
such statements. Such forward-looking statements are only predictions, and the
actual events or results may differ materially from the results discussed in the
forward-looking statements. Factors that could cause or contribute to such
differences include, but are not limited to, those matters discussed herein in
the sections entitled "Item 1 - Business," "Item 3 - Legal Proceedings" and
"Item 6 - Management's Discussion and Analysis or Plan of Operation"
particularly the subsection of such Item 6 entitled "Factors That May Impact
Future Operations."

The Company cautions readers to review the cautionary statements set forth in
this report and in the Company's other reports filed with the Securities and
Exchange Commission and cautions that other factors may prove to be important in
affecting the Company's business and results of operations. Readers are
cautioned not to place undue reliance on these forward- looking statements,
which speak only as of the date of this report. The Company undertakes no
obligation to publicly revise these forward-looking statements to reflect events
or circumstances that arise after the date of this report.

PART I
Item 1. Description of Business
The Company was incorporated in New Jersey in January 1993 and operates in a
single industry segment. The Company develops, manufactures, markets and sells a
line of products for the cardiac electrophysiology ("EP") market used to
diagnose, monitor and treat irregular heartbeats known as arrhythmias. Since
inception, the Company has acquired technology, has developed new products and
has begun marketing various electrophysiology products, including the EP
WorkMate[REGISTERED TRADEMARK] electrophysiology workstation, the EP-3
Stimulator, diagnostic electrophysiology catheters, internal cardioversion
catheters and related disposable supplies.

The Company has identified the diagnosis and treatment of atrial fibrillation as
a primary focus for its ongoing development efforts. Atrial fibrillation is the
most prevalent type of abnormal heart rhythm; estimated to afflict over
2,000,000 people in the United States with an estimated 160,000 new cases
developing each year. Although not immediately life threatening, atrial
fibrillation has been linked to a diminished lifestyle and to a significantly
increased risk of stroke. In patients over the age of 65, atrial fibrillation is
reported to quadruple the risk of stroke. In this regard, the Company has

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developed a new product for internal cardioversion of atrial fibrillation known
as the ALERT[REGISTERED TRADEMARK] System, which uses a patented electrode
catheter to deliver measured, variable, low energy electrical impulses directly
to the inside of the heart in order to convert atrial fibrillation to a normal
heart rhythm.

The ALERT[REGISTERED TRADEMARK] System is not approved for sale in the United
States, but is currently undergoing clinical trials. At the earliest, the
Company does not anticipate completing the clinical trial for several months. In
addition, the Company believes that approval to sell the ALERT[REGISTERED
TRADEMARK] System in the United States may take up to one year or more, if
approved at all. The Company has received Class III Design Examination
Certification from its European notified body to label the ALERT[REGISTERED
TRADEMARK] System with a CE Mark, an international symbol of adherence to
quality assurance standards. This designation allowed the Company to initiate
sales of the ALERT[REGISTERED TRADEMARK] System in the European Community. The
ALERT[REGISTERED TRADEMARK] family of products is intended to include a number
of catheter products for the future, all oriented towards internal cardioversion
of the heart.

The Company has developed an intracardiac ultrasound product line including the
ViewMate[TRADEMARK] ultrasound imaging console and U-View[TRADEMARK] deflectable
intracardiac imaging catheter. These products are designed to improve a
physician's ability to visualize inside the chambers of the heart, including the
internal anatomy of the heart. The Company believes that the ViewMate[TRADEMARK]
and U-View[TRADEMARK] may play an important role as new and effective treatment
options are developed for the treatment of complex cardiac arrhythmias,
including ventricular tachyarrhythmia and atrial fibrillation. The Company's
ultrasound products are not approved for sale and the Company does not
anticipate receiving approval to sell the ViewMate[TRADEMARK] or U-
View[TRADEMARK] for at least several months, if approved at all.

The Company's principal offices are located at 100 Stierli Court, Mount
Arlington, NJ 07856, and its telephone number is 973-398-2800. Unless the
context requires otherwise, references to the "Company" include EP MedSystems,
Inc. and its wholly owned subsidiaries ProCath Corporation ("ProCath") and EP
MedSystems UK Ltd. ("EP MedSystems UK").

Products
The Company develops, manufactures, markets and sells a broad based, integrated
line of electrophysiology products used to monitor, analyze, diagnose and treat
cardiac arrhythmias. The Company's products can be separated by function into
the following categories described below.

The ALERT[REGISTERED TRADEMARK] System
The Company has developed the ALERT[REGISTERED TRADEMARK] System to be a more
effective and less traumatic method of converting atrial fibrillation to normal
heart rhythm. The ALERT[REGISTERED TRADEMARK] System represents a new approach
to electrical cardioversion known as low energy internal cardioversion, in which
up to 15 joules of electrical energy are delivered directly to the inside of the
heart. The ALERT[REGISTERED TRADEMARK] System comprises a single use proprietary
electrode catheter with two separate electrode arrays (the "ALERT[REGISTERED
TRADEMARK] Catheter") and an external energy source (the "ALERT[REGISTERED
TRADEMARK] Companion").

The Company believes low energy internal cardioversion provides numerous

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potential advantages over high-energy external cardioversion and drug conversion
therapies. The Company believes the ALERT[REGISTERED TRADEMARK] System will
prove more effective, less painful and less traumatic than external
cardioversion. It does not require the use of general anesthesia, can be
performed on an outpatient basis and involves the delivery of much lower levels
of energy to the patient. The Company also believes the ALERT[REGISTERED
TRADEMARK] System will prove more effective than drug conversion therapy without
the risk of harmful side effects associated with such therapy.

The Company believes that internal cardioversion using the ALERT[REGISTERED
TRADEMARK] System will provide the following key benefits:

- Fewer traumas, discomfort and risk to patients than high-energy
external cardioversion.
- Higher success rate in converting patients with chronic atrial
fibrillation to normal heart rhythm than with high-energy external
cardioversion (based on initial clinical experience).
- Elimination of harmful side effects associated with drug therapies.
- Can be used on an outpatient basis; general anesthesia is not
required.
- Lower overall cost per procedure than high-energy external
cardioversion.
- Greater applicability for converting atrial fibrillation occurring in
the days immediately following open-heart surgery.
- Combination of temporary pacing and blood pressure monitoring features
with cardioversion in a single multi purpose catheter.

The ALERT[REGISTERED TRADEMARK] System is based on technology invented by
Eckhard Alt, MD, a member of the Company's Scientific Advisory Board. Direct
employees of the Company invented the catheter manufacturing technology. The
Company has licensed the exclusive worldwide right to use the ALERT[REGISTERED
TRADEMARK] technology in the ALERT[REGISTERED TRADEMARK] System from Dr. Alt.
Three patents have been issued in the United States on the ALERT[REGISTERED
TRADEMARK] System. The Company and Dr. Alt have also filed additional patent
applications and continuations for the ALERT[REGISTERED TRADEMARK] Catheter and
the ALERT[REGISTERED TRADEMARK] Companion in the United States and
internationally. See "-- Patents and Intellectual Property."

Clinical Trials The ALERT[REGISTERED TRADEMARK] System is a medical device that
will require pre-market approval ("PMA") from the U.S. Food and Drug
Administration ("FDA") prior to marketing in the United States. The Company
submitted a clinical study protocol to the FDA as part of an application for an
Investigational Device Exemption ("IDE"). The FDA has approved the IDE
application for the ALERT[REGISTERED TRADEMARK] System and the U.S. IDE clinical
trials are currently ongoing at eleven leading atrial fibrillation research
centers, including Duke University Medical Center; the Medical Center of the
University of Alabama at Birmingham; Indiana University; and University of
California at San Francisco. The Company hopes that the results of the
ALERT[REGISTERED TRADEMARK] clinical trials will demonstrate the safety and
efficacy of the ALERT[REGISTERED TRADEMARK] System for internal catheter based
cardioversion of atrial fibrillation. To date, approximately 70 treatments have
occurred under the ALERT[REGISTERED TRADEMARK] clinical trial. The Company is
encouraged by the results of the clinical trial on the limited number of
patients treated so far. See " --Government Regulation."

The Company has submitted the first two of five modular components in its

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ALERT[REGISTERED TRADEMARK] System PMA shell document with the FDA. The Company
believes that the provisions of the FDA Modernization Act are intended to allow
companies to accelerate the review and approval process for new medical devices
such as the ALERT[REGISTERED TRADEMARK] System. Under the Modernization Act, a
company may submit information and data in modules for review and approval prior
to completion of the clinical trials. The Company expects to submit additional
modules and expects to conclude the clinical trial during 1999. See
"--Government Regulation."

The ALERT[REGISTERED TRADEMARK] System has received Class III Design Examination
Certification for labeling with the CE Mark and the product is being sold
throughout Europe. European tests are now ongoing for a new version of the
ALERT[REGISTERED TRADEMARK] Catheter that incorporates thermal dilution to the
ALERT[REGISTERED TRADEMARK] pulmonary artery catheter. This feature is expected
to broaden the ALERT[REGISTERED TRADEMARK] applications to include the critical
care and heart surgery markets by incorporating cardiac output measurement into
the catheter. See "--Government Regulation."

EP Laboratory Workstations and Stimulators (EP WorkMate[REGISTERED TRADEMARK],
EP-3 Stimulator) The Company's EP WorkMate[REGISTERED TRADEMARK] is a
computerized electrophysiology workstation that monitors displays and stores
cardiac electrical activity and arrhythmia data. Electrophysiology workstations
are dedicated data management systems designed specifically for use in
electrophysiology procedures to view and record procedural data facilitate data
analysis and generate customized reports. The EP WorkMate[REGISTERED TRADEMARK]
offers, among other features, up to 120 recorded channels of cardiac electrical
data, real-time analysis including graphical and quantitative display of such
data, superior ease of use and a single keyboard for all operations. The EP
WorkMate[REGISTERED TRADEMARK] consists of a Pentium PC with integral
proprietary software, a proprietary signal-conditioning unit, dual 21-inch,
high-resolution color monitors, an optical disk or tape drive for data storage,
a custom keyboard, catheter and stimulator junction box and laser printer. The
EP WorkMate[REGISTERED TRADEMARK] is typically sold with an integrated EP-3
Stimulator. In addition, each EP WorkMate[REGISTERED TRADEMARK] has an internal
modem to provide a direct link between the purchaser and the Company,
facilitating field software support. The EP WorkMate[REGISTERED TRADEMARK] is
differentiated from competing products by (i) its seamless integration with the
EP-3 Stimulator, (ii) its capacity to receive and display up to 120 channels of
cardiac electrical data simultaneously, (iii) its ability to process and
simultaneously display both real time and historical electrophysiology activity
and (iv) its simple, user friendly software based on a menu driven, point and
click interface.

The Company's EP-3 Stimulator is a computerized electrical pulse generator and
processor used to stimulate the heart with electrical impulses in order to
locate electrical disturbances or arrhythmias. The Company believes the EP-3
Stimulator is currently the only computerized electrophysiology clinical
stimulator being marketed in the U.S. It features automatic synchronization and
rate controls as well as the same user interface as the EP WorkMate[REGISTERED
TRADEMARK]. The EP-3 Stimulator can be sold as a stand alone electrophysiology
stimulator or integrated with the EP WorkMate[REGISTERED TRADEMARK]. The Company
believes the EP WorkMate[REGISTERED TRADEMARK], when integrated with the EP- 3
Stimulator, offers the most advanced computer tools available to the
electrophysiology market.

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Catheter Products
The Company presently markets a full line of diagnostic electrophysiology
catheters for stimulation and sensing of electrical signals during
electrophysiology studies. The Company's diagnostic catheters are similar to
others sold within the industry. The Company offers numerous electrode/curve
configurations of catheters. Temporary pacing catheters incorporate both pacing
and sensing electrodes and are used to temporarily regulate pacing of the heart,
including during the period while a patient awaits permanent pacemaker implant.
These catheters are available in a number of sizes with different curve shapes.
The Company offers a temporary pacing catheter with a balloon tip that allows
guidance of the catheter without X- ray fluoroscopy. The Company also offers
disposable introducer kits that are used to aid in the insertion of catheters or
pacemaker leads into a patient's venous system. The kits include a plastic
introducer, dilator guidewire, needle and syringe. During March 1999, the
Company received substantial equivalence (SE) clearance from the FDA for its
flexible catheter electrodes. This clearance allows the Company to market the
product in the United States. This proprietary and patented technology known as
SilverFlex offers the Company the ability to manufacture and sell catheters with
numerous electrodes for sophisticated mapping procedures. The flexible nature
and lack of weight of these electrodes enable them to be placed on the catheter
shaft without the traditional problems of unwanted stiffness and poor handling
characteristics. SilverFlex appears to be a better alternative than metal
electrode bands when used with eight or more electrodes and/or with a
deflectable catheter. Also during March 1999, the Company submitted documents to
the FDA for 510(k) approval for a deflectable catheter design to be used with
diagnostic EP catheters made with both SilverFlex and platinum electrodes. The
addition of a deflectable catheter to the catheter product line will enable the
company to become more competitive in the diagnostic EP catheter market.

Ultrasound Products
The Company has developed an intracardiac ultrasound product line including the
ViewMate[TRADEMARK] ultrasound imaging console and U-View[TRADEMARK] deflectable
intracardiac imaging catheter. These products are designed to improve a
physician's ability to visualize inside the chambers of the heart, including the
internal anatomy of the heart. The Company believes that the ViewMate[TRADEMARK]
and U-View[TRADEMARK] may play an important role as new and effective treatment
options are developed for the treatment of complex cardiac arrhythmias,
including ventricular tachyarrhythmia and atrial fibrillation. The Company's
ultrasound products are not approved for sale and the Company does not
anticipate receiving approval to sell the ViewMate[TRADEMARK] or U-
View[TRADEMARK] for at least several months, if approved at all.

Patents and Intellectual Property
The Company's success and ability to compete depends in part upon its ability to
obtain patent protection for its existing products and those under development.
The Company has filed for patents on its important inventions, has acquired
patents and has entered into license agreements to obtain rights under selected
patents of third parties as to technology it considers important to its
business. The Company intends to file additional patents in the future in order
to continue its efforts to establish, preserve and enforce protection for its
proprietary technology and other intellectual property. The Company's
intellectual property consists of the following:

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- An exclusive worldwide license under three issued U.S. patents; an
exclusive license under one patent application pending in the European
Patent Office and additional filed or licensed patent applications and
continuations for the ALERT[REGISTERED TRADEMARK] System. The license
agreement provides for the Company to pay royalties equal to 5% of net
sales of all products covered by the licensed technology until
expiration of the last licensed patent.

- A semi-exclusive license under an issued U.S. patent for technology to
conduct temporary ventricular defibrillation. The license agreement
provides for the Company to pay royalties up to a maximum of 5% of net
sales of all products covered by the licensed technology until
expiration of the licensed patent, with lifetime royalties limited to
a maximum of $1,000,000.

- A non-exclusive license under an issued U.S. patent for
synchronization of a defibrillation shock delivered using the
ALERT[REGISTERED TRADEMARK] Companion. The license agreement provides
for the Company to pay royalties equal to the greater of $200 per unit
or 2% of net sales of the ALERT[REGISTERED TRADEMARK] Companion.

- Exclusive licenses under nine issued U.S. patents and four foreign
filings as to certain ultrasound technologies in an attempt to develop
ultrasound guided electrophysiology products within the field of use.
The field of use of the license covers cardiac electrophysiology
except for pacemaker leads and permanently implanted defibrillation
devices. The license agreement calls for a royalty on net sales of all
products covered by the licensed technology, including minimum
royalties beginning in 1999 and continuing for the life of the
applicable patents and continuations thereof.

- A patent covering the application of conductive adhesive bands for
catheter electrodes. The license agreement provides for the Company to
pay royalties of 1% of net sales of all products covered by the
licensed technology until expiration of the licensed patent, with
lifetime royalties limited to a maximum of $1,000,000.

- Three patent applications were issued or allowed during 1998 for
catheter products including the One-Piece catheter, a steerable
catheter and combination pacing/sensing/cardioversion catheters.

- Three patent applications in the United States for new catheter
products, manufacturing methods or other advanced catheter
technologies were filed in 1998.

- The Company is in the process of preparing patent applications for
seven new products or improvements to existing products.

During February 1997, the Company licensed certain technologies from EchoCath
Inc. ("EchoCath") in order to attempt to develop products that allow
visualization of the heart's anatomy and visualization of catheters inside the
heart through the use of ultrasound imaging. The agreement called for the
Company to make payments totaling $700,000, in four installments, as certain

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development milestones and initial sales are achieved. To the best of the
Company's knowledge, as of March 19, 1999, none of the development milestones
have been achieved and the deadlines for achieving certain of the milestones
have expired. The Company cannot determine if any of the development milestones
will be met. Terms of the license call for a royalty on net sales, including
minimum royalties beginning in 1999 and continuing for the life of the
applicable patents and continuations thereof. The Company also purchased 280,000
shares of newly issued 5.4% cumulative convertible preferred stock of EchoCath
for $1,400,000 in cash. (See "Legal Proceedings.")

The Company intends to rely on a combination of patents, trade secrets,
copyrights and trademarks to protect its intellectual property rights. No
assurance can be given, however, that competitors will not independently develop
substantially equivalent proprietary technology, or that the Company can
meaningfully protect its rights in unpatented proprietary technology.

There can be no assurance that any of the Company's patent applications or
applications as to which it has acquired licenses will issue as patents, or that
if patents are issued that they will be of sufficient scope and strength to
provide meaningful protection of the Company's technology or any commercial
advantage to the Company, or that such patents will not be challenged,
invalidated or circumvented in the future. Moreover, there can be no assurance
that the Company's competitors, many of which have substantial resources and
have made substantial investments in competing technologies, do not presently
have or will not seek patents that will prevent, limit or interfere with the
Company's ability to make, use or sell its products either in the U.S. or in
other countries.

The Company has not received any notices alleging, and is not aware of, any
infringement by the Company of any patents or intellectual property of others.
However, there can be no assurance that current and potential competitors and
other third parties have not filed or in the future will not file applications
for patents, or have not received or in the future will not receive, patents or
other proprietary rights relating to devices, apparatus, materials or processes
used or proposed to be used by the Company.

The market for medical devices for the treatment of cardiovascular disease has
been characterized by frequent litigation regarding patent and other
intellectual property rights. In the event that claims of infringement of a
third party's rights are made and upheld, the Company could be prevented from
exploiting the technology or other intellectual property involved, or could be
required to obtain licenses from the owners of such intellectual property.
Alternatively, the Company could be forced to redesign its products or processes
to avoid infringement. There can be no assurance that such licenses would be
available or, if available, would be on terms acceptable to the Company or that
the Company would be successful in any attempt to redesign its products or
processes to avoid infringement. Litigation may be necessary to defend against
claims of infringement, to enforce patents issued to the Company or to protect
trade secrets and could result in substantial cost to, and diversion of effort
by, the Company.

Research and Development
The electrophysiology market is characterized by rapid technological change, new
product introductions and evolving industry standards. To compete effectively in

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this environment, the Company engages in the continuous development of products
by (i) engaging in internal research and development or contracting with third
parties for specific research and development projects, (ii) licensing new
technology and (iii) acquiring products incorporating technology that could not
otherwise be developed as quickly using internal resources.

The Company's expenditures for research and development (which includes
expenditures for clinical trials, regulatory affairs and engineering) totaled
approximately $1,606,000 and $2,262,000 in the years ending December 31, 1998,
and 1997, respectively. During 1998, the Company's principal research and
development project involved the ALERT[REGISTERED TRADEMARK] System clinical
trials. The Company also realized research and development expenses related to
efforts to place a flexible metallic coating on its electrophysiology catheters,
efforts to develop and obtain regulatory approval of its line of ultrasound
guided products, hiring of additional in- house engineering and technical
support personnel and increased development work on existing products, including
the EP WorkMate and electrophysiology catheters. Additionally, other research
and development efforts are ongoing to develop new products, enhance existing
products and lower production costs.

During February 1997, the Company licensed certain technologies from EchoCath in
order to attempt to develop products that allow visualization of the heart's
anatomy and visualization of catheters inside the heart through the use of
ultrasound imaging. The Company is engaged in ongoing development of a number of
catheter based electrophysiology products and employs software engineers who are
continuously involved in software development of new products or improvements to
existing products. There can be no assurance that such development efforts will
be successful or that if products are developed that regulatory approval to sell
any such products will be obtained.

