SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                                   FORM 10-KSB

      (Mark one)

|X|   Annual Report Under Section 13 or 15(d) of the Securities Exchange Act of
      1934

      For the fiscal year ended: December 31, 2001

|_|   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)

                                (973) 398-2800
                                --------------
               (Issuer's Telephone Number, Including Area Code)

Securities registered under Section 12(b) of the Exchange Act: None

Securities registered under Section 12(g) of the Exchange Act: Common Stock,
without 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, 2001 were
$9,933,000

The aggregate market value of the issuer's outstanding voting stock held by
non-affiliates on March 25, 2002, based on the closing sale price of its common
stock on the Nasdaq National Market on such date, was approximately $26,766,150.

As of March 25, 2002 there were outstanding 14,663,652 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


                                      -1-
<PAGE>

            Cautionary Statement Regarding Forward-Looking Statements

      In addition to historical information, this Annual Report on Form 10-KSB
for EP MedSystems, Inc. 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. We emphasize to you that a variety of factors could cause EP Med's
actual results and experience to differ materially from the anticipated results
or other expectations expressed in the EP Med's forward-looking statements. When
we use the words or phrases "believe," "anticipate," "expect," "intend," "will
likely result," "estimate," "project" or similar expressions in this Annual
Report on Form 10-KSB, we intend to identify such forward-looking statements,
but they are not the exclusive means by which such statements are made. The
forward-looking statements are only expectations and/or predictions which are
subject to risks and uncertainties including the significant factors discussed
herein under "Risk Factors" and general economic, market or business conditions,
opportunities or lack of opportunities that may be presented to EP MedSystems,
competitive actions, changes in laws and regulations and other 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."

      We caution readers to review the cautionary statements set forth in this
Annual Report on Form 10-KSB and in EP Med's other reports filed with the
Securities and Exchange Commission and caution that other factors may prove to
be important in affecting EP Med's business and results of operations. We
caution you not to place undue reliance on these forward-looking statements,
which speak only as of the date of this Annual Report. We undertake no
obligation to publicly revise these forward-looking statements to reflect events
or circumstances that arise after the date of this report.


                                      -2-
<PAGE>

                                   FORM 10-KSB
                          Year Ended December 31, 2001
                                TABLE OF CONTENTS

Item
Number                                                                     Page
------                                                                     ----
                                     Part I.

1.    Description of Business                                                4
2.    Description of Property                                               21
3.    Legal Proceedings                                                     22
4.    Submission of Matters to a Vote of Security Holders                   23

                                    Part II.

5.    Market for Common Equity and Related Shareholders' Matters            23
6.    Management's Discussion and Analysis or Plan of Operation             24
7.    Financial Statements                                                  45
8.    Changes in and Disagreements with Accountants on Accounting and
      Financial Disclosures                                                 45
                                    Part III.

9.    Directors, Executive Officers, Promoters and Control Persons;
      Compliance with Section 16(a) of the Exchange Act                     45
10.   Executive Compensation                                                47
11.   Security Ownership of Certain Beneficial Owners and Management        53
12.   Certain Relationships and Related Transactions                        57

                                    Part IV.

13.   Exhibits and Reports on Form 8-K                                      58
      Signatures                                                            60


                                      -3-
<PAGE>

                                     PART I

Item 1. Description of Business.

General

      EP MedSystems, Inc., which we also refer to in this report as "EP Med",
was incorporated in New Jersey in January 1993 and operates in a single industry
segment. We develop, manufacture and market a line of products for the cardiac
electrophysiology market used to diagnose, monitor and treat irregular
heartbeats known as arrhythmias. Since inception, we have acquired technology,
have developed new products and have begun marketing various electrophysiology
products, including the EP-WorkMate(R) electrophysiology work station, the
EP-3(TM) Stimulator, diagnostic electrophysiology catheters and the ALERT(R)
System including the ALERT(R) Companion and ALERT(R) internal cardioversion
catheters and related disposable supplies like unique one-piece catheter.

      EP Med's leading product is the EP-WorkMate(R), a computerized
electrophysiology workstation that monitors displays and stores cardiac
electrical activity and arrhythmia data. The EP-WorkMate(R) offers, among other
features, display and storage of up to 192 intracardiac signals, real-time
analysis and integration with our own proprietary systems, such as the EP-3(TM)
Stimulator, as well as with other technologies and systems. The EP-3(TM)
Stimulator is a computerized signal generator and processor which, when
integrated with the EP-WorkMate(R), is used to stimulate the heart with
electrical impulses in order to locate arrhythmia. We believe that the
EP-WorkMate(R), when integrated with the EP-3(TM) Stimulator, offers the most
advanced computer system available to the electrophysiology market. During 2001,
the EP-WorkMate(R) and EP-3(TM) Stimulator accounted for approximately 86% of
our total sales revenues. EP Med also markets a line of diagnostic
electrophysiology catheters for stimulation and sensing of electrical signals
during electrophysiology studies, which represented approximately 6% of EP Med's
total sales revenues in 2001.

      We have identified the diagnosis and treatment of atrial fibrillation, a
particular type of arrhythmia, as an area of interest for our ongoing
development efforts. Atrial fibrillation is a condition where waves of energy
collect within the atria, the upper chambers of the heart, causing erratic
electrical signals which prevent the atria from providing appropriate blood flow
output. Atrial fibrillation is the most prevalent type of abnormal heart rhythm
which, in 2000, was estimated to afflict over 5,000,000 people worldwide
(approximately 2 million of such patients in the United States) with an
estimated 200,000 to 400,000 new cases diagnosed each year. Although not
immediately life threatening, atrial fibrillation exhibits symptoms such as
palpitations, fatigue and dizziness, among other symptoms. Atrial fibrillation
is linked to a significantly increased risk of stroke and to a diminished
lifestyle due to decreased cardiac output.


                                      -4-
<PAGE>

      In an effort to address this medical condition, we have developed a new
product for internal cardioversion of atrial fibrillation known as the ALERT(R)
System, which uses a patented electrode catheter to deliver measured, variable,
low-energy bi-phasic electrical impulses directly to the inside of the heart to
convert atrial fibrillation to a normal heart rhythm. We have obtained Class III
Design Examination Certification from a European Notified Body allowing us to
label the ALERT(R) System with a CE Mark, an international symbol of adherence
to quality assurance standards, design reviews and hazard analysis, which
permits us to sell the ALERT(R) System in the European Community. International
sales of the ALERT(R) System and related catheters accounted for approximately
8% of EP Med's total sales revenues in 2001. The ALERT(R) System is not approved
for sale in the United States, but we have completed clinical trials and have
submitted our application for pre-market approval of the device to the U.S. Food
and Drug Administration and have responded to FDA requests for supplemental
information; we are awaiting further action on this application and on other
regulatory matters; see the Section entitled "Description of
Business--Government Regulation." We are hopeful that we will receive approval
to market and sell the ALERT(R) System in the U.S. during 2002.

      We also are involved in the development of an intracardiac ultrasound
product line including the ViewMate(TM) ultrasound imaging console and
Viewflex(TM) intracardiac imaging catheters. These products offer
high-resolution, real-time ultrasound capability designed to improve a
physician's or clinician's ability to visualize the inside chambers of the
heart. We believe that the ViewMate(TM) Ultrasound System may play an important
diagnostic role allowing more effective treatment of complex cardiac arrhythmias
such as ventricular tachyarrhythmia and atrial fibrillation. Our ultrasound
products currently are not approved for sale. We previously submitted an
application to the U.S. Food and Drug Administration for 510(k) approval for
marketing clearance based on the device's substantial equivalence to a legally
marketed device but later changed the system design and abandoned this
application. A new submission and design dossier are in the process of being
completed and we expect to complete final electrical testing in the second
quarter of 2002. We expect to file for 510(k) approval and CE Mark authorization
in the second half of 2002. We do not anticipate receiving approval to sell the
ViewMate(TM) Ultrasound System until the fourth quarter of 2002, if approved at
all.

Products

      We develop, manufacture, market and sell a broad-based, integrated line of
electrophysiology products used to diagnose, monitor, analyze and treat
irregular cardiac arrhythmias. Our products can be separated by technology into
the categories described below.

EP Computer Workstations and Stimulators (EP-WorkMate(R), EP-3(TM) Stimulator)

      The EP-WorkMate(R) 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(R) offers, among other features, display and storage of up to 192
intracardiac signals, real-time analysis, including graphical and quantitative


                                      -5-
<PAGE>

display of such data, superior ease of use and a single keyboard for all
operations as well as integration capacity with our own proprietary products,
such as the EP-3(TM) Stimulator, and other technologies and systems. The
EP-WorkMate(R) consists of a Dual Pentium(R) III processor with integral
proprietary software, a proprietary signal-conditioning unit, two or three
21-inch high-resolution color monitors, an optical disk drive for data storage,
a custom keyboard, catheter and catheter interface module and a laser printer.
In addition, each EP-WorkMate(R) has an internal modem to provide a direct link
between the purchaser and EP Med, facilitating field software support. The
EP-WorkMate(R) is differentiated from competing products by (i) its seamless
integration with the EP-3(TM) Stimulator, (ii) its storage capacity of up to 192
intracardiac signals, (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.

      Our EP-3(TM) Stimulator is a computerized electrical pulse signal
generator and processor when integrated with the EP-WorkMate(R), is used to
stimulate the heart with electrical impulses in order to locate electrical
disturbances or arrhythmias. During 2001, the EP-WorkMate(R) and EP-3(TM)
Stimulator accounted for approximately 86% of our total sales revenues. We
believe the EP-3(TM) Stimulator is currently the only computerized EP clinical
stimulator being sold in the U.S. It features automatic synchronization and rate
controls as well as the same user interface as the EP-WorkMate(R). The EP-3(TM)
Stimulator can be sold as a stand-alone electrophysiology stimulator or it can
be integrated with the EP-WorkMate(R). We believe that the EP-WorkMate(R), when
integrated with the EP-3(TM) Stimulator, offers the most advanced computer
system available to the electrophysiology market.

The ALERT(R) System

      The ALERT(R) System was developed in an effort to provide a more effective
and less traumatic method of converting atrial fibrillation to normal heart
rhythm than traditional therapies such as drugs and external cardioversion. Drug
therapies are unpredictable in their effectiveness and often have side effects
such as abnormal heart rhythms such as rapid ventricular tachycardia and
potential life-threatening ventricular fibrillation. External cardioversion
accomplished by introducing electricity to the heart through paddles or patches
attached to a patient's chest, uses high energy in which electrical energy of up
to 360 joules may be administered. External cardioversion may require patient
hospitalization and general anesthesia due to the extreme pain associated with
the high electrical output. Our clinical trials have shown that the patient can
suffer skin burns and muscle and skeletal pain for days after the procedure.

      The ALERT(R) System represents a new approach to electrical cardioversion
known as low-energy internal cardioversion, which uses a patented electrode
catheter to deliver measured, variable, low-energy bi-phasic electrical
impulses, significantly less than 15 joules of electrical energy, directly to
the inside of the heart to convert atrial fibrillation to normal heart rhythm.
The ALERT(R) System is comprised of a single-use proprietary electrode catheter
with two separate electrode arrays (the "ALERT(R) Catheter") and an external
energy source (the "ALERT(R) Companion"). We believe low-energy internal
cardioversion using the ALERT(R) System


                                      -6-
<PAGE>

provides numerous potential advantages over high-energy external cardioversion
and drug conversion therapies. While only slightly more effective than external
cardioversion (76% compared to 67% in our clinical trials), the other advantages
over high-energy external cardioversion include:

      o     no use of general anesthesia;
      o     fewer traumas, less discomfort and risk to patients;
      o     higher success rate in converting patients with chronic atrial
            fibrillation to normal heart rhythm (based on initial clinical
            experience);
      o     potentially lower overall cost per procedure than high-energy
            external cardioversion (due to the absence of the hospital stay and
            only local anesthesia); and
      o     greater applicability for converting atrial fibrillation occurring
            in the days immediately following open-heart surgery.

      The advantage of the ALERT(R) System over traditional drug therapies is
the elimination of harmful side effects associated with many such drugs. The
trauma associated with the high-energy external cardioversion necessitating
general anesthesia make low-energy internal cardioversion a common-sense
alternative, assuming similar or better results. Our clinical trials of 156
patients demonstrated that the ALERT(R) Systems was effective in 76% of patients
as compared to external cardioversion in only 67% of patients.

      The disadvantages of the ALERT(R) System procedure are the same as with
any catheter procedure where a catheter is introduced into the body through the
skin. While catheter procedures are a common practice today generally considered
to be low risk, the chance of infection, swelling and bruising at the site of
insertion of the catheter remain a concern. Additionally, there is a certain
risk of abnormal heart rhythm with any kind of procedure involving electrical
application to the heart. EP Med believes that this is reduced with the ALERT(R)
Systems as compared to external cardioversion due to the lower energy utilized.

      The ALERT(R) System is based on medical technology invented by Eckhard
Alt, MD, a member of EP Med's Scientific Advisory Medical Board. Employees of EP
Med developed the catheter manufacturing technology. EP Med has obtained a
license of the exclusive worldwide rights to use the ALERT(R) technology in the
ALERT(R) System from Dr. Alt. Five patents have been issued in the United States
relating to technology used in connection with the ALERT(R) System and the
ALERT(R) Companion and six U.S. patents have been issued relating to the
ALERT(R) catheters. EP Med and Dr. Alt have also filed additional patent
applications and continuations for the ALERT(R) Catheter and the ALERT(R)
Companion in the United States and internationally. See the Section entitled
"Description of Business--Certain Patents, Trademarks and Licenses."

