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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549




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Form 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934


For the fiscal year ended December 31,
2001

Commission file number: 0-28288




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CardioGenesis Corporation

(formerly known as Eclipse Surgical
Technologies, Inc.)


(Exact name of Registrant as specified in its
charter)


|                         |  |                                         
|------------------------ |  | ----------------------------------------
|California               |  | 77-0223740                              
|(State of incorporation) |  | (I.R.S. Employer
	Identification Number)

26632 Towne Center Drive


Suite 320


Foothill Ranch, California 92610


(Address of principal executive
officers)


(714) 649-5000

(Registrants telephone number, including
area code)




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|                           |  |                                     
|-------------------------- |  | ------------------------------------
|Title of Each Class        |  | Name of Exchange on Which Registered
|                           |  |                                     
|Common Stock, no par value |  | Nasdaq National Market              

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

Indicate by check mark if disclosure of
delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be
contained, to the best of the registrants knowledge, in
definitive proxy or information statements incorporated herein
by reference in Part III of this Form 10-K or any amendment
to this Form 10-K. o

The aggregate market value of the voting stock
held by non-affiliates of the Registrant was approximately
$32,343,786 as of March 29, 2002, based upon the closing
sale price reported for that date on the Nasdaq National Market.
Shares of Common Stock held by each officer and director and by
each person who owns 5% or more of the outstanding Common Stock
have been excluded because such persons may be deemed to be
affiliates. This determination of affiliate status is not
necessarily a conclusive determination for any other purpose.

Indicate the number of shares outstanding of each
of the issuers classes of common stock outstanding as of
the last practicable date.

36,506,723 shares


As of March 29, 2002




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TABLE OF CONTENTS



|              |                                                                                                |  |  |  |  |  |  | 
|------------- | ---------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I       
|              | Item 1. Business.                                                                             
|              | Item 2. Description of Property.                                                              
|              | Item 3. Legal Proceedings.                                                                    
|              | Item 4. Submission of Matters to a Vote of Security Holders.                                  
|PART II      
|              | Item 5. Market for Registrants Shares and Related Shareholder Matters.                        
|              | Item 6. Selected Consolidated Financial Data.                                                 
|              | Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations.
|              | Item 7A. Quantitative and Qualitative Disclosures About Market Risk                           
|              | Item 8. Consolidated Financial Statements and Supplementary Data.                             
|              | Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. 
|PART III     
|              | Item 10. Directors and Executive Officers of the Registrant.                                  
|              | Item 11. Executive Compensation and Other Matters.                                            
|              | Item 12. Security Ownership of Certain Beneficial Owners and Management.                      
|              | Item 13. Certain Relationships and Related Transactions.                                      
|PART IV      
|              | Item 14. Exhibits, Financial Statement Schedule, and Reports on Form 8-K.                     
|SIGNATURES   
|EXHIBIT 3.3  
|EXHIBIT 10.2 
|EXHIBIT 10.3 
|EXHIBIT 10.11
|EXHIBIT 21.1 
|EXHIBIT 23.1 



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INDEX TO FORM 10-K

|           |  |                                                                                        |    |      |    | 
|---------- |  | -------------------------------------------------------------------------------------- | -- | ---- | -- | 
|           |  |                                                                                        |    | Page
|           |  |                                                                                        |    |     
|PART I    
|Item 1.    |  | Business                                                                               |    |      | 2  | 
|Item 2.    |  | Description of Property                                                                |    |      | 12 | 
|Item 3.    |  | Legal Proceedings                                                                      |    |      | 12 | 
|Item 4.    |  | Submission of Matters to a Vote of Security
	Holders                                   |    |      | 13 | 
|PART II   
|Item 5.    |  | Market for Registrants Shares and Related
	Shareholder Matters                        |    |      | 13 | 
|Item 6.    |  | Selected Consolidated Financial Data                                                   |    |      | 13 | 
|Item 7.    |  | Managements Discussion and Analysis of
	Financial Condition and Results of Operations |    |      | 14 | 
|Item 7A.   |  | Quantitative and Qualitative Disclosures About
	Market Risk                            |    |      | 31 | 
|Item 8.    |  | Consolidated Financial Statements and
	Supplementary Data                              |    |      | 32 | 
|Item 9.    |  | Changes in and Disagreements with Accountants on
	Accounting and Financial Disclosure  |    |      | 32 | 
|PART III  
|Item 10.   |  | Directors and Executive Officers of the Registrant                                     |    |      | 32 | 
|Item 11.   |  | Executive Compensation and Other Matters                                               |    |      | 32 | 
|Item 12.   |  | Security Ownership of Certain Beneficial Owners
	and Management                        |    |      | 33 | 
|Item 13.   |  | Certain Relationships and Related Transactions                                         |    |      | 33 | 
|PART IV   
|Item 14.   |  | Exhibits, Financial Statement Schedule and
	Reports on Form 8-K                        |    |      | 34 | 
|Signatures |  |                                                                                        | 37 |     

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PART I






|        |          
|------- | ---------
|Item 1. | Business.

This Annual Report on Form 10-K contains
forward-looking statements that involve risks and uncertainties.
The statements contained herein that are not purely historical
are forward-looking statements within the meaning of
Section 27A of the Securities Act and Section 21E of
the Exchange Act, including without limitation statements
regarding our expectations, beliefs, intentions or strategies
regarding the future. All forward-looking statements included in
this document or incorporated by reference herein are based on
information available to us on the date hereof, and we assume no
obligation to update any such forward-looking statements. Our
actual results could differ materially from those anticipated in
these forward-looking statements as a result of certain factors,
including those set forth in Item 7 and
elsewhere.

General

CardioGenesis Corporation, formerly known as
Eclipse Surgical Technologies, Inc., incorporated in California
in 1989, designs, develops, manufactures and distributes
laser-based surgical products and disposable fiber-optic
accessories for the treatment of advanced cardiovascular disease
through transmyocardial revascularization (TMR) and
percutaneous transluminal myocardial revascularization
(PMR). TMR and PMR are recent laser-based heart
treatments in which channels are made in the heart muscle. It is
believed these procedures encourage new vessel formation, or
angiogenesis. TMR is performed by a cardiac surgeon through a
small incision in the chest under general anesthesia. PMR is
performed by a cardiologist in a catheter based procedure which
utilizes local anesthesia. Clinical studies have demonstrated a
significant reduction in angina and increase in exercise
duration in patients treated with TMR or PMR plus medications,
when compared with patients who received medications alone.

We received CE Mark approval for our TMR system
in May 1997 and our PMR systems in April 1998. On
February 11, 1999, we received final approval from the FDA
for our TMR products for treatment of stable patients with
angina (Canadian Cardiovascular Society Class 4) refractory
to other medical treatments and secondary to objectively
demonstrated coronary artery atherosclerosis and with a region
of the myocardium with reversible ischemia not amenable to
direct coronary revascularization. Effective July 1, 1999,
the Health Care Financial Administration began to provide
Medicare coverage for TMR. Hospitals and physicians are now
eligible to receive Medicare reimbursement for TMR equipment and
procedures.

We have completed pivotal clinical trials
involving PMR, and study results were submitted to the FDA in a
Pre Market Approval application in December of 1999 along with
subsequent amendments. As discussed below under the caption
Regulatory Status, the FDA Advisory Panel
recommended against approval of PMR for public sale and use in
the United States. However, we will continue to pursue FDA
approval for PMR. There can be no assurance, however, that we
will receive a favorable decision from that agency.

On March 17, 1999, we merged with the former
CardioGenesis Corporation. Under the terms of the combination,
each share of the former CardioGenesis common stock was
converted into 0.8 of a share of our common stock, and the
former CardioGenesis has become a wholly owned subsidiary of
ours. As a result of the transaction, our outstanding shares
increased by approximately 9.9 million shares. The
transaction was structured to qualify as a tax-free
reorganization and has been accounted for as a pooling of
interests. Accordingly, the accompanying financial statements
have been restated as if the combined entity existed for the
1999 period prior to the merger.

Background

Cardiovascular disease is the leading cause of
death and disability in the U.S. according to the American Heart
Association. Coronary artery disease is the principal form of
cardiovascular disease and is characterized by a progressive
narrowing of the coronary arteries which supply blood to the
heart. This narrowing process is usually due to atherosclerosis,
which is the buildup of fatty deposits, or plaque, on the inner
lining of the arteries. Coronary artery disease reduces the
available supply of oxygenated blood to the heart muscle,

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potentially resulting in severe chest pain known
as angina, as well as damage to the heart. Typically, the
condition worsens over time and often leads to heart attack
and/or death.


Based on standards promulgated by the Canadian
Heart Association, angina is typically classified into four
classes, ranging from Class 1, in which angina pain results
only from strenuous exertion, to the most severe class,
Class 4, in which the patient is unable to conduct any
physical activity without angina and angina may be present even
at rest. The American Heart Association estimates that more than
six million Americans experience angina symptoms.

The primary therapeutic options for treatment of
coronary artery disease are drug therapy, balloon angioplasty
also known as percutaneous transluminal coronary angioplasty or
(PTCA), other interventional techniques which
augment or replace PTCA such as stent placement and atherectomy,
and coronary artery bypass grafting or (CABG). The
objective of each of these approaches is to increase blood flow
through the coronary arteries to the heart.

Drug therapy may be effective for mild cases of
coronary artery disease and angina either through medical
effects on the arteries that improve blood flow without reducing
the plaque or by decreasing the rate of formation of additional
plaque (e.g., by reducing blood levels of cholesterol). Because
of the progressive nature of the disease, however, many patients
with angina ultimately undergo either PTCA or CABG.

PTCA is a less-invasive alternative to CABG
introduced in the early 1980s in which a balloon-tipped catheter
is inserted into an artery, typically near the groin, and guided
to the areas of blockage in the coronary arteries. The balloon
is then inflated and deflated at each blockage site, thereby
rupturing the blockage and stretching the vessel. Although the
procedure is usually successful in widening the blocked channel,
the artery often re-narrows within six months of the procedure,
a process called restenosis, often necessitating a
repeat procedure. A variety of techniques for use in conjunction
with PTCA have been developed in an attempt to reduce the
frequency of restenosis, including stent placement and
atherectomy. Stents are small metal frames delivered to the area
of blockage using a balloon catheter and deployed or expanded
within the coronary artery. The stent is a permanent implant
intended to keep the channel open. Atherectomy is a means of
using mechanical, laser or other techniques at the tip of a
catheter to cut or grind away plaque.

CABG is an open chest procedure developed in the
1960s in which conduit vessels are taken from elsewhere in the
body and grafted to the blocked coronary arteries so that blood
can bypass the blockage. CABG typically requires the use of a
heart-lung bypass machine to render the heart inactive (to allow
the surgeon to operate on a still, relatively bloodless heart)
and involves prolonged hospitalization and patient recovery
periods. Accordingly, it is generally reserved for patients with
severe cases of coronary artery disease or those who have
previously failed to receive adequate relief of their symptoms
from PTCA or related techniques. Most bypass grafts fail within
one to fifteen years following the procedure. Repeating the
surgery (re-do bypass surgery) is possible, but is
made more difficult because of scar tissue and adhesions that
typically form as a result of the first operation. Moreover, for
many patients CABG is inadvisable for various reasons, such as
the severity of the patients overall condition, the extent
of coronary artery disease or the small size of the blocked
arteries.

When these treatment options are exhausted, the
patient is left with no viable surgical or interventional
alternative other than, in limited cases, heart transplantation.
Without a viable surgical alternative, the patient is generally
managed with drug therapy, often with significant lifestyle
limitations. TMR, which bears the CE Marking and has received
FDA approval, and PMR, which bears the CE Marking and for which
we are continuing to pursue FDA approval for use in the U.S.,
offer potential relief to a large population of patients with
severe cardiovascular disease.

The TMR and PMR Procedures

TMR, or transmyocardial revascularization, is a
surgical procedure performed on the beating or non-beating
heart, in which a laser device is used to create pathways
through the myocardium directly into the heart chamber. The
pathways are intended to supply blood to ischemic, or
oxygen-deprived regions of the myocardium and reduce angina in
the patient. TMR can be performed using open chest surgery or
minimally

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invasive surgery through a small incision between
the ribs. TMR offers end-stage cardiac patients who have regions
of ischemia not amenable to PTCA or CABG a means to alleviate
their symptoms and improve their quality of life. We have
received FDA approval for U.S. commercial distribution of our
TMR laser system for treatment of stable patients with angina
(Canadian Cardiovascular Society Class 4) refractory to
medical treatment and secondary to objectively demonstrated
coronary artery atherosclerosis and with a region of the
myocardium with reversible ischemia not amenable to direct
coronary revascularization.


PMR, or percutaneous transluminal myocardial
revascularization, is an interventional procedure performed by a
cardiologist. PMR is based upon the same principles as TMR, but
the procedure is much less invasive. The patient is under local
anesthesia and is treated through a catheter inserted in the
femoral artery at the top of the leg. A laser transmitting
catheter is threaded up into the heart chamber, where channels
are created in the inner portion of the myocardium (i.e. heart
muscle). We have completed pivotal clinical trials involving
PMR, and study results were submitted to the FDA in a Pre Market
Approval application in December of 1999 along with subsequent
amendments. As discussed below under the caption
Regulatory Status, the FDA Advisory Panel
recommended against approval of PMR for public sale and use in
the United States. However, we will continue to pursue FDA
approval for PMR. There can be no assurance, however, that we
will receive a favorable decision from that agency.

Business Strategy

Our objective is to become a recognized leader in
the field of myocardial revascularization, with TMR and PMR
established as well-known and acceptable therapies. Our
strategies to achieve this goal are as follows:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Expand Market for our
	Products.We are seeking to expand
	market awareness of our products among opinion leaders in the
	cardiovascular field, the referring physician community and the
	targeted patient population. In connection with the FDA approved
	TMR product, we have prioritized our efforts in the U.S. on the
	top 600 hospitals that perform the greatest number of
	cardiovascular procedures. We also sell our products in Europe
	and to the rest of the world through our direct international
	sales organization along with several distributors and agents.
	In addition, we have developed a comprehensive training program
	to assist physicians in acquiring the expertise necessary to
	utilize our TMR or PMR products and procedures.
|
| |  | Demonstrate Clinical Utility of
	PMR.We are seeking to demonstrate the
	clinical safety and effectiveness of PMR. We have completed a
	pivotal clinical trial regarding PMR, and the study results were
	submitted to the FDA in a Pre Market Approval Supplemental
	application in December of 1999. As discussed below under the
	caption Regulatory Status, the FDA Advisory Panel
	recommended against approval of PMR for public sale and use in
	the United States. However, we will continue to pursue FDA
	approval for PMR. There can be no assurance, however, that we
	will receive a favorable decision from the agency.                                                                                                                           
|
| |  | Leverage Proprietary
	Technology.We believe that our
	significant expertise in laser and catheter-based systems for
	cardiovascular disease and the proprietary technologies we have
	developed are important factors in our efforts to demonstrate
	the safety and effectiveness of our TMR and PMR procedures. We
	are seeking to develop additional proprietary technologies for
	TMR, PMR and related procedures. We have over 80 foreign
	and U.S. patents or allowed patent applications and more than
	150 U.S. and foreign patent applications pending relating to
	various aspects of TMR, PMR and other cardiovascular therapies.                                                                                                                      

Products and Technology

The
Companys TMR System

The Companys TMR system consists of our TMR
2000 laser console and a line of fiber-optic, laser-based
surgical tools. Each surgical tool utilizes an optical fiber
assembly to deliver laser energy from the source laser base unit
to the distal tip of the surgical handpiece or PMR catheter. The
compact base unit occupies a

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small amount of operating room floor space,
operates on a standard 208 or 220-volt power supply, and is
light enough to move within the operating room or among
operating rooms in order to use operating room space
efficiently. Moreover, the flexible fiberoptic assembly used to
deliver the laser energy to the patient enables ready access to
the patient and to various sites within the heart.


Our TMR system and related surgical procedures
are designed to be used without the requirement of the external
systems utilized with certain competitive TMR systems. For
example, our TMR 2000 system does not require
electrocardiogram synchronization, which monitors the electrical
output of the heart and times the use of the laser to minimize
electrical disruption of the heart, or transesophageal
echocardiography, which tests each application of the laser to
the myocardium during the TMR procedure to determine if the
pathway has penetrated through the myocardium into the heart
chamber.

Our Holmium Laser.Our TMR 2000 laser base unit generates laser light of a
2.1 micron wavelength by photoelectric excitation of a
solid state holmium crystal. The holmium laser, because it uses
a solid state crystal as its source, is compact, reliable and
requires minimal maintenance.

SoloGrip.The single
use SoloGrip handpiece system contains multiple, fine
fiber-optic strands in a one millimeter diameter bundle. The
flexible fiber optic delivery system combined with the ergonomic
handpiece provides access for treating all regions of the left
ventricle.

The SoloGrip fiber-optic delivery system has an
easy to install connector which screws into the laser base unit,
and the device is pre-calibrated in the factory so it requires
no special preparation.

The
Companys PMR System

The Companys PMR System is currently sold
only outside the United States. The PMR System consists of the
PMR Laser and ECG Monitor.

Our PMR Laser.The
holmium laser base unit generates laser light of a
2.1 micron wavelength in the mid-infrared spectrum. It
provides a reliable source for laser energy with low maintenance.

The Axcis Catheter
system.The Axcis catheter system is
an over-the-wire system that consists of two components, the
Axcis laser catheter and Axcis aligning catheter. The Axcis
catheter system is designed to provide controlled navigation and
access to target regions of the left ventricle. The coaxial
Axcis laser catheter has an independent, extendible lens with
radiopaque lens markers which show the location and orientation
of the tip for optimal contact with the ventricle wall. The
Axcis laser catheter also has nitinol petals at the laser-lens
tip which are designed for safe penetration of the endocardium
and to provide depth control.

Regulatory Status

On February 11, 1999, we received final
approval from the FDA for use of our TMR 2000 laser console and
SoloGrip handpiece for treatment of stable patients with angina
(Canadian Cardiovascular Society Class 4) refractory to
other medical treatments and secondary to objectively
demonstrated coronary artery atherosclerosis and with a region
of the myocardium with reversible ischemia not amenable to
direct coronary revascularization.

In February 1996, we obtained FDA clearance
to undertake Phase I of a clinical study of TMR intended to
assess the safety and effectiveness of TMR Used in
Conjunction with CABG as compared with CABG alone. In
September 1996, the FDA provided us with clearance to begin
Phase II of this study, which was subsequently completed.
In July 1999, we submitted a PMA supplement to the FDA for
an expanded indication to our approved TMR labeling to include
TMR in conjunction with CABG. In January 2000, we received a
response from the FDA requesting that we either provide more
information or modify our labeling request. Since TMR and CABG
are each presently utilized to treat separate regions of the
heart, we concluded that our present FDA approved labeling is
adequate, and that the physician can best decide how to use the
laser system within the approved labeling. As a result, in March
2000, we decided that we will not pursue any wording changes to
our already approved TMR labeling, and have withdrawn our
submission to the FDA for TMR in conjunction with CABG.

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We submitted a PMA supplement for our PMR system
to the FDA in December 1999. The PMR study compares PMR to
conventional medical therapy in patients with no option for
other treatment. As discussed below, the FDA Advisory Panel
recommended against approval of PMR for public sale and use in
the United States. However, we will continue to pursue FDA
approval for PMR. There can be no assurance, however, that we
will receive a favorable decision from the agency.

We have decided not to pursue any additional
claims for adjunctive procedures. Therefore, all studies
involving adjunctive procedures have been halted and terminated.

In addition, we have obtained approval to affix
the CE Marking to substantially all of our products, which
enables us to commercially distribute our TMR and PMR products
throughout the European Community.

On July 9, 2001, the Food and Drug
Administration Advisory Panel recommended against approval by
the Food and Drug Administration of our PMR device for public
sale and use in the United States. The practical effect of the
Advisory Panels recommendation is to delay indefinitely,
until such time as the Food and Drug Administration decides
differently, the introduction of our PMR device for sale and use
in the United States. Consequently, the Advisory Panels
recommendation has effectively delayed potential revenue, if
any, that may have been derived in the future from the sale of
our PMR device. Moreover, this recommendation has necessitated
the further investment of additional resources toward obtaining
the Food and Drug Administrations approval of our PMR
device. However, we do not expect to conduct further clinical
trials.

Sales and Marketing

We have received FDA approval for our surgical
TMR laser system. The Health Care Finance Administration has
also announced its coverage policy for the TMR with FDA approved
systems. We are promoting market awareness of our approved
surgical products among opinion leaders in the cardiovascular
field and are recruiting physicians and hospitals.

In the United States, we currently offer a laser
base unit at a current end user list price of $320,000 per unit,
and the disposable TMR handpiece (at least one of which must be
used with each TMR procedure) at an end user unit list price of
$2,745. In order to accelerate market adoption of the TMR
procedure, we intend to continue to either sell lasers to
hospitals outright or loan lasers to hospitals in return for the
hospital purchasing a minimum number of handpieces at a premium
over the list price.

Internationally, we sell our products through a
direct sales and support organization and distributors and
agents.

We have developed, in conjunction with several
major hospitals using our TMR or PMR products, a training
program to assist physicians in acquiring the expertise
necessary to utilize our products and procedures. This program
includes a comprehensive one-day course including didactic
training and hands-on performance of TMR or PMR in vivo. To date
over 1,000 cardiothoracic surgeons have been trained on the
CardioGenesis TMR system.

We exhibit our products at major cardiovascular
meetings. Investigators of our products have made presentations
at meetings around the world, describing their results.
Abstracts and articles have been published in peer-reviewed
publications and industry journals to present the results of our
clinical trials.

Research and Development

We believe that streamlining our research and
product effort is essential to our ability to stimulate growth
and maintain our market leadership position. Our ongoing
research and product development efforts are focused on the
development of new and enhanced lasers and fiber-optic
handpieces for TMR and PMR applications.

We believe our future success will depend, in
part, upon the success of our research and development programs.
There can be no assurance that we will realize financial benefit
from these efforts or that products or technologies developed by
others will not render our products or technologies obsolete or
non-competitive.

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Manufacturing

We outsource the manufacturing and assembly of
our TMR and PMR handpiece systems to a contract manufacturer. We
are currently exploring manufacturing outsourcing options for
the TMR 2000 laser. The PMR laser system is provided to us under
a manufacturing agreement with a laser manufacturing company.

Certain components of our laser units and
fiber-optic handpieces are generally acquired from multiple
sources. Other laser and fiber-optic components and
subassemblies are purchased from single sources. Although we
have identified alternative vendors, the qualification of
additional or replacement vendors for certain components or
services is a lengthy process. Any significant supply
interruption would have a material adverse effect on the ability
to manufacture our products and, therefore, would harm our
business. We intend to continue to qualify multiple sources for
components that are presently single sourced.

Competition

We expect that the market for TMR and PMR, which
is currently in the early stages of development, will be
competitive. At this point in time, we believe that our only
competitor is PLC Systems, Inc. (PLC) which is
selling FDA-approved TMR products in the U.S. and abroad. Other
competitors may also enter the market, including large companies
in the laser and cardiac surgery markets. Many of these
companies have or may have significantly greater financial,
research and development, marketing and other resources than we
do.

PLC is a publicly traded corporation which uses a
CO2 laser and an articulated mechanical arm in its TMR products.
PLC obtained a Pre Market Approval for TMR in 1998. PLC has
received the CE Marking, which allows sales of its products
commercially in all European Union countries. PLC has been
issued patents for its apparatus and methods for TMR. PLC
recently announced that Edwards Life Sciences has exercised its
option to assume full sales and marketing responsibility in the
U.S. for PLCs TMR Heart Laser 2 System and associated kits
pursuant to a co-marketing agreement between the two companies
that was signed in January 2001.

We believe that the factors which will be
critical to market success include: the timing of receipt of
requisite regulatory approvals, effectiveness and ease of use of
the TMR products and applications, breadth of product line,
system reliability, brand name recognition, effectiveness of
distribution channels and cost of capital equipment and
disposable devices.

TMR and PMR also compete with other methods for
the treatment of cardiovascular disease, including drug therapy,
PTCA and CABG. Even with the FDA approval of our TMR system in
patients for whom other cardiovascular treatments are not likely
to provide relief, and when used in conjunction with other
treatments, we can not assure you that our TMR or PMR products
will be accepted. Moreover, technological advances in other
therapies for cardiovascular disease such as pharmaceuticals or
future innovations in cardiac surgery techniques could make such
other therapies more effective or lower in cost than our TMR
procedure and could render our technology obsolete. We can not
assure you that physicians will use our TMR procedure to replace
or supplement established treatments, or that our TMR procedure
will be competitive with current or future technologies. Such
competition could harm our business.

Our TMR laser system and any other product
developed by us that gains regulatory approval will face
competition for market acceptance and market share. An important
factor in such competition may be the timing of market
introduction of competitive products. Accordingly, the relative
pace at which we can develop products, complete clinical
testing, achieve regulatory approval, gain reimbursement
acceptance and supply commercial quantities of the product to
the market are expected to be important competitive factors. In
the event a competitor is able to obtain a PMA for its products
prior to our doing so, we may not be able to compete
successfully. We may not be able to compete successfully against
current and future competitors even if we obtain a PMA prior to
our competitors.

Government Regulation

Laser-based surgical products and disposable
fiber-optic accessories for the treatment of advanced
cardiovascular disease through TMR are considered medical
devices, and as such are subject to regulation in

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the U.S. by the FDA and comparable international
regulatory agencies. Our devices require the rigorous PMA
process for approval to market the product in the U.S. and must
bear the CE Marketing for commercial distribution in the
European Community.