The Company expects that expenses related to the ALERT[REGISTERED TRADEMARK]
System will be significant during 1999. The Company expects that research and
development expenses will increase as it continues attempts to develop new
products as well as ongoing improvements to existing products and other
development projects that may arise.

Sales and Marketing
Domestic
Historically, the Company has relied on third party distributors for all of its
sales activities. Following completion of its initial public offering, the
Company began efforts to build a direct sales and marketing force to sell all of
its products in the domestic market. This included the hiring of a National
Sales Manager, a number of Regional Sales Managers, a Director of Marketing and
several clinical engineers and administrative support personnel. Also, the
Company terminated its relationships with all of its domestic distributors. The
Company believes its domestic direct sales force has the potential to generate
greater sales in the future than the Company had been experiencing through the
use of independent distributors.

International

The Company utilizes distributors to sell its products overseas and is in the
process of adding distributors in several countries not previously represented.
In 1997, the Company formed an U.S. subsidiary, with a branch office based in

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the United Kingdom, to improve distributor relationships and to assist in the
introduction of the ALERT[REGISTERED TRADEMARK] System for sale in Europe. The
UK office is currently staffed with two Sales Managers, International Marketing
Manager, clinical engineers and administrative employees. The Company expects to
expend considerable resources and effort to support the sale of the
ALERT[REGISTERED TRADEMARK] System in Europe. Examples of the types of
expenditures are physician training and education, promotional material, sample
products and increased direct sales expenses, among others. During July 1997,
the Company initiated sales through a new Japanese distributor and has taken
steps to improve its distribution network throughout the Asian markets.

No assurance can be given that the Company or its distributors can successfully
introduce the ALERT[REGISTERED TRADEMARK] System or the Company's other products
in Europe or elsewhere on terms acceptable to the Company, or at all. Future
foreign sales will be subject to certain risks, including exchange rate
fluctuations, local medical reimbursement issues, duties, tariffs and taxes,
import restrictions and other regulations.

Manufacturing
Catheter Products

Substantially all of the Company's catheter products are manufactured at
ProCath's facility located in Berlin, New Jersey. Each catheter is assembled and
tested by the Company prior to sterilization. The Berlin facilities and quality
assurance procedures are subject to Good Manufacturing Practices ("GMP")
regulations promulgated by the FDA. Raw material vendors are required to submit
certificates of compliance to the Company's specifications. In January 1997,
Procath received ISO-9001 Quality System Certification of its manufacturing
facility. ProCath has received Design Examination Certification from its
European notified body to apply the CE Mark to the ALERT[REGISTERED TRADEMARK]
product line and to its other catheter products, a necessity for the continued
sales of the Company's products in the European Community. During 1998, ProCath
expanded its catheter manufacturing facilities and has hired and trained
additional personnel. ProCath has no experience in large-scale manufacturing and
there can be no assurance that the Company will be successful in manufacturing
products in significant volume. The Company believes that it has sufficient
capacity to satisfy its catheter manufacturing needs for at least the next
twelve months.

Hardware and Software Products
The Company assembles its computer systems (EP WorkMate and EP-3 Stimulator) at
its Mount Arlington facility. The ALERT[REGISTERED TRADEMARK] Companion is
assembled at ProCath. The Company's engineers generally develop software
products. The Company relies on outside sources for the manufacture of critical
components of the ALERT[REGISTERED TRADEMARK] Companion, EP WorkMate and EP-3
Stimulator. All custom components are manufactured in conformity with the
Company's specifications and the manufacturers' facilities, activities and
quality assurance procedures are subject to GMP regulations and ISO 9001 audits.
Any interruption in the supply from these suppliers would have a material
adverse effect on the Company's ability to deliver its products until acceptable
arrangements can be made with a qualified alternative source of supply which, as
a result, could have a material adverse effect on the Company's business,
financial condition and results of operations. The Company also incorporates
several off the shelf components in its systems. Examples of these items are
computers, high-resolution monitors and

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laser printers that are typically available from more than one vendor. The parts
are inspected and tested upon receipt as well as when the components are
assembled into a complete system prior to shipment.

Government Regulation
United States

In the United States, the development, testing, manufacture, labeling,
marketing, promotion and sale of medical devices are regulated by numerous
governmental authorities, including the FDA under the Federal Food, Drug, and
Cosmetic Act ("FFDCA"). The FDA has broad discretion in enforcing the FFDCA, and
noncompliance with applicable requirements can result in fines, injunctions,
civil penalties, recall or seizure of products, total or partial suspension of
production, failure to grant premarket clearance or premarket approval for
devices, withdrawal of marketing approvals and criminal prosecution.

In the United States, medical devices are classified into one of three classes,
Class I, II or III, on the basis of the controls necessary to reasonably ensure
their safety and effectiveness. Class I devices require general controls such as
proper labeling, premarket notification and adherence to GMP. Class II devices
require the use of special controls such as performance standards, post-market
surveillance by regulatory bodies, patient registries and FDA guidelines. Class
III devices must generally receive a pre-market approval ("PMA") from the FDA
prior to being marketed in the U.S. in order to ensure their safety and
effectiveness.

Before a new device can be introduced into the market in the U.S., the
manufacturer generally must obtain either FDA clearance of a premarket
notification filing under Section 510(k) of the FDC Act (a "510(k) submission")
or FDA approval of a PMA application under Section 515 of the FDC Act. A 510(k)
submission will be granted clearance by the FDA if the submitted data and other
information establishes that the proposed device is "substantially equivalent"
to a predicate device legally marketed in the U.S. A predicate device is a
device that was legally marketed in the U.S. prior to May 28, 1976 or a device
marketed since that date that has been determined by the FDA to be substantially
equivalent pursuant to a 510(k) application and for which a PMA is not required.
Substantial equivalence means that the device has the same intended use and is
as safe and effective as a legally marketed device and does not raise questions
of safety and effectiveness that are different than those associated with the
legally marketed device. The FDA has recently been requiring more data and
information to demonstrate substantial equivalence than in the past. Based upon
industry and FDA publications, the Company believes that it generally takes
between 3 to 12 months from the date of submission to obtain 510(k) premarket
clearance, but may take longer depending upon the circumstances. The FDA may
determine that the proposed device is not substantially equivalent, or that
additional data is needed before a substantial equivalence determination can be
made. A "not substantially equivalent" determination, or a request for
additional data, could delay the market introduction of new products that fall
into this category and could have a materially adverse effect on the Company's
business, financial condition and results of operations. There can be no
assurance that the Company will obtain 510(k) premarket clearance within the
above time frames, if at all, for any of the devices for which it may file a
510(k) submission in the future.

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A 510(k) submission is also required when the manufacturer makes a change or
modification to a legally marketed device that could significantly affect the
safety or effectiveness of the device, or where there is a major change or
modification in the intended use of the device. When any change or modification
is made in a device or its intended use, the manufacturer is expected to make
the initial determination as to whether the change or modification is of a kind
that would necessitate a filing of a new 510(k) submission. The FDA's
regulations provide only limited guidance for making this determination.

A PMA application must be filed as to a proposed device if the device is not
substantially equivalent to a legally marketed device or if it is a Class III
device for which the FDA has called for PMAs. The PMA procedure involves a more
rigorous, complex and lengthy review process by the FDA than the 510(k)
premarket clearance procedure. A PMA application must be supported by extensive
data, including pre-clinical and clinical trial data to demonstrate the safety
and efficacy of the device. If human clinical trials of a device are undertaken,
and the device presents a "significant risk," the manufacturer or the
distributor of the device must obtain FDA approval of an IDE application prior
to commencing human clinical trials in the U.S.

The IDE application must be supported by data, typically including the results
of animal and laboratory testing. If the IDE application is approved, human
clinical trials may begin at a specific number of investigational sites with a
maximum specific number of patients, as approved by the FDA. Sponsors of
clinical trials are permitted to charge for those devices distributed in the
course of the study provided such compensation does not exceed recovery of the
costs of manufacture, research, development and handling.

Upon receipt of a PMA application, the FDA makes a threshold determination as to
whether the application is sufficiently complete to permit a substantive review.
If the FDA determines that the PMA application is sufficiently complete, it will
accept the application for filing. Otherwise, the FDA will request that the
sponsor submit additional information within 180 days. Depending on the nature
and amount of information requested by the FDA, the PMA review process may be
substantially delayed by such a request. Once the submission is accepted for
filing, the FDA begins a review of the PMA application. The Company believes
that a FDA review of a PMA application generally takes between one and three
years from the date the PMA application is accepted for filing but may take
significantly longer. The review time is often significantly extended if the FDA
requests more information or clarification of information already provided in
the submission. During the review period, a FDA advisory committee, typically a
panel of clinicians, will likely be convened to review and evaluate the
application and provide recommendations to the FDA as to whether the PMA should
be approved. In addition, the FDA will inspect the manufacturing facility where
the unapproved product is to be made to ensure compliance with the FDA's GMP
requirements prior to issuance of a PMA.

If the FDA's evaluations of both the PMA application and the manufacturing
facilities are favorable, the FDA may issue either an approval letter or an
"approvable letter," which usually contains a number of conditions that must be
met in order to secure final approval of the PMA application. When and if those

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conditions have been fulfilled to the satisfaction of the FDA, the agency will
issue a PMA, authorizing commercial marketing of the device for certain
indications. If the FDA evaluation of the PMA application or manufacturing
facilities is not favorable, the FDA will deny approval of the PMA application
or issue a "not approvable" letter. The FDA may also determine that additional
clinical trials are necessary, in which case the PMA may be delayed for several
years while additional clinical trials are conducted and submitted in an
amendment to the PMA application.

Modifications to a device that is the subject of an approved PMA, its labeling
or manufacturing process may require approval by the FDA of PMA supplements or
new PMAs. Supplements to a PMA often require the submission of the same type of
information required for an initial PMA, except that the supplement is generally
limited to that information needed to support the proposed change from the
product covered by the original PMA. Although under the FDC Act, the FDA is
required to complete its review of a PMA or PMA supplement within 180 days, the
agency may take a significantly longer period of time to complete its review.

The Company received FDA approval to begin clinical trials for the
ALERT[REGISTERED TRADEMARK] System under an IDE filing and has commenced human
clinical trials of the ALERT[REGISTERED TRADEMARK] System at eleven centers in
the United States. The Company intends to expand the trials to include
additional leading atrial fibrillation research centers to obtain data needed to
support its application. There can be no assurance that the clinical trials will
demonstrate the safety and effectiveness of the ALERT[REGISTERED TRADEMARK]
System, or that a subsequently filed application will be accepted by the FDA for
filing or approved.

The PMA process can be expensive and a number of devices for which other
companies have sought PMAs have never been approved for marketing. There can be
no assurance that the Company will be able to obtain necessary regulatory
approvals or clearances on a timely basis or at all. Delays in receipt of or
failure to receive such approvals, the loss of previously received approvals, or
failure to comply with existing or future regulatory requirements would have a
material adverse effect on the Company's business, financial condition and
results of operations.

Following FDA clearance or approval of a device for commercial distribution, the
primary form of government regulation of medical devices is the FDA's GMP
regulations for medical devices. These regulations, administered by the FDA, set
forth requirements to be observed in the design, manufacture, packaging,
labeling and storage of medical products for human use, including implementation
of a quality assurance program. These regulations require, among other things,
that manufacturing is controlled by the use of written procedures and the
ability to produce devices that meet specifications is validated by extensive
testing. They also require inspection and testing of the products produced and
investigation when devices fail to meet specifications. Failure to adhere to GMP
requirements would cause the products produced to be considered in violation of
the FFDCA and subject to enforcement action. The FDA monitors compliance with
these requirements by requiring manufacturers to register their manufacturing
facilities and list their products with the FDA. The Company is subject to
routine inspection by the FDA for compliance with QSR, Design Control and GMP
requirements, Medical Device Reporting regulations ("MDR") requirements, and
other applicable regulations. The FDA last inspected ProCath during June 1998.
The FDA last inspected EP MedSystems during October 1996. If an FDA inspector

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observes conditions that might be violative of GMP procedures, the manufacturer
must correct those conditions or explain them satisfactorily, or face potential
regulatory action that might include physical removal of the product from the
market. The FDA has made changes to the GMP regulations, including quality
systems and design control requirements, which will likely increase the cost of
compliance with GMP requirements. Changes in existing requirements or adoption
of new requirements could have a material adverse effect on the Company's
business, financial condition, and results of operation. There can be no
assurance that the Company will not incur significant costs to comply with laws
and regulations in the future or that laws and regulations will not have a
material adverse effect upon the Company's business, financial condition or
results of operation. The FDA's MDR regulations also require that the Company
provide information to the FDA on the occurrence of any deaths or serious
injuries alleged to have been associated with the use of the Company's products,
as well as on any product malfunction that would likely cause or contribute to a
death or serious injury if the malfunction were to recur. FDA law and
regulations also prohibit a device from being labeled or promoted for unapproved
or uncleared indications. If the FDA believes that a company is not in
compliance with any of these regulations, it can institute proceedings to detain
or seize products, issue a recall, seek injunctive relief or assess civil and
criminal penalties against such a company. Failure on the part of the Company or
by its suppliers of critical components to comply with GMP could have a material
adverse effect on the Company's business, financial condition and results of
operations.

In summary, the process of obtaining and maintaining required regulatory
approvals can be expensive, uncertain, and lengthy, and there can be no
assurance that the Company will ever obtain such approvals and that if such
approvals are obtained, there can be no assurance that the Company will be able
to maintain the approvals. In addition, there can be no assurance that the FDA
will act favorably or quickly on any of the Company's submissions to the FDA and
significant difficulties and costs may be encountered by the Company in its
efforts to obtain FDA clearance that could delay or preclude the Company from
selling its products in the United States. Furthermore, there can be no
assurance that the FDA will not request additional data or require that the
Company conduct further clinical studies, causing the Company to incur
substantial cost and delay. In addition, there can be no assurance that the FDA
will not impose strict labeling requirements, onerous operator training
requirements or other requirements as a condition of its PMA approval, any of
which could limit the Company's ability to market its systems. Labeling and
promotional activities are subject to scrutiny by the FDA and, in certain
circumstances, by the Federal Trade Commission ("FTC"). FDA enforcement policy
strictly prohibits the marketing of FDA cleared or approved medical devices for
unapproved uses. Further, if a company wishes to modify a product after FDA
approval of a PMA, including changes in indications or other modifications that
could affect safety or efficacy, additional clearances or approvals will be
required from the FDA. Failure to receive or delays in receipt of FDA clearances
or approvals, including the need for additional clinical trials or data as a
prerequisite to clearance or approval, or any FDA conditions that limit the
ability of the Company to market its systems, could have a material adverse
effect on the Company's business, financial condition and results of operations.

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International
In order for the Company to market its products in Europe and certain other
foreign jurisdictions, the Company must obtain required regulatory approvals and
clearances and otherwise comply with extensive regulations regarding safety and
manufacturing processes and quality. These regulations, including the
requirements for approvals or clearance to market and the time required for
regulatory review, vary from country to country. The time required to obtain
approval by a foreign country may be longer or shorter than that required for
FDA approval and the requirements may differ. Many foreign countries generally
permit studies involving humans for medical devices earlier in the product
development cycle than is permitted by regulation in the U.S. Other countries,
such as Japan, have standards similar to those of the FDA. There can be no
assurance that the Company will obtain regulatory approvals in such countries or
that it will not be required to incur significant costs in obtaining or
maintaining its foreign regulatory approvals. Delays in the receipt of approvals
to market the Company's products or failure to maintain these approvals could
have a material adverse impact on the Company's business, financial condition or
results of operations.

Foreign countries also often have extensive regulations regarding safety,
manufacturing processes and quality that differ from those in the United States
and must be met in order to continue sale of a product within the country. The
European Economic Community has instituted the requirement that all medical
products sold into the European Union, comply with the Medical Device Directive
(the "MDD"). The MDD requires that all such products be labeled with the CE
Mark. The Company has received Class III Design Examination Certification from
its notified body to label its products, including the ALERT[REGISTERED
TRADEMARK] System, with the CE Mark. This designation allowed the Company to
initiate sales of the ALERT[REGISTERED TRADEMARK] System in countries that are
members of the European Union and the European Free Trade Association. There can
be no assurance that the Company will be successful in maintaining its CE Mark
certification.

In addition to the import requirements of foreign countries, a company must also
comply with U.S. laws governing the export of FDA regulated products. Devices
with a 510(k) clearance or a PMA generally may be exported without further FDA
authorization, provided certain conditions are met. A Class III device without a
PMA may be exported to a foreign country for commercial marketing if the
exporting firm obtains an FDA export permit and the following requirements are
satisfied: (i) the device meets the specifications of the foreign purchaser;
(ii) the device is not in conflict with the laws of the country to which it is
intended for export; (iii) the device is labeled that it is intended for export;
(iv) the device is not sold or offered for sale in domestic commerce; and (v)
the FDA determines that the exportation of the device is not contrary to the
public health and has the approval of the country to which it is intended for
export.

The FDA Export Reform and Enhancement Act of 1996 relaxed the exportation
requirements governing devices under certain circumstances. Pursuant to this
law, a device that has not obtained FDA clearance or approval may be exported to
any country in the world without FDA authorization if the product complies with
the laws of that country and has valid marketing authorization in one of the

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following countries: Australia, Canada, Israel, Japan, New Zealand, Switzerland,
South Africa, the European Union or a country in the European economic area. The
FDA is authorized to add countries to this list in the future. Among other
restrictions, a device may only be exported under the new law if it is not
adulterated, meets the specifications of the foreign manufacturer, complies with
the laws of the importing country, is labeled for export, is manufactured in
substantial compliance with GMP regulations or recognized international
standards and is not sold in the U.S.

Other

The Company is also subject to numerous federal, state and local laws relating
to such matters as safe working conditions, manufacturing practices,
environmental protection, fire hazard control and disposal of hazardous or
potentially hazardous substances. There can be no assurance that it will not be
required to incur significant costs to comply with such laws and regulations in
the future or that such laws and regulations will not have a materially adverse
effect upon the Company's ability to do business.

Competition
The medical device market, particularly in the area of cardiac electrophysiology
products, is highly competitive. Many of the Company's competitors have access
to significantly greater financial and other resources than the Company.
Further, the medical device market is characterized by rapid product development
and technological change. The present or future products of the Company could be
rendered obsolete or uneconomic by technological advances by one or more of the
Company's present or future competitors or by other therapies. The Company's
future success will depend upon its ability to remain competitive with other
developers of such medical devices and therapies. The Company believes that its
existing products compete primarily on the basis of features, effectiveness,
quality, ease and convenience of use, customer service and cost effectiveness.

The Company's primary competitors in the production of catheters and disposable
accessories are C.R. Bard Inc., EP Technologies, Inc. (a subsidiary of Boston
Scientific Corporation), Medtronic, Inc., Cordis Webster Laboratories, Inc. (a
subsidiary of Johnson & Johnson, Inc.) and Daig Corporation (a subsidiary of St.
Jude Medical, Inc.). In the computerized EP workstation and EP stimulator
market, the Company's main competitors are Prucka Engineering, Inc., C.R. Bard
Inc. and Fischer Imaging. Other companies vying for market share in the cardiac
electrophysiology field include Marquette Electronics and Siemens Medical
Systems.

Many of the Company's competitors have substantially greater financial and other
resources, larger research and development staffs, and more experience and
capabilities in conducting research and development, testing products in
clinical trials and manufacturing, marketing and distributing products than the
Company. Competitors may develop new technologies and bring products to market
in the U.S. before the Company introduces its new products and may introduce
products that are more effective than its new products. In addition, competitive
products may be manufactured and marketed more successfully than the Company's
products. The Company's business will depend upon its ability to remain
competitive with other developers of such medical devices and therapies.