      The ALERT(R) System is a medical device that requires a pre-market
approval ("PMA") from the U.S. Food and Drug Administration prior to marketing
and sale in the United States. We submitted a clinical study protocol to the FDA
as part of an application for an Investigational Device Exemption ("IDE"). The
FDA approved the IDE application for the ALERT(R) System and the U.S. IDE
clinical trials were performed to demonstrate the safety and efficacy of the


                                      -7-
<PAGE>

ALERT(R) System for internal catheter-based cardioversion of atrial
fibrillation. The clinical trial data from the October 2, 2000 trial completion
reflected results of the 156 patients from 12 investigational centers wherein
the primary objective was to determine whether the probability of successful
termination of atrial fibrillation with the ALERT(R) System is practically
equivalent to external cardioversion. Patients were observed for termination of
atrial fibrillation after one hour and for continued sinus (normal) rhythm after
one month. The ALERT(R) System was shown to be effective in the primary instance
in 76% of patients who underwent the procedure as compared to 67% of the
patients who underwent external cardioversion. Follow-up of these patients after
one month revealed that 62% of patients successfully treated with the ALERT(R)
System (44% of the entire clinical trial population) remained in sinus (normal)
rhythm while 53% of those successfully treated with external cardioversion (and
31% of the entire clinical trial population) were still in sinus (normal)
rhythm. Of the patients who participated in the trials, 17% experienced
treatment-related adverse events such as abnormal rhythm (2%), bleeding (3%),
bruising (4%), hardening of catheter insertion site (1%), hypotension (1%),
infection (1%), ventricular fibrillation (1%) and ventricular tachycardia (1%).
No patient deaths occurred either device-related or non-device-related.

      After completion of our clinical trials, we submitted our PMA application
to the FDA on October 2, 2000. In April 2001, the FDA notified us of its
comments regarding our submission and of deficiencies contained in the
submission and requested additional information and clarification. The
deficiencies noted in the submission fall into three categories: qualification
and testing, clinical and statistical issues and labeling, which have required
providing greater or expanded disclosure relating to test results. We had
discussions with the FDA regarding the issues raised in the notification and, in
July 2001, we submitted our response to the FDA and subsequently, we have had
further communications with the FDA. As a consequence of the status of our PMA
submission, the timing of approval to market and sell the ALERT(R) System in the
U.S. cannot be predicted with any accuracy but we are hopeful that we will
receive the PMA during 2002. See the Section entitled "Description of
Business--Government Regulation."

      We do have Class III Design Examination Certification from a European
Notified Body allowing us to label the ALERT(R) System with the CE Mark and the
product is being sold throughout Europe. The ALERT(R) TD Catheter, which
incorporates thermodilution capability to the ALERT(R) pulmonary artery
catheter, received CE Mark authorization. Thermodilution is a technique used to
determine a patient's cardiac output by injecting a cold solution through the
catheter into the blood stream and measuring blood temperature change over time
with a thermistor mounted at the end of the catheter. This feature is expected
to broaden the ALERT(R) applications to include the critical care and heart
surgery markets by incorporating cardiac output measurement capability into the
catheter. A separate, industry standard 14k ohm thermistor connector,
facilitates catheter connection to existing Cardiac Output Computers distributed
by numerous manufacturers. In February 2000, we received approval from our
European Notified Body to begin shipment of our new ALERT(R) Companion II, a
newer touchscreen design of the ALERT(R) Companion. See the Section entitled
"Description of Business--Government Regulation."


                                      -8-
<PAGE>

Catheter Products

      We presently market a line of diagnostic electrophysiology catheters for
stimulation and sensing of electrical signals during electrophysiology studies.
Our diagnostic catheters are similar to others sold within the industry, with
the exception of our one-piece catheter design which offers the physician unique
recording capabilities. We offer numerous electrode/curve configurations of
catheters.

      We have developed a new electrode manufacturing process using long-length
electrodes for cardioversion and ablation procedures. This process, known as
SilverFlex(R), is a patented technology, which provides unique electrode
flexibility and a lightweight catheter while still maintaining excellent
handling characteristics. Due to development evolution, the current product uses
platinum instead of silver. It was determined that we would expand capabilities
of the catheter to provide diagnostic and therapeutic functionality for use with
our ALERT(R) product line. We are currently collecting clinical data and we
expect to file a supplement to the CE Mark and ALERT(R) PMA to incorporate
SilverFlex(R).

Ultrasound Products

      We have identified intracardiac ultrasound imaging as a necessary adjunct
to the advanced treatment of cardiac arrhythmias, especially for the treatment
of atrial fibrillation and ventricular tachycardias. We also believe that
ultrasound imaging may assist in the permanent implantation of pacemaker
electrodes in the left side of the heart. Fluoroscopy imaging, the primary
visual image used in electrophysiology today is unable to identify anatomic
structures of the heart (such as the ostium of the coronary sinus, the superior
and inferior vena cava, pulmonary veins, valves, infarcts, and the fossa ovalis,
among others), and it is unable to assess lesions created by the physician and
catheter placement in relation to certain anatomy. We believe that intracardiac
ultrasound imaging may overcome these deficiencies, and that this is important
in light of the increased complexity of newer electrophysiology procedures.
Ultrasound imaging may well address many of the concerns about complications of
using radio frequency energies to treat atrial fibrillation because of the
proximity of the atria to the great vessels of the heart.

      We are developing an intracardiac ultrasound product line, which includes
the ViewMate(TM) ultrasound imaging console and Viewflex(TM) intracardiac
imaging catheters. These products offer high resolution, real-time ultrasound
capability designed to improve a physician's or clinician's ability to view the
inside of the chambers and anatomic structure of the heart safely and
accurately, without the need to expose patients or physicians or clinicians,
themselves to repeated X-ray radiation. The increased visualization is a result
of having the catheter inside the heart itself thereby having cardiac features
in the near field or its area of highest image resolution and detail. By
manipulating the catheter tip and its phased array ultrasound crystal the
physician or clinician will be able to visualize not only the entire heart but
also to direct the wedge-shaped ultrasound beam at specific areas of interest.
Additionally, our color capability will allow verification of heart valve
patency and blood flow direction and amount. We believe that the ViewMate(TM)
Ultrasound System may play an important diagnostic role allowing more effective
treatment of complex cardiac arrhythmias, including ventricular tachyarrhythmia
and atrial fibrillation. Our ultrasound products currently are not approved for


                                      -9-
<PAGE>

sale. We previously submitted our application to the U.S. Food and Drug
Administration for 510(k) approval for marketing clearance based on the device's
substantial equivalence to a legally marketed device, but later changed the
system design and abandoned this application. A new submission and design
dossier are in the process of being completed and we expect to complete final
electrical testing in the second quarter 2002. We expect to file applications
for 510(k) approval and CE Mark authorization in the second half 2002. We do not
anticipate receiving approval to sell the ViewMate(TM) Ultrasound System until
the fourth quarter of 2002, if approved at all.

Fluoroscopy Products

      In May 2001, we entered into a distribution agreement with Fischer
Imaging, Inc., pursuant to which we will distribute the Fischer products into
the electrophysiology markets, primarily in the U.S. The Fischer products
include the Bloom electrophysiology stimulator, which sells for approximately
$22,000 to the hospital, and the Fischer EPX fluoroscopy (x-ray) products, which
sell at prices ranging from $400,000 to $800,000, depending on the features. We
believe these products fit well into our distribution force, and we expect to
see the first sales from the products beginning in the second quarter of 2002.
However, the distribution agreement expires in May, 2002, and may not be
renewed.

Certain Patents, Trademarks and Licenses

      EP Med's success and ability to compete depend, in part, upon our ability
to protect our proprietary positions. EP Med's policy is to protect its
proprietary position by, among other methods, filing United States and select
foreign patent applications to protect the technology that is important to the
development of the business. Pursuant to provisions adopted under the General
Agreement on Tariffs and Trade, patents in force on June 8, 1995 are entitled to
a patent term of the longer of 17 years from issuance or 20 years from the
earliest filing date of the patent. EP Med currently holds (title to or rights
under license or similar agreements to) 21 material patents in the U.S. and has
8 applications filed with the Patent and Trademark Office of which, one patent
is pending issue. The last to expire of EP Med's patents will remain in effect
until June 2018. We have also obtained certain patents in our principal overseas
markets. The following are current material patents:

<TABLE>
<CAPTION>
United States Patents                             Description                              Date of Expiration
---------------------                             -----------                              ------------------
<S>                          <C>                                                            <C>
5,433,742(1)                 Method for making a flexible adhesive electrode                November 19, 2013

5,807,324                    Steerable catheter                                             April 1, 2016

5,697,965                    Wiring of a common electrode array                             April 1, 2016

5,888,577                    Laser etched IBAD flexible metal electrodes                    June 30, 2017

5,931,863                    Combination pacing/sensing and cardioversion catheter          December 22, 2017
</TABLE>


                                      -10-
<PAGE>

<TABLE>
<S>                          <C>                                                            <C>
5,928,276                    One-piece electrophysiology catheter                           June 11, 2018

5,974,339                    Controlled current defibrillator                               November 26, 2017

6,085,117                    Electrophysiology catheter                                     December 22, 2017

6,144,870                    Catheter with improved electrodes and method of                October 21, 2016
                             fabrication

6,173,205                    Electrophysiology catheter                                     December 22, 2017

5,571,159(2)                 Temporary atrial defibrillation catheter and method            April 4, 2014

5,653,734(2)                 Temporary atrial defibrillation catheter and method            April 4, 2014
                             (division of 5,571,159)

5,928,269(2)                 Apparatus and method for temporary atrial defibrillation       April 4, 2014

6,181,967(2)                 Atrial defibrillator apparatus and method of use               April 4, 2014

5,207,219(3)                 Atrial defibrillator and method for providing interval         May 4, 2010
                             timing prior to cardioversion

5,161,536(4)                 Ultrasonic position indicating apparatus and methods           November 10, 2009
                             (electronics for detection)

5,373,845(4)                 Apparatus and method for forward looking volume imaging        December 20, 2011

5,329,927(4)                 Apparatus and method for locating an interventional            July 19, 2011
                             medical device with a ultrasound color imaging system
                             (equipment)

5,343,865(4)                 Apparatus and method for locating an interventional            Sept. 6, 2011
                             medical device with a ultrasound color imaging system
                             (method)

5,425,370(4)                 Method and apparatus for locating vibrating devices            March 23, 2014
                             (GreyMark)

5,421,336(4)                 Method for attaching an interventional medical device to       April 4, 2014
                             a vibratory member associated with visualization by an
                             ultrasound imaging system (NeedleEngager)
</TABLE>
----------

                                      -11-
<PAGE>

(1) Subject to technology agreement with Allan Willis. See the Section entitled
    "Description of Business--Licenses and other Technology Agreements" below.

(2) Subject to license agreement with Eckhard Alt. See the Section entitled
    "Description of Business--Licenses and other Technology Agreements" below.

(3) Subject to license agreement with Incontrol, Inc. See the Section entitled
    "Description of Business--Licenses and other Technology Agreements" below.

(4) Subject to license agreement with EchoCath, Inc. See the Section entitled
    "Description of Business--Licenses and other Technology Agreements" below.

      In addition, EP Med is a party to certain license agreements which have
provided EP Med with rights under selected patents of third parties with regard
to technology we consider important to our business.

      Licenses and other Technology Agreements:

      o     Pursuant to a license agreement with Eckhard Alt, M.D., dated as of
            November 1, 1995, and subsequently amended, Dr. Alt granted to EP
            Med an exclusive, worldwide license relating to certain technology
            used in connection with the ALERT(R)System, some of which has since
            become protected under 4 issued U.S. patents and 1 patent
            application pending in the European Patent Office and for which
            additional patent applications and continuations have been filed.
            The license agreement provides that EP Med shall pay royalties equal
            to 5% of quarterly net sales of all products covered by the licensed
            technology until the expiration of the last to expire of any
            licensed patents covered by the agreement or the earlier declaration
            of invalidity of such patent. Under the terms of this license
            agreement, EP MedSystems has the right to sublicense this technology
            to third parties and in such case EP MedSystems is obligated to pay
            to Dr. Alt the greater of a 2% royalty or 50% of the total
            sublicense royalties derived from the sublicense agreement. The term
            of this license agreement will continue for the life of the last to
            expire of the licensed patents covered by the agreement unless
            earlier terminated by either party due to breach by the other party
            which breach remains uncured for a period of 60 days.

      o     Pursuant to a license agreement with Incontrol, Inc., dated as of
            January 21, 1998, Incontrol granted to EP Med a non-exclusive,
            worldwide license relating to certain technology covered by an
            issued U.S. patent for synchronization of a defibrillation shock
            delivered using the ALERT(R) Companion. The license agreement
            provides that EP Med shall pay royalties equal to the greater of
            $200 per unit or 2% of the net sales price of the ALERT(R)Companion
            for the life of the patent. The term of the agreement will continue
            for the life of the last to expire of the licensed patents covered
            by the agreement unless earlier terminated by either party.
            Incontrol has the right to terminate the license upon 30 days' prior
            written notice to EP Med in the event of EP Med's breach which
            breach remains uncured.


