<PAGE>
 
________________________________________________________________________________

                      SECURITIES AND EXCHANGE COMMISSION

                            Washington, D.C. 20549

                                  FORM 10-KSB

                         ____________________________ 
                                        

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

 
FOR THE FISCAL YEAR ENDED MARCH 31, 1997         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 SECTION12(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. [_]

  The issuer's revenues for its fiscal year ended March 31, 1997 were
$6,595,297.

  The aggregate market value of voting stock of the Registrant held by non-
affiliates of the Registrant on May 30, 1997 was $1,144,691 (based on the
average of the closing bid and ask prices of the Registrant's common stock on
May 30, 1997 of 1 1/16 and 1 1/8 respectively).

  As of May 30, 1997, 2,619,371 shares of the Registrant's common stock were
issued and outstanding.

                      DOCUMENTS INCORPORATED BY REFERENCE

                                     None

________________________________________________________________________________
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                                    PART I

ITEM 1.  BUSINESS

  GENERAL. The Company was incorporated as Supramedics 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  ventricular electrode leads and
equipment for the external programming and monitoring of the pacemakers. The
Company has received classification (clearance) from the United States Food and
Drug Administration ("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 has historically been listed in the National
Association of Securities Dealers Automatic Quotation System ("NASDAQ").
However, on August 29, 1991, the Company was advised by the NASDAQ Stock Market
that the Company's common stock listing would be deleted effective August 30,
1991. The Company was not in compliance with the NASDAQ's capital and surplus
requirement then in effect of $375,000. However, the Company is currently listed
on the NASD OTC Bulletin Board Service. This service allows market makers to
enter quotes and trade securities that do not meet  NASDAQ 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 maintain 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 continue to
be profitable or will satisfy future cash-flow requirements. See  "Item 6.
Management's Discussion and Analysis of Financial Position and Results 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 are of different dimensions
encompassing 7 pacemaker models (under the tradenames MAESTRO(R) II or MAESTRO
II SAVVI) and approximately 7 electrode lead models (under the tradenames
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-chamber models received
FDA clearance in 1993 and is being sold under the MAESTRO II tradename.  The
Company also received FDA clearance to market its streamlined dual-chamber
pacemaker, the MAESTRO(R) Series 500 Model 533 (dual chamber DDD, unipolar) in
September 1995. The Company developed and completed qualification testing of a
new hybrid (the S-7) which is to be the main building block of two other 500
Series products currently under development.

  The Company further developed a single-pass atrial-controlled ventricular
(VDD) pacing system and received 

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FDA clearance in 1993 for two VDD models which the Company sells under the trade
name MAESTRO II SAVVI. These pacing systems were unique in the industry until a
competitor of the Company (Sulzer Intermedics) received FDA approval of its
single-pass atrial-controlled ventricular pacing system. Sulzer Intermedics Inc.
commenced marketing its new product in March 1995. The Company licenses
technology to Sulzer Intermedics for the manufacture of electrode leads used
with Sulzer Intermedics' new system and further supplies Sulzer Intermedics with
those leads pursuant to license and supply agreements entered into with the
Company. The Company receives income in the form of royalties and direct payment
for leads under those agreements. Other competitors have also recently entered
the market with competitive single lead products.

  In addition, the Company markets certain electrode leads and pacing
accessories manufactured by other medical companies. Further, the Company sells
hybrid circuit components to an Italian manufacturer and to an Indian
manufacturer. See  "Sales, Markets and Distribution Methods,"  below.

  The Company's products are classified as medical devices 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 European Union Nations.  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 Regulations," below.)

  The Company's MAESTRO II anti-bradycardia cardiac pacemakers are
electronically based with an integrated circuit design, and include multi-
programmable single-chamber (either atrial or ventricular), 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.   In fiscal 1996, the Company
introduced state-of-the-art Computer Aided Design (CAD) capability,
Pro/Engineering, affording increased efficiencies and reducing costs through
virtual prototyping of mechanical assemblies.  The Company expects that this
tool will be key to the timely development of a new pacing system project
initiated by the Company's research and development ("R&D") group which has been
planned to utilize the best of outside design forces, the Company's marketing
personnel and its R&D department.

  The Company's pacemakers are generally sold together with electrode leads
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 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, and are
manufactured using a patented coating process, rights to which are held by the
Company (see "Certain Patents, Trademarks and Licenses," below). 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.

  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 

                                       3
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provides 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 hardcopy records. Both provide for
connection of a stripchart recorder, for generating hardcopy records of EGM
telemetry data. A programmer carrying the CE mark label, as required in Europe,
has been developed.

  SALES, MARKETS 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 Regulations,"  below.

  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. The majority 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, 1997, 16  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 term, 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 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 maintain a profitable level of operations would be adversely affected
if the Company's sales representatives are 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 is 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 term of ten
(10) years and will automatically renew for a five (5) year period unless
terminated by either party upon six month's prior notice.

  The Company has opened a Japanese sales office and has received Japanese
approvals and license to import and sell the Company's single lead VDD product.
A major Japanese distributor, The Hertz Co., has begun distributing the product
throughout Japan.  The Company expects that these efforts will enable the
Company to expand sales in the Japanese market, where the average unit price is
significantly higher than in the rest of  the world.

                                       4
<PAGE>
 
  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
accounting for $892,279 (21%) of the total. With the exception of Sulzer
Intermedics Inc., as disclosed below, during the year ended March 31, 1997 no
single domestic or international customer accounted for in excess of 10% of the
Company's sales. Accordingly, the Company does not believe that the loss of any
single customer in the United States, excluding Sulzer Intermedics Inc., would
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 maintain a profitable level of operations. See  "Item 6. Management's
Discussion and Analysis of Financial Position and Results of Operations."

  On August 1, 1990, the Company executed a License Agreement and a Supply
Agreement with Sulzer Intermedics Inc., a subsidiary of Sulzer Brothers Limited.
The License Agreement provided initial fees to the Company aggregating $1.5
million. The License Agreement also provided for the payment of royalties to the
Company based upon net sales of Sulzer Intermedics products incorporating the
licensed (single-pass lead) technology.  On April 2, 1993, the Company amended
and restated its License Agreement and Supply Contract with Sulzer Intermedics
Inc. The Amended and Restated License Agreement provided for the prepayment of
$850,000 in royalties to the Company.  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. The Supply Contract,  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 Sulzer Intermedics Inc. at specified prices.
Sales to Sulzer Intermedics Inc. accounted for 47% of sales for the year ended
March 31, 1997.  (See Note 8 "Segment Data and Significant Customers" of the
Notes to Financial Statements).

  On January 1, 1997, the Company executed a supply and joint development
agreement of defibrillation leads with a major implantable defibrillator
manufacturer. Pursuant to the terms of the joint development agreement, the
manufacturer provided equity financing of $200,000 with the purchase of 40,000
shares of the Company's Common Stock.

  Historically, the Company encountered many difficulties in connection with its
efforts to develop a distribution network of independent sales representative 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 visibility and the competitive environment, and, most important the
Company's financial position.   However, in June 1997, the Company obtained a
credit facility for a maximum borrowing of $3.5 million, which maximum amount
is subject to eligible receivables and inventory.  The credit facility includes
a line of credit, a subline for capital expenditures and a term loan. (See Note
10 "Subsequent Event" of the Notes to Financial Statements.)  The Company
believes that with this available financing and with management providing
expertise in corporate finance, sales and marketing, and research and
development, the Company will be able to expand its distribution.  Further, the
Company estimates its market share of pacing products to be less than 1%.
Because the estimated pacing systems market is $2.0 billion, the Company
considers the market large enough to accommodate the Company's products.

  The Company believes that, with its new-generation single-chamber MAESTRO II
and single-lead dual-chamber MAESTRO II SAVVI pacing systems and with the
additional financing, it has the potential to increase its sales volume in the
United States and  to continue to expand into other international markets.

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

                                       5
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  CERTAIN PATENTS, TRADEMARKS, AND LICENSES. The Company obtains licenses from
others that it deems necessary to its business, and its policy is to obtain
patents on its inventions whenever practical. Technological advance has been
characteristically rapid in the industry in which the Company competes, and the
Company does not believe its business is 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 Director and Senior Executive Vice
President 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 DataO 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, formerly a Director and Senior
Executive Vice President of the Company, 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 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, formerly a Director and Senior
Executive Vice President of the Company, 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 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 corresponds to the life
of the patent, which expires on February 4, 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 June 30, 1994, the
license became non-exclusive. Further, on March 29, 1993, the licensor executed
a sublicense agreement with the Company, pursuant to which  the Company granted
a limited sublicense  allowing Sulzer Intermedics Inc. to use the extrusion
technique to  manufacture leads pursuant to the terms of the Amended and
Restated License Agreement between the Company and Sulzer Intermedics Inc.

  On March 5, 1997, an objection to CCS European patent #0350282 relating to
single-pass diagonal atrial bipolar pacemaker catheter technology was heard in
Munich, Germany.  On March 24, 1997, CCS was advised that the objection was
rejected by the Patent Court.  An appeal period of two months was initiated from
the date of the judgment.

  The Company uses various trademarks with its product lines. The MAESTRO
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 and Interim
and Surethane are unregistered trademarks of the Company.

  RESEARCH AND DEVELOPMENT. The Company expended $1,086,800 and $698,000 on
research and development activities during the years ended March 31, 1997 and
1996.  R&D activity previously reported as culminating in FDA submission was
rewarded with FDA approval in September 1995 of the MAESTRO (R)

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Series 500 Model 533 (dual chamber DDD, unipolar) pulse generator.

  The R&D group successfully developed and completed qualification testing of a
new hybrid (the S-7) which is to be the main building block of two other 500
Series products currently under development (the model 534 and 535).