To obtain a Pre Market Approval (PMA)
for a medical device, we must file a PMA application that
includes clinical data and the results of pre-clinical and other
testing sufficient to show that there is a reasonable assurance
of safety and effectiveness of the product for its intended use.
To begin a clinical study, an Investigational Device Exemption
(IDE) must be obtained and the study must be
conducted in accordance with FDA regulations. An IDE application
must contain preclinical test data demonstrating the safety of
the product for human investigational use, information on
manufacturing processes and procedures, and proposed clinical
protocols. If the FDA clears the IDE application, human clinical
trials may begin. The results obtained from these trials are
accumulated and, if satisfactory, are submitted to the FDA in
support of a PMA application. Prior to U.S. commercial
distribution, premarket approval is required from the FDA. In
addition to the results of clinical trials, the PMA application
must include other information relevant to the safety and
effectiveness of the device, a description of the facilities and
controls used in the manufacturing of the device, and proposed
labeling. By law, the FDA has 180 days to review a PMA
application. While the FDA has responded to PMA applications
within the allotted time frame, reviews more often occur over a
significantly longer period and may include requests for
additional information or extensive additional trials. There can
be no assurance that we will not be required to conduct
additional trials which may result in substantial costs and
delays, nor can there be any assurance that a PMA will be
obtained for each product in a timely manner, if at all. In
addition, changes in existing regulations or the adoption of new
regulations or policies could prevent or delay regulatory
approval of our products. Furthermore, even if a PMA is granted,
subsequent modifications of the approved device or the
manufacturing process may require a supplemental PMA or the
submission of a new PMA which could require substantial
additional clinical efficacy data and FDA review. After the FDA
accepts a PMA application for filing, and after FDA review of
the application, a public meeting is frequently held before an
FDA advisory panel in which the PMA is reviewed and discussed.
The panel then issues a favorable or unfavorable recommendation
to the FDA or recommends approval with conditions. Although the
FDA is not bound by the panels recommendations, it tends
to give such recommendations significant weight. In February
1999, we received a PMA for our TMR laser system for use in
certain indications. As discussed above under the caption
Regulatory Status, the FDA Advisory Panel
recommended against approval of PMR for public sale and use in
the United States. However, we will continue to pursue FDA
approval for PMR. There can be no assurance, however, that we
will receive a favorable decision from that agency.

Products manufactured or distributed by us
pursuant to a PMA will be subject to pervasive and continuing
regulation by the FDA, including, among other things, postmarket
surveillance and adverse event reporting requirements. Failure
to comply with applicable regulatory requirements can result in,
among other things, warning letters, fines, suspensions or
delays of approvals, seizures or recalls of products, operating
restrictions or criminal prosecutions. The Federal Food, Drug
and Cosmetic Act requires us to manufacture our products in
registered establishments and in accordance with Good
Manufacturing Practices (GMP) regulations and to
list our devices with the FDA. Furthermore, as a condition to
receipt of a PMA, our facilities, procedures and practices will
be subject to additional pre-approval GMP inspections and
thereafter to ongoing, periodic GMP inspections by the FDA.
These GMP regulations impose certain procedural and
documentation requirements upon us with respect to manufacturing
and quality assurance activities. Labeling and promotional
activities are subject to scrutiny by the FDA. Current FDA
enforcement policy prohibits the marketing of approved medical
devices for unapproved uses. Changes in existing regulatory
requirements or adoption of new requirements could harm our
business. We may be required to incur significant costs to
comply with laws and regulations in the future and current or
future laws and regulations may harm our business.

We are also regulated by the FDA under the
Radiation Control for Health and Safety Act, which requires
laser products to comply with performance standards, including
design and operation requirements, and manufacturers to certify
in product labeling and in reports to the FDA that our products
comply with all such standards. The law also requires laser
manufacturers to file new product and annual reports, maintain

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manufacturing, testing and sales records, and
report product defects. Various warning labels must be affixed
and certain protective devices installed, depending on the class
of the product. In addition, we are subject to California
regulations governing the manufacture of medical devices,
including an annual licensing requirement. Our facilities are
subject to ongoing, periodic inspections by the FDA and
California regulatory authorities.


Sales, manufacturing and further development of
our TMR and PMR systems also may be subject to additional
federal regulations pertaining to export controls and
environmental and worker protection, as well as to state and
local health, safety and other regulations that vary by locality
and which may require obtaining additional permits. We can not
predict the impact of these regulations on our business.

Sales of medical devices outside of the U.S. are
subject to foreign regulatory requirements that vary widely by
country. In addition, the FDA must approve the export of devices
to certain countries. To market in Europe, a manufacturer must
obtain the certifications necessary to affix to its products the
CE Marking. The CE Marking is an international symbol of
adherence to quality assurance standards and compliance with
applicable European medical device directives. In order to
obtain and to maintain a CE Marking, a manufacturer must be in
compliance with appropriate ISO 9001 standards and obtain
certification of its quality assurance systems by a recognized
European Union notified body. However, certain individual
countries within Europe require further approval by their
national regulatory agencies. We have achieved International
Standards Organization and European Union certification for our
manufacturing facility. In addition, we have completed CE mark
registration for all of our products in accordance with the
implementation of various medical device directives in the
European Union. Failure to maintain the right to affix the CE
Marking or other requisite approvals could prohibit us from
selling our TMR and PMR products in member countries of the
European Union or elsewhere.

Intellectual Property Matters

Our success will depend, in part, on our ability
to obtain patent protection for our products, preserve our trade
secrets, and operate without infringing the proprietary rights
of others. Our policy is to seek to protect our proprietary
position by, among other methods, filing U.S. and foreign patent
applications related to our technology, inventions and
improvements that are important to the development of our
business. We have over 80 U.S. and foreign patents or
allowed patent applications and more than 150 U.S. and
foreign patent applications pending relating to various aspects
of TMR, PMR and other cardiovascular therapies. Our patents or
patent applications may be challenged, invalidated or
circumvented in the future or the rights granted may not provide
a competitive advantage. We intend to vigorously protect and
defend our intellectual property. We do not know if patent
protection will continue to be available for surgical methods in
the future. Costly and time-consuming litigation brought by us
may be necessary to enforce our patents and to protect our trade
secrets and know-how, or to determine the enforceability, scope
and validity of the proprietary rights of others.

We also rely upon trade secrets, technical
know-how and continuing technological innovation to develop and
maintain our competitive position. We typically require our
employees, consultants and advisors to execute confidentiality
and assignment of inventions agreements in connection with their
employment, consulting, or advisory relationships with us. These
agreements may be breached and we may not have adequate remedies
for any breach. Furthermore, our competitors may independently
develop substantially equivalent proprietary information and
techniques or otherwise gain access to our proprietary
technology, or we may not be able to meaningfully protect our
rights in unpatented proprietary technology.

The medical device industry in general, and the
industry segment that includes products for the treatment of
cardiovascular disease in particular, have been characterized by
substantial competition and litigation regarding patent and
other intellectual property rights. In this regard, our
competitors have been issued a number of patents related to TMR
and PMR. There can be no assurance, however, that claims or
proceedings will not be initiated by a competitor, or that
claims by other parties will not arise in the future. In
particular, the introduction in the United States market of the
Companys PMR technology, should that occur, may create new
exposures to claims of infringement of third party patents. Any
such claims in the future, with or without merit, could be
time-consuming and expensive to respond to and could divert the
attention of our

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technical and management personnel. We may be
involved in litigation to defend against claims of our
infringement, to enforce our patents, or to protect our trade
secrets. If any relevant claims of third party patents are
upheld as valid and enforceable in any litigation or
administrative proceeding, we could be prevented from practicing
the subject matter claimed in such patents, or we could be
required to obtain licenses from the patent owners of each such
patent or to redesign our products or processes to avoid
infringement.


Until recently, patent applications in the U.S.
were maintained in secrecy until patents issue, and patent
applications in foreign countries are maintained in secrecy for
a period after filing. Most of our U.S. applications are
maintained in secrecy unless they have issued. Publication of
discoveries in the scientific or patent literature tends to lag
behind actual discoveries and the filing of related patent
applications. Accordingly, we can not assure that our current
and potential competitors and other third parties have not filed
or in the future will not file applications for, or have not
received or in the future will not receive, patents or obtain
additional proprietary rights that will prevent, limit or
interfere with our ability to make, use or sell our products
either in the U.S. or internationally. In the event we were to
require licenses to patents issued to third parties, such
licenses may not be available or, if available, may not be
available on terms acceptable to us. In addition, we may not be
successful in any attempt to redesign our products or processes
to avoid infringement or that any such redesign could be
accomplished in a cost-effective manner. Accordingly, an adverse
determination in a judicial or administrative proceeding or
failure to obtain necessary licenses could prevent us from
manufacturing and selling our products, which would harm our
business.

Third Party Reimbursement

We expect that sales volumes and prices of our
products will depend significantly on the availability of
reimbursement for surgical procedures using our products from
third party payors such as governmental programs, private
insurance and private health plans. Reimbursement is a
significant factor considered by hospitals in determining
whether to acquire new equipment. Reimbursement rates from third
party payors vary depending on the third party payor, the
procedure performed and other factors. Moreover, third party
payors, including government programs, private insurance and
private health plans, have in recent years been instituting
increasing cost containment measures designed to limit payments
made to healthcare providers by, among other measures, reducing
reimbursement rates, limiting services covered, negotiating
prospective or discounted contract pricing and carefully
reviewing and increasingly challenging the prices charged for
medical products and services.

Medicare reimburses hospitals on a prospectively
determined fixed amount for the costs associated with an
in-patient hospitalization based on the patients discharge
diagnosis, and reimburses physicians on a prospectively
determined fixed amount based on the procedure performed,
regardless of the actual costs incurred by the hospital or
physician in furnishing the care and unrelated to the specific
devices used in that procedure. Medicare and other third party
payors are increasingly scrutinizing whether to cover new
products and the level of reimbursement for covered products. In
addition, Medicare traditionally has considered items or
services involving devices that have not been approved or
cleared for marketing by the FDA to be precluded from Medicare
coverage. In July 1999, Centers for Medicare and Medicaid
Services (CMS), formerly known as HCFA, began
coverage of FDA approved TMR systems for any manufacturers
TMR procedures. In October of 1999, CMS further clarified its
coverage policy to include coverage of TMR when performed as an
adjunctive to Coronary Artery Bypass Graft.

We have limited experience to date with the
acceptability of our TMR procedures for reimbursement by private
insurance and private health plans. Private insurance and
private health plans may not approve reimbursement for TMR or
PMR. The lack of private insurance and health plans
reimbursement may harm our business. Based on physician
feedback, we know that private insurers are reimbursing
hospitals and physicians when the procedure is performed on
non-Medicare patients. In May 2001, Blue Cross/ Blue
Shields Technology Evaluation Center (TEC)
assessed our therapy and confirmed that both TMR and TMR used as
an adjunct to bypass surgery, improves net health
outcomes. While TEC decisions are not binding, many Blue
Cross/ Blue Shield plans and other third-party payers use the
center as a benchmark and adopt into policy those therapies that
meet the TEC assessment.

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In foreign markets, reimbursement is obtained
from a variety of sources, including governmental authorities,
private health insurance plans and labor unions. In most foreign
countries, there are also private insurance systems that may
offer payments for alternative therapies. Although not as
prevalent as in the U.S., health maintenance organizations are
emerging in certain European countries. We may need to seek
international reimbursement approvals, and we may not be able to
attain these approvals in a timely manner, if at all. Failure to
receive foreign reimbursement approvals could make market
acceptance of our products in the foreign markets in which such
approvals are sought more difficult.

We believe that reimbursement in the future will
be subject to increased restrictions such as those described
above, both in the U.S. and in foreign markets. We also believe
that the escalating cost of medical products and services has
led to and will continue to lead to increased pressures on the
health care industry, both foreign and domestic, to reduce the
cost of products and services, including products offered by us.
Third party reimbursement and coverage may not be available or
adequate in U.S. or foreign markets, current levels of
reimbursement may be decreased in the future or future
legislation, regulation, or reimbursement policies of third
party payors may reduce the demand for our products or our
ability to sell our products on a profitable basis. Fundamental
reforms in the healthcare industry in the U.S. and Europe that
could affect the availability of third party reimbursement
continue to be proposed, and we cannot predict the timing or
effect of any such proposal. If third party payor coverage or
reimbursement is unavailable or inadequate, our business may
suffer.

Product Liability and Insurance

We maintain insurance against product liability
claims in the amount of $10 million per occurrence and
$10 million in the aggregate. We may not be able to obtain
additional coverage or continue coverage in the amount desired
or on terms acceptable to us, and such coverage may not be
adequate for liabilities actually incurred. Any uninsured or
underinsured claim brought against us or any claim or product
recall that results in a significant cost to or adverse
publicity against us could harm our business.

Employees

As of December 31, 2001 we had 59 employees,
of which 30 employees were in sales and marketing. In
January 2002, we reduced our staff by approximately 28%. In
November 2001, we entered into an employment agreement with
Michael J. Quinn, our Chief Executive Officer.
Darrell F. Eckstein, our Interim Chief Financial Officer,
was provided with a letter employment agreement when he was
hired in December 2000. None of our employees are covered
by a collective bargaining agreement and we have not experienced
any work stoppages to date.

Our executive officers as of April 15, 2002
are as follows:

|                     |  |     |    |          |  |                                                                                                    
|-------------------- |  | --- | -- | -------- |  | ---------------------------------------------------------------------------------------------------
|Name                 |  | Age |    | Position
|                     |  |     |    |         
|Michael J. Quinn     |  |     | 58 |          |  | Chief Executive Officer, President, Chairman of
	the Board and Director                            
|Darrell F. Eckstein  |  |     | 44 |          |  | Interim Chief Financial Officer, Vice President,
	Chief Accounting Officer, Treasurer and Secretary
|Richard P. Lanigan   |  |     | 43 |          |  | Vice President of Government Affairs and Business
	Development                                     
|Michael A. Tuckerman |  |     | 35 |          |  | Vice President of Sales                                                                            
|Christopher M. Owens |  |     | 33 |          |  | Vice President of Marketing                                                                        

Michael J. Quinnhas
served as our Chief Executive Officer, President, Chairman of
the Board and Director since October 2000. From
November 1999 to September 2000, Mr. Quinn served
as Chief Executive Officer, President and a member of the Board
of Directors for Premier Laser Systems, a manufacturer of
surgical and dental products. From January 1998 to
November 1999, Mr. Quinn served as President and Chief
Operating Officer of Imagyn Medical Technologies, Inc., a
manufacturer of minimally invasive surgical specialty products.
From 1995 through December 1997, Mr. Quinn served as
President and Chief Operating Officer of Fisher Scientific
Company. Prior to 1995, Mr. Quinn held senior operating
management positions at

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major healthcare organizations including American
Hospital Supply Corporation, Picker International, Cardinal
Health Group and Bergen Brunswig.


Darrell F. Ecksteinhas served as our Interim Chief
Financial Officer, Vice President, Chief Accounting Officer,
Treasurer and Secretary since January 2002 and Vice President of
Operations since December 2000. From 1996 to 2000 he served
as Vice President and General Manager of the Surgical Products
Division of Imagyn Medical Technologies, a manufacturer of
minimally invasive surgical specialty products. From 1995 to
1996, Mr. Eckstein was Vice President of Finance, Chief
Financial Officer and an Executive Committee member of
Richard-Allen Medical Industries Inc., a medical devices
company. From 1991 to 1995, Mr. Eckstein was Vice President
of Finance, Chief Financial Officer and an Executive Committee
member of National Emergency Services Inc., a health care
services company that provides physician contract management,
medical billing and insurance services. Prior to 1991,
Mr. Eckstein worked for Deloitte and Touche, most recently
as a Senior Audit Manager, for 11 years. He received his
Bachelor of Science degree in Accounting from Indiana University.

Richard P. Laniganhas been our Vice President of
Government Affairs and Business Development since
March 2001, Vice President of Sales and Marketing since
March 2000 and Director of Marketing since 1997. From 1992
to 1997, Mr. Lanigan served in various positions, most
recently Marketing Manager, at Stryker Endoscopy. From 1987 to
1992, Mr. Lanigan served in Manufacturing and Operations
management at Raychem Corporation. From 1981 to 1987, he served
in the U.S. Navy where he completed six years of service as
Lieutenant in the Supply Corps. Mr. Lanigan has a Bachelors
of Arts in Finance from Notre Dame and a Masters degree in
Systems Management from the University of Southern California.

Michael A. Tuckermanhas been our Vice President of Sales
since January 2002 and General Manager, Central Area since
May 2001. From 1997 to 2001, Mr. Tuckerman served in
various positions, most recently National Manager of Sales, at
Heartport Inc. From 1995 to 1997, he served as Technical Sales
Representative at Schneider, Inc., a division of Pfizer, Inc.,
and from 1991 to 1995, Mr. Tuckerman was the Midwest Area
Manager for U.S. Surgical Corporation. Mr. Tuckerman has a
Bachelors of Science in Marketing from Indiana University.

Christopher M. Owenshas been our Vice President of
Marketing since March 2001. Prior to CardioGenesis,
Mr. Owens was Director of Marketing for the global Lamellar
Surgery business of Bausch & Lomb. The Lamellar Surgery
business provides surgical products for vision correction
procedures. From 1997 to 2000, Mr. Owens served in a
variety of sales related positions (most recently National Sales
Manager) at Imagyn Medical Technologies, Inc., a manufacturer of
minimally invasive surgical specialty products. From 1996 to
1997, Mr. Owens was Marketing Product Manager for
Stackhouse, Inc. From 1990 to 1996 he also served as a Product
Development Engineer at Baxter Healthcare Corp. He has both a
Bachelors and Masters degree in Plastics Engineering from the
University of Massachusetts and a Masters in Business
Administration from the University of Phoenix.




Item 2.     Description
of Property.

Our headquarters, located in Foothill Ranch,
California, are comprised of 17,845 square feet of leased
space. The lease expires in July 2006. We believe our
facilities are adequate to meet our foreseeable requirements.
There can be no assurance that additional facilities will be
available to us, if and when needed, thereafter.




Item 3.     Legal
Proceedings.

There are no pending legal proceedings against us
other than ordinary litigation incidental to our business, the
outcome of which, individually or in the aggregate, is not
expected to have a material adverse effect on our business or
financial condition.

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

None.




PART II




Item 5.     Market
for Registrants Shares and Related Shareholder
Matters.

(a) Our common stock is traded on the Nasdaq
National Market under the symbol CGCP (and, prior to our name
change, under the symbol ESTI), since May 31, 1996. For the
periods indicated, the following table presents the range of
high and low sale prices for the common stock as reported by the
Nasdaq National Market.

|               |  |      |      |     |  |   |      | 
|-------------- |  | ---- | ---- | --- |  | - | ---- | 
|2001           |  | High |      | Low
|               |  |      |      |    
|First Quarter  |  | $    | 2.28 |     |  | $ | 0.81 | 
|Second Quarter |  | $    | 3.12 |     |  | $ | 0.91 | 
|Third Quarter  |  | $    | 2.98 |     |  | $ | 0.60 | 
|Fourth Quarter |  | $    | 1.65 |     |  | $ | 0.65 | 

|               |  |      |       |     |  |   |      | 
|-------------- |  | ---- | ----- | --- |  | - | ---- | 
|2000           |  | High |       | Low
|               |  |      |       |    
|First Quarter  |  | $    | 11.50 |     |  | $ | 6.75 | 
|Second Quarter |  | $    | 7.69  |     |  | $ | 2.88 | 
|Third Quarter  |  | $    | 4.69  |     |  | $ | 3.31 | 
|Fourth Quarter |  | $    | 4.06  |     |  | $ | 0.50 | 

As of December 31, 2001 shares of our common
stock were held by 203 shareholders of record.

We have never paid a cash dividend on our common
stock and do not anticipate paying any cash dividends in the
foreseeable future, as we intend to retain our earnings, if any,
to generate increased growth and for general corporate purposes.

Pursuant to a Share Purchase Agreement, dated
April 11, 2001, we sold 2,000,000 shares of common stock to
the State of Wisconsin Investment Board for a total price of
$2,000,000, in reliance upon the exemption from registration
provided by Section 4(2) of the Securities Act of 1933, as
amended (the Securities Act), and Rule 506
under the Securities Act.

In connection with entering into our facilities
lease at 26632 Towne Centre Dr., Suite 320, Foothill Ranch,
California, we issued a Common Stock Purchase Warrant covering
75,000 shares of common stock for an exercise price of
$1.63 a share. The warrants are immediately exercisable at any
time prior to May 7, 2006 at 5:00 pm (Eastern Time).
This Common Stock Purchase Warrant was issued in reliance upon
the exemption from registration provided by Section 4(2) of
the Securities Act and Rule 506 under the Securities Act.

Pursuant to a Share Purchase Agreement, dated
December 21, 2001, we sold 2,222,225 shares of common stock
to the State of Wisconsin Investment Board for a total price of
$2,000,000 in reliance upon the exemption from registration
provided by Section 4(2) of the Securities Act and
Rule 506 under the Securities Act.




Item 6.     Selected
Consolidated Financial Data.

The following selected consolidated statement of
operations data for fiscal years ended 2001, 2000 and 1999 and
the consolidated balance sheet data for 2001 and 2000 set forth
below are derived from our

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consolidated financial statements and are
qualified by reference to our consolidated financial statements
included herein.


The selected consolidated statement of operations
data for fiscal years ended 1998 and 1997 and the consolidated
balance sheet data for 1999, 1998 and 1997 have been derived
from our audited consolidated financial statements not included
herein. These historical results are not necessarily indicative
of the results of operations to be expected for any future
period. As a result of our 1999 pooling of interest with the
former CardioGenesis, all prior period data has been restated as
if the combined entity existed for all periods presented.

Selected Consolidated Financial Data

(in thousands, except per share
amounts)


|                                                 |                            |                          |          |        |  |         |          |        |  |      |          |        |  |   |          |        |  |   |         |        | 
|------------------------------------------------ | -------------------------- | ------------------------ | -------- | ------ |  | ------- | -------- | ------ |  | ---- | -------- | ------ |  | - | -------- | ------ |  | - | ------- | ------ | 
|                                                 |                            |                         
|                                                 |                            | Years Ended December 31,
|                                                 |                            |                         
|                                                 |                            | 2001                     |          | 2000   |  | 1999(1) |          | 1998   |  | 1997
|                                                 |                            |                          |          |        |  |         |          |        |  |     
|Consolidated Statement of Operations
	Data:      |                            |                          |          |        |  |         |          |        |  |      |          |        |  |   |          |        |  |   |         |       
|Net revenues                                     |                            | $                        | 14,153   |        |  | $       | 22,210   |        |  | $    | 25,324   |        |  | $ | 15,080   |        |  | $ | 13,058  |       
|Cost of revenues                                 |                            |                          | 5,777    |        |  |         | 10,055   |        |  |      | 13,246   |        |  |   | 7,868    |        |  |   | 7,295   |       
|                                                 |                            |                          |          |        |  |         |          |        |  |      |          |        |  |   |          |        |  |   |         |       
|Gross profit                                     |                            |                          | 8,376    |        |  |         | 12,155   |        |  |      | 12,078   |        |  |   | 7,212    |        |  |   | 5,763   |       
|                                                 |                            |                          |          |        |  |         |          |        |  |      |          |        |  |   |          |        |  |   |         |       
|Operating expenses:                              |                            |                          |          |        |  |         |          |        |  |      |          |        |  |   |          |        |  |   |         |       
|Research and development                         |                            |                          | 1,863    |        |  |         | 5,065    |        |  |      | 11,353   |        |  |   | 29,861   |        |  |   | 26,217  |       
|Sales, general and administrative                |                            |                          | 15,119   |        |  |         | 22,009   |        |  |      | 24,581   |        |  |   | 28,484   |        |  |   | 21,004  |       
|Restructuring and merger-related costs           |                            |                          | 1,033    |        |  |         |         |        |  |      | 5,214    |        |  |   |         |        |  |   |        |       
|                                                 |                            |                          |          |        |  |         |          |        |  |      |          |        |  |   |          |        |  |   |         |       
|                                                 | Total operating expenses   |                          |          | 18,015 |  |         |          | 27,074 |  |      |          | 41,148 |  |   |          | 58,345 |  |   |         | 47,221 | 
|                                                 |                            |                          |          |        |  |         |          |        |  |      |          |        |  |   |          |        |  |   |         |       
|Operating loss                                   |                            |                          | (9,639   | )      |  |         | (14,919  | )      |  |      | (29,070  | )      |  |   | (51,133  | )      |  |   | (41,458 | )     
|Interest and other income (expense), net         |                            |                          | (608     | )      |  |         | 310      |        |  |      | 737      |        |  |   | 3,366    |        |  |   | 5,240   |       
|                                                 |                            |                          |          |        |  |         |          |        |  |      |          |        |  |   |          |        |  |   |         |       
|Net loss                                         |                            | $                        | (10,247  | )      |  | $       | (14,609  | )      |  | $    | (28,333  | )      |  | $ | (47,767  | )      |  | $ | (36,218 | )     
|                                                 |                            |                          |          |        |  |         |          |        |  |      |          |        |  |   |          |        |  |   |         |       
|Net loss per share  basic and diluted           |                            | $                        | (0.31    | )      |  | $       | (0.48    | )      |  | $    | (0.99    | )      |  | $ | (1.77    | )      |  | $ | (1.39   | )     
|                                                 |                            |                          |          |        |  |         |          |        |  |      |          |        |  |   |          |        |  |   |         |       
|Shares used in per share calculation             |                            |                          | 33,311   |        |  |         | 30,166   |        |  |      | 28,629   |        |  |   | 27,000   |        |  |   | 26,027  |       
|                                                 |                            |                          |          |        |  |         |          |        |  |      |          |        |  |   |          |        |  |   |         |       
|Consolidated Balance Sheet Data:                 |                            |                          |          |        |  |         |          |        |  |      |          |        |  |   |          |        |  |   |         |       
|Cash, cash equivalents and marketable securities |                            | $                        | 2,629    |        |  | $       | 3,357    |        |  | $    | 13,313   |        |  | $ | 27,941   |        |  | $ | 75,729  |       
|Working capital                                  |                            |                          | 1,048    |        |  |         | 4,662    |        |  |      | 10,031   |        |  |   | 22,243   |        |  |   | 68,999  |       
|                                                 | Total assets               |                          |          | 11,309 |  |         |          | 16,965 |  |      |          | 34,019 |  |   |          | 52,978 |  |   |         | 91,714 | 
|Long-term debt, less current portion             |                            |                          | 32       |        |  |         | 405      |        |  |      | 815      |        |  |   | 114      |        |  |   | 10      |       
|Accumulated deficit                              |                            |                          | (164,080 | )      |  |         | (153,833 | )      |  |      | (139,224 | )      |  |   | (110,891 | )      |  |   | (63,124 | )     
|                                                 | Total shareholders equity |                          |          | 3,582  |  |         |          | 7,974  |  |      |          | 18,573 |  |   |          | 37,276 |  |   |         | 82,374 | 




|    |                                                                                                                     
|--- | --------------------------------------------------------------------------------------------------------------------
|(1) | Cost of revenues includes $2.5 million of
	inventory write-offs and upgrades associated with the
	March 1999 merger.






|        |                                                                                        
|------- | ---------------------------------------------------------------------------------------
|Item 7. | Managements Discussion and Analysis
	of Financial Condition and Results of Operations.