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Third-Party Reimbursement
In the U.S., the Company's products are marketed to medical institutions and
physicians that then bill various third party payors, such as government
programs, principally Medicare and Medicaid, and private insurance plans, for
the healthcare services provided to their patients. Third party payers are
increasingly challenging the prices charged for medical products and services,
and substantial uncertainty exists as to third party reimbursement for
investigational and newly approved products. Government agencies, private
insurers and other payors generally reimburse hospitals for medical treatment at
a fixed rate per patient or based on the procedures performed. The fixed rate
reimbursement is unrelated to the specific devices used in treatment. If a
procedure is not covered, payors may deny reimbursement. In addition, some
payors may deny reimbursement if they determine that the device used in the
treatment was unnecessary, inappropriate or not cost-effective, or if it was
experimental or was used for a non-approved indication, even if it has FDA
approval. Because the amount of the reimbursement is fixed, to the extent a
physician uses more expensive devices, the amount of potential profit relating
to the procedure is reduced. Accordingly, hospitals must determine that the
clinical benefits of more expensive equipment justify the additional cost. The
U.S. Health Care Financing Administration has entered into an interagency
agreement with the FDA pursuant to which the FDA will place all devices with
approved IDEs into one of two categories, "Category A" or "Category B." Category
A devices are innovative devices that are believed to be in Class III (the class
of medical devices subject to the most stringent FDA review) and are of a type
as to which initial questions of safety and effectiveness have not been resolved
and the FDA is unsure whether the device type can be safe and effective. They
will not be eligible for Medicare reimbursement. Category B devices include
Class III devices of a type as to which underlying questions of safety and
effectiveness have been resolved or that is known to be capable of being safe
and effective because other devices of that type have been approved. Category B
devices will be eligible for Medicare reimbursement if the devices are furnished
in accordance with the FDA approved protocols governing clinical trials and all
other Medicare coverage requirements are met. The Company believes the
ALERT[REGISTERED TRADEMARK] System may be a Class III device. There can be no
assurance that the ALERT[REGISTERED TRADEMARK] System will be placed in Category
B and thus eligible for Medicare reimbursement during clinical trials. There can
be no assurance that reimbursement will be or remain available for the Company's
products or for the ALERT[REGISTERED TRADEMARK] System if it is approved, or
even if reimbursement is available, that payors' reimbursement policies will not
adversely affect the Company's ability to sell its products on a profitable
basis.

Product Liability and Insurance
The manufacture and sale of the Company's products involves the risk of product
liability claims. The Company's products are highly complex and some are, or
will be, used in relatively new medical procedures and in situations where there
is a potential risk of serious injury, adverse side effects or death. Misuse or
reuse of catheters may increase the risk of product liability claims. The
Company currently maintains product liability insurance with coverage limits of
$5,000,000 per occurrence and $5,000,000 in the aggregate per year; however,
there can be no assurance that this coverage will be adequate. Such insurance is
expensive and may not be available in the future on acceptable terms, if at all.
A successful claim against or settlement by the Company in excess of its
insurance coverage or the Company's inability to maintain insurance in the

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future could have a material adverse effect on the Company's business, results
of operations and financial condition.

Employees
As of March 19, 1999, the Company had 75 full-time employees, of whom 30 are
dedicated to manufacturing and quality assurance, 11 are engaged in management
and administration, 20 are engaged in sales and marketing and 14 are engaged in
research and development and technical service. The Company believes its
employee relations are satisfactory.

Item 2. Description of Property

The Company currently leases approximately 7,800 square feet of office and
manufacturing space located in Mount Arlington, New Jersey through October 2002.
The Mount Arlington facility contains administrative, engineering, sales and
marketing and assembly operations and warehousing for certain of the Company's
hardware products. ProCath owns approximately 15,000 square feet of space in
Berlin, New Jersey. The Berlin facility contains catheter manufacturing
operations, administration, engineering and catheter research and development
and warehouse space. EP MedSystems UK leases 945 square feet of office and
storage space in London, England through January 2000. The Company believes that
its facilities are sufficient to meet its expected needs for at least the next
twelve months.

Item 3. Legal Proceedings
EchoCath
During October 1997, the Company filed a lawsuit against EchoCath in the United
States District Court for the District of New Jersey alleging, among other
things, that EchoCath made fraudulent misrepresentations and omissions in
connection with the prior sale of $1,400,000 of its preferred stock to the
Company.

EchoCath filed an answer to the complaint, denying the allegations and asserting
a counterclaim against the Company seeking its costs and expenses in the action.
EchoCath also filed a motion to dismiss the complaint. In December 1997, EP
MedSystems filed an amended complaint and EchoCath filed an answer thereto again
denying the allegations and asserting a counterclaim seeking reimbursement of
its costs and expenses in the action. EchoCath also filed a motion to dismiss
the amended complaint. During October 1998, the complaint was dismissed by the
District Court. The Company is considering an appeal of the decision. The
Company believes that EchoCath's counterclaim and request for reimbursement of
its costs and expenses is without merit. As a result, the Company has not
accrued for such costs and expenses at December 31, 1998. In the opinion of
management, the ultimate resolution of the counterclaim will not have a material
adverse impact of the Company's financial condition or results of operations.
The Company cannot determine the outcome of the EchoCath litigation at this
time.

Item 4. Submission of Matters to a Vote of Security Holders

On October 28, 1998, the Company held its Annual Meeting of Shareholders. The
matters voted upon by the security holders were:

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(1) To authorize an amendment of the Company's Amended and Restated Certificate
of Incorporation providing for classification of the Board of Directors
into three classes of directors with staggered terms of office;

Broker
For Against Abstain Non-votes

For the amendment to the
Certificate 6,898,493 0 6,200 1,706,783

(2) To elect four (4) directors to the Board of Directors as follows: (a) two
directors to serve a three year term, one director to serve a two year term
and one director to serve a one year term, and until their respective
successors shall be duly elected and qualified;

For the election of Directors For Withheld Abstain
David A. Jenkins 8,605,476 6,000 0
David W. Mortara 8,605,476 6,000 0
John E. Underwood 8,605,476 6,000 0
Anthony J. Varrichio 8,603,476 8,000 0

(3) To ratify the selection of PricewaterhouseCoopers LLP, independent public
accountants, as auditors for the Company for the fiscal year ending
December 31, 1998:

For Against Abstain
For the ratification of auditors 8,605,476 0 6,000

PART II

Item 5. Market for Common Equity and Related Stockholder Matters

The Company's Common Stock has been traded on the Nasdaq National Market under
the trading symbol "EPMD" since the Company completed its initial public
offering of Common Stock on June 21, 1996. Prior to that date, there was no
public market for the Company's Common Stock.

The following table sets forth the high and low closing sale prices for the
Company's Common Stock since its initial public offering based on transaction
data as reported by the Nasdaq National Market.

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For the year ended
December 31, 1998 High Low
---------------------- ---- ---
First quarter $2.25 $1.75
Second quarter $3.38 $1.31
Third quarter $4.13 $2.25
Fourth quarter $3.88 $3.19

For the year ended
December 31, 1997 High Low
----------------------- ---- ---
First quarter $5.00 $3.00
Second quarter $4.50 $2.75
Third quarter $3.50 $2.63
Fourth quarter $2.88 $0.94

As of March 19, 1999, there were approximately 73 registered holders of record
of the Company's Common Stock. This number excludes individual stockholders
holding stock under nominee security position listings. Because many of such
shares are held by brokers and other institutions on behalf of stockholders, the
Company is unable to estimate the total number of stockholders represented by
these record holders, but it believes that the amount is in excess of 400.

Dividend Policy
The Company has not paid any dividends on its Common Stock and does not expect
to pay any such dividends in the foreseeable future. The payment of dividends,
if any, in the future will be within the discretion of the Board of Directors
and will depend upon the Company's earnings, if any, its capital requirements
and financial condition and other relevant factors.

Recent Sales of Unregistered Securities

On April 9, 1998, the Company issued and sold 2,250,000 shares of its common
stock to six institutional investors (the "Investors") at a price of $2.25 per
share. The gross proceeds of the offering were $5,062,500 before deducting
offering expenses of approximately $401,000. The Company intends to use the net
proceeds from the sale of these shares for working capital purposes. The Company
granted the Investors certain registration rights with respect to these shares
pursuant to a Registration Rights Agreement. The Company filed a shelf
registration statement on Form S-3 covering all of these shares. During July
1998, the Securities and Exchange Commission declared the registration statement
effective.

Item 6. Management's Discussion and Analysis or Plan of Operation

The following Management's Discussion and Analysis or Plan of Operation contains
forward looking statements based upon current expectations that involve risks
and uncertainties. The Company's actual results could differ materially from
those anticipated in these forward looking statements as a result of certain
factors, that include, but are not limited to, the risks discussed in the
following section as well as those discussed in the section entitled "Factors
That May Impact Future Operations." These forward looking statements include,
but are not limited to, the statement in the second paragraph of "Overview"
relating to clinical trials, anticipated filing and approval time periods for

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<PAGE>

FDA market clearance and approval for sale of the ALERT[REGISTERED TRADEMARK]
System; the statements in the third paragraph of "Overview" relating to approval
of the Company's ultrasound products and their role in the diagnosis and
treatment of cardiac arrhythmias; the statements in the fourth paragraph of
"Overview" related to the Company's anticipated results of operations, capital
requirements, development efforts of new products and the filing of additional
patents; the statements in the fifth paragraph of "Overview" related to
milestones for 1999 and beyond; the forward looking statements contained in the
second, third, fifth, sixth, seventh, eighth and tenth paragraphs under the
discussion of the "Results of Operations" for the "Year Ended December 31, 1998
compared to the Year Ended December 31, 1997"; the forward looking statements in
the second, fourth, sixth and last paragraph of "Liquidity and Capital
Resources;" and the section titled "Year 2000 Issues."

The Company cautions investors and others to review the cautionary statements
set forth in this report on Form 10-KSB and in the Company's other reports filed
with the Securities and Exchange Commission and cautions that other factors may
prove to be important in affecting the Company's business and results of
operations. Readers are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date of this report. The
Company undertakes no obligation to publicly release the results of any
revisions to these forward looking statements that may be made to reflect events
or circumstances after the date of this report on Form 10-KSB or to reflect the
occurrence of anticipated events.

OVERVIEW

The Company was formed in January 1993 and operates in a single segment. The
Company develops manufactures, markets and sells a line of products for the
cardiac electrophysiology market used to diagnose, monitor and treat irregular
heartbeats known as arrhythmias. Since inception, the Company has acquired
technology and marketing rights, has developed new products and has begun
marketing various electrophysiology products, including the EP WorkMate
electrophysiology workstation, the EP-3 Stimulator, diagnostic electrophysiology
catheters, internal cardioversion catheters and related disposable supplies. To
date, these products have generated nearly all of the Company's sales.

The Company has developed a new product for internal cardioversion of atrial
fibrillation known as the ALERT[REGISTERED TRADEMARK] System, which uses a
proprietary electrode catheter to deliver measured, variable, low energy
electrical impulses directly to the inside of the heart in order to convert
atrial fibrillation to a normal heart rhythm. The ALERT[REGISTERED TRADEMARK]
System is not approved for sale in the United States, but is currently
undergoing clinical trials. At the earliest, the Company does not anticipate
completing the clinical trial for at least several months. Approval to sell the
ALERT[REGISTERED TRADEMARK] System in the United States may take up to one year
or more, if approved at all. The Company has received approval from its notified
body to label the ALERT[REGISTERED TRADEMARK] System with a CE Mark. This
designation allowed the Company to initiate sales of the ALERT[REGISTERED
TRADEMARK] System in the European Community.

During July 1998, the Company filed for 510(k) approval with the FDA for
marketing clearance for its ViewMate[TRADEMARK] ultrasound imaging console and

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U-View[TRADEMARK] deflectable intracardiac imaging catheter. These products are
designed to improve a physician's ability to visualize inside the chambers of
the heart, including the internal anatomy of the heart. The Company believes
that the ViewMate[TRADEMARK] and U-View[TRADEMARK] may play an important role as
new and effective treatment options are developed for the treatment of complex
cardiac arrhythmias, including ventricular tachyarrhythmia and atrial
fibrillation. The Company's ultrasound products are not approved for sale and
the Company does not anticipate receiving approval to sell the
ViewMate[TRADEMARK] or U-View[TRADEMARK] for at least several months, if
approved at all.

The Company expects to continue to incur operating losses in the near future as
it will continue to expend substantial funds for research and development,
clinical trials in support of regulatory approvals, increased manufacturing
activity and expansion of sales and marketing activities. The amount and timing
of future losses will be dependent upon, among other things, increased sales of
the Company's existing products, the results of clinical trials, regulatory
approval and market acceptance of the ALERT[REGISTERED TRADEMARK] System and
ultrasound products and developmental, regulatory and market success of new
products under development as well as the Company's ability to establish,
preserve and enforce intellectual property rights to its products. To date, the
Company's products have generated limited sales and the Company has an
accumulated deficit of approximately $14,400,000 at December 31, 1998.

The Company has set a number of goals for 1999 and beyond, including continued
expansion of its sales and marketing efforts aimed at achieving increased sales
of existing products, completion of the ALERT[REGISTERED TRADEMARK] clinical
trial, increased market acceptance of the ALERT[REGISTERED TRADEMARK] System in
Europe, introduction of the ultrasound product line, increased manufacturing
efficiency and lower production costs, regulatory approval and introduction of
several new catheter products, improvements to existing products and ongoing
research and development activities. The Company believes that attainment of
these goals is important to achieving the Company's long term objectives.

During 1998, the Company achieved a number of significant milestones, including:

- Achievement of an 86% increase in sales, largely due to continued
market acceptance of the Company's computerized electrophysiology
products;

- Receiving ISO 9001 Certification and approval to label its products
with the CE Mark, permitting the introduction of the ALERT[REGISTERED
TRADEMARK] System in Europe.

- Expanding its clean room and manufacturing operations, including the
hiring and training of additional personnel in order to increase its
manufacturing capacity to support the introduction of the
ALERT[REGISTERED TRADEMARK] product line.

- Commencing clinical trials at eleven leading research hospitals in the
United States for the ALERT[REGISTERED TRADEMARK] System and
concluding the clinical trials during 1999.

- Sales growth in Europe through introduction of the ALERT[REGISTERED
TRADEMARK] System and partnership with several new international
distributors.

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<PAGE>

- The Company continued development efforts for a number of new
products, including its ultrasound product line, a number of new
catheter products and improvements to existing products, including
upgrades to the EP WorkMate . The Company now owns or licenses 15
issued patents, 2 allowed, and has 10 patent applications on file. The
Company is in the process of preparing patent applications for 7 new
products or improvements to existing products.

Results of Operations
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
Revenue increased $3,447,000 (or 86%) to $7,460,000 in the year ended December
31, 1998 as compared to 1997. The increase in sales in 1998 resulted primarily
from increased sales of the EP WorkMate . The Company believes that the EP
WorkMate is the most technologically advanced and easy to use electrophysiology
workstation on the market. The Company also realized increased sales of certain
of its catheter products during the period. During 1997, the Company recorded
revenue from a research support grant that is not likely to be recurring in
future periods.

The level of sales for fiscal 1999 will continue to depend materially on sales
of the EP WorkMate and diagnostic catheters and the ability of the Company's
direct sales force and network of international independent distributors to
effectively market and sell the Company's existing products. The
ALERT[REGISTERED TRADEMARK] System is currently undergoing clinical trials and
is not approved for sale in the United States. The ALERT[REGISTERED TRADEMARK]
System has been introduced for sale in Europe. However, the Company cannot
accurately determine the sales level of the ALERT[REGISTERED TRADEMARK] System
for 1999 at this time nor when it will be available in the United States. The
Company expects the ALERT[REGISTERED TRADEMARK] System to contribute a greater
proportion of sales in 1999 and beyond.

Cost of products sold increased $1,536,000 (or 70%) to $3,721,000 due to
increased sales in the year ended December 31, 1998 as compared to 1997. Gross
profit on sales for the year ended December 31, 1998 was $3,739,000(or 50% as a
percentage of sales), as compared to $1,464,000 (or 40% as a percentage of
sales) for 1997. The Company realized an increase in gross profit on sales of
existing products during 1998 primarily due to increased sales of the EP
WorkMate , which currently yields a higher gross margin than certain of the
Company's other products. The Company hopes to improve its overall gross profit
percentage as sales of the ALERT[REGISTERED TRADEMARK] System and other catheter
products increase, which may offset the fixed costs, associated with maintaining
a catheter manufacturing operation.

Sales and marketing expenses increased $864,000 (or 29%) to $3,800,000 and
decreased as a percentage of total sales from 73% to 51% in the year ended
December 31, 1998 as compared to 1997. The dollar increase during 1998 was due
to continued expansion of the domestic sales force and international
distribution network. The Company's domestic direct sales force currently
includes ten domestic sales and marketing professionals as well as a team of
domestic field clinical engineers and administrative support personnel. The
Company has expended substantial funds in an effort to improve its network of
international independent distributors and has added distributors in several
territories not previously covered. The international distribution network is

23
<PAGE>

currently supported by a team of direct international sales and marketing
professionals, international field clinical engineers and administrative support
personnel. The Company incurs significant expenses for travel, trade show
related expenses, product promotion and physician educational materials in
support of its sales efforts.

The Company expects to incur substantial additional sales and marketing expenses
as a result of the introduction of the ALERT[REGISTERED TRADEMARK] System for
sale outside of the United States and, if the clinical trials progress according
to expectations, for the eventual introduction of the ALERT[REGISTERED
TRADEMARK] System for sale in the United States. Examples of the types of
expenditures would be costs associated with attending trade shows, physician
training and education, promotional material, sample products and expansion of
the sales force.

While sales and marketing expenses for fiscal 1999 are expected to increase, it
is anticipated that these expenses may continue to decline as a percentage of
sales in the event that incremental sales are generated. It is likely that the
Company will incur additional losses as a result of the increased fixed costs
associated with its sales efforts until incremental sales are generated. The
Company cannot determine when or if that level of sales will be achieved.

General and administrative expenses decreased $166,000 (or 9%) to $1,656,000 and
decreased as a percentage of total sales from 45% to 22% in the year ended
December 31, 1998 as compared to 1997. The decrease during 1998 was primarily
due to an increased focus on cost improvements and increased efficiencies. The
Company expects general and administrative expenses to increase in future
periods due to anticipated future growth. It is anticipated that these expenses
may continue to decline as a percentage of sales as incremental sales are
generated. The Company cannot determine when or if such incremental sales will
be achieved.

Research and development expenses decreased $656,000 (or 29%) to $1,606,000 for
the year ended December 31, 1998 as compared to 1997. Research and development
during the year ended December 31, 1997 included significant expenses incurred
in connection with the development and preparation for manufacturing of the
ALERT[REGISTERED TRADEMARK] System which were not recurring during the
corresponding period in 1998. During the year ended December 31, 1998, the
Company incurred research and development expenses in connection with ongoing
development efforts on existing products, including the EP WorkMate , costs
associated with the clinical trials for the ALERT[REGISTERED TRADEMARK] System,
development costs and costs of preparing regulatory submissions for the new
ultrasound imaging product line and costs associated with several new products
under development. The Company expects that research and development expenses
are likely to increase in future periods, in part due to ongoing expenses
related to the ALERT[REGISTERED TRADEMARK] System clinical trials, new product
development activities and regulatory applications aimed at gaining approval to
sell other new products.

The results of operations for the year ended December 31, 1998 included a
$1,400,000 write- down of the Company's investment in 280,000 shares of
EchoCath, Inc. preferred stock.

Interest expense was $3,410 during the year ended December 31, 1998. In March of
1999, the Company finalized a $2,000,000 revolving line of credit and a $500,000
term loan with a bank.

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<PAGE>

Therefore, the Company may incur additional interest expense during 1999.

Interest income decreased 35% to $215,000 during the year ended December 31,
1998 as compared to 1997. This decrease was due to the utilization of the cash
in the operation of the business.

The net loss for the year ended December 31, 1998 was $4,511,000 as compared to
a net loss of $4,864,000 during the comparable period in 1997. The basic and
diluted loss per share for the year ended December 31, 1998 was $0.49 per share
as compared to a basic and diluted loss per share of $0.64 in 1997.

Liquidity and Capital Resources
Since inception, the Company's expenses have exceeded its sales, resulting in an
accumulated deficit of approximately $14,400,000 at December 31, 1998. On June
21, 1996, the Company completed its initial public offering of 2,500,000 shares
of common stock at a purchase price of $5.50 per share, for aggregate net
proceeds of approximately $11,786,000 after deducting offering expenses. On
April 9, 1998, the Company sold and issued 2,250,000 shares of its common stock
to six institutional investors at a price of $2.25 per share. The gross proceeds
of the offering were $5,062,500, before deducting offering expenses of
approximately $401,000. The Company intends to use the net proceeds from the
sale of the shares for working capital purposes.