  In addition to finalizing the two new models, the Company has undertaken the
design and development of a new pacing system.  This development will utilize
state-of-the-art CAD capabilities, will capitalize upon outside design forces
and exploit appropriate aspects of computer technology.  Such exploitation is
evidenced by the development of a Graphical User Interface (GUI) programmer (the
PacePro) yielding a state-of-the-art programmer addressing the need for ease-of-
use in pacing system programming.  The new system is aimed at competing in the
dual chamber, rate responsive market while capitalizing on the parallel
developments of the single lead technology of the Company.

  Continued development of the Company's single lead technology includes the
development of a pre-shaped single pass lead.  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, for the application of the Company's unique lead technology to the
special challenges of implantable defibrillation leads.  This relationship
provides for the development and manufacture of an existing lead design and a
separate joint development for a combined, single-pass, pace/defibrillation
lead.

  The fiscal year ended March 31, 1997 included on-going activity in the area of
implementing design controls compliant with Section 4.4, ISO 9001 Quality
Standard and similar requirement of the FDA Good Manufacturing Practice (GMP)
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, that 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 Corp. and E.I. DuPont de
Nemours & Company, 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 Corning to discontinue supplying its
materials to medical device manufacturers.  The Company filed the "Special
Silicone Notification" for its products effected by the Dow Corning 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 Corning materials.  No further FDA approvals of the alternate
materials of such suppliers were required.

  With respect to other material changes resulting from decisions by the
material suppliers to discontinue supplying the medical device industry, e.g.
E.I. DuPont de Nemours, 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.  A tentative replacement
for the DuPont supplied material has been identified which meets manufacturing
requirements.  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 

                                       7
<PAGE>
 
material is anticipated to be forthcoming based upon a satisfactory outcome of
the testing in progress. The Company believes, however, that it has a sufficient
quantity of the DuPont material on supply to meet the Company's anticipated
demand for the next several years.

  Suppliers of custom Application Specific Integrated Circuits (ASIC's) have
advised the Company that the technology used to produce these IC's will no
longer be supported.  As such, the Company placed one last bulk order to ensure
the availability of sufficient IC's to satisfy projected demands for product.
The new pacing system under development will realize appropriate ASIC's for the
new system obviating the need for perpetual supply of the currently used ASIC's.

  INSURANCE. The Company maintains what it believes to be an adequate amount of
comprehensive general liability insurance and what it believes to be a
reasonable amount of products liability coverage.  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,"  above) or costs incurred by
the Company in the event of a product recall.  The Company intends to sponsor a
clinical study of its preshaped single lead.  Specific insurance coverage will
be required.

  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 31, 1997, the Company employs 66 persons full-time,
including management.

  GOVERNMENT REGULATIONS. The activities of the Company in developing, producing
and marketing medical devices are subject to regulation by the FDA and, in some
instances, by state and foreign governmental authorities.

  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 Federal Food, Drug and Cosmetic Act, as amended,
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 premarket approval ("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

                                       8
<PAGE>
 
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 will most
likely 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 products developed by the Company in the
future.

  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 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 to
implement these regulations. 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 the Good Manufacturing Practices ("GMP")
regulations audited by the FDA. FDA conducted an audit of 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 European Union ("EU") nations have adopted universal
  --------------------                                                          
standards as developed by the International Organization for Standardization
("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 EU 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 is developing design control
processes in preparation for a compliance audit to ISO 9001.

  WORKING CAPITAL. 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. There
is also 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. In
addition, a portion of the Company's business is related to consignment business
where the Company provides customers with the right to return products that are
not implanted or sold. Accordingly, 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.

                                       9
<PAGE>
 
  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.; Sulzer Intermedics Inc.; 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 in the marketplace today, given competing products with similar
capabilities, are product reliability, product capability, design
characteristics, longevity, service, technical support provided by the
manufacturer, product warranty and price, and credibility of the Company.
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.

  Sirrom Capital Corporation, a Tennessee Corporation ("Sirrom"), holds a first
mortgage on the Company's premises and a first lien against all of the Company's
real and personal property (including patents and royalties) but, excluding
inventory and accounts receivable. (See Note 5 - "Notes and Debt Obligations" of
the Notes to Financial Statements.)  In June 1997, the Company obtained
additional financing from Coast Business Credit ("Coast"), pursuant to which
Sirrom subordinated its first security interest in the Company's real and
personal property to Coast; however, the priority interest of Coast in the
Company's real estate is limited to $500,000.  For a discussion of the Coast
transaction occurring subsequent to the Company's fiscal year ended March 31,
1997, see Note 10 - "Subsequent Events" of the Notes to Financial Statements.

ITEM 3.   LEGAL PROCEEDINGS

  On  January 4, 1994, a financial brokering firm 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 from an agreement (the "Agreement"),
dated October 16, 1992. The suit requests a judgment requiring the Company to
deliver warrants to purchase 15% of the Company's common stock, and damages in
excess of $15,000.  The Company has denied liability and filed a counterclaim
alleging that the brokering firm fraudulently induced the Company into the
Agreement then breached the Agreement and certain fiduciary duties.  Management
plans to vigorously defend the lawsuit and pursue its counterclaims.

                                       10
<PAGE>
 
ITEM 4.   SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

          None

                                       11
<PAGE>
 
                                    PART II


ITEM 5.   MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS

  MARKET INFORMATION. The Company's common stock has historically been listed in
the National Association of Securities Dealers Automated Quotation System
("NASDAQ"). However, on August 29, 1991, the Company was advised by The NASDAQ
Stock Market that the Company's common stock listing would be deleted effective
August 30, 1991. The Company was not in compliance with the NASDAQ's capital and
surplus requirement then in effect of $375,000. However, the Company is
currently listed on the NASD OTC Bulletin Board Service under the symbol "CDCS".
This service allows market makers to enter quotes and trade securities that do
not meet NASDAQ 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, 1997 and 1996 were as follows:

<TABLE>
<CAPTION>
            -------------------------------------------
                                          High    Low
            -------------------------------------------
            <S>                         <C>      <C> 
            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...........   3 1/4    2
 
 
            YEAR ENDED MARCH 31, 1996
 
             Fourth Quarter..........   3 7/8    2 5/8
 
             Third Quarter..........    3 3/8    2
 
             Second Quarter..........   4 5/8    3 3/8
 
             First Quarter...........   4 1/8    3 3/8
</TABLE>

  These quotations represent prices between dealers in securities; they do not
include retail mark-up, mark-downs or commission, and do not necessarily
represent actual transactions.
                                                                                
  HOLDERS. As of May 30, 1997, there were approximately 599 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, 

                                       12
<PAGE>
 
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 Capital Corporation ("Sirrom") under the terms of Sirrom's
warrant. (See Note 5 - "Notes and Debt Obligations" of the Notes to Financial
Statements.)

  RECENT SALES OF UNREGISTERED SECURITIES.  During the last quarter of the
fiscal year ended March 31, 1997, the Company issued 40,000 shares of common
stock to a manufacturer with whom the Company plans to jointly develop
defibrillation leads. The manufacturer paid $200,000 for the shares. In May
1996, a lender purchased 50,000 shares of common stock pursuant to exercise of a
warrant at $5.00 per share. The issuance of the foregoing shares were deemed
exempt from the registration provisions of the Securities Act of 1933, as
amended (the "Act"), by reason of the provision of Section 4(2) of the Act
because, among other things, the investors are "accredited investors" as defined
in the Act or regulations promulgated thereunder, the transactions did not
involve a public offering, and the securities were acquired for investment and
not with a view to a distribution thereof. For additional information, see Note
5 - "Notes and Debt Obligations," and Note 6 - "Stockholders' Equity," of the
Notes to Financial Statements.
                                                                                
ITEM 6.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL POSITION AND RESULTS
          OF OPERATIONS
                                                                                
FINANCIAL POSITION AND LIQUIDITY

  Cash generated by operations during fiscal 1997 approximated $57,372.  Capital
expenditures and repayment of debt obligations during fiscal 1997 approximated
$544,628 and $875,174 respectively.  Net proceeds from the issue of common stock
and stock warrants during fiscal 1997 approximated $301,032.  Proceeds from
notes and debt obligations approximated $163,253.  Overall, negative cash flow
for fiscal 1997 approximated $981,716.
                                                                                
  Cash used by operations during fiscal 1996 approximated $242,000.  Capital
expenditures and repayment of debt obligations during fiscal 1996 approximated
$403,000 and $308,000 respectively.  Net proceeds from the issuance of stock
approximated $329,000.  Proceeds from notes and debt obligations payable
approximated $1,068,000.  Overall, positive cash flow for fiscal 1996
approximated $500,000.
                                                                                
  The Company has no significant commitments for the acquisition of capital
assets. It has, however, entered into material commitments pursuant to certain
inventory procurement contracts that aggregate approximately $1,107,000 at March
31, 1997. (See "Note 9 - Commitments and Contingencies" of the "Notes to
Financial Statements".
                                                                                
EVENT SUBSEQUENT TO MARCH 31, 1997

  On June 13, 1997, Coast Business Credit, a division of Southern Pacific
Thrift and Loan Association, a California corporation, with offices at 12121
Wilshire Boulevard, Suite 1111, Los Angeles, California, 90025, agreed under a
Loan and Security Agreement to lend the Company an amount not to exceed
$3,500,000 subject to limitations relating to the values of  receivables and
inventories and including a capital expenditure subline up to the value of
$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.  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 1998. (See "Note
10 - Subsequent Event" of the "Notes to Financial Statements")

RESULTS OF OPERATIONS

FISCAL YEAR ENDED MARCH 31, 1996 COMPARED TO FISCAL  YEAR ENDED  MARCH 31, 1995
                                                                                
  OVERVIEW.  The Company's total revenues for fiscal 1997 decreased 14% to $6.6
million from $7.7 million for fiscal 1996. Sales decreased from $5.3 million to
$4.2 million and royalties increased from $2.35 million to $2.39 million.
Royalty income represents royalties from Sulzer Intermedics Inc. pursuant to a
license

                                       13
<PAGE>
 
agreement between the Company and Sulzer Intermedics Inc. The decrease in
revenue, partially offset by a 5% decrease in costs to $7.2 million as compared
to $7.5 million in fiscal 1996, resulted in an operating loss of $575,464 as
compared to an operating profit of $159,486 in fiscal 1996. Interest expense in
fiscal 1997 decreased 27% to $490,508 as compared to $672,303 in fiscal 1996 due
to the conversion of $2.8 million 5% Debentures to equity on March 31, 1996 and
the repayment during fiscal 1997 of the Sulzer Intermedics Inc. loan balance of
$807,283 (see following paragraph). Other Income decreased in fiscal 1997 to
$167,300 in fiscal 1997 as compared to $234,600 in fiscal 1996. The net loss in
fiscal 1997 increased to $881,240 from $261,505 in fiscal 1996.

