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                      SECURITIES AND EXCHANGE COMMISSION

                            Washington, D.C. 20549

                                 FORM 10-KSB A
                         ----------------------------

               ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
                    THE SECURITIES AND EXCHANGE ACT OF 1934

    FOR THE FISCAL YEAR ENDED MARCH 31, 1998 COMMISSION FILE NUMBER 0-14653

                         CARDIAC CONTROL SYSTEMS, INC.
            (Exact Name of Registrant as specified in its charter)
                         -----------------------------

           DELAWARE                                   74-2119162
(State or other jurisdiction of         (I.R.S. Employer Identification Number)
Incorporation or Organization)    

3 COMMERCE BOULEVARD, PALM COAST, FLORIDA       32164          (904) 445-5450
 (Address of Principal Executive Offices)    (Zip Code)      (Telephone Number)

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

          SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

                                     None

          SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:

                         Common Stock, $.10 par value

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

     Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [ X ]

     The issuer's revenues for its fiscal year ended March 31, 1998 were
$5,886,309.

      The aggregate market value of voting stock of the Registrant held by
non-affiliates of the Registrant on May 29, 1998 was $405,233 (based on the
average of the closing bid and ask prices of the Registrant's common stock on
May 29, 1998 of $0.38 and $0.43 respectively).

      As of May 29, 1998, 2,648,739 shares of the Registrant's common stock were
issued and outstanding.

      Transmittal Small Disclosure format.      YES ___  NO  X
                                                            ---
                      DOCUMENTS INCORPORATED BY REFERENCE
                                     None
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<PAGE>
 
                                    PART I

ITEM 1.   BUSINESS

     GENERAL. Cardiac Control Systems, Inc. (the "Company") was incorporated as
Supramedics, Inc. on June 20, 1980 under the laws of the State of Delaware and
on August 28, 1980 changed its name to Cardiac Control Systems, Inc. to more
accurately reflect the business of the Company. The Company is engaged in the
design, development, manufacture, marketing, and sale of implantable cardiac
pacing systems. These systems consist of single-chamber, dual-chamber and
single-lead, atrial-controlled ventricular cardiac pacemakers together with
connecting electrode leads and equipment for the external programming and
monitoring of the pacemakers. The Company has received clearance from the Food
and Drug Administration of the United States Department of Health and Human
Service ("FDA") to distribute commercially a line of single-chamber and
dual-chamber pacemaker systems and a single-lead atrial-controlled ventricular
cardiac pacing system. The equipment used for the external programming and
monitoring of the Company's pacemaker products is usually loaned without charge
to physicians and other purchasers of the Company's products. The Company's
products are "medical devices" as defined by the FDA and thus are subject to
Federal regulations enforced by the FDA, including restrictions on the
commercial introduction of products and clinical testing requirements.

     The Company's Common Stock, $.10 par value per share ("Company Common
Stock"), which historically was listed on the National Association of Securities
Dealers Automation Quotation Systems ("Nasdaq") SmallCap Market(SM), was
delisted effective August 30, 1991 as a result of non-compliance with the Nasdaq
SmallCap Market's capital and surplus requirement then in effect of $375,000.
However, shares of the Company's Common Stock are currently traded
over-the-counter under the symbol "CDCS" and are quoted on the OTC Bulletin
Board(TM) . This service allows market makers to enter quotes and trade
securities that do not need the Nasdaq SmallCap Market qualification
requirements.

     The Company has had a prior history of net losses and had experienced cash
flow deficiencies and had been unable to pay many of its obligations as they
became due. The Company is continuing its efforts to increase its sales volume
and attain a profitable level of operations. However, there is no assurance that
the Company's efforts will be successful. There are many events and factors in
connection with the development, manufacture and sale of the Company's products
over which the Company has little or no control, including, without limitation,
production delays, marketing difficulties, lack of market acceptance, and
superior competitive products based on future technological innovation. There
can be no assurance that future operations will be profitable or will satisfy
future cash-flow requirements. See "Item 6. Management's Discussion and Analysis
of Financial Position and Result of Operations."

     PRODUCTS. The Company currently manufactures and commercially distributes a
line of single- and dual-chamber implantable pacemakers and a single-lead,
dual-chamber atrial-controlled ventricular ("VDD") pacing system, as well as
electrode leads and programming equipment developed by the Company. Pacemaker
systems are prescribed by physicians for patients who suffer arrhythmias or
impairments of the natural electrical conduction system of the heart that render
the heart incapable of pumping blood throughout the body at a rate and rhythm
suitable for the body's needs. The pacemaker system treats the condition by
electrically stimulating the heart to restore proper rhythmic contractions of
the heart muscle.

     The Company's pacemakers and electrode leads encompass 8 pacemaker models
(under the trade names MAESTRO(R) II or MAESTRO(R) II SAVVI) and 7 electrode
lead models (under the trade names PolySafe, Unipass(R) or A-Track). The
Company's first single- and dual-chamber pacemaker products were sold under the
MAESTRO trade name. This generation of products, however, is no longer
manufactured and marketed by the Company. Instead, a second generation of more
streamlined single- and dual-chamber models are being sold under the MAESTRO(R)
II trade name. The Company received FDA market clearance to market its most
recent dual-chamber pacemaker, the MAESTRO(R) Series 500 Model 534 dual-chamber,
bipolar DDD pacing system in October 1997. The Company received FDA market
clearance for a new design of a temporary cardiac pacing lead, the INTERIM AV,
in December 1997. The INTERIM AV is designed to allow atrial sensing and
ventricular pacing through the same lead.

                                       2
<PAGE>
 
     The Company further developed its VDD pacing system and received FDA
clearance in 1993 for two new VDD models which the Company sells under the trade
name MAESTRO(R) II SAVVI. These pacing systems were unique in the industry until
Sulzer Intermedics, Inc. ("Intermedics"), a competitor of the Company at that
time, received FDA approval of its single-pass, atrial-controlled ventricular
pacing system. Intermedics commenced marketing its new product in March 1995.
One additional competitor (Medtronic, Inc.) has also recently entered the United
States market with a competitive single-lead product.

     In addition, the Company markets certain electrode leads and pacing
accessories manufactured by other medical companies. Further, a significant
portion of the Company's business is the sale of implantable leads for
implantable pacemakers and defibrillators on an original equipment manufacturing
("OEM") basis to implantable cardiac device manufacturers and hybrid circuit
components to an Italian manufacturer and to an Indian manufacturer. See "Sales,
Marketing and Distribution Methods."

     The Company's products are classified as "medical devices" within the
meaning of the Federal Food, Drug and Cosmetics Act, as amended (the "FDA Act")
and, as such, are subject to extensive domestic regulation by the FDA and
European regulation by the International Organization for Standardization
("ISO"). All of the pacemaker systems marketed in the United States by the
Company (including related electrode leads) are in commercial distribution under
the FDA's 510(k) Premarket Notification regulations or Premarket Approval
("PMA") regulations. European regulations now include the ISO 9000 series of
standards developed by the ISO as adopted by the member nations of the European
Economic Community ("EEC"). The Company is certified to ISO 9002 by the Notified
Body, TUV Product Services, of Munich, Germany and is developing design control
processes in preparation for a compliance audit to ISO 9001. See "- Government
Regulation."

     The Company's MAESTRO(R) II anti-bradycardia cardiac pacemakers are
electronically based with an integrated circuit design, and include
multi-programmable single-chamber, dual-chamber and atrial-controlled
ventricular pacemakers. They are non-invasively programmable to multiple
operating modes and functions for prescriptive flexibility, provide a wide range
of sensitivity values and incorporate programmable high- and low-frequency
bandpass filters. This extensive programmability permits the physician the
flexibility required to provide truly prescriptive, individualized pacing
therapy for a wide range of patients.

     The Company's pacemakers are generally sold together with electrode leads,
most of which are manufactured by the Company. The Company's PolySafe electrode
leads include various models of its specialized single-pass A-Track leads. The
A-Track leads, developed and patented by the Company, are triaxial pacing leads
in which the inner coil connects to a ventricular tip electrode for pacing and
sensing in the ventricle, and the two other coils connect to two diagonal atrial
bipolar ("DAB") electrodes positioned so as to provide sensing data from the
atrium. The DAB electrodes transmit sensed atrial signals to the pacemaker,
which then stimulates the ventricle at an appropriate rate, providing
atrial-synchronous ventricular pacing, mimicking the normal action of the heart.
The MAESTRO(R) II SAVVI system incorporating the A-Track lead represents an
important advance in technology, combining atrial-controlled ventricular pacing
with the convenience and reliability of a single-lead implant procedure. This
system is appropriate for the many patients with conduction disorders and a
physiologically responsive sino-atrial node.

     The Company's electrode leads are insulated with Surethane, the Company's
proprietary urethane compound, and are manufactured using a patented coating
process, rights to which are held exclusively by the Company (see "Certain
Patents, Trademarks and Licenses"). The Surethane is applied in solution to the
pacing coil using a non-thermosetting coating process that results in
non-stratified bonding of each layer of the Surethane upon curing and a
"unitized" construction of coil and insulation. This process results in
extremely slender and durable leads. There has been some industry bias towards
using urethane, primarily for bipolar leads because of problems with insulation.
However, the Company has not manufactured bipolar leads of urethane material.
The Company only manufactures unipolar urethane leads. Its bipolar leads are
manufactured with silicone material. The Company is not aware of any historical
problems with its leads manufactured of urethane.

     Both of the Company's portable programmer models enable bi-directional
communication between the clinician and the implanted pacemaker. Programming and
telemetry messages are transmitted to the pacemaker via a lightweight wand.
Prior to transmitting a new program to the pacemaker, the programmer
automatically provides 

                                       3
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validation of the selected mode/parameter value combination as a safety step.
One model incorporates an integral printer, and the other provides for
connection of a printer, for generating hard copy records. Both provide for
connection of a strip chart recorder, for generating hard copy records of
pacemaker performance. A programmer carrying the CE Mark label, as required in
Europe, has been developed and commercialized. In addition, the Company is
nearing completion on a new computer-based programming system.

     SALES, MARKETING AND DISTRIBUTION METHODS. The primary markets for the
Company's products are hospitals, other medical institutions, and physicians
both in the United States and abroad. The Company currently markets its products
primarily through independent sales representatives in the United States and
independent distributors in the international markets. Also, the Company sells
selected components and products on an OEM basis to various U.S. and non-U.S.
companies. Independent representatives are paid by commission; independent
distributors generally purchase the Company's products at discounted prices. The
Company advertises in scientific publications and also uses trade shows and
convention demonstrations, direct mail advertising, telephone solicitations and
direct sales to selected customers as part of its marketing efforts.

     Pricing of the Company's products is generally similar to that for
competing products. The Company focuses its marketing attention on the
technological advantages of its pacemakers rather than on price considerations.
The Company bases its appeal to physicians on the Company's belief in the
relative simplicity with which its reliable and therapeutically effective
pacemaker systems can be implanted, programmed and monitored. The Company
focuses its marketing attention on the issue of price sensitivity only when
necessary. For example, under Medicare legislation, the amount of reimbursement
that a hospital and a physician receive from Medicare for a pacemaker implant
does not vary with the cost of the implanted pacemaker, and the Company must
consider this in its pricing decisions. See "- Government Regulation."

     The Company maintains inventories of pacing systems at many hospitals to
facilitate the immediate availability of these products when required. In
addition, the Company's independent sales representatives hold a supply of
pacemaker systems on consignment. A portion of the Company's sales in the United
States are filled by withdrawing products from consigned inventories, whereupon
the hospital is billed for the product.

     Independent sales representatives, organizations and distributors selling
the Company's products are free to sell products not produced by the Company
that do not compete with the Company's products. As of March 31, 1998, 12
independent sales representatives (or organizations) are actively selling the
Company's products in the United States. The Company has executed long-term
contracts with most of its sales representatives in the United States.
Generally, the contractual agreements executed between the Company and its
independent sales representatives provide each representative the exclusive
right to sell the Company's products in a specified area of the United States
for a three- or five-year period, are renewable for a second three- or five-year
period, and provide the Company with certain termination rights.

     The Company's operations, sales and ability to attain a profitable level of
operations are dependent upon expansion of its OEM business and maintaining the
contractual relationships with its principal sales representatives and upon
on-going expansion of their business volume. Termination of any of these
contractual agreements between the Company and its key independent sales
representatives could have a material adverse effect on the Company's sales
volume and operations. Furthermore, the Company's ability to achieve a
profitable level of operations would be adversely affected if the Company's
sales representatives were unable to expand the volume of their business.

     On December 20, 1995, the Company signed a distribution agreement with
Grupo Taper, S.A. of Madrid, Spain under which, subject to certain pre-existing
distribution agreements, Grupo Taper became the sole agent for the purchase,
import and distribution and sales of the Company's product in Europe and certain
specified non-European countries. The agreement is for an initial period of ten
years and will automatically renew for a five-year period unless terminated by
either party upon six month's prior notice.

     In August 1996, the Company opened a Japanese sales office and received
Japanese approvals and a license to import and sell the Company's single-lead
VDD product. A major Japanese distributor, The Herz Co., has begun distributing
the product throughout Japan. The Company expects that these efforts will enable
the Company to 

                                       4
<PAGE>
 
expand sales in the Japanese market, where the average unit price is
significantly higher than in the rest of the world.

    During the year ended March 31, 1998, two of the Company's independent sales
representatives each accounted for in excess of 10% of the Company's sales,
accounting for $897,492 (23%) of the total. With the exception of Intermedics
and a manufacturer of implantable cardiac defibrillators, as disclosed below,
during the year ended March 31, 1998, no single domestic or international
customer accounted for in excess of 10% of the Company's sales. Accordingly, the
Company believes that the loss of any single customer in the United States,
excluding its OEM customers, would not have a material adverse effect on its
business. However, the Company's ability to maintain a profitable level of
operations is dependent upon its ability to increase its sales volume.
Therefore, the loss of any important customer in the United States could
unfavorably impact the Company's sales volume and its ability to achieve a
profitable level of operations.

    On August 1, 1990, the Company executed both a license agreement and a
supply agreement with Intermedics. Pursuant to the license agreement, the
Company received initial license fees aggregating $1.5 million. The license
agreement also provided for the payment of royalties to the Company based upon
net sales of Intermedics products incorporating the licensed (single-pass lead)
technology. On April 2, 1993, the Company amended and restated both its license
agreement and supply agreement with Intermedics. Pursuant to the amended and
restated license agreement, the Company received prepayment of royalties in the
amount of $850,000. The prepayment was applied against royalties at a rate of
2/1 per pacing system sold, reducing the potential aggregate royalties to be
received over the life of the agreement from $7,031,250 to $6,181,250. Further,
pursuant to a subsequent amendment, a $100,000 prepayment of future royalties
was received in February 1994, which was applied against the next 1,000 pacing
systems sold at a rate of $100 per unit. The entire prepaid royalties of
$950,000 were earned by the Company as of March 31, 1997. Intermedic's
obligation to pay royalties under this license agreement terminated on January
22, 1998, however, the license agreement, which grants Intermedics the right to
manufacture and sell the technology, does not terminate until the expiration of
the Company's patent in July 2009. The supply agreement, which was to expire on
July 31, 1993, was extended until August 1, 1998 and provides for the Company to
supply its specialized single-pass leads to Intermedics at specified prices.
Sales to Intermedics accounted for 29% of sales for the year ended March 31,
1998.

    On January 1, 1997, the Company executed a supply agreement and a joint
development agreement for defibrillation leads with a major implantable
defibrillator manufacturer. The supply agreement allows for the OEM sale of
defibrillation leads to this manufacturer, while the development agreement
contemplates the development and eventual supply of a second proprietary lead.
Sales and shipments of the first lead commenced in October 1997, and accounted
for 13% of the Company's sales for the year ended March 31, 1998. In addition, a
third lead is being developed for this manufacturer and a supply agreement for
this product was executed on December 23, 1997, with the first shipment of this
product expected to occur in the second quarter of fiscal 1999. The Company
expects total sales volume for this customer to grow in fiscal 1999. Pursuant to
the terms of the joint development agreement, during fiscal 1997, the Company
received $200,000 from the manufacturer, $60,000 of which was recorded as equity
financing for the purchase of 40,000 shares of the Company's Common Stock, and
$140,000 was recorded as other income for the purchase of the defibrillation
leads technology.

    Historically, the Company encountered many difficulties in connection with
its efforts to develop a distribution network of independent sales
representatives in the United States large enough to attain enough sales to
generate profitability. The Company believes that these difficulties are
attributable to the Company's lack of a complete product line as well as the
competitive environment, and the Company's financial position. With the proposed
merger with Electro-Catheter Corporation ("Electro") (see below) and the
combined product line, the new products being developed and released to the
market and the financing associated with the merger, the Company expects to
expand its distribution. Further, the Company estimates its market share of
pacing products to be about 0.25% of an estimated worldwide pacing systems
market of $2.0 billion. The Company considers the market large enough to
accommodate the Company's products.

    PRODUCT WARRANTIES. The Company's pacemakers and electrode leads are both
covered by a limited warranty. Specific terms and conditions of the warranties
vary according to the pacemaker model and electrode lead. Generally, however,
the warranty on a pacemaker extends from 5 to 6 years, and the warranty on an
electrode lead 

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continues for the patient's lifetime. All warranties provide for replacement
with a comparable Company product and for partial reimbursement of medical
expenses not covered by third parties.

    CERTAIN PATENTS, TRADEMARKS AND LICENSES. The Company's policy is to obtain
patents on its inventions whenever practical and to obtain licenses from others
with regard to technology that it deems necessary to its business. Technological
advance has been characteristically rapid in the industry in which the Company
competes, and the Company believes its business is not materially dependent upon
any individual patent or license. However, should certain of the Company's
licenses be terminated for any reason, the Company's operations and competitive
ability could be adversely affected.

    On June 12, 1984, Mr. Robert R. Brownlee, a former director and former
officer of the Company, assigned all rights, title and interest in United States
Patent No. 4,585,004, titled "Heart Pacing and Intracardiac Electrogram
Monitoring System and Associated Method," to the Company. The patent, issued on
April 29, 1986, applies to the specialized A-V Data ventricular leads developed
by the Company.

    On November 14, 1985, all rights, title and interest in United States Patent
No. 4,726,379, titled "Cardiac Pacer with Switching Circuit for Isolation," were
assigned to the Company by two of its employees. The patent, issued on February
23, 1988, applies to bipolar dual-chamber pacing methods.

    On June 28, 1988, Mr. Robert R. Brownlee, assigned all rights, title and
interest in United States Patent No. 4,962,767, titled "Pacemaker Catheter," to
the Company. The patent, issued on October 16, 1990, applies to the A-Track
electrode leads used with the Company's SAVVI VDD pacing system.

    On December 12, 1988, all rights, title and interest in United States Patent
No. 4,907,592, titled "Self-Sealing Connector for Electrical Leads for Use in
Wet Environments," were assigned to the Company by one of its employees. The
patent was issued on March 13, 1990.

    On August 15, 1990, Mr. Robert R. Brownlee, assigned all rights, title and
interest in United States Patent No. 5,127,403, titled "Pacemaker Catheter
Utilizing Bipolar Electrodes Spaced in Accordance to the Length of a Heart
Depolarization Signal," to the Company. The patent, issued on July 7, 1992,
applies to the A-Track electrode leads used with the Company's SAVVI VDD pacing
system.

    On July 11, 1995, Mr. Robert R. Brownlee assigned all rights, title and
interest in United States Patent No. 5,630,835, titled "Method and Apparatus for
the Suppression of Far Field Interference Signals for Implantable Device Data
Transmission Systems," to the Company. The patent, issued on May 20, 1997,
applies to the SAVVI VDD pacing system.

    The Company obtained from Howard C. Hughes and Roy D. Bertolet, the latter
an employee of the Company, an exclusive license to an extrusion technique for
coating pacemaker leads and other wires with polyurethane, for which a patent
was granted on February 5, 1985. The term of the license expires on February 17,
2002. The license provides for payment of royalties for each contract year based
on a percentage of net sales of products produced using the licensed technology.
On March 29, 1993 the licensor executed a sublicense agreement with the Company,
pursuant to which the Company granted a limited sublicense allowing Intermedics
to use the extrusion technique to manufacture leads pursuant to the terms of the
amended and restated license agreement between the Company and Intermedics.

    On March 5, 1997, an objection to the Company European Patent No. 0350282
relating to single-pass diagonal atrial bipolar pacemaker catheter technology
was heard in Munich, Germany. On March 24, 1997, the Company was advised that
the objection was rejected by the Patent Court. An appeal has been filed.

    The Company uses various trademarks in association with marketing and sale
of its product lines. The MAESTRO(R) trademark, used with the Company's
pacemakers and programmers, has been registered with the U.S. Patent and
Trademark Office. The Company's trademarks PolySafe, A-Track, A-V Data, TriFix,
Trabeculok, SAVVI, DAB, PacePro, INTERIM and Surethane are unregistered
trademarks of the Company.

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    RESEARCH AND DEVELOPMENT. The Company expended approximately $975,100 and
$1,087,000 on research and development activities during the fiscal years ended
March 31, 1998 and 1997, respectfully. Research and development activity
previously reported as culminating in FDA submission was rewarded with FDA
approval in October 1997 of the MAESTRO(R) Series 500 Model 534 dual-chamber,
bipolar DDD pacing system and in December 1997 of the INTERIM single-lead
temporary pacing system.

    Continued development of the Company's single-lead technology included the
development of a preshaped single-pass lead for VDD and DDD pacing. These leads
are believed to expand capability and use, as well as offer further enhancement
of performance relative to the Company's current single-lead products. The
Company is currently performing animal and human studies and plans to initiate
chronic human clinical studies in the second quarter of fiscal 1999. This lead
is believed to offer further enhancement of performance with completion of
limited acute and chronic animal studies. In November 1996, a development
relationship was formally established with a manufacturer of implantable
defibrillators for the application of the Company's unique lead technology to
the special challenges of implantable defibrillation leads.
See "- Sales, Marketing and Distribution Methods."