The Company entered into two financing arrangements in March of 1999 with a
bank: a $2,000,000 revolving line of credit and a $500,000 term loan. Management
believes that its current liquidity position will be sufficient to meet the
needs of the Company until at least December 31, 1999. In the event that it
cannot generate additional capital funds during 1999, the Company believes that
it can reduce non-core related expenditures, which will allow it to continue in
its operations.

Net cash used in operating activities for the year ended December 31, 1998 was
$4,207,000 as compared to $5,266,000 for the year ended December 31, 1997. The
net use of cash in operations during 1998 was due primarily to the Company's
$4,511,000 net loss from operations. Accounts receivable, net, increased by
$1,085,000 and inventories increased by $288,000 in 1998 due to increased sales
activity. Accounts payable increased by $102,000 to $773,000 due to increased
operations. Accrued expenses payable decreased by $262,000 to $589,000. Amounts
payable to related parties increased by $61,000 to $189,000 due to increased
product purchases near year-end. Payments to related parties are made on terms
similar to those of other suppliers.

Capital expenditures, net of disposals, were $308,000 during 1998 as compared to
$722,000 in 1997. During February 1997, the Company purchased 7,500 square feet
of manufacturing, administrative and warehouse space, including 2,500 square
feet of space that was leased by ProCath, for a purchase price of approximately
$417,000, including transaction costs and improvements to prepare the space for
its intended use. The purchase provided for expansion of the existing
manufacturing operations, additional warehousing, shipping and quality assurance
activities and relocation of ProCath's administrative offices. During 1997, the

25
<PAGE>

Company purchased two new exhibition booths for use at domestic and
international industry trade shows.

During February 1999, the Company purchased an additional 7,500 square feet of
manufacturing and warehouse space at ProCath for a purchase price of
approximately $400,000. Costs to prepare the space for intended use are
estimated to be $100,000. This purchase was financed via a $500,000 term loan
executedsubsequent to Decemaber 31,1998. As of the date of this Report on Form
10-KSB, the Company does not have any other material commitments for capital
expenditures. However, the Company expects to purchase capital equipment and to
expand its manufacturing and assembly capabilities as it continues to grow. The
Company leases office and manufacturing space and certain office equipment under
operating leases. The aggregate commitment for minimum rentals under these
leases is approximately $107,000 for 1999.

During February 1997, the Company licensed the rights to several ultrasound
technologies from EchoCath, for use in the field of electrophysiology. The
agreement with EchoCath calls for the Company to make payments totaling up to a
maximum of $700,000, in four installments, as certain development milestones and
initial sales are achieved on the EchoMark and EchoEye technologies. One of the
milestones calls for a $400,000 payment payable upon the completion of a
development program for the EchoEye. This milestone was only payable in the
event that the development was completed by September 30, 1998. To the best of
the Company's knowledge, the milestone was not achieved and no milestone
payments are accrued or payable to EchoCath as of December 31, 1998.

The EchoCath license also provides for a royalty on net sales, including minimum
royalties of $120,000 beginning in 1999 and increasing to $400,000 in 2005 and
thereafter for the life of the applicable patents and continuations. The Company
may elect not to make minimum royalty payments and, in such case, EchoCath has
the option to render the license non- exclusive or cancel the license and return
any milestone payments to the Company. The Company may also elect to apply any
accrued and unpaid dividends earned on its investment in EchoCath preferred
stock against minimum royalties.

In conjunction with the license agreement, the Company purchased 280,000 shares
of newly issued EchoCath Series B Cumulative Convertible Preferred Stock for
$1,400,000 in cash. The Company's $1,400,000 investment was intended to fund
continuing development of EchoCath products, including the EchoMark and EchoEye
technology. Upon successful completion of its development projects, the Company
may introduce ultrasound technology into its electrophysiology catheter line
although there can be no assurance that the Company will be successful in this
effort. (See "Legal Proceedings").

On June 1, 1998, four non-employee holders of non-plan stock options exercised
their options to purchase 22,500 shares common stock of the Company at a price
of $1.33 per share.

The Company expects its operating losses to continue in the near future as it
will continue to expend substantial funds for research and development, clinical
trials in support of regulatory approvals, increased manufacturing capacity and

26
<PAGE>

expansion of sales and marketing activities. The amount and timing of future
losses will be dependent upon, among other things, increased sales of the
Company's existing products, clinical approval and market acceptance of the
ALERT[REGISTERED TRADEMARK] System and developmental, regulatory and market
success of new products under development. There can be no assurance that any of
the Company's development projects will be successful or that if development is
successful, that the products will generate any sales. Based upon its current
plans and projections, the Company believes that its existing capital resources
will be sufficient to meet its anticipated capital needs for at least the next
twelve months.

Year 2000 Readiness
The Year 2000 issue is the result of computer programs having been written using
two digits, rather than four, to define the applicable year. Software programs
and hardware that have date- sensitive software or embedded chips may recognize
a date using "00" as the year 1900, rather than the year 2000. This could result
in a major system failure or miscalculations causing disruptions to various
activities and operations.

The Year 2000 issue could affect computers, software and other equipment used,
operated or maintained by the Company. The Company has substantially completed a
review of its internal computer programs and systems to ensure that the programs
and systems will be Year 2000 compliant. The Company presently believes that,
based on current plans and efforts to date, its internal programs and systems
will be Year 2000 compliant in a timely manner.

The Year 2000 issue can also affect products sold by the Company, particularly
the EP WorkMate and ALERT Companion. The Company has performed a detailed
assessment of its products and, as a result of this review, believes that it has
substantially identified and resolved all potential Year 2000 issues with these
products. However, the Company also believes that it is not possible to
determine with complete certainty that all Year 2000 issues affecting the
Company's products have been identified or corrected due to the complexity of
these products and the fact that these products interact with other third party
products or operate on computer systems which are not under the Company's
control.

The Company believes that its greatest Year 2000 risk for disruption to its
business is the potential noncompliance of third parties. In this regard, the
Company has initiated communications with its vendors, major customers, service
providers and banks in order to determine the extent to which the Company's
business is vulnerable to the third parties' failure to make their systems Year
2000 compliant. Since the Company has no control over the actions of these third
parties, there can be no assurance that these third parties will resolve any or
all Year 2000 issues. Any failure of these third parties to resolve Year 2000
issues in a timely manner could have a material adverse effect on the Company's
financial condition and results of operations.

The Company currently does not have a contingency plan in the event that a
particular system, including the systems of material third parties, are not Year
2000 compliant. Such a plan will be developed if it becomes clear that the
Company is not going to achieve its scheduled compliance objectives. Although no

27
<PAGE>

assurance can be given that there will be no interruption of operations as a
result of the Year 2000 issue, the Company believes (an assuming that third
parties with whom the Company has material business relationships successfully
remediate their own Year 2000 issues) that it has reasonably assessed all of its
systems in order to ensure that the Company will not suffer any material adverse
effect from the Year 2000 issue. Though the Company has used and will continue
to use internal resources to resolve its Year 2000 issues, the Company may
retain third party consultants to assist in this regard.

Costs specifically associated with Year 2000 compliance are expensed as
incurred. To date, the Company has not spent a material amount on this project.
The Company does not expect the total costs relating to Year 2000 compliance to
have a material effect on the Company's results of operations or financial
condition. However, the total costs that the Company will incur in connection
with the Year 2000 issue will be influenced by (i) its ability to successfully
identify Year 2000 issues, (ii) the nature and amount of programming required to
remediate the issues, (iii) the related labor and/or consulting costs for such
remediation and (iv) the ability of third parties with whom the Company has
business relationships to successfully address their own Year 2000 concerns.
These and other unforseen factors could have a material adverse effect on the
Company's results of operations or financial condition.

The discussion of the Company's efforts, and management's expectations, relating
to Year 2000 compliance are forward looking statements and, as such, are subject
to uncertainties. The Company's ability to achieve Year 2000 compliance and the
level of incremental costs associated therewith could be adversely impacted by
unanticipated Year 2000 issues. For example, if the Company is unsuccessful in
identifying or remediating all Year 2000 issues in its operations, or if the
Company is affected by the inability of suppliers or major customers to continue
operations due to Year 2000 issues, the Company's results of operations or
financial condition could be materially impacted.

Recent Issued Accounting Standards
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (FAS No. 133) will be effective for the
Company in the first quarter of fiscal 2000 and establishes accounting and
reporting standards for derivative instruments and for hedging activities. It
requires companies to recognize all derivatives as either assets or liabilities
in the statement of financial position and measure those instruments at fair
value. It is expected that the adoption of FAS No. 133 will not have a material
effect on the Company's financial statements.

Impact of Introduction of Single European Currency (Euro)
On January 1, 1999, certain member countries of the European Union established
fixed conversion rates between their existing currencies and the European
Union's common currency (Euro). The transition period for the introduction of
the Euro is between January 1, 1999 and January 1, 2002. The Company is
presently identifying and ensuring that all Euro conversion compliance issues
are addressed. Although the Company cannot predict the overall impact of the
Euro conversion at this time, the Company does not expect that the Euro
conversion will have a material adverse effect on its consolidated results of
operations.

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<PAGE>

Issuance of Preferred Stock Could Delay or Prevent Corporate Takeover
The Board of Directors has the authority to issue up to 5,000,000 shares of
undesignated Preferred Stock and to determine the rights, preferences,
privileges and restrictions of such shares without any further vote or action by
the stockholders. The issuance of Preferred Stock under certain circumstances
could have the effect of delaying or preventing a change in control of the
Company or otherwise adversely affecting the rights of the holders of Common
Stock.

Factors That May Impact Future Operations

History of Losses; Future of Profitability Uncertain
The Company commenced operations in 1993 and has incurred substantial operating
losses in each year since inception. As of December 31, 1998, the Company's
accumulated deficit was approximately $14.4 million. While the Company is
generating product sales, the Company anticipates that losses could continue.
The Company's ability to generate significant sales or achieve profitable
operations is dependent on, in large part, its ability to raise sufficient funds
to meet its future cash requirements; the results of the ALERT[REGISTERED
TRADEMARK] clinical trials; market acceptance of existing products, including
the EP WorkMate and the ALERT[REGISTERED TRADEMARK] System; the ability of the
Company to increase its catheter manufacturing capabilities, improve efficiency,
control manufacturing costs and ensure the timely delivery of its products; the
successful development of new products; the ability to obtain regulatory
approvals and reimbursement of new products on a timely basis; the ability to
compete successfully in the future with companies which have greater resources
than the Company; and the ability to establish, preserve and enforce
intellectual property rights. There can be no assurance that the Company will
generate significant sales or attain profitability. See "Management's Discussion
and Analysis or Plan of Operation," "Business - The ALERT[REGISTERED TRADEMARK]
System," "- Research and Development," "- Manufacturing" and "- Government
Regulation."

Need to Raise Additional Capital
Based upon its current plans and projections, the Company believes that its
existing capital resources will be sufficient to meet its anticipated capital
needs for the next twelve months. The Company recently entered into a $2,000,000
revolving credit facility and $500,000 term loan to help achieve its long-term
objectives. The inability of the Company to raise capital when needed could have
a material adverse effect on the Company's business, financial condition and
results of operations. See "Management's Discussion and Analysis or Plan of
Operation."

Dependence on the ALERT[REGISTERED TRADEMARK] System
Although the Company currently markets a broad range of products, it believes
its greatest potential for substantial long-term growth will depend on the
success of the ALERT[REGISTERED TRADEMARK] System, a new product the Company has
developed to treat atrial fibrillation. The ALERT[REGISTERED TRADEMARK] System
has not been approved by the FDA and is not currently available for commercial
sale in the United States. Before the Company may begin marketing the
ALERT[REGISTERED TRADEMARK] System in the U.S., it must obtain FDA approval
based on, among other things, the results of clinical trials that demonstrate
the safety and effectiveness of the device. These can be no assurance that the
clinical trials will demonstrate the safety and effectiveness of the
ALERT[REGISTERED TRADEMARK] System, or that the Company will obtain FDA approval
on a timely

29
<PAGE>

basis or at all. Further, if granted, FDA approval may include significant
limitations on the indicated uses for which the product may be labeled or
marketed. Assuming the ALERT[REGISTERED TRADEMARK] System receives FDA approval,
commercial success will depend on acceptance by physicians as a desirable
treatment for atrial fibrillation. Such acceptance will depend on, among other
things, substantial, favorable clinical experience, advantages over alternative
treatments, including cost effectiveness, and favorable reimbursement policies
of third party payors such as insurance companies, Medicare and other
governmental programs. There can be no assurance that the ALERT[REGISTERED
TRADEMARK] System will achieve such market acceptance. The Company's ability to
sell the ALERT[REGISTERED TRADEMARK] System at prices necessary to achieve
profits and the profitability of the system will depend in part on the Company's
ability to manufacture the system efficiently in commercial quantities. At this
time, the Company has only manufactured the components of the ALERT[REGISTERED
TRADEMARK] System in limited quantities. There can be no assurance that the
Company will be able to develop the manufacturing processes and capabilities
necessary to attain efficient manufacturing. The Company will also be dependent
on sub-contractors for certain key components of the ALERT[REGISTERED TRADEMARK]
Companion. Failure to obtain FDA approval for, market acceptance of, efficient
manufacturing processes and/or reliable sub-contractors for the ALERT[REGISTERED
TRADEMARK] System would have a material adverse effect on the Company's
business, results of operations and financial condition. See "Business - The
ALERT[REGISTERED TRADEMARK] System," "-Sales and Marketing," and "- Government
Regulation."

ALERT[REGISTERED TRADEMARK] Clinical Trials
The Company has commenced human clinical trials of the ALERT[REGISTERED
TRADEMARK] System at eleven hospitals in the United States, including Duke
University Medical Center; the Medical Center of the University of Alabama at
Birmingham; Indiana University; and University of California at San Francisco.
Clinical data is needed in order to demonstrate the safety and efficacy of the
ALERT[REGISTERED TRADEMARK] System under applicable FDA regulatory guidelines.
The Company anticipates that the ALERT[REGISTERED TRADEMARK] System clinical
trials will be completed during calendar year 1999. At the conclusion of the
clinical trials, the Company plans to file its final PMA module for FDA approval
to market the ALERT[REGISTERED TRADEMARK] System in the United States. The
Company submitted the second of five modules in its PMA submission agreement
with FDA. Receipt of FDA approval to sell the ALERT[REGISTERED TRADEMARK] System
in the United States may take several years, if it is received at all.

There can be no assurance that the ALERT[REGISTERED TRADEMARK] System will prove
to be safe and effective in clinical trials under applicable United States or
international regulatory guidelines or that additional modifications to the
Company's products will not be necessary. In addition, the clinical trials may
identify significant technical or other obstacles to be overcome prior to
obtaining necessary regulatory or reimbursement approvals. If the
ALERT[REGISTERED TRADEMARK] System does not prove to be safe and effective in
clinical trials or if the Company is otherwise unable to commercialize the
product successfully, the Company's business, financial condition and results of
operations could be materially adversely affected.

Dependence on EP WorkMate
In late 1995, the Company began commercial sales of the EP WorkMate , a

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<PAGE>

computerized monitoring and analysis electrophysiology workstation. Although the
Company sells a broad range of products, it believes its ability to increase
sales over the next several years will depend significantly on acceptance of the
EP WorkMate by electrophysiologists. The EP WorkMate accounted for a significant
percentage of the Company's sales from product sales in the year ended December
31, 1998 and is expected to account for a significant portion of 1999 sales. The
EP WorkMate has a list price of approximately $129,000 with an integrated EP-3
Stimulator and, as a result, each sale of an EP WorkMate can represent a
relatively large percentage of the Company's net sales in a particular quarter.
There can be no assurance that the EP WorkMate will continue to be accepted by
the electrophysiology market or that sales will be substantial. Each sale of an
EP WorkMate may take a relatively long time to complete due in part to the high
selling price relative to other types of equipment and to the budgetary
processes of hospitals to which the Company markets the EP WorkMate . See
"Management's Discussion and Analysis or Plan of Operation," "Business -
Products" and "- Competition."

Government Regulation
The Company's business, financial condition and results of operations are
subject to various risks and uncertainties arising from domestic and
international laws and regulations, including, without limitation, risks
relating to its ability to sell the ALERT[REGISTERED TRADEMARK] System in the
United States, compliance with QSR/GMP regulations and compliance with the
requirements of the CE Mark and other foreign regulations in order to continue
product sales on a country by country basis. For a discussion of risks and
uncertainties see "Business - Government Regulation."

Necessity of Product Development and Improvement
The markets for medical devices in general and electrophysiology products in
particular are characterized by rapid technological change. The Company's
ability to compete in these markets will depend in part on its ability to
develop new products, improvements to existing products and processes for
cost-effective manufacturing of such products on a timely basis. Many of the
Company's development efforts will be based on new technologies or new
applications of existing technologies. As a result, research and development for
any potential new product or product refinement may take longer and require
greater expenditures than expected, and may ultimately prove unsuccessful. In
the event that the Company is successful in its development efforts, the
commercial acceptance of any new product will depend on the medical community's
acceptance of such product. There can be no assurance that the Company will be
able to develop new products or to refine existing products that will be
commercially accepted. The Company's inability to successfully develop new
products, to introduce improvements to existing products, to prove the safety
and efficacy of new products or to gain market acceptance of such products could
have a material adverse impact on the business, financial condition or results
of operations of the Company. See "Business The ALERT[REGISTERED TRADEMARK]
System," "--Research and Development," "Government Regulation," and "--
Manufacturing."

Potential Fluctuations in Operating Results
Several factors may have a significant impact upon the Company's sales, expenses
and results of operations from quarter to quarter and year to year, including
but not limited to a long sales cycle for the EP WorkMate , hospital budgetary

31
<PAGE>

processes with respect to capital equipment purchases, the success of the
ALERT[REGISTERED TRADEMARK] clinical trials, the success of new product
development efforts, the timing of new product introductions by the Company or
its competitors, development of other treatments for atrial fibrillation and
other heart rhythm disorders, changes in government or third party reimbursement
policies, foreign currency fluctuations to the extent the Company has developed
significant international sales, the ability to obtain products to meet customer
demand and increases or fluctuations in sales and marketing, administrative,
manufacturing and research and development costs. Consequently, quarterly
results of operations should be expected to fluctuate significantly. See
"Management's Discussion and Analysis or Plan of Operation."

Potential Lack of Proprietary Protection
The Company's success and ability to compete will depend in part upon its
ability to protect its proprietary technology and other intellectual property.
The Company seeks patents on its important inventions, has acquired patents and
has entered into license agreements to obtain rights under selected patents of
third parties as to technology it considers important to its business.

There can be no assurance that any of the Company's patent applications or
applications as to which it has acquired licenses will issue as patents, or that
if patents are issued on the Company's applications or on applications as to
which the Company has acquired licenses, they will be of sufficient scope and
strength to provide meaningful protection of the Company's technology or any
commercial advantage to the Company, or that such patents will not be
challenged, invalidated or circumvented in the future. Moreover, there can be no
assurance that the Company's competitors, many of which have substantial
resources and have made substantial investments in competing technologies, do
not presently have or will not seek patents that will prevent, limit or
interfere with the Company's ability to make, use or sell its products either in
the U.S. or in other countries.

The Company's software (which is an integrated component in its EP WorkMate and
EP-3 Stimulator) is not patented and existing copyright laws offer only limited
practical protection. There can be no assurance that any legal protection, which
may be sought, and precautions, which may be taken by the Company, will be
adequate to prevent misappropriation of the Company's software and trade
secrets.

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<PAGE>

The medical device industry is characterized by frequent litigation regarding
patent and other intellectual property rights. While the Company does not
believe it is infringing any patents or other intellectual property rights of
others and has received no notice of infringement, it is possible that claims in
the future may adversely affect the Company's ability to market certain
products. Any such claims, with or without merit, could be time consuming,
result in costly litigation and diversion of technical and management personnel,
cause shipment delays or require the Company to develop alternative technology
or to enter into royalty or licensing agreements. Although patent and
intellectual property disputes in the medical device area have often been
settled through licensing or similar arrangements, costs associated with such
arrangements may be substantial and could include ongoing royalties. There can
be no assurance that, if required, necessary licenses would be available to the
Company on satisfactory terms or at all, or that the Company could redesign its
products or processes to avoid alleged infringement. Accordingly, an adverse
determination in a judicial or administrative proceeding or failure to obtain
necessary licenses could prevent the Company from manufacturing and selling its
products, which would have a material adverse effect on the Company's business,
results of operations and financial condition. Conversely, costly and time
consuming litigation may be necessary to enforce the Company's rights under
patents, to protect trade secrets or know how owned by the Company or to
determine the enforceability, scope and validity of the proprietary rights of
others. See "Business - Patents and Intellectual Property" and " - Competition."