  On October 20, 1995, the Company executed a promissory note for the principal
amount of $1,000,000 with Sulzer Intermedics Inc. to assist the Company in
meeting the demand of Sulzer Intermedics' future electrode lead orders pursuant
to the Supply Agreement between Sulzer Intermedics and the Company. This loan
was fully paid down during fiscal 1997.
                                                                                
  SALES.  Total sales in the year ended March 31, 1997 decreased 21.1%.
Pacemaker unit sales decreased by 8.2% while pacemaker dollar sales were down by
32%. The larger decrease in dollar sales was primarily attributable to a drop in
average selling price with the change in distribution channels from direct sales
in Europe to using a distributor, Grupo Taper S.A. of Madrid Spain.
Additionally, the percentage of USA domestic pacemaker sales (with higher
average selling prices) to total worldwide sales decreased from 83% to 54%.

  Sales by geographic area for  fiscal 1997 and 1996 are as follows:

<TABLE>
<CAPTION>  
           ------------------------------------------------------------ 
            Geographic Area                       1997        1996   
          ------------------------------------------------------------
          <S>                                  <C>         <C>       
            United States...................   $3,486,511  $4,720,457
            International...................      714,536     601,366
                                             -------------------------
                                                $4,201,047  $5,321,823 
          ------------------------------------------------------------ 
</TABLE>

  The Company's domestic sales for fiscal 1997 decreased by 26.2% versus those
achieved in fiscal 1996, attributable primarily to a refocus of Company
resources into the research and development of advanced single lead systems in
preparation for long term growth as well as increased competitive pressures from
other companies that have entered the market with single lead products similar
to the Company's.  International sales had an overall increase of  18.8%, but
international pacemaker unit sales were up 150.5%, attributable to the impact of
Grupo Taper's distribution efforts, and entry into the Japanese and Turkish
markets.

  Sales by product line (including product assemblies) for fiscal 1997 and 1996
are as follows:

<TABLE>
<CAPTION>
          -------------------------------------------------------------
            Product Line                           1997        1996   
          -------------------------------------------------------------
          <S>                                   <C>         <C>       
            Pacemakers......................    $1,966,831  $2,927,318
            Electrode leads.................     2,171,641   2,359,879
            Other...........................        62,575      34,626
                                             --------------------------
                                                $4,201,047  $5,321,823 
          -------------------------------------------------------------
</TABLE>

  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 has begun distributing the product throughout Japan.  The
Company expects that these efforts will enable the Company to expand sales in
the Japanese market, where the average unit price is significantly higher than
in the rest of  the world.
                                                                                
  The CE mark has been granted by TgV  Product Service of Munich, Germany, which
enables the Company to sell products throughout the European market.  The
Company has also renewed an agreement with LEM Biomedica for the purchase of
hybrid circuits from the Company.
                                                                                
  ROYALTY INCOME.  Royalty income represents royalty fees from Sulzer
Intermedics Inc. pursuant to a

                                       14
<PAGE>
 
License Agreement between the Company and Sulzer Intermedics, whereby the
Company licensed the technology relating to its single-pass atrial-controlled
ventricular pacing system.
                                                                                
  COSTS OF PRODUCTS SOLD.  Cost of products sold in fiscal 1997 was $2,430,886,
compared to $2,551,413 in fiscal 1996, representing a decrease of 5% as compared
with the sales decrease of 21%, which reduced the rate of gross margin from 52%
to 42%. This reduction was largely due to a change in customer mix, with a
higher relative volume of sales to Sulzer Intermedics and the European market,
where selling prices are lower than in the domestic market. Decreased production
levels to reduce inventory contributed to an increase in unit fixed costs.
                                                                                
  SELLING, GENERAL AND ADMINISTRATIVE EXPENSES.   Selling, general and
administrative expenses were $3,013,224 in fiscal 1997, representing a decrease
of 19% from $3,701,743 in fiscal 1996.  Selling expenses were $1,591,807 in
fiscal 1997 compared to $2,058,192 in fiscal 1996, representing a decrease of
23%.  General and administrative expenses were $1,421,417 in fiscal 1997
compared to $1,643,551 in fiscal 1997 representing a decrease of 14%, largely
due to a reduction of $150,000 in salary related costs.
                                                                                
  ENGINEERING, RESEARCH AND DEVELOPMENT EXPENSES.   Engineering, research and
development expenses  were $1,726,651 in fiscal 1997, representing an increase
of 37% from $1,260,881 in fiscal 1996 due to the intensified 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 expense decreased in fiscal 1997 to
$490,508 from $672,303 in fiscal 1997 due to the conversion of $2.8 million 5%
Debentures to equity on March 31, 1996 and paying down the outstanding balance
of the $1.0 million secured loan made by Sulzer Intermedics Inc. in October
1995.  Other income during fiscal 1997 largely comprised $140,000 gain on the
sale of common stock in the Company pursuant to the supply and development
agreements executed with a major implantable defibrillator manufacturer on
January 1, 1997 and a prior year deposit of $25,000 that was taken into income
in fiscal 1997.
                                                                                
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 and its world-
wide market expansion, it will have the potential to increase sales.

  The European Union ("EU") nations have adopted universal standards as
developed by the International Organization for Standardization ("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 EU 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 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, Sulzer
Intermedics Inc., a competitor of the Company, received FDA clearance to
commercially 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.  Sulzer 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 

                                       15
<PAGE>
 
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. The Company
estimates that its market share of pacemakers generally is less than 1% of an
estimated total worldwide market of $2 billion per year.

  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 to successfully compete with Sulzer 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 capabilities due to financial constraints impeding its ability
to supply  products and recruit and train a sales force.  However, the Company
believes that the credit facility from Coast Business Credit and the cash flow
generated from Sulzer Intermedics' orders and royalties have positioned the
Company to increase its research and development capabilities and its sales
force, and to provide an uninterrupted supply of products.

  As discussed above, the manufacture and sale of leads to Sulzer Intermedics
produce income for the Company.  The Company sells electrode leads to Sulzer
Intermedics for its new systems under an Amended and Restated Supply Contract
that terminates on August 1, 1998.  The Company also receives royalties from
Sulzer Intermedics sales of  its products incorporating the licensed technology
under an Amended and Restated License Agreement.  The Company anticipates
supplying components to Sulzer Intermedics under the supply agreement for the
next several years.  An increase in demand for components by Sulzer Intermedics
will put further demands on the Company to supply the products; however, with
the anticipated cash flow from such orders that would be generated under the
license and supply agreements, plus anticipated positive cash flow from sales of
other products by the Company, management believes that the Company will be in a
position to accommodate an increase in orders.

  It is anticipated that Sulzer 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 Sulzer 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 Sulzer Intermedics with
products, the Company anticipates providing Sulzer Intermedics with components
for the next few years.  However, in the event Sulzer Intermedics receives FDA
approval in a shorter time-frame than anticipated, or other events occur which
causes a decrease in Sulzer 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 Corning Corp. and E.I. DuPont
de Nemours & Company, 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 Corning to discontinue supplying its
materials to medical device manufacturers. The Company filed the "Special
Silicone Notification" for its products effected by the Dow Corning 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 the FDA, the alternate
materials identified in the notification may be used in the Company's products
in place of the comparable Dow Corning materials. No further FDA approvals of
the alternate materials of such suppliers were required.

                                       16
<PAGE>
 
  With respect to other materials changes resulting from decisions by the
material suppliers to discontinue supplying the medical device industry, e.g.
E.I. DuPont de Nemours, 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.  A tentative replacement
for the DuPont supplied material has been identified which meets manufacturing
requirements.  Biocompatibility studies have been initiated on the replacement
candidate.  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 in progress.  The Company believes, however, that it has a
sufficient quantity of the DuPont material on supply to meet the Company's
anticipated demand for the next several years.

  Suppliers of custom Application Specific Integrated Circuits (ASIC's) have
advised that the technology used to produce these as IC's will no longer be
supported.  As such, the Company placed one last bulk order to ensure the
availability of sufficient as IC's to satisfy projected demands for product.
The new pacing system under development will realize appropriate ASIC's for the
new system obviating the need for perpetual supply of the currently used ASIC's.

INFLATION AND CHANGING PRICES

  In the opinion of Company 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 PRONOUNCEMENT

  The FASB has issued SFAS No. 128, "Earnings per Share," which provides
guidance for computing and presenting earnings per share (EPS).  This statement
simplifies the standards for computing EPS previously found in APB Opinion No.
15, "Earnings per Share."  This statement , when adopted, is not expected to
have a material impact in the Company.

ITEM 7.  FINANCIAL STATEMENTS

<TABLE> 
<CAPTION> 
                                                                   page
<S>                                                                <C> 
Report of Independent Certified Public Accountants                 F2
Balance Sheet at March 31, 1997                                    F3 -F4
Statements of Operations for the Years Ended
  March 31, 1997 and 1996                                          F5
Statements of Changes in Stockholders' Equity for
  the Years Ended March 31, 1997 and 1996                          F6
Statements of Cash Flows for the Years Ended
  March 31, 1997 and 1996                                          F7 - F8
Summary of Significant Accounting Policies and Notes to 
  Financial Statements                                             F-9 - F24
</TABLE>

ITEM 8.  DISAGREEMENTS IN ACCOUNTING AND FINANCIAL DISCLOSURE

Not applicable.