This Managements Discussion and Analysis
of Financial Condition and Results of Operations contains
descriptions of our expectations regarding future trends
affecting our business. These forward-looking statements and
other forward-looking statements made elsewhere in this document
are made in reliance upon

14



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##### Table of Contents



the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995. Please read the
section below titled Factors Affecting Future
Results to review conditions which we believe could cause
actual results to differ materially from those contemplated by
the forward-looking statements. Forward-looking statements are
identified by words such as believes,
anticipates, expects,
intends, plans, will,
may and similar expressions. In addition, any
statements that refer to our plans, expectations, strategies or
other characterizations of future events or circumstances are
forward-looking statements. Our business may have changed since
the date hereof and we undertake no obligation to update these
forward looking statements.


The following discussion should be read in
conjunction with financial statements and notes thereto included
in this Annual Report on Form 10-K.

Overview

CardioGenesis Corporation, formerly known as
Eclipse Surgical Technologies, Inc. (CardioGenesis,
Company), incorporated in California in 1989,
designs, develops, manufactures and distributes laser-based
surgical products and disposable fiber-optic accessories for the
treatment of advanced cardiovascular disease through
transmyocardial revascularization (TMR) and
percutaneous transluminal myocardial revascularization
(PMR).

On February 11, 1999, we received final
approval from the FDA for our TMR products for certain
indications, and we are now able to sell those products in the
U.S. on a commercial basis. We have also received the European
Conforming Mark (CE Mark) allowing the
commercial sale of our TMR laser systems and our PMR catheter
system to customers in the European Community. Effective
July 1, 1999, Health Care Financial Administration began
providing Medicare coverage for TMR. Hospitals and physicians
are now eligible to receive Medicare reimbursement for TMR
equipment and procedures.

We have completed pivotal clinical trials
involving PMR, and study results were submitted to the FDA in a
Pre Market Approval (PMA) application in December of 1999
along with subsequent amendments. As discussed above under the
caption Regulatory Status, the FDA Advisory Panel
recommended against approval of PMR for public sale and use in
the United States. However, we will continue to pursue FDA
approval for PMR. There can be no assurance, however, that we
will receive a favorable decision from the agency.

As of December 31, 2001, we had an
accumulated deficit of $164,080,000. We expect to continue to
incur operating losses. The timing and amounts of our
expenditures will depend upon a number of factors, including the
efforts required to develop our sales and marketing
organization, the timing of market acceptance of our products
and the status and timing of regulatory approvals.

Results of Operations



| |                                                                       
| | ----------------------------------------------------------------------
| | Year Ended December 31, 2001 Compared
	to Year Ended December 31, 2000



| |             
| | ------------
| | Net Revenues

Net revenues of $14,153,000 for the year ended
December 31, 2001 decreased $8,057,000, or 36%, when
compared to net revenues of $22,210,000 for the year ended
December 31, 2000. The decrease in net revenues was due to
a reduction in sales of laser systems and disposable handpiece
sales.

For the year ended December 31, 2001,
domestic laser revenue decreased by $4,800,000 and domestic
disposable handpiece revenue decreased by $2,100,000. In 2001,
domestic handpiece revenue consisted of $4,700,000 in sales of
product to customers operating under the loaned laser program,
of which $1,400,000 was attributed to premiums associated with
such sales. In 2000, domestic handpiece revenue consisted of
$5,100,000 in sales of product to customers operating under the
loaned laser program, of which $2,000,000 was attributed to
premiums associated with such sales. In 2001 and 2000, sales of
product to customers not operating under the loaned laser
program was $5,900,000 and $7,600,000, respectively.
International sales, accounting for approximately 7% of total
sales for the year ended December 31, 2001, decreased
$1,200,000 from the prior year when international sales
accounted for 10% of total sales. This reduction can be explained

15



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by a reduction in international sales
representation. We define international sales as sales to
customers located outside of the United States.




| |             
| | ------------
| | Gross Profit

Gross profit increased to 59% of net revenues for
the year ended December 31, 2001 as compared to 55% of net
revenues for the year ended December 31, 2000. Gross profit
in absolute dollars decreased by $3,779,000 to $8,376,000 for
the year ended December 31, 2001, as compared to
$12,155,000 for the year ended December 31, 2000. The
increase in gross profit as a percent of sales resulted from
improved margins on lasers and disposables partially as a result
of the outsourcing of the manufacturing process for disposables
which occurred in the second half of 2001. The decrease in gross
margin in absolute terms resulted from the decrease in sales
volumes.



| |                         
| | ------------------------
| | Research and Development

Research and development expenditures of
$1,863,000 decreased $3,202,000 or 63% for the year ended
December 31, 2001 when compared to $5,065,000 for the year
ended December 31, 2000. The decrease in overall research
and development expense is comprised of a decrease in employee
expenses of $1,400,000 related to reductions in force and a
reduction in clinical trials expenses of $785,000 related to the
conclusion of several of our major clinical trials.
Additionally, the allocation for facilities overhead costs
decreased by $620,000 and expenditures for engineering have
decreased by $400,000 due to a reduction in development
activities.



| |                                  
| | ---------------------------------
| | Sales, General and Administrative

Sales, general and administrative expenditures of
$15,119,000 decreased $6,890,000 or 31% for the year ended
December 31, 2001 when compared to $22,009,000 for the year
ended December 31, 2000. The decrease in expenses resulted
primarily from a decrease in employee expenses of $2,700,000
related to reductions in work force and a decrease in travel
costs. Additionally, facilities and office expenses decreased by
$1,950,000, costs for consulting and outside services decreased
by $1,100,000 and marketing expenses decreased by $760,000.



| |                                        
| | ---------------------------------------
| | Restructuring and Merger-Related
	Costs

During the year ended December, 31 2001, we
recognized restructuring charges of $1,303,000, which were
partially offset by a change in estimate of $270,000 in
connection with merger-related costs that were incurred in 1999.
The current year restructuring charges related to the
company-wide restructuring which began in the second quarter of
2001. The restructuring included a reduction in headcount, the
closing of our facilities in Sunnyvale, California and the move
to a new facility located in Foothill Ranch, California. As a
result of the restructuring, 48 employees were identified to be
terminated under the original restructuring plan and have since
been terminated, primarily from the finance and manufacturing
departments.

The following table summarizes the restructuring
activity and the remaining restructuring reserve balance:

|                 |                                 |                |      |                 |  |               |      |       |  |   |      |    |  |   |        |    | 
|---------------- | ------------------------------- | -------------- | ---- | --------------- |  | ------------- | ---- | ----- |  | - | ---- | -- |  | - | ------ | -- | 
|                 |                                 | Personnel and  |      | Lease and Other |  | Other         |      |      
|                 |                                 | Severance      |      | Contractual     |  | Miscellaneous |      |      
|                 |                                 | Costs          |      | Commitments     |  | Costs         |      | Total
|                 |                                 |                |      |                 |  |               |      |      
|                 |                                 |               
|                 |                                 | (in thousands)
|Provisions       |                                 | $              | 655  |                 |  | $             | 344  |       |  | $ | 304  |    |  | $ | 1,303  |   
|Payments         |                                 |                | (655 | )               |  |               | (252 | )     |  |   | (176 | )  |  |   | (1,083 | ) 
|Non-cash charges |                                 |                |     |                 |  |               | (52  | )     |  |   | (116 | )  |  |   | (168   | ) 
|                 |                                 |                |      |                 |  |               |      |       |  |   |      |    |  |   |        |   
|                 | Balance as of December 31, 2001 |                | $    |                |  |               | $    | 40    |  |   | $    | 12 |  |   | $      | 52 | 
|                 |                                 |                |      |                 |  |               |      |       |  |   |      |    |  |   |        |   

Personnel and severance costs are comprised of
severance, retention and relocation costs. Certain employees
were offered a retention incentive to stay employed through a
certain date while we were going

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through the restructuring phase. Lease and other
contractual commitments are comprised primarily of the
termination penalties associated with the early lease
termination on our manufacturing and office facilities.




| |                                          
| | -----------------------------------------
| | Interest and Other Income (Expense),
	Net

Interest income of $62,000 decreased $338,000 or
85% for the year ended December 31, 2001 when compared to
$400,000 for the year ended December 31, 2000. This
decrease was due to lower interest rates and lower investments
in cash equivalents.

Interest expense of $18,000 decreased $14,000 or
44% for the year ended December 31, 2001 when compared to
$32,000 for the year ended December 31, 2000. This decrease
reflects a lower level of debt outstanding.

Equity in net loss of investee of $652,000 for
the year ended December 31, 2001, compared to $58,000 for
the year ended December 31, 2000, represents our share of
the net loss of Microheart, Inc., formerly known as
Microheart Holdings, Inc., a privately-held company, of
which our ownership was 30.3% as of December 31, 2001.



| |                                                                       
| | ----------------------------------------------------------------------
| | Year Ended December 31, 2000 Compared
	to Year Ended December 31, 1999



| |             
| | ------------
| | Net Revenues

Net revenues of $22,210,000 for the year ended
December 31, 2000 decreased $3,114,000, or 12%, when
compared to net revenues of $25,324,000 for the year ended
December 31, 1999. The decrease in net revenues was mainly
due to a reduction in sales of laser systems resulting from a
change, made at the end of 1999, to a new sales model, which
emphasizes laser system placements to develop the disposable
handpiece market more rapidly. The reduction in laser sales is
partially offset by an increase in disposable handpiece sales
generated from the new sales model.

Domestic laser revenue fell by $8,750,000 while
domestic disposable handpiece revenue increased by $8,000,000.
Domestic handpiece revenue consisted of $5,100,000 in sales of
product to customers operating under the loaned laser program,
of which $2,000,000 was attributed to premiums associated with
those handpieces and $7,600,000 in handpiece sales to customers
not operating under the loaned laser program. Compared to the
prior year, handpiece sales under the loaned laser program
increased $4,500,000 and handpiece sales to customers not
operating under the loaned laser program increased $3,500,000.
Other domestic changes in revenue from 2000 to 1999 were caused
by no revenue recognized in the year 2000 for revenue producing
activities such as research revenue of $730,000 recognized in
1999 associated with the sale of intellectual property and
revenue of $600,000 recognized in 1999 for product sold in
conjunction with active PMR clinical trials. These reductions in
revenue were offset by a $300,000 increase in service revenue
associated with extended service contracts and service calls.
International sales, accounting for approximately 10% of total
sales for the year ended December 31, 2000, fell $1,300,000
from the prior year when international sales accounted for 14%
of total sales. This reduction is a result of a reduction in
international sales representation. We define international
sales as sales to customers located outside of the
United States.



| |             
| | ------------
| | Gross Profit

Gross profit increased to $12,155,000 or 55% of
net revenues for the year ended December 31, 2000 as
compared to $12,078,000 or 48% of net revenues for the year
ended December 31, 1999. In 1999, we incurred $2,523,000 in
cost of revenues for inventory write-offs and a laser upgrade
program resulting from our merger with the former CardioGenesis
Corporation. Excluding these one-time charges, gross margin in
the year ended December 31, 2000 decreased $2,446,000
compared to the prior year. This decrease in gross margin in
absolute terms and as a percentage of sales resulted from the
fixed component of cost of goods sold becoming a larger portion
of sales, due to the decrease in sales volumes.

We began using a new sales model in the quarter
ended December 31, 1999. The new sales model was derived to
expedite the process of laser system placement and the adoption
of TMR. Under the new model, hospitals were given the
opportunity to bypass the capital approval process and, as a
result, we were able to

17



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place more lasers than we would have placed if we
had continued to sell lasers to hospitals. Given that product
margins of lasers and disposable handpieces vary only slightly,
the change in composition of our revenue did not significantly
affect our gross margin.




| |                         
| | ------------------------
| | Research and Development

Research and development expenditures of
$5,065,000 decreased $6,288,000 or 55% for the year ended
December 31, 2000 when compared to $11,353,000 for the year
ended December 31, 1999. The decrease in overall research
and development expense is comprised of a $4,875,000 reduction
in expenses related to clinical trials, a $675,000 reduction in
engineering project expenses and a $725,000 reduction in
employee related expenses as headcount had fallen through
general attrition.



| |                                  
| | ---------------------------------
| | Sales, General and Administrative

Sales, general and administrative expenses of
$22,009,000 decreased $2,572,000 or 10% for the year ended
December 31, 2000 when compared to $24,581,000 for the year
ended December 31, 1999. The decrease is due to a
$1,500,000 reduction in salary and commissions expense
associated with both the elimination of redundant positions that
existed between the former CardioGenesis Corporation and us
prior to the merger and a decrease in commission payments
directly related to the decrease in laser revenue from 2000
compared to 1999. In addition, there was a significant decrease
in bad debt expense of $850,000 in the year 2000 compared to
1999.



| |                                        
| | ---------------------------------------
| | Restructuring and Merger-Related
	Costs

There were merger-related costs in 1999 of
$5,214,000 associated with the merger between us and the former
CardioGenesis Corporation. In March 1999, we recognized
merger-related costs of $6,893,000 for financial advisory and
legal fees, personnel severance, terminated relationships and
other costs including write-offs of fixed assets and inventory.
A majority of the 40 employees that were terminated as a result
of the merger were located in California and worked in
operations, sales, marketing, quality, research and development
and administrative functions. In addition, we recognized
merger-related costs of $844,000, which were primarily due to an
upgrade program to replace customer owned equipment rendered
unusable by the merger. The total merger-related costs for the
twelve months ended December 31, 1999 were $7,737,000,
which included costs attributed to inventory write-offs and a
laser upgrade program totaling $2,523,000 that were recorded as
a component of cost of revenues.

There were no restructuring related costs
recognized in the year 2000 or 1999.

Interest
and Other Income (Expense), Net

Interest income of $400,000 decreased $401,000 or
50% for the year ended December 31, 2000 when compared to
$801,000 for the year ended December 31, 1999. This
decrease was due to lower investments in marketable securities
and cash equivalents.

Interest expense of $32,000 decreased $32,000 or
50% for the year ended December 31, 2000 when compared to
$64,000 for the year ended December 31, 1999. This decrease
reflects a lower level of debt outstanding.

Equity in loss of investee of $58,000 for the
year ended December 31, 2000 represents our share of the
net loss of Microheart, Inc., a privately-held company,
resulting from our November 2000 exercise of warrants which
increased our ownership percentage to approximately 32%.

Liquidity and Capital Resources

Cash and cash equivalents were $2,629,000 at
December 31, 2001 compared to $3,357,000 at
December 31, 2000, a decrease of 22%. We used $6,213,000 of
cash for operating activities, including funding our operating
loss and changes in accounts receivable, inventories and accrued
liabilities. Accounts receivable was $2,330,000 at
December 31, 2001 compared to $3,654,000 at
December 31, 2000, a decrease of 36%. The

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decrease in accounts receivable is partly
attributed to a net increase of $761,000 in the allowance for
doubtful accounts. Inventories decreased by $2,185,000 or 40% to
$3,215,000 at December 31, 2001 from a level of $5,400,000 at
December 31, 2000. This decrease is mainly due to
depreciation on lasers loaned to hospitals of $1,100,000 million
and a reduction in inventory levels. Accrued liabilities
decreased by $1,322,000 or 23% to $4,467,000 at
December 31, 2001 compared to $5,789,000 at
December 31, 2000, primarily due to payments on obligations
and an overall decrease in our operating expenses.


Investing activities, consisting primarily of
additions to property and equipment, used cash of $269,000 in
the fiscal year 2001. Since our inception, we have satisfied our
capital requirements through sales of our equity securities. In
addition, our operations have been funded through sales of our
products. In the fiscal year 2001, financing activities provided
cash of $5,777,000, primarily from the issuance of common stock
pursuant to exercise of stock options and various sales of our
common stock.

In March 2001, we sold 898,202 shares of
common stock to Acqua Wellington North American Equities Fund,
Ltd. at a negotiated purchase price of $1.1133 per share. In
April 2001, we sold 2,000,000 shares of common stock to a
governmental entity at a negotiated purchase price of $1.00 per
share. In August 2001, we established a receivables-based
financing arrangement with a finance company. As of
December 31, 2001, we have borrowing capacity of
approximately $1.2 million based on qualifying accounts
receivable and have outstanding borrowings of $100,000. The term
of this arrangement is one year from the date of inception,
July 25, 2001, and is renewable annually at the mutual
consent of both parties. The agreement provides us with the
option of borrowing at an annual rate of 12% plus an
administrative fee of 0.50% on all outstanding borrowings. In
December 2001, we sold 2,222,225 shares of common stock to
a governmental entity at a negotiated purchase price of $0.90
per share. In April 2002, we sold our ownership interest in
Microheart, Inc. for $2,285,150. In April 2002, we sold
500,000 shares of common stock to a governmental entity at a
negotiated purchase price of $1.00 per share.

We have incurred significant losses for the last
several years and at December 31, 2001 have an accumulated
deficit of $164,080,000. The accompanying consolidated financial
statements have been prepared assuming we will continue as a
going concern. Our ability to continue as a going concern is
dependent upon achieving profitable operations in the future.
Our plans include increasing sales through increased direct
sales and marketing efforts on existing products and achieving
timely regulatory approval for certain other products.

We also plan to continue our cost containment
efforts by focusing on reducing cost of revenues and on reducing
sales, general and administrative expenses. With regard to
reducing cost of revenues, we completed the outsourcing of a
significant portion of our manufacturing, which allows us to
purchase products at lower costs. With regard to reducing
operating expenses, we have focused our efforts on reducing
headcount and overall expenses in functions that are not
essential to core and critical activities.

Currently, one of our primary goals is to achieve
break-even operations followed by profitability. Our actions
have been guided by this imperative, and the resulting cost
containment measures have helped to conserve our cash. Our focus
is upon core and critical activities, thus operating expenses
that are nonessential to our core operations have been
eliminated.

We believe our cash balance as of
December 31, 2001, the borrowing capacity available under
our receivable financing arrangement and the infusions to our
cash balance in April 2002 will be sufficient to meet our
capital and operating requirements through the end of 2002. We
believe that if revenue from sales or new funds from debt or
equity instruments is insufficient to maintain the current
expenditure rate, it will be necessary to significantly reduce
our operations until an appropriate solution is implemented.

Quarterly Results of Operations

The following table sets forth certain quarterly
financial information for the periods indicated. This
information has been derived from unaudited financial statements
that, in the opinion of management, have been prepared on the
same basis as the audited information, and includes all normal
recurring adjustments

19



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necessary for a fair presentation of such
information. The results of operations for any quarter are not
necessarily indicative of the results to be expected for any
future periods.


|                                    |  |                    |        |         |  |          |        |         |  |          |        |         |  |          |        |         |  |   |        |   |  |   |        |   |  |   |        |   |  |  |        |  
|----------------------------------- |  | ------------------ | ------ | ------- |  | -------- | ------ | ------- |  | -------- | ------ | ------- |  | -------- | ------ | ------- |  | - | ------ | - |  | - | ------ | - |  | - | ------ | - |  |  | ------ | -
|                                    |  |                   
|                                    |  | Three Months Ended
|                                    |  |                   
|                                    |  |                    |        |        
|                                    |  | 2001               |        | 2000   
|                                    |  |                    |        |        
|                                    |  | March 31           |        | June 30 |  | Sept. 30 |        | Dec. 31 |  | March 31 |        | June 30 |  | Sept. 30 |        | Dec. 31
|                                    |  |                    |        |         |  |          |        |         |  |          |        |         |  |          |        |        
|Net revenues                        |  | $                  | 3,111  |         |  | $        | 4,030  |         |  | $        | 4,221  |         |  | $        | 2,791  |         |  | $ | 5,677  |   |  | $ | 6,608  |   |  | $ | 5,014  |   |  |  | $4,911 |  
|Gross profit                        |  |                    | 1,576  |         |  |          | 2,447  |         |  |          | 2,594  |         |  |          | 1,759  |         |  |   | 3,346  |   |  |   | 3,910  |   |  |   | 2,554  |   |  |  | 2,345  |  
|Operating loss                      |  |                    | (2,105 | )       |  |          | (2,705 | )       |  |          | (2,494 | )       |  |          | (2,335 | )       |  |   | (4,546 | ) |  |   | (3,398 | ) |  |   | (3,800 | ) |  |  | (3,175 | )
|Net loss                            |  |                    | (2,437 | )       |  |          | (2,967 | )       |  |          | (2,481 | )       |  |          | (2,362 | )       |  |   | (4,439 | ) |  |   | (3,262 | ) |  |   | (3,744 | ) |  |  | (3,164 | )
|Net loss per share:                 |  |                    |        |         |  |          |        |         |  |          |        |         |  |          |        |         |  |   |        |   |  |   |        |   |  |   |        |   |  |  |        |  
|Basic and diluted                   |  |                    | (0.08  | )       |  |          | (0.09  | )       |  |          | (0.07  | )       |  |          | (0.07  | )       |  |   | (0.15  | ) |  |   | (0.11  | ) |  |   | (0.13  | ) |  |  | (0.10  | )
|Weighted average shares outstanding |  |                    | 30,837 |         |  |          | 33,631 |         |  |          | 34,209 |         |  |          | 34,415 |         |  |   | 29,664 |   |  |   | 30,064 |   |  |   | 30,191 |   |  |  | 30,729 |  

Critical Accounting Policies and
Estimates

We consider certain accounting policies related
to use of estimates and revenue recognition to be critical
accounting policies.

Use of
Estimates

The preparation of financial statements in
conformity with generally accepted accounting principles
requires our management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and
disclosure of contingent 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.

Revenue
Recognition

We recognize revenue on product sales upon
receipt of a purchase order, subsequent shipment of the product
and the price is fixed or determinable and collection of sales
proceeds is reasonably assured. Where purchase orders allow
customers an acceptance period or other contingencies, revenue
is recognized upon the earlier of acceptance or removal of the
contingency.

Revenues from sales to distributors and agents
are recognized upon shipment when there is evidence that an
arrangement exists, delivery has occurred, the sales price is
fixed or determinable and the ability to collect sales proceeds
is reasonably assured. The contracts regarding these sales do
not include any rights of return or price protection clauses.

We frequently loan lasers to hospitals in return
for the hospital purchasing a minimum number of handpieces at a
premium over the list price. Loaned lasers are depreciated to
cost of revenues over a useful life of 24 months. Revenue
on handpieces is recognized upon shipment at an amount equal to
the list price. The premium over the list price represents
revenue related to the use of the laser unit and is recognized
ratably, generally over the 24-month useful life of the placed
lasers.

Revenues from service contracts are recognized
upon performance or over the terms of the contract as
appropriate.

Recently Issued Accounting Standards

In July 2001, the Financial Accounting Standards
Board (FASB) issued Statement of Financial Accounting
Standards (SFAS) No. 141 Business Combinations,
and SFAS No. 142 Goodwill and Other Intangible
Assets, which change the accounting for business
combinations and goodwill. SFAS No. 141 requires that the
purchase method of accounting be used for business combinations
initiated after June 30, 2001. Use of the
pooling-of-interests method is now prohibited. SFAS No. 142
changes the accounting for goodwill from an amortization method
to an impairment-only approach. Amortization of goodwill,
including

20



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goodwill recorded in past business combinations,
will therefore cease upon adoption of this statement, which for
us will be January 1, 2002. We do not expect the adoption
of these standards will have a material effect on our
consolidated financial statements.


In August 2001, the FASB issued SFAS
No. 144 Accounting for the Impairment or Disposal of
Long-Lived Assets. SFAS No. 144 addresses financial
accounting and reporting for the impairment or disposal of
long-lived assets. SFAS No. 144 develops one accounting
model for long-lived assets that are to be disposed of by sale,
requires that long-lived assets that are to be disposed by sale
be measured at the lower of book value or fair value less cost
to sell and expands the scope of discontinued operations to
include all components of an entity with operations that
(a) can be distinguished from the rest of the entity and
(b) will be eliminated from the ongoing operations of the
entity in a disposal transaction. SFAS No. 144 is effective
for all fiscal years beginning after December 15, 2001 and
is therefore effective for us beginning with our fiscal quarter
ending March 31, 2002. We do not expect the adoption of
this standard will have a material effect on our consolidated
financial statements.

Factors Affecting Future Results

In addition to the other information included
in this Form 10-K, the following risk factors should be
considered carefully in evaluating us and our
business.

Our ability to continue as a going concern is
dependent upon achieving profitable operations in the
future.

