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

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

                                Writer's Email:
                            JMARCUS@SILLSCUMMIS.COM


                                 March 31, 1999
                              


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

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

Dear Sir or Madam:

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

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

                              Very truly yours,        


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

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

<PAGE>

                     U.S. SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                                   FORM 10-KSB
 (Mark one)
 _X_   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
       EXCHANGE ACT OF 1934
       For the fiscal year ended: December 31, 1998
                      
____   TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
       ACT OF 1934
       For the transition period from _________ TO _________
  
                         Commission file number 0-28260
  
                               EP MedSystems, Inc.
                 (Name of small business issuer in its charter)
                              
         New Jersey                                    22-3212190          
(State or other jurisdiction of             (I.R.S. Employer Identification No.)
 incorporation or organization)        
  
 100 Stierli Court, Mount Arlington, NJ              07856   
(Address of principal executive offices)           (Zip code)
                              
Issuer's telephone number:  (973) 398-2800
  
Securities  registered  under Section 12(b) of the Exchange Act: None 
Securities  registered under Section 12(g) of the Exchange Act: Common Stock, no
par value, $.001 stated value per share
  
Check  whether the issuer (1) filed all reports  required to be filed by Section
13 or 15(d) of the  Exchange  Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports),  and (2) has been
subject to such filing requirements for the past 90 days. 
                               __X__ Yes ____ No
  
Check if disclosure  of delinquent  filers in response to Item 405 of Regulation
S-B is not contained in this form, and no disclosure  will be contained,  to the
best of registrant's  knowledge,  in definitive proxy or information  statements
incorporated  by reference  in Part III of this Form 10-KSB or any  amendment to
this Form 10-KSB. [ ]
  
The  issuer's  revenues  for the  fiscal  year  ended  December  31,  1998  were
$7,460,324.
  
The  aggregate  market  value of the issuer's  outstanding  voting stock held by
non-affiliates  on March 19, 1999, based on the closing sale price of its common
stock on the Nasdaq National Market on such date, was approximately $28,300,000.
  
As of March 19, 1999,  there were  outstanding  9,872,417 shares of the issuer's
Common Stock, no par value, stated value $.001 per share.
  
Transitional Small Business Disclosure Format (check one): 
____Yes __X__ No
  

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<PAGE>

Forward Looking Statements
In addition to historical information, this Form 10-KSB contains forward looking
statements  relating to such matters as  anticipated  financial and  operational
performance, business prospects, technological developments, results of clinical
trials, new products,  research and development  activities and similar matters.
The Private Securities  Litigation Reform Act of 1995 provides a safe harbor for
forward-looking  statements.  EP MedSystems,  Inc. (the "Company")  notes that a
variety of factors could cause the Company's  actual  results and  experience to
differ materially from the anticipated  results or other expectations  expressed
in the Company's forward looking statements.  When used in this Form 10-KSB, the
words or phrases "believes,"  "anticipates,"  "expects," "intends," "will likely
result," "estimates," "projects" or similar expressions are intended to identify
such forward looking statements,  but are not the exclusive means of identifying
such statements.  Such forward-looking statements are only predictions,  and the
actual events or results may differ materially from the results discussed in the
forward-looking  statements.  Factors  that could  cause or  contribute  to such
differences  include,  but are not limited to, those matters discussed herein in
the sections  entitled  "Item 1 - Business,"  "Item 3 - Legal  Proceedings"  and
"Item  6  -   Management's   Discussion  and  Analysis  or  Plan  of  Operation"
particularly  the  subsection  of such Item 6 entitled  "Factors That May Impact
Future Operations."
  
The Company  cautions  readers to review the cautionary  statements set forth in
this report and in the Company's  other reports  filed with the  Securities  and
Exchange Commission and cautions that other factors may prove to be important in
affecting  the  Company's  business  and  results  of  operations.  Readers  are
cautioned  not to place undue  reliance on these  forward-  looking  statements,
which  speak  only as of the date of this  report.  The  Company  undertakes  no
obligation to publicly revise these forward-looking statements to reflect events
or circumstances that arise after the date of this report.
  
                                     PART I
Item 1. Description of Business
The Company was  incorporated  in New Jersey in January  1993 and  operates in a
single industry segment. The Company develops, manufactures, markets and sells a
line of  products  for  the  cardiac  electrophysiology  ("EP")  market  used to
diagnose,  monitor and treat irregular  heartbeats  known as arrhythmias.  Since
inception,  the Company has acquired technology,  has developed new products and
has  begun  marketing  various  electrophysiology  products,  including  the  EP
WorkMate[REGISTERED   TRADEMARK]   electrophysiology   workstation,   the   EP-3
Stimulator,   diagnostic  electrophysiology  catheters,  internal  cardioversion
catheters and related disposable supplies.
  
The Company has identified the diagnosis and treatment of atrial fibrillation as
a primary focus for its ongoing development efforts.  Atrial fibrillation is the
most  prevalent  type of  abnormal  heart  rhythm;  estimated  to  afflict  over
2,000,000  people in the  United  States  with an  estimated  160,000  new cases
developing  each  year.  Although  not  immediately  life  threatening,   atrial
fibrillation  has been linked to a diminished  lifestyle and to a  significantly
increased risk of stroke. In patients over the age of 65, atrial fibrillation is
reported  to  quadruple  the risk of stroke.  In this  regard,  the  Company has


                                       2
<PAGE>

developed a new product for internal  cardioversion of atrial fibrillation known
as the  ALERT[REGISTERED  TRADEMARK]  System,  which uses a  patented  electrode
catheter to deliver measured,  variable, low energy electrical impulses directly
to the inside of the heart in order to convert atrial  fibrillation  to a normal
heart rhythm.
  
The  ALERT[REGISTERED  TRADEMARK]  System is not approved for sale in the United
States,  but is currently  undergoing  clinical  trials.  At the  earliest,  the
Company does not anticipate completing the clinical trial for several months. In
addition,  the  Company  believes  that  approval  to sell the  ALERT[REGISTERED
TRADEMARK]  System  in the  United  States  may take up to one year or more,  if
approved  at  all.  The  Company  has  received  Class  III  Design  Examination
Certification  from its  European  notified  body to label the  ALERT[REGISTERED
TRADEMARK]  System  with a CE Mark,  an  international  symbol of  adherence  to
quality assurance  standards.  This designation  allowed the Company to initiate
sales of the ALERT[REGISTERED  TRADEMARK] System in the European Community.  The
ALERT[REGISTERED  TRADEMARK]  family of products is intended to include a number
of catheter products for the future, all oriented towards internal cardioversion
of the heart.
  
The Company has developed an intracardiac  ultrasound product line including the
ViewMate[TRADEMARK] ultrasound imaging console and U-View[TRADEMARK] deflectable
intracardiac  imaging  catheter.  These  products  are  designed  to  improve  a
physician's ability to visualize inside the chambers of the heart, including the
internal anatomy of the heart. The Company believes that the ViewMate[TRADEMARK]
and  U-View[TRADEMARK] may play an important role as new and effective treatment
options  are  developed  for  the  treatment  of  complex  cardiac  arrhythmias,
including  ventricular  tachyarrhythmia and atrial  fibrillation.  The Company's
ultrasound  products  are not  approved  for  sale  and  the  Company  does  not
anticipate   receiving   approval   to  sell  the   ViewMate[TRADEMARK]   or  U-
View[TRADEMARK] for at least several months, if approved at all.
  
The  Company's  principal  offices  are  located  at 100  Stierli  Court,  Mount
Arlington,  NJ 07856,  and its  telephone  number is  973-398-2800.  Unless  the
context requires  otherwise,  references to the "Company" include EP MedSystems,
Inc. and its wholly owned subsidiaries  ProCath  Corporation  ("ProCath") and EP
MedSystems UK Ltd. ("EP MedSystems UK").
  
Products 
The Company develops, manufactures,  markets and sells a broad based, integrated
line of electrophysiology  products used to monitor, analyze, diagnose and treat
cardiac  arrhythmias.  The Company's  products can be separated by function into
the following  categories  described  below. 

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

The  Company  believes  low  energy  internal  cardioversion  provides  numerous

                                       3
<PAGE>

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


The Company  believes that  internal  cardioversion  using the  ALERT[REGISTERED
TRADEMARK] System will provide the following key benefits:
  
     -    Fewer  traumas,  discomfort  and  risk to  patients  than  high-energy
          external  cardioversion.  
     -    Higher  success  rate  in  converting  patients  with  chronic  atrial
          fibrillation  to normal  heart rhythm than with  high-energy  external
          cardioversion (based on initial clinical experience). 
     -    Elimination of harmful side effects associated with drug therapies. 
     -    Can  be  used  on an  outpatient  basis;  general  anesthesia  is  not
          required.
     -    Lower   overall  cost  per   procedure   than   high-energy   external
          cardioversion.
     -    Greater applicability for converting atrial fibrillation  occurring in
          the days immediately following open-heart surgery.
     -    Combination of temporary pacing and blood pressure monitoring features
          with cardioversion in a single multi purpose catheter.
  
The  ALERT[REGISTERED  TRADEMARK]  System  is based on  technology  invented  by
Eckhard Alt, MD, a member of the Company's  Scientific  Advisory  Board.  Direct
employees of the Company  invented the catheter  manufacturing  technology.  The
Company has licensed the exclusive  worldwide right to use the  ALERT[REGISTERED
TRADEMARK]  technology in the  ALERT[REGISTERED  TRADEMARK] System from Dr. Alt.
Three  patents  have been  issued in the United  States on the  ALERT[REGISTERED
TRADEMARK]  System.  The Company and Dr. Alt have also filed  additional  patent
applications and continuations for the ALERT[REGISTERED  TRADEMARK] Catheter and
the   ALERT[REGISTERED   TRADEMARK]   Companion   in  the   United   States  and
internationally. See "-- Patents and Intellectual Property."

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

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

                                       4
<PAGE>

ALERT[REGISTERED  TRADEMARK] System PMA shell document with the FDA. The Company
believes that the provisions of the FDA  Modernization Act are intended to allow
companies to accelerate the review and approval  process for new medical devices
such as the  ALERT[REGISTERED  TRADEMARK] System. Under the Modernization Act, a
company may submit information and data in modules for review and approval prior
to completion of the clinical trials.  The Company expects to submit  additional
modules  and  expects  to  conclude   the  clinical   trial  during  1999.   See
"--Government Regulation."
  
The ALERT[REGISTERED TRADEMARK] System has received Class III Design Examination
Certification  for  labeling  with the CE Mark  and the  product  is being  sold
throughout  Europe.  European  tests are now  ongoing  for a new  version of the
ALERT[REGISTERED  TRADEMARK] Catheter that incorporates  thermal dilution to the
ALERT[REGISTERED  TRADEMARK] pulmonary artery catheter. This feature is expected
to broaden the ALERT[REGISTERED  TRADEMARK] applications to include the critical
care and heart surgery markets by incorporating  cardiac output measurement into
the catheter. See "--Government Regulation."
  