Royalty Payment Obligations
The Company has entered into several license agreements which provide for the
Company to pay royalties based upon net sales of products covered by the
licensed technology, including, in some cases, minimum annual royalties. In the
event that the Company does not pay such royalties, the Company may lose its
rights under the license agreements. The loss of certain of the Company's
technology licenses could have a material adverse impact on the business,
financial condition and results of operations of the Company.

Significant Competition
The medical device market, particularly in the area of electrophysiology
products, is highly competitive. The Company competes with many companies, many
of which have access to significantly greater financial, marketing and other
resources than the Company. Further, the medical device market is characterized
by rapid product development and technological change. The present or future
products of the Company could be rendered obsolete or uneconomic by
technological advances by one or more of the Company's present or future
competitors or by other therapies. In particular, the ALERT[REGISTERED
TRADEMARK] System is a new technology that must compete with established
treatments for atrial fibrillation as well as with new treatments currently
under development by other companies. The Company's future success will depend
upon its ability to remain competitive with other developers of such medical
devices and therapies. See "Business - Competition."

Limitations on Third Party Reimbursement
The Company's products are generally purchased by physicians or hospitals. In
the U.S., third party payers are then billed for the healthcare services
provided to patients using those products. These payors include Medicare,

33
<PAGE>

Medicaid and private insurers. Similar reimbursement arrangements exist in
several European countries. Third party payers may deny or limit reimbursement
for the Company's existing products and future products such as the
ALERT[REGISTERED TRADEMARK] System. Third party payers are increasingly
challenging the prices charged for medical products and services and are putting
pressure on medical equipment suppliers to reduce prices. Furthermore,
substantial uncertainty exists as to third party reimbursement for
investigational and newly approved products. The U.S. Health Care Financing
Authority has entered into an interagency agreement with the FDA pursuant to
which the FDA places all IDEs it approves into one of two categories, "Category
A" or "Category B." Category A devices are innovative devices that are believed
to be in Class III (the class of medical devices subject to the most stringent
FDA review) and are of a type as to which initial questions of safety and
effectiveness have not been resolved and the FDA is unsure whether the device
type can be safe and effective. They will not be eligible for Medicare
reimbursement. Category B devices include Class III devices of a type as to
which underlying questions of safety and effectiveness have been resolved or
that is known to be capable of being safe and effective because other devices of
that type have been approved. Category B devices will be eligible for Medicare
reimbursement if the devices are furnished in accordance with the FDA approved
protocols governing clinical trials and all other Medicare coverage requirements
are met. The Company believes the ALERT[REGISTERED TRADEMARK] System may be a
Class III device. There can be no assurance that the ALERT[REGISTERED TRADEMARK]
System will be categorized as a Category B device and thus eligible for Medicare
reimbursement during clinical trials. There can be no assurance that
reimbursement will be or remain available for the Company's products, or for the
ALERT[REGISTERED TRADEMARK] System if it is approved for marketing in the U.S.,
or even if reimbursement is available, that payors' reimbursement policies will
not adversely affect the Company's ability to sell its products on a profitable
basis. Mounting concerns about rising healthcare costs may cause more
restrictive coverage and reimbursement policies to be implemented in the future.
Changes in government and private third party payers' policies toward
reimbursement for procedures employing the Company's products in the U.S. or
other countries could have a material adverse effect on the Company's ability to
market its products. See "Business - Third Party Reimbursement."

Ability to Manage Sales Growth
During 1996, the Company began to assemble a domestic direct sales and marketing
force to sell and promote the Company's products in the U.S. market. Previously,
the Company relied on third party distributors for all sales efforts. There can
be no assurance that the Company will be able to continue to attract and retain
qualified and capable individuals who can successfully promote the Company's
products.

The Company is in the process of expanding its marketing internationally and
will continue to rely on third party distributors in foreign markets. During
1997, the Company formed an U.S. subsidiary, with a branch based in the United
Kingdom, to increase sales in the UK, improve distributor relationships and
customer service and to assist in the introduction of the ALERT[REGISTERED
TRADEMARK] System in Europe. The Company has initiated sales through a new
Japanese distributor and has taken steps to improve its distribution network
throughout the Asian markets. The Company operates pursuant to written or oral
agreements with third party distributors, which are often terminable by
distributors. There can be no assurance that distributors will actively and
effectively market the Company's products or that the Company will be able to
replace any existing distributors on advantageous terms if any of its present
relationships are terminated.

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<PAGE>

Further, there can be no assurance that the Company will be able to make
arrangements with new distributors to access new international markets. See
"Business - Sales and Marketing."

Healthcare Reform
The healthcare industry is subject to changing political, economic and
regulatory influences that may affect the procurement practices and the
operation of healthcare facilities. During the past several years, the
healthcare industry has been subject to an increase in governmental regulation
of, among other things, reimbursement rates and certain capital expenditures.
Certain legislators have introduced legislation or have announced proposals to
reform certain aspects of the U.S. healthcare system, including proposals that
may increase governmental involvement in healthcare, lower reimbursement rates
for both treatment and capital costs incurred by hospitals, or otherwise change
the operating environment for the Company's customers. Significant changes in
healthcare systems may have a substantial impact on the manner in which the
Company conducts its business and could have a material adverse effect on the
Company's business, financial condition and ability to market the Company's
products. Changes resulting from healthcare reform proposals or the enactment
thereof may influence customer purchases and the amount of reimbursement
available from governmental agencies and private third party payers for
diagnostic and therapeutic procedures conducted with the Company's products, or
could impose limitations on prices that customers will be able to pay, or the
Company may charge, for its products.

Dependence on Key Personnel; Need to Recruit Additional Key Management Personnel
The Company is dependent upon a limited number of key management and technical
personnel, particularly David A. Jenkins, C. Bryan Byrd, Joseph M. Turner and
Joseph C. Griffin, III. The Company's continued growth and long term success
will depend, in part, on its ability to attract and retain highly qualified
personnel. There can be no assurance that the Company will be able to attract
and retain such personnel. The Company competes for such personnel with other
medical device companies, academic institutions and other organizations. The
loss of any key personnel, the inability to hire or retain qualified personnel
or the failure of such personnel to function effectively as a management group
could have a material adverse effect on the Company's business, results of
operations and financial condition

Product Liability and Insurance
The manufacture and sale of the Company's products involves the risk of product
liability claims. The Company's products are highly complex and some are, or
will be, used in relatively new medical procedures and in situations where there
is a potential risk of serious injury, adverse side effects or death. Misuse or
reuse of catheters may increase the risk of product liability claims. The
Company currently maintains product liability insurance with coverage limits of
$5,000,000 per occurrence and $5,000,000 in the aggregate per year; however,
there can be no assurance that this coverage will be adequate. Such insurance is
expensive and may not be available in the future on acceptable terms if at all.
A successful claim against or settlement by the Company in excess of its
insurance coverage or the Company's inability to maintain insurance in the
future could have a material adverse effect on the Company's business, results
of operations and financial condition.

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<PAGE>

Limited Manufacturing Experience; Dependence on Suppliers
To date, the Company's manufacturing activities have been limited. The Company
must manufacture, or contract for the manufacturing of, products in commercial
quantities in compliance with regulatory requirements and at acceptable costs.
The Company currently manufactures substantially all of its catheter products,
including the ALERT[REGISTERED TRADEMARK] Catheter. There can be no assurance
that the Company will be able to manufacture catheters or other products with
sufficient processes and in quantities necessary to achieve and sustain
profitability. In addition, the Company has expanded its catheter manufacturing
facilities and hired and trained additional personnel. The Company has no
experience in large-scale manufacturing and there can be no assurance that the
Company will be successful in manufacturing catheter products in significant
volume.

The Company relies on outside sources for the manufacture of critical components
of the ALERT[REGISTERED TRADEMARK] Companion, EP WorkMate and EP-3 Stimulator.
All components are manufactured in conformance with the Company's
specifications. Any interruption in the supply from its suppliers would have a
material adverse effect on the Company's ability to deliver its products until
acceptable arrangements can be made with a qualified alternative source of
supply. There can be no assurance that the Company would be able to reach an
acceptable arrangement with an alternative source of supply at acceptable prices
and adequate quality levels on a timely basis. If the Company were unable to do
so, such an interruption would have a material adverse effect on the Company's
business, results of operations and financial condition. See "Business --
Manufacturing" and "Certain Relationships and Related Transactions."

Risks Associated With International Operations
During 1997, the Company established a branch office in the United Kingdom in
order to increase sales in Europe, improve international distributor service and
relations and to aid in the introduction of the ALERT[REGISTERED TRADEMARK]
System for sale in Europe. Approximately 11% of the Company's sales for 1998
were derived outside the U.S. Since international sales are expected to continue
to represent a significant percentage of total sales, the Company expects to
continue to increase its operations outside of the United States. As such, the
Company will continue to be subject to fluctuations in currency exchange rates
and other risks of foreign operations, including tariff regulations and export
license requirements, unexpected changes in regulatory requirements, extended
collection period for accounts receivable, potentially inadequate protection of
intellectual property rights, local taxes, restrictions on repatriation of
earnings and economic and political instability. There can be no assurance that
such factors will not have a material adverse effect on the Company's ability to
maintain and expand profitable foreign sales and, consequently, on the Company's
business, results of operations and financial condition.

Possible Volatility of Stock Price
The market price of shares of the Company's Common Stock, like that of the
common stock of many medical products high technology companies, has, in the
past, been, and is likely in the future to continue to be, highly volatile. The
Company believes that factors such as quarterly fluctuations in financial
results, announcements of new developments relating to cardiac care diagnosis
and treatment therapies and developments in third party reimbursement policy and

36
<PAGE>

in the medical device industry could contribute to the volatility of the price
of its Common Stock, causing it to fluctuate significantly. These factors, as
well as general economic conditions, such as recessions or high interest rates,
or other events unrelated to the Company or its products, may adversely affect
the market price of the Common Stock. See "Market for Common Equity and Related
Stockholder Matters."

Transactions with Affiliates and Potential Conflicts
Anthony Varrichio, a director and shareholder of the Company, is an officer,
director and shareholder of Hi-Tronics Designs, Inc. ("HDI"). HDI has sold
rights to various products to the Company, performs research and development
services for the Company and currently manufactures certain of the Company's
non-catheter products. While the Company believes its arrangements with HDI have
been, and will continue to be, on terms no less favorable to the Company than it
could obtain from third parties, there can be no assurance that all arrangements
between the Company and HDI will be as favorable to the Company as they would be
in the absence of its relationships with affiliates of HDI. See "Certain
Relationships and Related Transactions."

The Company purchases certain components for the EP WorkMate and
ALERT[REGISTERED TRADEMARK] Companion from Mortara Instrument, Inc. ("Mortara
Instrument"). Dr. David W. Mortara, a director and shareholder of the Company,
is also a Director and shareholder of Mortara Instrument. While the Company
believes its arrangements with Mortara Instrument have been, and will continue
to be, on terms no less favorable to the Company than it could obtain from third
parties, there can be no assurance that all arrangements between the Company and
Mortara Instrument will be as favorable to the Company as they would be in the
absence of its relationships with affiliates of Mortara Instrument. See "Certain
Relationships and Related Transactions."

Concentration of Ownership
As of March 19, 1999, the Company's six directors and named executive officers
and their affiliates beneficially owned an aggregate of approximately 18.4% of
the Company's outstanding Common Stock, including unexercised vested stock
options. As a result, these shareholders, acting together, could have
significant influence over all matters requiring approval by the shareholders of
the Company. This level of ownership could have an effect in delaying, deferring
or preventing a change in control of the Company and may adversely affect the
voting and other rights of other holders of Common Stock. See "Security
Ownership of Certain Beneficial Owners and Management."

Item 7. Financial Statements

The information in response to this item is set forth in the Consolidated
Financial Statements beginning on page F-1 of this report on Form 10-KSB.

Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure

Arthur Andersen LLP had been the Company's certifying accountant since the
inception of the Company in 1993. On August 25, 1998 the Company notified Arthur

37
<PAGE>

Andersen that the audit committee recommended and the board of directors
approved a change in the Company's certifying accountants to
PricewaterhouseCoopers LLP for the audit of the Company's financial statements
for the year ended December 31, 1998. The Company engaged PricewaterhouseCoopers
as certifying accountant effective August 25, 1998.

Arthur Andersen's report on the Company's financial statements for each of the
past two years did not contain an adverse opinion or a disclaimer of opinion,
and was not qualified nor modified as to uncertainty, audit scope, or accounting
principles.

During the Company's two most recent fiscal years and any subsequent interim
period preceding the change in accountants, there were no disagreements with the
former accountant on any matter of accounting principles or practices, financial
statement disclosure, or auditing scope or procedure, which disagreements, if
not resolved to the satisfaction of the former accountant, would have caused it
to make a reference to the subject matter of the disagreements in connection
with its report.

During the Company's two most recent fiscal years and the subsequent interim
period prior to engaging the Company's new certifying accountant,
PricewaterhouseCoopers LLP was not consulted regarding any of the matters set
forth in paragraph (a)(2) of Item 304 of Regulation S-B.

PART III

Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance
with Section 16 (a) of the Exchange Act

The following table sets forth certain information regarding the directors and
executive officers of the Company:

NAME AGE POSITION
---- --- --------
David A. Jenkins (3) 41 Chairman of the Board, President and
Chief Executive Officer
Joseph M. Turner 36 Chief Financial Officer, Treasurer and
Secretary
J. Randall Rolston 52 Vice President, Sales
C. Bryan Byrd 38 Vice President, Engineering
Joseph C. Griffin, III 38 Vice President, Regulatory Affairs

David W. Mortara, Ph.D. (1)(2) 58 Director
Anthony J. Varrichio (3) 52 Director
John E. Underwood (1)(2) 56 Director

- - ------------------------
(1) Member of the Compensation Committee of the Board of Directors.
(2) Member of the Audit Committee of the Board of Directors.

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<PAGE>

(3) Member of the Plan Committee of the Board of Directors.

Directors and officers of the Company are elected annually and hold offices
until their successors are elected and qualified or until their earlier removal,
death or resignation. Set forth below is a brief summary of the recent business
experience and background of each director and executive officer of the Company.

David A. Jenkins is the co-founder and Chairman of the Board of Directors,
President and Chief Executive Officer of the Company. Mr. Jenkins served as the
President and a Director of the Company from 1993 to 1995. From 1988 to 1993,
Mr. Jenkins served as the Chief Executive Officer and then Chairman of the Board
of Directors of Arrhythmia Research Technology, Inc., a publicly held company
involved in the sale and distribution of electrophysiology products.

Joseph M. Turner joined the Company as Chief Financial Officer, Treasurer and
Secretary of the Company effective February 1, 1999. Mr. Turner served as Chief
Financial Officer and Treasurer of Tri-Seal International, a thermoplastic
extrusion company from 1994 to 1999. Prior to joining Tri-Seal International, he
was employed at PricewaterhouseCoopers, LLP from 1985-1994. Mr. Turner is a
certified public accountant.

J. Randall Rolston is the Vice President, Sales of the Company. Mr. Rolston
joined the Company in September 1996 as National Sales Manager and was named
Vice President, Sales in April 1998. Prior to joining the Company, Mr. Rolston
was employed in various sales management positions at Cordis Webster, an
electrophysiology catheter company owned by Johnson & Johnson. Prior to Cordis
Webster, Mr. Rolston held various sales management positions, including 15 years
at American Edwards prior to its merger with Baxter Healthcare Corporation.

C. Bryan Byrd is the Vice President, Engineering of the Company. Mr. Byrd joined
the Company in April 1993 to oversee software development for new products. From
1989 to 1993, he co-founded and served as the Director of Engineering for
BioPhysical Interface Corp. where he was responsible for developing automated
computerized monitoring equipment for pacemaker and open heart operating rooms
and follow-up clinics. Before that, he was a software engineer for Medtronic,
where he developed the ValveBase, PaceBase and TeleTrace software modules and
before that with Mt. Sinai Medical Center in Miami Beach, Florida. He has
developed databases for all aspects of cardiac surgery.

Joseph C. Griffin, III is the Vice President, Regulatory Affairs of the company.
Mr. Griffin founded Professional Catheter Corporation, the predecessor to
ProCath, in 1990 and served as its President until the Company acquired its
business in 1993. Before that, Mr. Griffin was Manager of Research and
Development at Oscor Medical Corporation, a manufacturer of implantable pacing
leads, and Director, Research and Development and Technical Services at Nova
Medical Specialties, Inc., a division of B. Braun of America. Mr. Griffin has
more than 18 years experience in the design, development, regulation and
manufacture of cardiac catheters and has served as a member of the Health

39
<PAGE>

Industry Manufacturers Association Pacemaker Task Force, the Electrode Catheter
Task Force and the Society of Manufacturing Engineers.

David W. Mortara, Ph.D. has served as a Director of the Company since November
1995. Dr. Mortara founded and has served as the Chairman and Chief Executive
Officer of Mortara Instrument, a privately held manufacturer and supplier of
electrocardiography equipment, since 1982. Prior to founding Mortara Instrument,
Dr. Mortara was Vice President, Engineering at Marquette Electronics, Inc. He
has authored numerous scientific publications on signal processing for
electrocardiography and currently serves as co-chair of AAMI's ECG Standards
Committee.

Anthony J. Varrichio has served as a Director of the Company since inception and
served as the Chairman of the Board and Treasurer of the Company from 1993 to
1995. Since 1987, Mr. Varrichio has served as the President and a director of
HDI, a privately held engineering, consulting and medical device manufacturing
corporation. Prior to co-founding HDI, Mr. Varrichio served as Vice President of
Electro-Biology, Inc., a manufacturer of electronic bone growth stimulator
devices. Prior thereto, Mr. Varrichio was the Director of Engineering at the
Advanced Technology Laboratory division of Intermedics, Inc.

John E. Underwood has served as a Director of the Company since June 1998. Since
1985, Mr. Underwood has served as the founder and President of Proteus
International, a venture banking and venture consulting concern with offices in
Mahwah, New Jersey. Prior to founding Proteus, Mr. Underwood held senior
management positions with Pfizer, General Electric and Becton Dickinson.

Compliance with Reporting Requirements

Section 16(a) of the Exchange Act requires the Company's executive officers,
directors and holders of more than 10% of the Company's common stock, to file
reports of ownership and changes in ownership with the Securities and Exchange
Commission. Such persons are required to furnish the Company with copies of all
Section 16(a) forms they file. Based solely on its review of the copies of such
forms received by it or oral or written representations from certain reporting
persons that no Forms 5 were required for those persons, the Company believes
that, with respect to the year ended December 31, 1998, its executive officers,
directors and greater than 10% beneficial owners complied with all such filing
requirements, with two exceptions. J. Randall Rolston and C. Bryan Byrd,
officers of the Company did not file timely Forms 5 with regard to one
reportable transaction for each individual.

Item 10. Executive Compensation
The following summary compensation table sets forth certain information
concerning compensation paid or accrued to the Chief Executive Officer, Vice
President of Sales, and Vice President of Regulatory Affairs of the Company (the
"Named Executive Officers") for services rendered in all capacities for the
years ended December 31, 1998, 1997 and 1996. No other executive officer of the
Company was paid a salary and bonus aggregating greater than $100,000 during
such time periods.

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<PAGE>

Summary Compensation Table

Annual Compensation Long Term Compensation
------------------- -----------------------
Securities
Name and Principal Salary Bonus Underlying
Position Year ($) ($) Options
- - ---------------------- ---- -------- ------ ------------
David A. Jenkins 1998 $150,833 $ 0 0
Chairman, President and 1997 $145,000 $ 0 0
Chief Executive Officer 1996 $127,500 $ 250 0

J. Randall Rolston (1) 1998 $156,077 $2,500 67,771 (4)
Vice President, Sales 1997 $140,500 $ 0 28,000 (2)
1996 $ 31,250 $ 0 12,000 (3)

Joseph C. Griffin 1998 $103,835 $ 0 0
Vice President, Regulatory 1997 $ 99,170 $ 0 0
Affairs 1996 $ 95,919 $ 0 0

1) Mr. Rolston served as National Sales Manager of the Company from September
1996 through April 1998. During April 1998, Mr. Rolston was named Vice
President, Sales.