We will have a continuing need for new infusions
of cash until revenues are increased to meet our operating
expenses. We plan to increase our sales through increased direct
sales and marketing efforts on existing products and achieving
regulatory approval for other products. If we are unable to
increase our sales or achieve regulatory approval for our
products, we will be unable to significantly increase our
revenues. We believe that if we are unable to generate
sufficient funds from sales or from debt or equity issuances to
maintain our current expenditure rate, it will be necessary to
significantly reduce our operations. We may be required to seek
additional sources of financing, which could include short-term
debt, long-term debt or equity. There is a risk that we may be
unsuccessful in obtaining such financing and will not have
sufficient cash to fund our operations.

We may fail to obtain required regulatory
approvals to market our products including our PMR laser system
in the United States.

Our business could be harmed if any of the
following events, circumstances or occurrences related to the
regulatory process occurred thereby causing a reduction in our
revenues:



| |   |                                                                                               
| | - | ----------------------------------------------------------------------------------------------
| |  | the failure to obtain regulatory approvals for
	our PMR system;                               
|
| |  | any significant limitations in the indicated uses
	for which our products may be marketed; and
|
| |  | substantial costs incurred in obtaining
	regulatory approvals.                                

The Food and Drug Administration has not approved
our PMR laser systems for any application in the United States.
The PMR study compares PMR to conventional medical therapy in
patients with no option for other treatment. The Food and Drug
Administration may not accept the study as safe and effective,
and PMR may not be approved for commercial use in the United
States. Responding to Food and Drug Administration requests for
additional information could require substantial financial and
management resources and take several years.

In the future, the Food and Drug
Administration could restrict the current uses of our TMR
product.

The Food and Drug Administration has approved our
TMR product for sale and use by physicians in the United States.
At the request of the Food and Drug Administration, we are
currently conducting post-market surveillance of our TMR
product. We received a letter from the Food and Drug
Administration expressing

21



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concern about the progress of our post-market
surveillance study for our TMR product. We have submitted a plan
to the Food and Drug Administration to enable the timely
completion of our post-market surveillance study. However, if we
should fail to meet the requirements mandated by the Food and
Drug Administration or fail to complete our post-market
surveillance study in an acceptable time period, the Food and
Drug Administration could withdraw its approval for the sale and
use of our TMR product by physicians in the United States.
Additionally, though we are not aware of any safety concerns
during our on-going post-market surveillance of our TMR product,
if concerns over the safety of our TMR product were to arise,
the Food and Drug Administration could possibly restrict the
currently approved uses of our TMR product. In the future, if
the Food and Drug Administration were to withdraw its approval
or restrict the range of uses for which our TMR product can be
used by physicians, such as restricting TMRs use with the
coronary artery bypass grafting procedure which occurs in more
than half the procedures in which TMR is used, either outcome
could lead to reduced or no sales of our TMR product in the
United States and our business could be adversely affected.


The Circulatory Devices Panel of the Food and
Drug Administration in July 2001 recommended against approval of
our PMR device for public sale and use in the United States,
which has effectively delayed potential revenue, if any, that
may have been derived in the future from the sale of that device
in the United States and which may have other adverse
effects.

The Circulatory Devices Panel of the Food and
Drug Administration recommended in July 2001 that the Food and
Drug Administration not approve our PMR device for public sale
and use in the United States based on concerns related to the
safety of the device and the data regarding adverse events in
the clinical trials. Although we do not expect to conduct
further clinical trials of our PMR device, this recommendation
has necessitated the further investment of additional resources
toward obtaining the Food and Drug Administrations
approval of our PMR device. We will not be able to derive any
revenue from the sale of that device in the United States until
such time, if any, that the Food and Drug Administration
approves the device. Such inability to realize revenue from
sales of our PMR device in the United States may have an adverse
effect on our results of operations. Additionally, the trading
price of our common stock on the NASDAQ National Market fell
substantially after the panels recommendation became
public.

The medical community has not broadly adopted
our products, and unless our products are broadly adopted, our
business will suffer.

Our TMR products and PMR products have not yet
achieved broad commercial and clinical adoption. We cannot
predict whether or at what rate and how broadly our products
will be adopted by the medical community. Our business would be
harmed if our TMR and PMR systems fail to achieve significant
market acceptance.

The receipt of positive endorsements by
physicians is essential for the success of our products in the
market place.

Positive endorsements, by physicians, are
essential for clinical adoption of our TMR and PMR laser
systems. Physicians may elect not to recommend TMR and PMR laser
systems for any number of reasons.

Clinical adoption of these products will depend
upon:



| |   |                                                                                                                         
| | - | ------------------------------------------------------------------------------------------------------------------------
| |  | our ability to facilitate training of
	cardiothoracic surgeons and interventional cardiologists in TMR
	and PMR therapy;
|
| |  | willingness of such physicians to adopt and
	recommend such procedures to their patients; and                           
|
| |  | raising the awareness of TMR and PMR with the
	targeted patient population.                                             

Patient acceptance of the procedure will depend
on:



| |   |                            
| | - | ---------------------------
| |  | physician recommendations; 
|
| |  | the degree of invasiveness;

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| |   |                                                                                                       
| | - | ------------------------------------------------------------------------------------------------------
| |  | the effectiveness of the procedure; and                                                               
|
| |  | the rate and severity of complications associated
	with the procedure as compared to other procedures.

To expand our business, we must establish
effective sales, marketing and distribution systems.

To expand our business, we must establish
effective systems to sell, market and distribute products. To
date, we have had limited sales which have consisted primarily
of U.S. sales of our TMR lasers and disposable handpieces on a
commercial basis since February 1999 and PMR lasers and
disposable catheters outside of the U.S. through international
distributors.

If our sales force is not successful in
increasing market share and selling our disposable handpieces,
our business will suffer.

With Food and Drug Administration approval of our
TMR laser system, we are marketing our products primarily
through our direct sales force. If the sales force is not
successful in increasing market share and selling our disposable
handpieces, our business will suffer.

Expansion of our business may put added
pressure on our management and operational infrastructure
affecting our ability to meet any increased demand for our
products and possibly having an adverse effect on our operating
results.

The growth in our business may place a
significant strain on our limited personnel, management,
financial systems and other resources. The evolving growth of
our business presents numerous risks and challenges, including:



| |   |                                                                                                                                                            
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the dependence on the growth of the market for
	our TMR and PMR systems;                                                                                   
|
| |  | our ability to successfully and rapidly expand
	sales to potential customers in response to potentially
	increasing clinical adoption of the TMR procedure;
|
| |  | the costs associated with such growth, which are
	difficult to quantify, but could be significant;                                                         
|
| |  | domestic and international regulatory
	developments;                                                                                                       
|
| |  | rapid technological change;                                                                                                                                
|
| |  | the highly competitive nature of the medical
	devices industry; and                                                                                        
|
| |  | the risk of entering emerging markets in which we
	have limited or no direct experience.                                                                   

To accommodate any such growth and compete
effectively, we may need to obtain additional funding to improve
information systems, procedures and controls and expand, train,
motivate and manage our employees, and such funding may not be
available in sufficient quantities, if at all. If we are not
able to manage these activities and implement these strategies
successfully to expand to meet any increased demand, our
operating results could suffer.

Our operating results are expected to
fluctuate and quarter-to-quarter comparisons of our results may
not indicate future performance.

Our operating results have fluctuated
significantly from quarter-to-quarter and are expected to
fluctuate significantly from quarter-to-quarter due to a number
of events and factors, including:



| |   |                                                                                                                                  
| | - | ---------------------------------------------------------------------------------------------------------------------------------
| |  | the level of product demand and the timing of
	customer orders;                                                                  
|
| |  | changes in strategy;                                                                                                             
|
| |  | delays associated with the Food and Drug
	Administration and other regulatory approval processes;                                
|
| |  | personnel changes including our ability to
	continue to attract, train and motivate additional qualified
	personnel in all areas;

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| |   |                                                                                                        
| | - | -------------------------------------------------------------------------------------------------------
| |  | the level of international sales;                                                                      
|
| |  | changes in competitive pricing policies;                                                               
|
| |  | the ability to develop, introduce and market new
	and enhanced versions of products on a timely basis; 
|
| |  | deferrals in customer orders in anticipation of
	new or enhanced products;                             
|
| |  | product quality problems; and                                                                          
|
| |  | the enactment of health care reform legislation
	and any changes in third party reimbursement policies.

We believe that quarter-to-quarter comparisons of
our operating results are not a good indication of our future
performance. Due to the emerging nature of the markets in which
we compete, forecasting operating results is difficult and
unreliable. Over the past year, our revenue has been lower than
anticipated, largely attributable to the transition to our new
sales strategy. It is likely or possible that our operating
results for a future quarter will fall below the expectations of
public market analysts and investors. When this occurred in the
past, the price of our common stock fell substantially, and if
this occurs again, the price of our common stock may fall again,
perhaps substantially.

Growth in our future operating results is
highly contingent and subject to significant risks.

Our future operating results will be
significantly affected by our ability to:



| |   |                                                                           
| | - | --------------------------------------------------------------------------
| |  | successfully and rapidly expand sales to
	potential customers;            
|
| |  | implement operating, manufacturing and financial
	procedures and controls;
|
| |  | improve coordination among different operating
	functions; and            
|
| |  | achieve manufacturing efficiencies as production
	volume increases.       

We may not be able to successfully market our
products if third party reimbursement for the procedures
performed with our products is not available for our health care
provider customers.

Few individuals are able to pay directly for the
costs associated with the use of our products. In the United
States, hospitals, physicians and other healthcare providers
that purchase medical devices generally rely on third party
payors, such as Medicare, to reimburse all or part of the cost
of the procedure in which the medical device is being used.

Effective July 1, 1999 the Health Care
Financing Administration commenced Medicare coverage for TMR
systems for any manufacturers TMR procedures. Hospitals
and physicians are now eligible to receive Medicare
reimbursement covering 100% of the costs for TMR procedures. The
Health Care Financing Administration has not approved
reimbursement for PMR. If it does not in the future provide
reimbursement, our ability to successfully market and sell our
PMR products will be harmed.

Currently there are over 2,000 private health
insurers and managed care organizations in the United States.
Even though Medicare beneficiaries appear to account for
approximately 52% of all patients treated with the TMR
procedure, the remaining 48% are beneficiaries of private
insurance and private health plans. We have limited data on the
reimbursement of our TMR procedures by private insurance and
private health plans. If they do not provide reimbursement, our
business will suffer.

Based on physician feedback, we know that private
insurers are reimbursing hospitals and physicians when the
procedure is performed on non-Medicare patients. In
May 2001, Blue Cross/ Blue Shields Technology
Evaluation Center (TEC) assessed our therapy and
confirmed that both TMR and TMR used as an adjunct to bypass
surgery, improves net health outcomes. While TEC
decisions are not binding, many Blue Cross/ Blue Shield plans
and other third-party payors use the Center as a benchmark and
adopt into policy those therapies that meet the TEC assessment.

24



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We face competition from our competitors
products which could limit market acceptance of our products and
render our products obsolete.

The market for TMR laser systems is competitive.
If our competitor is more effective in developing new products
and procedures and marketing existing and future products, our
business will suffer. The market for TMR laser systems is
characterized by rapid technical innovation. Accordingly, our
current or future competitors may succeed in developing TMR
products or procedures that:



| |   |                                                     
| | - | ----------------------------------------------------
| |  | are more effective than our products;               
|
| |  | are more effectively marketed than our products;
	or
|
| |  | may render our products or technology obsolete.     

We currently compete with PLC Systems. PLC
recently announced that Edwards Life Sciences has exercised its
option to assume full sales and marketing responsibility in the
U.S. for PLCs TMR Heart Laser 2 System and associated
kits pursuant to a co-marketing agreement between the two
companies that was signed in January 2001.

If we obtain the Food and Drug
Administrations approval for our PMR laser system, we will
face competition for market acceptance and market share for that
product. Our ability to compete may depend in significant part
on the timing of introduction of competitive products into the
market, and will be affected by the pace, relative to
competitors, at which we are able to:



| |   |                                                              
| | - | -------------------------------------------------------------
| |  | develop products;                                            
|
| |  | complete clinical testing and regulatory approval
	processes;
|
| |  | obtain third party reimbursement acceptance; and             
|
| |  | supply adequate quantities of the product to the
	market.    

Our products depend on TMR technology that is
rapidly changing which may require us to incur substantial
product development expenditures to prevent our products from
becoming obsolete.

The medical device industry is characterized by
rapid and significant technological change. Our future success
will depend in large part on our ability to respond to such
changes through further product research and development. In
addition, we must expand the indications and applications for
our products by developing and introducing enhanced and new
versions of our TMR and PMR laser systems. Product research and
development requires substantial expenditures and is inherently
risky. We may not be able to:



| |   |                                                                                           
| | - | ------------------------------------------------------------------------------------------
| |  | identify products for which demand exists; or                                             
|
| |  | develop products that have the characteristics
	necessary to treat particular indications.

Overall increases in medical costs could
adversely affect our business.

We believe that the overall escalating cost of
medical products and services has led, and will continue to
lead, to increased pressures on the health care industry, both
foreign and domestic, to reduce the cost of products and
services, including products offered by them. We cannot assure
you that in either United States or international markets that:



| |   |                                                                                                                                                                                                  
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | third party reimbursement and coverage will be
	available or adequate;                                                                                                                           
|
| |  | current reimbursement amounts will not be
	decreased in the future; or                                                                                                                           
|
| |  | future legislation, regulation or reimbursement
	policies of third party payors will not otherwise adversely
	affect the demand for our products or our ability to profitably
	sell our products.

Fundamental reforms in the healthcare industry in
the United States and Europe continue to be considered. We
cannot predict whether or when any healthcare reform proposals
will be adopted and what effect such proposals might have on our
business.

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We have a history of losses and may not be
profitable in the future.

We have incurred significant losses since
inception. Our revenues and operating income will be constrained:



| |   |                                                                                                                                           
| | - | ------------------------------------------------------------------------------------------------------------------------------------------
| |  | until such time, if ever, as we obtain broad
	commercial adoption of our TMR laser systems by healthcare
	facilities in the United States;
|
| |  | until such time, if ever, as we obtain Food and
	Drug Administration and other regulatory approvals for our PMR
	laser systems; and       
|
| |  | for an uncertain period of time after such
	approvals are obtained.                                                                       

We may not achieve or sustain profitability in
the future.

Third parties may limit the development and
protection of our intellectual property, which could adversely
affect our competitive position.

Our success is dependent in large part on our
ability to:



| |   |                                                                                     
| | - | ------------------------------------------------------------------------------------
| |  | obtain patent protection for our products and
	processes;                           
|
| |  | preserve our trade secrets and proprietary
	technology; and                         
|
| |  | operate without infringing upon the patents or
	proprietary rights of third parties.

The medical device industry has been
characterized by extensive litigation regarding patents and
other intellectual property rights. Companies in the medical
device industry have employed intellectual property litigation
to gain a competitive advantage. Certain competitors and
potential competitors of ours have obtained United States
patents covering technology that could be used for certain TMR
and PMR procedures. We do not know if such competitors,
potential competitors or others have filed and hold
international patents covering other TMR or PMR technology. In
addition, international patents may not be interpreted the same
as any counterpart United States patents.

While we periodically review the scope of our
patents and other relevant patents of which we are aware, the
question of patent infringement involves complex legal and
factual issues. Any conclusion regarding infringement may not be
consistent with the resolution of any such issues by a court.

Costly litigation may be necessary to protect
intellectual property rights.

We may have to engage in time consuming and
costly litigation to protect our intellectual property rights or
to determine the proprietary rights of others. In addition, we
may become subject to patent infringement claims or litigation,
or interference proceedings declared by the United States Patent
and Trademark Office to determine the priority of inventions.

Defending and prosecuting intellectual property
suits, United States Patent and Trademark Office interference
proceedings and related legal and administrative proceedings are
both costly and time-consuming. We may be required to litigate
further to:



| |   |                                                                                       
| | - | --------------------------------------------------------------------------------------
| |  | enforce our issued patents;                                                           
|
| |  | protect our trade secrets or know-how; or                                             
|
| |  | determine the enforceability, scope and validity
	of the proprietary rights of others.

Any litigation or interference proceedings will
result in substantial expense and significant diversion of
effort by technical and management personnel. If the results of
such litigation or interference proceedings are adverse to us,
then the results may:



| |   |                                                         
| | - | --------------------------------------------------------
| |  | subject us to significant liabilities to third
	parties;
|
| |  | require us to seek licenses from third parties;         

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| |   |                                                                       
| | - | ----------------------------------------------------------------------
| |  | prevent us from selling our products in certain
	markets or at all; or
|
| |  | require us to modify our products.                                    

Although patent and intellectual property
disputes regarding medical devices are often settled through
licensing and similar arrangements, costs associated with such
arrangements may be substantial and could include ongoing
royalties. Furthermore, we may not be able to obtain the
necessary licenses on satisfactory terms, if at all.

Adverse determinations in a judicial or
administrative proceeding or failure to obtain necessary
licenses could prevent us from manufacturing and selling our
products. This would harm our business.

The United States patent laws have been amended
to exempt physicians, other health care professionals, and
affiliated entities from infringement liability for medical and
surgical procedures performed on patients. We are not able to
predict if this exemption will materially affect our ability to
protect our proprietary methods and procedures.

We rely on patent and trade secret laws, which
are complex and may be difficult to enforce.

The validity and breadth of claims in medical
technology patents involve complex legal and factual questions
and, therefore, may be highly uncertain. Issued patent or
patents based on pending patent applications or any future
patent application may not exclude competitors or may not
provide a competitive advantage to us. In addition, patents
issued or licensed to us may not be held valid if subsequently
challenged and others may claim rights in or ownership of such
patents.

Furthermore, we cannot assure you that our
competitors:



| |   |                                                                 
| | - | ----------------------------------------------------------------
| |  | have not developed or will not develop similar
	products;       
|
| |  | will not duplicate our products; or                             
|
| |  | will not design around any patents issued to or
	licensed by us.

Because patent applications in the United States
were historically maintained in secrecy until the patents are
issued, we cannot be certain that:



| |   |                                                                                                      
| | - | -----------------------------------------------------------------------------------------------------
| |  | others did not first file applications for
	inventions covered by our pending patent applications; or
|
| |  | we will not infringe any patents that may issue
	to others on such applications.                     

We may not be able to meet future product
demand on a timely basis and may be subject to delays and
interruptions to product shipments because we depend on single
source third party suppliers and manufacturers.

Certain critical products and components for
lasers and disposable handpieces are purchased from single
sources. In addition, we are vulnerable to delays and
interruptions, for reasons out of our control, because we
outsource the manufacturing of some of these products to third
parties. We may experience harm to our business if these sources
have difficulties supplying our needs for these products and
components. In addition, we do not have long term supply
contracts. As a result, these sources are not obligated to
continue to provide these critical products or components to us.
Although we have identified alternative suppliers and
manufacturers, a lengthy process would be required to qualify
them as additional or replacement suppliers or manufacturers.
Also, it is possible some of our suppliers or manufacturers
could have difficulty meeting our needs if demand for our TMR
and PMR laser systems were to increase rapidly or significantly.
In addition, any defect or malfunction in the laser or other
products provided by such suppliers and manufacturers could
cause a delay in regulatory approvals or adversely affect
product acceptance. Further, we cannot predict:



| |   |                                                                                                                                                           
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | if materials and products obtained from outside
	suppliers and manufacturers will always be available in adequate
	quantities to meet our future needs; or

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| |   |                                                                                                                                                                                    
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | whether replacement suppliers and/or
	manufacturers can be qualified on a timely basis if our current
	suppliers and/or manufacturers are unable to meet our needs for
	any reason.

Our products could contain defects which could
delay regulatory approval or market acceptance of our
products.

We may experience future product defects,
malfunctions, manufacturing difficulties or recalls related to
the lasers or other components used in our TMR and PMR laser
systems. Any such occurrence could cause a delay in regulatory
approvals or adversely affect the commercial acceptance of our
products. We are unable to quantify the likelihood or costs of
any such occurrences, but they could potentially be significant.
Our business could be harmed because we may be unable to
sufficiently remedy a significant product recall while still
maintaining our daily manufacturing quotas.

We must comply with Food and Drug
Administration manufacturing standards or face fines or other
penalties including suspension of production.

We are required to demonstrate compliance with
the Food and Drug Administrations current good
manufacturing practices regulations if we market devices in the
United States or manufacture finished devices in the United
States. The Food and Drug Administration inspects manufacturing
facilities on a regular basis to determine compliance. If we
fail to comply with applicable Food and Drug Administration or
other regulatory requirements, we can be subject to:



| |   |                                                
| | - | -----------------------------------------------
| |  | fines, injunctions, and civil penalties;       
|
| |  | recalls or seizures of products;               
|
| |  | total or partial suspensions of production; and
|
| |  | criminal prosecutions.                         

The impact on the company of any such failure to
comply would depend on the impact of the remedy imposed on us.

We may suffer losses from product liability
claims if our products cause harm to patients.

We are exposed to potential product liability
claims and product recalls. These risks are inherent in the
design, development, manufacture and marketing of medical
devices. We could be subject to product liability claims if the
use of our TMR or PMR laser systems is alleged to have caused
adverse effects on a patient or such products are believed to be
defective. Our products are designed to be used in
life-threatening situations where there is a high risk of
serious injury or death. We are not aware of any material side
effects or adverse events arising from the use of our TMR
product. Though we are in the process of responding to the Food
and Drug Administrations Circulatory Devices Panels
recent recommendation against approval of our PMR product
because of concerns over the safety of the device and the data
regarding adverse events in the clinical trials, we believe
there are no material side effects or adverse events arising
from the use of our PMR product. When being clinically
investigated, it is not uncommon for new surgical or
interventional procedures to result in a higher rate of
complications in the treated population of patients as opposed
to those reported in the control group. In light of this, we
believe that the difference in the rates of complications
between the treated groups and the control groups in the
clinical trials for our PMR product are not statistically
significant, which is why we believe that there are no material
side effects or material adverse events arising from the use of
our PMR product.

Any regulatory clearance for commercial sale of
these products will not remove these risks. Any failure to
comply with the Food and Drug Administrations good
manufacturing practices or other regulations could hurt our
ability to defend against product liability lawsuits. Although
we have not experienced any product liability claims to date,
any such claims could cause our business to suffer.

28



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##### Table of Contents



Our insurance may be insufficient to cover
product liability claims against us.

Our product liability insurance may not be
adequate for any future product liability problems or continue
to be available on commercially reasonable terms, or at all.

If we were held liable for a product liability
claim or series of claims in excess of our insurance coverage,
such liability could harm our business and financial condition.
We maintain insurance against product liability claims in the
amount of $10 million per occurrence and $10 million in the
aggregate.

We may require increased product liability
coverage as sales of approved products increase and as
additional products are commercialized. Product liability
insurance is expensive and in the future may not be available on
acceptable terms, if at all.

We depend heavily on key personnel and
turnover of key employees and senior management could harm our
business.

Our future business and results of operations
depend in significant part upon the continued contributions of
our key technical and senior management personnel. They also
depend in significant part upon our ability to attract and
retain additional qualified management, technical, marketing and
sales and support personnel for our operations. If we lose a key
employee or if a key employee fails to perform in his or her
current position, or if we are not able to attract and retain
skilled employees as needed, our business could suffer.

During the last two years, we have had
significant change in our senior management team. Our former
Chief Executive Officer, Allen Hill, resigned from the company
in December 1999. One of our former Directors, Alan
Kaganov, acted as interim Chief Executive Officer until we hired
our current Chief Executive Officer, Michael Quinn, in October
of 2000. Our former Chief Financial Officer, Dick Powers,
resigned from the company in July 2000. Ian Johnston, our
then Vice President of Finance who resigned in June 2001,
acted as interim Chief Financial Officer until our former Chief
Financial Officer, J. Stephen Wilkins, was hired in
May 2001. In January 2002, our former Chief Financial
Officer, J. Stephen Wilkins, resigned and was replaced by
Darrell Eckstein who was originally hired in December 2000
as our Vice President of Operations, originally replacing Bill
Picht, who resigned earlier in 2000. Additionally, Richard
Lanigan moved from Vice President of Sales to Vice President of
Government Affairs and Business Development in March 2001
and Michael A. Tuckerman was promoted to Vice President,
U.S. Sales, after Thomas Kinder, our former Vice President of
Worldwide Sales resigned in January 2002. In addition,
Christopher M. Owens was hired as Vice President of
Marketing in March 2001. William Von Brendel, who was hired
in August 2001 as Vice President and General Manager of the
International Business Unit, resigned in January 2002 and is
currently providing international sales support under a
consulting agreement with us.

Our future business could be harmed by our
turnover in senior management if we have difficulty
familiarizing and training our new management with respect to
our business. Further significant turnover in our senior
management could significantly deplete our institutional
knowledge held by our existing senior management team. We depend
on the skills and abilities of these key employees in managing
the manufacturing, technical, marketing and sales aspects of our
business, any part of which could be harmed by further turnover.

We may fail to comply with international
regulatory requirements and could be subject to regulatory
delays, fines or other penalties.

Regulatory requirements in foreign countries for
international sales of medical devices often vary from country
to country. In addition, the Food and Drug Administration must
approve the export of devices to certain countries. The
occurrence and related impact of the following factors would
harm our business:



| |   |                                                                                          
| | - | -----------------------------------------------------------------------------------------
| |  | delays in receipt of, or failure to receive,
	foreign regulatory approvals or clearances;
|
| |  | the loss of previously obtained approvals or
	clearances; or                             
|
| |  | the failure to comply with existing or future
	regulatory requirements.                  

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To market in Europe, a manufacturer must obtain
the certifications necessary to affix to its products the CE
Marking. The CE Marking is an international symbol of adherence
to quality assurance standards and compliance with applicable
European medical device directives. In order to obtain and to
maintain a CE Marking, a manufacturer must be in compliance with
the appropriate quality assurance provisions of the
International Standards Organization and obtain certification of
its quality assurance systems by a recognized European Union
notified body. However, certain individual countries within
Europe require further approval by their national regulatory
agencies.