EP Laboratory Workstations and Stimulators (EP  WorkMate[REGISTERED  TRADEMARK],
EP-3   Stimulator)  The  Company's  EP   WorkMate[REGISTERED   TRADEMARK]  is  a
computerized  electrophysiology  workstation  that monitors  displays and stores
cardiac electrical activity and arrhythmia data. Electrophysiology  workstations
are  dedicated  data  management  systems  designed   specifically  for  use  in
electrophysiology  procedures to view and record procedural data facilitate data
analysis and generate customized reports. The EP WorkMate[REGISTERED  TRADEMARK]
offers, among other features,  up to 120 recorded channels of cardiac electrical
data,  real-time analysis including  graphical and quantitative  display of such
data,  superior  ease of use and a single  keyboard for all  operations.  The EP
WorkMate[REGISTERED   TRADEMARK]   consists  of  a  Pentium  PC  with   integral
proprietary  software,  a proprietary  signal-conditioning  unit,  dual 21-inch,
high-resolution  color monitors, an optical disk or tape drive for data storage,
a custom keyboard,  catheter and stimulator junction box and laser printer.  The
EP  WorkMate[REGISTERED  TRADEMARK] is typically  sold with an  integrated  EP-3
Stimulator. In addition, each EP WorkMate[REGISTERED  TRADEMARK] has an internal
modem  to  provide  a  direct  link  between  the  purchaser  and  the  Company,
facilitating field software support.  The EP  WorkMate[REGISTERED  TRADEMARK] is
differentiated from competing products by (i) its seamless  integration with the
EP-3 Stimulator,  (ii) its capacity to receive and display up to 120 channels of
cardiac  electrical  data  simultaneously,  (iii) its  ability  to  process  and
simultaneously display both real time and historical  electrophysiology activity
and (iv) its simple,  user friendly  software based on a menu driven,  point and
click interface.

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



                                       5
<PAGE>

Catheter Products 
The  Company  presently  markets  a full  line of  diagnostic  electrophysiology
catheters   for   stimulation   and  sensing  of   electrical   signals   during
electrophysiology  studies.  The Company's  diagnostic  catheters are similar to
others sold within the industry.  The Company  offers  numerous  electrode/curve
configurations of catheters.  Temporary pacing catheters incorporate both pacing
and sensing electrodes and are used to temporarily regulate pacing of the heart,
including during the period while a patient awaits permanent  pacemaker implant.
These  catheters are available in a number of sizes with different curve shapes.
The Company  offers a temporary  pacing  catheter with a balloon tip that allows
guidance of the  catheter  without X- ray  fluoroscopy.  The Company also offers
disposable introducer kits that are used to aid in the insertion of catheters or
pacemaker  leads into a  patient's  venous  system.  The kits  include a plastic
introducer,  dilator  guidewire,  needle and  syringe.  During  March 1999,  the
Company  received  substantial  equivalence  (SE) clearance from the FDA for its
flexible  catheter  electrodes.  This clearance allows the Company to market the
product in the United States.  This proprietary and patented technology known as
SilverFlex offers the Company the ability to manufacture and sell catheters with
numerous electrodes for sophisticated  mapping  procedures.  The flexible nature
and lack of weight of these electrodes  enable them to be placed on the catheter
shaft without the traditional  problems of unwanted  stiffness and poor handling
characteristics.  SilverFlex  appears  to be a  better  alternative  than  metal
electrode  bands  when  used  with  eight  or  more  electrodes  and/or  with  a
deflectable catheter. Also during March 1999, the Company submitted documents to
the FDA for 510(k)  approval for a deflectable  catheter  design to be used with
diagnostic EP catheters made with both SilverFlex and platinum  electrodes.  The
addition of a deflectable  catheter to the catheter product line will enable the
company to become more competitive in the diagnostic EP catheter market.
  
Ultrasound Products
The Company has developed an intracardiac  ultrasound product line including the
ViewMate[TRADEMARK] ultrasound imaging console and U-View[TRADEMARK] deflectable
intracardiac  imaging  catheter.  These  products  are  designed  to  improve  a
physician's ability to visualize inside the chambers of the heart, including the
internal anatomy of the heart. The Company believes that the ViewMate[TRADEMARK]
and  U-View[TRADEMARK] may play an important role as new and effective treatment
options  are  developed  for  the  treatment  of  complex  cardiac  arrhythmias,
including  ventricular  tachyarrhythmia and atrial  fibrillation.  The Company's
ultrasound  products  are not  approved  for  sale  and  the  Company  does  not
anticipate   receiving   approval   to  sell  the   ViewMate[TRADEMARK]   or  U-
View[TRADEMARK] for at least several months, if approved at all.
  
Patents and Intellectual Property
The Company's success and ability to compete depends in part upon its ability to
obtain patent protection for its existing products and those under  development.
The Company  has filed for patents on its  important  inventions,  has  acquired
patents and has entered into license  agreements to obtain rights under selected
patents  of  third  parties  as to  technology  it  considers  important  to its
business.  The Company intends to file additional patents in the future in order
to continue its efforts to establish,  preserve and enforce  protection  for its
proprietary   technology  and  other   intellectual   property.   The  Company's
intellectual  property  consists  of the  following:  

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<PAGE>

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

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

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

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

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

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

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

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

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



                                       7
<PAGE>

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

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

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


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

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

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



                                       8
<PAGE>

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

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

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

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

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

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



                                       9
<PAGE>

the United Kingdom,  to improve  distributor  relationships and to assist in the
introduction of the  ALERT[REGISTERED  TRADEMARK] System for sale in Europe. The
UK office is currently staffed with two Sales Managers,  International Marketing
Manager, clinical engineers and administrative employees. The Company expects to
expend   considerable   resources   and  effort  to  support  the  sale  of  the
ALERT[REGISTERED   TRADEMARK]  System  in  Europe.  Examples  of  the  types  of
expenditures are physician training and education,  promotional material, sample
products and increased  direct sales expenses,  among others.  During July 1997,
the Company  initiated  sales through a new Japanese  distributor  and has taken
steps to improve its distribution network throughout the Asian markets.
  
No assurance can be given that the Company or its  distributors can successfully
introduce the ALERT[REGISTERED TRADEMARK] System or the Company's other products
in Europe or elsewhere on terms  acceptable  to the Company,  or at all.  Future
foreign  sales  will be  subject  to  certain  risks,  including  exchange  rate
fluctuations,  local medical  reimbursement issues,  duties,  tariffs and taxes,
import restrictions and other regulations.
  
Manufacturing
Catheter Products

Substantially  all  of the  Company's  catheter  products  are  manufactured  at
ProCath's facility located in Berlin, New Jersey. Each catheter is assembled and
tested by the Company prior to sterilization.  The Berlin facilities and quality
assurance  procedures  are  subject  to  Good  Manufacturing  Practices  ("GMP")
regulations  promulgated by the FDA. Raw material vendors are required to submit
certificates  of compliance to the  Company's  specifications.  In January 1997,
Procath  received  ISO-9001 Quality System  Certification  of its  manufacturing
facility.  ProCath  has  received  Design  Examination  Certification  from  its
European notified body to apply the CE Mark to the  ALERT[REGISTERED  TRADEMARK]
product line and to its other catheter  products,  a necessity for the continued
sales of the Company's products in the European Community.  During 1998, ProCath
expanded  its  catheter  manufacturing  facilities  and has  hired  and  trained
additional personnel. ProCath has no experience in large-scale manufacturing and
there can be no assurance  that the Company will be successful in  manufacturing
products in  significant  volume.  The Company  believes that it has  sufficient
capacity  to  satisfy  its  catheter  manufacturing  needs for at least the next
twelve months.
  
Hardware and Software Products
The Company  assembles its computer systems (EP WorkMate and EP-3 Stimulator) at
its Mount  Arlington  facility.  The  ALERT[REGISTERED  TRADEMARK]  Companion is
assembled  at  ProCath.  The  Company's  engineers  generally  develop  software
products.  The Company relies on outside sources for the manufacture of critical
components of the ALERT[REGISTERED  TRADEMARK]  Companion,  EP WorkMate and EP-3
Stimulator.  All custom  components  are  manufactured  in  conformity  with the
Company's  specifications  and the  manufacturers'  facilities,  activities  and
quality assurance procedures are subject to GMP regulations and ISO 9001 audits.
Any  interruption  in the  supply  from  these  suppliers  would have a material
adverse effect on the Company's ability to deliver its products until acceptable
arrangements can be made with a qualified alternative source of supply which, as
a result,  could  have a  material  adverse  effect on the  Company's  business,
financial  condition and results of  operations.  The Company also  incorporates
several off the shelf  components  in its  systems.  Examples of these items are
computers, high-resolution monitors and



                                       10
<PAGE>

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

Government Regulation
United States

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

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

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

                                       11
<PAGE>

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

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

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

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

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


                                       12
<PAGE>

conditions  have been fulfilled to the  satisfaction of the FDA, the agency will
issue  a PMA,  authorizing  commercial  marketing  of  the  device  for  certain
indications.  If the FDA  evaluation  of the PMA  application  or  manufacturing
facilities is not favorable,  the FDA will deny approval of the PMA  application
or issue a "not approvable"  letter.  The FDA may also determine that additional
clinical trials are necessary,  in which case the PMA may be delayed for several
years  while  additional  clinical  trials are  conducted  and  submitted  in an
amendment to the PMA application.
  
Modifications  to a device that is the subject of an approved  PMA, its labeling
or  manufacturing  process may require approval by the FDA of PMA supplements or
new PMAs.  Supplements to a PMA often require the submission of the same type of
information required for an initial PMA, except that the supplement is generally
limited to that  information  needed to support  the  proposed  change  from the
product  covered by the  original  PMA.  Although  under the FDC Act, the FDA is
required to complete its review of a PMA or PMA supplement  within 180 days, the
agency may take a significantly longer period of time to complete its review.
  
The  Company   received   FDA  approval  to  begin   clinical   trials  for  the
ALERT[REGISTERED  TRADEMARK]  System under an IDE filing and has commenced human
clinical trials of the  ALERT[REGISTERED  TRADEMARK] System at eleven centers in
the  United  States.  The  Company  intends  to expand  the  trials  to  include
additional leading atrial fibrillation research centers to obtain data needed to
support its application. There can be no assurance that the clinical trials will
demonstrate  the safety and  effectiveness  of the  ALERT[REGISTERED  TRADEMARK]
System, or that a subsequently filed application will be accepted by the FDA for
filing or approved.

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

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


                                       13
<PAGE>

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

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

                                       14
<PAGE>
  
International
In order for the  Company to market its  products  in Europe and  certain  other
foreign jurisdictions, the Company must obtain required regulatory approvals and
clearances and otherwise comply with extensive  regulations regarding safety and
manufacturing   processes  and  quality.   These   regulations,   including  the
requirements  for  approvals or  clearance  to market and the time  required for
regulatory  review,  vary from country to country.  The time  required to obtain
approval by a foreign  country may be longer or shorter  than that  required for
FDA approval and the requirements may differ.  Many foreign countries  generally
permit  studies  involving  humans for  medical  devices  earlier in the product
development  cycle than is permitted by regulation in the U.S. Other  countries,
such as  Japan,  have  standards  similar  to those of the FDA.  There can be no
assurance that the Company will obtain regulatory approvals in such countries or
that it will  not be  required  to  incur  significant  costs  in  obtaining  or
maintaining its foreign regulatory approvals. Delays in the receipt of approvals
to market the Company's  products or failure to maintain these  approvals  could
have a material adverse impact on the Company's business, financial condition or
results of operations.
  
Foreign  countries  also  often have  extensive  regulations  regarding  safety,
manufacturing  processes and quality that differ from those in the United States
and must be met in order to continue sale of a product  within the country.  The
European  Economic  Community has  instituted the  requirement  that all medical
products sold into the European Union,  comply with the Medical Device Directive
(the  "MDD").  The MDD  requires  that all such  products be labeled with the CE
Mark. The Company has received Class III Design  Examination  Certification from
its  notified  body  to  label  its  products,  including  the  ALERT[REGISTERED
TRADEMARK]  System,  with the CE Mark. This  designation  allowed the Company to
initiate sales of the  ALERT[REGISTERED  TRADEMARK] System in countries that are
members of the European Union and the European Free Trade Association. There can
be no assurance that the Company will be successful in  maintaining  its CE Mark
certification.
  