                                      -12-
<PAGE>

            EP Med has the right to terminate the license at any time upon 60
            days' prior written notice to Incontrol.

      o     Pursuant to an agreement, dated as of April 10, 2000, EP Med
            purchased certain patent rights, technology and related know-how,
            relating to electrode configuration for catheter electrodes which
            may be used by EP Med in its internal cardioversion product line,
            from Sanjeev Saksena for an initial payment of 10,000 shares of EP
            Med's common stock and subsequent payments in the form of quarterly
            royalties equal to 5% of net revenues (as defined under the
            agreement) derived by EP Med in respect of the sale or lease of the
            products covered by the technology (or 2 1/2% of net revenue where
            EP Med is paying a royalty to third party as to the product), and
            50% of the net revenues received from EP Med's licensees or
            sublicensees in respect of product sales or leases, up to an
            aggregate of $1 million whereupon the royalty decreases to 1% of net
            revenues up to total aggregate royalty payments of $5 million. The
            agreement further provides that, for a four-year period following
            the issuance of the patent (an application for which is pending), EP
            Med shall pay a minimum quarterly royalty of $10,000. The agreement
            may be terminated by either party in the event of breach of a
            material obligation by the other party which breach remains uncured
            for a period of 30 days after written notice thereof to the
            breaching party.

      o     Pursuant to an agreement, dated as of March 9, 1998, EP Med
            purchased from Allan Willis an issued U.S. patent and related
            know-how and technology, relating to conductive adhesive bands for
            catheter electrodes used in EP Med's SilverFlex(R) catheters. The
            agreement provides that the purchase price for the technology is
            comprised of an initial payment of $20,000 and subsequent payments
            in the form of quarterly royalties equal to 1% of net revenues (as
            defined under the agreement) derived by EP Med in respect of the
            sale or lease of the products covered by the technology and 50% of
            the net revenues received from EP Med's licensees or sublicensees in
            respect of product sales or leases, up to total aggregate royalty
            payments of $1 million. The agreement further provides that, as of
            January 1, 2001 through the date of expiration or declaration of
            invalidity of the patent, EP Med shall either pay a minimum
            quarterly royalty of $3,000 or grant to Mr. Willis a non-exclusive,
            royalty-free license to the patent including the right to sublicense
            to third parties. The agreement may be terminated by either party in
            the event of breach of a material obligation by the other party
            which breach remains uncured for a period of 30 days after written
            notice thereof to the breaching party.

      o     Pursuant to a settlement agreement with EchoCath, Inc., dated
            November 6, 2001, settling certain litigation among the parties (see
            "Legal Proceedings" below), EchoCath granted to EP Med a fully
            paid-up worldwide, non-exclusive, non-assignable and
            non-transferable license on the use of patents and technology
            associated with EchoCath's ultrasound product line (EchoMark(R),
            EchoEye(R) and ColorMark(R) systems and products) which are designed
            and/or manufactured for


                                      -13-
<PAGE>

            electrophysiology applications, including mapping, ablation and
            internal cardioversion, but excluding permanent pacemaker leads and
            permanent defibrillator leads attached to permanent implantable
            pulse generators. The settlement agreement provides that EP Med
            shall pay to EchoCath a royalty equal to 2% of net sales of any
            product made, used or sold using the patents and technology but no
            minimum royalties. The term of the license will continue for the
            life of the last to expire of the licensed patents, including any
            improvements, unless earlier terminated by either party in the event
            of the other party's insolvency, declaration of receivership, making
            of an assignment for the benefit of creditors or the commission of
            an act of bankruptcy, dissolution, winding up or liquidation, or
            commission of any material breach which breach remains uncured for a
            period of 30 days.

      Although EP Med holds patents, patent rights and patent applications, we
believe that our business as a whole is not or will not be materially dependent
upon patent protection. However, we will continue to seek such patents, as we
deem advisable to protect our research and development efforts and to market our
products. There can be no assurance that any of EP Med's patent applications or
applications as to which we have 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 our technology or any commercial advantage to
EP Med, or that such patents will not be challenged, invalidated or circumvented
in the future. Moreover, there can be no assurance that our 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 our ability to make, use or sell our products
either in the U.S. or in other countries.

      We have not received any notices alleging, and are not aware of any
infringement by EP Med on any other party's patents or intellectual property.
However, there can be no assurance that current and potential competitors have
not filed or in the future will not file applications or apply for patents or
additional proprietary rights relating to devices, apparatus, materials or
processes used or proposed to be used by EP Med.

      We also rely upon technical know-how and continuing technological
innovation to develop and maintain EP Med's position in the market and we
believe that the success of operations will depend largely upon such know-how
and innovation. We require employees and consultants to execute appropriate
confidentiality agreements and assignments of inventions in connection with
their employment or consulting arrangement with EP Med. There can be no
assurance that trade secrets will be established, that secrecy obligations will
be honored or that competition will not independently develop superior or
similar technology.

      We use various trademarks in association with marketing and sale of our
products. The following trademarks include those, which have been registered
with the U.S. Patent and Trademark Office, and those, which are unregistered
trademarks of EP Med:

      Registered Trademarks: EP-WorkMate(R), ALERT(R) System, SilverFlex(R),
      ProCath(R), V-LERT(R), ALERT VT(R)


                                      -14-
<PAGE>

      Unregistered Trademarks: EP-3(TM) Stimulator, Viewflex(TM) and
      ViewMate(TM)

      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, we 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, we
could be forced to redesign our 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 us or that we would be successful in
any attempt to redesign our products or processes to avoid infringement.
Litigation may be necessary to defend against claims of infringement, to enforce
patents issued to EP Med or to protect trade secrets and could result in
substantial cost to, and diversion of effort by, EP Med.

Research and Development

      The electrophysiology market is characterized by rapid technological
change, new product introductions and evolving industry standards. To compete
effectively in this environment, we engage in the continuous development of
products by (i) conducting 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.

      Our expenditures for research and development (which include expenditures
for clinical trials, regulatory affairs and engineering) totaled approximately
$2,521,000 and $2,788,000 in the years ending December 31, 2001 and 2000,
respectively. During 2001 and 2000, our principal research and development costs
involved the ALERT(R) System clinical trials and regulatory approval process,
efforts to develop and obtain regulatory approval of our line of ultrasound
products, hiring of additional in-house engineering and technical support
personnel and increased development work on existing products, including the
EP-WorkMate(R) and electrophysiology catheters. Additionally, other research and
development efforts are ongoing to develop new products, enhance existing
products and lower production costs.

Sales, Marketing and Distribution Methods

Domestic

      We utilize our own direct sales and marketing force to sell and promote
our products in the U.S. market. This includes a Vice President of Sales, a
European Sales Manager, Regional Sales Managers, a Director of Marketing,
clinical engineers, product manager and sales and customer support personnel.

International

      We utilize our own direct sales and marketing force to sell and promote
our products in France. Outside of France, we utilize distributors to sell our
products internationally and we are


                                      -15-
<PAGE>

in the process of adding distributors in several countries not previously
represented. Our distributors pay for products purchased by them in accordance
with agreed-upon terms contained in agreements with them. Some of our agreements
with third-party distributors are oral, and many of our distributor agreements,
both written and oral, are terminable by the distributors. While we do not
consider any one distributor arrangement to be material to our business, we
might not be able to replace existing distributors on a timely basis if present
relationships are terminated. Further, we might not be able to make arrangements
with new distributors to access new international markets and both current and
future distributors might not be successful in actively and effectively
marketing our products. We have branch offices in the United Kingdom and France,
to improve distributor relationships and service European needs in a shorter
response time and assist in additional promotion of our products in Europe. Our
European offices are staffed with Sales Managers, a field engineer and an office
manager. We additionally have a sales engineer located in Japan to assist our
Asia Pacific distributors. We expect to expend considerable resources and effort
to support the sale of the ALERT(R) System in Europe. Examples of the types of
expenditures are physician/clinician training and education, promotional
materials, sample products and increased direct sales expenses, among others.

      No assurance can be given that EP Med or our distributors can successfully
sell the ALERT(R) System or other products in Europe or elsewhere on terms
acceptable to us, 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.

Customers

      Our products are sold to medical institutions and physicians in the United
States which parties then bill various third-party payers, such as government
programs and private insurance plans. See the Section entitled "Description of
Business--Third-Party Reimbursement."

Manufacturing and Sources of Supply

      We assemble our products at our West Berlin, New Jersey facility. Our
engineers generally design our products and their functionality, however,
certain critical components of the ALERT(R) Companion, EP-WorkMate(R), EP-3(TM)
Stimulator and, when completed, our ultrasound products, are, and will be,
obtained from outside sources. Examples of these components are computers,
high-resolution monitors and laser printers that are typically available from
more than one vendor. Vendors of raw materials are required to submit
certificates of compliance to EP Med's specifications. The parts are inspected
and tested upon receipt as well as when the components are assembled into a
complete system prior to shipment.

      Our catheters are assembled and tested by us at our West Berlin, New
Jersey facility prior to contract sterilization. The West Berlin, New Jersey
facility has ISO-9001 Quality System and Design Examination Certification which
allows the CE Mark to be used on our products allowing the sale of the products
in the European Community. The West Berlin, New Jersey facility and the quality
assurance procedures in effect there are subject to good manufacturing practices
("GMP") regulations and quality system regulations promulgated by the U.S. Food
and Drug Administration. In July 2001, subsequent to an inspection of our
manufacturing facility by


                                      -16-
<PAGE>

the FDA, we received a "warning letter" from the FDA requiring us to investigate
and correct various observations made by the FDA with respect to violations at
the facility and relating to our procedures primarily pertaining to design
controls and manufacturing process controls. See the Section entitled
"Description of Business--Government Regulation." We responded to all of the
issues raised in the "warning letter" and the FDA subsequently completed a
re-audit of the facility in January 2002. On March 20, 2002, EP Med met with the
FDA to review the GMP/PMA audit. The conclusion of that meeting was to schedule
a follow-up limited scope re-affirmation visit to occur in the next 30 days.
This follow-up validation was required given that the facility is being cleared
for a GMP/PMA approval. If the FDA is not satisfied with the follow-up, it could
require us to make additional changes as it has in the past or, it could take
regulatory actions against us including license suspension, revocation and/or
denial, seizure and/or injunction and/or civil penalties. Any such action is
likely to have a material adverse effect upon our business and financial
condition.

      The West Berlin, New Jersey facility has no experience in large-scale
manufacturing and there can be no assurance that we will be successful in
manufacturing products in significant volume. We believe that we have sufficient
capacity to satisfy our manufacturing needs for at least the next twelve months.

Government Regulation

United States

      In July 2001, subsequent to an inspection of our facility by the FDA, we
received a "warning letter" requiring us to investigate and correct various
observations made by the FDA with respect to violations at the facility and
relating to our procedures primarily pertaining to design controls and
manufacturing process controls. The "warning letter" identified six areas
requiring our attention. We responded to all of the issues raised in the
"warning letter" and the FDA subsequently completed a GMP re-audit of the
facility and initial PMA audit of the facility in January 2002. The PMA
procedure involves a more rigorous, complex and lengthy review process by the
FDA and the FDA will inspect the manufacturing facility where the unapproved
product is to be made to ensure compliance with the FDA's requirements as to
good manufacturing practices regulations prior to issuance of a PMA.

      On March 20, 2002, EP Med met with the FDA to review the GMP/PMA audit.
The conclusion of that meeting was to schedule a follow-up limited scope
re-affirmation visit to occur in the next 30 days. This follow-up validation was
required given that the facility is being cleared for a GMP/PMA approval. If the
FDA is not satisfied with the follow-up, it could require us to make additional
changes as it has in the past or, it could take regulatory actions against us
including license suspension, revocation and/or denial, seizure and/or
injunction and/or civil penalties. Any such action is likely to have a material
adverse effect upon our business and financial condition.

      We have pre-market approval for the marketing and sale of the
EP-WorkMate(R) and the EP-3 (TM) Stimulator in the United States.


                                      -17-
<PAGE>

      With respect to our ALERT(R) System product line, after completion of our
clinical trials, we submitted our PMA application to the FDA in October 2000. In
April 2001, the FDA notified us of its comments regarding our submission and of
deficiencies contained in the submission and requested additional information
and clarification. The deficiencies noted in the submission fall into three
categories: qualification and testing, clinical and statistical issues and
labeling, which have required providing supplemental or expanded disclosure
relating to test results. We have had discussions with the FDA regarding the
issues raised in the notification and, in July 2001 we submitted our response to
the FDA. Our current discussions with the FDA are focused on resolving labeling
clarifications and closure of the GMP/PMA audit. Approval to market and sell the
ALERT(R) System in the U.S. may take until the second half of 2002, or later.

      We have developed a new electrode manufacturing process using long-length
electrodes for cardioversion and ablation procedures. This process, known as
SilverFlex(R), is a patented technology, which provides unique electrode
flexibility and a lightweight catheter while still maintaining excellent
handling characteristics. Due to development evolution, the current product uses
platinum instead of silver. It was determined that we would expand capabilities
of the catheter to provide diagnostic and therapeutic functionality for use with
our ALERT(R) product line. We are currently collecting clinical data and we
expect to file a supplement to the CE Mark and ALERT(R) PMA to incorporate
SilverFlex(R).

     With respect to our ViewMate(TM) product, we previously submitted our
application to the U.S. Food and Drug Administration for 510(k) approval for
marketing clearance due to the device's substantial equivalence to a legally
marketed device, but later changed the system design and abandoned this
application. A new submission and design dossier are in the process of being
completed and we expect to complete final electrical testing in the second
quarter 2002. We expect to file applications for 510(k) approval and CE Mark
authorization in the second half 2002. We do not anticipate receiving approval
to sell the ViewMate(TM) Ultrasound System until the fourth quarter of 2002, if
approved at all.

      The process of obtaining and maintaining required regulatory approvals can
be expensive, uncertain, and lengthy, and there can be no assurance that we will
ever obtain such approvals and that if such approvals are obtained, there can be
no assurance that we will be able to maintain the approvals. 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 our business, financial condition and
results of operations. Changes in existing requirements or adoption of new
requirements also could have a material adverse effect on our business,
financial condition, and results of operation.

      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 our
ability to market our products.


                                      -18-
<PAGE>

International

      In order for EP Med to market products in Europe and certain other foreign
jurisdictions, we 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. 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 which requires that all such products be labeled with the CE
Mark. EP Med has received Class III Design Examination Certification from its
Notified Body to label its products, including the ALERT(R) System, with the CE
Mark. This designation allows us to market the ALERT(R) System in countries that
are members of the European Union and the European Free Trade Association. There
can be no assurance that we will be successful in maintaining the CE Mark
certification or that we will be able to obtain the CE Mark certification on
newly developed products.

      There can be no assurance that we will obtain regulatory approvals in
countries that require compliance with the laws of that country or that we will
not be required to incur significant costs in obtaining or maintaining our
foreign regulatory approvals. Delays in the receipt of approvals to market our
products or failure to maintain these approvals could have a material adverse
impact on our business, financial condition or results of operations.