                                       17
<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, 1997, 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 47 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.) 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.  Mr. Burns is also a director of American
Consolidated Laboratories, an eye care technology company.

     Bart C. Gutekunst, age 46, 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
NovaVison, Inc., an eye care technology company.  In May 1997, NovaVision Inc.
was merged with American Consolidated Laboratories, Inc., a special vision
products company, and Mr. Gutekunst became Chairman of the Board.  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 50, 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 also serves as a director to Electro-
Pharmacology, Inc. and ORBTEC, Inc.

     Augusto Ocana, age 53, has been a member of the Board of Directors since
April, 1996.  He has over 20 years experience in international health care
business, including turn arounds, corporate licensing, strategic alliances and
management.  Dr. Ocana joined Grupo Taper International in 1994 as Executive
Vice President.  Previously Dr. Ocana was President and Chairman of the Board of
Rempak International Corporation.  He joined that firm in 1990.  Prior to that,
Dr. Ocana was at Abbott Laboratories. He joined that firm in 1975 and held
various management positions including Marketing Director, Business Development,
Director Pharmaceutical Worldwide and Managing Director of the Latin American
and European Subsidiaries.  Dr. Ocana has also been trained as a physician and
has a Doctorate in International Law and Diplomacy.  He serves as a permanent
member of the council of the "Centro de Estudios Internacionales".

                                       18
<PAGE>
 
     Alan J. Rabin, age 47,  joined the Company in October 1994 and has been a
member of the Board and the Company's President and Chief Executive Officer
since that date. Until September 1994, Mr. Rabin was President and Chief
Executive Officer of R-2 Medical Systems, Inc, a manufacturer of cardiac care
devices, including disposables used in cardiac pacing. R-2 Medical Systems, Inc.
was sold to Cardiotronics, Inc. in 1994.  From 1987 to 1992, Mr. Rabin was Vice
President of Marketing and Sales for Stereo Optical Company, a manufacturer and
distributor of disposable and ophthalmic diagnostic devices. From 1985 to 1986,
he was Director of Marketing and Sales at Tycos Life Services, Inc., a
manufacturer of cardiovascular diagnostic and monitoring devices.  From 1980 to
1985, Mr. Rabin held various marketing, new business development, and product
management positions with surgical and cardiovascular equipment divisions of
C.R. Bard.  Prior to assuming those positions, Mr. Rabin was employed in
marketing and sales in the critical care and anesthesia market.  He also
currently serves as a director of American Consolidated Laboratories.

     Robert T. Rylee, age 66, 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 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 since 1986  He is
currently a director of Clarus Medical Systems, which position  he has held
since September 1993.

     Tracey E. Young, age 42 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 Sulzer Intermedics, Inc.

     Terry McMahon, age 47, became the Company's Vice President of Regulatory
Affairs and Quality Assurance in November 1994. Prior to joining the Company,
Mr. McMahon was employed as the Manager for Clinical Affairs with Xomed-Treace,
Inc. from 1990 to December 1994, where he managed clinical and pre-clinical
(animal) studies to demonstrate the safety and efficacy of devices for head and
neck injury.  Additional responsibilities included the preparation of all
regulatory filings for establishing and maintaining market clearance for the
company's product line. Prior to his employment with Xomed-Treace, he served in
a variety of managerial positions in Regulatory and Technical Affairs for
companies involved in medical device implants.

     William Wharton, age 49, was appointed Vice President of Manufacturing and
Facilities in March 1996.  Mr. Wharton had 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 63, joined the Company as Executive Vice President and
Chief Operating Officer in March 1996. Mr. Walton is a fellow of the Institute
of Chartered Accountants in England and Wales, and was from March 1995 to
February 1996 engaged as a financial and operations consultant with Biosight
Inc., of Orchard Park, NY, a firm specializing in helping health care businesses
enhance their performance.  Prior to his experience with Biosight, he spent
nineteen years in senior Financial and Systems Management positions with Dunlop
Holdings plc in the United Kingdom, including a position as general manager,
Group Information Systems, with responsibility for Dunlop's global computing and
communications.

     Jonathan S. Lee, age 45, joined the Company in May 1996 as Vice President
of Research and Development. Mr. Lee is a biomedical engineer and has 18 years
experience in Research & Development, Regulatory Affairs and Marketing with
Telectronics, a leading pacemaker manufacturer. He established and managed
Telectronic's

                                       19
<PAGE>
 
world wide service facilities, and established Telectronics' research and
development presence in Denver, Colorado. He has been a member of the North
American Society of Pacing and Electrophysiology since 1984.

     Kirk Kamsler, age 46, joined the Company in April 1996 as Director of
Marketing and Sales. In April 1997 he was promoted to Vice President Sales.  He
has over 20 years of sales, sales management and marketing management experience
in the medical device industry, including Davis & Geck, Matrx Medical and
Marquette Medical Systems. He was with Marquette from November 20, 1989 until
joining the Company in April 1996.  At Marquette, he was a sales representative
until May 1, 1992, when he was promoted to Group Product Manager, responsible
for the worldwide marketing of external cardiac defibrillators.

     The Board of Directors is elected at each annual meeting of the
shareholders. 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 shareholders of the Company by the
affirmative vote of a majority of the shares then entitled to vote at an
election of directors.

     Under the by-laws 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 shareholders. 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 in
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 Bart C. Gutekunst who is Chairman of the Boards of
United Education Software, Inc. and of American Consolidated Laboratories, Inc.,
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.

     Each director and executive officer, and each person owning beneficially
more than 10% of a registered class of the Company's equity securities, is
required to report to the Securities and Exchange Commission, by a specified
date, his or her transactions related to the Company's Common Stock and to
provide a copy of any such report to the Company. A late report was filed for
each of Messrs. Gutekunst and Rabin, officers and directors, Messrs. Burns,
Haimovitch and Rylee, directors, and Messrs. Lee, Kamsler and McMahon, officers,
with respect to one stock option grant to each of them, late reports were filed
for Ms. Young, director, with respect to two stock option grants, a late report
was filed for Mr. Rylee, director, with respect to the expiration of a stock
option grant and a late report was filed for Mr. Lee, officer, with respect to a
purchase of shares of common stock. A late report was filed for Dr. Ocana,
director, with respect to his appointment to the Board of Directors in April
1996.

                                       20
<PAGE>
 
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, 1997, 1996, and 1995 to the Company's Chief Executive Officers and any
other Executive Officer whose aggregate compensation exceeded $100,000 in fiscal
1996.


                          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       Compensation        Options          Compensation
---------------------------------------------------------------------------------------------------------------
<S>                         <C>              <C>           <C>                <C>               <C> 
Alan J. Rabin                1997            $146,000              -          12,000/(1)/       $   521/(2)/    
(President, CEO,             1996            $110,000      $  10,000/(3)/     20,000/(4)/       $26,349/(5)/    
Director)                    1995            $ 55,000      $   1,250/(6)/     28,571/(7)/       $64,451/(8)/    
---------------------------------------------------------------------------------------------------------------
Bart C. Gutekunst            1997            $ 48,000              -          10,000/(1)/       $11,321/(9)/     
(Chairman of the             1996            $ 48,000              -          15,000/(4)/       $ 8,700/(10)/     
Board)                       1995            $ 24,000      $   1,250/(11)/    21,429/(7)/       $95,050/(12)/     
---------------------------------------------------------------------------------------------------------------
Kirk D. Kamsler              1997            $ 81,104              -          10,000/(13)/      $45,000/(14)/   
(Vice President              1996                   -              -               -                  -        
 Sales)                      1995                   -              -               -                  -         
---------------------------------------------------------------------------------------------------------------
W. Alan Walton               1997            $ 77,549              -               -            $22,655/(14)/    
(Executive Vice President    1996                   -              -               -                  -        
 Operations)                 1995                   -              -               -                  -         
---------------------------------------------------------------------------------------------------------------
Jonathan S. Lee              1997            $ 80,596              -          10,000/(15)/      $33,460/(14)/    
(Vice President              1996                                      
Engineering)                 1995                   -              -               -                  -
---------------------------------------------------------------------------------------------------------------
</TABLE>

(1)  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.

(2)  This represents interest received prior to conversion of debentures to
     stock.

(3)  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.

(4)  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
     exercisable one third on August 5, 1995, one third on May 5, 1996, and one
     third on May 5, 1997.

(5)  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.

(6)  This represents a monthly fee of $625 paid to Mr. Rabin in October and
     November 1994 for his services to the Company as a Director.

                                       21
<PAGE>
 
(7)  Upon execution of  their employment agreements with the Company, Mr. Rabin
     was granted stock options for 28,571 shares of the Company's common stock
     and Mr. Gutekunst was granted stock options for 21,429 shares of the
     Company's common stock, exercisable at $3.50 per share.

(8)  This includes $12,751 for reimbursement of relocation expenses paid to Mr.
     Rabin pursuant to his employment agreement.  It also includes $51,700  for
     consulting  services rendered the Company in connection with the
     development of its new business plan and its  financing efforts prior to
     his employment with the Company.

(9)  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 $100K secured promissory note, and $521 of interest paid
     on debentures held prior to the conversion of the debentures to stock.

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

(11) This represents a monthly fee of  $625 paid to Mr. Gutekunst in August and
     September 1994 for his services to the Company as a Director prior to his
     employment as Chairman.

(12) This includes $79,050 for  consulting services rendered the Company in
     connection with the development of its new business plan and its financing
     efforts  prior to his employment with the Company.  It also includes
     $16,000 in connection with his facilitating the refinancing of the mortgage
     on the Company's property.

(13) 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.

(14) This represents reimbursement of relocation expenses paid pursuant to
     their employment agreements.

(15) 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.