In addition to the import requirements of foreign countries, a company must also
comply with U.S. laws  governing the export of FDA regulated  products.  Devices
with a 510(k)  clearance or a PMA generally may be exported  without further FDA
authorization, provided certain conditions are met. A Class III device without a
PMA may be  exported  to a  foreign  country  for  commercial  marketing  if the
exporting firm obtains an FDA export permit and the following  requirements  are
satisfied:  (i) the device meets the  specifications  of the foreign  purchaser;
(ii) the device is not in  conflict  with the laws of the country to which it is
intended for export; (iii) the device is labeled that it is intended for export;
(iv) the device is not sold or offered  for sale in domestic  commerce;  and (v)
the FDA  determines  that the  exportation  of the device is not contrary to the
public  health and has the  approval of the country to which it is intended  for
export.

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


                                       15
<PAGE>

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

Other

The Company is also subject to numerous  federal,  state and local laws relating
to  such  matters  as  safe   working   conditions,   manufacturing   practices,
environmental  protection,  fire hazard  control and  disposal of  hazardous  or
potentially hazardous substances.  There can be no assurance that it will not be
required to incur  significant costs to comply with such laws and regulations in
the future or that such laws and regulations will not have a materially  adverse
effect upon the Company's ability to do business.
  
Competition
The medical device market, particularly in the area of cardiac electrophysiology
products,  is highly competitive.  Many of the Company's competitors have access
to  significantly  greater  financial  and  other  resources  than the  Company.
Further, the medical device market is characterized by rapid product development
and technological change. The present or future products of the Company could be
rendered obsolete or uneconomic by technological  advances by one or more of the
Company's  present or future  competitors or by other  therapies.  The Company's
future  success  will depend upon its ability to remain  competitive  with other
developers of such medical devices and therapies.  The Company believes that its
existing  products  compete  primarily on the basis of features,  effectiveness,
quality, ease and convenience of use, customer service and cost effectiveness.

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

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

                                       16
<PAGE>

Third-Party Reimbursement
In the U.S.,  the Company's  products are marketed to medical  institutions  and
physicians  that  then bill  various  third  party  payors,  such as  government
programs,  principally  Medicare and Medicaid,  and private insurance plans, for
the  healthcare  services  provided to their  patients.  Third party  payers are
increasingly  challenging the prices charged for medical  products and services,
and  substantial   uncertainty  exists  as  to  third  party  reimbursement  for
investigational  and  newly  approved  products.  Government  agencies,  private
insurers and other payors generally reimburse hospitals for medical treatment at
a fixed rate per patient or based on the  procedures  performed.  The fixed rate
reimbursement  is  unrelated to the specific  devices  used in  treatment.  If a
procedure  is not covered,  payors may deny  reimbursement.  In  addition,  some
payors may deny  reimbursement  if they  determine  that the device  used in the
treatment was  unnecessary,  inappropriate or not  cost-effective,  or if it was
experimental  or was  used  for a  non-approved  indication,  even if it has FDA
approval.  Because  the amount of the  reimbursement  is fixed,  to the extent a
physician uses more expensive  devices,  the amount of potential profit relating
to the procedure is reduced.  Accordingly,  hospitals  must  determine  that the
clinical  benefits of more expensive  equipment justify the additional cost. The
U.S.  Health  Care  Financing  Administration  has entered  into an  interagency
agreement  with the FDA  pursuant to which the FDA will place all  devices  with
approved IDEs into one of two categories, "Category A" or "Category B." Category
A devices are innovative devices that are believed to be in Class III (the class
of medical  devices  subject to the most stringent FDA review) and are of a type
as to which initial questions of safety and effectiveness have not been resolved
and the FDA is unsure  whether the device type can be safe and  effective.  They
will not be eligible  for  Medicare  reimbursement.  Category B devices  include
Class III  devices  of a type as to which  underlying  questions  of safety  and
effectiveness  have been  resolved  or that is known to be capable of being safe
and effective because other devices of that type have been approved.  Category B
devices will be eligible for Medicare reimbursement if the devices are furnished
in accordance with the FDA approved protocols  governing clinical trials and all
other  Medicare  coverage   requirements  are  met.  The  Company  believes  the
ALERT[REGISTERED  TRADEMARK]  System may be a Class III device.  There can be no
assurance that the ALERT[REGISTERED TRADEMARK] System will be placed in Category
B and thus eligible for Medicare reimbursement during clinical trials. There can
be no assurance that reimbursement will be or remain available for the Company's
products or for the  ALERT[REGISTERED  TRADEMARK]  System if it is approved,  or
even if reimbursement is available, that payors' reimbursement policies will not
adversely  affect the  Company's  ability to sell its  products on a  profitable
basis.
  
Product Liability and Insurance
The manufacture and sale of the Company's  products involves the risk of product
liability  claims.  The Company's  products are highly  complex and some are, or
will be, used in relatively new medical procedures and in situations where there
is a potential risk of serious injury,  adverse side effects or death. Misuse or
reuse of  catheters  may  increase  the risk of product  liability  claims.  The
Company currently  maintains product liability insurance with coverage limits of
$5,000,000 per  occurrence  and  $5,000,000 in the aggregate per year;  however,
there can be no assurance that this coverage will be adequate. Such insurance is
expensive and may not be available in the future on acceptable terms, if at all.
A  successful  claim  against  or  settlement  by the  Company  in excess of its
insurance  coverage or the  Company's  inability  to maintain  insurance  in the


                                       17
<PAGE>

future could have a material adverse effect on the Company's  business,  results
of operations and financial condition.
 
Employees
As of March 19,  1999,  the Company had 75 full-time  employees,  of whom 30 are
dedicated to manufacturing and quality  assurance,  11 are engaged in management
and administration,  20 are engaged in sales and marketing and 14 are engaged in
research  and  development  and  technical  service.  The Company  believes  its
employee relations are satisfactory.

Item 2. Description of Property

The  Company  currently  leases  approximately  7,800  square feet of office and
manufacturing space located in Mount Arlington, New Jersey through October 2002.
The Mount Arlington  facility contains  administrative,  engineering,  sales and
marketing and assembly  operations and  warehousing for certain of the Company's
hardware  products.  ProCath owns  approximately  15,000 square feet of space in
Berlin,  New  Jersey.  The  Berlin  facility  contains  catheter   manufacturing
operations,  administration,  engineering and catheter  research and development
and  warehouse  space.  EP  MedSystems  UK leases 945 square  feet of office and
storage space in London, England through January 2000. The Company believes that
its  facilities  are sufficient to meet its expected needs for at least the next
twelve months.
  
Item 3. Legal Proceedings
EchoCath
During October 1997, the Company filed a lawsuit against  EchoCath in the United
States  District  Court for the  District  of New Jersey  alleging,  among other
things,  that  EchoCath  made  fraudulent  misrepresentations  and  omissions in
connection  with the prior  sale of  $1,400,000  of its  preferred  stock to the
Company.
  
EchoCath filed an answer to the complaint, denying the allegations and asserting
a counterclaim against the Company seeking its costs and expenses in the action.
EchoCath  also filed a motion to dismiss the  complaint.  In December  1997,  EP
MedSystems filed an amended complaint and EchoCath filed an answer thereto again
denying the allegations and asserting a counterclaim  seeking  reimbursement  of
its costs and  expenses in the action.  EchoCath  also filed a motion to dismiss
the amended  complaint.  During October 1998, the complaint was dismissed by the
District  Court.  The  Company is  considering  an appeal of the  decision.  The
Company believes that EchoCath's  counterclaim and request for  reimbursement of
its costs and  expenses  is without  merit.  As a result,  the  Company  has not
accrued  for such costs and  expenses at December  31,  1998.  In the opinion of
management, the ultimate resolution of the counterclaim will not have a material
adverse  impact of the Company's  financial  condition or results of operations.
The Company  cannot  determine  the outcome of the EchoCath  litigation  at this
time.
  
Item 4. Submission of Matters to a Vote of Security Holders

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

                                       18
<PAGE>
  
  
(1)  To authorize an amendment of the Company's Amended and Restated Certificate
     of  Incorporation  providing for  classification  of the Board of Directors
     into three classes of directors with staggered terms of office;

                                                                          Broker
                                   For       Against        Abstain    Non-votes

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

(2)  To elect four (4)  directors to the Board of Directors as follows:  (a) two
     directors to serve a three year term, one director to serve a two year term
     and one  director  to serve a one year  term,  and until  their  respective
     successors shall be duly elected and qualified;
  
     For the election of Directors      For       Withheld       Abstain
          David A. Jenkins            8,605,476     6,000           0
          David W. Mortara            8,605,476     6,000           0
          John E. Underwood           8,605,476     6,000           0
          Anthony J. Varrichio        8,603,476     8,000           0

(3)  To ratify the selection of  PricewaterhouseCoopers  LLP, independent public
     accountants,  as  auditors  for the  Company  for the  fiscal  year  ending
     December 31, 1998:
  
                                          For         Against      Abstain
     For the ratification of auditors   8,605,476        0          6,000
  
  
                                     PART II
                              
Item 5. Market for Common Equity and Related Stockholder Matters
  
The Company's  Common Stock has been traded on the Nasdaq  National Market under
the trading  symbol  "EPMD"  since the  Company  completed  its  initial  public
offering  of Common  Stock on June 21,  1996.  Prior to that date,  there was no
public market for the Company's Common Stock.
  
The  following  table sets forth the high and low  closing  sale  prices for the
Company's  Common Stock since its initial  public  offering based on transaction
data as reported by the Nasdaq National Market.
  

                                       19
<PAGE>
  
     For the year ended
     December 31, 1998             High                Low
     ----------------------        ----                ---
     First quarter                 $2.25               $1.75
     Second quarter                $3.38               $1.31
     Third quarter                 $4.13               $2.25
     Fourth quarter                $3.88               $3.19
  
  
     For the year ended
     December 31, 1997             High                Low
     -----------------------       ----                ---
     First quarter                 $5.00               $3.00
     Second quarter                $4.50               $2.75
     Third quarter                 $3.50               $2.63
     Fourth quarter                $2.88               $0.94
  
  
As of March 19, 1999, there were  approximately 73 registered  holders of record
of the Company's  Common Stock.  This number  excludes  individual  stockholders
holding stock under nominee  security  position  listings.  Because many of such
shares are held by brokers and other institutions on behalf of stockholders, the
Company is unable to estimate the total number of  stockholders  represented  by
these record holders, but it believes that the amount is in excess of 400.

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

Recent Sales of Unregistered Securities

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

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

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


                                       20
<PAGE>

FDA market  clearance and approval for sale of the  ALERT[REGISTERED  TRADEMARK]
System; the statements in the third paragraph of "Overview" relating to approval
of the  Company's  ultrasound  products  and  their  role in the  diagnosis  and
treatment of cardiac  arrhythmias;  the  statements  in the fourth  paragraph of
"Overview" related to the Company's  anticipated results of operations,  capital
requirements,  development  efforts of new products and the filing of additional
patents;  the  statements  in the  fifth  paragraph  of  "Overview"  related  to
milestones for 1999 and beyond; the forward looking statements  contained in the
second,  third,  fifth,  sixth,  seventh,  eighth and tenth paragraphs under the
discussion of the "Results of Operations"  for the "Year Ended December 31, 1998
compared to the Year Ended December 31, 1997"; the forward looking statements in
the  second,  fourth,  sixth  and  last  paragraph  of  "Liquidity  and  Capital
Resources;" and the section titled "Year 2000 Issues."
  