Other

      EP Med 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. EP Med has not incurred significant costs to
date in order to comply with such laws. There can be no assurance that we 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 our ability to do business.

Third-Party Reimbursement

      In the U.S., our products are marketed to medical institutions and
physicians that then bill various third-party payers, such as government
programs (principally Medicare and Medicaid) and private insurance plans, for
the healthcare services provided to their patients using our products.
Third-party payers are increasingly challenging the prices charged for medical
products and services, and substantial uncertainty exists as to third-party
reimbursement for newly approved products. Government agencies, private insurers
and other payers generally reimburse medical institutions 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.


                                      -19-
<PAGE>

If a procedure is not covered, payers may deny reimbursement. In addition, some
payers 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 approval
from the U.S. Food and Drug Administration. 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, medical institutions must determine that the clinical benefits of
more expensive equipment justify the additional cost.

      Procedures in which the ALERT(R) System has been used in clinical trials
have been deemed eligible for Medicare reimbursement. However, final
determination of its classification relative to reimbursement will be made
during review by the FDA of the ALERT(R) System pre-market approval application.
EP Med believes that the medical institutions at which clinical trials were
performed have submitted their claims for reimbursement. EP Med is not involved
in the collection of reimbursement monies and has no knowledge as to the status
of payments on reimbursement claims relating to the clinical trials. As
reimbursement is made directly to the medical institutions or physicians using
our products, we do not monitor reimbursement success. We are not aware of
material reimbursement difficulties experienced by medical institutions or
physicians to date.

      EP Med is currently gathering and analyzing clinical cost related
information for inclusion in a request to the U.S. Health Care Financing
Administration regarding the assignment of a new technology reimbursement code
for the use of the ALERT(R) System for internal cardioversion in order to obtain
higher reimbursement amounts to third parties using the ALERT(R) System
procedures. In obtaining this code, the burden of substantiating procedure cost
falls on the manufacturer. The U.S. Health Care Financing Administration can
agree with this amount or reject it and suggest a lower amount. This will be an
on-going process between the U.S. Health Care Financing Administration and EP
Med that could take months to close, if not longer. However, existing U.S.
Health Care Financing Administration codes for defibrillation or
electrophysiology studies may be applied to the use of the ALERT(R) System until
a new technology code is approved. We believe the existing reimbursement codes
would pay lower amounts than the amount expected for the new technology. A new
technology reimbursement code allowing the higher reimbursement would likely
provide further incentive to third parties to select our product over others. We
are exploring our reimbursement options with private insurance plans as well.

      There can be no assurance that substantial reimbursement will be or remain
available for our products or for the ALERT(R) System if it is approved, or even
if reimbursement is available, that payers' reimbursement policies will not
adversely affect our ability to sell our products on a profitable basis.

Competition

      The medical device market, particularly in the area of cardiac
electrophysiology, is highly competitive as the market is characterized by rapid
product development and technological change. Our present or future products
could be rendered obsolete or uneconomic by technological advances by one or
more of our present or future competitors or by other


                                      -20-
<PAGE>

therapies. EP Med's future success will depend upon our ability to remain
competitive with other developers of such medical devices and therapies. We
believe that our existing products compete primarily on the basis of features,
effectiveness, quality, ease and convenience of use, customer service and cost
effectiveness.

      Our 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., Biosense Webster, 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 our
main competitors are Marquette-Prucka (a division of General Electric) and C.R.
Bard Inc.

      Many of our 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 we
do. Competitors may develop new technologies and bring products to market in the
U.S. before we introduce new products and may introduce products that are more
effective than our new products. In addition, competitive products may be
manufactured and marketed more successfully than our products. Our business will
depend upon its ability to remain competitive with other developers of such
medical devices and therapies.

Product Liability and Insurance

      The manufacture and sale of our products involves the risk of product
liability claims. Our 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. Currently, we
maintain 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, EP Med in excess of our insurance coverage or
our inability to maintain insurance in the future could have a material adverse
effect on our business and financial condition.

Employees

      As of March 25, 2002, EP Med had 76 full-time and 7 part-time employees,
of whom 29 are dedicated to manufacturing and quality assurance, 13 represent
executive management and administration, 20 are engaged in sales and marketing
and 21 are engaged in research and development, regulatory affairs and technical
service. We believe our employee relations are satisfactory.

Item 2. Description of Property.

      EP Med currently leases approximately 8,800 square feet of office and
manufacturing space located in Mount Arlington, New Jersey through October 2002,
of which 7,706 square feet


                                      -21-
<PAGE>

is subleased to a related party. This facility houses executive and
administrative employees. EP Med owns and operates a facility comprising
approximately 15,000 square feet in West Berlin, New Jersey. The operations of
this facility are predominantly manufacturing and assembly of hardware and
catheter products. This facility additionally houses administration,
engineering, catheter research and development and warehousing. EP Med entered
into a lease in September 2000, for an additional 2,500 square feet of space
adjacent to its West Berlin, New Jersey facility to be used for administration
and warehousing. At December 31, 2001, the facility owned by EP Med in West
Berlin was encumbered by a mortgage given as security for a $500,000 term loan
from a bank, which was to mature on December 31, 2004. The loan was repaid in
March 2002 and, accordingly, encumbrances on the facility are in the process of
being released.

      EP MedSystems UK Ltd. has an office in Kent, England under a lease for
approximately 822 square feet effective through January 2003. The lease provides
for monthly rental payments of (pounds sterling)708 ($1,029 U.S.). EP MedSystems
France S.A.R.L. entered into a lease in January 2000, for 1,350 square feet of
office and warehouse space in Villebon-Courtaboeuf, France effective through
January 2003. The lease provides for monthly rental payments of (French
francs)9000 ($1,226 U.S.). In addition, EP MedSystems France S.A.R.L. entered
into a month to month lease in May 1999, for 150 square feet of office space in
Aix en Provence, France. The lease provides for monthly rental payments of
(French francs)2600 ($278 U.S.).

      We believe that our facilities are sufficient to meet our expected needs
for at least the next twelve months and that our facilities are adequately
covered by insurance.

Item 3. Legal Proceedings.

      In October 2001, EP MedSystems finalized settlement negotiations with
EchoCath, Inc. relating to the previously reported lawsuit filed by EP Med
against EchoCath in October 1997.

      Settlement negotiations were commenced in 2001 and the terms of the
settlement were finalized in October and put into effect thereafter. Pursuant to
the terms of the settlement, the litigation was dismissed with prejudice with
each party agreeing to bear its own costs and legal fees. In addition, among
other things, EchoCath paid to EP Med $30,000 and waived any rights it may have
had to receive royalty payments from EP Med allegedly due to EchoCath under the
exclusive license agreement entered into by the parties, which license formed
part of the basis for the litigation. EP Med agreed to convert all of its shares
of EchoCath preferred stock into 300,000 shares of EchoCath Class A common stock
and to accept a five-year warrant to purchase an additional 150,000 shares of
EchoCath Class A common stock at an exercise price per share equal to the fair
market value of a share of the stock on the date of settlement. EP Med also
waived its rights to receive any dividends due to EP Med incident to its
ownership of the EchoCath preferred stock.

      EchoCath granted to EP Med a fully paid-up, worldwide, non-exclusive,
non-assignable and non-transferable license to use the patents and technology
associated with EchoCath's ultrasound product line in the field of
electrophysiology applications, including mapping, ablation and internal
cardioversion, but excluding permanent pacemaker leads and defibrillator


                                      -22-
<PAGE>

leads attached to permanent implantable pulse generators. See the Section
entitled "Description of Business -- Licenses and other Technology Agreements."

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

      No matters were submitted to a vote of security holders in the last
quarter of 2001.

                                     PART II

Item 5. Market for Common Equity and Related Stockholder Matters.

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

      The following table sets forth the high and low sale prices for our common
stock for the periods indicated.

        Period                  High              Low
        ------                  ----              ---
        2000
        First quarter           $5.25             $3.25
        Second quarter          $6.82             $3.88
        Third quarter           $5.63             $3.38
        Fourth quarter          $4.75             $1.38

        2001
        First quarter           $3.50             $1.78
        Second quarter          $3.15             $1.13
        Third quarter           $2.64             $1.05
        Fourth quarter          $2.98             $1.08

        2002
        January                 $3.85             $2.25
        February                $3.09             $2.25
        March (through          $3.00             $2.40
           March 25, 2002)

      As of March 25, 2002, there were approximately 59 registered holders of
record of EP Med's common stock. This number excludes individual shareholders
holding stock under nominee security position listings because many of such
shares are held by brokers and other


                                      -23-
<PAGE>

institutions on behalf of shareholders. As a result, we are unable to estimate
the total number of shareholders represented by these record holders, but we
believe that the amount is in excess of 400.

Dividend Policy

      Historically, we have not paid any dividends to our shareholders and we do
not expect to pay any dividends in the foreseeable future.

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

      Except for historical information, the following Management's Discussion
and Analysis or Plan of Operation contains forward-looking statements based upon
current expectations that involve certain risks and uncertainties. EP Med's
actual results could differ materially from those reflected in these
forward-looking statements as a result of certain factors that include, but are
not limited to; the risks discussed in the Section entitled "Risk Factors."
Please see the statements contained under the Section entitled "Cautionary
Statements Regarding Forward-Looking Statements" above.

Overview

      EP MedSystems was incorporated in January 1993 and operates in a single
industry segment. We develop, manufacture, market and sell a line of products
for the cardiac electrophysiology market used to diagnose, monitor and treat
irregular heartbeats known as arrhythmias. Since EP Med's inception, we have
acquired technology and marketing rights, have developed new products and have
begun marketing various electrophysiology products, including the EP-WorkMate(R)
computerized electrophysiology workstation, the EP-3(TM) Stimulator, diagnostic
electrophysiology catheters and the ALERT(R) System, including the ALERT(R)
Companion and ALERT(R) internal cardioversion catheters and related disposable
supplies. To date, these products have generated nearly all of EP Med's sales.

      EP Med's leading diagnostic product is the EP-WorkMate(R), a computerized
electrophysiology workstation that monitors displays and stores cardiac
electrical activity and arrhythmia data. The EP-WorkMate(R) offers, among other
features, display and storage of up to 192 intracardiac signals, real-time
analysis and integration with our own proprietary systems, such as the EP-3(TM)
Stimulator, as well as with other technologies and systems. The EP-3(TM)
Stimulator is a computerized signal generator and processor which, when
integrated with the EP-WorkMate(R), is used to stimulate the heart with
electrical impulses in order to locate arrhythmia. During 2001, the
EP-WorkMate(R) and the EP-3(TM) Stimulator accounted for approximately 86% of EP
Med's total sales. EP Med also markets a line of diagnostic electrophysiology
catheters for stimulation and sensing of electrical signals during
electrophysiology studies, which represented approximately 6% of EP Med's total
sales revenues in 2001.

      We have identified the diagnosis and treatment of atrial fibrillation, a
particular type of arrhythmia, as a primary focus for our ongoing development
efforts. See the Section entitled "Description of Business--General." In an
effort to address this medical condition, we have


                                      -24-
<PAGE>

developed a new product for internal cardioversion of atrial fibrillation known
as the ALERT(R) System, which uses a patented electrode catheter to deliver
measured, variable, low-energy electrical impulses directly to the inside of the
heart to convert atrial fibrillation to a normal heart rhythm. We have obtained
Class III Design Examination Certification from a European Notified Body
allowing us to label the ALERT(R) System with a CE Mark, an international symbol
of adherence to quality assurance standards, design reviews and hazard analysis,
which permits us to sell the ALERT(R) System in the European Community.
International sales of the ALERT(R) System and related catheters accounted for
approximately 8% of EP Med's total sales revenues in 2001. The ALERT(R) System
is not approved for sale in the United States, but we have completed clinical
trials and have submitted our application for pre-market approval of the device
to the U.S. Food and Drug Administration and have responded to FDA requests for
supplemental information; we are awaiting further action on this application and
on other regulatory matters; see the Sections entitled "Description of
Business--Products--ALERT(R) System" and "--Government Regulation." As such,
approval to market and sell the ALERT(R) System in the U.S. may take until the
second half of 2002, or later.

     EP Med also is involved in the development of an intracardiac ultrasound
product line including the ViewMate(TM) ultrasound imaging console and
intracardiac imaging catheters. These products offer high-resolution, real-time
ultrasound capability designed to improve a physician or clinician's ability to
visualize inside the chambers of the heart. We believe that the ViewMate(TM)
Ultrasound System may play an important diagnostic role allowing more effective
treatment options of complex cardiac arrhythmias such as ventricular
tachyarrhythmia and atrial fibrillation. Our ultrasound products currently are
not approved for sale. We expect to file applications for 510(k) approval and CE
Mark authorization in the second half 2002. We do not anticipate receiving
approval to sell the ViewMate(TM) Ultrasound System until the fourth quarter of
2002, if approved at all.

      Critical Accounting Policies

      Financial Reporting Release No. 60, which was recently issued by the
Securities and Exchange Commission, requires all companies to include a
discussion of critical accounting policies or methods used in the preparation of
financial statements. The SEC indicated that a critical accounting policy is one
which is both important to the portrayal of the company's financial condition
and results and requires management's most difficult, subjective or complex
judgements, often as a result of the need to make estimates about the effect of
matters that are inherently uncertain. Note 1 of our Notes to the Consolidated
Financial Statements includes a summary of the significant accounting policies
and methods used in the preparation of our Consolidated Financial Statements.
The following is a brief discussion of the more significant accounting policies
and methods used by us. Note that the preparation of our consolidated financial
statements in conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. There can be no assurance that actual
results will not differ from those estimates.