  The following table sets forth information concerning options granted during
the fiscal year ended March 31, 1997 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>
Alan J. Rabin          12,000/(1)/         14%            $3.50          8/22/2001
Bart  C. Gutekunst     10,000/(1)/         12%            $3.50          8/22/2001
Kirk D. Kamsler        10,000/(2)/         12%            $3.50          4/21/2001
Jonathan S. Lee        10,000/(3)/         12%            $3.50          5/05/2001
----------------------------------------------------------------------------------
</TABLE>

(1)  These options are subject to immediate exercise.

(2)  These options are exercisable 1/3 on April 21, 1997; 1/3 on April 21, 1998
     and 1/3 on April 21, 1999.

                                       22
<PAGE>
 
(3)  These options are exercisable 1/3 on May 5, 1997; 1/3 on May 5, 1998 and
     1/3 on May 5, 1999.


 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    Exercisable/Unexercisable
------------------------------------------------------------------------------------------------------
<S>                  <C>          <C>        <C>                          <C>
Alan J. Rabin          -           -              49,143/11,429                   $0/$0          
Bart C. Gutekunst      -           -               37,858/8,572                   $0/$0          
W. Alan Walton         -           -                7,500/7,500                   $0/$0          
Kirk D. Kamsler        -           -                   0/10,000                   $0/$0          
Jonathan S. Lee        -           -                   0/10,000                   $0/$0          
------------------------------------------------------------------------------------------------------
</TABLE>

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 NASD OTC Bulletin Board
Service as quoted on March 31, 1997. 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 4,174 shares of the Company's common stock for their
services through fiscal year 1997.

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
50% of his annual salary based on the 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, 23,809 of which are
execisable immediately and the remaining 4,762 shares will become exercisable in
October 1997. 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

                                       23
<PAGE>
 
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, 17,858 of which are exercisable
immediately and the remaining 3,571 will become exercisable in October 1997. 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 OPTIONS
 
     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, 1997, there were
outstanding options for 309,969 shares under the Combined Plan, of which 237,569
shares were subject to options held by officers and directors at exercise prices
ranging from $3.50 to $5.25 per share.
 
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     CERTAIN BENEFICIAL OWNERS. As of May 30, 1997, seven (7) stockholders were
known by the Company to beneficially 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 30, 1997 with respect to each person known by
the Company to own beneficially more than five percent (5%) (calculated in
accordance with the guidelines promulgated by the Securities and Exchange
Commission) of the 2,619,371 issued and outstanding shares of common stock of
the Company on that date.

     In accordance with Rule 13d-3, promulgated under the Exchange Act, shares
that are not outstanding but that are issuable upon exercise of outstanding
options, warrants, rights or conversion privileges have been deemed to be
outstanding for the purpose of computing the percentage of outstanding shares
owned by the person owning such right, but have not been deemed outstanding for
the purpose of computing the percentage for any other person.

                                       24
<PAGE>
 
<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                            277,351                10.50%     
3 Chase Lane                                                                   
Colorado Springs, CO 80906                                                     
                                                                               
Special Situations Fund III, L.P.            327,770                12.38%     
153 East 53rd St. Rm 5101                                                      
New York, New York 10022                                                       
                                                                               
Penfield Partners                            204,856                 7.77%     
c/o William D. Witter, Inc.                                                    
150 E. 53rd Street                                                             
New York, NY 10022                                                             
                                                                               
Bradley Resources Company                    198,709                 7.54%     
107 John Street                                                                
Southport, CT 06490                                                            
                                                                               
ROI Partners                                 143,399                 5.45%     
353 Sacramento Street                                                          
San Francisco, CA 94111                                                        
                                                                               
Dow Corning Enterprises, Inc.                235,714 (3)             8.36%     
2200 West Salzburg Road                                                        
Auburn, MI 48611                                                               
                                                                               
                                                                               
Sirrom Capital                               250,000 (4)             8.87%     
St. Cloud Corner
500 Church Street, Suite 200
Nashville, TN 37219
                                   ---------------------------------------------
 
                                           1,637,799                52.56%     
                                   =============================================
</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 purchases common stock exercisable within the next sixty days as
     though the shares subject thereto were issued and outstanding.

(3)  This amount represents (a) 200,000 shares of common stock issuable upon
     exercise of warrants issued pursuant to the retirement of the Company's
     mortgage with Dow Corning Enterprises, Inc. and (b) 35,714 shares of common
     stock of which Dow Corning Enterprises, Inc. is the record owner.

(4)  This amount represents (a) 150,000 shares of common stock issuable upon
     exercise of warrants issued pursuant to the mortgage loan of $1,500,000
     made by Sirrom, (b) 50,000 shares of common stock issuable upon exercise of
     warrants issued pursuant to Sirrom for its consent to the Sulzer
     Intermedic's loan of $1,000,000 and (c) 50,000 shares of common stock of
     which Sirrom Capital Corporation is the record 

                                       25
<PAGE>
 
     owner.

     MANAGEMENT. The following table sets forth the number of shares of common
stock beneficially owned by each Director of the Company as of May 30, 1997, and
the percentage of the outstanding shares such ownership represented at the close
of business on May 30, 1997 (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 30, 1997.

<TABLE>
<CAPTION>
     ------------------------------------------------------------------------------------
     Name of Individual or                        Amount and Nature of         Percent
     Number of Persons in Group              Beneficial Ownership(1)(3)(4)   of Class (2)
     ------------------------------------------------------------------------------------
     <S>                                     <C>                             <C>
     William H. Burns.......................           13,690                  0.52%
     Bart C. Gutekunst......................           61,100                  2.29%
     Larry G. Haimovitch....................           28,971                  1.10%
     Alan J. Rabin..........................           80,251                  2.99%
     Robert T. Rylee........................           38,829                  1.46%
     Tracey E. Young........................           18,621                  0.71%
     Augusto Ocana..........................            7,000                  0.27%
     All Directors and Executive Officers
       as a group (12 persons)..............          328,623 (4)              9.03%
     ------------------------------------------------------------------------------------
</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 options to purchase common stock exercisable within the next 60 days
     as though the shares subject thereto were issued and outstanding.

(3)  Includes options exercisable within the next 60 days to purchase shares of
     common stock granted pursuant to the Company's Combined Option Plan (see
     "Item 11. Directors' and Executive Officers' Compensation -Stock Options")
     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................................................    50,858
          Larry G. Haimovitch..............................................    15,000
          Alan J. Rabin....................................................    67,809
          Robert T. Rylee..................................................    36,429
          Tracey E. Young..................................................    18,000
          Augusto Ocana....................................................     7,000

          All Directors and Executive Officers as a group (12 persons).....   277,118
          ----------------------------------------------------------------------------
</TABLE>

(4)  Includes shares subject to options and warrants as described in notes (3)
     and (4), to the table under "Security Ownership of Certain Beneficial
     Owners,"above.

                                       26
<PAGE>
 
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.  Interest payments
were made on March 31 and October 31 of each year, commencing March 31, 1995.
The Debentures' maturity date was October 31, 1999.  Effective March 31, 1996,
the holders of Debentures converted their Debentures into common stock of the
Company at a conversion rate of $2.80 per shares.  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 in respect of the conversion. Those beneficial owners holding 5% or more
of the Company's 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 5% Convertible
Debentures, the Company filed with the SEC a registration statement on Form S-1
registering the 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 convertible 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
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 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 a debenture 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 shareholder. 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's common stock.

     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.

     During fiscal 1996, the Company entered into a distribution agreement for
the European market with Grupo Taper, S.A., Madrid, Spain ("Grupo Taper"). Dr.
Augusto Ocana, who became a director of the Company in April 1996, is an
executive officer of Grupo Taper.

    On October 28, 1996, the Company executed a Security Agreement and
Promissory Note with Bart C.

                                       27
<PAGE>
 
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 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 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 that transactions
with affiliates be on terms at least as favorable as could have been reasonably
obtained from an unaffiliated third party.

                                       28
<PAGE>
 
                                    PART IV

ITEM 13.  EXHIBITS AND REPORTS ON FORM 8-K
 
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                             
-------------------------------------------------------------------------------------------------------------------------
<C>                <S>                                         <C>                                                       
    3.0            Certificate of Incorporation of             Exhibit 3.0 to Amendment No. 1 to Form S-1 Registration
                   the Company, as amended                     Statement filed on February 1, 1988, Registration No. 33-
                                                               16490 and Form 10-K for the year ended March 31, 1990,
                                                               File No. 0-14653
 
    3.1            Amendment to Certificate of                 Exhibit 3.1 to Form S-1 Registration Statement filed on
                   Incorporation                               March 2, 1995, Registration No. 33-89938
 
    3.2            By-Laws of the Company                      Exhibit 3.1 to Form S-18 Registration Statement filed on
                                                               October 16, 1985, Registration No. 33-9208
 
    3.3            Amendment to Bylaws                         Exhibit 3.3 to Form S-1 Registration Statement filed on
                                                               March 2, 1995, Registration No. 33-89938
 
    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 11,
                   5% Convertible Debenture due                1994, File No. 0-14653
                   October 31, 1999              
 
    4.3            Combined 1987-1992 Non-Qualified            Exhibit 4.8 to Amendment No. 1 to Form S-1 Registration
                   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 31,
                   March 31, 1995 in favor of Dow              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 or                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.             
</TABLE> 

                                       29
<PAGE>
 
<TABLE> 
<CAPTION> 
------------------------------------------------------------------------------------------------------------------------- 
Exhibit                                                        Sequential Page Number or                                  
Number             Description                                 Incorporation by Reference to                              
------------------------------------------------------------------------------------------------------------------------- 
<C>                <S>                                         <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 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 October
                   Alan J. Rabin and the Company,              11, 1994, File No. 0-14653
                   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                       Exhibit 10.12 to Form S-1 Registration Statement filed on
                   Company and Alan J. Rabin and               March 2, 1995, Registration No. 33-89938
                   Bart C. Gutekunst dated July 1,
                   1994                           
       
 10.9              Form of Indemnification                     Exhibit 10.13 to Form S-1 Registration Statement filed on
                   Agreement between the                       March 2, 1995, Registration No. 33-89938
                   Company and each Director,
                   executed December 1994    
 