The Company  cautions  investors and others to review the cautionary  statements
set forth in this report on Form 10-KSB and in the Company's other reports filed
with the Securities and Exchange  Commission and cautions that other factors may
prove to be  important  in  affecting  the  Company's  business  and  results of
operations.  Readers  are  cautioned  not  to  place  undue  reliance  on  these
forward-looking statements,  which speak only as of the date of this report. The
Company  undertakes  no  obligation  to  publicly  release  the  results  of any
revisions to these forward looking statements that may be made to reflect events
or circumstances  after the date of this report on Form 10-KSB or to reflect the
occurrence of anticipated events.
  
OVERVIEW

The Company was formed in January  1993 and  operates in a single  segment.  The
Company  develops  manufactures,  markets and sells a line of  products  for the
cardiac  electrophysiology market used to diagnose,  monitor and treat irregular
heartbeats  known as  arrhythmias.  Since  inception,  the Company has  acquired
technology  and  marketing  rights,  has  developed  new  products and has begun
marketing  various  electrophysiology   products,   including  the  EP  WorkMate
electrophysiology workstation, the EP-3 Stimulator, diagnostic electrophysiology
catheters,  internal cardioversion catheters and related disposable supplies. To
date, these products have generated nearly all of the Company's sales.
  
The Company has  developed a new product for  internal  cardioversion  of atrial
fibrillation  known as the  ALERT[REGISTERED  TRADEMARK]  System,  which  uses a
proprietary  electrode  catheter  to  deliver  measured,  variable,  low  energy
electrical  impulses  directly  to the  inside of the heart in order to  convert
atrial  fibrillation to a normal heart rhythm. The  ALERT[REGISTERED  TRADEMARK]
System  is  not  approved  for  sale  in the  United  States,  but is  currently
undergoing  clinical  trials.  At the earliest,  the Company does not anticipate
completing the clinical trial for at least several months.  Approval to sell the
ALERT[REGISTERED  TRADEMARK] System in the United States may take up to one year
or more, if approved at all. The Company has received approval from its notified
body to label  the  ALERT[REGISTERED  TRADEMARK]  System  with a CE  Mark.  This
designation  allowed  the  Company  to  initiate  sales of the  ALERT[REGISTERED
TRADEMARK] System in the European Community.
  
During  July  1998,  the  Company  filed for  510(k)  approval  with the FDA for
marketing clearance for its ViewMate[TRADEMARK] ultrasound imaging console and


                                       21
<PAGE>

U-View[TRADEMARK]  deflectable intracardiac imaging catheter. These products are
designed to improve a  physician's  ability to visualize  inside the chambers of
the heart,  including the internal  anatomy of the heart.  The Company  believes
that the ViewMate[TRADEMARK] and U-View[TRADEMARK] may play an important role as
new and effective  treatment  options are developed for the treatment of complex
cardiac   arrhythmias,   including   ventricular   tachyarrhythmia   and  atrial
fibrillation.  The Company's  ultrasound  products are not approved for sale and
the   Company   does   not   anticipate   receiving   approval   to   sell   the
ViewMate[TRADEMARK]  or  U-View[TRADEMARK]  for  at  least  several  months,  if
approved at all.
  
The Company expects to continue to incur operating  losses in the near future as
it will  continue to expend  substantial  funds for  research  and  development,
clinical  trials in support of  regulatory  approvals,  increased  manufacturing
activity and expansion of sales and marketing activities.  The amount and timing
of future losses will be dependent upon, among other things,  increased sales of
the Company's  existing  products,  the results of clinical  trials,  regulatory
approval and market  acceptance of the  ALERT[REGISTERED  TRADEMARK]  System and
ultrasound  products and  developmental,  regulatory  and market  success of new
products  under  development  as well as the  Company's  ability  to  establish,
preserve and enforce intellectual  property rights to its products. To date, the
Company's  products  have  generated  limited  sales  and  the  Company  has  an
accumulated deficit of approximately $14,400,000 at December 31, 1998.
  
The Company has set a number of goals for 1999 and beyond,  including  continued
expansion of its sales and marketing efforts aimed at achieving  increased sales
of existing products,  completion of the  ALERT[REGISTERED  TRADEMARK]  clinical
trial, increased market acceptance of the ALERT[REGISTERED  TRADEMARK] System in
Europe,  introduction of the ultrasound  product line,  increased  manufacturing
efficiency and lower production costs,  regulatory  approval and introduction of
several new catheter  products,  improvements  to existing  products and ongoing
research and  development  activities.  The Company  believes that attainment of
these goals is important to achieving the Company's long term objectives.
  
During 1998, the Company achieved a number of significant milestones, including:
  
     -    Achievement  of an 86%  increase in sales,  largely  due to  continued
          market  acceptance  of the  Company's  computerized  electrophysiology
          products;
       
     -    Receiving  ISO 9001  Certification  and approval to label its products
          with the CE Mark,  permitting the introduction of the ALERT[REGISTERED
          TRADEMARK] System in Europe.
       
     -    Expanding its clean room and manufacturing  operations,  including the
          hiring and training of  additional  personnel in order to increase its
          manufacturing   capacity   to   support   the   introduction   of  the
          ALERT[REGISTERED TRADEMARK] product line.
       
     -    Commencing clinical trials at eleven leading research hospitals in the
          United  States  for  the   ALERT[REGISTERED   TRADEMARK]   System  and
          concluding the clinical trials during 1999.
       
     -    Sales growth in Europe through  introduction  of the  ALERT[REGISTERED
          TRADEMARK]  System and  partnership  with  several  new  international
          distributors.
       


                                       22
<PAGE>

     -    The  Company  continued  development  efforts  for  a  number  of  new
          products,  including  its  ultrasound  product  line,  a number of new
          catheter  products and  improvements to existing  products,  including
          upgrades  to the EP  WorkMate . The  Company  now owns or  licenses 15
          issued patents, 2 allowed, and has 10 patent applications on file. The
          Company is in the process of preparing  patent  applications for 7 new
          products or improvements to existing products.
  
Results of Operations 
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
Revenue  increased  $3,447,000 (or 86%) to $7,460,000 in the year ended December
31, 1998 as compared to 1997.  The increase in sales in 1998 resulted  primarily
from  increased  sales of the EP  WorkMate . The  Company  believes  that the EP
WorkMate is the most technologically  advanced and easy to use electrophysiology
workstation on the market.  The Company also realized increased sales of certain
of its catheter  products during the period.  During 1997, the Company  recorded
revenue  from a research  support  grant that is not likely to be  recurring  in
future periods.
  
The level of sales for fiscal 1999 will  continue to depend  materially on sales
of the EP WorkMate and  diagnostic  catheters  and the ability of the  Company's
direct  sales force and network of  international  independent  distributors  to
effectively   market   and   sell   the   Company's   existing   products.   The
ALERT[REGISTERED  TRADEMARK] System is currently  undergoing clinical trials and
is not approved for sale in the United States. The  ALERT[REGISTERED  TRADEMARK]
System has been  introduced  for sale in Europe.  However,  the  Company  cannot
accurately determine the sales level of the  ALERT[REGISTERED  TRADEMARK] System
for 1999 at this time nor when it will be  available in the United  States.  The
Company expects the  ALERT[REGISTERED  TRADEMARK] System to contribute a greater
proportion of sales in 1999 and beyond.
  
Cost of  products  sold  increased  $1,536,000  (or  70%) to  $3,721,000  due to
increased  sales in the year ended December 31, 1998 as compared to 1997.  Gross
profit on sales for the year ended December 31, 1998 was  $3,739,000(or 50% as a
percentage  of sales),  as compared to  $1,464,000  (or 40% as a  percentage  of
sales) for 1997.  The Company  realized an increase in gross  profit on sales of
existing  products  during  1998  primarily  due to  increased  sales  of the EP
WorkMate , which  currently  yields a higher  gross  margin than  certain of the
Company's other products.  The Company hopes to improve its overall gross profit
percentage as sales of the ALERT[REGISTERED TRADEMARK] System and other catheter
products increase, which may offset the fixed costs, associated with maintaining
a catheter manufacturing operation.
  
Sales and  marketing  expenses  increased  $864,000 (or 29%) to  $3,800,000  and
decreased  as a  percentage  of total  sales  from 73% to 51% in the year  ended
December 31, 1998 as compared to 1997. The dollar  increase  during 1998 was due
to  continued   expansion  of  the  domestic   sales  force  and   international
distribution  network.  The  Company's  domestic  direct  sales force  currently
includes ten domestic  sales and  marketing  professionals  as well as a team of
domestic field clinical  engineers and  administrative  support  personnel.  The
Company has  expended  substantial  funds in an effort to improve its network of
international  independent  distributors  and has added  distributors in several
territories not previously covered.  The international  distribution  network is


                                       23
<PAGE>

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

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

While sales and marketing expenses for fiscal 1999 are expected to increase,  it
is  anticipated  that these  expenses may continue to decline as a percentage of
sales in the event that incremental  sales are generated.  It is likely that the
Company will incur  additional  losses as a result of the increased  fixed costs
associated  with its sales efforts until  incremental  sales are generated.  The
Company cannot determine when or if that level of sales will be achieved.
  
General and administrative expenses decreased $166,000 (or 9%) to $1,656,000 and
decreased  as a  percentage  of total  sales  from 45% to 22% in the year  ended
December 31, 1998 as compared to 1997.  The decrease  during 1998 was  primarily
due to an increased focus on cost improvements and increased  efficiencies.  The
Company  expects  general  and  administrative  expenses  to  increase in future
periods due to anticipated  future growth. It is anticipated that these expenses
may  continue  to  decline as a  percentage  of sales as  incremental  sales are
generated.  The Company cannot determine when or if such incremental  sales will
be achieved.

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

The  results of  operations  for the year ended  December  31,  1998  included a
$1,400,000  write-  down  of the  Company's  investment  in  280,000  shares  of
EchoCath, Inc. preferred stock.
  
Interest expense was $3,410 during the year ended December 31, 1998. In March of
1999, the Company finalized a $2,000,000 revolving line of credit and a $500,000
term loan with a bank.

                                       24
<PAGE>


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

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

The net loss for the year ended  December 31, 1998 was $4,511,000 as compared to
a net loss of $4,864,000  during the  comparable  period in 1997.  The basic and
diluted loss per share for the year ended  December 31, 1998 was $0.49 per share
as compared to a basic and diluted loss per share of $0.64 in 1997.
  
Liquidity and Capital Resources
Since inception, the Company's expenses have exceeded its sales, resulting in an
accumulated  deficit of approximately  $14,400,000 at December 31, 1998. On June
21, 1996, the Company  completed its initial public offering of 2,500,000 shares
of common  stock at a  purchase  price of $5.50 per  share,  for  aggregate  net
proceeds of approximately  $11,786,000  after deducting  offering  expenses.  On
April 9, 1998, the Company sold and issued  2,250,000 shares of its common stock
to six institutional investors at a price of $2.25 per share. The gross proceeds
of  the  offering  were  $5,062,500,   before  deducting  offering  expenses  of
approximately  $401,000.  The Company  intends to use the net proceeds  from the
sale of the shares for working capital purposes.
  
The Company  entered  into two  financing  arrangements  in March of 1999 with a
bank: a $2,000,000 revolving line of credit and a $500,000 term loan. Management
believes  that its current  liquidity  position  will be  sufficient to meet the
needs of the Company  until at least  December  31,  1999.  In the event that it
cannot generate  additional capital funds during 1999, the Company believes that
it can reduce non-core related expenditures,  which will allow it to continue in
its operations.
  