    The fiscal year ended March 31, 1998 included on-going activity in the area
of implementing design controls in compliance with Section 4.4, ISO 9001 Quality
Standard and similar requirements of current good manufacturing practices
("cGMP") regulations.

    RAW MATERIALS AND PRODUCTION. Although the Company endeavors to have
alternative supply sources for parts and materials used in manufacturing its
products, single sources are used for certain critical materials, including
medical adhesives, integrated circuits, hybrid microelectronic circuitry,
lithium batteries, various other components, and a material used to produce
Surethane. The loss of any one of these single sources or significant delivery
delays could cause a costly delay in production. Although the Company believes
that various design or material alternatives could be used, qualification of
these could prove time-consuming and could require notification to and clearance
by the FDA.

    Sources of Supply. Two of the Company's principal suppliers of materials
used primarily in electrode lead production, Dow Corning Enterprises, Inc.
("Dow") and E.I. DuPont de Nemours & Co. ("DuPont"), indicated that they will no
longer supply their materials to the medical device industry for use in
implantable devices. In July 1993, the FDA published in the Federal Register a
one-time-only requirement for medical device manufacturers to file a special
notification of material supplier changes resulting from the decision of Dow to
discontinue supplying its materials to medical device manufacturers. The Company
filed the "Special Silicone Notification" for its products effected by the Dow
decision in September 1993. In this notification, alternate suppliers and
materials were identified and supporting technical biological test data were
provided for the alternate materials. The FDA acknowledged receiving the
Company's notification and indicated that, unless otherwise notified by FDA, the
alternate materials identified in the notification may be used in the Company's
products in place of the comparable Dow materials. No further FDA approvals of
the alternate materials of such suppliers were required.

    With respect to other material changes resulting from decisions by material
suppliers to discontinue supplying the medical device industry, e.g. DuPont, the
FDA has indicated that such changes shall be handled on a case-by-case basis
through the established product approval processes within the FDA. The
availability of materials suitable for use in implantable medical devices is an
industry-wide problem and is not unique to the Company or to the cardiovascular
device segment of the industry. The Polymer Technology Group produces a product
that meets manufacturing requirements and has been identified as a tentative
replacement for the DuPont supplied material. Biocompatibility studies have been
completed. Since the candidate replacement material is comprised of the same
chemical composition as the DuPont material, it is expected that it will be
comparable with respect to the performance characteristics and biocompatibility
of the current material in use. Similarly, FDA approval of this replacement
material is anticipated to be forthcoming based upon a satisfactory outcome of
the testing performed on the product. The Company believes, however, that it has
a sufficient supply of the DuPont material to meet the Company's anticipated
demand for the next several years.

    Suppliers of custom Application Specific Integrated Circuits ("ASICs") have
advised the Company that the technology used to produce these ASICs will no
longer be supported. As such, the Company placed one last bulk order to ensure
the availability of sufficient ASICs to satisfy projected demands for current
products. The new 

                                       7
<PAGE>
 
pacing system under development will utilize appropriate new ASICs obviating the
need for perpetual supply of the currently used ASICs.

    INSURANCE. The Company maintains what it believes to be an adequate amount
of comprehensive general liability insurance in an amount of $2,000,000 and what
it believes to be a reasonable amount of products liability coverage in an
amount of $1,000,000. No assurance can be given that the products liability
coverage will be sufficient to protect the Company's assets against claims by
users of its products or that the Company will be able to maintain such coverage
(or obtain additional coverage) in the future at reasonable premium rates or at
all, in which case its assets will be at risk in the event of successful claims
by users of its products. Furthermore, the Company's liability coverage may not
cover costs incurred by the Company under its product warranties (see "Product
Warranties") or costs incurred by the Company in the event of a product recall.

    The Company has no pending, threatened or actual claims as of this date, nor
is the Company aware of any current circumstances that might give rise to such
claims. However, the Company could be exposed to possible claims for personal
injury or death resulting from the sale or subsequent malfunction of allegedly
defective products.

    EMPLOYEES. As of May 29, 1998, the Company employed 46 persons full-time and
5 persons part time. Of the total employees, 23 were engaged in manufacturing
and quality control, 13 in general administration and executive activities, 12
in engineering and research and development, and 3 in sales and marketing. The
Company is not a party to any collective bargaining agreement and considers its
relations with its employees to be good.

    GOVERNMENT REGULATION.

    Federal Regulations. In the United States, the FDA, among other government
    -------------------
agencies, is charged with regulating the introduction to the marketplace of new
medical devices, related manufacturing and laboratory practices, and labeling
and record keeping for such devices. The FDA has the authority to ban, detain or
seize "adulterated or misbranded" medical devices, and may also order repair,
replacement or refund and require notification of health professionals and
others with regard to medical devices that present unreasonable risks or
substantial harm to the public health. The FDA may also proceed through court
action to enjoin and restrain or initiate action for criminal prosecution of
certain violations of the FDA Act pertaining to medical devices.

    Most implantable cardiac pacemakers fall within a category for which the FDA
has stringent clinical investigation and premarket clearance requirements. Such
regulation tends to lengthen the time for introducing new products in the United
States, and to increase the expense of developing and marketing such products.
Moreover, the FDA administers certain controls over approvals for exporting such
devices from the United States.

    FDA regulations require a company to file a 510(k) Premarket Notification
for certain products demonstrating that the products are substantially
equivalent to products that were introduced into interstate commerce for
commercial distribution before May 28, 1976 (pre-enactment devices) or to
products which the FDA has already found to be substantially equivalent to
pre-enactment devices. The FDA has also issued regulations for the PMA of
medical devices that are not substantially equivalent to pre-enactment devices
(such as the Company's dual-chamber and single-lead atrial-controlled
ventricular devices). These must be cleared for commercial distribution through
a PMA submission or a PMA supplement. The regulations will eventually require a
PMA submission for all products (such as the Company's single-chamber devices)
previously cleared for commercial distribution through premarket notifications.
Prior to seeking PMA clearance for a medical device, a company is generally
required to complete a clinical evaluation in accordance with Investigational
Device Exemption ("IDE") regulations. The time and expense associated with the
clinical investigation and premarket clearance requirements of the FDA are
substantial.

    Many of the new products developed by the Company in the future most likely
will be subject to the IDE and/or PMA regulations of the FDA. Accordingly, the
Company will continue to devote significant time to the FDA regulatory process
leading to FDA market clearance of new products developed by the Company.

                                       8
<PAGE>
 
    FDA regulations require the Company to register its manufacturing
establishment with the FDA, list all medical devices that are manufactured and
distributed by the Company, observe certain production and labeling standards
and submit to unscheduled inspections by the FDA. Other FDA regulations relate
to repair and replacement of devices, refund of purchase price and notification
of risks, record keeping and reporting, and restrictions on the sale,
distribution or use of certain devices.

    In recent years the FDA has implemented product tracking and electrode lead
post-market surveillance regulations. These regulations require the Company to
track and maintain information regarding the location of product not in its
direct possession. The post-market surveillance regulations require the Company
to collect and analyze clinical data to complete product longevity analysis. The
expense to the Company to meet these regulations has been minimal to date. The
potential for a material expense due to these regulations remains a possibility.

    The average pacemaker recipient in the United States is of advanced age.
Most pacemaker recipients thus are eligible for Medicare. Therefore, in addition
to FDA and similar foreign regulations, the Company may also be affected by
changes in the laws and regulations relating to Medicare.

    The Company's products are manufactured by the Company under closely
controlled environmental conditions with processes developed by engineering
personnel and monitored by quality assurance personnel. These processes are
designed to be consistent with cGMP regulations audited by the FDA. FDA
conducted an audit of the Company operations in December 1996 citing only minor
deficiencies which have since been corrected.

    State Regulation. In addition to Federal law, the Company is subject to the
    ----------------
Florida Drug and Cosmetic Act. In particular, the Company is required to
maintain a permit to operate a medical device manufacturing facility and must
register its medical devices with the appropriate Florida authority. All such
required permits have been received, and registrations made, by the Company.

    European Regulation. The EEC nations have adopted universal standards as
    -------------------
developed by the ISO in order to provide simplified trade among the member
nations and to assure free access to trade while maintaining quality standards
for products sold. All companies doing business in these nations must be
certified to these standards set forth by the EEC which is evidenced by being
granted the CE Mark. See Item 6. "Management's Discussion and Analysis of
Financial Position and Results of Operations - Operating Trends and
Uncertainties."

    INVENTORY AND BACKLOG. There is a several-month lead time between the time
that the Company acquires parts until such time that a product is completed and
available for sale. The Company is required to carry significant amounts of
inventory in order to meet rapid delivery requirements of customers and assure
itself a continuous supply of key components and parts from its suppliers. In
addition, a portion of the Company's business is consignment in nature where the
Company provides customers with the right to return products that are not
implanted or sold. As a result of the nature in which the Company runs its
business, it does not carry a significant backlog, however inventory management
is an important business concern both with respect to the Company's liquidity
and due to the potential for rapidly changing business conditions and
technological advances within the industry.

    COMPETITION IN THE INDUSTRY. The Company competes with many other domestic
and foreign companies, many of which have significantly greater financial and
other resources than the Company. The industry is currently dominated by
Medtronic, Inc., Intermedics, Cardiac Pacemakers, Inc. (a division of Guidant
Corporation), and Pacesetter Systems, Inc. (a division of St. Jude Medical,
Inc.). Although many of the larger companies have a group of loyal physicians
who use their products exclusively, most physicians use more than one pacemaker
supplier.

    Technological innovation and sales ability are important with respect to
market entry and penetration. The Company believes that the primary competitive
factors determining the buying decision in the marketplace today include the
ability to reduce procedural cost, increase patient safety and improve product
effectiveness. Other factors include product reliability, product capability,
technical support provided by the manufacturer, price, and 

                                       9
<PAGE>
 
credibility of the manufacturer. Nevertheless, the Company's products are
subject to the risk of being rendered obsolete by the introduction of new
products or techniques by others.

    Some of the conditions and diseases that the Company's pacemakers are
designed to treat may, in certain cases, also be treated by drug therapy. The
Company does not deem itself to be in substantial direct competition with
pharmaceutical companies because, at present, drug therapy is only infrequently
a viable alternative to use of a pacemaker. However, new drugs and methods of
therapy that might compete with the Company's pacemaker products may be
developed by pharmaceutical or other health care companies. Many such companies
are larger than the Company and possess more substantial research facilities and
other resources.

    Companies that are already well established can be expected to protect their
existing market shares. This is coupled with increasing marketing costs under
heavier competition, and escalating regulatory burdens. In addition, there is an
overriding necessity to increase research and development expenditures in order
to remain competitive.

ITEM 2.   PROPERTY OF THE COMPANY

    The Company owns and occupies a 50,000 square foot building on 4.11 acres of
land in Palm Coast, Florida. The facility houses the Company's headquarters and
its research and development, manufacturing, administrative and marketing
divisions. The facility includes a 3,000 square-foot controlled environment area
for the manufacture of the Company's medical products, and 18,000 square feet of
unimproved space that is not in use. The production capacity of the Company's
existing facility is greater than current production levels and should be
sufficient to meet the Company's needs for at least the next several years. In
the opinion of management, the property is adequately covered by insurance.

    Sirrom Capital Corporation ("Sirrom") holds a first mortgage and assignment
of rents and leases on the property as security for a $1.5 million promissory
note. However, Sirrom's mortgage is subject to subordination up to a maximum of
$500,000 under an Intercreditor and Subordination Agreement entered into with
Coast Business Credit, a division of Southern Pacific Thrift and Loan
Association ("Coast"). The Sirrom note bears interest at a rate of 13.5%
annually, matures on March 31, 2000 and is payable monthly, interest only, with
a balloon payment of principal and accrued and unpaid interest due on the
maturity date.

    Coast also holds a mortgage on the Property as part of its security for a
$3.5 million credit facility (the "Coast Loan"). Coast's security interest in
the Property consists of a first priority lien up to $500,000 (plus Coast's
costs and expenses of collection and enforcement of such mortgage on the
Property) and a second priority lien on the remainder of the Company's
indebtedness to it. The Coast Loan is subject to a minimum interest rate of 9%
per annum and a maximum interest rate of prime rate plus 2.25%. The maturity
date for payment of any outstanding principal balance is June 30, 2000, subject
to automatic renewal for successive one-year terms, continuing until one party
gives advance written notice to the other that such party wishes to terminate
the Coast Loan. The Coast Loan is subject to an early termination fee of $70,000
if terminated from June 14, 1998 to June 12, 1999, and $35,000 if terminated on
or after June 14, 1999.

ITEM 3.   LEGAL PROCEEDINGS

    On January 4, 1994, Strategica Group, Inc., a Miami-based financial
brokering firm ("SGI"), filed suit against the Company in the Circuit Court of
the 11th Judicial Circuit in and for Dade County, Florida (the "Court"),
alleging that the Company had breached certain contractual duties and
obligations arising under an agreement (the "Agreement"), dated October 16,
1992. The suit seeks a judgment requiring the Company to deliver warrants to
purchase shares of the Company's Common Stock representing 15% of the total
outstanding shares of the Company, and damages in excess of $15,000. The Company
has denied liability and filed a counterclaim alleging that SGI fraudulently
induced the Company into the Agreement then breached the Agreement and certain
fiduciary duties. Management has vigorously defended the lawsuit and filed
counterclaims, and believes the ultimate outcome would not be expected to
materially affect the Company's financial position. Management has had
settlement discussions with SGI and in April 1998 reached an
agreement-in-principle regarding settlement with SGI. The final terms have not
yet been reduced to writing. The settlement, as proposed, contemplates the

                                       10
<PAGE>
 
reciprocal dismissal of all claims asserted by each party and the grants by the
Company to SGI of a warrant exercisable within five (5) years for 125,000 shares
at an exercise price of $.20 per share.

    In December, 1997, Japan Crescent, Inc. and Shinji Hara filed a civil action
against the Company in the Circuit Court of the 9th Judicial Circuit in and for
Orange County, Florida. The suit alleges that the Company is indebted to the
plaintiffs for approximately $200,000 for services rendered in connection with
the acquisition of import approvals for certain of the Company's products. The
Company believes the matter can ultimately be resolved short of trial. The
Company further believes the outcome of the litigation is not expected to
materially affect its financial position.


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

    None

                                       11
<PAGE>
 
                                    PART II


ITEM 5.   MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

  MARKET INFORMATION. The Company's Common Stock, which historically was listed
on the Nasdaq SmallCap Market, was delisted effective August 30, 1991 as a
result of non-compliance with the Nasdaq SmallCap Market's capital and surplus
requirement then in effect of $375,000.  However, shares of the Company's Common
Stock are currently traded over-the-counter under the symbol "CDCS" and are
quoted on the OTC Bulletin Board.  This service allows market makers to enter
quotes and trade securities that do not meet Nasdaq SmallCap Market
qualification requirements.

  The high and low closing bid prices for the Company's Common Stock for each of
the quarters during the years ended March 31, 1998 and 1997 as reported in the
OTC Bulletin Board:

<TABLE>
<CAPTION>
          -------------------------------------------------------------------
                                                    High              Low
          -------------------------------------------------------------------
           YEAR ENDED MARCH 31, 1998         
           <S>                                      <C>                <C> 
            Fourth Quarter................                                      
                                                     9/16              13/32
            Third Quarter.................                                 
                                                    1 1/8               9/16
            Second Quarter................                                  
                                                    15/16              15/32
            First Quarter.................                                  
                                                    1 7/32               3/4
                                                                            
           YEAR ENDED MARCH 31, 1997                                        
                                                                            
            Fourth Quarter................                                  
                                                    1 7/16             1 3/16
            Third Quarter.................                                  
                                                    1 3/4              1 3/8
            Second Quarter................                                  
                                                    2 3/4              1 1/2
            First Quarter.................                                  
</TABLE>                                            3 1/4              2

  These quotations represent prices between dealers in securities; they do not
include retail mark-up, mark-down or commission, and may not represent actual
transactions.

  HOLDERS. As of May 29, 1998, there were approximately 586 holders of record of
the Company's Common Stock.

  DIVIDENDS.  The Company has not declared or paid any cash dividends on its
common stock and has no present plans to pay cash dividends in the foreseeable
future and intends to retain earnings for the future operation and expansion of
the business.  Any determination to declare or pay dividends in the future will
be at the discretion of the Company's Board of Directors and will depend upon
the Company's results of operations, financial condition, any contractual
restrictions, considerations imposed by applicable law and other factors deemed
relevant by the Board of Directors.  Currently there are no contractual
restrictions on the Company's ability to pay or declare dividends; however, the
Company must give advance notice of such event to Sirrom under the terms of
Sirrom's warrant. (See Note 6 - "Notes and Debt Obligations" of the Notes to
Financial Statements.)

                                       12
<PAGE>
 
ITEM 6.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL POSITION AND RESULTS
OF OPERATIONS

LIQUIDITY AND CAPITAL RESOURCES

  The Company's liquidity benefited from the Coast Loan whereby Coast agreed to
lend the Company an amount not to exceed $3,500,000, subject to limitations
relating to the value of receivables and inventories and including a capital
expenditure sub-line up to $500,000 and a term loan in the sum of $300,000, of
which the latter two are repayable over a forty-eight month period.  On June 6,
1997, as consideration for Sirrom subordinating its interests to Coast, the
Company issued to Sirrom a warrant to purchase 50,000 shares of the Company's
Common Stock exercisable commencing immediately and expiring June 6, 2002 at an
exercise price of $5.00 per share.  In connection with the Coast Loan, on June
13, 1997 the Company issued to Coast a warrant to purchase 37,500 shares of the
Company's Common Stock exercisable commencing immediately and expiring June 30,
2002 at an exercise price of $4.00 per share.  As of March 31, 1998, the Company
had outstanding indebtedness of approximately $1,013,298 under the loan.

  As of March 31, 1998, the Company had no commitments for the acquisition of
capital assets.  As of that date, it did have material commitments pursuant to
certain inventory procurement contracts of approximately $864,000 of which
$165,000 had been prepaid by the Company.  The Company does not anticipate any
significant capital expenditures during the next twelve months.

  Cash used by operations during fiscal year 1998 approximated $49,000.  Capital
expenditures and repayment of long-term debt additionally utilized approximately
$472,000 and $330,000, respectively.  Proceeds under the line of credit and
long-term borrowings approximated $1,239,000.  Deferred financing and Merger
costs absorbed approximately $575,000.  Overall, negative cash flow for fiscal
year 1998 was approximately $164,000.

  Cash generated by operations during fiscal year 1997 approximated $57,000.
Capital expenditures and repayment of debt obligations during fiscal year 1997
approximated $545,000 and $875,000 respectively.  Net proceeds from the issue of
common stock and stock warrants during fiscal year 1997 approximated $301,000.
Proceeds from notes and debt obligations approximated $163,000.  Overall,
negative cash flow for fiscal year 1997 approximated $982,000.

  As indicated by the independent public accountants in their report and as
shown in the financial statements, the Company has experienced significant
operating losses which have resulted in an accumulated deficit of $21,901,927 as
of March 31, 1998.  In addition, as discussed below, royalty payments from
Intermedics ceased in January 1998.  These conditions raise substantial doubt
about the Company's ability to continue as a going concern.

  Intermedics obligation to pay royalties under its license agreement with the
Company terminated on January 22, 1998, however, the license agreement which
grants Intermedics the right to manufacture and sell the technology does not
terminate until the expiration of the Company's patent in July 2009.  During the
fiscal year ended March 31, 1998, the Company recorded $2,063,250 in royalty
income from Intermedics.  The termination of those royalty obligations will have
a material affect on the Company's working capital.

  The financing proposed to satisfy the condition to consummation of the Merger
is intended to enable the combined companies to meet their obligations for at
least the first 24 months post closing of the Merger (see "Probable Merger").
The business plan anticipates that the combined companies will, within 12 to 18
months after completion of the Merger, be able to achieve a positive operational
cash flow at least sufficient to support normal operation and research and
development activity.

  Relative to its current operations and the loss of royalty income from
Intermedics, the Company has taken the following actions to increase cash
availability:

  a. The Company reduced its staff and operating expenses; and

                                       13
<PAGE>
 
  b.  The Company expanded its revenue base by adding additional OEM customers,
      providing leads to a new implantable defibrillator customer and to a new
      manufacturer of otologic implants; and obtained $300,000 in additional
      cash through the issuance of 8% convertible debentures, and is attempting
      to issue more 8% convertible debentures for an additional $250,000.

  These steps should be adequate to address liquidity needs until closing of the
Merger.  If, however, the Merger is not consummated, then additional cash will
have to be raised and significant additional staff and operating expense cuts
will have to be made to conserve cash.  The Company would attempt to acquire
another entity or to be acquired itself by another entity.  If another merger
did not occur, then without an additional infusion of cash, a significant
increase in revenue and a substantial reduction in operating expenses, the
Company could not survive.

EVENT SUBSEQUENT TO MARCH 31, 1998

  In addition, from April 22 through May 4, 1998, the Company obtained $300,000
in interim financing from selected current investors through issuance of an 8%
convertible debenture, convertible at current market price of $0.40 per share.
The Company is also attempting to obtain an additional $250,000 on similar
terms.  Management believes that this additional resource will assist the
Company in the achievement of its planned product and market development
programs through the fiscal year 1999.

  On June 11, 1998, the Company and Coast amended the Coast Loan to provide for
a term loan in the amount of $250,000 (the "Bridge Loan").  In connection with
the Bridge Loan, the Company issued to Coast a warrant to purchase 25,000 shares
of Company Common Stock exercisable commencing immediately and expiring June 30,
2002 at an exercise price of $.40 per share and the exercise price per share of
the warrant issued to Coast in connection with the Coast Loan was reduced from
$4.00 per share to $.40 per share.