 10.10             Employment Agreement between                Exhibit 10.14 to Form S-1 Registration Statement filed on
                   Robert R. Brownlee and the                  March 2, 1995, Registration No. 33-89938
                   Company dated as of October 1,
                   1994                          
</TABLE> 

                                       30
<PAGE>
 
<TABLE> 
<CAPTION> 
-------------------------------------------------------------------------------------------------------------------------  
Exhibit                                                        Sequential Page Number or                                   
Number             Description                                 Incorporation by Reference to                               
-------------------------------------------------------------------------------------------------------------------------  
<C>                <S>                                         <C>                                                         
 10.11             Loan and Security Agreement
                   between the Company and                     Exhibit 10.1 to Form 8-K Current Report, dated March 31,
                   Sirrom Capital Corporation,                 1995, File No. 0-14653
                   dated March 31, 1995       
       
 10.12             $1,500,000 Secured Promissory               Exhibit 10.2 to Form 8-K Current Report, dated March 31,
                   Note in favor of Sirrom Capital             1995, File No. 0-14653
                   Corporation, dated March 31,  
                   1995                           
       
 10.13             Mortgage, Assignment of Rents               Exhibit 10.3 to Form 8-K Current Report, dated March 31,
                   and Leases, and Security                    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 31,
                   Agreement in favor of Dow                   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 31,
                   between the Company Sirrom                  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 between              Exhibit 10.19 to Form 10-QSB for the Quarter ended
                   Grupo Taper S.A. and the                    December 31, 1995, File No. 0-14653
                   Company, dated December 20,   
                   1995                           
       
 10.20             Distribution Agreement between              Exhibit 10.20 to Form 10-QSB for the Quarter ended
                   LEM Biomedica s.r.l. and the                September 30, 1996, File No. 0-14653
                   Company, dated                
</TABLE> 

                                       31
<PAGE>
 
<TABLE>  
<CAPTION>
------------------------------------------------------------------------------------------------------------------------- 
Exhibit                                                        Sequential Page Number or                                  
Number             Description                                 Incorporation by Reference to                              
------------------------------------------------------------------------------------------------------------------------- 
<C>                <S>                                         <C>                                                         
                   October 1, 1996.
              
 10.21             Security Agreement and Secured
                   Promissory Note between Bart                Exhibit 10.21 to Form 10-QSB for the Quarter ended
                   C. Gutekunst and the Company,               December 31, 1996, File No. 0-14653
                   dated October 28, 1996.        
 
                   Security Agreement and Secured
  10.22            Promissory Note between Bart                Included herewith.
                   C. Gutekunst and the Company,
                   dated March 24, 1997.         
-------------------------------------------------------------------------------------------------------------------------
</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.

    REPORTS ON FORM 8-K
 
     There were no reports on Form 8-K filed by the Company during the year
ended March 31, 1996.

                                       32
<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: June 25, 1997
 
     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: June 25, 1997
 
 
      /s/ Alan J. Rabin                 President and CEO, and a Director
     -----------------------------------
      Alan J. Rabin
      Dated: June 25, 1997
 
 
      /s/ Tracey E. Young               Director
     -----------------------------------
      Tracey E. Young
      Dated: June 25, 1997
 
 
      /s/ William H. Burns              Director
     -----------------------------------
      William H. Burns
      Dated: June  25, 1997
 
 
      /s/ Larry G. Haimovitch           Director
     -----------------------------------
      Larry G. Haimovitch
      Dated: June 25, 1997
 
 
      /s/ Robert T. Rylee               Director
     -----------------------------------
      Robert T. Rylee
      Dated: June 25, 1997
 
      /s/ Augusto Ocana                 Director
     -----------------------------------
      Augusto Ocana
      Dated: June 25, 1997
 
 
      /s/ W. Alan Walton                Executive Vice President, Chief 
     -----------------------------------
      W. Alan Walton                    Operating Officer (Principal Accounting
                                        Officer)
      Dated: June  25, 1997

                                       33
<PAGE>
 
                                                  CARDIAC CONTROL SYSTEMS, INC. 

                                                                      CONTENTS

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

<TABLE>  
             <S>                                                 <C>      <C> 
             Report of Independent Certified Public Accountants            F-2

 
             Financial statements
                 Balance sheet                                    F-3  -   F-4
                 Statements of operations                                  F-5
                 Statements of stockholders' equity                        F-6
                 Statements of cash flows                         F-7  -   F-8
                 Summary of significant accounting policies       F-9  -  F-11
                 Notes to financial statements                   F-12  -  F-24
 </TABLE>

                                      F-1
<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, 1997 and the related statements of operations, stockholders'
equity and cash flows for each of the two years in the period ended March 31,
1997. 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, 1997 and the results of its operations and its cash flows for
each of the two years in the period ended March 31, 1997 in conformity with
generally accepted accounting principles.



                                     BDO Seidman, LLP
Orlando, Florida
May 29, 1997, except for Note 10
 which is as of June 13, 1997

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

                                                                  BALANCE SHEET


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

<TABLE>  
<CAPTION> 
March 31,                                                                  1997
--------------------------------------------------------------------------------
<S>                                                                  <C> 
ASSETS

                                                                                
CURRENT:                                                                        
 CASH                                                                $  185,463 
 Accounts receivable (Note 2)                                           952,842 
 Inventories (Note 3)                                                 1,519,638 
 Prepaid expenses                                                       256,112 
--------------------------------------------------------------------------------

       TOTAL CURRENT ASSETS                                           2,914,055
--------------------------------------------------------------------------------

PROPERTY, PLANT AND EQUIPMENT, NET (Notes 4 and 5)                    1,787,324
--------------------------------------------------------------------------------

OTHER ASSETS:

 Deferred financing costs, less accumulated
  amortization of $116,712 (Note 6)                                     326,788
 Deferred license fees, less accumulated
  amortization of $3,333                                                196,667
 Other                                                                   73,546
--------------------------------------------------------------------------------

       TOTAL OTHER ASSETS                                               597,001
--------------------------------------------------------------------------------


                                                                     $5,298,380
================================================================================
</TABLE> 

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

                                                                  BALANCE SHEET


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

<TABLE>  
<CAPTION> 
March 31,                                                                  1997
--------------------------------------------------------------------------------
<S>                                                                  <C> 
LIABILITIES AND STOCKHOLDERS' EQUITY


CURRENT LIABILITIES:
 Accounts payable                                                    $  828,243 
 Accrued compensation                                                   230,452 
 Accrued royalties (Note 9)                                             310,304 
 Other accrued expenses                                                  29,082 
 Deposits payable                                                       392,632 
 Notes and debt obligations payable within one year (Note 5)            106,530 
--------------------------------------------------------------------------------

       TOTAL CURRENT LIABILITIES                                      1,897,243
 
                                                                                
NOTES AND DEBT OBLIGATIONS PAYABLE AFTER ONE YEAR (Note 5)            1,446,583 
OTHER LIABILITIES                                                        70,674
--------------------------------------------------------------------------------

       TOTAL LIABILITIES                                              3,414,500
--------------------------------------------------------------------------------

COMMITMENTS AND CONTINGENCIES (Note 9)

STOCKHOLDERS' EQUITY (Notes 5 and 6):
 Common stock, $.10 par value, 30,000,000 shares authorized,
  2,619,371 shares issued                                               261,937
 Additional paid-in capital                                          22,291,215
 Accumulated deficit                                                (20,662,217)
 Cumulative translation adjustment                                       (7,055)
--------------------------------------------------------------------------------

       TOTAL STOCKHOLDERS' EQUITY                                     1,883,880
--------------------------------------------------------------------------------

                                                                     $5,298,380
================================================================================
</TABLE> 

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

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

                                                       STATEMENTS OF OPERATIONS


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

<TABLE> 
<CAPTION> 
Year ended March 31,                                       1997            1996
--------------------------------------------------------------------------------
<S>                                                  <C>             <C>  
REVENUE:
 Sales (Note 8)                                      $4,201,047      $5,321,823
 Royalty income                                       2,394,250       2,351,700
--------------------------------------------------------------------------------
       Total revenue                                  6,595,297       7,673,523
--------------------------------------------------------------------------------
 
COSTS AND EXPENSES:
 Cost of products sold                                2,430,886       2,551,413
 Selling, general and administrative expenses         3,013,224       3,701,743
 Engineering, research and development expenses       1,726,651       1,260,881
--------------------------------------------------------------------------------
       Total costs and expenses                       7,170,761       7,514,037
--------------------------------------------------------------------------------
       Income (loss) from operations                   (575,464)        159,486
--------------------------------------------------------------------------------
OTHER INCOME (EXPENSES):
 Interest income                                         17,432          16,712 
 Interest expense                                      (490,508)       (672,303)
 Other income                                           167,300         234,600 
--------------------------------------------------------------------------------
       Total other expenses                            (305,776)       (420,991)
--------------------------------------------------------------------------------
NET LOSS                                              $(881,240)      $(261,505)
================================================================================

LOSS PER COMMON SHARE                                 $    (.34)      $    (.19)
================================================================================

WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING  2,585,212       1,356,607
================================================================================
</TABLE> 

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

                                      F-5
<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, 1995           1,342,819   $134,282   $18,725,430   $         -   $(19,519,472)          $     - 
 Conversion of debentures and                                                                                              
  related interest, net of                                                                                                 
  costs of $225,175               1,082,012    108,201     2,696,269             -              -                 -        
 Common shares issued               108,111     10,811       280,939             -              -                 -        
 Stock warrants issued                    -          -       154,750             -              -                 -        
 Acquisition of treasury stock            -          -             -       (10,938)             -                 -        
 Net loss                                 -          -             -                     (261,505)                -        
------------------------------------------------------------------------------------------------------------------------    