2) On September 30, 1997, the Company granted Mr. Rolston an incentive stock
option to purchase 28,000 shares of common stock pursuant to the 1995 Long
Term Incentive Plan at an exercise price of $3.00 per share. Options to
purchase 5,600 of such shares became exercisable on the grant date and
options to purchase an additional 5,600 of such shares become exercisable
each year thereafter. The term of such option is five years.

3) On October 3, 1996, the Company granted Mr. Rolston an incentive stock
option to purchase 12,000 shares of common stock pursuant to the 1995 Long
Term Incentive Plan at an exercise price of $4.75 per share. Options to
purchase 2,400 of such shares became exercisable on the grant date and
options to purchase an additional 200 shares become exercisable each month
thereafter. The term of such option is five years. These options were
cancelled in 1998 and reissued at $3.00 per share with a new vesting
period. See (4) below.

4) On April 30, 1998, the Company cancelled an incentive stock option to
purchase 12,000 shares of common stock issued in 1996 and granted Mr.
Rolston a new incentive stock option to purchase 12,000 shares of common
stock pursuant to the 1995 Long Term Incentive Plan at an exercise price of
$3.00 per share. Options to purchase 2,400 shares became exercisable on the
grant date and options to purchase an additional 2,400 shares become
exercisable each year thereafter. The term of such option is five years. On
June 30, 1998, the Company granted Mr. Rolston an incentive stock option to
purchase 969 shares of common stock pursuant to the 1995 Long Term
Incentive Plan at an exercise price of $2.50 per share. Options to purchase
all 969 of such shares became exercisable on the grant date. The term of
such option is five years. On July 23, 1998, the Company granted Mr.
Rolston an incentive stock option to purchase 15,000 shares of common stock
pursuant to the 1995 Long Term Incentive Plan at an exercise price of $3.00

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<PAGE>

per share. Options to purchase 3,000 shares became exercisable on the grant
date and options to purchase an additional 3,000 shares became exercisable
each year thereafter. The term of such option is five years. On July 23,
1998, the Company granted Mr. Rolston an incentive stock option to purchase
25,000 shares of common stock pursuant tot he 1995 Long Term Incentive Plan
at an exercise price of $3.00 per share. Options to purchase 12,500 of such
shares become exercisable uponn meeting or exceeding certain performance
objectives for the year ended December 31, 1999. Options to purchase the
remaining 12,500 of such shares become exercisable upon meeting or
exceeding certain performance objectives for the year ended December 31,
2000. The term of such option is five years. On December 31, 1998, the
Company granted Mr. Rolston an incentive stock option to purchase 14,802
shares of common stock pursuant to the 1995 Long Term Incentive Plan at an
exercise price of $2.875 per share. Options to purchase 2,960 shares became
exercisable on the grant date and options to purchase an additional 2,960
shares become exercisable each year thereafter. The term of such option is
five years.

Stock Options

The following table sets forth certain information concerning grants of stock
options to the Named Executive Officers during the fiscal year ended
December 31, 1998.

Option Grants in Fiscal Year 1998

Percent of
Number of Options to
Shares Employees Excercise
Underlying in Fiscal Price per Expiration
Granted Year Share Date
------------------------------------------------------------
J. Randall Rolston 67,771 14.5% $2.50-$3.00 July 2003-December 2003
Vice President, Sales

Option Exercises and Holdings
The following table provides certain information with respect to the Named
Executive Officers concerning the exercise of stock options during the fiscal
year ended December 31, 1998 and the value of unexercised stock options held as
of December 31, 1998.

Aggregated Option Exercises in 1998 and Year End Option Values
--------------------------------------------------------------
Number of Shares
Underlying Unexercised Value of Unexercised
Options at In the Money Option at
December 31, 1998 December 31, 1998 ($) (1)
-------------------------- ----------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- - --------------------------------- ------------- ----------- -------------
David A.Jenkins(2) 139,000 27,000 $249,625 $50,625
Chairman, President
and Chief Executive
Officer

J. Randall Rolston 20,530 75,271 $ 18,803 $65,000
Vice President, Sales

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<PAGE>

Joseph C. Griffin - - - -
Vice President, Regulatory
Affairs

- - --------------------------
No options were exercised by the Named Executive Officers during the fiscal year
ended December 31, 1998.

(1) Amounts calculated by subtracting the exercise price of the options from
the market value of the underlying Common Stock using the closing sale
price on the Nasdaq National Market of $3.875 per share on December 31,
1998.

(2) The Company granted Mr. Jenkins a non-qualified stock option to purchase
96,000 shares of common stock at an exercise price of $2.20 per share (the
"Jenkins NQSO"). Options to purchase 30,000 of the Jenkins NQSO shares
became exercisable on the grant date and options to purchase 1,000 shares
become exercisable each month thereafter. The term of the Jenkins NQSO
option is five years. On November 29, 1995, the Company granted Mr. Jenkins
an incentive stock option to purchase 70,000 shares of Common Stock
pursuant to the Company's 1995 Plan at an exercise price of $2.20 per share
(the "Jenkins ISO"). Options to purchase 45,000 of the Jenkins ISO shares
became exercisable upon completion of the Company's initial public offering
and options to purchase the remaining 25,000 Jenkins ISO shares became
exercisable on the first anniversary of the granting of the Jenkins ISO.
The term of such option is ten years.

Compensation Plans and Other Arrangements
1995 Long Term Incentive Plan
The Company's 1995 Long Term Incentive Plan (the "1995 Incentive Plan") was
adopted by the Board of Directors and shareholders in November 1995. On October
30, 1997, the Shareholders approved an amendment increasing the number of shares
available under the Plan from 400,000 to 700,000. At December 31, 1998, options
to purchase 712,610 shares were outstanding at exercise prices ranging from
$2.00 to $3.00 per share. The Board of Directors has approved an increase in the
number of shares issuable under the plan from 700,000 to 1,000,000. This
amendment is subject to shareholder approval. The 1995 Incentive Plan provides
for grants of "incentive" and "non-qualified" stock options to employees of the
Company. The 1995 Incentive Plan is administered by the Compensation Committee,
which determines the optionees and the terms of the options granted, including
the exercise price, number of shares subject to the options and the
exercisability thereof. The 1995 Incentive Plan will terminate on November 30,
2005, unless earlier terminated by the Board of Directors.

The exercise price of incentive stock options granted under the 1995 Incentive
Plan must be equal to at least the fair market value of the Common Stock on the
date of grant, and the term of such options may not exceed ten years. With
respect to any optionee who owns stock representing more than 10% of the voting
power of all classes of the Company's outstanding capital stock, the exercise
price of any incentive stock option must be equal to at least 110% of the fair
market value of the Common Stock on the date of grant, and the term of the
option may not exceed five years. The aggregate fair market value of Common

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<PAGE>

Stock (determined as of the date of the option grant) for which an incentive
stock option may for the first time become exercisable in any calendar year may
not exceed $100,000.

1995 Director Option Plan
The Company's 1995 Director Option Plan was adopted by the Board of Directors
and the shareholders in November 1995. A total of 360,000 shares of Common Stock
of the Company are available for issuance under the 1995 Director Option Plan
and options to purchase 228,000 shares were outstanding as of December 31, 1998.
The 1995 Director Option Plan provides for grants of "director options" to
eligible directors of the Company and for grants of "advisor options" to
eligible members of the Scientific Advisory Board. Director options and advisor
options become exercisable at the rate of 1,000 shares per month, commencing
with the first month following the date of grant for so long as the optionee
remains a director or advisor, as the case may be. The 1995 Director Option Plan
is administered by the Plan Committee of the Company, which determines the
optionees and the terms of the options granted, including the exercise price and
the number of shares subject to the options. The 1995 Director Option Plan will
terminate on November 30, 2005, unless earlier terminated by the Board of
Directors.

Compensation of Directors

John Underwood was granted an option to purchase 60,000 shares of common stock
at $3.00 per share upon his appointment to serve on the Board of Directors.
These options vest at a rate of 1,000 shares per month of service on the Board.
During 1998, no other directors of the Company received cash or other
compensation for services on the Board of Directors or any committee thereof. In
the past, the Company has issued independent Directors options to purchase
shares of the Company's Common Stock under the 1995 Director Option Plan upon
their election or appointment to the Board. These options vest at a rate of
1,000 shares per month of service on the Board. The directors are reimbursed for
their reasonable travel expenses incurred in performance of their duties as
directors.

Employment Agreements

On August 31, 1995, the Company entered into an Employment Agreement Addendum
with Mr. David A. Jenkins, which extended the term of his employment through
March 1, 1999. The addendum provides for base compensation of $145,000, plus
five percent of the Company's consolidated income before taxes. During 1998, the
Board of Directors increased Mr. Jenkins' salary to $180,000 per year. Mr.
Jenkins' Employment Agreement may be terminated at any time for cause. It
contains a non-competition provision extending for two years after termination
of employment for cause and, in the Company's discretion, one year after
termination of employment for any other reason, provided that if Mr. Jenkins is
terminated without cause, the Company is obligated to continue to pay him
compensation during such discretionary period.

Repricing

In April 1998, the Company canceled options to acquire 139,000 shares of common
stock of the Company which had been granted to employees in 1996 and 1997, with
exercise prices of $4.75 and $5.50. The shares were reissued at an exercise
price of $3.00. The vesting periods were reset for each employee. The options

44
<PAGE>

were issued at the fair market value on the date of re-issuance. Thus, the
Company did not record compensation expense related to these options.

Item 11. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth certain information regarding beneficial
ownership of Common Stock of the Company as of March 19, 1999 by (i) each of the
Company's directors, (ii) the Named Executive Officers, (iii) all directors and
executive officers as a group and (iv) each person known to the Company to
beneficially own more than five percent of the Company's common stock. Except as
otherwise indicated, the persons named in the table have sole voting and
investment power with respect to all shares beneficially owned, subject to
community property laws, where applicable.

Name and Address Number of Shares Percentage of Class
of Beneficial Owner Beneficially Owned Beneficially Owned (1)
- - ---------------------------- ------------------ ----------------------
David A. Jenkins(2) 1,049,000 10.5%
100 Stierli Court-Suite 107
Mount Arlington, NJ 07856

Anthony J. Varrichio (3) 545,000 5.5%
1 Hemlock Lane
Flanders, NJ 07836

David W. Mortara, Ph.D.(4) 91,000 *
7865 North 86th Street
Milwaukee, WI 53224

J. Randall Rolston (5) 42,830 *
100 Stierli Court - Suite 107
Mount Arlington, NJ 07856

Joseph C. Griffin(6) 126,736 1.2%
100 Stierli Court - Suite 107
Mount Arlington, NJ 07856

John E. Underwood (7) 10,000 *
c/o Proteus International
Crossroads Plaza
Mahwah, NJ 07430

H&Q Life Sciences Investors(8) 430,000 4.4%
50 Rowes Wharf
Boston, MA 02110-6679

H&Q Healthcare Investors(8) 645,000 6.5%
50 Rowes Wharf
Boston, MA 02110-6679

45
<PAGE>

SC Fundamental Value Fund, LP(8) 376,800 3.8%
10 East 50th Street
New York, NY 10022

SC Fundamental Value BVI, Ltd.(8) 373,200 3.8%
c/o SC BVI Partners
10 East 50th Street
New York, NY 10022

Special Situations Fund III LP(8) 435,100 4.4%
153 East 53rd Street
New York, NY 10022

Special Situations Cayman Fund(8) 144,200 1.5%
153 East 53rd Street
New York, NY 10022

Medtronic, Inc. 548,000 5.6%
7000 Central Avenue NE
Minneapolis, MN 55432

Oppenheimer Funds, Inc. 600,000 5.1%
Two World Trade Center
New York, NY 10048

All Named Executive Officers
and directors as a group
(6 persons) (9) 1,864,566 18.4%

- - -----------------------------
* Represents beneficial ownership of less than one percent of the Common Stock.

(1) Applicable percentage ownership as of December 31, 1998 is based upon
9,872,417 shares of Common Stock outstanding together with the applicable
options for such shareholder. Beneficial ownership is determined in
accordance with Rule 13d-3(d) of the Securities Exchange Act of 1934, as
amended. Under Rule 13d-3(d), shares issuable within 60 days upon exercise
of outstanding options, warrants, rights or conversion privileges
("Purchase Rights") are deemed outstanding for the purpose of calculating
the number and percentage owned by the holder of such Purchase Rights, but
not deemed outstanding for the purpose of calculating the percentage owned
by any other person. "Beneficial ownership" under Rule 13d-3 includes all
shares over which a person has sole or shared dispositive or voting power.

(2) Includes 144,000 shares issuable upon exercise of options. Also includes
160,000 shares held by Mr. Jenkins as trustee for the Dalin Class Trust,
45,000 shares held by Mr. Jenkins' wife, and 20,000 shares held by Mr.
Jenkins' wife as custodian for his children. Mr. Jenkins disclaims
beneficial ownership of 45,000 shares held by his wife and 20,000 shares
held by his wife as custodian for his children.

(3) Includes 74,000 shares issuable upon exercise of options.

46
<PAGE>

(4) Includes 41,000 shares issuable upon exercise of options.

(5) Includes 17,830 shares issuable upon exercise of options.

(6) Includes 5,000 shares issuable upon exercise of options.

(7) Includes 8,000 shares issuable upon exercise of options.

(8) SC Fundamental Value Fund, LP and SC Fundamental Value BVI, Ltd. share
common management. H&Q Life Sciences Investors and H&Q Healthcare Investors
share common management and are significant shareholders of the Company by
virtue of their holding, in the aggregate, greater than 10% of the issued
and outstanding common stock. The management companies of Special
Situations Fund III LP and Special Situations Cayman Fund share certain
common ownership.

(9) Includes 291,830 shares issuable upon exercise of options.

Item 12. Certain Relationships and Related Transactions

Hi-Tronics Designs, Inc.

HDI was one of the Company's two founding shareholders. HDI's shareholders are
Anthony J. Varrichio, William Winstrom and Medtronic, Inc. Mr. Varrichio is the
President, a director and the largest shareholder of HDI, and Mr. Winstrom is an
officer and director of HDI.

Mr. Varrichio has been a director of the Company since the Company's inception
and was Chairman of the Board of Directors and Treasurer of the Company until
November 1995. Mr. Winstrom was a director of the Company until November 1995.
Lester Swenson, an officer of Medtronic, was a Director of the Company from
November 1995 until July, 1998. Mr. Varrichio, Mr. Winstrom and Medtronic
acquired shares of the Company's Common Stock from HDI. As of March 19, 1999,
Mr. Varrichio owned beneficially 5.5% of the Company's Common Stock, Mr.
Winstrom owned beneficially 3.5% and Medtronic owned 5.6%

During April 1996, the Company entered into a Master Manufacturing Agreement
with HDI (the "Master Manufacturing Agreement") which provides that HDI will
manufacture components for the EP WorkMate , the EP-3 Stimulator, the TeleTrace
III Receiver, and all subsequent versions of such products for the Company on an
exclusive basis in accordance with GMP regulations and all other applicable laws
and regulations. The Master Manufacturing Agreement has a term of five years
commencing on March 31, 1996 and, unless terminated by either party upon at
least 90 days written notice, will automatically renew for successive terms of
one year. The Company purchased products from HDI aggregating $360,000 and
$506,000 during the year ended December 31, 1998 and 1997, respectively.

In 1997, the Company sold its line of arrhythmia monitors including an
arrhythmia monitor under development to HDI in return for 60,000 shares of
common stock in Neomedics, Inc., a newly created company involved in the design
and manufacture of implantable medical devices, which is an affiliate of HDI.
Sales of arrhythmia monitors by the Company were approximately $12,000 in the

47
<PAGE>

year ended December 31, 1996. Since the value assigned to the arrhythmia monitor
technology had been fully amortized, the Company did not record a gain or loss
on the sale. The Neomedics common stock is not a registered security traded on a
public exchange and therefore its fair value is not readily determinable. At
December 31, 1998, the Company valued the shares of Neomedics stock at zero.

HDI completed development of the TeleTrace III-S Receiver in 1997 for an
aggregate consideration of 19,000 shares of common stock of the Company, issued
in 1995, and $30,000 in cash paid in 1997. HDI is the manufacturer of the
TeleTrace III-S Receiver. On December 29, 1997, the Company granted HDI a
nonexclusive license to sell the TeleTrace receiver in connection with the sale
of arrhythmia monitors. The agreement calls for the payment of a royalty of $300
per unit sold by HDI. To date, HDI has not sold any TeleTrace receivers.

The Company believes that each of the preceding transactions with HDI were
entered into on terms and at prices no less favorable than the Company could
have received from an unaffiliated party.

Mortara Instrument, Inc.
The Company purchases certain components for the EP WorkMate and
ALERT[REGISTERED TRADEMARK] Companion from Mortara Instrument. Dr. David W.
Mortara, a director of the Company, is also a Director and shareholder of
Mortara Instrument. The approximate value of products purchased from Mortara
Instrument was $546,000 and $573,000 in 1998 and 1997, respectively. The Company
believes that each of the transactions with Mortara Instrument were entered into
on terms and at prices no less favorable than the Company could have received
from an unaffiliated party.

Item 13. Exhibits and Reports on Form 8-K.

(a) Exhibits

3.1 Amended and Restated Certificate of Incorporation (1)

3.2 Bylaws, as amended (1)

4.1 Common Stock Purchase Agreement, dated April 9, 1998,
between the Company and each of the Selling Security
Holders (filed as Exhibit 4.1 to the Company's Current
Report on Form 8-K dated April 14, 1998 and incorporated
herein by reference). (4)

4.2 Registration Rights Agreement, dated April 9, 1998,
between the Company and each of the Selling Security
Holders (filed as Exhibit 4.2 to the Company's Current
Report on Form 8- K dated April 14, 1998 and
incorporated herein by reference).(4)

10.6* Employment Agreement dated as of March 1, 1993 between
EP Medical, Inc. and David A. Jenkins, as amended (1)

48
<PAGE>

10.7* Employment Agreement dated as of November 6, 1993
between EP Acquisition Corp. and Joseph C. Griffin, III
(1)

10.8* 1995 Director Option Plan (1)

10.10 License Agreement dated as of November 1, 1995 between
EP Medical, Inc. and Dr. Eckhard Alt, as amended (1)

10.11 Consulting Agreement dated as of February 1, 1996
between EP Medical, Inc. and Raman Mitra (1)

10.12 License Agreement dated as of November 1, 1995 between
EP Medical, Inc. and Sanjeev Saksena (1)

10.14*Investment Agreement dated April 22, 1994 among EP
Medical, Inc., David Jenkins, Anthony Varrichio, William
Winstrom and American Medical Electronics, Inc. (1)

10.15 Letter Agreement dated December 15, 1995 between EP
Medical, Inc. and Rudiger Dahle (1)

10.16 Investment Agreement dated January 16, 1996 among EP
Medical, Inc., Rudiger Dahle, Anthony Varrichio and
William Winstrom (1)

10.22 Master Manufacturing Agreement dated April 16, 1996
between EP MedSystems and Hi-Tronics Designs, Inc. (1)

10.25 Exclusive Rights Agreement dated May 26, 1996 between EP
MedSystems and Spire Corporation (1)

10.26 Letter Agreement dated April 12, 1996 between EP
MedSystems, Inc. and Hi-Tronics Designs, Inc. relating
to the TeleTrace IV Receiver (1)

10.27 Consulting Agreement dated as of May 24, 1996 between EP
MedSystems, Inc. and Elliott Young and Associates Inc.,
as amended and restated. (1)

10.28 Stock Option Agreement dated August 31, 1995 between EP
MedSystems, Inc. and Tracey Young, as amended (1)

10.29 Registration Rights Agreement dated as of May 24, 1996
between EP MedSystems, Inc. and Tracey Young (1)

10.30 Exclusive License Agreement dated February 27, 1997
between EP MedSystems, Inc. and EchoCath, Inc. (2)

49
<PAGE>

10.31 Subscription Agreement dated February 27, 1997 between
EchoCath, Inc. and EP MedSystems, Inc. (2)

10.32* Amended 1995 Long Term Incentive Plan (3)

10.33 Agreement of Lease dated August 25, 1997 between EP
MedSystems, Inc. and Provident Mutual Life Insurance
Company, as landlord (5)

16 Letter of Changes in Registrant's Certifying Accountants
(6)

21 List of Subsidiaries

27 Financial Data Schedule (7)
--------------------------------------------------------------

* Denotes management contract or compensatory plan or arrangement

1. Incorporated by reference to the exhibit of the same number
previously filed with the Commission in connection with the
Company's Registration Statement on Form SB-2 and Pre-Effective
Amendments No. 1 and 2 thereto.