RESULTS OF OPERATIONS

Fiscal Year ended March 31, 1998 compared to Fiscal year ended March 31, 1997.

  OVERVIEW.  The Company's total revenues for fiscal year 1998 decreased 11% to
approximately $5.9 million from approximately $6.6 million for fiscal year 1997.
Sales decreased from approximately $4.2 million to approximately $3.8 million
and royalties decreased from approximately $2.4 million to approximately $2.1
million.  Royalty income represented royalties from Intermedics pursuant to a
license agreement between the Company and Intermedics; royalty income under this
agreement ceased on January 22, 1998.  Operating costs for fiscal year 1998
decreased 8% to approximately $6.6 million from approximately $7.2 million in
fiscal year 1997, which, with the decrease in total revenues, resulted in an
Operating Loss of $726,399 in fiscal year 1998 as compared to an Operating Loss
of $575,464 in fiscal year 1997.  Interest expense in fiscal year 1998 increased
to $523,949 from $490,508 in fiscal year 1997 due to an increase in the amount
borrowed under the Coast Loan. Other Income decreased to $941,000 in fiscal year
1998 from $167,300 in fiscal year 1997.  The pre-tax loss in fiscal year 1998
increased to $1,239,710 from $881,240 in fiscal year 1997.

  SALES.  Total Sales in the fiscal year ended March 31, 1998 decreased by
$377,988 or 9.0% to $3,823,059 from the level of $4,201,047 achieved in the
prior year.  Pacemaker unit sales decreased by 1.6% and pacemaker dollar sales
decreased by 3.8%, as pacemaker average selling prices declined by 2.2% due to
competitive pressures.  The average selling prices of pacing electrode leads
improved by 6%, but their unit sales declined by 40%, due to reduced demand from
an established OEM customer, resulting in a net revenue reduction of $808,421,
which was largely offset by initial sales to the value of $503,500 for the
Company's newly introduced defibrillation electrode leads to a new OEM customer.
Penetration of the Japanese market has, so far, been below expectations, but
management believes that the long term potential of the Japanese and Asian
markets and the more effective marketing and distribution process intended to
result from the Merger warrant continued perseverance in this area.

                                       14
<PAGE>
 
  Sales by geographic area for fiscal 1998 and 1997 are as follows:


<TABLE>
<CAPTION>
        Geographic Area            1998             1997
        ---------------            ----             ----
    <S>                      <C>                 <C>
    United States               $3,047,963       $3,486,511
    International               $  775,096       $  714,536
                             --------------------------------
                                $3,823,059       $4,201,047
                             ================================
</TABLE>


  Sales by product line, including product assemblies, for fiscal 1998 and 1997
are as follows:

<TABLE>
<CAPTION>
        Product Line               1998           1997
        ------------               ----           ----
    <S>                         <C>            <C>
    Pacemakers                  $1,678,905     $1,744,528
    Hybrid Circuits             $  258,250     $  222,303
    Electrode Leads             $1,866,721     $2,171,641
    Other                       $   19,183     $   62,575
                             ------------------------------ 
                                $3,823,059     $4,201,047
                             ==============================
</TABLE>

  ROYALTY INCOME.   Royalty income represented royalty fees from Intermedics
pursuant to a license agreement between the Company and Intermedics, whereby the
Company licensed the technology relating to its single-pass, atrial-controlled
ventricular pacing system.  Royalty fees under this agreement terminated on
January 22, 1998.

  COST OF PRODUCTS SOLD.   Cost of products sold in fiscal year 1998 was
$2,339,973, compared to $2,378,743 in fiscal year 1997, representing a decrease
of 1.6% as compared with a sales decrease of 9%, which reduced the rate of gross
margin from 43% to 39%.  This reduction was largely due to lower selling prices
for pacers and pacer assemblies in the European market due to competitive
pressures and increased rates of manufacturing overhead cost arising from
reduced production volumes.

  SELLING, GENERAL AND ADMINISTRATIVE EXPENSES.   Selling, general and
administrative expenses were $2,496,817 in fiscal year 1998, representing a
decrease of 17% from $3,013,724 in fiscal year 1997.  Selling expenses were
$1,052,038 in fiscal year 1998 compared to $1,591,807 in fiscal year 1997,
representing a decrease of 34%, largely due to a decrease of $312,327 in volume
dependent sales commission and royalty expenses, employment cost reductions of
$141,944 and additional cost controls.  General and administrative expenses were
$1,444,780 in fiscal year 1998 compared to $1,421,917 in fiscal year 1997
representing an increase of 1.6% despite increases totaling $74,000 in bank and
finance charges, insurance costs and overseas taxes.

  ENGINEERING, RESEARCH AND DEVELOPMENT EXPENSES.  Engineering, research and
development expenses were $1,775,918 in fiscal year 1998, representing no
significant change  from $1,778,294 in fiscal year 1997 due to 

                                       15
<PAGE>
 
the continued development activities in the areas of single pass electrode
leads, bipolar dual-chamber operation, light weight pulse generator, rate
responsive pacing and the PacePro programmer.

  OTHER INCOME AND EXPENSES.  Interest income was $9,697 during fiscal year
1998, compared to $17,431 during fiscal year 1997.  Total interest expense
during fiscal year 1998 increased to $523,949 from the level of $490,508
incurred during fiscal year 1997, due largely to additional interest arising in
fiscal year 1998 since  June 13, 1997 on the loan from Coast.

OPERATING TRENDS AND UNCERTAINTIES

  SALES.  The ability of the Company to attain a profitable level of operations
is dependent upon expansion of sales volume, both domestically and
internationally, and continued development of new, advanced products.  The
Company believes that with the continued release of new products, its world-wide
market expansion, and the addition of new OEM corporate customers, it will have
the potential to increase sales.

  EEC nations have adopted universal standards as developed by the ISO in order
to provide simplified trade among the member nations and to assure free access
to trade while maintaining quality standards for products sold. All companies
doing business in these nations must be certified to these standards set forth
by the EEC which is evidenced by being granted the CE Mark.  Standards for
active implantable medical products were implemented January 1, 1993 with a
transition period ending December 31, 1994.  The Company Quality System received
certification to the ISO 9002 on November 19, 1996.  The CE Mark certification
was issued by the Notified Body, TUV Product Services, of Munich, Germany,
during the second quarter of fiscal 1996 for the Company's products intended for
sale in Europe.  The Company was audited in July 1997 by TUV Product Services as
part of the annual review of the certified Quality System.  As a result of the
TUV Product Services audit, the Quality System Certificate was renewed.  The
Company is developing design control processes in preparation for a compliance
audit to ISO 9001.

  Until March 1995, the Company was the only manufacturer commercially marketing
single-lead, atrial-controlled ventricular pacemakers.  However, Intermedics, a
competitor of the Company, received FDA clearance commercially to market a
single-lead, atrial-controlled ventricular pacemaker that it developed utilizing
the Company's technology pursuant to license and supply agreements with the
Company.  Intermedics commenced marketing its new pacemakers in March 1995.  In
addition, other competitors have also commenced marketing competitive single-
lead products.

  Although the introduction of the new single-lead pacemakers poses competition
for the Company, management believes that the Company will benefit from such
competition since the new competition will increase the visibility of single-
lead, atrial-controlled ventricular pacemakers in the marketplace and thereby
increase market acceptance of the product.  Further, management believes that
there is a sufficient market to accommodate both the Company's and other
competitive pacemakers.

  Various factors impact on a firm's ability to increase market share including,
but not limited to, the financial strength of the firm, the ability of the firm
and its competitors, and the time involved in obtaining FDA clearance for new or
improved products.  Therefore, although management believes that the Company is
well poised for viable growth, management cannot predict the degree of market
share the Company can obtain.  Factors beyond the Company's control may impede
its progress  and in such event, its business and operations would be adversely
impacted.

  The Company's ability successfully to compete with Intermedics and other
pacemaker manufacturers will depend on the Company's ability to supply product
and recruit and increase a quality sales force and continue to develop and
release new advanced products.  The Company historically has been restricted in
its marketing 

                                       16
<PAGE>
 
capabilities due to financial constraints impeding its ability to supply
products and recruit and train a sales force. However, the Company believes that
the resources and products available with the proposed merger, and the
associated funding to be obtained in connection with the proposed merger, will
position the combined companies to be able to develop effective sales and
marketing, and research and development programs.

  As discussed above, the manufacture for and sale of leads to Intermedics
produce income for the Company.  The Company sells electrode leads to
Intermedics for its new systems under an amended and restated Supply agreement
that expires on August 1, 1998.

  It is anticipated that Intermedics will eventually develop its own
manufacturing capability for electrode leads necessary for its new pacemakers.
However, any such development will take time.  Although the Company does not
know how long it will take Intermedics to develop its own manufacturing
capability, added to any such development period would be the time necessary to
obtain FDA clearance of its manufacturing process.  Thus, although the Company
cannot guarantee that it will continue to supply Intermedics with products, the
Company anticipates providing Intermedics with existing or new leads for the
next few years without a supply agreement on the same or similar terms and
conditions that the Company sells to other similar customers.  However, in the
event Intermedics receives FDA approval in a shorter time-frame than
anticipated, or other events occur which causes a decrease in Intermedics'
orders, the Company's business and operating results would be adversely
affected.

  SOURCES OF SUPPLY.  Two of the Company's principal suppliers of materials used
primarily in electrode lead production, Dow and DuPont, indicated that they will
no longer supply their materials to the medical device industry for use in
implantable devices.

  The availability of materials suitable for use in implantable medical devices
is an industry-wide problem and is not unique to the Company or to the
cardiovascular device segment of the industry.  The Polymer Technology Group
produces a product that meets manufacturing requirements and has been identified
as a tentative replacement for the DuPont supplied material.  Since the
candidate replacement material is comprised of the same chemical composition as
the DuPont material, it is expected that it will be comparable with respect to
the performance characteristics and biocompatibility of the current material in
use.  Similarly, FDA approval of this replacement material is anticipated to be
forthcoming based upon a satisfactory outcome of the testing performed on the
product.  The Company believes, however, that it has a sufficient supply of the
DuPont material to meet the Company's anticipated demand for the next several
years.  See Item 1. "Business - Sources of Supply."

  Suppliers of custom ASICs have advised the Company that the technology used to
produce these ASICs will no longer be supported.  As such, the Company placed
one last bulk order to ensure the availability of sufficient ASICs to satisfy
projected demands for current products.  The new pacing system under development
will utilize appropriate new ASICs obviating the need for perpetual supply of
the currently used ASICs.

  PROBABLE MERGER.  On October 27, 1997, the Company entered into a letter of
intent with Electro, a New Jersey corporation, to effect a merger of a wholly-
owned subsidiary of the Company ("Sub"), into and with Electro (the "Merger") as
a result of which Electro will become a wholly-owned subsidiary of the Company.
The Company has filed a Form S-4 Registration Statement with the Securities and
Exchange Commission ("SEC"), which will need to be declared effective by the SEC
before the merger can become effective.

  To effectuate the Merger, the Company, Electro and Sub executed an Agreement
and Plan of Reorganization dated January 20, 1998, as amended by a First
Amendment to the Agreement and Plan of Reorganization, dated May 5, 1998
(collectively, the "Merger Agreement").  Simultaneously with the Merger, the
Company will reorganize into a holding company structure whereby the Company
will become a direct wholly-owned subsidiary of Catheter Technology Group, Inc.,
a Delaware corporation and a holding company ("CTG").  The stockholders 

                                       17
<PAGE>
 
of the Company will become stockholders of CTG and will continue to hold their
shares of common stock without any change in number, designation, terms or
rights. The structure of the transaction contemplates that upon effectiveness of
the Merger, holders of Electro's common stock, $.10 par value per share
("Electro Common Stock"), will receive one share of common stock, $.10 par value
per share, of CTG for each share of Electro Common Stock held. No fractional
shares will be issued in the Merger.

  Consummation of the Merger and transactions contemplated thereby are subject
to the satisfaction of certain conditions, including, among other things: (i)
The approval and adoption of the Merger Agreement and the Merger by the
stockholders of Electro; and (ii) the registration under the Securities Act of
1933, as amended, and all applicable state securities laws, of the shares of CTG
Common Stock to be issued pursuant to the Merger.  The material conditions to
the obligations of the Company, Sub or Electro to consummate the Merger may not
be waived or modified by the party that is, or whose stockholders are, entitled
to the benefits thereof.

  Electro is based in Rahway, New Jersey and is engaged in the business of the
design, development, manufacture, marketing and sale of catheters and related
devices utilized in connection with illnesses of the heart and circulatory
system.  The Company believes the Merger may allow certain efficiencies to
improve operating performance and that the broader product line may provide for
a more effective marketing and distribution process.  There can be no assurance,
however, that consummation of the Merger will occur, or that if it does, it will
yield positive operating results in the future.

  YEAR 2000 ISSUE.  Many existing computer programs use only two digits to
identify a year in the date field.  These programs were designed and developed
without considering the impact of the upcoming change in the year 2000.  Some
older computer systems stored dates with only a two-digit year with an assumed
prefix of  "19".  Consequently, this limits those systems to dates between 1900
and 1999.  If not corrected, many computer systems and applications could fail
or create erroneous results by or at the year  2000 (the "Year 2000 issue").

  The Company has undertaken a review of the potential impact of the Year 2000
issue.  Such assessment has included a review of the impact of the issue
primarily in four areas:  products, manufacturing systems, business systems and
miscellaneous/ other areas.  Based on the results of its initial review, the
Company does not anticipate that the Year 2000 issue will impact operations or
operating results.  The Company is in the process of testing its systems which
may be affected by the Year 2000 issue and estimates that all affected systems
can be tested, upgraded and/or replaced before they cause any operational
problems.  This upgrading is estimated to take less than four man-months of
effort.  In order to ensure Year 2000 compliance, the Company has created a task
force periodically to review areas of concern.  This task force is to meet on a
quarterly basis through the middle of year 2000.  Management believes that the
incremental costs associated with achieving Year 2000 compliance will not be
material to the Company's operating results.

  The Company relies on its customers, suppliers, utility service providers,
financial institutions and other partners in order to continue normal business
operations.  At this time, it is impossible to assess the impact of the Year
2000 issue on each of these organizations.  There can be no guarantee that the
systems of other unrelated entities on which  the Company relies will be
corrected on a timely basis and will not have a material adverse effect on the
Company.  The Company's task force has identified the other organizations which
are critical to the Company's continued operations.  The Company intends to
survey these organizations to determine the impact of the Year 2000 on their
operations and their plans for addressing any potential concerns.  The Company
expects that this assessment will be completed in the fourth quarter of 1998 and
expects that any issues will be resolved by the end of the second calendar
quarter of 1999.

                                       18
<PAGE>
 
INFLATION AND CHANGING PRICES

  In the opinion of the Company's management, the rate of inflation during the
past two fiscal years has not had any material impact on the Company's
operations.  Because of the implementation of cost containment and new Medicare
regulations, any increase in sales revenues is expected to result from an
increase in the volume of business rather than from an increase in selling
prices.  The Company's pricing structure may not reflect inflation rates, due to
constraints of Medicare regulations, market conditions and competition.

RECENT ACCOUNTING PRONOUNCEMENTS

  In June 1997, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income" ("FAS 130") and No. 131, "Disclosure about Segments of an
Enterprise and Related Information" ("FAS 131").  FAS 130 establishes standards
for reporting and displaying comprehensive income, its components and
accumulated balances.  FAS 131 establishes standards for the way that public
companies report information about operating segments in annual financial
statements and requires reporting of selected information about operating
segments in interim financial statements issued to the public.  Both FAS 130 and
FAS 131 are effective for periods beginning after December 15, 1997.  Because of
the recent issuance of the standards, management has been unable to fully
evaluate the impact, if any, they may have on future financial statement
disclosures.

Item 7.  FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
                                                                       page                                      
<S>                                                                  <C>                                              
Report of Independent Certified Public Accountants                   F1                                               
                                                                                                                      
Financial statements                                                                                                  
     Balance sheet                                                   F2 - F3                                          
     Statements of operations                                        F4                                               
     Statements of stockholders' equity                              F5                                               
     Statements of cash flows                                        F6 - F7                                          
     Summary of significant accounting policies                      F8 - F11                                         
     Notes to financial statements                                   F12 - F26                                         
</TABLE>

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

     Not applicable.

                                       19
<PAGE>
 
                                CARDIAC CONTROL
                                 SYSTEMS, INC.





================================================================================
                                                            FINANCIAL STATEMENTS
                                                            As of March 31, 1998
                                                and for the Two Years Then Ended
<PAGE>
 
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS



To the Board of Directors and Stockholders
Cardiac Control Systems, Inc.


We have audited the accompanying balance sheet of Cardiac Control Systems, Inc.
as of March 31, 1998 and the related statements of operations, stockholders'
equity and cash flows for each of the two years in the period ended March 31,
1998. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Cardiac Control Systems, Inc.
as of March 31, 1998 and the results of its operations and its cash flows for
each of the two years in the period ended March 31, 1998 in conformity with
generally accepted accounting principles.

The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As described in Note  to the financial
statements, the Company has experienced significant operating losses and has an
accumulated deficit at March 31, 1998. These conditions raise substantial doubt
about the Company's ability to continue as a going concern. Management's plans
in regard to these matters are also described in Note . The financial statements
do not include any adjustments that might result from the outcome of this
uncertainty.


                               BDO Seidman, LLP

Orlando, Florida
June 15, 1998

                                      F-1
<PAGE>
 
                                                   CARDIAC CONTROL SYSTEMS, INC.

                                                                   BALANCE SHEET

<TABLE> 
<CAPTION> 
================================================================================

March 31,                                                                   1998
--------------------------------------------------------------------------------
<S>                                                                   <C> 
ASSETS

CURRENT:
  Cash                                                                $   21,412
  Accounts receivable, net (Note 3)                                      673,673
  Inventories (Note 4)                                                 1,423,697
  Prepaid expenses                                                       207,563
--------------------------------------------------------------------------------


       TOTAL CURRENT ASSETS                                            2,326,345
--------------------------------------------------------------------------------


PROPERTY, PLANT AND EQUIPMENT, NET (Notes 5 and 7)                     1,974,096
--------------------------------------------------------------------------------


OTHER ASSETS:
  Deferred financing costs, less accumulated        
   amortization of $238,248 (Note 8)                                     460,200
  Deferred license fees, less accumulated       
   amortization of $43,333                                               156,667
  Deferred merger costs (Note 13)                                        320,450
  Other                                                                   79,220
--------------------------------------------------------------------------------


       TOTAL OTHER ASSETS                                              1,016,537
--------------------------------------------------------------------------------







                                                                      $5,316,978
================================================================================
</TABLE> 

                                      F-2
<PAGE>
 
                                                   CARDIAC CONTROL SYSTEMS, INC.

                                                                   BALANCE SHEET

<TABLE> 
<CAPTION> 
==================================================================================================

March 31,                                                                                1998
--------------------------------------------------------------------------------------------------
<S>                                                                                  <C> 
LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
         Accounts payable                                                            $  1,028,440
         Due to related party (Note 6)                                                    106,000
         Accrued compensation                                                             257,912
         Accrued royalties (Note 11)                                                      226,906
         Other accrued expenses                                                            48,372
         Deposits payable                                                                 352,482
         Current portion of long-term debt (Note 7)                                     1,021,682
--------------------------------------------------------------------------------------------------

               TOTAL CURRENT LIABILITIES                                                3,041,794

LONG-TERM DEBT, less current portion (Note 7)                                           1,491,720
OTHER LIABILITIES                                                                          82,720
--------------------------------------------------------------------------------------------------

               TOTAL LIABILITIES                                                        4,616,234
--------------------------------------------------------------------------------------------------

COMMITMENTS AND CONTINGENCIES (NOTE 11)

STOCKHOLDERS' EQUITY (NOTES 7 AND 8):
         Common stock, $.10 par value, 30,000,000 shares authorized,
           2,648,739 shares issued                                                        264,874
         Additional paid-in capital                                                    22,350,756
         Accumulated deficit                                                          (21,901,927)
         Cumulative translation adjustment                                                (12,959)
--------------------------------------------------------------------------------------------------

               TOTAL STOCKHOLDERS' EQUITY                                                 700,744
--------------------------------------------------------------------------------------------------

                                                                                     $  5,316,978
==================================================================================================
</TABLE> 

   See accompanying summary of significant accounting policies and notes to
                             financial statements

                                      F-3
<PAGE>
 
                                                   CARDIAC CONTROL SYSTEMS, INC.

                                                        STATEMENTS OF OPERATIONS

================================================================================

<TABLE> 
<CAPTION> 
Year ended March 31,                                     1998           1997
--------------------------------------------------------------------------------
<S>                                                  <C>            <C> 
REVENUE:
 Sales (Note 10)                                     $ 3,823,059    $ 4,201,047
 Royalty income                                        2,063,250      2,394,250
--------------------------------------------------------------------------------
       Total revenue                                   5,886,309      6,595,297
--------------------------------------------------------------------------------
COSTS AND EXPENSES:
 Cost of products sold                                 2,339,973      2,378,743
 Selling, general and administrative expenses          2,496,818      3,013,724
 Engineering, research and development expenses        1,775,917      1,778,294
--------------------------------------------------------------------------------
       Total costs and expenses                        6,612,708      7,170,761
--------------------------------------------------------------------------------
       Loss from operations                             (726,399)      (575,464)
--------------------------------------------------------------------------------
OTHER INCOME (EXPENSES):
 Interest income                                           9,697         17,432
 Interest expense                                       (523,949)      (490,508)
 Other income                                                941        167,300
--------------------------------------------------------------------------------
       Total other expenses                             (513,311)      (305,776)
--------------------------------------------------------------------------------
NET LOSS                                             $(1,239,710)   $  (881,240)
================================================================================
LOSS PER COMMON SHARE                                $      (.47)   $      (.34)
================================================================================
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING   2,636,954      2,585,212
================================================================================
</TABLE> 

See accompanying summary of significant accounting policies and notes to
                             financial statements.