                                      -25-
<PAGE>

      In addition, Financial Reporting Release No. 61 also recently issued by
the SEC, requires all companies to include a discussion to address, among other
things, liquidity, off-balance sheet arrangements, contractual obligations and
commercial commitments. The information provided below describing EP Med's debt
and future commitments is provided to facilitate a review of EP Med's liquidity
and capital resources.

General

      The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the dates of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. The most significant estimates and assumptions relate to the
recoverability of accounts receivable, inventory, goodwill, intangibles, and
other long-lived assets, and the adequacy of allowances for doubtful accounts
and reserves for inventory obsolescence. Actual amounts could differ
significantly from these estimates.

Revenue Recognition

      EP Med ships products to customers based on FOB shipping point and, as
such recognizes product sales on the date of shipment. Installation of the
products is considered perfunctory. Payments received in advance of shipment of
product are deferred until such products are shipped. EP Med does not have
royalty agreements that result in revenue to EP Med. EP Med does not provide
distributors or end-users with a general right to return products purchased.

      EP Med has two sales channels: sales to independent distributors and sales
directly to customers. EP Med's products do not require "installation" in the
traditional sense, but the EP-WorkMate(R) does require setting up. For
distributor sales, distributors are responsible for all set-up of all electronic
hardware products and EP Med has no obligation after shipment of products to the
distributors. For direct sales, the customer can perform the set-up on its own,
however, EP Med personnel generally will assist customers in this process. The
set-up process, which takes approximately 1-2 hours to complete, is usually
performed within the week of shipment and primarily consists of assembling the
workstation cart and plugging in the monitors, printer, isolation transformer,
and the EP-3(TM) Stimulator (or other catheter) to the main computer and then
answering any customer questions. This process does not impact our standard
payment terms. For sales to distributors, payment terms are defined in the
distributor agreements as 100% of the purchase price being due 30-60 days after
shipment. For direct sales, payment terms are agreed in advance of the sale and
generally require a 50% deposit prior to shipment, with the balance due 30-60
days after shipment.


                                      -26-
<PAGE>

      We provide a standard one-year warranty on all of our products, and in
accordance with Statement of Financial Accounting Standard No. 5, "Accounting
for Contingencies", we accrue the estimated cost of providing the warranty at
the time of sale.

Valuation of Accounts Receivable

      We continuously monitor customers' balances, collections and payments, and
maintain a provision for estimated credit losses based upon our historical
experience and any specific customer collection issues that we have identified.
We may request letters of credit from our customers, when we believe that there
is a significant risk of credit loss. While such credit losses have historically
been within our expectations and the provisions established, we cannot guarantee
that we will continue to experience the same credit loss rates that we have in
the past.

Valuation of Inventory

      We value our inventory at the lower of cost or market, with cost being
determined on a first-in, first-out basis. We continually monitor our
slow-moving items, and establish reserve amounts on a specific identification
basis, as necessary. In addition, due to the fact that our business is dependent
on the latest computer technology, we continually monitor our inventory and
products for obsolescence. If we determine market value to be less than cost, we
write down the cost to that value. Generally, we do not experience significant
issues with the valuation of our inventory; however, these reserves are
estimates, which could change significantly, either favorably or unfavorably,
depending on market and competitive conditions.

Valuation of Goodwill, Intangible Assets, and Other Long-Lived Assets

      We assess the impairment of identifiable intangibles, long-lived assets
and related goodwill and enterprise level goodwill whenever events or changes in
circumstances indicate that the carrying value may not be recoverable. Factors
we consider important which could trigger an impairment review include the
following:

o     significant underperformance relative to expected historical or projected
      future operating results;

o     significant changes in the manner of our use of the acquired assets or the
      strategy for our overall business;

o     significant negative industry or economic trends;

o     significant decline in our stock price for a sustained period; and


                                      -27-
<PAGE>

o     our market capitalization relative to net book value.

      When we determine that the carrying value of intangibles, long-lived
assets and related goodwill and enterprise level goodwill may not be recoverable
based upon the existence of one or more of the above indicators of impairment,
we measure any impairment based on a projected discounted cash flow method using
a discount rate determined by our management to be commensurate with the risk
inherent in our current business model.

      In 2002, Statement of Financial Accounting Standards ("SFAS") No. 142,
"Goodwill and Other Intangible Assets" became effective and as a result, we will
cease to amortize the remaining unamortized goodwill of $342,000. We had
recorded approximately $50,000 of amortization on these amounts during 2001 and
would have recorded approximately the same amount of amortization during 2002.
In lieu of amortization, we are required to perform an initial impairment review
of our goodwill in 2002 and an annual impairment review thereafter. We expect to
complete our initial review during the first quarter of 2002.

      We currently do not expect to record an impairment charge upon completion
of the initial impairment review. However, there can be no assurance that, at
the time the review is completed, a material impairment charge will not be
recorded.

Deferred Offering Costs

      Our policy is to defer offering costs relating to the purchase of common
stock issued under the Fusion Capital common stock purchase agreement in
Shareholder's Equity. We will reclassify the balance from Deferred Offering
Costs to Additional Paid-In Capital ratably as the stock is sold. If any portion
of the $10 million maximum offering amount available from Fusion Capital is not
sold by Fusion Capital, the unamortized amount of Deferred Offering Costs will
be removed from equity and expensed. Based on the current stock price and the
daily maximum offering amount, EP Med may be required to take a charge in 2002.

Results of Operations.

Results of Operations for the Fiscal Year Ended December 31, 2001 Compared to
the Fiscal Year Ended December 31, 2000.

      Sales increased $173,000 (or 2%) to $9,933,000 in the year ended December
31, 2001 as compared to 2000. This increase in sales in 2001 resulted primarily
from higher domestic sales due to a combination of enhanced EP-Workmate(R)
system features and improved sales and marketing efforts. This was partially
offset by lower activity in Asia and the Pacific Rim resulting, in part, from a
delay in the roll-out of hardware improvements to the EP-Workmate(R) to this
region until the first quarter of 2002. Costs of products sold increased
$218,000 (or 5%) to $4,652,000 in the year ended December 31, 2001 as compared
to 2000 due to approximately $80,000 cost of sales on the $173,000 increase in
sales, coupled with an increase in lower margin parts sales and write-off of
certain service parts. As a result, gross profit on sales for the year ended
December 31, 2001 was $5,282,000 as compared to $5,327,000 for 2000. The gross
profit


                                      -28-
<PAGE>

declined as a percentage of sales to 53% from 55%. We hope to improve our
overall gross profit percentage due to continued improvement in manufacturing
costs and as sales of the ALERT(R) System and catheters increase when we receive
approval in the U.S.

      Net sales for the year ended December 31, 2001 were billed in three
currencies: $8,211,000 in U.S. dollars, 1,680,000 in Euro and (pounds
sterling)135,000 pounds sterling. Management has determined that the impact of
foreign currency risk on sales is minimal since a majority of sales are billed
in U.S. dollars. EP Med does incur translation gains/losses, which are recorded
in Shareholders' Equity. EP Med's cumulative translation loss was $80,000 and
its transaction loss was $104,000 for the year ended December 31, 2001. EP Med
has not entered into any derivative financial instruments for hedging or other
purposes.

      Sales and marketing expenses decreased $355,000 (or 7%) to $4,789,000 and
decreased as a percentage of total sales to approximately 48% in the year ended
December 31, 2001 as compared to 53% in 2000. The decrease during 2001 was due
primarily to a reduction in trade show expenses of $187,000 and a decrease in
advertising expenses of $149,000.

      General and administrative expenses decreased $29,000 (or 1%) to
$2,237,000 and remained as a percentage of total sales at approximately 23%. The
decrease in 2001 was primarily due to a $33,000 reduction in expenses for
telecommunications.

      Research and development expenses decreased $266,000 (or 10%) to
$2,521,000 for the year ended December 31, 2001 as compared to 2000. This
decrease was the result of a $70,000 reduction in travel expenses, lower
engineering parts and supplies of $137,000 and a $296,000 reduction in outside
ALERT(R) development costs. These were partially offset by an increase in
in-house salaries and related benefits of $166,000 primarily related to new
hires. We expect that research and development expenses are likely to increase
in future periods due to ongoing development activities relating to the
ViewMate(TM) Ultrasound System and regulatory efforts aimed at gaining approval
to sell this and other new products.

      Interest expense increased $177,000 for the year ended December 31, 2001
as compared to 2000, primarily due to the $281,000 of interest expense accrued
on the $3.2 million note payable to Medtronic.

      Other income, net, increased $264,000 to $403,000 for the year ended
December 31, 2001 as compared to 2000, primarily due to the receipt of $420,000
on the sale of a portion of EP Med's New Jersey 1999 cumulative net operating
loss received in 2001 as compared to $217,000 for the New Jersey 1998 cumulative
net operating loss received in 2000. The sale of the cumulative net operating
loss is a result of a New Jersey State law enacted January 1, 1999 allowing
emerging technology and biotechnology companies to transfer or "sell" their
unused New Jersey net operating loss carry forwards and New Jersey research and
development tax credits to any profitable New Jersey company qualified to
purchase them for cash.


                                      -29-
<PAGE>

Liquidity and Capital Resources.

      Since EP Med's incorporation in January 1993, EP Med's expenses have
exceeded sales resulting in an accumulated deficit of approximately $26.6
million at December 31, 2001 and approximately $22.4 million at December 31,
2000.

      On June 21, 1996, we completed our 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. In early 1998, we sold and issued
2,250,000 shares of our common stock to 6 institutional investors at a price of
$2.25 per share using the gross proceeds of this offering in the amount of
$5,062,500, before deducting offering expenses of approximately $401,000, for
working capital purposes.

      In September 1999, we sold and issued an aggregate of 1,135,000 shares of
common stock in a private offering to an institutional investment fund and three
individuals (together, the "1999 Investors") at $2.75 per share. Each of the
1999 Investors received a callable warrant (collectively, the "1999 Warrants"),
exercisable at $3.50 per share, entitling them to purchase an aggregate of
567,500 shares of common stock subject to EP Med's right to call the 1999
Warrants when the average closing price of EP Med's common stock equaled or
exceeded $4.125 per share during any 20 consecutive trading days. The proceeds
from the offering were $3,032,000, net of approximately $89,000 in related
expenses. During February 2000, warrants to purchase 205,250 warrant shares at
$3.50 per warrant share were exercised for which EP Med received $718,375. EP
Med called the remaining warrants and issued non-callable replacement warrants
to purchase 362,250 shares of common stock at an exercise price of $7.50 per
share.

      In November 2000, EP Med completed a debt financing with Medtronic Asset
Management, Inc., an affiliate of Medtronic, Inc., one of EP Med's shareholders,
which provided an aggregate of $3.2 million. The financing transaction,
evidenced by a note purchase agreement and secured promissory note bearing
interest at two percentage points over the prime rate, provides that principal
and all accrued interest on the note are to be repaid on November 15, 2003 and
that the note is secured by a pledge by David Jenkins, EP Med's, Chief Executive
Officer and a director and shareholder of EP Med, of 300,000 shares of common
stock of Transneuronix, Inc., a privately-held corporation engaged in the
development of neuro-muscular stimulation devices. The shares pledged amounted
to approximately 5% of the total outstanding common stock of Transneuronix, Inc.

      On March 28, 2001, EP Med consummated the sale and issuance of 1,625,000
shares of common stock and warrants for 812,500 additional shares to certain
investors for $3,250,000. Included among the investors is Cardiac Capital, LLC,
a limited liability company, of which our Chairman of the Board and Chief
Executive Officer and a shareholder of EP Med, David A. Jenkins, is a 50% owner.
The consummation of the transaction provided EP Med with approximately
$3,000,000 in working capital after expenses.

     On June 11, 2001, we entered into a common stock purchase agreement with
Fusion Capital Fund II, LLC under which Fusion Capital has committed to purchase
on each trading day during the 25-month term of the agreement $20,000 of our
common stock up to an aggregate of


                                      -30-
<PAGE>

$10 million upon the declaration of effectiveness of a registration statement
covering the shares to be purchased, subject to our right to suspend or
terminate the agreement. The Board of Directors has authorized the sale to
Fusion Capital of up to 2,700,000 shares (19.9% of EP Med's outstanding shares
of common stock on the date that we entered into the common stock purchase
agreement), of EP MedSystems common stock (inclusive of the 225,000 shares
issuable to Fusion Capital as a commitment fee). Sale of any additional shares
would require shareholder approval. Assuming that all sales were to occur at the
closing price on June 11, 2001 (the date on which the agreement with Fusion
Capital was entered into) of $2.97, we would be able to raise approximately
$7,350,750 through the sale of 2,475,000 shares to Fusion Capital (exclusive of
the 225,000 shares issuable to Fusion Capital as a commitment fee). In light of
the number of shares currently registered, liquidity to be afforded to EP
MedSystems in connection with the equity line with Fusion Capital is directly
correlated to our stock price. The lower the price of our stock, the greater the
number of shares that will need to be sold for us to obtain the same proceeds
and, since a fixed number of shares are being registered, the price of our stock
will determine how much of the equity line is available to us absent shareholder
approval to issue additional shares.

     In order to sell in excess of 19.9% of EP Med's outstanding shares of
common stock on the date that we entered into the common stock purchase
agreement (or 2,716,144), it will be necessary for us to obtain EP Med's
shareholders' approval to such sale as required by the Nasdaq Marketplace Rules
to which EP Med is subject. Assuming that we have an adequate number of shares
of common stock to sell and that we stay in compliance with the agreement,
depending on the price at which shares are sold, Fusion Capital could provide us
with sufficient funding to sustain our operations for up to two years.
Alternatively, as described above, a low stock price will limit the amount of
proceeds available to us under the equity line (absent shareholder approval to
issue a greater number of shares) and, thereby, the amount of time during which
our operations will be sustained solely from funds under the equity line. In
connection with the transaction, which closed in October 2001, subsequent to the
declaration by the Securities and Exchange Commission of the effectiveness of
the registration statement, we issued 225,000 shares of our common stock to
Fusion Capital for its purchase commitment.