Net cash used in operating  activities  for the year ended December 31, 1998 was
$4,207,000 as compared to $5,266,000  for the year ended  December 31, 1997. The
net use of cash in  operations  during 1998 was due  primarily to the  Company's
$4,511,000 net loss from  operations.  Accounts  receivable,  net,  increased by
$1,085,000 and inventories  increased by $288,000 in 1998 due to increased sales
activity.  Accounts  payable  increased by $102,000 to $773,000 due to increased
operations.  Accrued expenses payable decreased by $262,000 to $589,000. Amounts
payable to related  parties  increased  by $61,000 to $189,000  due to increased
product  purchases near year-end.  Payments to related parties are made on terms
similar to those of other suppliers.

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


                                       25
<PAGE>

Company   purchased  two  new   exhibition   booths  for  use  at  domestic  and
international industry trade shows.
  
During February 1999, the Company purchased an additional 7,500 square feet of 
manufacturing  and  warehouse space at  ProCath  for a purchase price of
approximately $400,000. Costs to prepare the space for intended use are
estimated to be $100,000. This purchase was financed via a $500,000 term loan
executedsubsequent to Decemaber 31,1998. As of the date of this Report on Form
10-KSB, the Company does not have any other material commitments for capital
expenditures. However, the Company expects to purchase capital equipment and to
expand its manufacturing and assembly capabilities as it continues to grow. The
Company leases office and manufacturing space and certain office equipment under
operating leases. The aggregate commitment for minimum rentals under these
leases is approximately $107,000 for 1999.
  
During  February  1997,  the Company  licensed the rights to several  ultrasound
technologies  from  EchoCath,  for use in the  field of  electrophysiology.  The
agreement with EchoCath calls for the Company to make payments  totaling up to a
maximum of $700,000, in four installments, as certain development milestones and
initial sales are achieved on the EchoMark and EchoEye technologies.  One of the
milestones  calls  for a  $400,000  payment  payable  upon the  completion  of a
development  program for the  EchoEye.  This  milestone  was only payable in the
event that the  development  was completed by September 30, 1998. To the best of
the  Company's  knowledge,  the  milestone  was not  achieved  and no  milestone
payments are accrued or payable to EchoCath as of December 31, 1998.
  
The EchoCath license also provides for a royalty on net sales, including minimum
royalties of $120,000  beginning in 1999 and  increasing to $400,000 in 2005 and
thereafter for the life of the applicable patents and continuations. The Company
may elect not to make minimum royalty  payments and, in such case,  EchoCath has
the option to render the license non- exclusive or cancel the license and return
any milestone  payments to the Company.  The Company may also elect to apply any
accrued and unpaid  dividends  earned on its  investment  in EchoCath  preferred
stock against minimum royalties.
  
In conjunction with the license agreement,  the Company purchased 280,000 shares
of newly issued  EchoCath  Series B Cumulative  Convertible  Preferred Stock for
$1,400,000 in cash.  The Company's  $1,400,000  investment  was intended to fund
continuing development of EchoCath products,  including the EchoMark and EchoEye
technology.  Upon successful completion of its development projects, the Company
may introduce  ultrasound  technology into its  electrophysiology  catheter line
although  there can be no assurance  that the Company will be successful in this
effort. (See "Legal Proceedings").
  
On June 1, 1998, four  non-employee  holders of non-plan stock options exercised
their  options to purchase  22,500 shares common stock of the Company at a price
of $1.33 per share.
  
The Company  expects its  operating  losses to continue in the near future as it
will continue to expend substantial funds for research and development, clinical
trials in support of regulatory approvals,  increased manufacturing capacity and


                                       26
<PAGE>

expansion  of sales and  marketing  activities.  The amount and timing of future
losses will be  dependent  upon,  among  other  things,  increased  sales of the
Company's  existing  products,  clinical  approval and market  acceptance of the
ALERT[REGISTERED  TRADEMARK]  System and  developmental,  regulatory  and market
success of new products under development. There can be no assurance that any of
the Company's  development projects will be successful or that if development is
successful,  that the products will  generate any sales.  Based upon its current
plans and projections,  the Company believes that its existing capital resources
will be sufficient to meet its  anticipated  capital needs for at least the next
twelve months.
  
Year 2000 Readiness
The Year 2000 issue is the result of computer programs having been written using
two digits,  rather than four, to define the applicable year.  Software programs
and hardware that have date- sensitive  software or embedded chips may recognize
a date using "00" as the year 1900, rather than the year 2000. This could result
in a major system  failure or  miscalculations  causing  disruptions  to various
activities and operations.
  
The Year 2000 issue could affect  computers,  software and other equipment used,
operated or maintained by the Company. The Company has substantially completed a
review of its internal computer programs and systems to ensure that the programs
and systems will be Year 2000 compliant.  The Company  presently  believes that,
based on current  plans and efforts to date,  its internal  programs and systems
will be Year 2000 compliant in a timely manner.
  
The Year 2000 issue can also affect  products sold by the Company,  particularly
the EP  WorkMate  and ALERT  Companion.  The  Company  has  performed a detailed
assessment of its products and, as a result of this review, believes that it has
substantially  identified and resolved all potential Year 2000 issues with these
products.  However,  the  Company  also  believes  that  it is not  possible  to
determine  with  complete  certainty  that all Year 2000  issues  affecting  the
Company's  products have been  identified or corrected due to the  complexity of
these products and the fact that these products  interact with other third party
products  or  operate  on  computer  systems  which are not under the  Company's
control.
  
The Company  believes  that its greatest  Year 2000 risk for  disruption  to its
business is the potential  noncompliance of third parties.  In this regard,  the
Company has initiated communications with its vendors, major customers,  service
providers  and banks in order to  determine  the  extent to which the  Company's
business is vulnerable to the third parties'  failure to make their systems Year
2000 compliant. Since the Company has no control over the actions of these third
parties,  there can be no assurance that these third parties will resolve any or
all Year 2000  issues.  Any failure of these third  parties to resolve Year 2000
issues in a timely manner could have a material  adverse effect on the Company's
financial condition and results of operations.
  
The  Company  currently  does not have a  contingency  plan in the event  that a
particular system, including the systems of material third parties, are not Year
2000  compliant.  Such a plan will be  developed  if it  becomes  clear that the
Company is not going to achieve its scheduled compliance objectives. Although no


                                       27
<PAGE>

assurance  can be given that there will be no  interruption  of  operations as a
result of the Year 2000 issue,  the Company  believes  (an  assuming  that third
parties with whom the Company has material business  relationships  successfully
remediate their own Year 2000 issues) that it has reasonably assessed all of its
systems in order to ensure that the Company will not suffer any material adverse
effect from the Year 2000 issue.  Though the Company has used and will  continue
to use  internal  resources  to resolve  its Year 2000  issues,  the Company may
retain third party consultants to assist in this regard.
  
Costs  specifically  associated  with  Year  2000  compliance  are  expensed  as
incurred.  To date, the Company has not spent a material amount on this project.
The Company does not expect the total costs relating to Year 2000  compliance to
have a material  effect on the  Company's  results of  operations  or  financial
condition.  However,  the total costs that the Company will incur in  connection
with the Year 2000 issue will be influenced  by (i) its ability to  successfully
identify Year 2000 issues, (ii) the nature and amount of programming required to
remediate the issues,  (iii) the related labor and/or  consulting costs for such
remediation  and (iv) the  ability of third  parties  with whom the  Company has
business  relationships  to  successfully  address their own Year 2000 concerns.
These and other  unforseen  factors could have a material  adverse effect on the
Company's results of operations or financial condition.
  
The discussion of the Company's efforts, and management's expectations, relating
to Year 2000 compliance are forward looking statements and, as such, are subject
to uncertainties.  The Company's ability to achieve Year 2000 compliance and the
level of incremental costs associated  therewith could be adversely  impacted by
unanticipated Year 2000 issues.  For example,  if the Company is unsuccessful in
identifying or  remediating  all Year 2000 issues in its  operations,  or if the
Company is affected by the inability of suppliers or major customers to continue
operations  due to Year 2000 issues,  the  Company's  results of  operations  or
financial condition could be materially impacted.
  
Recent Issued Accounting Standards
Statement of Financial  Accounting Standards No. 133, "Accounting for Derivative
Instruments  and Hedging  Activities"  (FAS No. 133) will be  effective  for the
Company  in the first  quarter of fiscal  2000 and  establishes  accounting  and
reporting standards for derivative  instruments and for hedging  activities.  It
requires  companies to recognize all derivatives as either assets or liabilities
in the  statement of financial  position and measure those  instruments  at fair
value.  It is expected that the adoption of FAS No. 133 will not have a material
effect on the Company's financial statements.
            
Impact of Introduction of Single European Currency (Euro)
On January 1, 1999,  certain member countries of the European Union  established
fixed  conversion  rates  between  their  existing  currencies  and the European
Union's common currency  (Euro).  The transition  period for the introduction of
the Euro is  between  January  1, 1999 and  January  1,  2002.  The  Company  is
presently  identifying and ensuring that all Euro conversion  compliance  issues
are  addressed.  Although the Company  cannot  predict the overall impact of the
Euro  conversion  at this  time,  the  Company  does  not  expect  that the Euro
conversion will have a material  adverse effect on its  consolidated  results of
operations.
  


                                       28
<PAGE>

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

History of Losses; Future of Profitability Uncertain
The Company commenced operations in 1993 and has incurred substantial  operating
losses in each year since  inception.  As of December  31, 1998,  the  Company's
accumulated  deficit  was  approximately  $14.4  million.  While the  Company is
generating  product sales,  the Company  anticipates that losses could continue.
The  Company's  ability to  generate  significant  sales or  achieve  profitable
operations is dependent on, in large part, its ability to raise sufficient funds
to meet its  future  cash  requirements;  the  results  of the  ALERT[REGISTERED
TRADEMARK]  clinical trials;  market acceptance of existing products,  including
the EP WorkMate and the  ALERT[REGISTERED  TRADEMARK] System; the ability of the
Company to increase its catheter manufacturing capabilities, improve efficiency,
control manufacturing costs and ensure the timely delivery of its products;  the
successful  development  of new  products;  the  ability  to  obtain  regulatory
approvals and  reimbursement  of new products on a timely basis;  the ability to
compete  successfully in the future with companies which have greater  resources
than  the  Company;   and  the  ability  to  establish,   preserve  and  enforce
intellectual  property  rights.  There can be no assurance that the Company will
generate significant sales or attain profitability. See "Management's Discussion
and Analysis or Plan of Operation," "Business - The ALERT[REGISTERED  TRADEMARK]
System," "- Research  and  Development,"  "-  Manufacturing"  and "-  Government
Regulation."
  
Need to Raise  Additional  Capital
Based upon its current  plans and  projections,  the Company  believes  that its
existing  capital  resources will be sufficient to meet its anticipated  capital
needs for the next twelve months. The Company recently entered into a $2,000,000
revolving  credit  facility and $500,000 term loan to help achieve its long-term
objectives. The inability of the Company to raise capital when needed could have
a material  adverse effect on the Company's  business,  financial  condition and
results of  operations.  See  "Management's  Discussion  and Analysis or Plan of
Operation."