                                      F-4
<PAGE>
 
                                                   CARDIAC CONTROL SYSTEMS, INC.

                                              STATEMENTS OF STOCKHOLDERS' EQUITY

================================================================================

<TABLE>
<CAPTION>
                                           Common Stock           Additional                                   Cumulative
                                      -----------------------                                               
                                          Number          Par        Paid-in     Treasury     Accumulated     Translation
                                       of Shares        Value        Capital        Stock         Deficit      Adjustment
-------------------------------------------------------------------------------------------------------------------------
<S>                                   <C>            <C>         <C>             <C>         <C>              <C>
Balance, March 31, 1996                2,532,942     $253,294    $21,857,388     $(10,938)   $(19,780,977)    $         -
 Common shares issued, net of                                                                              
  costs of $8,968                         91,428        9,143        296,889            -               -               -
 Stock warrants issued                         -            -        152,376            -               -               -
 Acquisition of treasury stock                 -            -              -       (5,000)              -               -
 Retirement of treasury stock             (4,999)        (500)       (15,438)      15,938               -               -
 Translation adjustment                        -            -              -            -               -          (7,055)
 Net loss                                      -            -              -            -        (881,240)              -
------------------------------------------------------------------------------------------------------------------------- 
                                                                                                           
Balance, March 31, 1997                2,619,371      261,937     22,291,215            -     (20,662,217)         (7,055)
 Common shares issued                     29,368        2,937         39,991            -               -               -
 Stock warrants issued                         -            -         19,550            -               -               -
 Translation adjustment                        -            -              -            -               -          (5,904)
 Net loss                                      -            -              -            -      (1,239,710)              -
------------------------------------------------------------------------------------------------------------------------- 
Balance, March 31, 1998                2,648,739     $264,874    $22,350,756     $      -    $(21,901,927)    $   (12,959)
=========================================================================================================================
</TABLE> 

   See accompanying summary of significant accounting policies and notes to
                             financial statements.

                                      F-5
<PAGE>
 
                                                   CARDIAC CONTROL SYSTEMS, INC.

                                                        STATEMENTS OF CASH FLOWS

<TABLE> 
<CAPTION> 
===========================================================================================================

Year ended March 31,                                                                   1998           1997
-----------------------------------------------------------------------------------------------------------
<S>                                                                             <C>            <C> 
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net loss                                                                      $(1,239,710)   $  (881,240)
  Adjustments to reconcile net loss to net cash
   provided by (used for) operating activities:
     Depreciation and amortization                                                  506,675        551,225
     Gain on fixed asset disposals                                                  (12,935)       (12,957)
     Stock issued for payment of directors' fees                                     34,000              -
     Stock issued for payment of consulting fees                                      8,928              -
     Cash provided by (used for):
      Accounts receivable                                                           279,169        382,515
      Inventories                                                                    95,941        514,807
      Prepaid expenses                                                               48,549       (192,039)
      Other assets                                                                  (10,811)       (50,588)
      Accounts payable                                                              200,197        327,535
      Due to related parties                                                        106,000              -
      Accrued expenses                                                              (36,648)       (13,957)
      Deposits payable                                                              (40,150)      (126,962)
      Other liabilities                                                              12,046       (112,717)
      Deferred royalties                                                                  -       (328,250)
-----------------------------------------------------------------------------------------------------------

Net cash provided by (used for) operating activities                                (48,749)        57,372
-----------------------------------------------------------------------------------------------------------

CASH FLOWS FROM INVESTING ACTIVITIES:
  Purchase of property, plant and equipment                                        (471,992)      (544,628)
  Deferred merger costs                                                            (320,450)             -
  Proceeds from sale of equipment                                                    29,458         22,633
-----------------------------------------------------------------------------------------------------------

Net cash used for investing activities                                             (762,984)      (521,995)
-----------------------------------------------------------------------------------------------------------

CASH FLOWS FROM FINANCING ACTIVITIES:
  Proceeds from issuance of common stock and stock warrants,
   net of issuance costs                                                                  -        301,032
  Deferred financing costs                                                         (254,878)       (99,149)
  Net borrowings on line of credit                                                  775,798              -
  Proceeds from long-term debt                                                      463,149        163,253
  Repayments of long-term debt                                                     (330,483)      (875,174)
-----------------------------------------------------------------------------------------------------------

Net Cash Provided By (Used For) Financing Activities                                653,586       (510,038)
-----------------------------------------------------------------------------------------------------------

EFFECT OF EXCHANGE RATE CHANGES IN CASH                                              (5,904)        (7,055)
-----------------------------------------------------------------------------------------------------------

NET DECREASE IN CASH                                                               (164,051)      (981,716)

CASH, beginning of year                                                             185,463      1,167,179
-----------------------------------------------------------------------------------------------------------

CASH, end of year                                                               $    21,412    $   185,463
===========================================================================================================
</TABLE> 

        See accompanying summary of significant accounting policies and notes to
                             financial statements.

                                      F-6

<PAGE>
 
                                                   CARDIAC CONTROL SYSTEMS, INC.

                                                        STATEMENTS OF CASH FLOWS

<TABLE> 
<CAPTION> 
================================================================================

Year ended March 31,                                                           1998           1997
---------------------------------------------------------------------------------------------------
<S>                                                                       <C>            <C> 
SUPPLEMENTAL CASH FLOW INFORMATION:
  Interest paid during the year                                           $ 317,356      $ 283,676
                                                                                      
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:                  
  Deferred financing costs incurred by issuance of stock warrants         $       -      $  81,000
  Treasury stock acquired for reinstatement of accounts payable                   -          5,000
  Reduction in accounts payable in exchange for common stock                      -          5,000
  Accounts payable incurred for costs of license fees                             -        200,000
  Debt discount incurred by issuance of stock warrants                       19,550         71,376
  Debt incurred for purchase of property and equipment                            -         15,345
===================================================================================================
</TABLE> 

   See accompanying summary of significant accounting policies and notes to
                             financial statements.

                                      F-7

<PAGE>
 
                                                   CARDIAC CONTROL SYSTEMS, INC.

                                      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

================================================================================

INVENTORIES         Inventories are stated at the lower of cost or market. Cost
                    is determined by the first-in, first-out (FIFO) method for
                    raw material and supply inventories. Cost of work-in-process
                    and finished goods inventories is determined based upon
                    standard cost, which approximates cost on a FIFO basis.

PROPERTY, PLANT     Property, plant and equipment are stated at cost. Additions,
AND EQUIPMENT       improvements and expenditures that significantly extend the
                    useful life of an asset are capitalized. Expenditures for
                    repairs and maintenance are charged to operations as
                    incurred. Depreciation and amortization are provided on the
                    straight-line method for financial reporting purposes and
                    accelerated methods for tax purposes over the estimated
                    useful lives of the assets as follows:

                       Building and building improvements          10 - 30 years
                       Land improvements                                20 years
                       Machinery and equipment                      5 -  6 years
                       Office equipment and furniture and fixtures  5 - 10 years
                       Vehicles                                     3 -  5 years
                       Ancillary equipment                               2 years

DEFERRED            Deferred financing costs related to a mortgage note payable
COSTS               and other loan agreements are capitalized and amortized over
AND FEES            the term of the loans (see Note 7). Deferred license fees
                    related to a license to distribute products in Japan are
                    capitalized and amortized over five years, the life of the
                    license. Deferred merger costs relate to the proposed merger
                    with Electro and will be a cost of the transaction when the
                    merger occurs or charged to operations if the merger does
                    not occur (see Note 13).

IMPAIRMENT OF       The Company evaluates impairment of long-lived assets in
LONG-LIVED ASSETS   accordance with Statement of Financial Accounting Standards
                    No. 121, "Accounting for the Impairment of Long-Lived Assets
                    and for Long-Lived Assets to be Disposed Of," (SFAS 121).
                    SFAS 121 requires impairment losses to be recorded on long-
                    lived assets used in operations when indicators of
                    impairment are present and the undiscounted cash flows
                    estimated to be generated by those assets are less than the
                    assets' carrying amount.

                                      F-8
<PAGE>
 
                                                   CARDIAC CONTROL SYSTEMS, INC.

                                      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

================================================================================

TRANSLATION OF      The financial statements of the non-U.S. division are
FOREIGN CURRENCY    translated into U.S. dollars as follows: all assets and
                    liabilities at the year-end exchange rate and revenue and
                    expenses at the average exchange rate. Adjustments resulting
                    from the translation of financial statements are reflected
                    as a separate component of stockholders' equity. Gains and
                    losses resulting from foreign currency transactions are
                    included in income currently and were not significant for
                    the years ended March 31, 1998 and 1997. 

REVENUE             Sales revenue and cost of sales are recognized as products
RECOGNITION         are shipped and title passes, unless the buyer has a right
                    to return the products. Sales revenue and cost of sales
                    attributable to shipments that the buyer has the right to
                    return are recognized when the return privilege has expired,
                    usually upon resale (implant) of the products.

                    Pursuant to a license agreement with a third-party
                    distributor, the Company recognizes royalty income as leads
                    are sold by the distributor.

ENGINEERING,        The Company capitalizes the cost of materials and equipment
RESEARCH AND        acquired or constructed for research and development
DEVELOPMENT COSTS   activities that have alternative future uses. All other
                    costs incurred for the purpose of product research, design,
                    and development are charged to operations as incurred.
                    Research and development costs included in engineering,
                    research and development expenses on the statements of
                    operations for the years ended March 31, 1998 and 1997
                    approximate $975,100 and $1,086,800, respectively.

INCOME TAXES        The Company accounts for income taxes in accordance with
                    Statement of Financial Accounting Standards No. 109,
                    "Accounting for Income Taxes" ("FAS 109"). FAS 109 is an
                    asset and liability approach that requires the recognition
                    of deferred tax assets and liabilities for the expected
                    future tax consequences of events that have been recognized
                    in the Company's financial statements or tax returns.
                    Measurement of deferred income tax is based on enacted tax
                    laws including tax rates, with the measurement of deferred
                    income tax assets being reduced by available tax benefits
                    not expected to be realized.

LOSS PER            Loss per share is based upon the weighted average number of
COMMON SHARE        common shares outstanding during each period. Potential
                    common shares have not been 

                                      F-9
<PAGE>
 
                                                   CARDIAC CONTROL SYSTEMS, INC.

                                      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

================================================================================

                    included since their effect would be antidilutive. Potential
                    common shares include 397,475 stock options and 465,965
                    warrants.

                    In February 1997, the Financial Accounting Standards Board
                    issued Statement of Financial Accounting Standards No. 128,
                    "Earnings per Share," (FAS 128), which is effective for
                    financial statements issued for periods ending after
                    December 15, 1997. FAS 128 simplifies the standards for
                    computing earnings per share and makes them comparable to
                    international earnings per share standards. This statement
                    replaces the presentation of primary EPS and fully diluted
                    EPS with a presentation of basic EPS and diluted EPS,
                    respectively. Basic EPS excludes dilution and is computed by
                    dividing earnings available to common stockholders by the
                    weighted-average number of common shares outstanding for the
                    period. Similar to fully diluted EPS, diluted EPS reflects
                    the potential dilution of securities that could share in the
                    earnings. Adoption of this statement did not have a material
                    effect on the Company's reported loss per share amounts.

FAIR VALUE OF       Statement of Financial Accounting Standards No. 107,
FINANCIAL           "Disclosures about Fair Value of Financial Instruments,"
INSTRUMENTS         requires disclosure of fair value information about
                    financial instruments. Fair value estimates discussed herein
                    are based upon certain market assumptions and pertinent
                    information available to management as of March 31, 1998.

                    The respective carrying value of certain on-balance-sheet
                    financial instruments approximated their fair values. These
                    financial instruments include cash, accounts receivable,
                    accounts payable, accrued expenses and deposits payable.
                    Fair values were assumed to approximate carrying values for
                    these financial instruments since they are short term in
                    nature and their carrying amounts approximate fair values or
                    they are receivable or payable on demand. The fair value of
                    the Company's long-term debt is estimated based upon the
                    quoted market prices for the same or similar issues or on
                    the current rates offered to the Company for debt of the
                    same remaining maturities.

USE OF              The preparation of financial statements in conformity with
ESTIMATES           generally accepted accounting principles requires management
                    to make estimates and assumptions

                                      F-10
<PAGE>
 
                                                   CARDIAC CONTROL SYSTEMS, INC.

                                      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

================================================================================

                    that affect the reported amounts of assets and liabilities
                    at the date of the financial statements and the reported
                    amounts of revenues and expenses during the reporting
                    period. Actual results could differ from those estimates.

RECENT ACCOUNTING   In June 1997, the Financial Accounting Standards Board 
PRONOUNCEMENT       issued Statement of Financial Accounting Standards No. 130,
                    "Reporting Comprehensive Income" (FAS 130), and No. 131,
                    "Disclosure about Segments of an Enterprise and Related
                    Information" (FAS 131). FAS 130 establishes standards for
                    reporting and displaying comprehensive income, its
                    components and accumulated balances. FAS 131 establishes
                    standards for the way that public companies report
                    information about operating segments in annual financial
                    statements and requires reporting of selected information
                    about operating segments in interim financial statements
                    issued to the public. Both FAS 130 and FAS 131 are effective
                    for periods beginning after December 15, 1997. The Company
                    has not determined the impact that the adoption of these new
                    accounting standards will have on its future financial
                    statements and disclosures.

RECLASSIFICATIONS   Certain reclassifications have been made to the financial
                    statements previously reported for the year ended March 31,
                    1997 to conform with classifications used in the financial
                    statements for the year ended March 31, 1998.

                                      F-11
<PAGE>
 
                                                   CARDIAC CONTROL SYSTEMS, INC.

                                                  NOTES TO FINANCIAL STATEMENTS 

================================================================================

1.  NATURE OF       Cardiac Control Systems, Inc. (the "Company") was 
    OPERATIONS      incorporated in June 1980 as a Delaware Corporation. The
                    Company is engaged in the design, development, manufacture
                    and marketing of implantable cardiac pacemaker systems,
                    consisting of implantable pacemakers, connecting electrode
                    leads and devices used for programming and monitoring the
                    pacemaker systems. The Company commenced its principal
                    business operations during the year ended March 31, 1986
                    after the commercial release of its initial single-chamber
                    pacemaker system. The Company has received clearance from
                    the United States Food and Drug Administration (the "FDA")
                    to commercially distribute and market a line of the
                    Company's pacemaker systems.

                    In August 1996, the Company formed a division in Tokyo,
                    Japan to distribute and market the Company's products in
                    Japan. The Company has obtained the appropriate licensing
                    for the sale of several of its products in Japan.

2.  GOING CONCERN   As shown in the accompanying financial statements, the 
    AND             Company has experienced significant losses which have 
    MANAGEMENT'S    resulted in an accumulated deficit of $21,901,927. The 
    PLANS           Company has also experienced severe cash flow shortages
                    which have resulted in a decrease in operating activity and
                    have caused the Company to significantly reduce its labor
                    force. In addition, royalties of $2,063,250 and $2,394,250
                    during fiscal 1998 and 1997, respectively, received under a
                    license agreement ceased in January 1998. These conditions
                    raise substantial doubt about the Company's ability to
                    continue as a going concern.

                    The Company has executed a letter of intent to merge with
                    Electro-Catheter Corporation (see Note 13). It is believed
                    that as a result of this merger, the combined entity will be
                    able to generate significant volume and cost savings,
                    allowing the realization of profitable operations and
                    positive cash flow within a 12- to 18-month period post
                    completion of the merger. It is also believed that this
                    merger will also provide the vehicle and opportunity for
                    additional acquisitions of like companies, further building
                    critical mass and enhancing growth potential.

                    As a condition of this merger, the Company is planning to
                    raise a minimum of $4 million in a combination of debt and
                    equity. This capital will be utilized to

                                      F-12
<PAGE>
 
                                                   CARDIAC CONTROL SYSTEMS, INC.

                                                   NOTES TO FINANCIAL STATEMENTS

================================================================================

                         fund the ongoing operations of the two companies, as
                         well as the research and development of new
                         technologies. Management believes that such financing
                         will occur and that sufficient funds will be provided
                         to overcome its financial difficulties. However, no
                         assurances can be given that the Company will be
                         successful in obtaining financing and completing the
                         merger, and if the Company is unable to obtain adequate
                         financing, there remains substantial doubt concerning
                         the Company's ability to continue as a going concern.

3.   ACCOUNTS            Accounts receivable at March 31, 1998 are summarized as
     RECEIVABLE          follows:
                         -------------------------------------------------------

<TABLE> 
                         <S>                                          <C> 
                         Trade accounts receivable                    $677,281
                         Other accounts receivable                       2,265
                         -------------------------------------------------------
                                                                       679,546
                         Allowance for doubtful accounts                (5,873)
                         -------------------------------------------------------
                                                                      $673,673
                         =======================================================
</TABLE> 

4    INVENTORIES         Inventories at March 31, 1998 consist of the 
                         following:  
                         -------------------------------------------------------
                           
<TABLE> 
                         <S>                                        <C> 
                         Raw materials and supplies                 $  859,836
                         Work-in-process                               315,643
                         Finished goods                                285,166
                         -------------------------------------------------------
                                                                     1,460,645
                         Reserve for obsolescence                      (36,948)
                         -------------------------------------------------------
                                                                    $1,423,697
                         =======================================================
</TABLE> 

                         Finished goods inventories include approximately
                         $192,000 of products consigned to customers and
                         independent sales representatives.

5.   PROPERTY, PLANT     Components of property, plant and equipment at March  
     AND EQUIPMENT       31, 1998 are as follows:                              

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

<TABLE> 
                         <S>                                       <C> 
                         Land                                      $   123,300
</TABLE> 

                                      F-13

<PAGE>
 
                                                   CARDIAC CONTROL SYSTEMS, INC.

                                                   NOTES TO FINANCIAL STATEMENTS

================================================================================

<TABLE> 
                        <S>                                         <C> 
                        Building and building improvements          1,788,251
                        Land improvements                              29,450
                        Machinery and equipment                     1,147,277
                        Office equipment                              559,593
                        furniture and fixtures                        149,620
                        Ancillary equipment                         1,250,743
                        Construction in progress (estimated costs            
                          to complete $300,000)                       577,620
                        ------------------------------------------------------
                                                                    5,625,854   
                        Accumulated depreciation                   (3,651,758)  
                        ------------------------------------------------------  
                                                                  $ 1,974,096   
                        ======================================================  
</TABLE> 

                        Depreciation expense for the years ended March 31, 1998
                        and 1997 was $268,697 and $310,797, respectively.

6.   RELATED PARTY      As of March 31, 1998, $106,000 was due to an affiliate
     TRANSACTIONS       owned by a director of the Company for consulting
                        services provided to the Company during fiscal 1998.

                        During the year ended March 31, 1998, the Company repaid
                        in full $200,983 of advances from the Chairman of the
                        Board and President of the Company under certain
                        promissory notes.

7.  LONG-TERM           Long-term debt consists of the following at March 31, 
    DEBT                1998:

<TABLE> 
                        ---------------------------------------------------------------------------
                        <S>                                                            <C>   
                        Sirrom mortgage note, net of discount (see note below)         $ 1,480,450
                        CBC line of credit (see note below)                                775,798
                        CBC term note (see note below)                                     237,500
                        Other                                                               19,654
                       ---------------------------------------------------------------------------
  
                                                                                         2,513,402
                        Less current portion                                            (1,021,682)
                       ---------------------------------------------------------------------------
</TABLE> 

                                     F-14
<PAGE>
 
                                                   CARDIAC CONTROL SYSTEMS, INC.


                                                   NOTES TO FINANCIAL STATEMENTS


================================================================================

<TABLE> 
                    <S>                                                            <C> 
                    Total                                                          $ 1,491,720
                    ===========================================================================
</TABLE> 

                    Aggregate maturities of long-term debt over future years are
                    as follows:

<TABLE> 
                    ---------------------------------------------------------------------------
                    <S>                                                            <C> 
                    1999                                                           $ 1,021,682
                    2000                                                             1,485,642
                    2001                                                                 3,539
                    2002                                                                 2,539
                    ---------------------------------------------------------------------------

                                                                                   $ 2,513,402
                    ===========================================================================
</TABLE> 

                    Sirrom
                    ------

                    On March 31, 1995, the Company entered into a Loan and
                    Security Agreement (the "Loan Agreement") with Sirrom
                    Capital Corporation ("Sirrom") and executed a $1,500,000
                    secured promissory note. Interest on the note is payable
                    monthly at 13.5% and principal is due on March 31, 2000. The
                    note is secured by a first mortgage lien on all the
                    Company's real and personal property, excluding inventory
                    and accounts receivable, but including general intangibles
                    such as its patents and royalties. The Loan Agreement
                    restricts the Company from incurring additional indebtedness
                    in excess of $200,000 annually without the lender's consent.
                    In addition, the Company must give the lender advance notice
                    of certain events, such as dividend payments, certain new
                    stock issues, reorganizations, and merger or sale of
                    substantially all assets.

                    In connection with the Loan Agreement, the Company
                    originally granted the lender warrants to purchase 100,000
                    shares of the Company's common stock at $.01 per share. An
                    additional 50,000 warrants to purchase shares of common
                    stock at $.01 per share will be granted to the lender upon
                    each anniversary date, beginning March 31, 1997 through
                    March 31, 1999, that any amount owed to Sirrom shall be
                    outstanding. On March 31, 1997 and 1998, the Company granted
                    Sirrom 50,000 additional warrants pursuant to this
                    agreement. The Company recorded $279,000 (100,000 shares) in
                    fiscal 1995, $71,376 (50,000 shares) in fiscal 1997 and
                    $19,550 (50,000 shares) in fiscal

                                     F-15
<PAGE>
 
                                                   CARDIAC CONTROL SYSTEMS, INC.