We have completed CE mark registration for all of
our products in accordance with the implementation of various
medical device directives in the European Union. Failure to
maintain the right to affix the CE Marking or other requisite
approvals could prohibit us from selling our products in member
countries of the European Union or elsewhere. Any enforcement
action by international regulatory authorities with respect to
past or future regulatory noncompliance could cause our business
to suffer. Noncompliance with international regulatory
requirements could result in enforcement action such as not
being allowed to market our product in the European Union, which
would significantly reduce international revenue.

We sell our products internationally which
subjects us to specific risks of transacting business in foreign
countries.

In future quarters, international sales may
become a significant portion of our revenue if our products
become more widely used outside of the United States. Our
international revenue is subject to the following risks, the
occurrence of any of which could harm our business:



| |   |                                                                
| | - | ---------------------------------------------------------------
| |  | foreign currency fluctuations;                                 
|
| |  | economic or political instability;                             
|
| |  | foreign tax laws;                                              
|
| |  | shipping delays;                                               
|
| |  | various tariffs and trade regulations;                         
|
| |  | restrictions and foreign medical regulations;                  
|
| |  | customs duties, export quotas or other trade
	restrictions; and
|
| |  | difficulty in protecting intellectual property
	rights.        

We may not achieve wide acceptance of our
products in foreign markets if we fail to obtain third party
reimbursement for the procedures performed with our
products.

If we obtain the necessary foreign regulatory
registrations or approvals, market acceptance of our products in
international markets would be dependent, in part, upon the
availability of reimbursement within prevailing health care
payment systems. Reimbursement is a significant factor
considered by hospitals in determining whether to acquire new
equipment. A hospital is more inclined to purchase new equipment
if third-party reimbursement can be obtained. Reimbursement and
health care payment systems in international markets vary
significantly by country. They include both government sponsored
health care and private insurance. Although we expect to seek
international reimbursement approvals, any such approvals may
not be obtained in a timely manner, if at all. Failure to
receive international reimbursement approvals could hurt market
acceptance of our TMR and PMR products in the international
markets in which such approvals are sought, which would
significantly reduce international revenue.

We may engage in future acquisitions that
could distract our management, cause us to incur debt, or dilute
our shareholders.

We may, from time to time, acquire or invest in
other complementary businesses, products or technologies. While
there are currently no commitments with respect to any
particular acquisition or investment, our management frequently
evaluates the strategic opportunities available in complementary

30



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##### Table of Contents



businesses, products or technologies. The process
of integrating an acquired companys business into our
operations may result in unforeseen operating difficulties and
expenditures and may absorb significant management attention
that would otherwise be available for the ongoing development of
our business. Moreover, the anticipated benefits of any
acquisition or investment may not be realized. Any future
acquisitions or investments by us could result in potentially
dilutive issuances of equity securities, the incurrence of debt
and contingent liabilities and impairment/amortization expenses
related to goodwill and other intangible assets, any of which
could materially harm our operating results.


The price of our common stock may fluctuate
significantly, which may result in losses for
investors.

The market price of our common stock has been and
may continue to be volatile. For example, during 52-week period
ended December 31, 2001, the closing prices of our common
stock as reported on the NASDAQ National Market ranged from a
high of $3.12 to a low of $0.60. We expect our stock price to be
subject to fluctuations as a result of a variety of factors,
including factors beyond our control. These factors include:



| |   |                                                                                                  
| | - | -------------------------------------------------------------------------------------------------
| |  | actual or anticipated variations in our quarterly
	operating results;                            
|
| |  | announcements of technological innovations or new
	products or services by us or our competitors;
|
| |  | announcements relating to strategic relationships
	or acquisitions;                              
|
| |  | changes in financial estimates by securities
	analysts;                                          
|
| |  | statements by securities analysts regarding us or
	our industry;                                 
|
| |  | conditions or trends in the medical device
	industry; and                                        
|
| |  | changes in the economic performance and/or market
	valuations of other medical device companies. 

Because of this volatility, we may fail to meet
the expectations of our shareholders or of securities analysts
at some time in the future, and our stock price could decline as
a result.

In addition, the stock market has experienced
significant price and volume fluctuations that have particularly
affected the trading prices of equity securities of many high
technology companies. These fluctuations have often been
unrelated or disproportionate to the operating performance of
these companies. Any negative change in the publics
perception of medical device companies could depress our stock
price regardless of our operating results. Our common stock
could be subject to certain consequences in the future
established by the NASDAQ National Market such as being delisted
if we do not meet the Nasdaqs continued listing standards.
For instance, if our common stock were to trade under $1.00 for
30 consecutive days on the NASDAQ National Market, or our
current net tangible assets fell below $4 million, or if we
do not in the future meet the Nasdaqs $10 million in
stockholders equity test starting November 1, 2002,
we would be in violation of the Nasdaqs continued listing
standards. If our common stock were delisted from the NASDAQ
National Market, then we could apply for listing on the Nasdaq
SmallCap Market or explore becoming listed on an alternative
market. Delisting from the Nasdaq National Market could
adversely affect the liquidity and price of our common stock and
it could have a long-term adverse impact on our ability to raise
capital in the future.

Recently, when the market price of a stock has
been volatile, holders of that stock have often instituted
securities class action litigation against the company that
issued the stock. If any of our shareholders brought such a
lawsuit against us, we could incur substantial costs defending
the lawsuit. The lawsuit could also divert the time and
attention of our management.




Item 7A.     Quantitative
and Qualitative Disclosures About Market Risk

Quantitative
Disclosures

The Company is exposed to market risks inherent
in its operations, primarily related to interest rate risk and
currency risk. These risks arise from transactions and
operations entered into in the normal course of

31



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##### Table of Contents



business. The Company does not use derivatives to
alter the interest characteristics of its marketable securities
or its debt instruments. The Company has no holdings of
derivative or commodity instruments.


Interest Rate Risk.The Company is subject to interest rate risks on cash and cash
equivalents and any future financing requirements. The long-term
debt at December 31, 2001 consists of an outstanding
balance on a lease obligation.

The following table presents the future principal
cash flows or amounts and related weighted average interest
rates expected by year for the Companys existing cash and
cash equivalents and long-term debt instruments:

|                                 |  |                |       |      |  |      |     |      |  |      |   |            |  |   |   |  |  |   |   |  |  |   |       |  
|-------------------------------- |  | -------------- | ----- | ---- |  | ---- | --- | ---- |  | ---- | - | ---------- |  | - | - |  |  | - | - |  |  | - | ----- | -
|                                 |  |                |       |      |  |      |     |      |  |      |   | Total Fair
|                                 |  | 2002           |       | 2003 |  | 2004 |     | 2005 |  | 2006 |   | Value     
|                                 |  |                |       |      |  |      |     |      |  |      |   |           
|                                 |  |               
|                                 |  | (In Thousands)
|Assets                           |  |                |       |      |  |      |     |      |  |      |   |            |  |   |   |  |  |   |   |  |  |   |       |  
|Cash, cash equivalents           |  | $              | 2,629 |      |  | $    |    |      |  | $    |  |            |  | $ |  |  |  | $ |  |  |  | $ | 2,629 |  
|Weighted average interest rate   |  |                | 3.0   | %    |  |      |    |      |  |      |  |            |  |   |  |  |  |   |  |  |  |   | 3.0   | %
|Liabilities                      |  |                |       |      |  |      |     |      |  |      |   |            |  |   |   |  |  |   |   |  |  |   |       |  
|Fixed Rate Debt Lease obligation |  | $              | 32    |      |  | $    | 32  |      |  | $    |  |            |  | $ |  |  |  | $ |  |  |  | $ | 64    |  
|Weighted average interest rate   |  |                | 6.8   | %    |  |      | 6.8 | %    |  |      |  |            |  |   |  |  |  |   |  |  |  |   | 6.8   | %

Qualitative
Disclosures

Interest Rate Risk.The Companys primary interest rate risk exposures relate
to the impact of interest rate movements on the Companys
ability to obtain adequate financing to fund future operations.

The Company manages interest rate risk on its
outstanding long-term debts through the use of fixed rate debt.
Management evaluates the Companys financial position on an
ongoing basis.

The Company does not hedge any balance sheet
exposures and intercompany balances against future movements in
foreign exchange rates. The exposure related to currency rate
movements would not have a material impact on future net income
or cash flows.






|        |                                                           
|------- | ----------------------------------------------------------
|Item 8. | Consolidated Financial Statements and
	Supplementary Data.

See Item 14(a) below and the Index therein
for a listing of the consolidated financial statements and
supplementary data filed as part of this report.






|        |                                                                                        
|------- | ---------------------------------------------------------------------------------------
|Item 9. | Changes in and Disagreements with
	Accountants on Accounting and Financial
	Disclosure.

None.




PART III




Item 10.     Directors
and Executive Officers of the Registrant.

Certain information required by Part III,
Item 10 is omitted from this Annual Report on
Form 10-K because we will file a definitive proxy statement
within 120 days after the end of our fiscal year pursuant
to Regulation 14A for our Annual Meeting of Shareholders,
currently scheduled for May 31, 2002, and the information
included in the proxy statement is incorporated herein by
reference.




Item 11.     Executive
Compensation and Other Matters.

Certain of the information concerning our
executive officers required by this Item is contained in the
section of Part I of this Annual Report on Form 10-K
entitled Item 1. Business  Employees.

32



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##### Table of Contents



The information concerning our directors and the
remaining information concerning our executive officers required
by this item is incorporated by reference to the information set
forth under the similarly titled caption contained in the proxy
statement to be used by us in connection with our 2002 Annual
Meeting of Shareholders.






|         |                                                                 
|-------- | ----------------------------------------------------------------
|Item 12. | Security Ownership of Certain Beneficial
	Owners and Management.

The information required by this item is
incorporated by reference to the information set forth under the
similarly titled caption contained in the proxy statement to be
used by us in connection with our 2002 Annual Meeting of
Shareholders.




Item 13.     Certain
Relationships and Related Transactions.

The information required by this item is
incorporated by reference to the information set forth under the
similarly titled caption contained in the proxy statement to be
used by us in connection with our 2002 Annual Meeting of
Shareholders.

33



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##### Table of Contents






PART IV




Item 14.     Exhibits,
Financial Statement Schedule, and Reports on
Form 8-K.

(a)(1) Financial Statements.The
financial statements required to be filed by Item 8
herewith are as follows:

|                                                                                                                     |  |      |    | 
|-------------------------------------------------------------------------------------------------------------------- |  | ---- | -- | 
|                                                                                                                     |  | Page
|                                                                                                                     |  |     
|Report of Independent Accountants                                                                                    |  |      | 38 | 
|Consolidated Balance Sheets as of
	December 31, 2001 and 2000.                                                       |  |      | 39 | 
|Consolidated Statements of Operations and
	Comprehensive Loss for the years ended December 31, 2001,
	2000 and 1999. |  |      | 40 | 
|Consolidated Statements of Shareholders
	Equity for the years ended December 31, 2001, 2000 and 1999.               |  |      | 41 | 
|Consolidated Statements of Cash Flows for the
	years ended December 31, 2001, 2000 and 1999                          |  |      | 42 | 
|Notes to Consolidated Financial Statements                                                                           |  |      | 43 | 

(2) Financial Statement Schedule

The following financial statement schedule is
filed herewith.

|                                                 |  |  |    | 
|------------------------------------------------ |  |  | -- | 
|Schedule II  Valuation and
	Qualifying Accounts |  |  | 57 | 

(3) Exhibits.

The exhibits listed under Item 14(c) are
filed or incorporated by reference herein.

(b) Reports on Form 8-K.

A report was filed on December 21, 2001, to
report the execution of a Share Purchase Agreement dated
December 21, 2001, between CardioGenesis and the State of
Wisconsin Investment Board, pursuant to which CardioGenesis sold
2,222,225 share of common stock to the State of Wisconsin
Investment Board for $2.0 million on December 26, 2001.

(c) Exhibits.

The exhibits below are filed or incorporated
herein by reference.

34



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##### Table of Contents



|        |          |             |  |                                                                                                                                                                                                                                                                                                                                                  
|------- | -------- | ----------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |          |            
|Number  |          | Description
|        |          |            
|        | 2.1(1)   |             |  | Agreement and Plan of Reorganization among the
	Company, the former CardioGenesis Corporation and RW Acquisition
	Corporation dated October 21, 1998.                                                                                                                                                                                            
|        | 3.1(2)   |             |  | Certificate of Amendment and Restated Articles of
	Incorporation of Registrant.                                                                                                                                                                                                                                                                  
|        | 3.2      |             |  | Certificate of Amendment to Articles of
	Incorporation of Registrant (incorporated by reference to the
	Registrants Form 10-Q filed August 14, 2001).                                                                                                                                                                                           
|        | 3.3      |             |  | Amended and Restated Bylaws of Registrant.                                                                                                                                                                                                                                                                                                       
|        | 4.1      |             |  | Form of Rights Agreement, dated as of
	August 17, 2001, between CardioGenesis Corporation and
	EquiServe Trust Company, N.A., as Rights Agent, which includes
	as Exhibit A the Form of Right Certificate, Form of
	Assignment and Form of Election to Purchase (incorporated by
	reference to the Registrants Form 8-K filed
	August 20, 2001).
|        | 4.2      |             |  | First Amendment to Rights Agreement, dated as of
	January 17, 2002, between CardioGenesis Corporation and
	EquiServe Trust Company, N.A., as Rights Agent (incorporated by
	reference to the Registrants Form 8-K filed
	January 18, 2001).                                                                                                     
|        | 4.3      |             |  | Form of Common Stock Purchase Warrant issued in
	connection with Facilities Lease for 26632 Towne Centre
	Dr., Suite 320, Foothill Ranch California (incorporated by
	reference to the Registrants Form 10-Q/A,
	Exhibit 10.1, filed August 16, 2001).                                                                                          
|        | 4.4      |             |  | Share Purchase Agreement dated April 11,
	2001 between the Company and the State of Wisconsin Investment
	Board (incorporated by reference to Exhibit 4.1 of the
	Registrants Form 8-K filed April 23, 2001).                                                                                                                                   
|        | 4.5      |             |  | Share Purchase Agreement dated December 21,
	2001 between the Company and the State of Wisconsin Investment
	Board (incorporated by reference to Exhibit 4.1 of the
	Registrants Form 8-K filed January 18, 2002).                                                                                                                              
|        | 10.1(2)  |             |  | Form of Director and Officer Indemnification
	Agreement.                                                                                                                                                                                                                                                                                         
|        | 10.2     |             |  | Stock Option Plan, as amended and restated.                                                                                                                                                                                                                                                                                                      
|        | 10.3     |             |  | Director Stock Option Plan, as amended and
	restated.                                                                                                                                                                                                                                                                                            
|        | 10.4(2)  |             |  | 1996 Employee Stock Purchase Plan of
	CardioGenesis Corporation.                                                                                                                                                                                                                                                                                 
|        | 10.5(2)  |             |  | Facilities Lease for 1049 Kiel Court, Sunnyvale,
	California.                                                                                                                                                                                                                                                                                    
|        | 10.6(2)  |             |  | Facilities Lease for 1139 Karlstad Drive,
	Sunnyvale, California.                                                                                                                                                                                                                                                                                
|        | 10.7     |             |  | Facilities Lease for 26632 Towne Centre Dr.,
	Suite 320, Foothill Ranch, California (incorporated herein
	by reference to the Registrants Form 10-Q/A,
	Exhibit 10.1, filed August 16, 2001).                                                                                                                                                   
|        | 10.8(2)  |             |  | 401(k) Plan.                                                                                                                                                                                                                                                                                                                                     
|        | 10.9(3)  |             |  | 1993 Equity Incentive Plan of the former
	CardioGenesis Corporation                                                                                                                                                                                                                                                                              
|        | 10.10(4) |             |  | 1996 Equity Incentive Plan of the former
	CardioGenesis Corporation                                                                                                                                                                                                                                                                              
|        | 10.11    |             |  | Employment agreement dated September 27,
	2001 between the Company and Michael J. Quinn, Chief
	Executive Officer.                                                                                                                                                                                                                               
|        | 10.12    |             |  | Employment Letter Agreement dated
	December 19, 2000 between the company and Darrell F.
	Eckstein, Vice President of Operations (incorporated by
	reference to the Registrants Form 10-K, filed
	April 17, 2001).                                                                                                                               
|        | 21.1     |             |  | List of Subsidiaries                                                                                                                                                                                                                                                                                                                             
|        | 23.1     |             |  | Consent of PricewaterhouseCoopers LLP                                                                                                                                                                                                                                                                                                            
|        | 24.1     |             |  | Power of Attorney (see signature page)                                                                                                                                                                                                                                                                                                           



---



|    |                                                                                                                                                                                             
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Incorporated herein by reference to
	Appendix 1 to the Companys Registration Statement on
	S-4 filed with the Securities and Exchange Commission on
	February 9, 1999 (File No. 333-72063).
|   
|(2) | Incorporated herein by reference from the
	Companys Registration Statement on Form S-1 (File
	No. 333-03770), as amended, filed on April 18, 1996.                                         

35



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##### Table of Contents





|    |                                                                                                                                                      
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------
|(3) | Incorporated herein by reference from the former
	CardioGenesis Corporations Form SB-2, (File
	No. 333-3752-LA), declared effective on May 21, 1996.
|   
|(4) | Incorporated herein by reference from the former
	CardioGenesis Corporations Form S-8, (File
	No. 333-35095, dated September 8, 1997).              

36



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##### Table of Contents






SIGNATURES

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



| |                          
| | -------------------------
| | CARDIOGENESIS CORPORATION
| | Registrant               



| |     |                     
| | --- | --------------------
| | By: | /s/ MICHAEL J. QUINN

| |                                    
| | -----------------------------------
| |                                    
| | Michael J. Quinn                   
| | Chief Executive Officer, President,
| | Chairman of the Board and Director 
| | (Principal Executive Officer)      

Date: April 16, 2002

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 Registrant in the capacities
and on the date indicated.

KNOW ALL PERSONS BY THESE PRESENTS, that each
person whose signature appears below constitutes and appoints
jointly and severally, Michael J. Quinn and/or
Darrell F. Eckstein and each one of them, his
attorneys-in-fact, each with the power of substitution, for him
in any and all capacities, to sign any and all amendments to
this Annual Report on Form 10-K and to file the same, with
exhibits thereto and other documents in connection therewith,
with the Securities and Exchange Commission, hereby ratifying
and confirming all that each of said attorneys-in-fact, or his
substitute or substitutes, may do or cause to be done by virtue
hereof.

|                                           |  |                                                                                                         |  |                |  | 
|------------------------------------------ |  | ------------------------------------------------------------------------------------------------------- |  | -------------- |  | 
|                                           |  |                                                                                                         |  |               
|Signature                                  |  | Title                                                                                                   |  | Date          
|                                           |  |                                                                                                         |  |               
|                                          
|/s/ MICHAEL J. QUINNMichael J. Quinn       |  | Chief Executive Officer, President,
	Chairman of the Board and Director
	(Principal Executive Officer)  |  | April 16, 2002
|                                          
|/s/ DARRELL F. ECKSTEINDarrell F. Eckstein |  | Interim Chief Financial Officer
	(Principal Accounting and Financial Officer, Secretary and
	Treasurer) |  | April 16, 2002
|                                          
|/s/ JACK M. GILLJack M. Gill               |  | Director                                                                                                |  | April 16, 2002
|                                          
|/s/ JOSEPH R. KLETZELJoseph R. Kletzel     |  | Director                                                                                                |  | April 16, 2002
|                                          
|/s/ ROBERT L. MORTENSENRobert L. Mortensen |  | Director                                                                                                |  | April 16, 2002
|                                          
|/s/ ROBERT C. STRAUSSRobert C. Strauss     |  | Director                                                                                                |  | April 16, 2002

37



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##### Table of Contents



REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Shareholders of
CardioGenesis Corporation

In our opinion, the consolidated financial
statements listed in the index appearing under
Item 14(a)(1) on page 34 present fairly, in all
material respects, the financial position of CardioGenesis
Corporation and its subsidiaries (the Company) at
December 31, 2001 and December 31, 2000, and the
results of their operations and their cash flows for each of the
three years in the period ended December 31, 2001 in
conformity with accounting principles generally accepted in the
United States of America. In addition, in our opinion, the
financial statement schedule listed in the index appearing under
Item 14(a)(2) on page 34 presents fairly, in all
material respects, the information set forth therein when read
in conjunction with the related consolidated financial
statements. These financial statements and the financial
statement schedule are the responsibility of the Companys
management; our responsibility is to express an opinion on these
financial statements and financial statement schedule based on
our audits. We conducted our audits of these statements in
accordance with auditing standards generally accepted in the
United States of America, which require that we plan and perform
the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable
basis for our opinion.

PRICEWATERHOUSECOOPERS LLP

San Jose, California

February 1, 2002, except Note 18


as to which the date is April 11, 2002


38



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##### Table of Contents



CARDIOGENESIS CORPORATION

CONSOLIDATED BALANCE SHEETS

December 31, 2001 and 2000


(in thousands)


|                                                                                                                                          |                                                                                                                              |                                                                                                                                       |                                            |          |         |        |       |          |         |        | 
|----------------------------------------------------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | -------- | ------- | ------ | ----- | -------- | ------- | ------ | 
|                                                                                                                                          |                                                                                                                              | 2001                                                                                                                                  |                                            | 2000    
|                                                                                                                                          |                                                                                                                              |                                                                                                                                       |                                            |         
|ASSETS                                                                                                                                   
|Current assets:                                                                                                                           |                                                                                                                              |                                                                                                                                       |                                            |          |         |        |       |         
|                                                                                                                                          | Cash and cash equivalents                                                                                                    |                                                                                                                                       | $                                          | 2,629    |         |        | $     | 3,357    |        
|                                                                                                                                          | Accounts receivable, net of allowance for
	doubtful accounts of $1,114 and $353 at December 31, 2001
	and 2000, respectively |                                                                                                                                       |                                            | 2,330    |         |        |       | 3,654    |        
|                                                                                                                                          | Inventories, net of reserves of $1,246 and $2,180
	at December 31, 2001 and 2000, respectively                               |                                                                                                                                       |                                            | 3,215    |         |        |       | 5,400    |        
|                                                                                                                                          | Prepaids and other current assets                                                                                            |                                                                                                                                       |                                            | 569      |         |        |       | 837      |        
|                                                                                                                                          |                                                                                                                              |                                                                                                                                       |                                            |          |         |        |       |         
|                                                                                                                                          |                                                                                                                              |                                                                                                                                       | Total current assets                       |          |         | 8,743  |       |          |         | 13,248 | 
|Property and equipment, net                                                                                                               |                                                                                                                              |                                                                                                                                       | 863                                        |          |         |        | 1,048 |         
|Accounts receivable over one year, net of
	allowance for doubtful accounts of $240 and $443, at
	December 31, 2001 and 2000, respectively |                                                                                                                              |                                                                                                                                       |                                           |          |         |        | 119   |         
|Other assets                                                                                                                              |                                                                                                                              |                                                                                                                                       | 1,703                                      |          |         |        | 2,550 |         
|                                                                                                                                          |                                                                                                                              |                                                                                                                                       |                                            |          |         |        |       |         
|                                                                                                                                          |                                                                                                                              |                                                                                                                                       | Total assets                               |          | $       | 11,309 |       |          | $       | 16,965 | 
|                                                                                                                                          |                                                                                                                              |                                                                                                                                       |                                            |          |         |        |       |         
|LIABILITIES AND SHAREHOLDERS
	EQUITY                                                                                                    
|Current liabilities:                                                                                                                      |                                                                                                                              |                                                                                                                                       |                                            |          |         |        |       |         
|                                                                                                                                          | Accounts payable                                                                                                             |                                                                                                                                       | $                                          | 1,548    |         |        | $     | 689      |        
|                                                                                                                                          | Accrued liabilities                                                                                                          |                                                                                                                                       |                                            | 4,467    |         |        |       | 5,789    |        
|                                                                                                                                          | Customer deposits                                                                                                            |                                                                                                                                       |                                            | 54       |         |        |       | 186      |        
|                                                                                                                                          | Deferred revenue                                                                                                             |                                                                                                                                       |                                            | 931      |         |        |       | 1,310    |        
|                                                                                                                                          | Notes payable                                                                                                                |                                                                                                                                       |                                            | 170      |         |        |       | 86       |        
|                                                                                                                                          | Current portion of capital lease obligation                                                                                  |                                                                                                                                       |                                            | 30       |         |        |       | 26       |        
|                                                                                                                                          | Other current liability                                                                                                      |                                                                                                                                       |                                            | 495      |         |        |       | 500      |        
|                                                                                                                                          |                                                                                                                              |                                                                                                                                       |                                            |          |         |        |       |         
|                                                                                                                                          |                                                                                                                              |                                                                                                                                       | Total current liabilities                  |          |         | 7,695  |       |          |         | 8,586  | 
|Capital lease obligation, less current portion                                                                                            |                                                                                                                              |                                                                                                                                       | 32                                         |          |         |        | 66    |         
|Long-term liability, less current portion                                                                                                 |                                                                                                                              |                                                                                                                                       |                                           |          |         |        | 339   |         
|                                                                                                                                          |                                                                                                                              |                                                                                                                                       |                                            |          |         |        |       |         
|                                                                                                                                          |                                                                                                                              |                                                                                                                                       | Total liabilities                          |          |         | 7,727  |       |          |         | 8,991  | 
|                                                                                                                                          |                                                                                                                              |                                                                                                                                       |                                            |          |         |        |       |         
|Commitments and contingencies (Note 11)                                                                                                   |                                                                                                                              |                                                                                                                                       |                                            |          |         |        |       |         
|Shareholders equity:                                                                                                                     |                                                                                                                              |                                                                                                                                       |                                            |          |         |        |       |         
|                                                                                                                                          | Preferred stock:                                                                                                             |                                                                                                                                       |                                            |          |         |        |       |          |        
|                                                                                                                                          |                                                                                                                              | no par value; 6,600 shares authorized; none
	issued and outstanding;                                                                  |                                            |          |        |        |       |          |        |       
|                                                                                                                                          | Common stock:                                                                                                                |                                                                                                                                       |                                            |          |         |        |       |          |        
|                                                                                                                                          |                                                                                                                              | no par value; 50,000 shares authorized; 36,507
	and 30,836 shares issued and outstanding at December 31,
	2001 and 2000, respectively |                                            |          | 167,750 |        |       |          | 161,938 |       
|                                                                                                                                          | Deferred compensation                                                                                                        |                                                                                                                                       |                                            |         |         |        |       | (66      | )      
|                                                                                                                                          | Accumulated other comprehensive loss                                                                                         |                                                                                                                                       |                                            | (88      | )       |        |       | (65      | )      
|                                                                                                                                          | Accumulated deficit                                                                                                          |                                                                                                                                       |                                            | (164,080 | )       |        |       | (153,833 | )      
|                                                                                                                                          |                                                                                                                              |                                                                                                                                       |                                            |          |         |        |       |         
|                                                                                                                                          |                                                                                                                              |                                                                                                                                       | Total shareholders equity                 |          |         | 3,582  |       |          |         | 7,974  | 
|                                                                                                                                          |                                                                                                                              |                                                                                                                                       |                                            |          |         |        |       |         
|                                                                                                                                          |                                                                                                                              |                                                                                                                                       | Total liabilities and shareholders equity |          | $       | 11,309 |       |          | $       | 16,965 | 
|                                                                                                                                          |                                                                                                                              |                                                                                                                                       |                                            |          |         |        |       |         