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) 
========================================================================================================================
</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,                                                 1997         1996
---------------------------------------------------------------------------------------
<S>                                                            <C>          <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
 Net loss                                                      $ (881,240)  $ (261,505)
 Adjustments to reconcile net loss to net
  cash provided by (used for) operating activities:
   Depreciation and amortization                                  551,225      486,942
   Gain on fixed asset disposals                                  (12,957)      (7,136)
   Stock issued for payment of directors' fees                          -       21,750
   Stock issued for payment of interest                                 -      144,645
   Cash provided by (used for):
    Accounts receivable                                           382,515       56,981
    Inventories                                                   514,807     (279,013)
    Prepaid expenses                                             (192,039)      (6,414)
    Other assets                                                  (50,588)     (22,257)
    Accounts payable                                              327,535     (174,169)
    Accrued expenses                                              (13,957)     (22,197)
    Deposits payable                                             (126,962)     168,447
    Other liabilities                                            (112,717)      14,079
    Deferred royalties                                           (328,250)    (361,800)
--------------------------------------------------------------------------------------
 
Net cash provided by (used for) operating activities               57,372     (241,647)
--------------------------------------------------------------------------------------
 
CASH FLOWS FROM INVESTING ACTIVITIES:
 Purchase of property, plant and equipment                       (544,628)    (402,701)
 Proceeds from sale of equipment                                   22,633       25,482
 Redemption of certificate of deposit                                   -       40,000
--------------------------------------------------------------------------------------
 
Net cash used for investing activities                           (521,995)    (337,219)
--------------------------------------------------------------------------------------
 
CASH FLOWS FROM FINANCING ACTIVITIES:
 Proceeds from issuance of common stock and stock warrants,
  net of issuance costs                                           301,032      328,950
 Deferred financing costs                                         (99,149)     (11,140)
 Proceeds from notes and debt obligations                         163,253    1,068,490
 Repayment of notes and debt obligations                         (875,174)    (307,745)
--------------------------------------------------------------------------------------
 
Net cash provided by (used for) financing activities             (510,038)   1,078,555
--------------------------------------------------------------------------------------
 
EFFECT OF EXCHANGE RATE CHANGES IN CASH                            (7,055)           -
--------------------------------------------------------------------------------------
 
NET INCREASE (DECREASE) IN CASH                                  (981,716)     499,689
 
CASH, beginning of year                                         1,167,179      667,490
--------------------------------------------------------------------------------------
 
CASH, end of year                                              $  185,463   $1,167,179
</TABLE>

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

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

                                      F-7
<PAGE>
 
                                                CARDIAC CONTROL SYSTEMS, INC.
     
                                                     STATEMENTS OF CASH FLOWS

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

<TABLE> 
<CAPTION> 
Year ended March 31,                                                            1997            1996 
----------------------------------------------------------------------------------------------------
<S>                                                                        <C>           <C>       
SUPPLEMENTAL CASH FLOW INFORMATION:                                                                 
 Interest paid during the year                                             $ 283,676      $  299,225
                                                                                                    
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:                                
 Transfer of deferred registration costs from other assets to capital                               
  in excess of par                                                         $       -      $   51,844
 Conversion of debentures to common stock, net of unamortized                                       
  debt issue costs                                                                 -       2,723,219
 Deferred financing costs incurred for issuance of stock warrants             81,000          84,250
 Treasury stock acquired in settlement of note receivable                          -          10,938
 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 for issuance of stock warrants                        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-8
<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 agreements are
and Fees            capitalized and amortized over the term of the loans (see
                    Note 5). Deferred license fees related to a license to
                    distribute products in Japan are capitalized and amortized
                    over five years, the life of the license.
 
Impairment of Long- Impairment losses are recognized on long-lived assets when
Lived Assets        expected future cash flows are less than the assets'
                    carrying value. Accordingly, when indicators of impairment
                    are present, the Company evaluates the carrying value of
                    property and equipment in relation to the operating
                    performance and future undiscounted cash flows of the
                    underlying business. The Company adjusts the net book value
                    of the underlying assets if the sum of expected future cash
                    flows is less than book value.

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

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

                                      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES



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

                    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, 1997 and 1996.
 
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, 1997 and 1996
                    approximate $1,086,800 and $698,000, 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            Primary loss per share of common stock is based on the 
Common Share        weighted average number of common shares and common share
                    equivalents, principally in the form of options and
                    warrants, outstanding during the period. Common stock
                    equivalents have not been included for 1997 and 1996 as
                    their effect on the loss per share is anti-dilutive.

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

                                      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES



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

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, 1997.
 
                    The respective carrying value of certain on-balance-sheet
                    financial instruments approximated their fair values. These
                    financial instruments include cash, accounts receivable,
                    accounts payable and accrued expenses. 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 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.
 
Reclassifications   Certain reclassifications have been made to the financial
                    statements previously reported for the year ended March 31,
                    1996 to conform with classifications used in the financial
                    statements for the year ended March 31, 1997.
 
Recent Accounting   The FASB has issued SFAS No. 128, "Earnings per Share,"
Pronouncement       which provides guidance for computing and presenting
                    earnings per share (EPS). This statement simplifies the
                    standards for computing EPS previously found in APB Opinion
                    No. 15, "Earnings per Share." This statement, when adopted,
                    is not expected to have a material impact on the Company.

                                     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.  Accounts        Accounts receivable at March 31, 1997 are summarized as
    Receivable      follows:

<TABLE> 
                    ------------------------------------------------------------
                    <S>                                              <C>  
                    Trade accounts receivable                        $  468,576
                    Royalties receivable                                496,575
                    Other accounts receivable                             5,376
                    ------------------------------------------------------------
 
                                                                        970,527
                    Allowance for doubtful accounts                     (17,685)
                    ------------------------------------------------------------
 
                                                                     $  952,842
                    ============================================================
</TABLE>

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

                                                   NOTES TO FINANCIAL STATEMENTS



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

3. Inventories      Inventories at March 31, 1997 consist of the following:

<TABLE> 
                    ------------------------------------------------------------
                    <S>                                              <C>  
                    Raw materials and supplies                       $  780,737
                    Work-in-process                                     397,996
                    Finished goods                                      359,689
                    ------------------------------------------------------------
 
                                                                      1,538,422
                    Reserve for obsolescence                            (18,784)
                    ------------------------------------------------------------
 
                                                                     $1,519,638
                    ============================================================
 
</TABLE> 

                    Finished goods inventories include approximately $220,098 of
                    products consigned to customers and independent sales
                    representatives at March 31, 1997.

 
4. Property, Plant  Components of property, plant and equipment at March 31,
   and Equipment    1997 are as follows:

<TABLE> 
                    ------------------------------------------------------------
                    <S>                                             <C>        
                    Land                                            $   123,300 
                    Building and building improvements                1,793,840 
                    Land improvements                                    29,450 
                    Machinery and equipment                           1,088,511 
                    Office equipment                                    524,361 
                    Furniture and fixtures                              146,403 
                    Ancillary equipment                               1,285,087 
                    Vehicles                                             11,666 
                    Construction in progress (estimated costs                   
                     to complete $198,000)                              212,967 
                    ------------------------------------------------------------
 
                                                                      5,215,585
                    Accumulated depreciation                         (3,428,261)
                    ------------------------------------------------------------
 
                                                                    $ 1,787,324
                    ============================================================
</TABLE> 
                                     F-13
<PAGE>
 
                                                   CARDIAC CONTROL SYSTEMS, INC.

                                                   NOTES TO FINANCIAL STATEMENTS



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

5. Notes and Debt   Notes and debt obligations consist of the following at 
   Obligations      March 31, 1997:
 
<TABLE> 
                    ============================================================
                    <S>                                           <C> 
                    Sirrom mortgage note, net of discount
                     (see note below)                             $  1,428,625
                    10% secured note payable to stockholder            100,000
                    Other                                               24,488
                    ------------------------------------------------------------
 
                                                                     1,553,113
                    Less amounts payable within one year              (106,530)
                    ------------------------------------------------------------
 
                    Total notes and debt obligations payable 
                     after one year                               $  1,446,583
                    ============================================================
</TABLE> 

                    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, the Company granted Sirrom
                    50,000 additional warrants pursuant to this agreement. The
                    Company recorded $279,000 (100,000 shares) in fiscal 1995
                    and $71,376 (50,000 shares) in fiscal 1997 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 6). This has resulted in an
                    effective interest rate of

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

                                                  NOTES TO FINANCIAL STATEMENTS

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

                      approximately 30% on the Sirrom debt. The Sirrom note
                      includes an unamortized debt discount of $71,375 at March
                      31, 1997.
 
                      Aggregate notes and debt obligations outstanding at March
                      31, 1997 mature as follows:

<TABLE> 
                     ----------------------------------------------------------
                     <S>                                            <C> 
                     1998                                           $  106,530
                     1999                                                7,698
                     2000                                            1,432,097
                     2001                                                4,005
                     2002                                                2,783 
                     ---------------------------------------------------------- 
                                                                    $1,553,113
                     ==========================================================
</TABLE>

6. Stockholders'     Issuance of Common Shares
   Equity            -------------------------
 
                     In March 1996, the Company entered into a distribution
                     agreement with Grupo Taper ("Grupo") whereby Grupo will
                     receive exclusive distribution rights for most of Europe.
                     In connection with this agreement, Grupo paid the Company
                     $500,000 and received 100,000 shares of common stock valued
                     at $270,000 and 100,000 common stock purchase warrants
                     valued at $70,500. The difference between the purchase
                     price and the value assigned to the common stock and
                     warrants of $159,500 was recorded as a gain on sale of the
                     distribution agreement included in other income.

                     During the year ended March 31, 1996, the Company issued
                     8,111 shares of common stock as payment of directors' fees.
 
                     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 to the manufacturer. In connection with
                     this
 

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

                                                  NOTES TO FINANCIAL STATEMENTS

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

                     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 supply agreement included in other
                     income.
                     