                                                   NOTES TO FINANCIAL STATEMENTS


================================================================================


                    1998 as a debt discount with the offset to additional paid-
                    in capital, representing the difference between the
                    estimated fair market value of the underlying stock at the
                    date of grant and $.01 per share (see Note ). This has
                    resulted in an effective interest rate of approximately 24%
                    on the Sirrom debt. The Sirrom note includes an unamortized
                    debt discount of $19,550 at March 31, 1998.

                    CBC
                    ---

                    On June 13, 1997, the Company entered into a Loan Agreement
                    ("Agreement") with Coast Business Credit ("CBC") for a
                    maximum borrowing of $3.5 million, which includes a line of
                    credit up to $2.7 million, a $500,000 Subline for capital
                    expenditures ("CAPEX"), which was unused at March 31, 1998,
                    and a $300,000 Term Loan. The maximum borrowing base
                    available under the line of credit is based upon eligible
                    receivables and inventory as defined in the Agreement. The
                    maturity date for the Agreement is June 30, 2000. The CAPEX
                    and the term loan are based upon a 48-month amortization
                    period. The interest rate on the line of credit is equal to
                    the prime rate plus 2% (10.5% at March 31, 1998), and the
                    interest rate for the Term Loan and the CAPEX Subline is
                    equal to the prime rate plus 2.25% (10.75% at March 31,
                    1998). Borrowings under the Agreement are collateralized by
                    a first security interest in substantially all of the assets
                    of the Company. The agreement also contains a minimum
                    tangible net worth requirement, of which the Company was in
                    violation as of March 31, 1998. Accordingly, the amounts due
                    under the CBC agreement as of March 31, 1998 amounting to
                    $1,013,298 have been classified as current. In addition, CBC
                    was granted a warrant to purchase 37,500 shares of stock at
                    $4 per share, expiring June 30, 2002.

                    In conjunction with the Agreement, Company obtained an
                    Intercreditor and Subordination Agreement between CBC and
                    Sirrom. This agreement provided that Sirrom subordinate its
                    first security interest in the Company's real estate to CBC
                    limited however to $500,000 secured by the Sirrom mortgage.
                    As consideration for its waiver of its first security
                    interest in the assets of the Company, Sirrom was granted
                    warrants to purchase 50,000 shares of stock at $5 per share,
                    exercisable at any time and expiring five years from the
                    date of the Warrant Agreement.

                                      F-16
<PAGE>
 
                                                   CARDIAC CONTROL SYSTEMS, INC.

                                                   NOTES TO FINANCIAL STATEMENTS


================================================================================


                    On June 11, 1998, the CBC Loan Agreement was amended to
                    include an additional $250,000 bridge loan bearing interest
                    at prime plus 5% and due on August 31, 1998. The warrant
                    originally granted to CBC to purchase 37,500 shares of stock
                    was also amended. The exercise price was reduced from $4 per
                    share to $.40 per share. In addition, CBC was granted a
                    second warrant to purchase 25,000 shares of stock at $.40
                    per share. The warrant expires June 30, 2002. 

8.  STOCKHOLDERS'   Issuance of Common Shares  
                    -------------------------
    EQUITY

                    In May 1996, Sirrom purchased 50,000 shares of common stock
                    for $5.00 per share. In June 1996, the Company issued 1,428
                    shares of common stock as payment for accounts payable of
                    $5,000 to a third party. The accounts payable balance was
                    then reinstated in March 1997, in conjunction with the
                    Company's purchase of 1,428 shares of treasury stock.

                    In January 1997, the Company entered into a supply agreement
                    with a major defibrillator manufacturer whereby the Company
                    will be the exclusive outside supplier of a defibrillation
                    lead. The agreement expires in December 1999. In connection
                    with this agreement, the manufacturer paid the Company
                    $200,000 and received 40,000 shares of common stock valued
                    at $60,000, representing the quoted market price of the
                    common shares. The difference between the purchase price and
                    the value assigned to the common stock of $140,000 was
                    recorded as a gain on sale of the technology underlying the
                    supply agreement included in other income.

                    During the year ended March 31, 1998, the Company issued
                    23,654 shares of common stock as payment of directors' fees,
                    which were valued at $34,000 and 5,714 shares of common
                    stock as payment for consulting services which were valued
                    at $8,928.

                    Stock Option Plan
                    -----------------

                    On September 9, 1987, the Company's Board of Directors
                    adopted the 1987 Non-Qualified Stock Option Plan (the "1987
                    Plan"). On February 7, 1992, the Company's Board of
                    Directors adopted the 1992 Non-Qualified Stock Option Plan
                    (the "1992 Plan"). In fiscal 1995, the Company combined the
                    1987 Plan and

                                      F-17
<PAGE>
 
                                                   CARDIAC CONTROL SYSTEMS, INC.

                                                   NOTES TO FINANCIAL STATEMENTS


================================================================================


                    the 1992 Plan. This Plan provides the Board of Directors
                    with the authority to grant officers, directors, and
                    employees of the Company non-qualified options to purchase
                    up to a maximum of 400,000 shares of the Company's common
                    stock. Options granted under the Plan expire five years
                    after the date the options are granted or upon termination
                    of employment.

                    The Company applies APB Opinion 25, "Accounting for Stock
                    Issued to Employees," and related interpretations in
                    accounting for options issued to employees. Accordingly, no
                    compensation cost has been recognized for options granted to
                    employees at exercise prices which equal or exceed the
                    market price of the Company's common stock at the date of
                    grant. Options granted at exercise prices below market
                    prices are recognized as compensation cost measured as the
                    difference between market price and exercise price at the
                    date of grant.

                    Statement of Financial Accounting Standards No. 123 (FAS
                    123) "Accounting for Stock-Based Compensation," requires the
                    Company to provide pro forma information regarding net
                    income and earnings per share as if compensation cost for
                    the Company's employee stock options had been determined in
                    accordance with the fair value based method prescribed in
                    FAS 123. The Company estimates the fair value of each stock
                    option at the grant date by using the Black-Scholes option-
                    pricing model with the following weighted-average
                    assumptions used for grants in 1998 and 1997, respectively:
                    no dividend yield for both years, an expected life of five
                    years for both years, expected volatility of 60% and 44% and
                    risk-free interest rates of 6.6% and 6.4%.

                    Under the accounting provisions of FAS 123, the Company's
                    net loss and loss per share would have been increased to the
                    pro forma amounts indicated below:

                                      F-18
<PAGE>
 
                                                   CARDIAC CONTROL SYSTEMS, INC.


                                                   NOTES TO FINANCIAL STATEMENTS


================================================================================


<TABLE> 
<CAPTION> 
                                                           1998            1997
                    ------------------------------------------------------------
                    <S>                            <C>               <C> 
                    NET LOSS
                      As reported                  $ (1,239,710)     $ (881,240)
                      Pro forma                      (1,264,723)       (952,300)


                    LOSS PER SHARE
                      As reported                  $       (.47)     $     (.34)
                      Pro forma                            (.48)           (.37)
                    ============================================================
</TABLE> 

                                     F-19
<PAGE>
 
                                                   CARDIAC CONTROL SYSTEMS, INC.

                                                   NOTES TO FINANCIAL STATEMENTS

================================================================================

A summary of the status of options under this plan as of March 31, 1998 and 1997
and changes during the years ending on those dates are presented below:

<TABLE> 
<CAPTION> 
                                                  1998                                        1997
                                     -----------------------------------        -----------------------------------
                                                        Weighted-Average                           Weighted-Average
                                        Shares           Exercise Price            Shares           Exercise Price
-------------------------------------------------------------------------------------------------------------------
<S>                                  <C>                <C>                     <C>                <C>             
Balance at beginning of year             309,969            $   3.72                $   305,186        $   4.02
  Granted                                 88,500                1.O4                     84,429            3.50
  Forfeited or expired                   (24,542)               5.25                    (79,646)           4.55
                                         -------            --------                -----------        --------   
Balance at end of year                   373,927            $   2.83                    309,969        $   3.72 
                                         =======            ========                ===========        ========

Options exercisable at year end          350,617            $   2.89                    244,658        $   3.69

Options granted during the year 
 at exercise  prices which exceed 
 market price of stock at date of 
 grant:
   Weighted average exercise price        88,500            $   1.04                     74,429        $   3.50
   Weighted average fair value            88,500            $    .47                     74,429             .73 

Options granted  during the year
 at exercise  prices which equal
 market price of stock at date of
 grant:
   Weighted average exercise price             -            $      -                     10,000        $   3.50
   Weighted average fair value                 -                   -                     10,000            1.66
</TABLE> 

The following table summarizes information about fixed stock options at March
31, 1998:

<TABLE> 
<CAPTION> 
                                          Options Outstanding                                 Options Exercisable
                            ------------------------------------------------------    ----------------------------------
                                    Number    Weighted-Average                                Number                    
Range of                    Outstanding at           Remaining    Weighted-Average    Exercisable at    Weighted-Average
Exercise Prices             March 31, 1998    Contractual Life      Exercise Price    March 31, 1998      Exercise Price 
------------------------------------------------------------------------------------------------------------------------
<S>                         <C>               <C>                 <C>                 <C>               <C>   
$   1.00                        87,000             4.1 years          $   1.00             87,000            $   1.00
$   3.50 to 3.63               286,927             2.1 years              3.52            263,617                3.52
                               -------                                                    -------
                               373,927                                                    350,617
                               =======                                                    =======
</TABLE> 

                                     F-20
<PAGE>
 
                                                   CARDIAC CONTROL SYSTEMS, INC.

                                                   NOTES TO FINANCIAL STATEMENTS

================================================================================

                         Non-Plan Stock Options
                         ----------------------

                         The Company has granted options to independent sales
                         representatives, Board of Directors and others. The
                         total number of non-plan stock options outstanding at
                         March 31, 1998 and 1997 were 23,548 and 31,406,
                         respectively. The total number of exercisable non-plan
                         stock options at March 31, 1998 and 1997 were 21,548
                         and 24,073, respectively. The exercise price for these
                         options range from $.40 to $10.50 per share. These
                         options are exercisable over five-year periods and
                         expire five years from the date of grant. The value of
                         these options was not material, and accordingly, no
                         compensation cost has been recognized by the Company.

                         Common Stock Purchase Warrants
                         ------------------------------

                         Common stock purchase warrants outstanding at March 31,
                         1998 are as follows:

<TABLE> 
<CAPTION> 
                                                                                   Exercise
                                                                     Number of        Price
                                                                    Underlying          Per   Expiration
                                                                        Shares        Share         Date
                         -------------------------------------------------------------------------------
                         <S>                                        <C>            <C>        <C> 
                         Converted debenture holders                   100,000     $   5.00      3/31/99
                         Sirrom (see Note 7)                           200,000     $    .01      3/31/00
                         Sirrom (see note below)                        50,000          .01     10/18/00
                         Sirrom (see Note 7)                            50,000     $   5.00       6/6/02
                         Coast Business Credit (see Note 7)             37,500     $   4.00      6/30/02
                         Employees                                       3,465          .18      8/21/02
                         Grupo Taper (see note below)                   25,000     $    .80       8/5/07 
                         ==============================================================================
</TABLE> 

                         All of the above warrants were exercisable at March 31,
                         1998, except for Grupo Taper, of which 25,000 are
                         unexercisable. The warrants issued to Grupo Taper
                         become exercisable according to the following schedule:
                         (i) 50,000 shares shall be exercisable one year after
                         the Company achieves ISO and CE approval if the
                         Distribution Agreement is still in force and if Grupo
                         has achieved at least 60% of its forecasted sales
                         commitment; (ii) 25,000 shares shall be exercisable
                         after December 20, 1997 if the Distribution Agreement
                         is

                                     F-21

<PAGE>
 
                                                   CARDIAC CONTROL SYSTEMS, INC.

                                                   NOTES TO FINANCIAL STATEMENTS

================================================================================

                         in force and Grupo has achieved 60% of its forecasted
                         sales commitment for the year ended December 20, 1997;
                         and (iii) 25,000 shares shall be exercisable after
                         December 20, 1998 if the Distribution Agreement is in
                         force and if Grupo has achieved its forecasted sales
                         commitment over the two-year period ending December 20,
                         1998. Certain of the above warrants contain "piggy-
                         back" registration rights and anti-dilution provisions.

                         The Company granted Sirrom 25,000 warrants in October
                         1995 and 25,000 in May 1996 at an exercise price of
                         $.01 per share. These warrants were issued under an
                         agreement whereby Sirrom gave up a first security
                         interest as a result of the issuance of a note payable.
                         The Company recorded $81,000 during the year ended
                         March 31, 1997 as deferred financing costs and
                         additional paid-in capital, representing the difference
                         between the estimated fair market value of the
                         underlying stock at the date of grant and $.01 per
                         share.

                         Common Stock Reserved
                         ---------------------

                         The aggregate number of shares of the Company's common
                         stock reserved for future issuance at March 31, 1998 is
                         summarized as follows:

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

<TABLE> 
                         <S>                                             <C> 
                         Common stock options:
                          1987/1992 Stock Option Plan                    396,407
                          Non-plan                                        31,318
                         Common stock purchase warrants:
                          Sirrom Capital Corporation                     300,000
                          Grupo Taper                                     25,000
                          Converted debenture holders                    100,000
                          Coast Business Credit                           37,500
                          Employees                                        3,465
                         Directors' compensation                          69,765
                         -------------------------------------------------------

                                                                         963,455
                         =======================================================
</TABLE> 

9. INCOME TAXES   Significant components of the Company's deferred income tax
                  assets and liabilities at March 31, 1998 are as follows:

                                     F-22

<PAGE>
 
                                                 CARDIAC CONTROL SYSTEMS, INC.

                                                  NOTES TO FINANCIAL STATEMENTS


================================================================================


<TABLE> 
                  --------------------------------------------------------------
                  <S>                                             <C> 
                  Deferred tax assets:
                   Accrued liabilities                            $      99,000
                   Net operating loss carryforwards                   6,785,000
                   Inventory                                            148,000
                   Amortization                                          42,000
                   Other                                                  3,000
                  --------------------------------------------------------------
                  Gross deferred tax assets                           7,077,000

                  Deferred tax liability - depreciation                (409,000)
                  Valuation allowance                                (6,668,000)
                  --------------------------------------------------------------
                  Net deferred taxes                              $           -
                  ==============================================================
</TABLE> 

                  The net change in the valuation allowance for deferred tax
                  assets was a decrease of $178,000 in fiscal 1998. As of March
                  31, 1998, the Company has approximately $18,900,000 of tax net
                  operating loss carryforwards (NOLs) available that expire from
                  1998 through 2011. The tax benefit of these losses of
                  approximately $6,426,000 has been offset by a valuation
                  allowance sufficient to reduce the deferred tax asset to an
                  amount management believes is more likely than not to be
                  realized.

                  The provision for income taxes differs from the amounts
                  computed by applying the Federal statutory rates to loss
                  before taxes due to the following:

<TABLE> 
<CAPTION> 
                                                              1998      1997
                  --------------------------------------------------------------
                  <S>                                        <C>       <C> 
                  Provisions for Federal income taxes
                   at the statutory rate                     (34.0%)   (34.0%)
                  Loss producing no current tax benefit       34.0%     34.0%
                  --------------------------------------------------------------
                  Taxes on income                                 -         -
                  ==============================================================
</TABLE> 

                                     F-23
<PAGE>
 
                                                   CARDIAC CONTROL SYSTEMS, INC.

                                                   NOTES TO FINANCIAL STATEMENTS

================================================================================

10.  SEGMENT DATA        The Company operates in a single industry segment, that
     AND                 of providing implantable medical products to the health
     SIGNIFICANT         care industry. During the years ended March 31, 1998
     CUSTOMERS           and 1997, the Company exported its products to
                         European, Japanese and Asian distributors and exported
                         components and assemblies to certain European
                         manufacturers. Sales by geographic area for the years
                         ended March 31, 1998 and 1997 are as follows:

<TABLE> 
<CAPTION> 
                         Geographic Area                     1998         1997
                         -------------------------------------------------------
                         <S>                           <C>          <C> 
                         United States                 $3,047,963   $3,486,511
                         Europe                           605,440      626,508
                         Japan/Asia                       169,656       88,028
                         -------------------------------------------------------
                                                                    
                                                       $3,823,059   $4,201,047
                         =======================================================
</TABLE> 

                         The Company's products are primarily distributed
                         through independent sales representatives in the United
                         States. During the year ended March 31, 1998, two of
                         the Company's independent sales representatives each
                         accounted for in excess of 10% of the Company's sales
                         and in the aggregate accounted for $897,492 (23%) of
                         the Company's sales. During the year ended March 31,
                         1997, two of the Company's independent sales
                         representatives each accounted for in excess of 10% of
                         the Company's sales and in the aggregate accounted for
                         $892,279 (21%) of the Company's sales.

                         Further, pursuant to an electrode lead Supply Agreement
                         with Intermedics Inc., the Company sold $1,095,076 and
                         $1,954,408 of product to Intermedics Inc. for the years
                         ended March 31, 1998 and 1997, respectively, which
                         accounted for 29% and 47% of the Company's sales.

11. COMMITMENTS          Patent Licensing Agreements
                         ---------------------------
    AND
    CONTINGENCIES        Effective July 1, 1986, the Company renegotiated its
                         exclusive license to a patented electrode-wire coating
                         system that was originally acquired by the Company on
                         July 1, 1981. The modified license agreement requires
                         the payment of royalties equal to a percentage of sales
                         of products manufactured

                                 F-24         

<PAGE>
 
                                                   CARDIAC CONTROL SYSTEMS, INC.

                                                   NOTES TO FINANCIAL STATEMENTS


================================================================================


                      using the patented technology. The license became non-
                      exclusive on July 1, 1994. The term of the license
                      agreement expires upon the expiration date of the patent,
                      February 4, 2002, unless terminated earlier by the
                      Company. Royalty expense under the terms of the agreement
                      for the years ended March 31, 1998 and 1997 was $39,564
                      and $62,655 respectively. Further, on March 29, 1993, the
                      licensor executed a sublicense agreement with the Company,
                      enabling an unrelated company to manufacture the licensed
                      product.

                      Purchase Obligations
                      --------------------

                      During the year ended March 31, 1989, the Company entered
                      into an agreement for the procurement of hybrid
                      microelectronic circuits. The development of circuits for
                      the Company's atrial-controlled ventricular and single-
                      chamber pacing products was completed in fiscal 1992.
                      Development of the circuits for the Company's dual-chamber
                      devices was completed in fiscal 1993. As of March 31,
                      1998, the Company's future maximum purchase obligation
                      approximated $629,000.

                      During the year ended March 31, 1990, the Company entered
                      into an agreement for the procurement of integrated
                      circuits. The development of these circuits was completed
                      in fiscal 1992. As of March 31, 1998, the Company's future
                      maximum purchase obligation approximated $235,000, of
                      which approximately $165,000 has been prepaid by the
                      Company.

                      Legal Proceedings
                      -----------------

                      The Company is party to various legal proceedings arising
                      in the normal conduct of business. Management believes
                      that the final outcome of these proceedings will not have
                      a material adverse effect upon the Company's financial
                      position or results of operations.

12. SUBSEQUENT        During April 1998, the Company issued $300,000 of 8% 
    EVENT             convertible debentures. Interest is payable in cash or
                      stock, or a combination thereof, on each April 30 and
                      October 31 commencing October 31, 1998 and ending April
                      24, 2003, at which time all outstanding principal and
                      interest is due. The debentures are convertible from April
                      24, 1998 through the day immediately

                                      F-25
<PAGE>
 
                                                   CARDIAC CONTROL SYSTEMS, INC.

                                                   NOTES TO FINANCIAL STATEMENTS


================================================================================


                    prior to the maturity date at a rate of one share of common
                    stock for each $.40 of outstanding principal. The conversion
                    price is adjustable upon the occurrence of certain events.

13. PROPOSED        In October 1997, the Company executed a letter of intent to
    MERGER          merge with Electro-Catheter Corporation ("Electro"), wherein
                    CCS Subsidiary, Inc. ("Sub") a newly-formed New Jersey
                    corporation and wholly-owned subsidiary of the Company will
                    merge into Electro pursuant to an Agreement and Plan of
                    Reorganization among the Company, Electro and Sub. If the
                    merger is consummated, of which there can be no assurance,
                    the separate corporate existence of Sub will cease and
                    Electro will become a wholly-owned subsidiary of the
                    Company. Prior to consummation of the merger, the Company
                    will reorganize into a holding company structure, whereby
                    the Company will become a direct, wholly-owned subsidiary of
                    Catheter Technology Group, a Delaware corporation and a
                    holding company ("CTG"). CTG will succeed to all rights and
                    obligations of Cardiac, and the stockholders of the Company
                    will become stockholders of CTG and will continue to hold
                    their shares of capital stock without any change in number,
                    designation, terms or rights. Pursuant to the merger, each
                    outstanding share of Electro common stock will be converted
                    into the right to receive one share of common stock, $.10
                    par value, of CTG. The proposed merger will result in the
                    reverse acquisition by Electro stockholders of CTG due to
                    the fact that the number of shares of CTG common stock to be
                    issued to Electro's current stockholders will represent
                    approximately 71% of the outstanding CTG common stock.

                                      F-26
<PAGE>
 
                                   PART III

ITEM 9.  DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY

  The following sets forth the names and ages of the directors and executive
officers of the Company as of March 31, 1998, in addition to information
respecting their positions and offices with the Company, their periods of
service in such capacities, and their business experience for at least the past
five years.  There are no family relationships among the directors and executive
officers of the Company.