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

39



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##### Table of Contents



CARDIOGENESIS CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS AND
COMPREHENSIVE LOSS

For the Years Ended December 31, 2001,
2000 and 1999


(in thousands, except per share
amounts)


|                                               |                                          |                                                                      |                          |        |         |         |        |        |         |         |        |        |         |         |  
|---------------------------------------------- | ---------------------------------------- | -------------------------------------------------------------------- | ------------------------ | ------ | ------- | ------- | ------ | ------ | ------- | ------- | ------ | ------ | ------- | ------- | -
|                                               |                                          | 2001                                                                 |                          | 2000   |         | 1999   
|                                               |                                          |                                                                      |                          |        |         |        
|Net revenues                                   |                                          | $                                                                    | 14,153                   |        |         | $       | 22,210 |        |         | $       | 25,324 |       
|Cost of revenues                               |                                          |                                                                      | 5,777                    |        |         |         | 10,055 |        |         |         | 13,246 |       
|                                               |                                          |                                                                      |                          |        |         |         |        |        |         |         |        |       
|                                               |                                          |                                                                      | Gross profit             |        |         | 8,376   |        |        |         | 12,155  |        |        |         | 12,078  |  
|                                               |                                          |                                                                      |                          |        |         |         |        |        |         |         |        |       
|Operating expenses:                            |                                          |                                                                      |                          |        |         |         |        |        |         |         |        |       
|                                               | Research and development                 |                                                                      |                          | 1,863  |         |         |        | 5,065  |         |         |        | 11,353 |        
|                                               | Sales, general and administrative        |                                                                      |                          | 15,119 |         |         |        | 22,009 |         |         |        | 24,581 |        
|                                               | Restructuring and merger-related costs   |                                                                      |                          | 1,033  |         |         |        |       |         |         |        | 5,214  |        
|                                               |                                          |                                                                      |                          |        |         |         |        |        |         |         |        |       
|                                               |                                          |                                                                      | Total operating expenses |        |         | 18,015  |        |        |         | 27,074  |        |        |         | 41,148  |  
|                                               |                                          |                                                                      |                          |        |         |         |        |        |         |         |        |       
|                                               |                                          |                                                                      | Operating loss           |        |         | (9,639  | )      |        |         | (14,919 | )      |        |         | (29,070 | )
|Interest expense                               |                                          |                                                                      | (18                      | )      |         |         | (32    | )      |         |         | (64    | )     
|Interest income                                |                                          |                                                                      | 62                       |        |         |         | 400    |        |         |         | 801    |       
|Equity in net loss of investee                 |                                          |                                                                      | (652                     | )      |         |         | (58    | )      |         |         |       |       
|                                               |                                          |                                                                      |                          |        |         |         |        |        |         |         |        |       
|                                               |                                          |                                                                      | Net loss                 |        |         | (10,247 | )      |        |         | (14,609 | )      |        |         | (28,333 | )
|                                               |                                          |                                                                      |                          |        |         |         |        |        |         |         |        |       
|Other comprehensive income (loss), net of tax: |                                          |                                                                      |                          |        |         |         |        |        |         |         |        |       
|                                               | Unrealized gains (losses) on securities: |                                                                      |                          |        |         |         |        |        |         |         |        |        |        
|                                               |                                          | Unrealized holding gains (losses) arising
	during period             |                          |        |        |         |        |        | 44      |         |        |        | (145    | )      
|                                               |                                          | Less: reclassification adjustment for losses
	included in net income |                          |        |        |         |        |        |        |         |        |        | (5      | )      
|                                               | Foreign currency translation adjustment  |                                                                      |                          | (23    | )       |         |        | (34    | )       |         |        | 26     |        
|                                               |                                          |                                                                      |                          |        |         |         |        |        |         |         |        |       
|                                               |                                          | Other comprehensive income (loss)                                    |                          |        | (23     | )       |        |        | 10      |         |        |        | (124    | )      
|                                               |                                          |                                                                      |                          |        |         |         |        |        |         |         |        |       
|                                               |                                          | Comprehensive loss                                                   |                          | $      | (10,270 | )       |        | $      | (14,599 | )       |        | $      | (28,457 | )      
|                                               |                                          |                                                                      |                          |        |         |         |        |        |         |         |        |       
|Net loss per share:                            |                                          |                                                                      |                          |        |         |         |        |        |         |         |        |       
|                                               | Basic and diluted                        |                                                                      | $                        | (0.31  | )       |         | $      | (0.48  | )       |         | $      | (0.99  | )      
|                                               |                                          |                                                                      |                          |        |         |         |        |        |         |         |        |       
|                                               | Weighted average shares outstanding      |                                                                      |                          | 33,311 |         |         |        | 30,166 |         |         |        | 28,629 |        
|                                               |                                          |                                                                      |                          |        |         |         |        |        |         |         |        |       

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

40



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##### Table of Contents



CARDIOGENESIS CORPORATION

CONSOLIDATED STATEMENTS OF SHAREHOLDERS
EQUITY

For the Years Ended December 31, 2001,
2000 and 1999


(in thousands)


|                             |                                                                                              |              |        |          |  |               |         |             |   |         |      |       |   |   |     |      |   |   |          |         |   |   |        |         |  
|---------------------------- | -------------------------------------------------------------------------------------------- | ------------ | ------ | -------- |  | ------------- | ------- | ----------- | - | ------- | ---- | ----- | - | - | --- | ---- | - | - | -------- | ------- | - | - | ------ | ------- | -
|                             |                                                                                              |              |        |          |  |               |         | Accumulated |   |         |      |      
|                             |                                                                                              |              |        |          |  | Other         |         |             |   |        
|                             |                                                                                              | Common Stock |        |          |  | Comprehensive |         |             |   |        
|                             |                                                                                              |              |        | Deferred |  | Income        |         | Accumulated |   |        
|                             |                                                                                              | Shares       |        | Amount   |  | Compensation  |         | (Loss)      |   | Deficit |      | Total
|                             |                                                                                              |              |        |          |  |               |         |             |   |         |      |      
|Balances, December 31, 1998. |                                                                                              |              | 27,466 |          |  | $             | 148,947 |             |   | $       | (829 | )     |   | $ | 49  |      |   | $ | (110,891 | )       |   | $ | 37,276 |        
|                             | Issuance of common stock pursuant to exercise of
	options                                    |              |        | 1,448    |  |               |         | 7,269       |   |         |      |      |   |   |     |     |   |   |          |        |   |   |        | 7,269   |  
|                             | Issuance of common stock pursuant to stock
	purchased under the Employee Stock Purchase Plan |              |        | 74       |  |               |         | 478         |   |         |      |      |   |   |     |     |   |   |          |        |   |   |        | 478     |  
|                             | Issuance of common stock pursuant to exercise of
	warrants                                   |              |        | 449      |  |               |         | 833         |   |         |      |      |   |   |     |     |   |   |          |        |   |   |        | 833     |  
|                             | Deferred stock compensation                                                                  |              |        |         |  |               |         | 811         |   |         |      | (811  | ) |   |     |     |   |   |          |        |   |   |        |        |  
|                             | Amortization of deferred compensation                                                        |              |        |         |  |               |         |            |   |         |      | 1,174 |   |   |     |     |   |   |          |        |   |   |        | 1,174   |  
|                             | Net change in unrealized gains (losses) on
	marketable securities                            |              |        |         |  |               |         |            |   |         |      |      |   |   |     | (150 | ) |   |          |        |   |   |        | (150    | )
|                             | Foreign currency translation adjustment                                                      |              |        |         |  |               |         |            |   |         |      |      |   |   |     | 26   |   |   |          |        |   |   |        | 26      |  
|                             | Net loss                                                                                     |              |        |         |  |               |         |            |   |         |      |      |   |   |     |     |   |   |          | (28,333 | ) |   |        | (28,333 | )
|                             |                                                                                              |              |        |          |  |               |         |             |   |         |      |       |   |   |     |      |   |   |          |         |   |   |        |        
|Balances, December 31, 1999. |                                                                                              |              | 29,437 |          |  |               | 158,338 |             |   |         | (466 | )     |   |   | (75 | )    |   |   | (139,224 | )       |   |   | 18,573 |        
|                             | Issuance of common stock pursuant to exercise of
	options                                    |              |        | 640      |  |               |         | 1,064       |   |         |      |      |   |   |     |     |   |   |          |        |   |   |        | 1,064   |  
|                             | Issuance of common stock pursuant to stock
	purchased under the Employee Stock Purchase Plan |              |        | 204      |  |               |         | 388         |   |         |      |      |   |   |     |     |   |   |          |        |   |   |        | 388     |  
|                             | Issuance of common stock to private entity                                                   |              |        | 526      |  |               |         | 1,873       |   |         |      |      |   |   |     |     |   |   |          |        |   |   |        | 1,873   |  
|                             | Issuance of common stock to private company in
	lieu of payment for services                 |              |        | 29       |  |               |         | 44          |   |         |      |      |   |   |     |     |   |   |          |        |   |   |        | 44      |  
|                             | Deferred stock compensation                                                                  |              |        |         |  |               |         | 231         |   |         |      | (231  | ) |   |     |     |   |   |          |        |   |   |        |        |  
|                             | Amortization of deferred compensation                                                        |              |        |         |  |               |         |            |   |         |      | 631   |   |   |     |     |   |   |          |        |   |   |        | 631     |  
|                             | Net change in unrealized gains (losses) on
	marketable securities                            |              |        |         |  |               |         |            |   |         |      |      |   |   |     | 44   |   |   |          |        |   |   |        | 44      |  
|                             | Foreign currency translation adjustment                                                      |              |        |         |  |               |         |            |   |         |      |      |   |   |     | (34  | ) |   |          |        |   |   |        | (34     | )
|                             | Net loss                                                                                     |              |        |         |  |               |         |            |   |         |      |      |   |   |     |     |   |   |          | (14,609 | ) |   |        | (14,609 | )
|                             |                                                                                              |              |        |          |  |               |         |             |   |         |      |       |   |   |     |      |   |   |          |         |   |   |        |        
|Balances, December 31, 2000. |                                                                                              |              | 30,836 |          |  |               | 161,938 |             |   |         | (66  | )     |   |   | (65 | )    |   |   | (153,833 | )       |   |   | 7,974  |        
|                             | Issuance of common stock pursuant to exercise of
	options                                    |              |        | 446      |  |               |         | 719         |   |         |      |      |   |   |     |     |   |   |          |        |   |   |        | 719     |  
|                             | Issuance of common stock pursuant to stock
	purchased under the Employee Stock Purchase Plan |              |        | 105      |  |               |         | 120         |   |         |      |      |   |   |     |     |   |   |          |        |   |   |        | 120     |  
|                             | Issuance of common stock purchase warrants                                                   |              |        |         |  |               |         | 94          |   |         |      |      |   |   |     |     |   |   |          |        |   |   |        | 94      |  
|                             | Issuance of common stock to private entities                                                 |              |        | 5,120    |  |               |         | 4,884       |   |         |      |      |   |   |     |     |   |   |          |        |   |   |        | 4,884   |  
|                             | Deferred stock compensation                                                                  |              |        |         |  |               |         | (5          | ) |         |      | 5     |   |   |     |     |   |   |          |        |   |   |        |        |  
|                             | Amortization of deferred compensation                                                        |              |        |         |  |               |         |            |   |         |      | 61    |   |   |     |     |   |   |          |        |   |   |        | 61      |  
|                             | Foreign currency translation adjustment                                                      |              |        |         |  |               |         |            |   |         |      |      |   |   |     | (23  | ) |   |          |        |   |   |        | (23     | )
|                             | Net loss                                                                                     |              |        |         |  |               |         |            |   |         |      |      |   |   |     |     |   |   |          | (10,247 | ) |   |        | (10,247 | )
|                             |                                                                                              |              |        |          |  |               |         |             |   |         |      |       |   |   |     |      |   |   |          |         |   |   |        |        
|Balances, December 31, 2001. |                                                                                              |              | 36,507 |          |  | $             | 167,750 |             |   | $       |     |       |   | $ | (88 | )    |   | $ | (164,080 | )       |   | $ | 3,582  |        
|                             |                                                                                              |              |        |          |  |               |         |             |   |         |      |       |   |   |     |      |   |   |          |         |   |   |        |        

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

41



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##### Table of Contents



CARDIOGENESIS CORPORATION

CONSOLIDATED STATEMENTS OF CASH
FLOWS

For the Years Ended December 31, 2001,
2000 and 1999


(in thousands)


|                                                                             |                                                                                                                                       |                                          |                                                        |         |        |        |       |         |        |         |       |         |        |         |  
|---------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------- | ---------------------------------------- | ------------------------------------------------------ | ------- | ------ | ------ | ----- | ------- | ------ | ------- | ----- | ------- | ------ | ------- | -
|                                                                             |                                                                                                                                       | 2001                                     |                                                        | 2000    |        | 1999  
|                                                                             |                                                                                                                                       |                                          |                                                        |         |        |       
|Cash flows from operating activities:                                        |                                                                                                                                       |                                          |                                                        |         |        |        |       |         |        |         |       |        
|                                                                             | Net loss                                                                                                                              |                                          | $                                                      | (10,247 | )      |        | $     | (14,609 | )      |         | $     | (28,333 | )     
|Adjustments to reconcile net loss to net cash
	used in operating activities: |                                                                                                                                       |                                          |                                                        |         |        |        |       |         |        |         |       |        
|                                                                             | Depreciation and amortization                                                                                                         |                                          |                                                        | 450     |        |        |       | 933     |        |         |       | 1,453   |       
|                                                                             | Equity in net loss of investee                                                                                                        |                                          |                                                        | 652     |        |        |       | 58      |        |         |       |        |       
|                                                                             | Provision for doubtful accounts                                                                                                       |                                          |                                                        | 904     |        |        |       | 620     |        |         |       | 1,377   |       
|                                                                             | Inventory reserves                                                                                                                    |                                          |                                                        | 1,144   |        |        |       | 1,788   |        |         |       | 1,782   |       
|                                                                             | Amortization of deferred compensation for options
	to consultants                                                                     |                                          |                                                        | 61      |        |        |       | 631     |        |         |       | 1,174   |       
|                                                                             | Amortization of license fees and other assets                                                                                         |                                          |                                                        | 211     |        |        |       | 194     |        |         |       | 195     |       
|                                                                             | Accretion of long-term liability                                                                                                      |                                          |                                                        | 31      |        |        |       |        |        |         |       |        |       
|                                                                             | Loss on disposal of property and equipment                                                                                            |                                          |                                                        | 4       |        |        |       |        |        |         |       | 317     |       
|                                                                             | Issuance of stock to private company in lieu of
	payment for services                                                                 |                                          |                                                        |        |        |        |       | 44      |        |         |       |        |       
|                                                                             | Changes in operating assets and liabilities:                                                                                          |                                          |                                                        |         |        |        |       |         |        |         |       |         |       
|                                                                             |                                                                                                                                       | Accounts receivable  short term         |                                                        |         | 420    |        |       |         | 3,756  |         |       |         | 551    |        
|                                                                             |                                                                                                                                       | Inventories                              |                                                        |         | 1,041  |        |       |         | (694   | )       |       |         | 799    |        
|                                                                             |                                                                                                                                       | Prepaids and other current assets        |                                                        |         | 346    |        |       |         | (70    | )       |       |         | 1,195  |        
|                                                                             |                                                                                                                                       | Other assets                             |                                                        |         |       |        |       |         |       |         |       |         | 24     |        
|                                                                             |                                                                                                                                       | Accounts receivable  long term          |                                                        |         | 119    |        |       |         | 1,096  |         |       |         | 51     |        
|                                                                             |                                                                                                                                       | Accounts payable                         |                                                        |         | 859    |        |       |         | (1,130 | )       |       |         | 230    |        
|                                                                             |                                                                                                                                       | Accrued liabilities                      |                                                        |         | (1,322 | )      |       |         | (3,768 | )       |       |         | (1,907 | )      
|                                                                             |                                                                                                                                       | Current portion of long term liabilities |                                                        |         | (5     | )      |       |         | (375   | )       |       |         |       |        
|                                                                             |                                                                                                                                       | Long term liabilities                    |                                                        |         | (370   | )      |       |         | (386   | )       |       |         | (687   | )      
|                                                                             |                                                                                                                                       | Customer deposits                        |                                                        |         | (132   | )      |       |         | 41     |         |       |         | (111   | )      
|                                                                             |                                                                                                                                       | Deferred Revenue                         |                                                        |         | (379   | )      |       |         | (410   | )       |       |         | (425   | )      
|                                                                             |                                                                                                                                       |                                          |                                                        |         |        |        |       |         |        |         |       |        
|                                                                             |                                                                                                                                       |                                          | Net cash used in operating activities                  |         |        | (6,213 | )     |         |        | (12,281 | )     |         |        | (22,315 | )
|                                                                             |                                                                                                                                       |                                          |                                                        |         |        |        |       |         |        |         |       |        
|Cash flows from investing activities:                                        |                                                                                                                                       |                                          |                                                        |         |        |        |       |         |        |         |       |        
|                                                                             | Purchase of marketable securities                                                                                                     |                                          |                                                        |        |        |        |       | (3,317  | )      |         |       | (44,702 | )     
|                                                                             | Maturities of marketable securities                                                                                                   |                                          |                                                        |        |        |        |       | 11,108  |        |         |       | 61,473  |       
|                                                                             | Acquisition of property and equipment                                                                                                 |                                          |                                                        | (269    | )      |        |       | (762    | )      |         |       | (637    | )     
|                                                                             | Exercise of warrants in Microheart, Inc.                                                                                              |                                          |                                                        |        |        |        |       | (310    | )      |         |       |        |       
|                                                                             |                                                                                                                                       |                                          |                                                        |         |        |        |       |         |        |         |       |        
|                                                                             |                                                                                                                                       |                                          | Net cash (used in) provided by investing
	activities   |         |        | (269   | )     |         |        | 6,719   |       |         |        | 16,134  |  
|                                                                             |                                                                                                                                       |                                          |                                                        |         |        |        |       |         |        |         |       |        
|Cash flows from financing activities:                                        |                                                                                                                                       |                                          |                                                        |         |        |        |       |         |        |         |       |        
|                                                                             | Net proceeds from issuance of common stock from
	exercise of options and from stock purchased under the Employee
	Stock Purchase Plan |                                          |                                                        | 839     |        |        |       | 1,452   |        |         |       | 8,580   |       
|                                                                             | Net proceeds from sale of common stock to private
	entities                                                                           |                                          |                                                        | 4,884   |        |        |       | 1,873   |        |         |       |        |       
|                                                                             | Proceeds from short term borrowings                                                                                                   |                                          |                                                        | 439     |        |        |       | 319     |        |         |       |        |       
|                                                                             | Repayment of note payable                                                                                                             |                                          |                                                        | (355    | )      |        |       | (233    | )      |         |       | (111    | )     
|                                                                             | Repayments of capital lease obligations                                                                                               |                                          |                                                        | (30     | )      |        |       | (24     | )      |         |       | (21     | )     
|                                                                             |                                                                                                                                       |                                          |                                                        |         |        |        |       |         |        |         |       |        
|                                                                             |                                                                                                                                       |                                          | Net cash provided by financing activities              |         |        | 5,777  |       |         |        | 3,387   |       |         |        | 8,448   |  
|                                                                             |                                                                                                                                       |                                          | Effect of exchange rates on cash and cash
	equivalents |         |        | (23    | )     |         |        | (34     | )     |         |        | 26      |  
|                                                                             |                                                                                                                                       |                                          |                                                        |         |        |        |       |         |        |         |       |        
|                                                                             |                                                                                                                                       |                                          | Net increase (decrease) in cash and cash
	equivalents  |         |        | (728   | )     |         |        | (2,209  | )     |         |        | 2,293   |  
|Cash and cash equivalents at beginning of year                               |                                                                                                                                       |                                          | 3,357                                                  |         |        |        | 5,566 |         |        |         | 3,273 |        
|                                                                             |                                                                                                                                       |                                          |                                                        |         |        |        |       |         |        |         |       |        
|Cash and cash equivalents at end of year                                     |                                                                                                                                       | $                                        | 2,629                                                  |         |        | $      | 3,357 |         |        | $       | 5,566 |        
|                                                                             |                                                                                                                                       |                                          |                                                        |         |        |        |       |         |        |         |       |        
|Supplemental schedule of cash flow information:                              |                                                                                                                                       |                                          |                                                        |         |        |        |       |         |        |         |       |        
|                                                                             | Interest paid                                                                                                                         |                                          | $                                                      | 21      |        |        | $     | 32      |        |         | $     | 64      |       
|                                                                             |                                                                                                                                       |                                          |                                                        |         |        |        |       |         |        |         |       |        
|                                                                             | Taxes paid                                                                                                                            |                                          | $                                                      | 74      |        |        | $     | 153     |        |         | $     | 112     |       
|                                                                             |                                                                                                                                       |                                          |                                                        |         |        |        |       |         |        |         |       |        
|Supplemental schedule of noncash investing and
	financing activities:        |                                                                                                                                       |                                          |                                                        |         |        |        |       |         |        |         |       |        
|                                                                             | Change in unrealized gain (loss) on
	marketable securities                                                                            |                                          | $                                                      |        |        |        | $     | 44      |        |         | $     | (150    | )     
|                                                                             |                                                                                                                                       |                                          |                                                        |         |        |        |       |         |        |         |       |        
|                                                                             | Issuance of common stock purchase warrants                                                                                            |                                          | $                                                      | 94      |        |        | $     |        |        |         | $     |        |       
|                                                                             |                                                                                                                                       |                                          |                                                        |         |        |        |       |         |        |         |       |        
|                                                                             | Deferred compensation                                                                                                                 |                                          | $                                                      | (5      | )      |        | $     | 231     |        |         | $     | 811     |       
|                                                                             |                                                                                                                                       |                                          |                                                        |         |        |        |       |         |        |         |       |        

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

42



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##### Table of Contents



CARDIOGENESIS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS

1.     Nature of
Operations:

CardioGenesis Corporation
(CardioGenesis or the Company), formerly
known as Eclipse Surgical Technologies, Inc., was founded in
1989 to develop, manufacture and market surgical lasers and
accessories for the treatment of disease. Currently,
CardioGenesis emphasis is on the development and
manufacture of products used for transmyocardial
revascularization (TMR) and percutaneous myocardial
revascularization (PMR), which are cardiovascular
procedures. CardioGenesis markets its products for sale
primarily in the U.S., Europe and Asia. CardioGenesis operates
in a single segment.

These financial statements contemplate the
realization of assets and the satisfaction of liabilities in the
normal course of business. CardioGenesis has sustained
significant losses for the last several years and expects to
continue to incur losses through 2002. Management believes its
cash balance as of December 31, 2001 is not sufficient to
meet the Companys capital and operating requirements for
the next 12 months. CardioGenesis has obtained additional
funding through the sale of an investment and the sale of common
stock through a private placement (See Note 18 
Subsequent Events).

CardioGenesis may require additional financing in
the future. There can be no assurance that CardioGenesis will be
able to obtain additional debt or equity financing, if and when
needed, on terms acceptable to the Company. Any additional
equity or debt financing may involve substantial dilution to
CardioGenesis stockholders, restrictive covenants or high
interest costs. The failure to raise needed funds on
sufficiently favorable terms could have a material adverse
effect on CardioGenesis business, operating results and
financial condition. CardioGenesis long term liquidity
also depends upon its ability to increase revenues from the sale
of its products and achieve profitability. The failure to
achieve these goals could have a material adverse effect on the
business, operating results and financial condition.

2.     Summary of
Significant Accounting Policies:

Basis of
Presentation:

On March 17, 1999, Eclipse Surgical
Technologies, Inc. (Eclipse) completed the
acquisition of the former CardioGenesis Corporation pursuant to
the Agreement and Plan of Reorganization (the
merger) dated as of October 21, 1998. The
merger was accounted for using the pooling of interests method
of accounting for business combinations. Accordingly, the
Companys financial statements have been restated to
include the accounts of the former CardioGenesis Corporation for
1999. The accompanying consolidated financial statements include
the accounts of the Company and its wholly-owned subsidiaries.
All significant intercompany transactions and balances have been
eliminated.