                     Convertible Debentures
                     ----------------------
 
                     During fiscal 1995, the Company issued $2,885,000 in 5%
                     Convertible Debentures ("the Debentures") which were due
                     October 31, 1999. The Debentures were convertible into
                     common stock at the option of the Debenture holder at a
                     conversion price of $2.80. On March 31, 1996, the Debenture
                     holders elected to convert the $2,885,000 Debentures into
                     1,030,352 shares of common stock. The shares underlying
                     these Debentures were registered with the SEC effective
                     April 27, 1995. Interest related to the Debentures for
                     fiscal 1996 of $144,645 was paid in the form of 51,660
                     shares of common stock at a conversion price of $2.80.
                     Costs incurred to register the shares underlying the
                     Debentures of $63,394, as required by the Debenture
                     agreement, and unamortized costs incurred to issue the
                     Debentures of $161,781 were recorded as a reduction of
                     capital in excess of par value upon conversion.

                     In conjunction with the conversion of the debentures, the
                     Company issued 100,000 warrants to the Debenture holders at
                     an exercise price of $5 per share expiring March 31, 1999.
                      
                     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 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.

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

                                                  NOTES TO FINANCIAL STATEMENTS

===============================================================================
 
                     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 1997 and 1996, respectively:
                     no dividend yield for both years, an expected life of five
                     years for both years, expected volatility of 44% for both
                     years, and risk-free interest rates of 6.4% and 6.3%.
 
                     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:
 
<TABLE> 
<CAPTION> 
                                                        1997            1996
                     -----------------------------------------------------------
                     <S>                              <C>             <C> 
                     NET LOSS
                      As reported                     $(881,240)      $(261,505)
                      Pro forma                        (952,300)       (383,365)
 
                     LOSS PER SHARE
                      As reported                          (.34)           (.19)
                      Pro forma                            (.37)           (.28)
                     ===========================================================
</TABLE>

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

                                                  NOTES TO FINANCIAL STATEMENTS

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

A summary of the status of options under this plan as of March 31, 1997 and 1996
and changes during the years ending on those dates are presented below:

<TABLE> 
<CAPTION> 
                                               1997                           1996
                                   --------------------------      -------------------------
                                              Weighted-Average               Weighted-Average   
                                     Shares    Exercise Price       Shares    Exercise Price
----------------------------------------------------------------------------------------------
<S>                                  <C>      <C>                   <C>      <C>
Balance at beginning of year         305,186           $ 4.02       242,710           $ 4.11   
 Granted                              84,429             3.50        72,000             3.59   
 Forfeited                            79,646             4.55         9,524             3.50   
                                   ---------           ------      --------           ------    
                                                                                               
Balance at end of year               309,969           $ 3.72       305,186           $ 4.02   
                                   =========           ======      ========           ======      
                                                                                               
Options exercisable at year end      244,658           $ 3.69       200,521           $ 4.07   
                                                                                               
Options granted during the year                                                                
 at exercise prices which exceed                                                               
 market price of stock at date of                                                              
 grant:                                                                                        
  Weighted average exercise price     74,429           $ 3.50             -           $    -   
  Weighted average fair value         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        72,000           $ 3.59   
  Weighted average fair value         10,000             1.66        72,000             1.48   
</TABLE>

The following table summarizes information about fixed stock options at March
31, 1997:

<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, 1997    Contractual Life     Exercise Price      March 31, 1997      Exercise Price   
-----------------------------------------------------------------------------------------------------------------------
<S>                      <C>                <C>                <C>                   <C>               <C>               
$3.50 to 3.63                    285,427           2.9 years            $  3.52             220,116               $3.52      
$5.25                             24,542           0.5 years               5.25              24,542                5.25      
                                 -------                                               ------------                         
                                                                                                                        
                                 309,969                                                    244,658                         
                                ========                                                ===========                         
</TABLE>

                                      F-18
<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,
                     1997 and 1996 were 31,406 and 33,945, respective ly. The
                     total number of exercisable non-plan stock options at March
                     31, 1997 and 1996 were 24,073 and 27,945, respectively. The
                     exercise price for these options range from $.70 to $10.50
                     per share. These options are exercisable over five-year
                     periods and expire five years from the date of grant.

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

                     Common stock purchase warrants outstanding at March 31,
                     1997 are as follows:

 <TABLE>  
 <CAPTION>                                      
                                                                 Exercise
                                                    Number of       Price
                                                   Underlying         Per    Expiration
                                                       Shares       Share          Date
                     --------------------------------------------------------------------
                     <S>                              <C>           <C>        <C>
                     Dow Corning Enterprises, Inc.    200,000       $2.80       3/31/98
                     Converted debenture holders      100,000       $5.00       3/31/99
                     Sirrom (see Note 5)              150,000       $ .01       3/31/00
                     Sirrom (see note below)           50,000       $ .01      10/18/00
                     Grupo Taper                      100,000       $ .80        8/5/07
                     ==================================================================== 
</TABLE>

                     All of the above warrants were exercisable at March 31,
                     1997, except for Grupo Taper, of which 100,000 are
                     unexercisable. 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 and $84,250 during the years ended March
                     31, 1997 and 1996, respectively, 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.

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

                                                  NOTES TO FINANCIAL STATEMENTS

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

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

                     The aggregate number of shares of the Company's common
                     stock reserved for future issuance at March 31, 1997 is
                     summarized as follows:

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

<TABLE>
<CAPTION>
                     <S>                                           <C> 
                     Common stock options:
                      1987/1992 Stock Option Plan                    391,645   
                      Non-plan                                        31,406    
                     Common stock purchase warrants:               
                      Dow Corning Enterprises, Inc.                  200,000   
                      Sirrom Capital Corporation                     200,000   
                      Grupo Taper                                    100,000   
                      Debenture holders                              100,000   
                     Directors' compensation                          23,652 
                     ---------------------------------------------------------

                                                                   1,046,703
                     ========================================================= 
</TABLE>

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

                                                  NOTES TO FINANCIAL STATEMENTS

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

7.  Income Taxes     Significant components of the Company's deferred income tax
                     assets and liabilities at March 31, 1997 are as follows:
                      
                     -----------------------------------------------------------

<TABLE> 
                     <S>                                           <C> 
                     Deferred tax assets:
                      Accrued liabilities                          $  116,000
                      Net operating loss carryforwards              6,689,000
                      Inventory                                       156,000
                      Amortization                                    122,000
                      Other                                             8,000
                     -----------------------------------------------------------
                     Gross deferred tax assets                      7,091,000
 
                     Deferred tax liabilities - depreciation         (240,000)
                     Valuation allowance                           (6,851,000)
                     -----------------------------------------------------------
                     Net deferred taxes                            $        -
                     ===========================================================
</TABLE> 
 
                     The net change in the valuation allowance for deferred tax
                     assets was an increase of $5,000 in fiscal 1997. As of
                     March 31, 1997, the Company has approximately $18,800,000
                     of tax net operating loss carryforwards (NOLs) available
                     that expire from 1998 through 2011. The tax benefit of
                     these losses of approximately $6,689,000 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> 
                                                                 1997     1996
                     -----------------------------------------------------------
                     <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-21
<PAGE>
 
                                                   CARDIAC CONTROL SYSTEMS. INC.

                                                  NOTES TO FINANCIAL STATEMENTS

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

8.   Segment Data    The Company operates in a single industry segment, that of
     and             providing implantable medical products to the health care
     Significant     industry. During the years ended March 31, 1997 and 1996,
     Customers       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, 1997 and 1996 are as follows:

<TABLE> 
<CAPTION> 
                     Geographic Area                         1997          1996
                     -----------------------------------------------------------
                     <S>                             <C>           <C> 
                     United States                   $  3,486,511  $  4,720,457
                     Europe                               626,508       601,366
                     Japan/Asia                            88,028             -
                     -----------------------------------------------------------
 
                                                     $  4,201,047  $  5,321,823
                     ===========================================================
</TABLE> 
 

                     The Company's products are primarily distributed through
                     independent sales representatives in the United States.
                     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. During
                     the year ended March 31, 1996, 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 $1,787,118 (34%) of the Company's sales.

                     Further, pursuant to an electrode lead Supply Agreement
                     with Intermedics Inc., the Company sold $1,954,408 and
                     $1,989,089 of product to Intermedics Inc. for the years
                     ended March 31, 1997 and 1996, respectively, which
                     accounted for 47% and 37% of the Company's sales.
                      

                                      F-22
<PAGE>
 
                                                   CARDIAC CONTROL SYSTEMS. INC.

                                                  NOTES TO FINANCIAL STATEMENTS

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

9.   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 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, 1997 and 1996 was
                     $62,655 and $45,567, 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, 1997,
                     the Company's future maximum purchase obligation
                     approximated $743,000.

                     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, 1997, the Company's future
                     maximum purchase obligation approximated $364,000.

                     Employment Agreements
                     ---------------------
 
                     The Company has entered into various employment agreements
                     expiring during fiscal year 1998. Minimum future
                     obligations under all employment agreements amount to
                     $115,500 in 1998.
                      

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

                                                  NOTES TO FINANCIAL STATEMENTS

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


                     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.

10.  Subsequent      On June 13, 1997, the Company entered into a Loan Agreement
     Event           ("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"), 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%, and the
                     interest rate for the Term Loan and the CAPEX Subline is
                     equal to the prime rate plus 2.25%. 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. In addition, CBC was granted warrants 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 5 years from
                     the date of the Warrant Agreement.

                                      F-24
<PAGE>
 
                               INDEX OF EXHIBITS
                                        
 
<TABLE>
<CAPTION>
EXHIBIT NUMBER          DESCRIPTION                SEQUENTIAL PAGE 
                                                      NUMBER
<S>               <C>                              <C>
10.22             Security Agreement and                35 
                  Secured Promissory Note               
                  between Bart C. Gutekunst            
                  and the Company, dated               
</TABLE>

<PAGE>
 
                                 EXHIBIT 10.22


                Security Agreement and Secured Promissory Note
                  between Bart C. Gutekunst and the Company,
                             dated March 24, 1997.