  William H. Burns Jr., age 48, has been a member of  the Board of Directors
since September 1995.  Mr. Burns is a health care entrepreneur and is a director
and president of five health care businesses (Biosight, Inc., BioVector, Inc.,
Minrad, Inc., Medical Infusion, Inc., and Fertility Acoustics, Inc., and is a
fund manager of Platform Technologies Holdings, LLC, a venture capital fund).
From July 1988 through March 1994, he was Founder, President and CEO of Matrx
Medical, Inc., a medical product design and distribution company.  His efforts
in building Matrx Medical, Inc. earned him an award as Entrepreneur of the Year
in New York State in 1993.  From 1975 through 1988, Mr. Burns held various
positions with the BOC group, including Vice President and General Manager of
Ohmeda, DVE Care Products.

  Bart C. Gutekunst, age 47, has been a member of the Board of Directors since
July 1994 and became Chairman of the Board in October 1994.  Mr. Gutekunst
focuses on growing businesses with a view toward enhancing value through
strategic, managerial and financial advisory involvement, with a particular
emphasis on the medical sector.  In July 1995 he became Chairman and CEO of
NovaVision, Inc., an eye care technology company.  In May 1997, NovaVision, Inc.
was merged with American Consolidated Laboratories, Inc., a specialty vision
products company, and Mr. Gutekunst was Chairman of the Board from May 1997
until January 1998.  Also, since August 1997, Mr. Gutekunst has been a director
of Platform Technologies, LLC, a pool of venture capital investments.  From
September 1992 to September 1994, he was Vice Chairman and Chief Financial
Officer of R-2 Medical Systems, Inc., a cardiac care device company, with
responsibility for strategic and corporate development as well as overseeing the
financial functions of the company.  From February 1994 to March 1996, Mr.
Gutekunst served as Chairman of the Board of Directors of United Education and
Software, Inc., a multi-state operator of nursing and vocational schools
operating under Chapter 11 of the United States Bankruptcy Code where he oversaw
the voluntary liquidation of the company's assets.  From 1988 to 1990, he was a
senior member of an investment firm, Entrecanales, Inc., funded by a major
European family, making equity investments and leveraged buyouts.  From 1981 to
1987, he was Executive Vice President and a member of the Board of Directors, as
well as the Management and Investment Committees of Laidlaw, Adams & Peck Inc.,
where he supervised the investment banking department and completed over 50
public and private transactions.  From 1976 to 1981, he was a member of Chemical
Bank's Merchant Banking Group.  Mr. Gutekunst has been a member of the Board of
Directors or advisor to the Board for many companies.

  Larry Haimovitch, age 51, has been a member of the Board of Directors since
November 1994.  He is President of Haimovitch Medical Technology Consultants, a
San Francisco, California based healthcare consulting firm which specializes in
the medical device and technology industry with a particular emphasis on
cardiology-related areas and whose clients have included a major hospital chain,
numerous medical device companies, venture capital firms, investment groups, and
investment bankers.  Prior to forming his firm in 1991, Mr. Haimovitch spent
over 20 years as a healthcare industry analyst for a number of leading research
firms and financial institutions such as Furman Selz, Sutro & Co., and Wells
Fargo Investment Advisors.  He serves as a director to Electro- Pharmacology,
Inc., ORBTEC, Inc. and Milestone Scientific, Inc.

  Augusto Ocana, age 54, was appointed to the Board of Directors in April 1996.
He has over 20 years experience in building, turning around and managing
international health care businesses.  Until December 31, 

                                       20
<PAGE>
 
1997, he was Executive Vice President of Grupo Taper International., S.A., a
Spanish based holding group of companies engaging in distribution of state-of-
the-art medical products. Prior to Grupo Taper, Dr. Ocana had been President and
Chairman of Rempak International and Managing Director of Abbott Laboratories.
Dr. Ocana has also been trained as a physician and has a degree in international
law.

  Alan J. Rabin, age 47, joined the Company in October 1994 as President, Chief
Executive Officer and a member of the Board of Directors.  Mr. Rabin has 26
years experience in the management and growth of medical companies, with
emphasis on internal business development through marketing, sales, new product
development and building strategic relationships.  Prior to joining the Company,
Mr. Rabin held an array of management positions, including:

       .  From 1992 to September 1994, President and Chief Executive Officer of
          R-2 Medical Systems, Inc., a manufacturer of cardiac care devices,
          including disposables used in cardiac pacing. In partnership with Bart
          Gutekunst, this underperforming company was successfully turned around
          and sold to an industry participant.

       .  Vice President of Marketing and Sales for Stereo Optical Company, a
          manufacturer of disposable and capital ophthalmic diagnostic devices
          from 1987 to 1992.

       .  Director of Marketing and Sales of Tycos Life Sciences, Inc., a
          manufacturer of cardiovascular diagnostic and monitoring devices from
          1985 to 1986 and was instrumental in the turnaround and ultimate sale
          of the company.

       .  From 1980 to 1985, various marketing, new business development and
          product management positions with Davol, Inc., a division of C.R. Bard
          in the surgical and cardiovascular equipment area.

  Mr. Rabin currently serves as a director of BioVector, Inc., a medical
distribution company.  He received a Bachelor of Science degree in biology and a
Master in Business Administration degree from the University of Illinois and
Northwestern University, respectively.

  Robert T. Rylee, age 67, has been a member of  the Board of Directors since
November 1988.  He practiced law from 1958 to 1969 and was a partner in the firm
of Wood, Boykin, Rylee, and Walter from 1965 to 1969.  In 1969, Mr. Rylee became
the President and CEO of Wright Manufacturing Company, a manufacturer of
orthopedic implants and instruments, a position he held until 1981 when he
became a Dow Corning Incorporated U.S. Area Vice President and the General
Manager of Health Care Business.  On May 31, 1993, he retired as Vice President
and Chairman of Health Care Business, a position he had held with Dow Corning
Incorporated since 1986.  He is currently a director of Clarus Medical Systems,
which position  he has held since September 1993.

  Tracey E. Young, age 43, has been a member of the Board of Directors since
September 1995.  She is the Founder and President of Elliot Young & Associates,
Inc., a proprietary health care consulting concern, formed in 1987 to assist
companies and investors in identifying, evaluating, capturing and managing
strategic growth and financing opportunities in high technology health care
markets.  Ms. Young also held key consulting positions with The Wilkerson Group,
both as the founding Associate Director of its Cardiovascular Market
Intelligence Service and as an independent consultant to the firm.  She also
spent seven years in the pacemaker industry in senior marketing and strategic
planning positions with Telectronics Pacing Systems and Intermedics.

                                       21
<PAGE>
 
  William Wharton, age 50, was appointed Vice President of Manufacturing and
Facilities in March 1996.  Mr. Wharton had previously served the Company as Vice
President of Operations since February 1994 and as Vice President of Quality
Assurance since 1985.  Mr. Wharton joined the Company in 1982 as Director of
Quality Assurance.  Before joining the Company, he was employed as a Quality
Assurance Supervisor for at least five years by Medtronic, Inc., a major
competitor in the cardiac pacing industry.

  W. Alan Walton, age 64, joined the Company Control Systems, Inc. in March,
1996 as Executive Vice President and Chief Operating Officer.  Mr. Walton is a
fellow of the Institute of Chartered Accountants in England and from March, 1995
to February, 1996 was engaged as a financial and operations consultant with
Biosight, Inc. of Orchard Park, New York, a firm specializing in helping health
care businesses enhance their performance.  Prior to his experience with
Biosight, he spent 19 years in senior financial and systems management positions
with Dunlop Holdings PLC in the United Kingdom and the United States, including
a position as General Manager, Group Information System with responsibility for
Dunlop's global computing and communications.

  Jonathan S. Lee, age 46, a biomedical engineer, joined the management team at
the Company, Inc. in May, 1996 and serves as Vice President - Research and
Development.  Prior to joining the Company, Mr. Lee spent 18 years in Research
and Development, Regulatory Affairs and Marketing with Telectronics Pacing
Systems, a leading pacemaker manufacturer.  He established and managed
Telectronics' worldwide service facilities and established Telectronic's US
research and development presence in Denver, Colorado.  Mr. Lee was also
involved in International Marketing Management with Telectronics.  Mr. Lee
received a Bachelor of Engineering degree in Biomedical Engineering from the
University NSW in Sidney, Australia.  He also completed two years post graduate
work in computer studies at the University NSW.  He has been a member of the
North American Society of Pacing and Electrophysiology since 1984.

  Kirk Kamsler, age 47, joined the Company in April 1996 as Director of
Marketing and Sales.  He has over 20 years of sales, sales management and
marketing management experience with a variety of medical device companies,
including Davis & Geck, Inc., Matrix Medical, Inc. and Marquette Electronics,
Inc.  Mr. Kamsler received a Bachelor of Arts degree from St. Lawrence
University in Canton, New York.

  The Board of Directors is elected at each annual meeting of the stockholders.
Each Director holds office until his successor is duly elected and qualified or
until his earlier resignation or removal, with or without cause, at any duly
noticed special meeting of the stockholders of the Company by the affirmative
vote of the holders of a majority of the shares of the Company Common Stock
present in person or represented by proxy and entitled to vote at an election of
directors.

  Under the bylaws of the Company, officers are elected annually by the Board of
Directors at the meeting of the Board of Directors following the annual meeting
of the stockholders.  Each officer holds office until his or her successor has
been chosen and qualified, or until his or her death, resignation or removal,
with or without cause, by the Board of Directors.

  None of the Directors or Executive Officers of the Company is a director of
any company, other than the Company, with a class of equity securities
registered pursuant to Section 12 of the Securities and Exchange Act of 1934, as
amended, or subject to the requirements of Section 15(d) of such Act or any
company registered as an investment company under the Investment Company Act of
1940, as amended, except for Larry Haimovitch who is a director of Electro-
Pharmacology, Inc. and Alan J. Rabin and William H. Burns who are directors of
American Consolidated Laboratories, Inc.

  

                                       22
<PAGE>
 
     SECTION 16 (A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

     Each Director and Executive Officer, and each person owning beneficially
more than ten (10%) percent of a registered class of the Company's equity
securities, is required to file reports of ownership and changes in ownership
with the SEC, and furnish the Company with copies of all such reports. A late
report was filed for Phillip R. Beutel, director, with respect to a reinstated
stock option grant.


ITEM 10.  DIRECTORS' AND EXECUTIVE OFFICERS' COMPENSATION

     EXECUTIVE REMUNERATION. The following table sets forth information about
the compensation paid or accrued by the Company during the fiscal years ended
March 31, 1998, 1997, and 1996 to the Company's Chief Executive Officers and any
other Executive Officer whose aggregate compensation exceeded $100,000 in fiscal
1998.


                           SUMMARY COMPENSATION TABLE

<TABLE> 
<CAPTION> 
--------------------------------------------------------------------------------------------------------------------------------- 
                                                                                              LONG-TERM
                                                                                             COMPENSATION
                                                               ANNUAL COMPENSATION              AWARDS

                            Fiscal Year                                      Other            Securities
   Name and Principal          Ended                                         Annual           Underlying          All Other
        Position             March 31        Salary          Bonus        Compensation         Options           Compensation
--------------------------------------------------------------------------------------------------------------------------------- 
<S>                        <C>            <C>            <C>            <C>               <C>                 <C> 
Alan J. Rabin                  1998          $150,624          -                               12,559(1)        $      559(2)
(President, CEO,               1997          $146,000          -                               12,000(3)        $      521(4)
Director)                      1996          $110,000    $10,000(5)                            20,000(6)        $   26,349(7)
--------------------------------------------------------------------------------------------------------------------------------- 
Bart C. Gutekunst              1998           $48,624          -                               10,906(8)        $   15,934(9)
(Chairman of the Board)        1997           $48,000          -                               10,000(3)        $   11,313(10)
                               1996           $48,000          -                               15,000(6)        $    8,700(11)
--------------------------------------------------------------------------------------------------------------------------------- 
Kirk D. Kamsler                1998           $93,928    $10,200(12)                            8,000(13)                -
(Vice President Sales)         1997           $81,104          -                               10,000(14)       $   45,000(15)
                               1996                 -          -                                    -                    -
--------------------------------------------------------------------------------------------------------------------------------- 
Jonathan S. Lee                1998          $100,514    $10,920(16)                            8,000(13)                -
(Vice President                1997           $80,596          -                               10,000(17)       $   33,460(15)
Engineering)                   1996                 -          -                                    -                    -
--------------------------------------------------------------------------------------------------------------------------------- 
</TABLE> 

(1) This includes options to purchase 12,000 shares of common stock in the
    Company at $1.00 exercisable immediately and a warrant to purchase 559
    shares of common stock in the Company at $.0.18.

(2) This represents interest on a Security Agreement and Promissory Note between
    Alan J. Rabin and the Company dated April 15, 1997.

(3) On August 22, 1996, the Board of Directors awarded these options to purchase
    shares of common stock in the Company at $3.50 per share, exercisable on
    March 31, 1997.

(4) This represents interest received prior to conversion of the Debentures to
    stock.

(5) In addition to his salary, Mr. Rabin is entitled to a performance bonus.
    This represents the performance bonus paid in respect of Mr. Rabin's
    services during the year ended March 31, 1996.

                                       23
<PAGE>
 
(6)  On May 5, 1995, the Board of Directors awarded these options to purchase
     shares of common stock of the Company at $3.63 per share. The options are
     now exercisable.

(7)  This represents reimbursement of relocation expenses, $21,549, paid to Mr.
     Rabin pursuant to his employment agreement and consulting fees in
     connection with debenture financing, $4,800.

(8)  These include options to purchase 8,000 shares of common stock in the
     Company at $1.00 exercisable immediately and a warrant to purchase 2,906
     shares of common stick in the Company at $0.18.

(9)  This represents interest of $2,906 on two security agreements and
     promissory notes between Bart C. Gutekunst and the Company dated March 24,
     1997 and April 21, 1997, and consulting fees related to the Coast financing
     in the amount of $13,028.

(10) This includes $7,500 in connection with his facilitating the Grupo Taper
     Distributor and Sirrom mortgage agreements. It also includes $3,292 of
     interest paid on a $100,000 secured promissory note, and $521 of interest
     paid on debentures held prior to the conversion of the debentures to stock.

(11) This represents consulting fees in connection with the Debenture financing.

(12) In addition to his salary, Mr. Kamsler received a performance bonus. This
     represents the performance bonus paid in respect of Mr. Kamsler's services
     during the year ended March 31, 1997.

(13) This represents options to purchase 8,000 shares of common stock in the
     Company at $1.00 exercisable immediately.

(14) Upon execution of his employment agreement with the Company, Mr. Kamsler
     was granted options to purchase 10,000 shares of common stock of the
     Company at $3.50 per share, exercisable one third on April 21, 1997, one
     third on April 21, 1998 and one third on April 21, 1999.

(15) This represents reimbursement of relocation expenses paid pursuant to an
     employment agreement.

(16) In addition to his salary, Mr. Lee received a performance bonus. This
     represents the performance bonus paid in respect of Mr. Lee's services
     during the year ended March 31, 1997.

(17) Upon execution of his employment agreement with the Company, Mr. Lee was
     granted options to purchase 10,000 shares of common stock of the Company at
     $3.50 per share, exercisable one third on May 5, 1997, one third on May 5,
     1998 and one third on May 5, 1999.

                                       24
<PAGE>
 
     The following table sets forth information concerning options granted
during the fiscal year ended March 31, 1998 to those persons named in the
preceding Summary Compensation Table.

                        OPTION GRANTS IN LAST FISCAL YEAR

<TABLE> 
<CAPTION> 
----------------------------------------------------------------------------------------------------------------------
                                    Number of
                                    Securities          % of Total
                                    Underlying       Options Granted
                                     Options         to Employees in         Exercise Price           Expiration
Name                                 Granted           Fiscal Year             ($/share)                 Date
----------------------------------------------------------------------------------------------------------------------
<S>                                 <C>              <C>                     <C>                      <C> 
Bart C. Gutekunst                      8,000(1)             9%                   $1.00                 5/8/2002
Alan J. Rabin                         12,000(1)            14%                   $1.00                 5/8/2002
Kirk D. Kamsler                        8,000(1)             9%                   $1.00                 5/8/2002
Jonathan S. Lee                        8,000(1)             9%                   $1.00                 5/8/2002
</TABLE> 

     (1)  These options are subject to immediate exercise.

     The following table sets forth information concerning the value of
unexercised stock options at March 31, 1997 for those persons named in the
Summary Compensation Table.

                   AGGREGATED OPTIONS IN LAST FISCAL YEAR AND
                          FISCAL YEAR END OPTION VALUES

<TABLE> 
<CAPTION> 
----------------------------------------------------------------------------------------------------------------------
                                                            Number of Securities           Value of Unexercised In-
                              Shares                       Underlying Unexercised            The-Money Options at
                           Acquired on      Value        Options at Fiscal Year End             Fiscal Year End
Name                         Exercise     Realized      Exercisable/Unexercisable(1)       Exercisable/Unexercisable
----------------------------------------------------------------------------------------------------------------------
<S>                        <C>            <C>           <C>                                <C>      
Bart C. Gutekunst                -            -                   54,429/0                           $0/$0
Alan J. Rabin                    -            -                   72,571/0                           $0/$0
Jonathan S. Lee                  -            -                 11,333/6,667                         $0/$0
Kirk D. Kamsler                  -            -                 11,333/6,667                         $0/$0
</TABLE> 

     (1)  These options have been adjusted to give effect to the Company's one
          for seven reverse stock split effected December 13, 1994.

COMPENSATION OF DIRECTORS

     For their service on the Board, each outside director is entitled to
receive annually the sum of $3,000 and such number of shares of the Company's
Common Stock that have a total value of $6,000 based on the average of the bid
and ask prices of the Company's Common Stock on the OTC Bulletin Board Service
as quoted on March 31, 1998. The Company accrued in respect of each of William
Burns, Larry Haimovitch, Augusto Ocana, Robert Rylee and Tracey Young the sum of
$3,000 and 13,953 shares of the Company's Common Stock for their services
through fiscal year 1998.

EMPLOYMENT AGREEMENTS

     Mr. Alan J. Rabin is employed as the President and Chief Executive Officer
of the Company pursuant to a three-year employment agreement dated as of October
13, 1994 amended by the Board of Directors at its meeting of May 15, 1996. As
compensation thereunder, Mr. Rabin receives an annual salary of $150,000;
reimbursement for business travel and other business expenses; and a bonus of up
to 50% of his annual salary based on the 

                                       25
<PAGE>
 
performance of the Company. The employment agreement also provided reimbursement
for Mr. Rabin's relocation and temporary living expenses, not to exceed $38,000
plus the cost associated with the moving of personal possessions and his family.
His employment agreement provides a severance package under certain defined
circumstances equal to the balance of the salary due under the employment
agreement (payable in accordance with the Company's payroll practices) and a
lump sum payment equal to nine months of his annual base salary then in effect,
plus maintenance by the Company (to the extent permitted under plan documents)
for nine months from the date of termination all benefit plans in which he was
entitled to participate while an employee, or the equivalent. The nine-month
lump sum severance payment is also payable to Mr. Rabin in the event his
employment agreement is not renewed by the Company at the end of its term.
Pursuant to his employment agreement, the Company awarded to Mr. Rabin a stock
option for 28,571 shares of the Company's Common Stock at an exercise price of
$3.50 per share, all of which are now exercisable immediately. Mr. Rabin's stock
option agreement contains a change of control provision whereby in the event of
a change in control of the Company, all outstanding options become immediately
exercisable.

     Mr. Bart C. Gutekunst is employed as the Chairman of the Board of the
Company pursuant to a three-year employment agreement dated as of October 13,
1994. As compensation thereunder, Mr. Gutekunst receives an annual salary of
$48,000; reimbursement for business travel and other business expenses; and a
bonus related to the Company's financial, capital raising and corporate
development and acquisition activities in the form of the following
transactional fees: 1% for debt and equity source, and 1% of the gross
consideration for asset acquisitions or sales, which fees are payable to Mr.
Gutekunst upon closing by the Company or its successor-in-interest of the
applicable transaction. Pursuant to the employment agreement, Mr. Gutekunst
received an option for 21,429 shares of the common stock of the Company at an
exercise price of $3.50 per share, all of which are now exercisable. His
employment agreement contains the same severance provisions as Mr. Rabin's
employment agreement and his stock option contains the same change of control
provision as Mr. Rabin's stock option agreement.

STOCK OPTION PLANS

     On September 9, 1987, the Board of Directors of the Company adopted the
1987 Non-Qualified Stock Option Plan (the "1987 Plan"). The 1987 Plan provided
the Board of Directors with the authority to grant to employees, officers and
directors, and employees of the Company non-qualified options to purchase up to
a maximum of 142,857 shares of the Company's Common Stock.

     On February 7, 1992, the Company's Board of Directors adopted the 1992
Non-Qualified Stock Option Plan (the "1992 Plan"). The 1992 Plan provided the
Board of Directors with the authority to grant officers, directors, and
employees of the Company non-qualified options to purchase up to a maximum of
42,857 shares of the Company's Common Stock. On March 17, 1994, the Board of
Directors amended and restated the 1992 Plan and provided therein authorization
to issue options for up to a maximum of 157,143 shares of the Company's Common
Stock.

     On January 19, 1995, the Board of Directors of the Company authorized the
combination of the 1987 Plan and the 1992 Plan into one plan now known as the
Combined 1987-1992 Non-Qualified Stock Option Plan ("Combined Option Plan"). The
Combined Option Plan provides that all issued and outstanding stock option
agreements under the previous plans shall be governed by the Combined Option
Plan. Under the Combined Option Plan, the Company is authorized to issue options
to employees, officers and directors to purchase up to a maximum of 400,000
shares of the Company's Common Stock. As of March 31, 1998, there were
outstanding options for 373,927 shares under the Combined Plan, of which 309,857
shares were subject to options held by officers and directors at exercise prices
ranging from $1.00 to $3.75 per share.