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


                                       29
<PAGE>

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

ALERT[REGISTERED TRADEMARK]  Clinical Trials 
The  Company  has  commenced  human  clinical  trials  of  the  ALERT[REGISTERED
TRADEMARK]  System at eleven  hospitals  in the United  States,  including  Duke
University  Medical  Center;  the Medical Center of the University of Alabama at
Birmingham;  Indiana University;  and University of California at San Francisco.
Clinical data is needed in order to  demonstrate  the safety and efficacy of the
ALERT[REGISTERED  TRADEMARK] System under applicable FDA regulatory  guidelines.
The Company  anticipates that the  ALERT[REGISTERED  TRADEMARK]  System clinical
trials will be completed  during  calendar year 1999.  At the  conclusion of the
clinical trials, the Company plans to file its final PMA module for FDA approval
to market  the  ALERT[REGISTERED  TRADEMARK]  System in the United  States.  The
Company  submitted  the second of five modules in its PMA  submission  agreement
with FDA. Receipt of FDA approval to sell the ALERT[REGISTERED TRADEMARK] System
in the United States may take several years, if it is received at all.
  
There can be no assurance that the ALERT[REGISTERED TRADEMARK] System will prove
to be safe and effective in clinical  trials under  applicable  United States or
international  regulatory  guidelines or that  additional  modifications  to the
Company's products will not be necessary.  In addition,  the clinical trials may
identify  significant  technical  or other  obstacles  to be  overcome  prior to
obtaining   necessary   regulatory   or   reimbursement    approvals.   If   the
ALERT[REGISTERED  TRADEMARK]  System does not prove to be safe and  effective in
clinical  trials or if the  Company is  otherwise  unable to  commercialize  the
product successfully, the Company's business, financial condition and results of
operations could be materially adversely affected.
  
Dependence on EP WorkMate  
In late  1995,  the  Company  began  commercial  sales  of the EP  WorkMate  , a


                                       30
<PAGE>

computerized monitoring and analysis electrophysiology workstation. Although the
Company  sells a broad range of  products,  it believes  its ability to increase
sales over the next several years will depend significantly on acceptance of the
EP WorkMate by electrophysiologists. The EP WorkMate accounted for a significant
percentage of the Company's  sales from product sales in the year ended December
31, 1998 and is expected to account for a significant portion of 1999 sales. The
EP WorkMate has a list price of  approximately  $129,000 with an integrated EP-3
Stimulator  and,  as a  result,  each sale of an EP  WorkMate  can  represent  a
relatively large percentage of the Company's net sales in a particular  quarter.
There can be no assurance  that the EP WorkMate  will continue to be accepted by
the electrophysiology market or that sales will be substantial.  Each sale of an
EP WorkMate may take a relatively  long time to complete due in part to the high
selling  price  relative  to  other  types  of  equipment  and to the  budgetary
processes  of  hospitals  to which the  Company  markets  the EP  WorkMate . See
"Management's  Discussion  and  Analysis  or Plan  of  Operation,"  "Business  -
Products" and "- Competition."
  
Government Regulation
The  Company's  business,  financial  condition  and results of  operations  are
subject  to  various   risks  and   uncertainties   arising  from  domestic  and
international  laws  and  regulations,   including,  without  limitation,  risks
relating to its ability to sell the  ALERT[REGISTERED  TRADEMARK]  System in the
United States,  compliance  with QSR/GMP  regulations  and  compliance  with the
requirements  of the CE Mark and other foreign  regulations in order to continue
product  sales on a country  by country  basis.  For a  discussion  of risks and
uncertainties see "Business - Government Regulation."
  
Necessity of Product Development and Improvement
The  markets for medical  devices in general and  electrophysiology  products in
particular  are  characterized  by rapid  technological  change.  The  Company's
ability  to  compete  in these  markets  will  depend in part on its  ability to
develop new  products,  improvements  to existing  products  and  processes  for
cost-effective  manufacturing  of such products on a timely  basis.  Many of the
Company's  development  efforts  will  be  based  on  new  technologies  or  new
applications of existing technologies. As a result, research and development for
any  potential  new  product or product  refinement  may take longer and require
greater  expenditures than expected,  and may ultimately prove unsuccessful.  In
the event  that the  Company  is  successful  in its  development  efforts,  the
commercial  acceptance of any new product will depend on the medical community's
acceptance of such product.  There can be no assurance  that the Company will be
able to  develop  new  products  or to  refine  existing  products  that will be
commercially  accepted.  The  Company's  inability to  successfully  develop new
products,  to introduce  improvements to existing products,  to prove the safety
and efficacy of new products or to gain market acceptance of such products could
have a material adverse impact on the business,  financial  condition or results
of operations of the Company.  See  "Business  The  ALERT[REGISTERED  TRADEMARK]
System,"  "--Research  and  Development,"   "Government   Regulation,"  and  "--
Manufacturing."

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


                                       31
<PAGE>

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

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

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

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

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

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

                                       32
<PAGE>

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

Royalty Payment Obligations
The Company has entered into several  license  agreements  which provide for the
Company  to pay  royalties  based  upon net  sales of  products  covered  by the
licensed technology,  including, in some cases, minimum annual royalties. In the
event that the  Company  does not pay such  royalties,  the Company may lose its
rights  under the  license  agreements.  The loss of  certain  of the  Company's
technology  licenses  could  have a  material  adverse  impact on the  business,
financial condition and results of operations of the Company.
  
Significant Competition
The  medical  device  market,  particularly  in the  area  of  electrophysiology
products, is highly competitive.  The Company competes with many companies, many
of which have access to  significantly  greater  financial,  marketing and other
resources than the Company.  Further, the medical device market is characterized
by rapid product  development and  technological  change.  The present or future
products  of  the  Company   could  be  rendered   obsolete  or   uneconomic  by
technological  advances  by one or  more  of the  Company's  present  or  future
competitors  or  by  other  therapies.   In  particular,   the  ALERT[REGISTERED
TRADEMARK]  System  is a new  technology  that  must  compete  with  established
treatments  for atrial  fibrillation  as well as with new  treatments  currently
under  development by other companies.  The Company's future success will depend
upon its ability to remain  competitive  with other  developers  of such medical
devices and therapies. See "Business - Competition."
 
Limitations on Third Party Reimbursement
The Company's  products are generally  purchased by physicians or hospitals.  In
the U.S.,  third  party  payers  are then  billed  for the  healthcare  services
provided to patients  using  those  products.  These  payors  include  Medicare,


                                       33
<PAGE>

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

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

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


                                       34
<PAGE>

Further,  there  can be no  assurance  that  the  Company  will  be able to make
arrangements  with new  distributors to access new  international  markets.  See
"Business - Sales and Marketing."
  
Healthcare Reform
The  healthcare  industry  is  subject  to  changing  political,   economic  and
regulatory  influences  that  may  affect  the  procurement  practices  and  the
operation  of  healthcare  facilities.   During  the  past  several  years,  the
healthcare  industry has been subject to an increase in governmental  regulation
of, among other things,  reimbursement  rates and certain capital  expenditures.
Certain  legislators have introduced  legislation or have announced proposals to
reform certain aspects of the U.S.  healthcare system,  including proposals that
may increase governmental  involvement in healthcare,  lower reimbursement rates
for both treatment and capital costs incurred by hospitals,  or otherwise change
the operating  environment for the Company's  customers.  Significant changes in
healthcare  systems  may have a  substantial  impact on the  manner in which the
Company  conducts its business and could have a material  adverse  effect on the
Company's  business,  financial  condition  and ability to market the  Company's
products.  Changes  resulting from healthcare  reform proposals or the enactment
thereof  may  influence  customer  purchases  and the  amount  of  reimbursement
available  from  governmental  agencies  and  private  third  party  payers  for
diagnostic and therapeutic  procedures conducted with the Company's products, or
could impose  limitations  on prices that  customers will be able to pay, or the
Company may charge, for its products.
 
Dependence on Key Personnel; Need to Recruit Additional Key Management Personnel
The Company is dependent  upon a limited  number of key management and technical
personnel,  particularly  David A. Jenkins,  C. Bryan Byrd, Joseph M. Turner and
Joseph C.  Griffin,  III. The Company's  continued  growth and long term success
will  depend,  in part,  on its ability to attract and retain  highly  qualified
personnel.  There can be no  assurance  that the Company will be able to attract
and retain such  personnel.  The Company  competes for such personnel with other
medical device companies,  academic  institutions and other  organizations.  The
loss of any key personnel,  the inability to hire or retain qualified  personnel
or the failure of such personnel to function  effectively as a management  group
could have a  material  adverse  effect on the  Company's  business,  results of
operations and financial condition
  
Product Liability and Insurance
The manufacture and sale of the Company's  products involves the risk of product
liability  claims.  The Company's  products are highly  complex and some are, or
will be, used in relatively new medical procedures and in situations where there
is a potential risk of serious injury,  adverse side effects or death. Misuse or
reuse of  catheters  may  increase  the risk of product  liability  claims.  The
Company currently  maintains product liability insurance with coverage limits of
$5,000,000 per  occurrence  and  $5,000,000 in the aggregate per year;  however,
there can be no assurance that this coverage will be adequate. Such insurance is
expensive and may not be available in the future on acceptable  terms if at all.
A  successful  claim  against  or  settlement  by the  Company  in excess of its
insurance  coverage or the  Company's  inability  to maintain  insurance  in the
future could have a material adverse effect on the Company's  business,  results
of operations and financial condition.
  

                                       35
<PAGE>

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

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

Risks Associated With  International Operations
During 1997,  the Company  established a branch office in the United  Kingdom in
order to increase sales in Europe, improve international distributor service and
relations  and to aid in the  introduction  of the  ALERT[REGISTERED  TRADEMARK]
System for sale in Europe.  Approximately  11% of the  Company's  sales for 1998
were derived outside the U.S. Since international sales are expected to continue
to represent a  significant  percentage of total sales,  the Company  expects to
continue to increase its operations  outside of the United States.  As such, the
Company will continue to be subject to fluctuations  in currency  exchange rates
and other risks of foreign  operations,  including tariff regulations and export
license requirements,  unexpected changes in regulatory  requirements,  extended
collection period for accounts receivable,  potentially inadequate protection of
intellectual  property  rights,  local taxes,  restrictions  on  repatriation of
earnings and economic and political instability.  There can be no assurance that
such factors will not have a material adverse effect on the Company's ability to
maintain and expand profitable foreign sales and, consequently, on the Company's
business, results of operations and financial condition.
  
Possible Volatility of Stock Price
The  market  price of shares of the  Company's  Common  Stock,  like that of the
common stock of many medical  products high  technology  companies,  has, in the
past, been, and is likely in the future to continue to be, highly volatile.  The
Company  believes  that  factors  such as  quarterly  fluctuations  in financial
results,  announcements of new  developments  relating to cardiac care diagnosis
and treatment therapies and developments in third party reimbursement policy and

                                       36
<PAGE>

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

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

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

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

Item 7. Financial Statements
  
The  information  in  response  to this  item is set  forth in the  Consolidated
Financial Statements beginning on page F-1 of this report on Form 10-KSB.
  
Item 8. Changes  in and  Disagreements  with  Accountants  on  Accounting  and
Financial Disclosure
  
Arthur  Andersen  LLP had been the  Company's  certifying  accountant  since the
inception of the Company in 1993. On August 25, 1998 the Company notified Arthur

                                       37
<PAGE>

Andersen  that the  audit  committee  recommended  and the  board  of  directors
approved   a   change   in   the    Company's    certifying    accountants    to
PricewaterhouseCoopers  LLP for the audit of the Company's financial  statements
for the year ended December 31, 1998. The Company engaged PricewaterhouseCoopers
as certifying accountant effective August 25, 1998.
  
Arthur Andersen's report on the Company's  financial  statements for each of the
past two years did not contain an adverse  opinion or a  disclaimer  of opinion,
and was not qualified nor modified as to uncertainty, audit scope, or accounting
principles.
  