     We currently are negotiating with an institutional lender regarding a $2
million line of credit facility in order to supplement the amounts which may be
available to us under the Fusion Capital equity line.

      In October 2001, EP Med consummated the private sale and issuance of
newly-designated Series A convertible preferred stock to Century Medical, Inc.
("CMI"), its Japanese distributor, and Medtronic, Inc., a shareholder and
creditor of EP Med. An aggregate of 1,259,717 shares was issued in the
transactions. The transaction with Century Medical, Inc. effected in reliance
upon the exemption afforded by Regulation S of the Securities Act of 1933, as
amended, involved the sale of the shares of preferred stock at a price of $2.048
per share as well as an amendment to EP Med's Distribution Agreement with CMI,
including an extension of the original Distribution Agreement. CMI has converted
its Series A Preferred Stock to shares of common stock.


                                      -31-
<PAGE>

     The transaction with Medtronic, effected in reliance upon the exemption
afforded by Regulation D of the Securities Act of 1933, as amended, involved the
sale of the shares of preferred stock at a price of $1.781 per share. As part of
each transaction, EP Med granted demand and incidental registration rights to
each of Century Medical and Medtronic pursuant to registration rights agreements
entered into by the parties. EP MedSystems received aggregate gross proceeds of
$2.4 million from the two transactions.

      Net cash used in operating activities for the year ending December 31,
2001 decreased $729,000 as compared to 2000. The decrease in our net use of cash
in operations during 2001 was primarily due to a $691,000 reduction in our net
operating loss as compared to the prior year. Payments to related parties are
made on terms similar to those of other suppliers. Capital expenditures, net of
disposals, were $234,000 for the year 2001 as compared to $1,174,000 in 2000.
Capital expenditures in 2000 were high primarily due to an increase in equipment
used for demonstration purposes, the cost of purchasing and implementing an
Enterprise Resource Planning software solution for EP Med and building
improvements. We expect to purchase capital equipment and to expand our
manufacturing and assembly capabilities as we continue to grow, however, we
currently do not have any commitments for purchases. We lease office and
manufacturing space and certain office equipment under operating leases.

      Working capital increased $3,373,000 from December 31, 2000 to $6,340,000
at December 31, 2001. This is primarily due to (1) a $2,041,000 increase in
cash, (2) a $1,312,000 increase in accounts receivable mainly the result of the
higher fourth quarter sales in 2001 versus the same period in 2000, and (3) a
$419,000 increase in prepaid expenses and other current assets primarily prepaid
deposits and insurances. These were somewhat offset by an $876,000 increase in
accrued expenses, deferred revenue and customer deposits.

      EP Med evaluates the collectability of its receivables quarterly. The
allowance for bad debts is based upon specific identification of customer
accounts for which collection is doubtful and EP Med's estimate of the
likelihood of potential loss. To date, EP Med has experienced only modest credit
losses with respect to its accounts receivable. To date, EP Med has experienced
insignificant inventory write-downs and the reserve is consistent with
management's expectations.

      EP Med has a history of operating losses and we expect to continue to
incur operating losses in the near future as we continue to expend substantial
funds for research and development, increased manufacturing activity and
expansion of sales and marketing activities. The amount and timing of future
losses will depend upon, among other things, volume of sales of our existing
products, the timing of regulatory approval and market acceptance of the
ALERT(R) System and ultrasound products and developmental, regulatory and market
success of new products under development as well as EP Med's ability to
establish, preserve and enforce intellectual property rights related to our
products. There can be no assurance that any of our development projects will be
successful or that if development is successful, that the products will generate
any sales. Based upon our current plans and projections, we believe that our


                                      -32-
<PAGE>

existing capital resources will be sufficient to meet our anticipated capital
needs for at least the next twelve months.

      The following table summarizes EPMed's contractual cash obligations at
December 31, 2001, and the effects such obligations are expected to have on
liquidity and cash flow in future periods. EPMed does not have any other
commercial commitments.

                             Payments Due by Period

<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------
 Contractual Obligations          Total          Less than 1 year      1-3 years          4-5 years    After 5 years
--------------------------------------------------------------------------------------------------------------------
<S>                             <C>                   <C>               <C>                 <C>              <C>
Long-Term Debt                  $3,909,000                              $3,909,000
--------------------------------------------------------------------------------------------------------------------
Operating Lease
Obligations                       $217,000            $137,000             $45,000          $18,000          $17,000
--------------------------------------------------------------------------------------------------------------------
Other
Long Term Obligations                   $0                  $0                  $0               $0               $0
--------------------------------------------------------------------------------------------------------------------
Total Contractual Cash
Obligations                     $4,126,000            $137,000          $3,954,000          $18,000          $17,000
--------------------------------------------------------------------------------------------------------------------
</TABLE>

The long term debt includes interest and principal on the note payable to
Medtronic, described above, as interest is payable at maturity.

Impact of Recently Issued Accounting Standards

      In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 141 ("SFAS No. 141"), "Business
Combinations." SFAS No. 141 supercedes Accounting Principles Board Opinion No.
16 ("APB No. 16"), "Business Combinations." The primary changes made by SFAS No.
141 are: (1) requiring that the purchase method of accounting be used for all
business combinations initiated after June 30, 2001, (2) establishing specific
criteria for the recognition of intangible assets separately from goodwill, and
(3) requiring unallocated negative goodwill to be written off immediately as an
extraordinary gain (instead of being deferred and amortized). The adoption of
SFAS No. 141 is required for all business combinations initiated after June 30,
2001. EP MedSystems does not expect that the adoption of SFAS No. 141 will have
a material impact on its results of operations, financial position or cash
flows. We will cease to amortize the remaining unamortized goodwill of $342,000.
We had recorded approximately $50,000 of amortization on these amounts during
2001 and would have recorded approximately the same amount of amortization
during 2002.

      In addition, in June 2001, the FASB issued Statement of Financial
Accounting Standards No. 142 ("SFAS No. 142"), "Goodwill and Other Intangible
Assets." SFAS No. 142 supercedes Accounting Principles Board Opinion No. 17,
"Intangible Assets." SFAS No. 142 primarily addresses the accounting for
goodwill and intangible assets subsequent to their acquisition. The


                                      -33-
<PAGE>

provisions of SFAS No. 142 will be effective for fiscal years beginning after
December 15, 2001. The primary changes made by SFAS No. 142 are: (1) goodwill
and indefinite lived intangible assets will no longer be amortized, (2) goodwill
will be tested for impairment at least annually at the reporting unit level, (3)
intangible assets deemed to have an indefinite life will be tested for
impairment at least annually, and (4) the amortization period of intangible
assets with finite lives will no longer be limited to forty years. In connection
with the adoption of this standard, EP MedSystems' unamortized goodwill balance
will no longer be amortized, but will continue to be tested for impairment. EP
MedSystems plans to test impairment of goodwill, at least annually, using a
two-step impairment test consisting of comparing goodwill fair value and book
value of determined reporting units and, if applicable, measuring the excess of
the recorded amount of goodwill with its implied fair value. EP MedSystems is
currently assessing the impact of the standard on our results of operations.

      In August 2001, the FASB issued Statement of Financial Accounting
Standards No. 143 ("SFAS No. 143"), "Accounting for Asset Retirement
Obligations." This standard requires that obligations associated with the
retirement of tangible long-lived assets be recorded as liabilities when those
obligations are incurred, with the amount of the liability initially measured at
fair value. Upon initially recognizing a liability for an asset retirement
obligation, an entity must capitalize the cost by recognizing an increase in the
carrying amount of the related long-lived asset. Over time, this liability is
accreted to its present value, and the capitalized cost is depreciated over the
useful life of the related asset. Upon settlement of the liability, an entity
either settles the obligation for its recorded amount or incurs a gain or loss
upon settlement. SFAS No. 143 is effective for financial statements issued for
fiscal years beginning after June 15, 2002, which for EP MedSystems, Inc. means
the standard will be adopted on January 1, 2003. EP MedSystems does not expect
that the adoption of this statement will have a material impact on its results
of operations, financial position or cash flows.

     In October 2001, the FASB issued Statement of Financial Accounting
Standards No. 144 ("SFAS No. 144"), "Accounting for the Impairment or Disposal
of Long-Lived Assets," which supercedes Statement of Financial Accounting
Standards No. 121 ("SFAS No. 121"), "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of." SFAS No. 144 applies to all
long-lived assets, including discontinued operations, and consequently amends
Accounting Principles Board Opinion No. 30, "Reporting the Results of
Operations-Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions."
Based on SFAS No. 121, SFAS No. 144 develops one accounting model for long-lived
assets that are to be disposed of by sale, as well as addresses the principal
implementation issues. SFAS No. 144 requires that long-lived assets that are to
be disposed of by sale be measured at the lower of book value or fair value less
cost to sell. Additionally, SFAS No. 144 expands the scope of discontinued
operations to include all components of an entity with operations that (1) can
be distinguished from the rest of the entity and (2) will be eliminated from the
ongoing operations of the entity in a disposal transaction. SFAS No. 144 is
effective for financial statements issued for fiscal years beginning after
December 15, 2001, which for EP MedSystems, Inc. means the standard will be
adopted on January 1, 2002. The Company does not expect that the adoption of
SFAS No. 144 will have a material impact on its results of operations, financial
position or cash flows.


                                      -34-
<PAGE>

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. We are
presently identifying and ensuring that all Euro conversion compliance issues
are addressed. For the year ended December 31, 2001 EP Med recorded
approximately $104,000 in transaction losses primarily from weakness in the
Euro.

                                  Risk Factors

      An investment in EP MedSystems involves a high degree of risk. You should
carefully consider the following risk factors and other information in this
report before deciding to buy our common stock. There may be other risks and
uncertainties that we do not know of or that we do not consider material at this
time. If these risks occur, our business, financial condition and results of
operations will suffer. In such case, the trading price of our common stock
could decline and you could lose all or part of your investment. Additionally,
this report contains forward-looking statements that involve uncertainties and
EP Med's actual results may differ significantly for those expressed in
forward-looking statements. This Section discusses factors that can cause those
differences. See the Section entitled "Cautionary Statement Regarding
Forward-Looking Statements," above.

We have a history of operating losses and expect future losses.

     EP MedSystems was incorporated in January 1993 and completed its initial
public offering of common stock in June 1996. We have incurred substantial
operating losses in each year since incorporation with aggregate losses of
approximately $3,533,000 for the period from 1993 through 1995 and annual losses
in the approximate amounts set forth below in the years since our initial public
offering:

                1996           $1,571,000
                1997           $4,864,000
                1998           $4,511,000
                1999           $3,213,000
                2000           $4,836,000
                2001           $4,145,000


                                      -35-
<PAGE>

      As of December 31, 2001, we had an accumulated deficit of approximately
$26.6 million. Our present product sales did not cover our operating expenses of
approximately $14.2 million for the year ended December 31, 2001 and $14.6
million for the year ended December 31, 2000. Additionally, we expect that our
2002 operating expenses will exceed those for 2001 and will not be covered by
our 2002 sales revenues. Further, we expect that our future operating expenses
will continue, and as such, we may continue to incur operating losses.

The funds which may be obtained pursuant to our agreement with Fusion Capital
may be insufficient to support our capital needs beyond 2002.

      Our agreement with Fusion Capital could provide us with sufficient funding
to sustain our operations for up to two years, beginning in the third quarter of
2001, but the extent to which we rely on Fusion Capital as a source of financing
will depend on a number of factors, including the prevailing market price of our
common stock. Since we initially have registered 2,475,000 shares for sale by
Fusion Capital, the selling price of our stock to Fusion Capital will have to
average at least $4.04 per share for us to receive the maximum proceeds of $10
million available under the common stock purchase agreement without registering
and issuing any additional shares. We will need to seek shareholder approval to
issue more than 2,716,144 shares of our common stock to Fusion Capital. Even if
we are able to access the full $10 million, we may still need additional capital
to fully implement our business, operating and development plans as we only have
the right to receive $20,000 per trading day under the common stock purchase
agreement unless our stock price equals or exceeds $5.00 per share, in which
event the daily purchase amount may be increased. If obtaining sufficient
funding from Fusion Capital were to prove prohibitively expensive and if we are
unable to generate significant sales of our products in the near term, we will
need to secure another source of funding in order to satisfy our working capital
needs or significantly curtail our operations. Should the funding we require be
unavailable or prohibitively expensive when we require it, the consequences
would have a material adverse effect on our business and financial condition.

Our success will depend on continued market acceptance of the EP-WorkMate(R).

     Our ability to increase revenues over the next several years will depend on
the continued acceptance by electrophysiologists of one of our products, the
EP-WorkMate(R) computerized monitoring and analysis workstation. The
EP-WorkMate(R) accounted for 82% and 80% of our product sales in the years ended
December 31, 2001 and 2000, respectively, and is expected to account for a
significant portion of our 2002 revenues. Because the EP-WorkMate(R) has a list
price of approximately $140,000 with an integrated EP-3(TM) Stimulator, each
sale of an EP-WorkMate(R) represents a relatively large percentage of our net
sales. We cannot be sure that the EP-WorkMate(R)s present level of market
acceptance and sales can be maintained, a decrease in either of which could have
a material adverse effect on our business and financial condition.

Our success will depend on approval of the ALERT(R) System and resolution of
regulatory items.

     Our long-term success depends on the success of one of our products, the
ALERT(R) System. Although approved for sale in the European Community, the
ALERT(R) System has not been approved by the U.S. Food and Drug Administration
and cannot be sold commercially in


                                      -36-
<PAGE>

the United States without FDA approval. FDA approval is based upon, among other
things, the results of clinical trials that demonstrate the safety and
effectiveness of the device. We have completed clinical trials and have
submitted an application to the FDA for pre-market approval ("PMA") of the
ALERT(R) System and, in April 2001, we received comments and notification of
deficiencies relating to such application. We had discussions with the FDA
regarding the issues raised in the notification and, in July 2001, we submitted
our response to the FDA and subsequently, we have had further communications
with the FDA. As a consequence of the status of our PMA submission, the timing
of approval to market and sell the ALERT(R) System in the U.S. cannot be
predicted with any accuracy but we are hopeful that we will receive the PMA
during 2002. See the Section entitled "Description of Business--Government
Regulation."