2. Incorporated by reference to the exhibit of the same number
previously filed with the Commission on Form 10-KSB for the year
ended December 31, 1996.

3. Incorporated by reference to Exhibit A previously filed with the
Commission in the Company's Proxy Statement for the Annual
Meeting of Shareholders held on October 30, 1997.

4. Incorporated by reference to the exhibit of the same number
previously filed with the Commission on in connection with the
Company's Current Report on Form 8-K dated April 14, 1998.

5. Incorporated by reference to the exhibit of the same number
previously filed with the Commission in connection with the
Company's Form 10- KSB for the year ended December 31, 1997.

6. Incorporated by reference to the exhibit of the same number
previously filed with the Commission in connection with the
Company's Current Report on Form 8-K dated August 25, 1998.

7. EDGAR filing only.

(b) Reports on Form 8-K

The Company filed no Reports on Form 8-K during the last quarter of
the period covered by this report.

50
<PAGE>

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

1. FINANCIAL STATEMENTS PAGE

Report of Independent Public Accountants F-2 / F-3

Consolidated Balance Sheets as of December 31, 1998 F-4
and 1997

Consolidated Statements of Operations for the years
ended December 31, 1998 and 1997. F-5

Consolidated Statements of Changes in Shareholders'
Equity for the years ended December 31, 1998
and 1997. F-6

Consolidated Statements of Cash Flows for the years
ended December 31, 1998 and 1997. F-7

Notes to Consolidated Financial Statements F-8

F-1

<PAGE>

REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and
Shareholders of EP MedSystems, Inc.

In our opinion, the accompanying consolidated balance sheet as of December 31,
1998 and the related consolidated statements of operations, changes in
shareholders' equity and cash flows present fairly, in all material respects,
the financial position of EP MedSystems, Inc. and its subsidiaries (the
"Company") at December 31, 1998, and the results of its operations and its cash
flows for the year then ended, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audit. We conducted our audit of these statements in
accordance with generally accepted auditing standards, which require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for the opinion expressed above. The financial statements of the Company as of
December 31, 1997 and for the year then ended were audited by other independent
accountants whose report dated March 11, 1998 expressed an unqualified opinion
on those statements.

/s/ PricewaterhouseCoopers LLP
PRICEWATERHOUSECOOPERS LLP
Florham Park, NJ
March 11, 1999

F-2
<PAGE>

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To EP MedSystems, Inc.:

We have audited the accompanying consolidated balance sheet of EP MedSystems,
Inc. (a New Jersey corporation) and subsidiaries as of December 31, 1997, and
the related consolidated statements of operations, changes in shareholders'
equity and cash flows for the year then ended. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of EP MedSystems, Inc. and
subsidiaries as of December 31, 1997, and the results of their operations and
their cash flows for the year then ended in conformity with generally accepted
accounting principles.

/s/ Arthur Andersen LLP
ARTHUR ANDERSEN LLP

New York, New York
March 11, 1998

F-3
<PAGE>

EP MEDSYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

DECEMBER 31,
ASSETS 1998 1997
----------- -----------
Current assets:
Cash and cash equivalents $ 2,332,931 $ 752,068
Short-term investment 729,351 2,120,084
Accounts receivable, net of
allowances for doubtful accounts of 2,305,498 1,229,921
$99,275, and $74,112
Inventories 1,800,691 1,512,528
Prepaid expenses and other current assets 151,895 217,526
------------ -----------
Total current assets 7,320,366 5,832,127
Investment in EchoCath -- 1,400,000
Property and equipment, net 814,352 757,295
Intangible assets, net 541,677 569,705
Other assets 19,423 58,439
----------- -----------
Total assets $ 8,695,818 $ 8,617,566
=========== ===========

LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 772,639 $ 670,206
Payables due to related parties 188,789 127,859
Accrued expenses 588,907 850,507
Deferred revenue 86,750 34,313
Customer deposits 51,446 108,012
----------- -----------
Total current liabilities 1,688,531 1,790,897
=========== ===========
Commitments and contingencies
(See Notes 1, 4, 5 and 11)
Shareholders' equity:
Preferred Stock, no par value,
5,000,000 shares authorized, no shares -- --
issued and outstanding
Common stock, $.001 stated value,
25,000,000 shares authorized, 9,872,417
and 7,599,917 shares issued and 9,872 7,600
outstanding in 1998 and 1997
Additional paid-in capital 21,432,374 16,743,014
Accumulated deficit (14,434,959) (9,923,945)
------------ ------------
Total shareholders' equity 7,007,287 6,826,669
------------ ------------
Total liabilities and shareholders' equity $ 8,695,818 $ 8,617,566
=========== ============

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.

F-4

<PAGE>

EP MEDSYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31,

1998 1997
------------ -----------
Product sales $ 7,460,324 $ 3,648,782
Other revenue -- 365,000
------------ -----------
Total revenues 7,460,324 4,013,782
------------ -----------

Operating costs and expenses:
Cost of products sold 3,721,209 2,184,914
Sales and marketing expenses 3,799,500 2,935,876
General and administrative expenses 1,656,057 1,822,097
Research and development expenses 1,605,758 2,262,169
Write-down of investment in EchoCath 1,400,000 --
------------ -----------
Loss from operations (4,722,200) (5,191,274)

Interest expense (3,410) (2,436)
Interest income 214,596 330,053
------------ -----------
Net loss $ (4,511,014) $(4,863,657)
============= ============

Basic loss per share $ (0.49) $ (0.64)
============= ============
Diluted loss per share $ (0.49) $ (0.64)
============= ============
Weighted average shares
outstanding used to compute basic
and diluted loss per share 9,252,835 7,599,917
============= ============

The accompanying notes are an integral part of these statements.

F-5

<PAGE>

EP MEDSYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997

<TABLE>
<CAPTION>
Additional
Common Stock Paid-in Accumulated
Shares Amount Capital Deficit Total
<S> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1996 7,599,917 $ 7,600 $ 16,743,014 $ (5,060,288) $ 11,690,326
Net loss -- -- -- (4,863,657) (4,863,657)
---------- --------- ----------- ------------ ------------
BALANCE, DECEMBER 31, 1997 7,599,917 7,600 16,743,014 (9,923,945) 6,826,669
Issuance of common stock 2,250,000 2,250 4,659,457 -- 4,661,707
Issuance of common stock upon
exercise of stock options 22,500 22 29,903 -- 29,925
Net loss -- -- -- (4,511,014) (4,511,014)
---------- --------- ----------- ------------ ------------
BALANCE, DECEMBER 31, 1998 9,872,417 $ 9,872 $ 21,432,374 $(14,434,959) $ 7,007,287
========== ========= =========== ============ ============
</TABLE>

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.

F-6

<PAGE>

EP MEDSYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31,

<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (4,511,014) $ (4,863,657)
Adjustments to reconcile net income to net cash
used in operating activities:
Write-down of investment in EchoCath 1,400,000 --
Depreciation and amortization 317,653 219,302
Bad debt expense 10,000 --
Changes in assets and liabilities:
Increase in accounts receivable (1,085,577) (558,418)
Increase in inventories (288,163) (885,821)
Decrease (increase) in prepaid expenses and other 25,994 (31,765)
current assets
Decrease (increase) in other others assets 42,546 (27,439)
Increase in due to related parties 60,930 42,824
Increase in accounts payable 102,433 431,442
(Decrease) increase in accrued expenses, deferred
revenue and customer deposits (265,729) 407,108
------------ ----------
NET CASH USED IN OPERATING ACTIVITIES (4,190,927) (5,266,424)
------------ ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of investments -- 1,188,595
Maturities of investments 1,390,733 1,487,096
Investment in EchoCath -- (1,400,000)
Capital expenditures (307,790) (721,911)
Patent costs (42,421) (27,145)
------------ ----------
NET CASH PROVIDED BY INVESTING ACTIVITIES 1,040,522 526,635
------------ ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from note receivable 39,636 --
Proceeds from issuance of common stock and exercise
of stock options, net of offering expenses 4,691,632 --
------------ ----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 4,731,268 --
------------ ----------
Net increase (decrease) in cash and cash equivalents 1,580,863 (4,739,789)
Cash and cash equivalents, beginning of period 752,068 5,491,857
------------ ----------
Cash and cash equivalents, end of period $ 2,332,931 $ 752,068
============ ============

SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest $3,410 $2,436

</TABLE>
The companying notes are an integral part of these statements.

F-7

<PAGE>

EP MEDSYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. NATURE OF BUSINESS
EP MedSystems, Inc. (the "Company") operates in a single segment. The Company
designs, manufactures and markets a broad-based line of products for the cardiac
electrophysiology ("EP") market for the purpose of diagnosing, monitoring,
managing and treating irregular heartbeats known as arrhythmias.

The Company faces a number of risks, including significant operating losses, the
ability to raise sufficient financing to meet its future cash requirements, the
results of clinical trials and market acceptance of existing and future
products. Additionally, other risk factors such as government regulation,
uncertainty of new product development, significant competition, the loss of key
personnel and difficulty in establishing, preserving and enforcing intellectual
property rights could impact the future results of the Company.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of EP MedSystems,
Inc. and its wholly owned U.S. subsidiaries, ProCath Corporation ("ProCath") and
EP MedSystems UK Ltd. ("EP MedSystems UK"). All material intercompany accounts
and transactions have been eliminated in consolidation.

CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with an original maturity of
three months or less to be cash and cash equivalents.

CONCENTRATIONS OF CREDIT RISK
The Company is potentially subject to concentrations of credit risk with respect
to its cash investments and trade accounts receivable. The Company invests its
excess cash in a diversified portfolio of investment grade corporate bonds and
an institutional money market account.

The Company's customer base for its products is primarily comprised of
hospitals, and distributors throughout the United States and abroad. On certain
transactions, the Company may require payment in advance or an issuance of an
irrevocable letter of credit. The Company believes that its terms of sale
provide adequate protection against significant credit risk with respect to
trade accounts receivable.

INVENTORIES
Inventories are valued at the lower of cost or market with cost being determined
on a first-in, first-out basis.

F-8

<PAGE>

PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost and are depreciated on a
straight-line basis over the estimated useful lives of the assets ranging from
three to seven years. Leasehold improvements are amortized on a straight-line
basis over the shorter of their estimated useful lives or the term of the lease.
Expenditures for repairs and maintenance are expensed as incurred.

IMPAIRMENT OF LONG LIVED ASSETS
The recoverability of the excess of cost over fair value of net assets acquired
is evaluated by an analysis of operating results and consideration of other
significant events or changes in the business environment. If management
believes an impairment exists, the carrying amount of these assets would be
reduced to their fair value as defined in Statement of Financial Accounting
Standards No. 121.

INTANGIBLE ASSETS
Goodwill resulting from the purchase of ProCath is being amortized by the
straight-line method over 15 years and is included in intangible assets.
Unamortized goodwill as of December 31, 1998 and 1997 amounted to $495,000 and
$547,000, respectively.

Costs incurred in the research and development of new software products and
enhancements to existing software products are expensed as incurred until
technological feasibility has been established.

Registration and legal fees associated with patent filings are capitalized and
amortized over three years. Management reviews these assets for impairment
whenever events or changes in circumstances indicate that the carrying amounts
of the assets might not be recoverable. The Company has determined that, as of
December 31, 1998, no such assets have been impaired.

TRANSLATION OF FOREIGN CURRENCY
The Company's foreign operation is translated to U.S. dollars using current
exchange rates with translation adjustments accumulated in stockholders' equity.
At December 31, 1998 and 1997, translation adjustments were not material.

REVENUE RECOGNITION
The Company recognizes product sales on the date of shipment. Payments received
in advance of shipment of product are deferred until such products are shipped.
Revenues related to warranty contracts are recognized on a straight-line basis
over the warranty period. Royalties on product sales are included in cost of
sales.

RESEARCH AND DEVELOPMENT
Research and development costs, which include clinical and regulatory costs, are
expensed as incurred.

F-9
<PAGE>

NET LOSS PER COMMON SHARE
Effective for the year ended December 31, 1997, the Company adopted Statement of
Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS 128"). The
Company's basic and diluted earnings per share are equal, due to the exclusion
of common stock equivalents, which would make the earnings per share
calculations anti-dilutive.

STOCK BASED COMPENSATION
The Company accounts for stock options issued to employees and non- employee
directors in accordance with the "intrinsic value" method set forth in
Accounting Principles Board Opinion No. 25 "Accounting for Stock Issued to
Employees" ("APB 25") with supplemental pro forma disclosures of "fair value" as
required by Statement of Financial Accounting Standards No. 123 "Accounting for
Stock Based Compensation" ("SFAS 123").

COMPREHENSIVE INCOME
The company adopted SFAS 130 "Reporting for Comprehensive Income" in 1997. For
the years ended December 31, 1998 and 1997, the Company's comprehensive income
approximated net income.

USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Although these estimates are based on management's knowledge of current events
and actions it may undertake in the future, the estimates may ultimately differ
from actual results.

RECENTLY ISSUED ACCOUNTING STANDARDS
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (FAS No. 133) will be effective for the
Company in the first quarter of fiscal 2000 and establishes accounting and
reporting standards for derivative instruments and for hedging activities. It
requires companies to recognize all derivatives as either assets or liabilities
in the statement of financial position and measure those instruments at fair
value. It is expected that the adoption of FAS No. 133 will not have a material
effect on the Company's financial statements.

3. Investment Securities
At December 31, 1998 and 1997, all investment securities have been classified as
available for sale. The Company's available for sale investments mature during
June 1999. These investments are stated at market, which approximates their
amortized cost.

4. EchoCath License
During February 1997, the Company licensed the rights to several ultrasound

F-10
<PAGE>

technologies from EchoCath, Inc. ("EchoCath") for use in the field of
electrophysiology. The agreement calls for the Company to make milestone
payments of up to $700,000, in four installments, as certain development
milestones and initial sales are achieved on the EchoMark* and EchoEye*
technologies. One of the milestones calls for a $400,000 payment payable upon
the completion of a development program for the EchoEye*. This milestone was
only payable in the event that the development was completed by September 30,
1998. To the best of the Company's knowledge, the milestone was not achieved and
no milestone payments are accrued or payable to EchoCath at December 31, 1998.

Terms of the license also call for a two percent (2%) royalty on net sales,
including minimum royalties beginning in 1999 and continuing for the life of the
applicable patents and continuations thereof. The Company may elect to not make
minimum royalty payments and, in such case, EchoCath may render the license
non-exclusive or cancel the license and return any of the $700,000 milestone
payments which were paid.

The minimum annual royalties under the license are as follows:

1999 $120,000
2000 160,000
2001 200,000
2002 280,000
2003 320,000
2004 360,000
2005 and thereafter 400,000

In conjunction with the license agreement, the Company purchased 280,000 shares
of 5.4% cumulative convertible preferred stock of EchoCath for $1,400,000 in
cash. The preferred stock is convertible, at the option of the Company, into
shares of EchoCath common stock at a conversion price of $6.00 per share through
1999 and $6.50 per share thereafter.

The EchoCath preferred stock is not a registered security traded on a public
exchange and therefore its fair value is not readily determinable. Accordingly,
the shares were stated at historical cost. During September 1997, the Company
became aware that EchoCath might have been having cash flow difficulties. During
October, 1997, the Company filed a lawsuit against EchoCath in the United States
District Court for the District of New Jersey alleging, among other things, that
EchoCath made fraudulent misrepresentations and omissions in connection with the
sale of $1.4 million of its preferred stock to the Company. During October 1998,
the complaint was dismissed by the District Court. The Company has filed an
appeal of the decision.

EchoCath has limited cash reserves and is attempting to raise additional funds
through the issuance of debt or equity, through licensing agreements or through
other strategic alliances. Additionally, EchoCath's common stock has been
delisted from NASDAQ Small Cap Stock Market. Their independent accountants
included an explanatory paragraph in their fiscal 1998 opinion on the related
financial statements that stated that EchoCath had suffered recurring losses

F-11
<PAGE>

from operations, had negative working capital and had a net capital deficiency
which raised substantial doubt about its ability to continue as a going concern.
The Company cannot determine whether EchoCath will be successful in raising
additional funds or executing additional licensing agreements in order to meet
its long term cash needs, whether EchoCath will recognize additional sales or
attain profitability. As of December 31, 1998, management evaluated the
investment and determined that there has been an other than temporary
impairment. As such, the cost basis of the preferred stock has been written down
to zero representing the estimated fair value of the investment. The $1,400,000
write-down of the investment was reflected in loss from operations during the
year ended December 31, 1998.

5. Research Support Grant
During 1997, the Company received a research support grant in the amount of
$365,000 from a private foundation to support the Company's ongoing development
of a proprietary catheter. The proceeds of the grant are not refundable. In
connection with the grant, the Company has agreed to pay the foundation a
royalty of 5% of gross sales of the developed catheter until the foundation has
recovered its $365,000, as adjusted for inflation; 3% of gross sales until such
time as the foundation has recovered four times its $365,000 as adjusted for
inflation; and 1% in perpetuity.

6. Acquisitions of Products and Technology and Related Party Transactions
Hi-Tronics Design, Inc.
The Company's initial shareholders were David A. Jenkins, its current Chairman,
President and Chief Executive Officer, and Hi-Tronics Designs, Inc. ("HDI"), a
corporation engaged in the business of contract engineering and manufacturing.
The Company has purchased rights to certain products and the next generation of
several products under development from HDI. The Company has utilized, and
continues to utilize, HDI to provide research and development for various
products. The Company currently utilizes HDI to manufacture certain products,
including components for the EP WorkMate[REGISTERED TRADEMARK] and
EP-3[TRADEMARK] Stimulator. The value of products and services purchased from
HDI, excluding the purchase of technology, was $360,000 and $506,000 in 1998 and
1997, respectively.

Mortara Instrument, Inc.
The Company purchases certain components for the EP WorkMate[REGISTERED
TRADEMARK] and ALERT{*} Companion from Mortara Instrument. Dr. David W. Mortara,
a director of the Company, is also a Director and shareholder of Mortara
Instrument. The approximate value of products purchased from Mortara Instrument
was $546,000 and $573,000, in 1998 and 1997, respectively.

7. Agreements with In Control
During 1996, the Company recorded catheter development revenue of $250,000
related to a Product Development and Supply Agreement (the "Development
Agreement") with InControl, Inc. ("InControl") covering a new temporary atrial
defibrillation catheter ("TADCATH").

The Company also entered into non-exclusive distribution agreements which
allowed InControl to sell the ALERT{*} Catheter in parts of Europe, Africa and
the Middle East and the ALERT{*} Companion on a world wide basis for a period of

F-12
<PAGE>

two years subject to renewal upon mutual agreement of the parties. The
Development Agreement expired on June 30, 1997 and the distribution agreements
expired on August 14, 1998.

8. INTANGIBLE ASSETS
Intangible assets consist of the following:

DECEMBER 31,
1998 1997
---------- ----------
Catheter technology $ 774,099 $ 774,099
Other 71,966 29,545
---------- ----------
Total 846,065 803,644
Less: accumulated amortization (304,388) (233,939)
---------- ----------
$ 541,677 $ 569,705
=========== ===========

9. INVENTORIES
Inventories consist of the following:
DECEMBER 31,
1998 1997
---------- ----------
Raw materials $ 506,344 $ 249,018
Work in progress 46,623 12,925
Finished goods 1,247,724 1,250,585
--------- ---------
$ 1,800,691 $ 1,512,528
=========== ===========

10. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
DECEMBER 31,
1998 1997
---------- ----------
Land $ 69,738 $ 69,738
Buildings and improvements 351,924 346,824
Leasehold improvements 125,283 119,332
Machinery and equipment 642,891 390,521
Furniture and Fixtures 197,095 152,726
---------- ----------
1,386,931 1,079,141
Less: accumulated depreciation (572,579) (321,846)
---------- ----------
$ 814,352 $ 757,295
=========== ===========

During February, 1997, the Company purchased 7,500 square feet of manufacturing,
administrative and warehouse space, including 2,500 square feet of space that
was leased by the Company's ProCath subsidiary, for a purchase price of
approximately $417,000, including transaction costs and improvements. The
purchase provides for expansion of the existing manufacturing operations,
additional warehousing, shipping and quality assurance activities and relocation
of ProCath's administrative offices. During February 1999, the Company purchased
an additional 7,500 square feet of manufacturing space at ProCath for an
aggregate purchase price of $400,000 (See Note 17).