                                       26
<PAGE>
 
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     CERTAIN BENEFICIAL OWNERS. As of May 29, 1998, eighteen (18) stockholders
were known by the Company beneficially to own five percent (5%) or more of the
outstanding voting securities of the Company. The following table sets forth the
indicated information as of May 29, 1998 with respect to each person known by
the Company own beneficially to more than five percent (5%) (calculated in
accordance with the guidelines promulgated by the Securities and Exchange
Commission) of the 2,648,739 issued and outstanding shares of the Company Common
Stock on that date.

<TABLE> 
<CAPTION> 
          -----------------------------------------------------------------------------------------------------------
          Name and Address                                         Amount and Nature                   Percent
          of Beneficial Owner                                 of Beneficial Ownership (1)           of Class (2)
          -----------------------------------------------------------------------------------------------------------
          <S>                                                 <C>                                   <C> 
          Phillip R. Beutel(3)                                           277,351                        10.38%
          3 Chase Lane
          Colorado Springs, CO 80906

          Penfield Partners, L.P.(4)                                     159,856                         6.00%
          c/o William D. Witter, Inc.
          150 E. 53rd Street
          New York, New York 10022

          Bradley Resources Company(5)                                   452,280                        15.49%
          107 John Street
          Southport, CT 06490

          ROI Partners(6)                                                143,399                         5.39%
          353 Sacramento Street
          San Francisco, CA 94111

          Austin W. Marxe(7)                                             541,194                        20.28%
          153 East 53rd Street, Room 5101
          New York, New York 10022

          Irwin Gruverman(8)                                             187,500                         6.61%
          16 Tanglewood Road
          Needham, MA 02194

          Paul F. Glenn(9)                                               250,000                         8.62%
          P.O. Box 50310
          Santa Barbara, CA 93150-0310

          Sirrom Capital(10)                                             350,000                        11.87%
          St. Cloud Corner
          500 Church Street, Suite 200
          Nashville, TN 37219
</TABLE> 

(1)   Except as otherwise indicated, each person is the record owner of the
      shares indicated and possesses the sole voting and investment power with
      respect to such shares of common stock.

(2)   Computations of percentage ownership of each individual treat warrants and
      options to purchase common stock exercisable within the next sixty days as
      though the shares subject thereto were issued and outstanding.

(3)   Includes options to purchase 14,286 shares and warrants to purchase 8,665
      shares.

                                       27
<PAGE>
 
(4)   Includes warrants to purchase 17,332 shares. Penfield Partners, L.P. is a
      Delaware limited partnership. Pine Creek Advisors, L.P., a Delaware
      limited partnership, having its address c/o William D. Witter, Inc., 153
      East 53rd Street, New York, New York 10022 is the general partner of
      Penfield Partners, L.P. The general partners of Pine Creek Advisors, L.P.
      are Mr. Schuss and William D. Witter, Inc., 153 East 53rd Street, New
      York, New York 10022. Mr. William D. Witter is the President of William D.
      Witter, Inc. and controls all shares controlled by William D. Witter, Inc.
      Through their control of Pine Creek Advisors, L.P., each of Mr. Schuss and
      Mr. Witter, acting individually, may vote and/or dispose of the shares
      held by Penfield Partners, L.P.

(5)   Bradley Resources Company ("Bradley") is a partnership. Mr. Holbrook, Mr.
      McGoogan, and Mr. Traister are the general partners of Bradley. Each
      general partner, acting individually, may vote and/or dispose of all the
      shares held by Bradley. Bradley's shares include 181,898 shares held by
      Bradley directly, warrants to purchase 16,811 shares held by Bradley,
      options to purchase 3,571 shares held by Mr. Holbrook but beneficially
      owned by Bradley, and 250,000 convertible debentures held by Bradley.

(6)   Mr. Soboleski and Mr. Boyer are the general partners in the partnerships
      holding the Company Common Stock as follows: 143,399 shares, including
      warrants to purchase 12,132 shares are held by ROI Partners, 12,000 shares
      are held by ROI Offshore Fund, 6,000 shares are held by NAV LLC, 7,000
      shares are held by Pleiades Investment Partners, and 7,000 shares are held
      by ROI & Lane, L.P. The address of each of the foregoing partnerships is
      353 Sacramento Street, San Francisco, CA 94111. Each general partner,
      acting individually, may vote and/or dispose of all of the shares held by
      any of the foregoing partnerships.

(7)   Mr. Marxe owns 28,111 shares directly. Special Situations Fund III, L.P.
      ("Special"), 153 East 53rd Street, Room 5101, New York, New York, 10022
      owns 327,770 shares, including warrants to purchase 27,731 shares. Special
      Situations Cayman Fund ("Cayman"), 153 East 53rd Street, Room 5101, New
      York, New York 10022 owns 182,713 shares including warrants to purchase
      10,399 shares. Mr. Marxe is President and Chief Executive Officer of AWM
      Investment Company, Inc. ("AWM"), 153 East 53rd Street, Room 5101, New
      York, New York 10022. MGP Advisors Limited Partnership ("MGP"), 153 East
      53rd Street, Room 5101, New York, New York 10022 is the general partner of
      Special and AWM, in turn, is the general partner of MGP. Mr. Marxe,
      through AWM and MGP, has control over all shares held by Special. AWM is
      also the general partner of Cayman. Through AWM, Mr. Marxe has control
      over all shares held by Cayman. Control of shares held by Special and
      Cayman is shared with Mr. Greenhouse, the Executive Vice President of AWM.
      Mr. Greenhouse's address is 153 East 53rd Street, Room 5101, New York, New
      York 10022. Each of Mr. Marxe and Mr. Greenhouse may, individually, vote
      and/or dispose of all shares held by Special and/or Cayman. Mr. Greenhouse
      owns 10,242 shares directly, including warrants to purchase 866 shares.
      Mr. Greenhouse is the Executive Vice President of AWM. Through MGP and
      AWM, Mr. Greenhouse has control over all shares held by Special. Through
      AWM, Mr. Greenhouse has control over all shares held by Cayman. Control is
      shared with Mr. Marxe.

(8)   Includes convertible debentures convertible into 187,500 shares, of which
      62,500 shares are held by Mr. Gruverman directly and 125,000 shares are
      held by G&G Diagnostics, L.P. II, a limited partnership ("G&G"). Mr.
      Gruverman is the general partner of G&G and has control of all shares held
      by G&G.

(9)   Includes convertible debentures convertible into 250,000 shares.

(10)  Includes warrants to purchase 300,000 shares.

      MANAGEMENT. The following table sets forth the number of shares of common
stock beneficially owned by each Director of the Company as of May 29, 1998 and
of each Executive Officer whose aggregate compensation exceeded $100,000 in
fiscal year 1998, and the percentage of the outstanding shares such ownership
represented at the close of business on May 29, 1998 (according to information
received by the Company), together with information as to stock ownership of all
Directors and Executive Officers of the Company as a group as of May 29, 1998.

                                       28
<PAGE>
 
<TABLE> 
<CAPTION> 
     -----------------------------------------------------------------------------------------------------------   
     Name of Individual or                                     Amount and Nature of              Percent           
     Number of Persons in Group                             Beneficial Ownership(1)(3)         of Class(2)         
     -----------------------------------------------------------------------------------------------------------   
     <S>                                                    <C>                                <C>                 
     William H. Burns..................................                 24,274                     0.91%           
     Bart C. Gutekunst.................................                 67,577                     2.50%           
     Larry G. Haimovitch...............................                 33,841                     1.27%           
     Augusto Ocana.....................................                 11,174                     0.42%           
     Alan J. Rabin.....................................                 85,572                     3.14%           
     Robert T. Rylee...................................                 43,699                     1.63%           
     Tracey E. Young...................................                 23,491                     0.88%           
     Jonathan S. Lee...................................                 19,667                     0.74%           
     Kirk D. Kamsler...................................                 15,667                     0.59%           
     All Directors and Executive Officers                                                                          
       as a group (12 persons).........................                382,054                    12.94%            
</TABLE> 

(1)  Except as otherwise indicated, each person is the record owner of the
     shares indicated and possesses the sole voting and investment power.

(2)  Computations of percentage ownership of each individual and of the group
     treat warrants and options to purchase common stock exercisable within the
     next 60 days as though the shares subject thereto were issued and
     outstanding.

(3)  Includes warrants and options exercisable within the next 60 days to
     purchase shares of common stock granted pursuant to the Company's Combined
     Option Plan (see "Item 10. Directors' and Executive Officers' Compensation-
     Stock Option Plans") as follows:

<TABLE> 
<CAPTION> 
     -------------------------------------------------------------------------------------------------   
     Name of Individual or                                                                  Number       
     Number of Persons in Group                                                            of Shares     
     -------------------------------------------------------------------------------------------------   
     <S>                                                                                   <C>           
     William H. Burns...........................................................             13,000      
     Bart C. Gutekunst..........................................................             58,201      
     Larry G. Haimovitch........................................................             15,000      
     Augusto Ocana..............................................................              7,000      
     Alan J. Rabin..............................................................             73,996      
     Robert T. Rylee............................................................             36,429      
     Tracey E. Young............................................................             18,000      
     Jonathan S. Lee............................................................             14,667      
     Kirk D. Kamsler............................................................             14,667      
     All Directors and Executive Officers as a group (12 persons)...............            302,913       
</TABLE> 

ITEM 12.  CERTAIN RELATIONSHIPS AND TRANSACTIONS

     See "Employment Agreements" for a description of certain compensation
arrangements.

     During the last calendar quarter of 1994, the Company raised $2,885,000
through a private placement of 5% Convertible Debentures (the "Debentures").
Interest payments have been made on March 31 and October 31 of 

                                       29
<PAGE>
 
each year, commencing March 31, 1995. The Debentures were to mature October 31,
1999. Effective March 31, 1996, the holders of the Debentures converted their
Debentures into the Company's Common Stock at a conversion rate of $2.80 per
share. Alan Rabin and Bart Gutekunst, President/Chief Executive Officer and
Chairman of the Board, respectively, of the Company, each received 8,928 shares
of the Company's Common Stock as a result of the conversion of the Debentures
owned by them. Those beneficial owners holding 5% or more of the Company issued
and outstanding Common Stock and the Common Stock they received upon conversion
of their Debentures is as follows: Phillip R. Beutel, 89,285 shares; Special
Situation Fund III, L.P., 285,714 shares; Penfield Partners, 178,571 shares;
Bradley Resources Company, 173,214 shares; and ROI Partners, 125,000 shares.
Pursuant to the terms of the Debentures, the Company filed with the SEC a
registration statement on Form S-1 registering the Company's Common Stock
underlying the Debentures, which registration statement was declared effective
by the SEC on April 27, 1995.

     In respect of their conversion of the Debentures, the Company issued
warrants to the Debenture holders for an aggregate of 100,000 warrants (to be
divided among the Debenture holders pro rata in accordance with their percentage
interests in the Debentures). The warrants have a term of three years and are
exercisable commencing March 31, 1996 at $5.00 per share.

     Upon the closing of the minimum offering of the Debentures, Alan J. Rabin
and Bart C. Gutekunst entered into employment agreements with the Company on
October 13, 1994. Previously, Mr. Gutekunst and Mr. Rabin had been consulting
with and assisting the Company in preparing its business plan and in obtaining
additional financing. On July 31, 1994, Mr. Gutekunst was appointed to the Board
of Directors to fill a vacancy. On October 13, 1994, Mr. Gutekunst was appointed
Chairman of the Board and Mr. Rabin was appointed the Company's President and
Chief Executive Officer pursuant to their respective employment agreements. For
consulting services rendered to the Company in connection with the development
of the Company's new business plan and the Company's financing, Mr. Rabin and
Mr. Gutekunst were paid consulting fees in the aggregate amount of $130,750. Mr.
Gutekunst and Mr. Rabin also participated in the Debenture financing discussed
above, and each acquired Debentures in the amount of $25,000.

     In November 1995, the Company entered into an agreement with Biosight Inc.,
of which William H. Burns, Jr., a director of the Company, is President and
principal stockholder. Under the agreement, Biosight Inc. provided consulting
services regarding the Company's manufacturing processes and inventory planning.
The agreement provided for payment of $30,000 in fees during the year ended
March 31, 1996 plus reimbursement of approved out-of-pocket expenses, and future
performance-related payments to be paid in stock and cash, provided certain
goals are met. Upon earning $30,000 in performance-related payments (in combined
cash and stock), the agreement provides for subsequent performance-based
payments to be made in the Company Common Stock. On September 12, 1997, the
Company issued 5,714 shares of the Company's Common Stock at $3.50 per share to
William H. Burns, Jr., for performance-based payments of $20,000.

     During fiscal 1996, Tracey E. Young, a director of the Company, provided
consulting services to the Company regarding development of international
markets for the Company's products. In March 1996, the Board of Directors
approved payment of $5,000 in consulting fees to Ms. Young together with a grant
of a stock option for 5,000 shares, exercisable at $3.75 per share. In respect
of consulting services, the Board approved royalty payments to Ms. Young of $100
per unit (each unit comprised of a pacemaker and lead) sold in Japan for the
three year period following approval of the product by regulatory authorities in
that country. As of May 29, 1998, Ms. Young has accrued approximately $1,500 in
royalty fees, however, the Company has not made any royalty payments to her. Ms.
Young has also provided the Company with consulting services on clinical studies
and other matters which included assisting the Company in implementing its
clinical studies for its single-lead DDD system, as well as performing due
diligence on the Company's merger with Electro. As of December 26, 1997, Ms.
Young has invoiced the Company approximately $100,000 for consulting services
performed by her through such date. 

                                       30
<PAGE>
 
The Company intends to pay Ms. Young for her consulting services with funds
obtained through its equity financing in connection with the Merger.

     During fiscal 1996, the Company entered into a distribution agreement for
the European market with Grupo Taper, S.A., Madrid, Spain ("Grupo Taper"). As
part of the Distribution Agreement, Grupo Taper was permitted to designate a
member of the Board of Directors of The Company. Through December 31, 1997, that
member of the Board of Directors of the Company designated by Grupo Taper was
Dr. Augusto Ocana, an executive officer of Grupo Taper. On January 1, 1998, Dr.
Augusto Ocana left Grupo Taper's employ, and is therefore no longer Grupo
Taper's designate on the Board of Directors of the Company. Dr. Augusto Ocano
will, however, remain on the Board of Directors as an independent director. As
of that time, Grupo Taper will then designate another individual as a non-voting
member of the Board of Directors.

     On October 28, 1996, the Company executed a Security Agreement and
Promissory Note with Bart C. Gutekunst, director and Chairman of the Board.
Under the agreement and note, Mr. Gutekunst advanced the Company $108,247 at an
annual interest rate of ten per cent (10%). This advance, plus accrued interest,
was repaid to Mr. Gutekunst on February 14, 1997.

     On March 24, 1997, the Company executed a Security Agreement and Promissory
Note with Bart C. Gutekunst, director and Chairman of the Board. Under the
agreement and note, Mr. Gutekunst advanced the Company $100,000 at an annual
interest rate of ten per cent (10%) plus the right to purchase one (1) share of
restricted the Company Common Stock of the Company at an exercise price of
eighteen cents ($0.18) per share for each one dollar ($1.00) of interest earned
under the note. The note, plus accrued interest, was repaid to Mr. Gutekunst on
June 16, 1997.

     On April 21, 1997, the Company executed a Security Agreement and Promissory
Note with Bart C. Gutekunst, director and Chairman of the Board. Under the
agreement and note, Mr. Gutekunst advanced the Company $61,553.65 at an annual
interest rate of ten percent (10%) plus the right to purchase one (1) share of
restricted common stock of the Company at an exercise price of eighteen cents
($0.18) per share for each one dollar ($1.00) of interest earned under the note.
The note, plus accrued interest, was repaid to Mr. Gutekunst on June 16, 1997.

     On April 15, 1997, the Company executed a Security Agreement and Promissory
Note with Alan J. Rabin, a director and President. Under the agreement and note,
Mr. Rabin advanced the Company $32,429.18 at an annual interest rate of ten
percent (10%) plus the right to purchase one (1) share of restricted common
stock of the Company at an exercise price of eighteen cents ($0.18) per share
for each one dollar ($1.00) of interest earned under the note. The note, plus
accrued interest, was repaid to Mr. Rabin on June 16, 1997.

     From April 22, 1998 through May 4, 1998, the Company obtained $300,000 in
interim financing from selected current investors through the issuance of an 8%
convertible debenture, convertible into shares of Company Common Stock at $0.40
per share. The debenture holders include two holders of Company Common Stock,
Mr. George Holbrook and Mr. A. Bruce Brackenridge. In return for their
investment, the exercise price of the option controlled by Mr. Holbrook to
purchase 3,571 shares of Company Common Stock at $3.50 per share and the
exercise price of the warrant controlled by Mr. Holbrook to purchase 16,811
shares of Company Common Stock at $5.00 per share were each reduced to $0.40 a
share and the exercise price of the warrant held by Mr. Brackenridge to purchase
866 shares of Company Common Stock at $5.00 per share was reduced to $0.40. The
Company is currently attempting to obtain an additional $250,000 in financing on
similar terms. There can be no assurance that the Company's attempts to obtain
additional financing will be successful.

     The foregoing transactions between the Company and its affiliates were
negotiated on behalf of the Company by its management. The Company believes that
such transactions are in compliance with the Company's policy 

                                       31
<PAGE>
 
that transactions with affiliates be on terms at least as favorable as could
have been reasonably obtained from an unaffiliated third party.

                                       32
<PAGE>
 
                                    PART IV

ITEM 13.  EXHIBITS AND REPORTS ON FORM 8-K

   (A) EXHIBITS

       The following Exhibits are filed as part of this Form 10-KSB:

<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------

Exhibit                                                             Sequential Page Number or
Number                   Description                                Incorporation by Reference to
------------------------------------------------------------------------------------------------------------------------------------

<S>                      <C>                                        <C>  
2.0                      Agreement and Plan of                      Filed herewith
                         Reorganization, dated as of
                         January 20, 1998 among the
                         Company, CCS Subsidiary, Inc.
                         and Electro-Catheter
                         Corporation
 
3.0                      Certificate of Incorporation of            Filed herewith
                         the Company, as amended

3.2                      Restated Bylaws of the                     Filed herewith
                         Company, as amended
 
4.0                      Form of Common Stock                       Exhibit 4.0 to Form S-1 Registration Statement filed  on 
                         Certificate                                March 2, 1995, Registration No. 33-89938

4.1                      Form of Sales Representative               Exhibit 4.13 to Form 10-Q for the Quarter Ended
                         Stock Option Agreement                     September 30, 1988, File No. 0-14653

4.2                      Cardiac Control Systems, Inc.              Exhibit 4.15 to Form 8-K Current Report dated October 
                         5% Convertible Debenture due               11, 1994, File No. 0-14653
                         October 31, 1999

4.3                      Combined 1987-1992 Non-                    Exhibit 4.8 to Amendment No. 1 to Form S-1 Registration 
                         Qualified Stock Option  Plan               Statement filed on April 17, 1995, Registration No. 33-89938 
                    
4.4                      Stock Purchase Warrant dated               Exhibit 4.1 to Form 8-K Current Report, dated March 31, 
                         March 31, 1995 in favor of                 1995, File No. 0-14653
                         Sirrom Capital Corporation

4.5                      Stock Purchase Warrant, dated              Exhibit 4.2 to Form 8-K Current Report, dated March
                         March 31, 1995 in favor of Dow             31, 1995, File No. 0-14653
                         Corning Enterprises, Inc.

4.6                      Stock Purchase Warrant, dated              Exhibit 4.6 to Form 10-KSB for the year ended March 31, 
                         October 15, 1995 in favor of               1996, File No. 0-14653.
                         Sirrom Capital Corporation

4.7                      Stock Purchase Warrant, dated              Exhibit 4.7 to Form 10-KSB for the year ended March 31, 
                         March 29, 1996 in favor of                 1996, File No. 0-14653.
                         Grupo Taper, S.A.