Our success will depend on successful commercialization of the ALERT(R) System.

      If we receive approval from the U.S. Food and Drug Administration to
market the ALERT(R) System in the United States, we, nevertheless, will be faced
with obstacles to successful commercialization. The commercial success of the
product will depend significantly upon acceptance by physicians. Physician
acceptance will depend upon, among other things, substantial favorable clinical
experience, advantages over alternative treatments, cost effectiveness, and
favorable reimbursement policies of third-party payors such as insurance
companies, Medicare and other governmental programs. Our failure to obtain
market acceptance of the ALERT(R) System could have a material adverse effect on
our business and financial condition.

Our success will depend on our ability to manufacture the ALERT(R) System
profitably.

      If we receive approval from the U.S. Food and Drug Administration to
market the ALERT(R) System in the United States and we obtain market acceptance
of the product, profitability of the ALERT(R) System, nevertheless, will depend
on our ability to manufacture the product efficiently and economically in
commercial quantities. We have manufactured the components of the ALERT(R)
System only in limited quantities. We may not be able to attain efficient
manufacturing levels. Further, we will also be dependent on sub-contractors for
certain key components of the ALERT(R) System. Our failure to obtain
manufacturing efficiency and reliable sub-contractors could have a material
adverse effect on our business and financial condition.


                                      -37-
<PAGE>

A few of our shareholders, acting together, are able to influence, and possibly
control, most matters requiring shareholder approval thereby limiting the
influence which other shareholders can exercise over EP Med's business.

      As a result of the private placement financing with Cardiac Capital LLC
and Texada Trust completed in the first quarter of 2001, David Jenkins, Chairman
of the Board, and a shareholder of EP MedSystems, who is also a 50% owner of
Cardiac Capital, LLC, beneficially owns, in the aggregate, shares representing
approximately 22.7% of the outstanding shares of common stock, assuming warrants
held are fully exercised. As a result, David Jenkins and Cardiac Capital, LLC,
acting together, are able to influence significantly, and possibly control, most
matters requiring approval of the shareholders of EP Med, including approval of
amendments to EP Med's certificate of incorporation, mergers, a sale of all or
substantially all of EP Med's assets, going private transactions and other
fundamental transactions. EP Med's certificate of incorporation does not provide
for cumulative voting with respect to the election of directors. The certificate
of incorporation does provide for staggered elections of our Board of Directors.
As a result, Mr. Jenkins and his affiliates may be able to control the election
of members of our Board. Such a concentration of ownership could affect the
liquidity of EP Med's common stock and have an adverse effect on the price of
the common stock and may have the effect of delaying or preventing a change in
control of EP MedSystems, including transactions in which the shareholders might
otherwise receive a premium for their shares over current market prices.

Our business and financial condition are subject to various risks and
uncertainties arising from domestic and international laws and regulations.

      United States. In the United States, the development, testing,
manufacture, labeling, marketing, promotion and sale of medical devices is
regulated principally by the U.S. Food and Drug Administration under the Federal
Food, Drug and Cosmetic Act. The FDA has broad discretion in enforcing
compliance with that statute and its regulations. Our ability to continue to
sell our products commercially, is subject to continuing FDA oversight of the
on-going design, manufacturing, packaging, labeling, storage and quality of our
medical devices. Noncompliance can result in fines, injunctions, civil
penalties, recall or seizure of products, total or partial suspension of
production, failure to grant pre-market clearance or pre-market approval for
devices, withdrawal of marketing approvals and criminal prosecution any of which
could have a material adverse effect on our business and financial condition.

      In July 2001, subsequent to an inspection of our manufacturing facility in
West Berlin, New Jersey by the FDA, we received a "warning letter" from the FDA
requiring us to investigate and correct various observations made by the FDA
with respect to violations at the facility and relating to our procedures
primarily pertaining to design controls and manufacturing process controls; see
the Section entitled "Description of Business--Government Regulation." We
responded to all of the issues raised in the "warning letter" and the FDA
subsequently completed a re-audit of the facility in January 2002. On March 20,
2002, EP Med met with the FDA to review the GMP/PMA audit. The conclusion of
that meeting was to schedule a follow-up limited scope re-affirmation visit to
occur in the next 30 days. This follow-up validation was required given the
facility is being cleared for a GMP/PMA approval. If the FDA is not


                                      -38-
<PAGE>

satisfied with the follow-up, it could require us to make additional changes
as it has in the past or, it could take regulatory actions against us including
license suspension, revocation and/or denial, seizure and/or injunction and/or
civil penalties. Any such action is likely to have a material adverse effect
upon our business and financial condition.

      International. In order for us to market our products in Europe and
certain other foreign jurisdictions, we 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. 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. We may not be able to obtain
regulatory approvals in such countries or we may be required to incur
significant costs in obtaining or maintaining our foreign regulatory approvals.
Failure to obtain approvals or delays in the receipt of approvals to market our
products and/or failure to maintain the approvals we currently have and those
which we may receive in the future would have a material adverse effect on our
business, operating results, financial condition and prospects. Presently, we
are permitted to sell some of our products in countries that are members of the
European Union and the European Free Trade Association. We cannot be sure that
we will be successful in maintaining that permission.

Our success will depend, in part, on our ability to keep pace with technological
and marketplace changes.

      The electrophysiology market is characterized by rapidly changing
technology, new products and industry standards. Accordingly, our ability to
compete depends on our ability to develop new products and improve existing
ones. The research and development necessary for new products and for product
refinements can take longer and require greater expenditures than expected, and
might not succeed. Moreover, our new products and product refinements might not
be accepted by physicians and patients.

Our patents and proprietary rights might not provide sufficient protection.

      Our success and ability to compete in the marketplace will depend in part
upon our ability to protect our proprietary technology and other intellectual
property. We seek patents on our important inventions, have acquired patents and
have entered into license agreements to obtain rights under selected patents of
third parties that we consider important to our business. Patents might not be
issued on our patent applications and applications for which we have acquired
licenses. Further, if those patents are issued, they may not be of sufficient
scope and strength to provide us with meaningful protection or commercial
advantage. Additionally, these patents may be challenged, invalidated or
circumvented in the future. Moreover, our competitors, many of whom have
substantial resources and have made substantial investments in competing
technologies, may presently have or may seek patents that will prevent, limit or
interfere with our ability to make, use or sell our products in the U.S. and
other countries.


                                      -39-
<PAGE>

     In addition to patents, we rely on a combination of trade secrets,
copyrights and trademarks to protect our intellectual property rights. For
example, our software (which is an integrated component in the EP-WorkMate(R)
and EP-3(TM) Stimulator) is not patented and existing copyright laws offer only
limited practical protection from misappropriation. Our competitors may
independently develop substantially equivalent proprietary technology.

Intellectual property litigation could harm our business.

      While we do not believe that we are infringing any patents or other
intellectual property rights of others, litigation over infringement claims is
frequent in the medical device industry and could arise. This kind of
litigation, with or without merit, would be time consuming and costly, and could
cause shipment delays, require us to develop alternative technology or require
us to enter into costly royalty or licensing agreements. Further, if necessary
licenses are not available to us on satisfactory terms, we may not be able to
redesign our products or processes to avoid alleged infringement. Accordingly,
we could be prevented from manufacturing and selling some of our products. Also,
competitors might infringe our patents and trade secrets. Costly and time
consuming litigation may be necessary to enforce our patents and to protect our
trade secrets.

If we are unable to pay royalties we may lose our rights to use certain
important technology.

      We have entered into several technology agreements, which require us to
pay royalties, including, in some cases, minimum annual royalties. In 2001, we
had royalty expenses equal to approximately $51,000 payable in connection with
those agreements. Under the terms of our agreement relating to the SilverFlex(R)
technology, minimum royalties became payable in 2001 at the rate of $3,000 per
quarter or, in the alternative, at our option, we may grant to the inventor of
the technology, Allan Willis, a non-exclusive, royalty-free license to the
patent allowing him to use the technology as well as sublicensing it to third
parties. Royalty payments have not become payable under our other technology
agreements as yet. If we do not pay these royalties, we may be in breach of our
technology agreements and could lose the rights granted to the technology under
these agreements. The loss of these rights would effect our ability to make,
market and sell the ALERT(R) product line and the SilverFlex(R) product line,
which could have a material adverse impact on our business and financial
condition. See the Section entitled "Description of Business--Patents,
Trademarks and Licenses."

We face significant competition, which affects our likelihood of success.

      The medical device market, particularly in the area of electrophysiology
products, is highly competitive. Many of our competitors have access to
significantly greater financial, marketing and other resources. Further, the
medical device market is characterized by rapid product development and
technological change. Our present and future products could become obsolete or
uneconomic through technological advances by one or more of our competitors. For
example, the ALERT(R) System is a new technology that must compete with
established treatments for atrial fibrillation as well as with new treatments
currently under development by


                                      -40-
<PAGE>

other companies. Our future success will depend on our ability to remain
competitive with other developers of medical devices and therapies.

Third-party reimbursement might be denied or not be available for some of our
products.

      Our products are generally purchased by physicians or medical
institutions. In the U.S., third-party payors, such as Medicare, Medicaid and
private insurers, are then billed for the healthcare services provided to
patients using those products. Similar reimbursement arrangements exist in
several European countries. Third-party payors may deny or limit reimbursement
for our existing products and future products, such as the ALERT(R) System.
Third-party payors are increasingly challenging the prices charged for medical
products and services and are putting pressure on medical equipment suppliers to
reduce prices. Procedures involving the EP-WorkMate(R) and the ALERT(R) System
currently are eligible for reimbursement. However, changes in FDA regulations,
Medicare regulations or in other third-party payor policies, could reduce or
make either or both Medicare or other third-party reimbursement unavailable for
procedures using our existing products and, if approved by the FDA, for the
ALERT(R) System. Any of these occurrences could have a material adverse affect
on business and financial condition. See the Section entitled "Description of
Business--Third Party Reimbursement."

We might not be able to maintain or effectively manage our sales force, which
would reduce our ability to promote and sell our products.

      We utilize our own domestic direct sales and marketing force to sell and
promote our products in the U.S. We might not be able to continue to attract and
retain qualified and capable individuals who can successfully promote our
products.

      We are also in the process of expanding our marketing internationally and
will continue to rely on third-party distributors in foreign markets. We formed
a U.S. subsidiary located in France in 1999 and have a U.S. subsidiary, with a
branch in the United Kingdom, to increase sales, to improve distributor
relationships and customer service and to assist in the introduction of the
ALERT(R) System in Europe. We generate sales through a Japanese distributor and
have a distribution network in the Asian markets. Some of our agreements with
third-party distributors are oral, and many of our distributor agreements, both
written and oral, are terminable by the distributors. While we do not consider
any one distributor to be material to our business, we might not be able to
replace existing distributors on a timely basis if present relationships are
terminated. Further, we might not be able to make arrangements with new
distributors to access new international markets and both current and future
distributors might not be successful in actively and effectively marketing our
products.

Our business could be subject to product liability claims, which, if successful,
could have a material adverse effect on our business and financial condition.

      The manufacture and sale of our products involves the risk of product
liability claims. Our 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


                                      -41-
<PAGE>

or death. Misuse or reuse of our catheters may increase the risk of product
liability claims. We currently maintain product liability insurance with
coverage limits of $5,000,000 per occurrence and $5,000,000 in the aggregate per
year. This insurance is expensive and may not be available to us in the future.
A successful claim against us or settlement by us in excess of our insurance
coverage or our inability to maintain insurance could have a material adverse
effect on our business and financial condition.

We have limited manufacturing experience and depend on outside sources for the
manufacture of critical components of our products.

      We have limited manufacturing experience in manufacturing our catheter
products. Further, we have limited experience manufacturing these products in
the volume that will be necessary for us to achieve significant commercial sales
in the event of significant demand. While we have expanded our catheter
manufacturing facilities and have hired and trained additional personnel, we may
not be able to establish or maintain reliable, high-volume, cost-effective
manufacturing capacity. Moreover, we may encounter difficulties in increasing
our manufacturing capacity, including problems involving production yields,
quality control and assurance, component supply shortages, shortages of
qualified personnel, compliance with FDA regulations and the need for further
regulatory approval on new manufacturing processes. Additionally, we rely on
outside sources for the manufacturing of critical components for the ALERT(R)
Companion, EP-WorkMate(R) and EP-3(TM) Stimulator. Any interruption in this
supply from our outside sources would have a material adverse effect on our
ability to deliver our products. If an interruption were to occur, we may not be
able to reach an acceptable arrangement with an alternative source of supply on
a timely basis. Our failure to find alternative manufacturing sources would have
a material adverse effect on our business and financial condition.

We rely on international sales, which expose us to risks of foreign operations.

      In the year ended December 31, 2001, approximately 38% of our sales were
derived outside the U.S. We expect international sales will continue to
represent a significant percentage of our total sales and we intend to continue
to increase our operations outside of the United States. We sell our products in
the countries of the European Community and in Japan, Turkey, Saudi Arabia and
China, among others. Our reliance on international sales subjects us to
fluctuations in currency exchange rates in Europe in connection with the Euro
and pounds sterling, though sales in other jurisdictions are paid in U.S.
dollars. Management has determined that the impact of foreign currency risks on
sales are small since a majority of sales are billed in U.S. dollars. EP Med
does incur translation gains/losses, which are recorded in Stockholders' Equity.
EP Med's cumulative translation loss was $80,000 at December 31, 2001.