Use of
Estimates:

The preparation of financial statements in
conformity with generally accepted accounting principles
requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and
disclosure of contingent 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.

Cash and Cash
Equivalents:

All highly liquid instruments purchased with an
original maturity of three months or less are considered cash
equivalents.

Inventories:

Inventories are stated at the lower of cost
(principally standard cost, which approximates actual cost on a
first-in, first-out basis) or market value.

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CARDIOGENESIS CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Patent
Expenses:

Patent and patent related expenditures are
expensed as general and administrative expenses as incurred.

Property and
Equipment:

Property and equipment are stated at cost and
depreciated on a straight-line basis over their estimated useful
lives of two to seven years. Assets acquired under capital
leases are amortized over the shorter of their estimated useful
lives or the term of the related lease (generally three to five
years). Amortization of leasehold improvements is based on the
straight-line method over the shorter of the estimated useful
life or the lease term.

Long-Lived
Assets:

CardioGenesis evaluates the recoverability of its
long-lived assets in accordance with Statement of Financial
Accounting Standards No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed Of (SFAS 121). SFAS 121
requires recognition of the impairment of long-lived assets in
the event the net book value of such assets exceeds the future
undiscounted cash flows attributable to such assets.

Fair Value of
Financial Instruments:

The carrying amounts of certain of
CardioGenesis financial instruments including cash
equivalents, accounts receivable, accounts payable, accrued
liabilities and customer deposits approximate fair value due to
their short maturities.

The fair value of the Companys long-term
liabilities is estimated by discounting future cash flows of
each instrument at rates currently offered to the Company for
similar debt instruments of comparable maturities. Based upon
such rates currently available to the Company, the estimated
fair value of the Companys long-term liabilities
approximates carrying value.

Revenue
Recognition:

CardioGenesis recognizes revenue on product sales
upon receipt of a purchase order, subsequent shipment of the
product and the price is fixed or determinable and collection of
sales proceeds is reasonably assured. Where purchase orders
allow customers an acceptance period or other contingencies,
revenue is recognized upon the earlier of acceptance or removal
of the contingency.

Revenues from sales to distributors and agents
are recognized upon shipment when there is evidence that an
arrangement exists, delivery has occurred, the sales price is
fixed or determinable and the ability to collect sales proceeds
is reasonably assured. The contracts regarding these sales do
not include any rights of return or price protection clauses.

CardioGenesis frequently loans lasers to
hospitals in return for the hospital purchasing a minimum number
of handpieces at a premium over the list price. The loaned
lasers are depreciated to cost of revenues over a useful life of
24 months. The revenue on the handpieces is recognized upon
shipment at an amount equal to the list price. The premium over
the list price represents revenue related to the use of the
laser unit and is recognized ratably, generally over the
24-month useful life of the placed lasers.

Revenues from service contracts, rentals, and per
procedure fees are recognized upon performance or over the terms
of the contract as appropriate.

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CARDIOGENESIS CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Research and
Development:

Research and development expenses are charged to
operations as incurred.

Warranties:

CardioGenesis laser products are generally
sold with a one year warranty. CardioGenesis provides for
estimated future costs of repair or replacement which are
reflected in the accompanying financial statements.

Advertising:

CardioGenesis expenses all advertising as
incurred. CardioGenesis advertising expenses were
$137,000, $128,000 and $75,000 for 2001, 2000 and 1999,
respectively. Advertising expenses include fees for website
design and hosting, reprints from medical journals, promotional
materials and sales sheets.

Income
Taxes:

CardioGenesis accounts for income taxes using the
liability method under which deferred tax assets or liabilities
are calculated at the balance sheet date using current tax laws
and rates in effect for the year in which the differences are
expected to affect taxable income. Valuation allowances are
established, when necessary, to reduce deferred tax assets to
the amounts expected to be realized.

Foreign
Currency Translation:

CardioGenesis international subsidiary uses
its local currency as its functional currency. Assets and
liabilities are translated at exchange rates in effect at the
balance sheet date and income and expense accounts at average
exchange rates during the year. Resulting translation
adjustments are recorded in accumulated other comprehensive
income/loss in shareholders equity. Transaction gains and
losses are included in the results of operations and have not
been significant for all periods presented.

Stock-Based
Compensation:

CardioGenesis accounts for its stock-based
compensation in accordance with Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to
Employees (APB 25). CardioGenesis has
elected to adopt the disclosure only provisions of Statement of
Financial Accounting Standards No. 123, Accounting
for Stock-Based Compensation (SFAS 123), which
requires pro forma disclosures in the financial statements as if
the measurement provisions of SFAS 123 had been adopted.

CardioGenesis accounts for equity instruments
issued to non-employees in accordance with the provisions of
SFAS 123 and Emerging Issues Task Force Issue No. 96-18
Accounting for Equity Instruments that are issued to other
than Employees for Acquiring, or in Conjunction with Selling,
Goods or Services.

Net Loss Per
Share:

Basic earnings per share (EPS) is
computed by dividing the net loss by the weighted average number
of common shares outstanding for the period. Diluted EPS is
computed giving effect to all dilutive potential common shares
that were outstanding during the period. Dilutive potential
common shares consist of incremental shares issuable upon the
exercise of stock options and warrants using the treasury
stock method.

Options to purchase 2,787,000, 3,243,000, and
4,363,000 shares of common stock were outstanding at
December 31, 2001, 2000 and 1999, respectively. The range
of exercise prices for these options were $0.563 $12.6875
for 2001, $0.03$15.9375 for 2000 and $0.03$16.09 for
1999. Warrants to purchase 75,000 shares of common stock at
$1.63 per share were outstanding as of December 31, 2001.
No warrants were outstanding at

45



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CARDIOGENESIS CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

December 31, 2000 and 1999. Both the options
and warrants were not included in the calculation of diluted EPS
because their inclusion would have been anti-dilutive.

Recent
Accounting Pronouncements:

In July 2001, the Financial Accounting
Standards Board (FASB) issued Statement of Financial
Accounting Standards (SFAS) No. 141 Business
Combinations, and SFAS No. 142 Goodwill and
Other Intangible Assets, which change the accounting for
business combinations and goodwill. SFAS No. 141 requires
that the purchase method of accounting be used for business
combinations initiated after June 30, 2001. Use of the
pooling-of-interests method is now prohibited. SFAS No. 142
changes the accounting for goodwill from an amortization method
to an impairment-only approach. Amortization of goodwill,
including goodwill recorded in past business combinations, will
therefore cease upon adoption of this statement, which for the
Company will be January 1, 2002. The Company does not
expect the adoption of these standards will have a material
effect on its consolidated financial statements.

In August 2001, the FASB issued SFAS
No. 144 Accounting for the Impairment or Disposal of
Long-Lived Assets. SFAS No. 144 addresses financial
accounting and reporting for the impairment or disposal of
long-lived assets. SFAS No. 144 develops one accounting
model for long-lived assets that are to be disposed of by sale,
requires that long-lived assets that are to be disposed by sale
be measured at the lower of book value or fair value less cost
to sell and expands the scope of discontinued operations to
include all components of an entity with operations that
(1) can be distinguished from the rest of the entity and
(2) will be eliminated from the on-going operations of the
entity in a disposal transaction. SFAS No. 144 is effective
for all fiscal years beginning after December 15, 2001 and
is therefore effective for the Company beginning with its fiscal
quarter ending March 31, 2002. The Company does not expect
the adoption of this standard will have a material effect on its
consolidated financial statements.

3.     Business
Combination

On March 17, 1999, Eclipse Surgical
Technologies, Inc. and the former CardioGenesis Corporation
announced the completion of their business combination. Under
the terms of the combination, each share of common stock of the
former CardioGenesis Corporation was converted into 0.80 of a
share of Eclipse common stock, and the Company assumed all
outstanding stock options of the former CardioGenesis
Corporation. Additionally, the former CardioGenesis Corporation
became a wholly-owned subsidiary of Eclipse and its shares were
no longer publicly traded. As a result of the transaction, the
Company increased its outstanding shares by approximately
9.9 million shares. The transaction was structured to
qualify as a tax-free reorganization and was accounted for as a
pooling of interests.

The former CardioGenesis Corporation was a
medical device company like Eclipse, which developed,
manufactured, and marketed cardiac revascularization products
for the treatment of advanced cardiovascular disease and severe
angina pain through TMR and PTMR. This company also manufactured
and marketed disposable products to perform intraoperative
transmyocardial revascularization (ITMR),
catheter-based percutaneous myocardial revascularization
(PMR), and thorascopic transmyocardial
revascularization (TTMR) to treat patients afflicted
with debilitating angina.

There were merger-related costs in 1999 of
$5,214,000 associated with the merger between the Company and
the former CardioGenesis Corporation. In March 1999, the Company
recognized merger-related costs of $6,893,000 for financial
advisory and legal fees, personnel severance, terminated
relationships and other costs including write-offs of fixed
assets and inventory. A majority of the 40 terminated
employees as a result of the merger were located in California
and worked in operations, sales, marketing, quality, research
and development and administrative functions. In addition, the
Company recognized merger-related costs of $844,000, which were
mainly due to an upgrade program to replace customer owned
equipment rendered unusable by the merger. The total
merger-related costs for the twelve months ended
December 31, 1999 were

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CARDIOGENESIS CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

$7,737,000, which included costs attributed to
inventory write-offs and a laser upgrade program totaling
$2,523,000 that were recorded as a component of cost of revenues.

The following table summarizes the merger-related
costs:

|                                                            |       |                |        |       | 
|----------------------------------------------------------- | ----- | -------------- | ------ | ----- | 
|Description                                                 |       | Amount        
|                                                            |       |               
|                                                            |       | (in thousands)
|Financial advisory and legal fees                           |       | $              | 2,528  |      
|Personnel severance                                         |       |                | 1,190  |      
|Terminated relationships/contracts                          |       |                | 910    |      
|Other costs including fixed asset and inventory
	write-offs |       |                | 3,109  |      
|                                                            |       |                |        |      
|Subtotal                                                    |       |                | 7,737  |      
|Less: Amount included in cost of revenues                   |       |                | (2,523 | )    
|                                                            |       |                |        |      
|                                                            | Total |                | $      | 5,214 | 
|                                                            |       |                |        |      

The following table summarizes the fiscal year
1999 net revenues and net loss of Eclipse and the former
CardioGenesis Corporation through March 31, 1999:

|                                      |  |                |        |  
|------------------------------------- |  | -------------- | ------ | -
|                                      |  | Quarter Ended 
|                                      |  | March 31,     
|                                      |  | 1999          
|                                      |  |               
|                                      |  | (in thousands)
|                                      |  |               
|The former CardioGenesis Corporation: |  |                |        |  
|Net revenues                          |  | $              | 675    |  
|Net loss                              |  | $              | (8,317 | )
|Eclipse:                              |  |                |        |  
|Net revenues                          |  | $              | 3,799  |  
|Net loss                              |  | $              | (6,849 | )

The following table summarizes the Companys
merger related reserve balances:

|                                                                           |                    |                |       |       | 
|-------------------------------------------------------------------------- | ------------------ | -------------- | ----- | ----- | 
|                                                                           |                    | (in thousands)
|                                                                           |                    |               
|Merger Related Cost (for the twelve month period
	ended December 31, 1999) |                    | $              | 7,737 |      
|Less:                                                                      |                    |                |       |      
|                                                                           | Non-cash charges   |                |       | 2,060 | 
|                                                                           | Cash payments      |                |       | 5,163 | 
|                                                                           |                    |                |       |      
|Merger reserve balance at December 31, 1999                                |                    |                | 514   |      
|Less:                                                                      |                    |                |       |      
|                                                                           | Cash payments      |                |       | 244   | 
|                                                                           |                    |                |       |      
|Merger reserve balance at December 31, 2000                                |                    |                | 270   |      
|Less:                                                                      |                    |                |       |      
|                                                                           | Change in estimate |                |       | 270   | 
|                                                                           |                    |                |       |      
|Merger reserve balance at December 31, 2001                                |                    | $              |      |      
|                                                                           |                    |                |       |      

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CARDIOGENESIS CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

4.     Restructuring
Costs:

During the year ended December, 31 2001, the
Company recognized restructuring charges of $1,303,000, which
were partially offset by a change in estimate of $270,000 in
connection with merger-related costs that were incurred in 1999.
The current year restructuring charges related to the
company-wide restructuring which began in the second quarter of
2001. The restructuring included a reduction in headcount, the
closing of the Companys facilities in Sunnyvale,
California and the move to a new facility located in Foothill
Ranch, California. As a result of the restructuring, 48
employees were identified to be terminated under the original
restructuring plan and have since been terminated, primarily
from the finance and manufacturing departments.

The following table summarizes the restructuring
activity and the remaining restructuring reserve balance:

|                 |                                 |                |      |             |  |               |      |       |  |   |      |    |  |   |        |    | 
|---------------- | ------------------------------- | -------------- | ---- | ----------- |  | ------------- | ---- | ----- |  | - | ---- | -- |  | - | ------ | -- | 
|                 |                                 |                |      | Lease and   |  |               |      |      
|                 |                                 | Personnel and  |      | Other       |  | Other         |      |      
|                 |                                 | Severance      |      | Contractual |  | Miscellaneous |      |      
|                 |                                 | Costs          |      | Commitments |  | Costs         |      | Total
|                 |                                 |                |      |             |  |               |      |      
|                 |                                 |               
|                 |                                 | (in thousands)
|Provisions       |                                 | $              | 655  |             |  | $             | 344  |       |  | $ | 304  |    |  | $ | 1,303  |   
|Payments         |                                 |                | (655 | )           |  |               | (252 | )     |  |   | (176 | )  |  |   | (1,083 | ) 
|Non-cash charges |                                 |                |     |             |  |               | (52  | )     |  |   | (116 | )  |  |   | (168   | ) 
|                 |                                 |                |      |             |  |               |      |       |  |   |      |    |  |   |        |   
|                 | Balance as of December 31, 2001 |                | $    |            |  |               | $    | 40    |  |   | $    | 12 |  |   | $      | 52 | 
|                 |                                 |                |      |             |  |               |      |       |  |   |      |    |  |   |        |   

The restructuring reserve balance is included in
accrued liabilities.

Personnel and severance costs are comprised of
severance, retention and relocation costs. Certain employees
were offered a retention incentive to stay employed through a
certain date while the Company was going through the
restructuring phase. Lease and other contractual commitments are
comprised primarily of the termination penalties associated with
the early lease termination on the Companys manufacturing
and office facilities.

5.     Inventories:

Inventories consist of the following:

|                |  |                |       |      |  |   |       | 
|--------------- |  | -------------- | ----- | ---- |  | - | ----- | 
|                |  |               
|                |  | December 31,  
|                |  |               
|                |  | 2001           |       | 2000
|                |  |                |       |     
|                |  |               
|                |  | (in thousands)
|Raw materials   |  | $              | 917   |      |  | $ | 2,045 | 
|Work in process |  |                | 323   |      |  |   | 715   | 
|Finished goods  |  |                | 1,975 |      |  |   | 2,640 | 
|                |  |                |       |      |  |   |       | 
|                |  | $              | 3,215 |      |  | $ | 5,400 | 
|                |  |                |       |      |  |   |       | 

48



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##### Table of Contents



CARDIOGENESIS CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

6.     Property and
Equipment:

Property and equipment consists of the following:

|                                               |  |                |        |      |  |   |        |  
|---------------------------------------------- |  | -------------- | ------ | ---- |  | - | ------ | -
|                                               |  |               
|                                               |  | December 31,  
|                                               |  |               
|                                               |  | 2001           |        | 2000
|                                               |  |                |        |     
|                                               |  |               
|                                               |  | (in thousands)
|Computers and equipment                        |  | $              | 2,715  |      |  | $ | 2,508  |  
|Manufacturing and demonstration equipment      |  |                | 2,210  |      |  |   | 2,216  |  
|Assets in progress                             |  |                | 62     |      |  |   | 183    |  
|Leasehold improvements                         |  |                | 157    |      |  |   | 198    |  
|                                               |  |                |        |      |  |   |        |  
|                                               |  |                | 5,144  |      |  |   | 5,105  |  
|Less accumulated depreciation and amortization |  |                | (4,281 | )    |  |   | (4,057 | )
|                                               |  |                |        |      |  |   |        |  
|                                               |  | $              | 863    |      |  | $ | 1,048  |  
|                                               |  |                |        |      |  |   |        |  

CardioGenesis leases certain equipment under a
capital lease which expires in December 2003. Accordingly,
capitalized costs of $138,000, net of accumulated amortization
of $83,000 and $57,000 at December 31, 2001 and 2000,
respectively, are included in computers and equipment.

7.     Other
Assets:

On January 5, 1999, CardioGenesis entered
into a Settlement and License Agreement (the PLC
agreement) with PLC Medical Systems, Inc.
(PLC) which granted CardioGenesis a non-exclusive
worldwide license to certain PLC patents. In return,
CardioGenesis agreed to pay PLC a license fee and minimum
royalties totaling $2.5 million over an approximately
forty-month period. The present value of these payments of
$2.3 million was recorded as a prepaid license fee in other
assets, and is being amortized over the life of the underlying
patents. The Company has recorded accumulated amortization of
$584,000 and $389,000 for the years ended December 31, 2001
and 2000, respectively (See Note 10).

At December 31, 2001 and 2000, CardioGenesis
had a 30.3% and 32.1% ownership interest in Microheart, Inc.,
formerly known as Microheart Holdings, Inc.,
(Microheart), respectively, which is accounted for
under the equity method. The investment in Microheart was
originally recorded at cost and subsequently adjusted for the
Companys share of Microhearts loss. For the year
ended December 31, 2001 and 2000, CardioGenesis recorded
net losses of $652,000 and $58,000, respectively, which
represents CardioGenesis equity in the loss incurred by
Microheart subsequent to obtaining the equity interest. As of
December 31, 2001 the investment in Microheart has been
fully written down. CardioGenesis recorded no income or loss
related to Microheart under the equity method in 1999 (See
Note 18  Subsequent Events).

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CARDIOGENESIS CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

8.     Accrued
Liabilities:

Accrued liabilities consists of the following:

|                                              |  |                |       |      |  |   |       | 
|--------------------------------------------- |  | -------------- | ----- | ---- |  | - | ----- | 
|                                              |  |               
|                                              |  | December 31,  
|                                              |  |               
|                                              |  | 2001           |       | 2000
|                                              |  |                |       |     
|                                              |  |               
|                                              |  | (in thousands)
|Accrued research support                      |  | $              | 2,192 |      |  | $ | 2,356 | 
|Accrued accounts payable and related expenses |  |                | 989   |      |  |   | 1,256 | 
|Accrued merger expenses                       |  |                |      |      |  |   | 270   | 
|Accrued restructuring expenses                |  |                | 52    |      |  |   |      | 
|Accrued withholdings on exercised options     |  |                | 196   |      |  |   | 74    | 
|Accrued salaries and related expenses         |  |                | 248   |      |  |   | 472   | 
|Accrued commissions                           |  |                | 213   |      |  |   | 235   | 
|Accrued consulting fees and related expenses  |  |                | 50    |      |  |   | 43    | 
|Accrued warranty                              |  |                | 16    |      |  |   | 158   | 
|Accrued legal expense                         |  |                | 308   |      |  |   | 30    | 
|Accrued other                                 |  |                | 203   |      |  |   | 895   | 
|                                              |  |                |       |      |  |   |       | 
|                                              |  | $              | 4,467 |      |  | $ | 5,789 | 
|                                              |  |                |       |      |  |   |       | 

9.     Notes
Payable:

In May 2001, CardioGenesis financed
insurance premiums for Directors & Officers insurance
with a $339,000 note payable to a finance company at 6.1% per
annum, with an outstanding balance of $70,000 at
December 31, 2001. In May 2000, CardioGenesis financed
insurance premiums for Directors & Officers insurance with a
$319,000 note payable to a finance company at 8.0% per annum,
with an outstanding balance of $86,000 at December 31, 2000.

In August 2001, CardioGenesis established a
receivables financing arrangement with a finance company. As of
December 31, 2001, the Company has borrowing capacity of
approximately $1.2 million based on qualifying accounts
receivable and has outstanding borrowings of $100,000. The term
of this arrangement is one year from the date of inception,
July 25, 2001, and is renewable annually at the mutual
consent of both parties. The agreement provides the Company with
the option of borrowing at an annual rate of 12% plus an
administrative fee of 0.50% on all outstanding borrowings.

10.     Other Current
Liability:

Pursuant to the PLC agreement, which grants
CardioGenesis a non-exclusive worldwide license to certain PLC
patents, CardioGenesis agreed to pay PLC a license fee and
minimum royalties totaling $2.5 million over an
approximately forty-month period. As of December 31, 2001,
the liability for outstanding payments due to PLC is $495,000,
net of interest of $5,000, and has been reflected in other
current liability on the accompanying balance sheet (See
Note 7).

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##### Table of Contents



CARDIOGENESIS CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

11.     Commitments
and Contingencies:

CardioGenesis has entered into an operating lease
for an office facility with terms extending through
October 2006. The minimum future rental payments are as
follows:

|                         |  |                |       | 
|------------------------ |  | -------------- | ----- | 
|Year Ending December 31, |  | (in thousands)
|                         |  |               
|2002                     |  | $              | 498   | 
|2003                     |  |                | 498   | 
|2004                     |  |                | 498   | 
|2005                     |  |                | 498   | 
|2006                     |  |                | 436   | 
|                         |  |                |       | 
|                         |  | $              | 2,428 | 
|                         |  |                |       | 

Rent expense was approximately $1,154,000,
$950,000 and $1,089,000 for the years ended December 31,
2001, 2000 and 1999, respectively.

At December 31, 2001, the Company held a
capital lease which bears interest at 6.8% and expires in
December 2003. Future minimum lease payments under this
capital lease are as follows:

|                                               |  |                |     |  
|---------------------------------------------- |  | -------------- | --- | -
|Year Ending December 31,                       |  | (in thousands)
|                                               |  |               
|2002                                           |  | $              | 32  |  
|2003                                           |  |                | 32  |  
|                                               |  |                |     |  
|Total minimum lease payments                   |  |                | 64  |  
|Less: Amount representing interest             |  |                | (2  | )
|                                               |  |                |     |  
|Present value of capital lease obligations     |  |                | 62  |  
|Less: Current portion                          |  |                | (30 | )
|                                               |  |                |     |  
|Long-term portion of capital lease obligations |  | $              | 32  |  
|                                               |  |                |     |  

CardioGenesis is engaged in certain legal and
administrative proceedings incidental to its normal business
activities. While it is not possible to determine the ultimate
outcome of these actions at this time, management believes that
any liabilities resulting from such proceedings, or claims which
are pending or known to be threatened, will not have a material
adverse effect on the Companys financial position, cash
flows or results of operations.

12.     Shareholders
Equity:

Issuances of
Common Stock:

In March 2001 and September 2000, the
Company sold 898,202 shares and 526,496 shares, respectively, of
common stock to a private company. The March 2001 sale was at a
negotiated purchase price of $1.1133 per share and the
September 2000 sale was at a negotiated price of $3.7987
per share. The Company did not pay any other compensation in
conjunction with these sales of common stock.

In December 2001 and April 2001, the
Company sold 2,222,225 shares and 2,000,000 shares,
respectively, of common stock to a governmental entity. The
December 2001 sale was at a negotiated purchase price of
$0.90 per share and the April 2001 sale was at a negotiated
purchase price of $1.00 per share. The Company did not pay any
other compensation in conjunction with these sales of common
stock. Certain bylaws were amended as a condition of these sales.

51



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##### Table of Contents



CARDIOGENESIS CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Warrants:

During the year ended December 31, 2001, the
Company issued warrants to purchase 75,000 shares of common
stock at a price of $1.63 per share in connection with a
facilities lease agreement executed in 2001. The warrants were
fair valued at $94,000 using the Black-Scholes pricing model and
are being amortized over the five-year lease term. For the year
ended December 31, 2001, the Company recorded a charge of
$9,000 in connection with these warrants. The warrants expire in
May 2006 and were outstanding at December 31, 2001. At
December 31, 2000, no warrants were outstanding. During the
years ended December 31, 2001 and 2000, no warrants were
exercised. During the year ended December 31, 1999, 448,799
warrants were exercised, generating proceeds of approximately
$833,000.

Options
Granted to Consultants:

At December 31, 2001, 2000 and 1999, options
for consultants to purchase a total of 86,000, 371,000 and
678,000 shares of common stock, respectively, at exercise prices
ranging from $1.38 to $8.75 per share were outstanding. The
termination of this plan and terms under which stock options are
exercised are the same as CardioGenesis Stock Option Plan
which is described below. At December 31, 2001,
CardioGenesis had reserved 86,000 shares of common stock for
issuance upon exercise of these options. CardioGenesis recorded
deferred stock compensation of $61,000, $231,000 and $811,000
for the years ended December 31, 2001, 2000 and 1999,
respectively, related to these options. These options are
included in the Stock Option Plan disclosures below.

Stock Option
Plan:

CardioGenesis maintains a Stock Option Plan,
which includes the Employee Program under which incentive and
nonstatutory options may be granted to employees and the
Consultants Program, under which nonstatutory options may be
granted to consultants of the Company. As of December 31,
2001, CardioGenesis had reserved a total of 5,600,000 shares of
common stock for issuance under this plan. Under the plan,
options may be granted at not less than fair market value (110%
of fair market value for options granted to 10% shareholders),
as determined by the Board of Directors. Options generally vest
over a period of three years and expire ten years from date of
grant (five years for options granted to 10% shareholders). No
shares of common stock issued under the plan are subject to
repurchase.