During the  Company's two most recent  fiscal years and any  subsequent  interim
period preceding the change in accountants, there were no disagreements with the
former accountant on any matter of accounting principles or practices, financial
statement disclosure,  or auditing scope or procedure,  which disagreements,  if
not resolved to the satisfaction of the former accountant,  would have caused it
to make a reference to the subject  matter of the  disagreements  in  connection
with its report.
  
During the  Company's two most recent  fiscal years and the  subsequent  interim
period   prior  to   engaging   the   Company's   new   certifying   accountant,
PricewaterhouseCoopers  LLP was not  consulted  regarding any of the matters set
forth in paragraph (a)(2) of Item 304 of Regulation S-B.
  
  
                                    PART III
  
Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance
with Section 16 (a) of the Exchange Act
  
The following table sets forth certain  information  regarding the directors and
executive officers of the Company:
  
  
  NAME                             AGE  POSITION
  ----                             ---  --------
  David A. Jenkins (3)             41   Chairman of the Board, President and
                                        Chief Executive Officer
  Joseph M. Turner                 36   Chief Financial Officer, Treasurer and
                                        Secretary
  J. Randall Rolston               52   Vice President, Sales
  C. Bryan Byrd                    38   Vice President, Engineering
  Joseph C. Griffin, III           38   Vice President, Regulatory Affairs
  
  
  David W. Mortara, Ph.D. (1)(2)   58   Director
  Anthony J. Varrichio (3)         52   Director
  John E. Underwood (1)(2)         56   Director

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

                                       38
<PAGE>

(3) Member of the Plan Committee of the Board of Directors.
  
Directors  and  officers of the Company are elected  annually  and hold  offices
until their successors are elected and qualified or until their earlier removal,
death or resignation.  Set forth below is a brief summary of the recent business
experience and background of each director and executive officer of the Company.
  
David A.  Jenkins is the  co-founder  and  Chairman  of the Board of  Directors,
President and Chief Executive Officer of the Company.  Mr. Jenkins served as the
President  and a Director of the Company  from 1993 to 1995.  From 1988 to 1993,
Mr. Jenkins served as the Chief Executive Officer and then Chairman of the Board
of Directors of Arrhythmia  Research  Technology,  Inc., a publicly held company
involved in the sale and distribution of electrophysiology products.
  
Joseph M. Turner joined the Company as Chief  Financial  Officer,  Treasurer and
Secretary of the Company effective  February 1, 1999. Mr. Turner served as Chief
Financial  Officer and  Treasurer  of Tri-Seal  International,  a  thermoplastic
extrusion company from 1994 to 1999. Prior to joining Tri-Seal International, he
was employed at  PricewaterhouseCoopers,  LLP from  1985-1994.  Mr.  Turner is a
certified public accountant.
  
J. Randall  Rolston is the Vice  President,  Sales of the Company.  Mr.  Rolston
joined the Company in  September  1996 as National  Sales  Manager and was named
Vice President,  Sales in April 1998. Prior to joining the Company,  Mr. Rolston
was  employed  in various  sales  management  positions  at Cordis  Webster,  an
electrophysiology  catheter company owned by Johnson & Johnson.  Prior to Cordis
Webster, Mr. Rolston held various sales management positions, including 15 years
at American Edwards prior to its merger with Baxter Healthcare Corporation.
  
C. Bryan Byrd is the Vice President, Engineering of the Company. Mr. Byrd joined
the Company in April 1993 to oversee software development for new products. From
1989 to 1993,  he  co-founded  and served as the  Director  of  Engineering  for
BioPhysical  Interface Corp.  where he was responsible for developing  automated
computerized  monitoring  equipment for pacemaker and open heart operating rooms
and follow-up  clinics.  Before that, he was a software  engineer for Medtronic,
where he developed the ValveBase,  PaceBase and TeleTrace  software  modules and
before  that with Mt.  Sinai  Medical  Center in Miami  Beach,  Florida.  He has
developed databases for all aspects of cardiac surgery.
  
Joseph C. Griffin, III is the Vice President, Regulatory Affairs of the company.
Mr.  Griffin  founded  Professional  Catheter  Corporation,  the  predecessor to
ProCath,  in 1990 and served as its  President  until the Company  acquired  its
business  in 1993.  Before  that,  Mr.  Griffin  was  Manager  of  Research  and
Development at Oscor Medical  Corporation,  a manufacturer of implantable pacing
leads,  and Director,  Research and Development  and Technical  Services at Nova
Medical  Specialties,  Inc., a division of B. Braun of America.  Mr. Griffin has
more  than 18  years  experience  in the  design,  development,  regulation  and
manufacture  of  cardiac  catheters  and has  served as a member  of the  Health

                                       39
<PAGE>


Industry Manufacturers  Association Pacemaker Task Force, the Electrode Catheter
Task Force and the Society of Manufacturing Engineers.
  
David W. Mortara,  Ph.D.  has served as a Director of the Company since November
1995.  Dr.  Mortara  founded and has served as the Chairman and Chief  Executive
Officer of Mortara  Instrument,  a privately held  manufacturer  and supplier of
electrocardiography equipment, since 1982. Prior to founding Mortara Instrument,
Dr. Mortara was Vice President,  Engineering at Marquette  Electronics,  Inc. He
has  authored  numerous   scientific   publications  on  signal  processing  for
electrocardiography  and  currently  serves as co-chair of AAMI's ECG  Standards
Committee.
  
Anthony J. Varrichio has served as a Director of the Company since inception and
served as the  Chairman of the Board and  Treasurer  of the Company from 1993 to
1995.  Since 1987,  Mr.  Varrichio has served as the President and a director of
HDI, a privately held engineering,  consulting and medical device  manufacturing
corporation. Prior to co-founding HDI, Mr. Varrichio served as Vice President of
Electro-Biology,  Inc., a  manufacturer  of  electronic  bone growth  stimulator
devices.  Prior  thereto,  Mr.  Varrichio was the Director of Engineering at the
Advanced Technology Laboratory division of Intermedics, Inc.
  
John E. Underwood has served as a Director of the Company since June 1998. Since
1985,  Mr.  Underwood  has  served  as the  founder  and  President  of  Proteus
International,  a venture banking and venture consulting concern with offices in
Mahwah,  New  Jersey.  Prior to  founding  Proteus,  Mr.  Underwood  held senior
management positions with Pfizer, General Electric and Becton Dickinson.
  
Compliance  with  Reporting  Requirements  

Section  16(a) of the Exchange Act requires the  Company's  executive  officers,
directors  and holders of more than 10% of the Company's  common stock,  to file
reports of ownership and changes in ownership  with the  Securities and Exchange
Commission.  Such persons are required to furnish the Company with copies of all
Section 16(a) forms they file.  Based solely on its review of the copies of such
forms received by it or oral or written  representations  from certain reporting
persons that no Forms 5 were required for those  persons,  the Company  believes
that, with respect to the year ended December 31, 1998, its executive  officers,
directors and greater than 10% beneficial  owners  complied with all such filing
requirements,  with two  exceptions.  J.  Randall  Rolston  and C.  Bryan  Byrd,
officers  of the  Company  did  not  file  timely  Forms  5 with  regard  to one
reportable transaction for each individual.
  
Item 10. Executive Compensation
The  following  summary   compensation  table  sets  forth  certain  information
concerning  compensation  paid or accrued to the Chief Executive  Officer,  Vice
President of Sales, and Vice President of Regulatory Affairs of the Company (the
"Named  Executive  Officers")  for services  rendered in all  capacities for the
years ended December 31, 1998, 1997 and 1996. No other executive  officer of the
Company was paid a salary and bonus  aggregating  greater than  $100,000  during
such time periods.

                                       40
<PAGE>
      
                            
                           Summary Compensation Table
                            
                              

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

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

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

1)   Mr.  Rolston served as National Sales Manager of the Company from September
     1996  through  April 1998.  During April 1998,  Mr.  Rolston was named Vice
     President, Sales.
     
2)   On September 30, 1997, the Company  granted Mr. Rolston an incentive  stock
     option to purchase  28,000 shares of common stock pursuant to the 1995 Long
     Term  Incentive  Plan at an exercise  price of $3.00 per share.  Options to
     purchase  5,600 of such  shares  became  exercisable  on the grant date and
     options to purchase an additional  5,600 of such shares become  exercisable
     each year thereafter. The term of such option is five years.
     
3)   On October 3, 1996,  the Company  granted Mr.  Rolston an  incentive  stock
     option to purchase  12,000 shares of common stock pursuant to the 1995 Long
     Term  Incentive  Plan at an exercise  price of $4.75 per share.  Options to
     purchase  2,400 of such  shares  became  exercisable  on the grant date and
     options to purchase an additional 200 shares become  exercisable each month
     thereafter.  The term of such  option is five  years.  These  options  were
     cancelled  in 1998 and  reissued  at $3.00  per  share  with a new  vesting
     period. See (4) below.
  
4)   On April 30,  1998,  the Company  cancelled  an  incentive  stock option to
     purchase  12,000  shares of common  stock  issued in 1996 and  granted  Mr.
     Rolston a new  incentive  stock option to purchase  12,000 shares of common
     stock pursuant to the 1995 Long Term Incentive Plan at an exercise price of
     $3.00 per share. Options to purchase 2,400 shares became exercisable on the
     grant date and  options to  purchase  an  additional  2,400  shares  become
     exercisable each year thereafter. The term of such option is five years. On
     June 30, 1998, the Company granted Mr. Rolston an incentive stock option to
     purchase  969  shares  of  common  stock  pursuant  to the 1995  Long  Term
     Incentive Plan at an exercise price of $2.50 per share. Options to purchase
     all 969 of such shares became  exercisable  on the grant date.  The term of
     such  option is five  years.  On July 23,  1998,  the  Company  granted Mr.
     Rolston an incentive stock option to purchase 15,000 shares of common stock
     pursuant to the 1995 Long Term Incentive Plan at an exercise price of $3.00


                                       41
<PAGE>

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

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

                             Option Grants in Fiscal Year 1998

                                Percent of
                     Number of  Options to
                      Shares    Employees   Excercise
                    Underlying  in Fiscal   Price per           Expiration
                     Granted      Year        Share                Date
                    ------------------------------------------------------------
J. Randall Rolston     67,771      14.5%    $2.50-$3.00  July 2003-December 2003
Vice President, Sales
  
Option Exercises and Holdings
The  following  table  provides  certain  information  with respect to the Named
Executive  Officers  concerning  the exercise of stock options during the fiscal
year ended December 31, 1998 and the value of unexercised  stock options held as
of December 31, 1998.

                  Aggregated Option Exercises in 1998 and Year End Option Values
                  --------------------------------------------------------------
                              Number of Shares
                           Underlying Unexercised       Value of Unexercised
                              Options at               In the Money Option at
                           December 31, 1998          December 31, 1998 ($) (1)
                      --------------------------    ----------------------------
       Name           Exercisable  Unexercisable    Exercisable    Unexercisable
---------------------------------  -------------    -----------    -------------
David A.Jenkins(2)      139,000       27,000         $249,625        $50,625
Chairman, President
and Chief Executive 
Officer
                              
J. Randall Rolston       20,530       75,271         $ 18,803        $65,000
Vice President, Sales

                                       42
<PAGE>

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

--------------------------  
No options were exercised by the Named Executive Officers during the fiscal year
ended December 31, 1998.
  
(1)  Amounts  calculated by  subtracting  the exercise price of the options from
     the market  value of the  underlying  Common  Stock using the closing  sale
     price on the Nasdaq  National  Market of $3.875 per share on  December  31,
     1998.
     