4.8                      Stock Purchase Warrant, dated              Exhibit 4.2 to Form 8-K Current Report, dated June 13, 
                         June 6, 1997 in favor of  Sirrom           1997, File No. 0-14653.
                         Capital Corporation
</TABLE> 

                                       33
<PAGE>
 
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------

Exhibit                                                             Sequential Page Number or
Number                   Description                                Incorporation by Reference to
------------------------------------------------------------------------------------------------------------------------------------

<S>                      <C>                                        <C>  
4.9                      Stock Purchase Warrant, dated              Exhibit 4.1 to Form 8-K Current Report, dated June 13, 
                         June 13, 1997 in favor of  Coast           1997, File No. 0-14653.
                         Business Credit
 
10.0                     License Agreement between                  Exhibit 10.1 to Form 10-Q for the Quarter Ended
                         Hughes/Bertolet and the                    September 30, 1986, File No. 0-14653
                         Company

10.1                     Settlement Agreement and                   Exhibit 10.2 to Form 10-K for the Year Ended March 31, 
                         Release between Applied                    1990, File No. 0-14653
                         Cardiac Electro-physiology and 
                         the Company

10.2                     Amended and Restated License               Exhibit 10.19 to Form 8-K Current Report dated April 2, 
                         Agreement between Sulzer                   1993, File No. 0.14653
                         Intermedics Inc. and the
                         Company, dated April 2, 1993
 

10.3                     Amended and Restated Supply                Exhibit 10.20 to From 8-K Current Report dated April 2, 
                         Contract between Sulzer                    1992, File No. 0-14653
                         Intermedics Inc. and the
                         Company, dated April 2, 1993
 
10.4                     Employment Agreement between               Exhibit 10.24 to Form 8-K Current Report dated October 
                         Bart C. Gutekunst and the                  11, 1994, File No. 0-14653
                         Company, dated October 13, 1994 

10.5                     Employment Agreement between               Exhibit 10.25 to Form 8-K Current Report dated
                         Alan J. Rabin and the                      October 11, 1994, File No. 0-14653
                         Company, dated October 13, 1994 
               
10.6                     Employment Agreement between               Exhibit 10.12 to Form 10-Q for the Quarter Ended
                         Robert S. Miller and the                   December 31, 1994, File No. 0-14653
                         Company, dated December 12, 1994 
               
10.7                     Agreement between LEM                      Exhibit 10.13 to Form 10-Q for the Quarter Ended
                         Biomedica, s.r.l. and the                  December 31, 1994, File 0-14653
                         Company, dated October 1, 1994

10.8                     Agreement between the Company              Exhibit 10.12 to Form S-1 Registration Statement
                         and Alan J. Rabin and Bart C.              filed on March 2, 1995, Registration No. 33-89938
                         Gutekunst dated July 1, 1994

10.9                     Form of Indemnification                    Exhibit 10.13 to Form S-1 Registration Statement
                         Agreement between the Company              filed on March 2, 1995, Registration No. 33-89938
                         and each Director, executed
                         December 1994
</TABLE> 

                                       34
<PAGE>
 
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------

Exhibit                                                             Sequential Page Number or
Number                   Description                                Incorporation by Reference to
------------------------------------------------------------------------------------------------------------------------------------

<S>                      <C>                                        <C> 
10.10                    Employment Agreement between               Exhibit 10.14 to Form S-1 Registration Statement
                         Robert R. Brownlee and the                 filed on March 2, 1995, Registration No. 33-89938
                         Company dated as of October
                         1, 1994

10.11                    Loan and Security Agreement                Exhibit 10.1 to Form 8-K Current Report, dated March
                         between the Company and                    31, 1995, File No. 0-14653
                         Sirrom Capital Corporation,
                         dated March 31, 1995

10.12                    $1,500,000 Secured Promissory              Exhibit 10.2 to Form 8-K Current Report, dated March
                         Note in favor of Sirrom                    31, 1995, File No. 0-14653
                         Capital Corporation, dated
                         March 31, 1995

10.13                    Mortgage, Assignment of Rents              Exhibit 10.3 to Form 8-K Current Report, dated March
                         and Leases, and Security                   31, 1995, File No. 0-14653
                         Agreement in favor of Sirrom
                         Capital Corporation, dated
                         March 31, 1995
 
10.14                    Second Mortgage and Security               Exhibit 10.4 to Form 8-K Current Report, dated March
                         Agreement in favor of Dow                  31, 1995, File No. 0-14653
                         Corning Enterprises, Inc.,
                         dated March 31, 1995
 
10.15                    Subordination Agreement                    Exhibit 10.5 to Form 8-K Current Report, dated March
                         between the Company Sirrom                 31, 1995, File No. 0-14653
                         Capital Corporation, and the
                         Debentureholders, dated March
                         31, 1995

10.16                    Promissory Note and Security               Exhibit 10.16 to Form 10-QSB for the Quarter ended
                         Agreement between Sulzer                   September 30, 1995, File No. 0-14653
                         Intermedics Inc. and the
                         Company dated October 20, 1995
 
10.17                    Amendment 2 to Supply                      Exhibit 10.17 to Form 10-QSB for the Quarter ended
                         Contract between Sulzer                    September 30, 1995, File No. 0-14653
                         Intermedics Inc. and the
                         Company, October 20, 1995
                         dated
 
10.18                    Amendment 2 to License                     Exhibit 10.18 to Form 10-QSB for the Quarter ended
                         Agreement between Sulzer                   September 30, 1995, File No. 0-14653
                         Intermedics Inc. and the
                         Company, dated October 20,
                         1995
 
10.19                    Distribution Agreement                     Exhibit 10.19 to Form 10-QSB for the Quarter ended
                         between Grupo Taper S.A. and               December 31, 1995, File No. 0-14653
                         the Company, dated December
                         20, 1995
</TABLE> 

                                       35
<PAGE>
 
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------

Exhibit                                                             Sequential Page Number or
Number                   Description                                Incorporation by Reference to
------------------------------------------------------------------------------------------------------------------------------------

<S>                      <C>                                        <C> 
10.20                    Distribution Agreement                     Exhibit 10.20 to Form 10-QSB for the Quarter ended
                         between LEM Biomedica s.r.l.               September 30, 1996, File No. 0-14653
                         and the Company, dated
                         October 1, 1996.
 
10.21                    Security Agreement and                     Exhibit 10.21 to Form 10-QSB for the Quarter ended
                         Secured Promissory Note                    December 31, 1996, File No. 0-14653
                         between Bart C. Gutekunst and
                         the Company, dated October
                         28, 1996.
 
10.22                    Security Agreement  and                    Exhibit 10.22 to Form 10-QSB for the Quarter ended
                         Secured Promissory Note                    December 31, 1997, File No. 0-14653
                         between Bart C. Gutekunst and
                         the Company, dated March 24,
                         1997.
 
10.23                    Security Agreement and                     Exhibit 10.23 to Form 10-QSB for the Quarter ended
                         Secured Promissory Note                    June 30, 1997, File No. 0-14653
                         between Alan J. Rabin and the
                         Company, dated April 15, 1997.
 
10.24                    Security Agreement and                     Exhibit 10.24 to Form 10-QSB for the Quarter ended
                         Secured Promissory Note                    June 30, 1997, File No. 0-14653
                         Between Bart C. Gutekunst and
                         the Company, dated April 21,
                         1997.
 
10.25                    Loan and Security Agreement                Exhibit 10.1 to Form 8-K Current Report, dated June
                         Coast Business Credit and the              13, 1997, File No. 0-14653
                         Company, dated June 13, 1997.

10.26                    $300,000 Secured Promissory                Exhibit 10.2 to Form 8-K Current Report, dated June
                         Note of the Company to Coast               13, 1997, File No. 0-14653
                         Business Credit, dated June
                         13, 1997.
 
10.27                    $500,000 CAPEX Promissory                  Exhibit 10.3 to Form 8-K Current Report, dated June
                         Note of the Company to Coast               13, 1997, File No. 0-14653
                         Business Credit, dated June
                         13, 1997.

10.28                    Intercreditor and                          Exhibit 10.4 to Form 8-K Current Report, dated June
                         Subordination Agreement                    13, 1997, File No. 0-14653
                         between Coast Business Credit
                         and Sirrom Capital Corporation
 
10.29                    Mortgage and security                      Exhibit 10.5 to Form 8-K Current Report, dated June
                         Agreement between the Company              13, 1997, File No. 0-14653
                         and Coast Business Credit
 
10.30                    Security Agreement (Intellectual           Exhibit 10.6 to Form 8-K Current Report, dated June
                         Property) between the Company              13, 1997, File No. 0-14653
                         and Coast Business Credit 
</TABLE> 

                                       36
<PAGE>
 
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------

Exhibit                                                             Sequential Page Number or
Number                   Description                                Incorporation by Reference to
------------------------------------------------------------------------------------------------------------------------------------
<S>                      <C>                                        <C>  
10.31                    Grant of Security Interest                 Exhibit 10.7 to Form 8-K Current Report, dated June
                         Patents in favor of Coast                  13, 1997, File No. 0-14653
                         Business Credit
 
10.32                    Amendment to Employment                    Filed herewith
                         Agreement between Alan J.
                         Rabin and the Company,
                         effective as of May 1, 1996
 
21.0                     Subsidiaries of the Registrant             Filed herewith
 
27.0                     Financial Data Schedule                    Filed herewith
------------------------------------------------------------------------------------------------------------------------------------
</TABLE> 
     Copies of the above-described exhibits will be furnished to the
stockholders upon written request, addressed to President and Chief Executive
Officer, Cardiac Control Systems, Inc., 3 Commerce Boulevard, Palm Coast,
Florida 32164.

     (B)  REPORTS ON FORM 8-K

          The following reports on Form 8-K were filed by the Company during the
          last quarter of the year ended March 31, 1998.

          The execution of an Agreement and Plan of Reorganization by and
          between the Company, Electro, and Sub was reported on Form 8-K on
          February 2, 1998. A First Amendment to the Agreement and Plan of
          Reorganization was executed on May 5th, 1998, and such event was
          reported on Form 8-K on May 21, 1998.

                                       37
<PAGE>
 
                                  SIGNATURES

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


     By   /s/ Alan J Rabin
       --------------------
       Alan J. Rabin
       President and CEO, and a Director
       Dated: October 6, 1998

     Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the Company
and in the capacities indicated and on the date indicated.  This reporting may
be executed in multiple counterparts, each of which shall be deemed an original
and all of which together shall constitute one and the same instrument.


         /s/ Bart C. Gutekunst                  Chairman of the Board
    --------------------------------------------
    Bart C. Gutekunst
    Dated: October 6, 1998


         /s/ Alan J. Rabin                      President and CEO,and a Director
    --------------------------------------------

    Alan J. Rabin
    Dated: October 6, 1998


         /s/ Tracey E. Young                    Director
    ---------------------------------------------
    Tracey E. Young
    Dated: October 6, 1998


         /s/ William H. Burns                   Director
    ---------------------------------------------
    William H. Burns
    Dated: October 6, 1998


        /s/ Larry G. Haimovitch                 Director
    --------------------------------------------
    Larry G. Haimovitch
    Dated: October 6, 1998


       /s/ Robert T. Rylee                      Director
    --------------------------------------------
    Robert T. Rylee
    Dated: October 6, 1998

       /s/ Augusto Ocana                        Director
    --------------------------------------------
    Augusto Ocana
   Dated: October 6, 1998


        /s/ W. Alan Walton                      Executive Vice President, Chief
    ------------------------------------------- Operating Officer
    W. Alan Walton                              (Principal Accounting Officer)
    Dated: October 6, 1998

                                       38
<PAGE>
 
                               INDEX TO EXHIBITS

<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------

Exhibit                                                             Sequential Page Number or
Number                   Description                                Incorporation by Reference to
------------------------------------------------------------------------------------------------------------------------------------

<S>                      <C>                                        <C>  
2.0                      Agreement and Plan of                      Filed herewith
                         Reorganization, dated as of
                         January 20, 1998 among the
                         Company, CCS Subsidiary, Inc.
                         and Electro-Catheter
                         Corporation
 
3.0                      Certificate of Incorporation               Filed herewith
                         of the Company, as amended
 
3.2                      Restated Bylaws of the                     Filed herewith
                         Company, as amended
 
4.0                      Form of Common Stock                       Exhibit 4.0 to Form S-1 Registration Statement filed
                         Certificate                                on March 2, 1995, Registration No. 33-89938
 
4.1                      Form of Sales Representative               Exhibit 4.13 to Form 10-Q for the Quarter Ended
                         Stock Option Agreement                     September 30, 1988, File No. 0-14653
 
4.2                      Cardiac Control Systems, Inc.              Exhibit 4.15 to Form 8-K Current Report dated
                         5% Convertible Debenture due               October 11, 1994, File No. 0-14653
                         October 31, 1999
 
4.3                      Combined 1987-1992                         Exhibit 4.8 to Amendment No. 1 to Form S-1
                         Non-Qualified Stock Option                 Registration Statement filed on April 17, 1995,
                         Plan                                       Registration No. 33-89938
 
4.4                      Stock Purchase Warrant dated               Exhibit 4.1 to Form 8-K Current Report, dated March
                         March 31, 1995 in favor of                 31, 1995, File No. 0-14653
                         Sirrom Capital Corporation
 
4.5                      Stock Purchase Warrant, dated              Exhibit 4.2 to Form 8-K Current Report, dated March
                         March 31, 1995 in favor of                 31, 1995, File No. 0-14653
                         Dow Corning Enterprises, Inc.
 
4.6                      Stock Purchase Warrant, dated              Exhibit 4.6 to Form 10-KSB for the year ended March
                         October 15, 1995 in favor of               31, 1996, File No. 0-14653.
                         Sirrom Capital Corporation
 
4.7                      Stock Purchase Warrant, dated              Exhibit 4.7 to Form 10-KSB for the year ended March
                         March 29, 1996 in favor of                 31, 1996, File No. 0-14653.
                         Grupo Taper, S.A.
 
4.8                      Stock Purchase Warrant, dated              Exhibit 4.2 to Form 8-K Current Report, dated June
                         June 6, 1997 in favor of                   13, 1997, File No. 0-14653.
                         Sirrom Capital Corporation
 
4.9                      Stock Purchase Warrant, dated              Exhibit 4.1 to Form 8-K Current Report, dated June
                         June 13, 1997 in favor of                  13, 1997, File No. 0-14653.
                         Coast Business Credit
</TABLE> 

                                       39
<PAGE>
 
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------

Exhibit                                                             Sequential Page Number or
Number                   Description                                Incorporation by Reference to
------------------------------------------------------------------------------------------------------------------------------------

<S>                      <C>                                        <C> 
10.0                     License Agreement between                  Exhibit 10.1 to Form 10-Q for the Quarter Ended
                         Hughes/Bertolet and the                    September 30, 1986, File No. 0-14653
                         Company
 
10.1                     Settlement Agreement and                   Exhibit 10.2 to Form 10-K for the Year Ended March
                         Release between Applied                    31, 1990, File No. 0-14653
                         Cardiac Electro-physiology
                         and the Company
 
10.2                     Amended and Restated License               Exhibit 10.19 to Form 8-K Current Report dated April
                         Agreement between Sulzer                   2, 1993, File No. 0.14653
                         Intermedics Inc. and the
                         Company, dated April 2, 1993
 
10.3                     Amended and Restated Supply                Exhibit 10.20 to From 8-K Current Report dated April
                         Contract between Sulzer                    2, 1992, File No. 0-14653
                         Intermedics Inc. and the
                         Company, dated April 2, 1993
 
10.4                     Employment Agreement between               Exhibit 10.24 to Form 8-K Current Report dated
                         Bart C. Gutekunst and the                  October 11, 1994, File No. 0-14653
                         Company, dated October 13,
                         1994
 
10.5                     Employment Agreement between               Exhibit 10.25 to Form 8-K Current Report dated
                         Alan J. Rabin and the                      October 11, 1994, File No. 0-14653
                         Company, dated October 13,
                         1994
 
10.6                     Employment Agreement between               Exhibit 10.12 to Form 10-Q for the Quarter Ended
                         Robert S. Miller and the                   December 31, 1994, File No. 0-14653
                         Company, dated December 12,
                         1994
 
10.7                     Agreement between LEM                      Exhibit 10.13 to Form 10-Q for the Quarter Ended
                         Biomedica, s.r.l. and the                  December 31, 1994, File 0-14653
                         Company, dated October 1, 1994
 
10.8                     Agreement between the Company              Exhibit 10.12 to Form S-1 Registration Statement
                         and Alan J. Rabin and Bart C.              filed on March 2, 1995, Registration No. 33-89938
                         Gutekunst dated July 1, 1994
 
10.9                     Form of Indemnification                    Exhibit 10.13 to Form S-1 Registration Statement
                         Agreement between the Company              filed on March 2, 1995, Registration No. 33-89938
                         and each Director, executed
                         December 1994

10.10                    Employment Agreement between               Exhibit 10.14 to Form S-1 Registration Statement
                         Robert R. Brownlee and the                 filed on March 2, 1995, Registration No. 33-89938
                         Company dated as of October
                         1, 1994
</TABLE> 

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Exhibit                                                             Sequential Page Number or
Number                   Description                                Incorporation by Reference to
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<S>                      <C>                                        <C> 
10.11                    Loan and Security Agreement                Exhibit 10.1 to Form 8-K Current Report, dated March
                         between the Company and                    31, 1995, File No. 0-14653
                         Sirrom Capital Corporation,
                         dated March 31, 1995

10.12                    $1,500,000 Secured Promissory              Exhibit 10.2 to Form 8-K Current Report, dated March
                         Note in favor of Sirrom                    31, 1995, File No. 0-14653
                         Capital Corporation, dated
                         March 31, 1995

10.13                    Mortgage, Assignment of Rents              Exhibit 10.3 to Form 8-K Current Report, dated March
                         and Leases, and Security                   31, 1995, File No. 0-14653
                         Agreement in favor of Sirrom 
                         Capital Corporation, dated   
                         March 31, 1995               
                                                      
10.14                    Second Mortgage and Security               Exhibit 10.4 to Form 8-K Current Report, dated March
                         Agreement in favor of Dow                  31, 1995, File No. 0-14653
                         Corning Enterprises, Inc.,   
                         dated March 31, 1995         
                                                      
10.15                    Subordination Agreement                    Exhibit 10.5 to Form 8-K Current Report, dated March
                         between the Company Sirrom                 31, 1995, File No. 0-14653
                         Capital Corporation, and the 
                         Debentureholders, dated March
                         31, 1995                     
                                                      
10.16                    Promissory Note and Security               Exhibit 10.16 to Form 10-QSB for the Quarter ended
                         Agreement between Sulzer                   September 30, 1995, File No. 0-14653
                         Intermedics Inc. and the     
                         Company dated October 20, 1995
                                                      
10.17                    Amendment 2 to Supply                      Exhibit 10.17 to Form 10-QSB for the Quarter ended
                         Contract between Sulzer                    September 30, 1995, File No. 0-14653
                         Intermedics Inc. and the     
                         Company, October 20, 1995    
                         dated                        
                                                      
10.18                    Amendment 2 to License                     Exhibit 10.18 to Form 10-QSB for the Quarter ended
                         Agreement between Sulzer                   September 30, 1995, File No. 0-14653
                         Intermedics Inc. and the     
                         Company, dated October 20,   
                         1995                         
                                                      
10.19                    Distribution Agreement                     Exhibit 10.19 to Form 10-QSB for the Quarter ended
                         between Grupo Taper S.A. and               December 31, 1995, File No. 0-14653
                         the Company, dated December  
                         20, 1995                     
                                                      
10.20                    Distribution Agreement                     Exhibit 10.20 to Form 10-QSB for the Quarter ended
                         between LEM Biomedica s.r.l.               September 30, 1996, File No. 0-14653
                         and the Company, dated       
                         October 1, 1996.              
</TABLE> 

                                       41
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Exhibit                                                             Sequential Page Number or
Number                   Description                                Incorporation by Reference to
------------------------------------------------------------------------------------------------------------------------------------

<S>                      <C>                                        <C>  
10.21                    Security Agreement and                     Exhibit 10.21 to Form 10-QSB for the Quarter ended             
                         Secured Promissory Note                    December 31, 1996, File No. 0-14653                            
                         between Bart C. Gutekunst and                                                                             
                         the Company, dated October                                                                                
                         28, 1996.                                                                                                 
                                                                                                                                   
10.22                    Security Agreement  and                    Exhibit 10.22 to Form 10-QSB for the Quarter ended             
                         Secured Promissory Note                    December 31, 1997, File No. 0-14653                            
                         between Bart C. Gutekunst and                                                                             
                         the Company, dated March 24,                                                                              
                         1997.                                                                                                     
                                                                                                                                   
10.23                    Security Agreement and                     Exhibit 10.23 to Form 10-QSB for the Quarter ended             
                         Secured Promissory Note                    June 30, 1997, File No. 0-14653                                
                         between Alan J. Rabin and the                                                                             
                         Company, dated April 15, 1997.                                                                            
                                                                                                                                   
10.24                    Security Agreement and                     Exhibit 10.24 to Form 10-QSB for the Quarter ended             
                         Secured Promissory Note                    June 30, 1997, File No. 0-14653                                
                         Between Bart C. Gutekunst and                                                                             
                         the Company, dated April 21,                                                                              
                         1997.                                                                                                     
                                                                                                                                   
10.25                    Loan and Security Agreement                Exhibit 10.1 to Form 8-K Current Report, dated June            
                         Coast Business Credit and the              13, 1997, File No. 0-14653                                     
                         Company, dated June 13, 1997.                                                                             
                                                                                                                                   
10.26                    $300,000 Secured Promissory                Exhibit 10.2 to Form 8-K Current Report, dated June            
                         Note of the Company to Coast               13, 1997, File No. 0-14653                                     
                         Business Credit, dated June                                                                               
                         13, 1997.                                                                                                 
                                                                                                                                   
10.27                    $500,000 CAPEX Promissory                  Exhibit 10.3 to Form 8-K Current Report, dated June            
                         Note of the Company to Coast               13, 1997, File No. 0-14653                                     
                         Business Credit, dated June                                                                               
                         13, 1997.                                                                                                 
                                                                                                                                   
10.28                    Intercreditor and                          Exhibit 10.4 to Form 8-K Current Report, dated June            
                         Subordination Agreement                    13, 1997, File No. 0-14653                                     
                         between Coast Business Credit                                                                             
                         and Sirrom Capital Corporation                                                                            
                                                                                                                                   
10.29                    Mortgage and security                      Exhibit 10.5 to Form 8-K Current Report, dated June            
                         Agreement between the Company              13, 1997, File No. 0-14653                                     
                         and Coast Business Credit                                                                                 
                                                                                                                                   
10.30                    Security Agreement                         Exhibit 10.6 to Form 8-K Current Report, dated June            
                         (Intellectual Property)                    13, 1997, File No. 0-14653                                     
                         between the Company and Coast                                                                             
                         Business Credit                                                                                           
                                                                                                                                   
10.31                    Grant of Security Interest                 Exhibit 10.7 to Form 8-K Current Report, dated June            
                         Patents in favor of Coast                  13, 1997, File No. 0-14653                                      
                         Business Credit                                      
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<CAPTION>
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Exhibit                                                             Sequential Page Number or
Number                   Description                                Incorporation by Reference to
------------------------------------------------------------------------------------------------------------------------------------

<S>                      <C>                                        <C>  
10.32                    Amendment to Employment                    Filed herewith
                         Agreement between Alan J.
                         Rabin and the Company,
                         effective as of May 1, 1996
 
21.0                     Subsidiaries of the Registrant             Filed  herewith
 
27.0                     Financial Data Schedule                    Filed herewith
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</TABLE>

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