Directors
Stock Option Plan:

CardioGenesis maintains a Directors Stock
Option Plan which provides for the grant of nonstatutory options
to directors who are not officers or employees of the Company.
As of December 31, 2001, CardioGenesis had reserved 325,000
shares of common stock for issuance under this plan. Under this
plan, options are granted at the trading price of the common
stock at the date of grant. Options generally vest over twelve
to thirty-six months and expire ten years from date of grant. No
shares of common stock issued under the plan are subject to
repurchase.



| |                              
| | -----------------------------
| | Employee Stock Purchase Plan:

CardioGenesis maintains an Employee Stock
Purchase Plan (ESPP), under which
878,400 shares of common stock have been reserved for
issuance. CardioGenesis adopted the ESPP in April 1996. The
purpose of the ESPP is to provide eligible employees of
CardioGenesis with a means of acquiring common stock of
CardioGenesis through payroll deductions. Eligible employees are
permitted to purchase common stock at 85% of the fair market
value through payroll deductions of up to 15% of an
employees compensations, subject to certain limitations.
During fiscal years 2001, 2000 and 1999, approximately 105,000,
172,000, and 74,000 shares, respectively, were sold through
the ESPP.

52



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CARDIOGENESIS CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



| |                          
| | -------------------------
| | Stock-Based Compensation:

The Company has adopted the disclosure only
provisions of SFAS 123. CardioGenesis, however, continues
to apply APB 25 and related interpretations in accounting
for its plans. Had compensation cost for the Stock Option Plan,
the Directors Stock Option Plan and the ESPP been
determined based on the fair value of the options at the grant
date for awards in 2001, 2000 and 1999 consistent with the
provisions of SFAS 123, CardioGenesis net loss and
net loss per share would have increased to the pro forma amounts
indicated below:

|                                                 |  |                                          |         |      |  |      |         |   |  |   |         |  
|------------------------------------------------ |  | ---------------------------------------- | ------- | ---- |  | ---- | ------- | - |  | - | ------- | -
|                                                 |  |                                         
|                                                 |  | Year Ended December 31,                 
|                                                 |  |                                         
|                                                 |  | 2001                                     |         | 2000 |  | 1999
|                                                 |  |                                          |         |      |  |     
|                                                 |  |                                         
|                                                 |  | (in thousands, except per share amounts)
|Net loss as reported                             |  | $                                        | (10,247 | )    |  | $    | (14,609 | ) |  | $ | (28,333 | )
|Pro forma net loss                               |  | $                                        | (11,609 | )    |  | $    | (17,993 | ) |  | $ | (32,362 | )
|Basic and diluted net loss per share as reported |  | $                                        | (0.31   | )    |  | $    | (0.48   | ) |  | $ | (0.99   | )
|Pro forma basic and diluted net loss per share   |  | $                                        | (0.35   | )    |  | $    | (0.60   | ) |  | $ | (1.13   | )

The above pro-forma disclosures are not
necessarily representative of the effects on reported net income
for future years. The aggregate fair value and weighted average
fair value per share of options granted in the years ended
December 31, 2001, 2000 and 1999 were $1.4 million,
$2.5 million, and $7.9 million, and $1.53, $1.44, and
$5.25, respectively. The fair value of each option grant is
estimated on the date of grant using the Black-Scholes option
pricing model with the following weighted-average assumptions
for grants in 2001, 2000 and 1999:

|                        |  |              |         |      |  |      |         |   |  |  |         |  
|----------------------- |  | ------------ | ------- | ---- |  | ---- | ------- | - |  |  | ------- | -
|                        |  |             
|                        |  | December 31,
|                        |  |             
|                        |  | 2001         |         | 2000 |  | 1999
|                        |  |              |         |      |  |     
|Expected life of option |  |              | 7 years |      |  |      | 7 years |   |  |  | 7 years |  
|Risk-free interest rate |  |              | 5.26    | %    |  |      | 5.85    | % |  |  | 5.00    | %
|Expected dividends      |  |              |        |      |  |      |        |   |  |  |        |  
|Expected volatility     |  |              | 193     | %    |  |      | 165     | % |  |  | 100     | %

The aggregate fair value and weighted average
fair value per share of purchase rights under the ESPP in fiscal
years 2001, 2000 and 1999 was $61,000, $167,000 and $157,000,
and $0.64, $3.01, and $3.42, respectively. The fair value for
the purchase rights under the ESPP is estimated using the
Black-Scholes option pricing model, with the following
assumptions for the rights granted in 2001, 2000 and 1999:

|                        |  |              |           |      |  |      |           |   |  |  |           |  
|----------------------- |  | ------------ | --------- | ---- |  | ---- | --------- | - |  |  | --------- | -
|                        |  |             
|                        |  | December 31,
|                        |  |             
|                        |  | 2001         |           | 2000 |  | 1999
|                        |  |              |           |      |  |     
|Expected life           |  |              | .5  years |      |  |      | .5  years |   |  |  | .5  years |  
|Risk-free interest rate |  |              | 5.26      | %    |  |      | 5.85      | % |  |  | 5.00      | %
|Expected dividends      |  |              |          |      |  |      |          |   |  |  |          |  
|Expected volatility     |  |              | 193       | %    |  |      | 165       | % |  |  | 100       | %

53



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CARDIOGENESIS CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Option activity under the Stock Option Plan and
the Directors Stock Option Plan is as follows:

|                           |  |                                          |        |           |  |                  |        |   |  |   |      | 
|-------------------------- |  | ---------------------------------------- | ------ | --------- |  | ---------------- | ------ | - |  | - | ---- | 
|                           |  |                                         
|                           |  | Outstanding Options                     
|                           |  |                                         
|                           |  | Shares Available                         |        | Number    |  | Weighted Average
|                           |  | For Grant                                |        | of Shares |  | Price per Share 
|                           |  |                                          |        |           |  |                 
|                           |  |                                         
|                           |  | (in thousands, except per share amounts)
|Balance, December 31, 1998 |  |                                          | 437    |           |  |                  | 4,539  |   |  | $ | 4.36 | 
|Additional shares reserved |  |                                          | 1,225  |           |  |                  |       |   |  |   |     | 
|Options granted            |  |                                          | (1,494 | )         |  |                  | 1,494  |   |  | $ | 7.57 | 
|Options canceled           |  |                                          | 133    |           |  |                  | (222   | ) |  | $ | 8.11 | 
|Options exercised          |  |                                          |       |           |  |                  | (1,448 | ) |  | $ | 5.11 | 
|                           |  |                                          |        |           |  |                  |        |   |  |   |      | 
|Balance, December 31, 1999 |  |                                          | 301    |           |  |                  | 4,363  |   |  | $ | 5.35 | 
|Options granted            |  |                                          | (1,081 | )         |  |                  | 1,081  |   |  | $ | 2.34 | 
|Options canceled           |  |                                          | 780    |           |  |                  | (1,561 | ) |  | $ | 7.36 | 
|Options exercised          |  |                                          |       |           |  |                  | (640   | ) |  | $ | 1.66 | 
|                           |  |                                          |        |           |  |                  |        |   |  |   |      | 
|Balance, December 31, 2000 |  |                                          |       |           |  |                  | 3,243  |   |  | $ | 4.99 | 
|Additional shares reserved |  |                                          | 500    |           |  |                  |       |   |  |   |     | 
|Options granted            |  |                                          | (2,075 | )         |  |                  | 2,075  |   |  | $ | 1.61 | 
|Options canceled           |  |                                          | 2,085  |           |  |                  | (2,085 | ) |  | $ | 5.27 | 
|Options exercised          |  |                                          |       |           |  |                  | (446   | ) |  | $ | 1.58 | 
|                           |  |                                          |        |           |  |                  |        |   |  |   |      | 
|Balance, December 31, 2001 |  |                                          | 510    |           |  |                  | 2,787  |   |  | $ | 2.42 | 
|                           |  |                                          |        |           |  |                  |        |   |  |   |      | 

The following table summarizes information about
the Companys stock options outstanding and exercisable
under the Stock Option Plan and the Directors Stock Option
Plan at December 31, 2001:

|                |  |                     |       |                     |  |                  |      |                |  |                  |       |  |  |  |     |  |  |   |       | 
|--------------- |  | ------------------- | ----- | ------------------- |  | ---------------- | ---- | -------------- |  | ---------------- | ----- |  |  |  | --- |  |  | - | ----- | 
|                |  |                     |       |                    
|                |  | Options Outstanding |       | Options Exercisable
|                |  |                     |       |                    
|                |  |                     |       | Weighted Average    |  |                  |      |               
|                |  |                     |       | Remaining           |  |                  |      |               
|                |  | Number              |       | Contractual Life    |  | Weighted Average |      | Number         |  | Weighted Average
|Exercise Prices |  | Outstanding         |       | (in Years)          |  | Exercise Price   |      | Exercisable    |  | Exercise Price  
|                |  |                     |       |                     |  |                  |      |                |  |                 
|                |  | (in thousands)      |       |                     |  |                  |      | (in thousands) |  |                 
|$0.56-$1.02     |  |                     | 480   |                     |  |                  | 9.47 |                |  | $                | 0.92  |  |  |  | 75  |  |  | $ | 0.81  | 
|$1.10-$1.19     |  |                     | 530   |                     |  |                  | 9.67 |                |  | $                | 1.18  |  |  |  | 86  |  |  | $ | 1.19  | 
|$1.22-$1.67     |  |                     | 312   |                     |  |                  | 8.39 |                |  | $                | 1.40  |  |  |  | 80  |  |  | $ | 1.44  | 
|$1.69-$1.75     |  |                     | 749   |                     |  |                  | 8.81 |                |  | $                | 1.69  |  |  |  | 283 |  |  | $ | 1.69  | 
|$2.57-$4.00     |  |                     | 364   |                     |  |                  | 9.34 |                |  | $                | 2.91  |  |  |  | 63  |  |  | $ | 3.26  | 
|$5.00-$8.75     |  |                     | 264   |                     |  |                  | 7.36 |                |  | $                | 7.13  |  |  |  | 211 |  |  | $ | 7.25  | 
|$9.13-$12.69    |  |                     | 88    |                     |  |                  | 6.62 |                |  | $                | 11.69 |  |  |  | 74  |  |  | $ | 11.33 | 
|                |  |                     |       |                     |  |                  |      |                |  |                  |       |  |  |  |     |  |  |   |       | 
|                |  |                     | 2,787 |                     |  |                  | 8.90 |                |  | $                | 2.42  |  |  |  | 872 |  |  | $ | 3.81  | 
|                |  |                     |       |                     |  |                  |      |                |  |                  |       |  |  |  |     |  |  |   |       | 

The Companys stock options exercisable
under the Stock Option Plan and the Directors Stock Option
Plan at December 31, 2000 and 1999 were 2,477,000 and
2,509,000 shares, respectively.

54



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CARDIOGENESIS CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

13.     Employee
Retirement Plan:

CardioGenesis maintains a 401(k) plan for its
employees. The plan allows eligible employees to defer up to 15%
of their earnings, not to exceed the statutory amount per year
on a pretax basis through contributions to the plan. The plan
provides for employer contributions at the discretion of the
Board of Directors. For the year ended December 31, 2001,
$110,000 of employer contributions were made to the plan. For
the years ended December 31, 2000 and 1999, no such
contributions were made.

14.     Segment
Disclosures

The Company operates in the cardiovascular
medical device segment. The principal markets for the
Companys products are in the United States of America.
International sales occur in Europe, the Middle East and Asia
and amounted to $1.0 million, $2.2 million and $3.5 million for
the years ended December 31, 2001, 2000 and 1999,
respectively. The international sales represent 7%, 10% and 14%
of total sales for the years ended December 31, 2001, 2000
and 1999, respectively. The majority of international sales are
denominated in US dollars.

15.     Income
Taxes:

Significant components of CardioGenesis
deferred tax assets are as follows:

|                                           |  |                |         |      |  |   |         |  
|------------------------------------------ |  | -------------- | ------- | ---- |  | - | ------- | -
|                                           |  |               
|                                           |  | December 31   
|                                           |  |               
|                                           |  | 2001           |         | 2000
|                                           |  |                |         |     
|                                           |  |               
|                                           |  | (in thousands)
|Net operating losses                       |  | $              | 56,931  |      |  | $ | 50,734  |  
|Research and development and other credits |  |                | 3,823   |      |  |   | 3,697   |  
|Capitalized research and development       |  |                |        |      |  |   | 806     |  
|Reserves                                   |  |                | 1,950   |      |  |   | 2,038   |  
|Accrued liabilities                        |  |                | 680     |      |  |   | 1,118   |  
|Depreciation                               |  |                | 243     |      |  |   | 259     |  
|Other                                      |  |                | 304     |      |  |   | 763     |  
|                                           |  |                |         |      |  |   |         |  
|Net deferred tax asset                     |  |                | 63,931  |      |  |   | 59,415  |  
|Less valuation allowance                   |  |                | (63,931 | )    |  |   | (59,415 | )
|                                           |  |                |         |      |  |   |         |  
|Net deferred tax assets                    |  | $              |        |      |  | $ |        |  
|                                           |  |                |         |      |  |   |         |  

The Company has established a valuation allowance
to the extent of its deferred tax asset since it is not certain
that a benefit can be realized in the future due to the
Companys recurring operating losses.

As of December 31, 2001, the Company had
federal and state net operating loss carryforwards of
approximately $149 million and $68 million, respectively, to
offset future taxable income. In addition, the Company had
federal and state credit carryforwards of approximately
$2,548,000 and $1,275,000 available to offset future tax
liabilities. The Companys net operating loss
carryforwards, as well as credit carryforwards, will expire at
various dates beginning in 2002 through 2020, if not utilized.

The Internal Revenue Code limits the use of net
operating loss and tax credit carryforwards in certain
situations where changes occur in the stock ownership of a
company. The Company believes that the sale of common stock in
its initial public offering and the merger with CardioGenesis
resulted in changes in ownership which could restrict the
utilization of the carryforwards.

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##### Table of Contents



CARDIOGENESIS CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

16.     Related Party
Transactions:

The Company paid $3,875 for consulting fees to
certain stockholders during the year ended December 1999.
The Company did not enter into any other related party
transactions in 2001, 2000 and 1999.

17.     Risks and
Concentrations:

CardioGenesis sells its products primarily to
hospitals and other healthcare providers in North America,
Europe and Asia. CardioGenesis performs ongoing credit
evaluations of its customers and generally does not require
collateral. Although CardioGenesis maintains allowances for
potential credit losses that it believes to be adequate, a
payment default on a significant sale could materially and
adversely affect its operating results and financial condition.
At December 31, 2001, one customer individually accounted
for more than 10% of gross accounts receivable. No other
customers individually accounted for 10% or more of accounts
receivable at December 31, 2001 and 2000. For the years
ended December 31, 2001, 2000 and 1999, no customer
individually accounted for 10% or more of net revenues.

Certain components of our laser units and
fiber-optic handpieces are generally acquired from multiple
sources. Other laser and fiber-optic components and
subassemblies are purchased from single sources. Although we
have identified alternative vendors, the qualification of
additional or replacement vendors for certain components or
services is a lengthy process. Any significant supply
interruption would have a material adverse effect on the ability
to manufacture our products and, therefore, would harm our
business. We intend to continue to qualify multiple sources for
components that are presently single sourced.

18.     Subsequent
Events:

In April 2002, the Company sold its
ownership interest in Microheart, Inc. for $2,285,150 and will
recognize a gain of an equal amount in the second quarter of
2002. The Company did not pay any other compensation in
conjunction with the sale of this investment.

In April 2002, the Company sold 500,000
shares of common stock to a governmental entity at a negotiated
purchase price of $1.00 per share. The Company did not pay any
other compensation in conjunction with the sale of our common
stock. These securities carry registration rights. If a
registration statement is not declared effective by the SEC on
or before July 10, 2002, the Company will be required to
pay liquidated damages in the amount of 0.25% of the total
purchase price of the shares for each week after July 10,
2002 that the registration statement is not declared effective.

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CARDIOGENESIS CORPORATION

SCHEDULE II  VALUATION AND
QUALIFYING ACCOUNTS

(in thousands)


|                                 |  |            |        |              |  |               |       |               |  |   |       |  |  |   |        | 
|-------------------------------- |  | ---------- | ------ | ------------ |  | ------------- | ----- | ------------- |  | - | ----- |  |  | - | ------ | 
|                                 |  | Balance at |        |              |  |               |       |              
|                                 |  | Beginning  |        |              |  |               |       | Balance at   
|                                 |  | of Period  |        | Additions(1) |  | Deductions(2) |       | End of Period
|                                 |  |            |        |              |  |               |       |              
|Allowance for doubtful accounts: |  |            |        |              |  |               |       |               |  |   |       |  |  |   |        | 
|Year ended December 31, 1999     |  |            |        |              |  |               |       |               |  |   |       |  |  |   |        | 
|Allowance for doubtful accounts  |  | $          | 2,669  |              |  | $             | 1,377 |               |  | $ | 2,170 |  |  | $ | 1,876  | 
|Year ended December 31, 2000     |  |            |        |              |  |               |       |               |  |   |       |  |  |   |        | 
|Allowance for doubtful accounts  |  | $          | 1,876  |              |  | $             | 620   |               |  | $ | 1,700 |  |  | $ | 796    | 
|Year ended December 31, 2001     |  |            |        |              |  |               |       |               |  |   |       |  |  |   |        | 
|Allowance for doubtful accounts  |  | $          | 796    |              |  | $             | 904   |               |  | $ | 346   |  |  | $ | 1,354  | 
|Inventory reserve:               |  |            |        |              |  |               |       |               |  |   |       |  |  |   |        | 
|Year ended December 31, 1999     |  |            |        |              |  |               |       |               |  |   |       |  |  |   |        | 
|Inventory reserve                |  | $          | 403    |              |  | $             | 1,782 |               |  | $ | 187   |  |  | $ | 1,998  | 
|Year ended December 31, 2000     |  |            |        |              |  |               |       |               |  |   |       |  |  |   |        | 
|Inventory reserve                |  | $          | 1,998  |              |  | $             | 1,788 |               |  | $ | 1,606 |  |  | $ | 2,180  | 
|Year ended December 31, 2001     |  |            |        |              |  |               |       |               |  |   |       |  |  |   |        | 
|Inventory reserve                |  | $          | 2,180  |              |  | $             | 1,144 |               |  | $ | 2,078 |  |  | $ | 1,246  | 
|Warranty reserve:                |  |            |        |              |  |               |       |               |  |   |       |  |  |   |        | 
|Year ended December 31, 1999     |  |            |        |              |  |               |       |               |  |   |       |  |  |   |        | 
|Warranty reserve                 |  | $          | 178    |              |  | $             | 114   |               |  | $ | 67    |  |  | $ | 225    | 
|Year ended December 31, 2000     |  |            |        |              |  |               |       |               |  |   |       |  |  |   |        | 
|Warranty reserve                 |  | $          | 225    |              |  | $             | 95    |               |  | $ | 162   |  |  | $ | 158    | 
|Year ended December 31, 2001     |  |            |        |              |  |               |       |               |  |   |       |  |  |   |        | 
|Warranty reserve                 |  | $          | 158    |              |  | $             | 28    |               |  | $ | 170   |  |  | $ | 16     | 
|Valuation allowance:             |  |            |        |              |  |               |       |               |  |   |       |  |  |   |        | 
|Year ended December 31, 1999     |  |            |        |              |  |               |       |               |  |   |       |  |  |   |        | 
|Valuation allowance              |  | $          | 46,733 |              |  | $             | 9,564 |               |  | $ |      |  |  | $ | 56,297 | 
|Year ended December 31, 2000     |  |            |        |              |  |               |       |               |  |   |       |  |  |   |        | 
|Valuation allowance              |  | $          | 56,297 |              |  | $             | 3,118 |               |  | $ |      |  |  | $ | 59,415 | 
|Year ended December 31, 2001     |  |            |        |              |  |               |       |               |  |   |       |  |  |   |        | 
|Valuation allowance              |  | $          | 59,415 |              |  | $             | 4,516 |               |  | $ |      |  |  | $ | 63,931 | 






|    |                                         
|--- | ----------------------------------------
|(1) | Charged to costs and expenses.          
|   
|(2) | Amounts written off against the reserve.

THIS SCHEDULE CONTAINS SUMMARY FINANCIAL
INFORMATION EXTRACTED FROM THE YEAR ENDED DECEMBER 31, 2001
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.

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|        |          |             |  |                                                                                                                                                                                                                                                                                                                                                  
|------- | -------- | ----------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |          |            
|Number  |          | Description
|        |          |            
|        | 2.1(1)   |             |  | Agreement and Plan of Reorganization among the
	Company, the former CardioGenesis Corporation and
	RW Acquisition Corporation dated October 21, 1998.                                                                                                                                                                                            
|        | 3.1(2)   |             |  | Certificate of Amendment and Restated Articles of
	Incorporation of Registrant.                                                                                                                                                                                                                                                                  
|        | 3.2      |             |  | Certificate of Amendment to Articles of
	Incorporation of Registrant (incorporated by reference to the
	Registrants Form 10-Q filed August 14, 2001).                                                                                                                                                                                           
|        | 3.3      |             |  | Amended and Restated Bylaws of Registrant.                                                                                                                                                                                                                                                                                                       
|        | 4.1      |             |  | Form of Rights Agreement, dated as of
	August 17, 2001, between CardioGenesis Corporation and
	EquiServe Trust Company, N.A., as Rights Agent, which includes
	as Exhibit A the Form of Right Certificate, Form of
	Assignment and Form of Election to Purchase (incorporated by
	reference to the Registrants Form 8-K filed
	August 20, 2001).
|        | 4.2      |             |  | First Amendment to Rights Agreement, dated as of
	January 17, 2002, between CardioGenesis Corporation and
	EquiServe Trust Company, N.A., as Rights Agent (incorporated by
	reference to the Registrants Form 8-K filed
	January 18, 2001).                                                                                                     
|        | 4.3      |             |  | Form of Common Stock Purchase Warrant issued in
	connection with Facilities Lease for 26632 Towne Centre
	Dr., Suite 320, Foothill Ranch California (incorporated by
	reference to the Registrants Form 10-Q/A,
	Exhibit 10.1, filed August 16, 2001).                                                                                          
|        | 4.4      |             |  | Share Purchase Agreement dated April 11,
	2001 between the Company and the State of Wisconsin Investment
	Board (incorporated by reference to Exhibit 4.1 of the
	Registrants Form 8-K filed April 23, 2001).                                                                                                                                   
|        | 4.5      |             |  | Share Purchase Agreement dated December 21,
	2001 between the Company and the State of Wisconsin Investment
	Board (incorporated by reference to Exhibit 4.1 of the
	Registrants Form 8-K filed January 18, 2002).                                                                                                                              
|        | 10.1(2)  |             |  | Form of Director and Officer Indemnification
	Agreement.                                                                                                                                                                                                                                                                                         
|        | 10.2     |             |  | Stock Option Plan, as amended and restated.                                                                                                                                                                                                                                                                                                      
|        | 10.3     |             |  | Director Stock Option Plan, as amended and
	restated.                                                                                                                                                                                                                                                                                            
|        | 10.4(2)  |             |  | 1996 Employee Stock Purchase Plan of
	CardioGenesis Corporation.                                                                                                                                                                                                                                                                                 
|        | 10.5(2)  |             |  | Facilities Lease for 1049 Kiel Court, Sunnyvale,
	California.                                                                                                                                                                                                                                                                                    
|        | 10.6(2)  |             |  | Facilities Lease for 1139 Karlstad Drive,
	Sunnyvale, California.                                                                                                                                                                                                                                                                                
|        | 10.7     |             |  | Facilities Lease for 26632 Towne Centre Dr.,
	Suite 320, Foothill Ranch, California (incorporated herein
	by reference to the Registrants Form 10-Q/A,
	Exhibit 10.1, filed August 16, 2001).                                                                                                                                                   
|        | 10.8(2)  |             |  | 401(k) Plan.                                                                                                                                                                                                                                                                                                                                     
|        | 10.9(3)  |             |  | 1993 Equity Incentive Plan of the former
	CardioGenesis Corporation                                                                                                                                                                                                                                                                              
|        | 10.10(4) |             |  | 1996 Equity Incentive Plan of the former
	CardioGenesis Corporation                                                                                                                                                                                                                                                                              
|        | 10.11    |             |  | Employment agreement dated September 27,
	2001 between the Company and Michael J. Quinn, Chief
	Executive Officer.                                                                                                                                                                                                                               
|        | 10.12    |             |  | Employment Letter Agreement dated
	December 19, 2000 between the company and Darrell F.
	Eckstein, Vice President of Operations (incorporated by
	reference to the Registrants Form 10-K, filed
	April 17, 2001).                                                                                                                               
|        | 21.1     |             |  | List of Subsidiaries                                                                                                                                                                                                                                                                                                                             
|        | 23.1     |             |  | Consent of PricewaterhouseCoopers LLP                                                                                                                                                                                                                                                                                                            
|        | 24.1     |             |  | Power of Attorney (see signature page)                                                                                                                                                                                                                                                                                                           



---



|    |                                                                                                                                                                                             
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Incorporated herein by reference to
	Appendix 1 to the Companys Registration Statement on
	S-4 filed with the Securities and Exchange Commission on
	February 9, 1999 (File No. 333-72063).
|   
|(2) | Incorporated herein by reference from the
	Companys Registration Statement on Form S-1 (File
	No. 333-03770), as amended, filed on April 18, 1996.                                         

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##### Table of Contents





|    |                                                                                                                                                      
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------
|(3) | Incorporated herein by reference from the former
	CardioGenesis Corporations Form SB-2, (File
	No. 333-3752-LA), declared effective on May 21, 1996.
|   
|(4) | Incorporated herein by reference from the former
	CardioGenesis Corporations Form S-8, (File
	No. 333-35095, dated September 8, 1997).              

59