(2)  The Company  granted Mr. Jenkins a  non-qualified  stock option to purchase
     96,000 shares of common stock at an exercise  price of $2.20 per share (the
     "Jenkins  NQSO").  Options to purchase  30,000 of the  Jenkins  NQSO shares
     became  exercisable  on the grant date and options to purchase 1,000 shares
     become  exercisable  each month  thereafter.  The term of the Jenkins  NQSO
     option is five years. On November 29, 1995, the Company granted Mr. Jenkins
     an  incentive  stock  option to  purchase  70,000  shares  of Common  Stock
     pursuant to the Company's 1995 Plan at an exercise price of $2.20 per share
     (the "Jenkins  ISO").  Options to purchase 45,000 of the Jenkins ISO shares
     became exercisable upon completion of the Company's initial public offering
     and options to purchase  the  remaining  25,000  Jenkins ISO shares  became
     exercisable  on the first  anniversary  of the granting of the Jenkins ISO.
     The term of such option is ten years.
  
Compensation Plans and Other Arrangements
1995 Long Term Incentive Plan
The Company's  1995 Long Term  Incentive  Plan (the "1995  Incentive  Plan") was
adopted by the Board of Directors and  shareholders in November 1995. On October
30, 1997, the Shareholders approved an amendment increasing the number of shares
available under the Plan from 400,000 to 700,000.  At December 31, 1998, options
to purchase  712,610  shares were  outstanding  at exercise  prices ranging from
$2.00 to $3.00 per share. The Board of Directors has approved an increase in the
number  of  shares  issuable  under the plan from  700,000  to  1,000,000.  This
amendment is subject to shareholder  approval.  The 1995 Incentive Plan provides
for grants of "incentive" and "non-qualified"  stock options to employees of the
Company. The 1995 Incentive Plan is administered by the Compensation  Committee,
which determines the optionees and the terms of the options  granted,  including
the  exercise   price,   number  of  shares  subject  to  the  options  and  the
exercisability  thereof.  The 1995 Incentive Plan will terminate on November 30,
2005, unless earlier terminated by the Board of Directors.

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


                                       43
<PAGE>

Stock  (determined  as of the date of the option  grant) for which an  incentive
stock option may for the first time become  exercisable in any calendar year may
not exceed $100,000.
  
1995 Director Option Plan
The Company's  1995  Director  Option Plan was adopted by the Board of Directors
and the shareholders in November 1995. A total of 360,000 shares of Common Stock
of the Company are  available for issuance  under the 1995 Director  Option Plan
and options to purchase 228,000 shares were outstanding as of December 31, 1998.
The 1995  Director  Option Plan  provides  for grants of  "director  options" to
eligible  directors  of the  Company  and for  grants of  "advisor  options"  to
eligible members of the Scientific Advisory Board.  Director options and advisor
options  become  exercisable  at the rate of 1,000 shares per month,  commencing
with the first  month  following  the date of grant for so long as the  optionee
remains a director or advisor, as the case may be. The 1995 Director Option Plan
is  administered  by the Plan  Committee of the Company,  which  determines  the
optionees and the terms of the options granted, including the exercise price and
the number of shares subject to the options.  The 1995 Director Option Plan will
terminate  on November  30,  2005,  unless  earlier  terminated  by the Board of
Directors.

Compensation of Directors

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

Employment Agreements

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

Repricing

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


                                       44
<PAGE>

were  issued at the fair  market  value on the date of  re-issuance.  Thus,  the
Company did not record compensation expense related to these options.
 
Item 11.   Security Ownership of Certain Beneficial Owners and Management
The  following  table  sets  forth  certain  information   regarding  beneficial
ownership of Common Stock of the Company as of March 19, 1999 by (i) each of the
Company's directors,  (ii) the Named Executive Officers, (iii) all directors and
executive  officers  as a group and (iv) each  person  known to the  Company  to
beneficially own more than five percent of the Company's common stock. Except as
otherwise  indicated,  the  persons  named in the  table  have sole  voting  and
investment  power  with  respect to all shares  beneficially  owned,  subject to
community property laws, where applicable.
  
Name and Address                Number of  Shares         Percentage of Class
of Beneficial Owner             Beneficially Owned       Beneficially Owned (1)
----------------------------    ------------------       ----------------------
David A. Jenkins(2)               1,049,000                      10.5%
100 Stierli Court-Suite 107
Mount Arlington, NJ 07856
  
Anthony J. Varrichio (3)            545,000                       5.5%
1 Hemlock Lane
Flanders, NJ 07836
  
David W. Mortara, Ph.D.(4)           91,000                        *
7865 North 86th Street
Milwaukee, WI 53224

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

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

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

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

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



                                       45
<PAGE>

SC Fundamental Value Fund, LP(8)      376,800                       3.8%
10 East 50th Street
New York, NY 10022
  
SC Fundamental Value BVI, Ltd.(8)     373,200                       3.8%
c/o SC BVI Partners
10 East 50th Street
New York, NY 10022

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

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

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

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

All Named Executive Officers 
and directors as a group  
(6 persons) (9)                     1,864,566                      18.4%
  
-----------------------------                 
*  Represents beneficial ownership of less than one percent of the Common Stock.

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

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

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

                                       46
<PAGE>

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

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

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

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

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

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

Item 12.  Certain Relationships and Related Transactions

Hi-Tronics Designs, Inc.

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

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

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

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


                                       47
<PAGE>

year ended December 31, 1996. Since the value assigned to the arrhythmia monitor
technology had been fully  amortized,  the Company did not record a gain or loss
on the sale. The Neomedics common stock is not a registered security traded on a
public  exchange and  therefore its fair value is not readily  determinable.  At
December 31, 1998, the Company valued the shares of Neomedics stock at zero.
  
HDI  completed  development  of the  TeleTrace  III-S  Receiver  in 1997  for an
aggregate  consideration of 19,000 shares of common stock of the Company, issued
in 1995,  and  $30,000  in cash  paid in 1997.  HDI is the  manufacturer  of the
TeleTrace  III-S  Receiver.  On December  29,  1997,  the Company  granted HDI a
nonexclusive  license to sell the TeleTrace receiver in connection with the sale
of arrhythmia monitors. The agreement calls for the payment of a royalty of $300
per unit sold by HDI. To date, HDI has not sold any TeleTrace receivers.
  
The  Company  believes  that each of the  preceding  transactions  with HDI were
entered  into on terms and at prices no less  favorable  than the Company  could
have received from an unaffiliated party.
  
Mortara Instrument, Inc.
The   Company   purchases   certain   components   for  the  EP   WorkMate   and
ALERT[REGISTERED  TRADEMARK]  Companion  from Mortara  Instrument.  Dr. David W.
Mortara,  a director  of the  Company,  is also a Director  and  shareholder  of
Mortara  Instrument.  The approximate  value of products  purchased from Mortara
Instrument was $546,000 and $573,000 in 1998 and 1997, respectively. The Company
believes that each of the transactions with Mortara Instrument were entered into
on terms and at prices no less  favorable  than the Company  could have received
from an unaffiliated party.
  
Item 13.  Exhibits and Reports on Form 8-K.

          (a)  Exhibits 

                  3.1   Amended and Restated Certificate of Incorporation (1)

                  3.2   Bylaws, as amended (1)

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

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

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


                                       48
<PAGE>

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

                  10.8* 1995 Director Option Plan (1)

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

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

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

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

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

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

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

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

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

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

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

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

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

                                       49
<PAGE>

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

                  10.32* Amended 1995 Long Term Incentive Plan (3)

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

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

                  21    List of Subsidiaries

                  27    Financial Data Schedule (7)
                  --------------------------------------------------------------
                                            
          *    Denotes management contract or compensatory plan or arrangement
  
          1.   Incorporated  by  reference  to the  exhibit  of the same  number
               previously  filed  with the  Commission  in  connection  with the
               Company's  Registration  Statement on Form SB-2 and Pre-Effective
               Amendments No. 1 and 2 thereto.

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

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

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

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

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

          7.   EDGAR filing only.
  
          (b)  Reports on Form 8-K

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


                                       50
<PAGE>


                INDEX TO CONSOLIDATED FINANCIAL STATEMENTS


1.   FINANCIAL STATEMENTS                                                PAGE

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

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

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

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

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

          Notes to Consolidated Financial Statements                         F-8


                                       F-1

<PAGE>



                        REPORT OF INDEPENDENT ACCOUNTANTS



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


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



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

                                       F-2
<PAGE>


                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS



To EP MedSystems, Inc.:

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

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

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





                                   /s/ Arthur Andersen LLP 
                                   ARTHUR ANDERSEN LLP


New York, New York
March 11, 1998


                                      F-3
<PAGE>

                      EP MEDSYSTEMS, INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS

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

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

        THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.


                                   F-4

<PAGE>

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

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

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

Interest expense                                      (3,410)         (2,436)
Interest income                                      214,596         330,053
                                                ------------     -----------
      Net loss                                  $ (4,511,014)    $(4,863,657)
                                                =============    ============
   
Basic loss per share                            $      (0.49)    $     (0.64)
                                                =============    ============
Diluted loss per share                          $      (0.49)    $     (0.64)
                                                =============    ============
Weighted average shares
outstanding used to compute basic
and diluted loss per share                         9,252,835       7,599,917
                                                =============    ============



       The accompanying notes are an integral part of these statements.


                                   F-5


<PAGE>

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

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







        THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.

                                  F-6


<PAGE>

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


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

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

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

                                   F-7


<PAGE>

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

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

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

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

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

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

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

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

                                      F-8

<PAGE>

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

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

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

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

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

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

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

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

                                      F-9
<PAGE>

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

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


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

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

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

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

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

                                      F-10
<PAGE>

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

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

The minimum annual royalties under the license are as follows:

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


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

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

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


                                      F-11
<PAGE>

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

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

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

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

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

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

                                      F-12
<PAGE>

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

8.   INTANGIBLE ASSETS
Intangible assets consist of the following:

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

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

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


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

                                      F-13
<PAGE>

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

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

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


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

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

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

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

                                   F-14


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

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

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

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

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

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

                                   F-15

<PAGE>

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

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

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

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

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






                                   F-16


<PAGE>

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

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

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

                                         1998                 1997

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

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







                                   F-17


<PAGE>

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

                                               1998           1997
                                             ---------      --------
                                               
          Risk free interest rate               5.54%         6.5%
          Expected life                        5 years       5 years
          Expected volatility                   50%          50%
          Weighted average fair value
          of options granted during
          the year
                                               $3.00         $1.40

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

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

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

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

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

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

                                      F-18
<PAGE>

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

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

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

                                              YEAR ENDED DECEMBER 31,
                                            1998                  1997

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

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

                                   F-19


<PAGE>


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

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

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

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















                                   F-20


<PAGE>

                                   SIGNATURES

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

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

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

            SIGNATURE                                               DATE

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

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

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

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

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






<PAGE>
                              EXHIBIT INDEX

          Exhibit
          NUMBER                        DESCRIPTION

          3.1       Amended and Restated Certificate Incorporation (1)

          3.2       Bylaws, as amended (1)

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

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

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

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

          10.8*     1995 Director Option Plan (1)

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

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

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

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

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

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

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

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

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

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

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

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

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

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

          10.32*    Amended 1995 Long Term Incentive Plan (3)

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

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

          21        List of Subsidiaries

          27        Financial Data Schedule (7)



               * Denotes management contract or compensatory plan or arrangement

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

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

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

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

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

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

               (7)  EDGAR Filing Only.





<PAGE>