F-13
<PAGE>

11. COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
The Company currently leases approximately 7,600 square feet of office and
manufacturing space through October 2002. EP MedSystems UK leases 945 square
feet of office and storage space in London, England through January 2000.

The Company also leases certain office equipment for periods extending through
December 2001. The future aggregate commitment for minimum rentals as of
December 31, 1998 is as follows:

1999 $116,000
2000 108,000
2001 112,000
2002 87,000

Rent expense associated with these leases was approximately $93,000 for the
years ended December 31, 1998 and 1997.

EMPLOYEE LIFE INSURANCE
The Company has key man life insurance policies for $1,000,000 covering its
President, $1,000,000 for the Vice President of Regulatory Affairs and $500,000
for the Vice President of Engineering, for which it is the beneficiary.

LITIGATION
During October 1997, the Company filed a lawsuit against EchoCath in the United
States District Court for the District of New Jersey alleging, among other
things, that EchoCath made fraudulent misrepresentations and omissions in
connection with the prior sale of $1,400,000 of its preferred stock to the
Company.

EchoCath filed an answer to the complaint, denying the allegations and asserting
a counterclaim against the Company seeking its costs and expenses in the action.
EchoCath also filed a motion to dismiss the complaint. During October 1998, the
complaint was dismissed by the District Court. The Company is considering an
appeal of the decision. The Company believes that EchoCath's counterclaim and
request for reimbursement of its costs and expenses is without merit. As a
result, the Company has not accrued for such costs and expenses at December 31,
1998. In the opinion of management, the ultimate resolution of the counterclaim
will not have a material adverse impact of the Company's financial condition or
results of operations. The Company cannot determine the outcome of the EchoCath
litigation at this time.

F-14

<PAGE>
12. STOCKHOLDERS' EQUITY
COMMON STOCK
The Company is authorized to issue 25,000,000 shares of common stock, no par
value, $.001 stated value per share, of which a total of 9,872,417 and 7,599,917
shares were outstanding at December 31, 1998 and 1997, respectively.

On April 9, 1998, the Company sold and issued 2,250,000 shares of its common
stock to six institutional investors (the "Investors") at a price of $2.25 per
share. The gross proceeds of the offering were $5,062,500 before deducting
offering expenses of approximately $401,000. The Company intends to use the net
proceeds from the sale of the Shares for working capital purposes.

The Company granted the Investors certain registration rights with respect to
the Shares pursuant to a Registration Rights Agreement. The Company filed a
shelf registration statement on Form S-3 covering all of the Shares. During July
1998, the Securities and Exchange Commission declared the registration statement
effective.

On June 1, 1998, four non-employee holders of non-plan stock options to purchase
22,500 common stock of the Company exercised their options at $1.33 per share.

PREFERRED STOCK
The Company is authorized to issue 5,000,000 shares of undesignated preferred
stock, no par value per share. The Board of Directors has the authority to issue
preferred stock in one or more classes, to fix the number of shares constituting
a class and the stated value thereof, and to fix the terms of any such class,
including dividend rights, dividend rates, conversion or exchange rights, voting
rights, rights and terms of redemption, the redemption price and the liquidation
preference of such shares or class. At December 31, 1998 and 1997, the Company
had no shares of preferred stock outstanding.

STOCK OPTIONS
1995 LONG TERM INCENTIVE PLAN
During July 1997, the Board of Directors approved an amendment to increase the
number of shares of common stock issuable under the 1995 Long Term Incentive
Plan (the "1995 Incentive Plan") from 400,000 to 700,000. The amendment was
approved by the shareholders at the Annual Meeting of Shareholders held on
October 30, 1997. A total of 700,000 shares of Common Stock are available for
issuance under the 1995 Incentive Plan and options for 712,610 shares of Common
Stock, at an exercise price of $2.00 to $3.00 per share, have been granted and
are outstanding as of December 31, 1998. The Board of Directors has approved an
increase in the number of shares issuable under the Plan from 700,000 to
1,000,000. This amendment is subject to shareholder approval. The 1995 Incentive
Plan provides for grants of "incentive" and "non-qualified" stock options to
employees of the Company. Options under this plan have a term up to ten years
and vest over a period as determined by the Board of Directors. The 1995
Incentive Plan will terminate on November 30, 2005, unless earlier terminated by
the Board of Directors.

F-15

<PAGE>

During 1998, the Company issued options to purchase 392,000 shares of common
stock under the 1995 Incentive Plan. The exercise prices of these options range
from $2.00 to $3.00 per share. The options granted in 1998 have terms of five
years and vest over varying periods.

REPRICING
In April 1998, the Company cancelled 139,000 shares of options, which had been
granted to employees in 1996 and 1997, with exercise prices of $4.75 and $5.50.
The shares were reissued at an exercise price of $3.00. The vesting periods were
reset for each employee.

The shares were reissued at the fair market value on the date of re- issuance.
Thus, the Company did not record compensation expense related to these shares.
The re-issued shares were included in the calculation of pro-forma compensation
expense, as required by SFAS 123.

1995 DIRECTOR OPTION PLAN
The Company's 1995 Director Option Plan (the "1995 Director Plan") was adopted
by the Board of Directors and the shareholders in November 1995. A total of
360,000 shares of common stock of the Company are available for issuance under
the 1995 Director Plan and options for 228,000 shares of common stock, at
exercise prices ranging from $2.00 to $3.00 per share, are outstanding as of
December 31, 1998. The 1995 Director Plan provides for grants of director
options to eligible directors of the Company and for grants of advisor options
to eligible members of the Scientific Advisory Board of the Company. Each of the
director options and the advisor options are exercisable at the rate of 1,000
shares per month, commencing with the first month following the date of grant.
The terms of these options range from three to five years. The 1995 Director
Plan will terminate on November 30, 2005, unless earlier terminated by the Board
of Directors.

At December 31, 1998 and 1997, the Company had 1,724,610 and 1,479,500 shares,
respectively, of common stock reserved for stock options. All stock options
granted by the Company, except for an option to purchase 210,000 shares of
Common Stock at $.10 per share granted to Dr. Alt in connection with the license
of the ALERT{*} technology (the "Alt Option"), were granted at exercise prices
not less than the current fair market value of the Company's Common Stock on the
date of grant, as determined by the Board of Directors or the fair market value
on the date of grant for options issued after the Company's initial public
offering. During 1995, the Company expensed the difference between the fair
market value of the Alt Option as of the date of grant and the actual exercise
price of the Alt Option as acquired research and development expense.

F-16

<PAGE>

Information relating to stock options is as follows:
<TABLE>
<CAPTION>
OPTION Weighted
NUMBER OF PRICE Average
OPTIONS RANGE Exercise Price
<S> <C> <C> <C>

Outstanding at December 31, 1996 1,443,500 $ .10 - $5.50 $2.16
Granted 232,000 $2.00 - $4.75 $3.78
Exercised - - -
Canceled (196,000) $2.00 - $5.50 $5.31
----------
Outstanding at December 31, 1997 1,479,500 $ .10 - $4.75 $2.06
----------
Granted - original 392,110 $1.75 - $3.00 $2.83
Granted - reloaded 139,000 $3.00 $3.00
Exercised (22,500) $1.33 $1.33
Canceled (139,000) $4.75 - $5.50 $4.75
Expired (124,500) $1.33 - $2.00 $1.98
----------
Outstanding at December 31, 1998 1,724,610 $1.75 - $3.00 $2.12
----------
Exercisable at December 31, 1998 1,066,944 $ .10 - $3.00 $1.76
==========
</TABLE>

The Company accounts for its stock options issued to employees and nonemployee
directors based upon the "intrinsic value" method set forth in APB 25. Had
compensation costs for the Company's stock option plans been determined
consistent with SFAS 123, the Company's pro-forma net loss and loss per share
for 1998 and 1997 would have been as follows:

1998 1997

Reported net loss ($4,511,014) ($4,863,657)
============ ============
Reported Basic/Diluted
loss per share $ (.49) $ (.64)
============ ============

Pro-forma net loss ($4,693,373) ($4,961,077)
============ ============
Pro-forma Basic/Diluted
loss per share $ (.51) $ (.65)
============ ============

F-17

<PAGE>

Under SFAS 123, the fair value of each stock option grant is estimated on the
date of grant using the Black-Scholes option pricing model with the following
weighted average assumptions in 1998 and 1997, respectively:

1998 1997
--------- --------

Risk free interest rate 5.54% 6.5%
Expected life 5 years 5 years
Expected volatility 50% 50%
Weighted average fair value
of options granted during
the year
$3.00 $1.40

13. MAJOR CUSTOMERS
Revenue from a Research Support Grant to the Company by a not for profit
charitable foundation accounted for approximately 9% of total sales for the year
ended December 31, 1997. No customer accounted for in excess of 10% of total
sales during the years ended December 31, 1998 and1997.

14. INDUSTRY SEGMENT AND GEOGRAPHIC INFORMATION
The Company operates in a single industry segment, designing, manufacturing and
marketing medical devices. Its sales, operating profits and assets for the past
two years have been attributable to this single industry segment.

The Company began operations outside the United States by establishing a US
subsidiary, EP MedSystems UK with a United Kingdom branch office, in January
1997. Of the $601,000 of identifiable assets in Europe at December 31, 1997,
$408,000 was accounts receivable. European accounts receivable are derived
principally from sales in the United Kingdom.

The following table sets forth product sales by geographic segment as of
December 31,:

1998 1997
---------- ----------
United States $5,112,000 $2,356,000
Europe/Middle East 1,010,000 1,077,000
Asia and Pacific Rim 1,196,000 212,000
Other 142,000 4,000
---------- ----------
$7,460,000 $3,649,000
========== ==========

15. EMPLOYEE BENEFIT PLAN
During 1997, the Company established an employee 401(k)-salary deferral plan
that allows contributions by all eligible full time employees. Eligible
employees may contribute up to 15% of their respective compensation, subject to
statutory limitations, and the Company may match a percentage of employee
contributions at the discretion of the Board of Directors. During the year ended
December 31, 1998, no matching contributions were made to the plan. The Company
made matching contributions to eligible employees in the plan of approximately
$47,366 for the year ended December 31, 1997.

F-18
<PAGE>

16. INCOME TAXES
As a result of losses incurred during the years, there is no provision for
income taxes in the accompanying financial statements. The Company has
established a full valuation allowance against its net deferred tax assets as
realizability of such assets is predicated upon the Company achieving
profitability. The tax effects of temporary differences and carryforwards that
give rise to significant portions of deferred tax assets consist of the
following:
1998 1997
------------ -------------
Allowance for doubtful accounts $ 39,000 $ 30,000
Inventory reserves 59,000 59,000
Intangible asset amortization 3,000 3,000
Depreciation 41,000 36,000
Accrued liabilities 181,000 239,000
Net operating loss carryforwards 4,433,000 3,150,000
Research and development credit -- 72,000
Write-down of EchoCath investment 560,000 --
------------ -------------
5,316,000 3,589,000
Less: Valuation allowance (5,316,000) (3,589,000)
------------ -------------
$ -- $ --
------------ -------------

On December 31, 1998 and 1997, the Company had approximately $11,082,000 and
$7,850,000, respectively, of net operating loss carryforwards available to
offset future income. These carry forwards expire between 2008 and 2013. Due to
ownership changes that occurred during 1995 and 1996, as defined by Section 382
of the Internal Revenue Code, the Company is limited to the use of net operating
losses generated prior to the changes in ownership in each year following the
changes in ownership.

A reconciliation of the Company's effective tax rate is as follows:

YEAR ENDED DECEMBER 31,
1998 1997

Federal tax (benefit) (34.0%) (34.0%)
State tax benefit, net of
Federal tax effect (6.0) (6.0)

Valuation allowance 40.0 40.0
-------- -------
-- --
======== =======

F-19

<PAGE>

17. SUBSEQUENT EVENT
During March 1999, the Company entered into two debt agreements with a bank: a
$2,000,000 revolving note agreement ("revolver") and a $500,000 term note.

The proceeds of the revolver are intended to fund working capital purposes.
Borrowings bear interest at either the bank's Prime Rate plus 1/2 % or LIBOR
plus 3%. A facility fee is payable quarterly on the average unused commitment at
a rate of 3/4 %.

The purpose of the term note is to fund the purchase of 7,500 square feet of
manufacturing and warehouse space at ProCath and building improvements. Interest
is payable monthly in arrears at either Prime plus 3/4 % or LIBOR plus 3 1/4 %.
Principle is payable commencing January 2000 in 48 equal monthly installments
under a 15 year amortization schedule with a balloon payment due in December
2004.

The Company is required to maintain certain financial ratios, and meet certain
net worth and indebtedness tests. The debt is collateralized by a first priority
lien on all corporate assets. The agreement also prohibits the Company from
incurring certain additional indebtedness, limits investments, advances or loans
and restricts substantial asset sales, capital expenditures and cash dividends.

F-20

<PAGE>

SIGNATURES

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

EP MEDSYSTEMS, INC.
/s/ DAVID A. JENKINS MARCH 31, 1999
David A. Jenkins, Chairman, President and
Chief Executive Officer

IN ACCORDANCE WITH THE SECURITIES EXCHANGE ACT, THIS REPORT HAS BEEN SIGNED
BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT AND IN THE CAPACITIES
AND ON THE DATES INDICATED:

SIGNATURE DATE

/s/ DAVID A. JENKINS MARCH 31, 1999
David A. Jenkins, Chairman, President and
Chief Executive Officer
(Principal Executive Officer)

/s/ JOSEPH M. TURNER MARCH 31, 1999
Joseph M. Turner, Chief Financial Officer
and Secretary (Principal Accounting
Officer)

----------------------------------------- ----------------
David W. Mortara, Ph.D.
Director

/s/ ANTHONY J. VARRICHIO MARCH 31, 1999
Anthony J. Varrichio
Director

/s/ JOHN E. UNDERWOOD MARCH 31, 1999
John E. Underwood
Director

<PAGE>
EXHIBIT INDEX

Exhibit
NUMBER DESCRIPTION

3.1 Amended and Restated Certificate Incorporation (1)

3.2 Bylaws, as amended (1)

4.1 Common Stock Purchase Agreement, dated April 9, 1998,
between the Company and each of the Selling Security
Holders (4)

4.2 Registration Rights Agreement, dated April 9, 1998, between
the Company and each of the Selling Security Holders (4).

10.6* Employment Agreement dated as of
March 1, 1993 between EP Medical, Inc. and David A.
Jenkins, as amended (1)

10.7* Employment Agreement dated as of November 6, 1993 between
EP Acquisition Corp. and Joseph C. Griffin, III (1)

10.8* 1995 Director Option Plan (1)

10.10 License Agreement dated as of November 1, 1995 between EP
Medical, Inc. and Dr. Eckhard Alt, as amended (1)

10.11 Consulting Agreement dated as of February 1, 1996 between
EP Medical, Inc. and Raman Mitra (1)

10.12 License Agreement dated as of November 1, 1995 between
EP Medical, Inc. and Sanjeev Saksena (1)

10.14* Investment Agreement dated April 22, 1994 among EP Medical,
Inc., David Jenkins, Anthony Varrichio, William Winstrom
and American Medical Electronics, Inc. (1)

10.15 Letter Agreement dated December 15, 1995 between EP
Medical, Inc. and Rudiger Dahle (1)

10.16 Investment Agreement dated January 16, 1996 among EP
Medical, Inc., Rudiger Dahle, Anthony Varrichio and
William Winstrom (1)

10.22 Master Manufacturing Agreement dated April 16, 1996 between
EP MedSystems and Hi-Tronics Designs, Inc. (1)

10.25 Exclusive Rights Agreement dated May 26, 1996 between EP
MedSystems and Spire Corporation (1)

10.26 Letter Agreement dated April 12,
1996 between EP MedSystems, Inc. and Hi-Tronics
Designs, Inc. relating to the TeleTrace IV Receiver (1)

10.27 Consulting Agreement dated as of May 24, 1996 between EP
MedSystems, Inc. and Elliott Young and Associates Inc.,
as amended and restated.(1)

10.28 Stock Option Agreement dated August 31, 1995 between EP
MedSystems, Inc. and Tracey E. Young, as amended (1)

10.29 Registration Rights Agreement dated as of May 24, 1996
between EP MedSystems, Inc. and Tracey E. Young (1)

10.30 Exclusive License Agreement dated February 27, 1997
between EP MedSystems, Inc. and EchoCath, Inc. (2)

10.31 Subscription Agreement dated February 27, 1997 between
EchoCath, Inc. and EP MedSystems, Inc. (2)

10.32* Amended 1995 Long Term Incentive Plan (3)

10.33 Agreement of Lease dated August 25, 1997 between EP
MedSystems, Inc. and Provident Mutual Life Insurance
Company, as landlord (5)

16 Letter of Changes in Registrant's
Certifying Accountants (6)

21 List of Subsidiaries

27 Financial Data Schedule (7)

* Denotes management contract or compensatory plan or arrangement

(1) Incorporated by reference to the exhibit of the same number
previously filed with the Commission in connection with the
Company's Registration Statement on Form SB-2 and
Pre-Effective Amendments No.1 and 2 thereto.

(2) Incorporated by reference to the exhibit of the same number
previously filed with the Commission on Form 10-KSB for the
year ended December 31, 1996.

(3) Incorporation by reference to exhibit A previously filed
with the Commission in the Company's Proxy Statement for the
year ended December 31, 1996.

(4) Incorporated by reference to the exhibit of the same number
previously filed with the Commission in connection with the
Company's Current Report on Form 8-K dated April 14, 1998.

(5) Incorporated by reference to the exhibit of the same number
previously filed with the Commission in connection with the
Company's Form 10-KSB for the year ended December 31, 1997.

(6) Incorporated by reference to the exhibit of the same number
previously filed with the Commission in connection with the
Company's Current Report on Form 8-K dated August 25, 1998.

(7) EDGAR Filing Only.

<PAGE>

EP MEDSYSTEMS, INC. AND SUBSIDIARIES
EXHIBIT 21

SUBSIDIARIES OF EP MEDSYSTEMS, INC.

PROCATH CORPORATION
Cooper Run Executive Park
334 D6 Cooper Road
Berlin, NJ 08009
State of Incorporation: New Jersey
Business Name: ProCath Corporation

EP MEDSYSTEMS UK LTD.
100 Stierli Court, Suite 107
Mount Arlington, NJ 07856
State of Incorporation: New Jersey
Business Name: EP MedSystems, Europe Ltd.

<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED STATEMENT OF EARNINGS AND CONSOLIDATED BALANCE SHEET FOR THE
PERIOD ENDED DECEMBER 31, 1998 FILED WITH THE SECURITIES AND EXCHANGE
COMMISSION ON FORM 10-KSB AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS. IN ACCORDANCE WITH STATEMENT OF FINANCIAL
ACCOUNTING STANDARDS NO. 128, "EARNINGS PER SHARE," BASIC EARNINGS PER
SHARE AND DILUTED EARNINGS PER SHARE HAVE BEEN INCLUDED IN THE FINANCIAL
DATA SCHEDULE PRESENTED BELOW IN PLACE OF PRIMARY EARNINGS PER SHARE AND
FULLY DILUTED EARNINGS PER SHARE.
</LEGEND>
<MULTIPLIER> 1000

<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998

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<SECURITIES> 729
<RECEIVABLES> 2,405
<ALLOWANCES> (99)
<INVENTORY> 1,801
<CURRENT-ASSETS> 7,320
<PP&E> 1,387
<DEPRECIATION> (573)
<TOTAL-ASSETS> 8,696
<CURRENT-LIABILITIES> 1,689
<BONDS> 0
0
0
<COMMON> 10
<OTHER-SE> 21,432
<TOTAL-LIABILITY-AND-EQUITY> 8,696
<SALES> 7,460
<TOTAL-REVENUES> 7,460
<CGS> 3,721
<TOTAL-COSTS> 8,461
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3
<INCOME-PRETAX> (4,511)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,511)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,511)
<EPS-PRIMARY> (.49)
<EPS-DILUTED> (.49)

</TABLE>