      We experience the risks of unstable economies and political regimes in our
foreign selling markets such as Turkey, Saudi Arabia and China, among others.
Other risks of reliance on foreign sales include the following:

            o     export license requirements;
            o     unexpected changes in regulatory requirements;


                                      -42-
<PAGE>

            o     extended collection periods for accounts receivable;
            o     potentially inadequate protections of intellectual property
                  rights; and
            o     restrictions on repatriation of earnings.

      These factors could have a material adverse effect on our ability to
maintain and expand foreign sales. Our failure to maintain and expand foreign
sales would have a material adverse effect on our business and financial
condition.

Potential issuance of preferred stock may delay, defer 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 shareholders. The potential issuance of preferred stock under certain
circumstances may have the effect of delaying, deferring or preventing a change
in control of EP Med or otherwise adversely affecting the rights of the holders
of common stock.

The market price of our common stock has been and may continue to be highly
volatile.

      Factors, including announcements of technological innovations by us or
other companies, regulatory matters, new or existing products or procedures,
concerns about our financial position, operating results, litigation, government
regulation, developments or disputes relating to agreements, patents or
proprietary rights, may have a significant impact on the market price of our
stock. In addition, potential dilutive effects of future sales of shares of
common stock by shareholders and by EP Med, including sales of our common stock
by Fusion Capital and the possible subsequent sale of common stock by the
holders of warrants and options, could have a material adverse effect on the
prices of our securities.

We must comply with the continued listing requirements of the Nasdaq National
Market or we may be delisted or down-listed to the Nasdaq SmallCap Market.

      Our continued listing on the Nasdaq National Market is subject to our
compliance with all continued listing requirements set forth in the Nasdaq
Marketplace Rules. We have previously failed to meet some of the continued
listing requirements from time to time for a brief period and then cured
whatever defect caused the temporary noncompliance. We cannot be sure that we
will be successful in our efforts comply with the continued listing requirements
in the future or that if we fail to do so on a temporary basis that the Nasdaq
National Market will allow us to continue to list on that system. Our failure to
comply or promptly to cure a noncompliance could result in our stock being
delisted or, down-listed to the Nasdaq SmallCap Market. If our stock is
delisted, trading, if any, in the stock would thereafter be conducted in the
over-the-counter market in the "pink sheets" or the National Association of
Securities Dealers' "Electronic Bulletin Board" and the liquidity of our stock
could be materially impaired.


                                      -43-
<PAGE>

The sale of our common stock to Fusion Capital may cause substantial dilution
and the sale of the shares acquired by Fusion Capital could cause the price of
our common stock to decline.

     The purchase price for the common stock to be issued to Fusion Capital
under the common stock purchase agreement will fluctuate based on the closing
price of our common stock. Since we have initially registered 2,475,000 shares
in this offering for Fusion Capital to purchase under the common stock purchase
agreement (exclusive of the 225,000 shares issued to Fusion Capital as a
commitment fee), our stock price will need to equal or exceed $4.04 per share
for us to receive the maximum proceeds of $10 million under the common stock
purchase agreement. Assuming a purchase price of $2.97 per share (the closing
sale price of the common stock on June 11, 2001, the date on which the common
stock purchase agreement with Fusion Capital was entered into) and the purchase
by Fusion Capital of the full amount of shares purchasable under the common
stock purchase agreement (exclusive of the 225,000 shares issued to Fusion
Capital as a commitment fee), proceeds to us would only be $7,350,750 unless we
choose to issue more than 2,475,000 shares. A lower purchase price will reduce
considerably the amount of proceeds available to us under the equity line. In
the event that we decide to issue a number of shares that represents greater
than 19.9% of our outstanding shares of common stock, we would first seek
shareholder approval in order to be in compliance with Nasdaq Marketplace Rules.

      Fusion Capital may sell none, some or all of the other shares of common
stock purchased from us at any time. We expect that shares registered in this
offering will be sold over a period of up to 25 months from October 17, 2001.
Depending upon market liquidity at the time, a sale of shares under this
offering at any given time could cause the trading price of our common stock to
decline. The sale of a substantial number of shares of our common stock under
this offering, or anticipation of such sales, could make it more difficult for
us to sell equity or equity-related securities in the future at a time and at a
price that it might otherwise wish to effect sales.

      If Fusion Capital purchased the full amount of shares purchasable under
the common stock purchase agreement on October 17, 2001, the date of the
prospectus, and assuming a purchase price per share of $2.97 (the closing sale
price of the common stock on June 11, 2001, the date on which the agreement was
entered into), Fusion Capital would have been able to purchase 3,367,003 shares
of our common stock under the common stock purchase agreement. This would
constitute 24.7% of our outstanding common stock. Such dilution could be more
significant if the market price of our common stock at the time Fusion Capital
purchases shares of our common stock under the common stock purchase agreement
is lower than the current market price of our common stock, as a lower trading
price would cause more shares of our common stock to be issuable to Fusion
Capital.

The existence of the common stock purchase agreement with Fusion Capital to
purchase shares of our common stock could cause downward pressure on the market
price of our common stock.

      Both the actual dilution and the potential for dilution resulting from
sales of our common stock to Fusion Capital could cause shareholders to elect to
sell their shares of our common


                                      -44-
<PAGE>

stock, which could cause the trading price of our common stock to decrease. In
addition, prospective investors anticipating the downward pressure on the price
of our common stock due to the shares available for sale by Fusion Capital could
refrain from purchases or effect sales in anticipation of a decline of the
market price.

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 Annual Report on Form 10-KSB.

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

      None.

                                    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 EP Med:

  David A. Jenkins (1)       44     Chairman of the Board and Chief Executive
                                    Officer; Class III Director
  Reinhard Schmidt           47     President and Chief Operating Officer; Class
                                    II Director
  Joseph M. Turner           39     Chief Financial Officer, Treasurer and
                                    Secretary
  J. Randall Rolston         55     Vice President, Sales
  C. Bryan Byrd              41     Vice President, Engineering and Operations
  Darryl D. Fry              62     Class II Director
  John E. Underwood(2)(3)    58     Class I Director

----------
(1) Member of the Plan Committee of the Board of Directors.

(2) Member of the Audit Committee of the Board of Directors.

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

      EP Med's by-laws provide that the number of directors, as determined from
time to time by the Board of Directors, shall not be less than 3 nor more than
11. Pursuant to the by-laws, the Board of Directors has set the number of
directors at 5. EP Med's certificate of incorporation, as amended and restated,
provides that the directors shall be divided into 3 classes as nearly equal in
number as possible. The initial term of Class I directors expires at the 2002
Annual Meeting, the initial term of Class II directors expired at the 2000
Annual Meeting and the initial term of


                                      -45-
<PAGE>

the Class III directors expired at the 2001 Annual Meeting. The successors to
each class of directors whose terms expire at succeeding annual meetings, will
be elected to hold office for a term expiring at the Annual Meeting of
Shareholders held in the third year following the year of their election.
Officers of EP Med 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 EP Med.

      David A. Jenkins is a founder and currently Chairman of the Board of
Directors, President and Chief Executive Officer of EP Med. Mr. Jenkins has
served as the President, Chief Executive Officer and a director of EP Med since
its inception in 1993 and as Chairman since 1995; Mr. Jenkins resigned from his
position as President in August 2001. 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 engaged in the
sale and distribution of electrophysiology products. He also serves as a
director of Transneuronix, Inc., a privately held company.

      Reinhard Schmidt joined EP Med as President and Chief Operating Officer in
August 2001 and has been appointed to the Board of Directors. From 1998 through
2001, Mr. Schmidt was President of Surgical Navigation Specialist, Inc. From
1995 to 1998, Mr. Schmidt was Vice President and General Manager of Siemens
Healthcare Services, a Siemens company. From 1990 to 1995, Mr. Schmidt worked
with General Electric Medical Systems as Manager of National Accounts and
Manager of Multi-Hospital Systems and HealthCare Systems.

      Joseph M. Turner joined EP Med as Chief Financial Officer, Treasurer and
Secretary of EP Med in February 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 EP Med. Mr. Rolston
joined EP Med in September 1996 as National Sales Manager and was named Vice
President, Sales in April 1998. Prior to joining EP Med, Mr. Rolston was
employed in various sales management positions at Cordis Webster, an
electrophysiology catheter company owned by Johnson & Johnson. Prior to his
employment with 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 and Operations of EP Med.
Mr. Byrd joined EP Med in April 1993 to oversee software development for new
products. Prior to joining EP Med, Mr. Byrd co-founded and served as the
Director of Engineering for BioPhysical Interface Corp. from 1989 to 1993 where
he was responsible for developing automated computerized monitoring equipment
for pacemaker and open heart operating rooms and follow-up clinics. Prior to his
involvement with BioPhysical Interface Corp., Mr. Byrd was employed by Mt. Sinai
Medical Center in Miami Beach, Florida as a clinical software engineer.


                                      -46-
<PAGE>

      Darryl D. Fry has served as a Director of EP Med since September 1999,
when he was elected by the Board of Directors to fill a vacancy. From December
1993 until his retirement in January 1999, Mr. Fry served as Chairman (until his
retirement), President (until January 1997) and Chief Executive Officer (until
May 1998) of Cytec Industries, Inc., a New York Stock Exchange listed company.
Mr. Fry serves as a Director of Fortis Inc.

      John E. Underwood has served as a Director of EP Med 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, Inc., General Electric Company and Becton
Dickinson.

      In November 2001, Director Nigel K. Roberts, who joined EP Med's Board of
Directors in April 2001, passed away reducing the number of members comprising
the Board to four members; no replacement has been named as of the date of this
report.

Compliance with Reporting Requirements

      Section 16(a) of the Exchange Act requires EP Med's executive officers,
directors and holders of more than 10% of EP Med's common stock, to file reports
of ownership and changes in ownership with the Securities and Exchange
Commission. Such persons are required to furnish EP Med 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 Statements of Beneficial Ownership on Form 5 were required for
those persons, we believe that, with respect to the year ended December 31,
2001, our executive officers, directors and greater than 10% beneficial owners
complied with all such filing requirements.

Item 10. Executive Compensation.

      The following summary compensation table sets forth certain information
concerning compensation paid or accrued to the Chief Executive Officer and each
of EP Med's four most highly paid executive officers whose salary and bonus for
all of their services in all capacities in 2001 exceed $100,000.

                           Summary Compensation Table

<TABLE>
<CAPTION>
                                            Long Term Compensation
                                            ----------------------
Name and Principal                          Salary          Other     Securities Underlying
Position                       Year            $              $             Options
------------------             ----         -------       ---------   ---------------------
<S>                            <C>         <C>            <C>              <C>
David A. Jenkins               2001        $225,000           $0
Chairman and                   2000        $225,000           $0            70,000(1)
Chief Executive                1999        $203,750           $0                 0
Officer

Reinhard Schmidt               2001         $77,359       30,000(2)        160,000(3)
President and Chief
Operating Officer
</TABLE>


                                      -47-
<PAGE>

<TABLE>
<S>                            <C>          <C>           <C>               <C>
J. Randall Rolston             2001        $153,573           $0                 0
Vice President, Sales          2000        $160,549           $0             6,222(4)
                               1999        $158,851           $0            15,922(5)

C. Bryan Byrd                  2001        $150,000           $0                 0
Vice President,                2000        $154,658           $0            50,000(6)
Engineering and                1999        $112,083           $0                 0
Operations

Joseph M. Turner               2001        $130,000           $0                    0
Chief Financial                2000        $125,000           $0             5,000(7)
Officer                        1999        $110,000           $0            50,000(8)
</TABLE>

----------
(1)   On December 24, 2000, EP Med granted Mr. Jenkins an incentive stock option
      to purchase 70,000 shares of common stock pursuant to the 1995 Long Term
      Incentive Plan at an exercise price of $2.20 per share. Options to
      purchase 35,000 shares vested on grant date and options to purchase an
      additional 35,000 such shares vested on January 1, 2001. The term of such
      option is ten years. This option replaced a fully vested option held by
      Mr. Jenkins for the same number of shares that expired in December 2000.

(2)   In August 2001, in connection with Mr. Schmidt's employment, among other
      things, Mr. Schmidt was allowed to purchase 100,000 shares of common stock
      at $2.20 per share. EP Med provided a two-year, interest-free,
      non-recourse loan in the amount of $220,000 to finance the purchase price
      of the stock, which loan is secured by a pledge to EP Med of the shares,
      and the principal balance of which is forgiven ratably over the term of
      the loan. If Mr. Schmidt terminates his employment prior to August 20,
      2003, the remaining principal balance not forgiven, would be due and
      payable. The loan is forgiven, in whole, on August 20, 2003. EP Med has
      determined that the treatment for the valuing and recording of the
      restricted shares purchased is similar to the accounting for stock options
      that qualify for variable plan accounting. Based on the purchase price of
      the shares of common stock at the time of issuance, the intrinsic value of
      these instruments was zero and, as such, no compensation expense was
      recorded. These shares are re-measured on a quarterly basis and any
      resulting compensation expense will be amortized over the life of the
      note. EP Med recorded $30,000 in compensation expense as of December 31,
      2001. See Note 11 to the Notes to Consolidated Financial Statements
      contained under "Item 7. Financial Statements."

(3)   In connection with Mr. Schmidt's employment in August 2001, EP Med granted
      to Mr. Schmidt an option, under the Long-Term Incentive Plan, to purchase
      100,000 shares of common stock at an exercise price of $1.91 per share
      (the price of the stock on the date of grant); the option vests over four
      years. Also, Mr. Schmidt was granted an option, under the 1995 Director
      Option Plan, to purchase 60,000 shares of common stock at an exercise
      price of $1.91 per share (the price of the stock on the date of grant);
      the option vests 1,000 shares per month. In addition, Mr. Schmidt received
      a five-year warrant (not reflected in the table), which vested
      immediately, to purchase an additional 100,000 shares of common stock at
      an exercise price of $2.75 per share.

(4)   On January 11, 2000, EP Med granted Mr. Rolston an incentive stock option
      to purchase 6,222 shares of common stock pursuant to the 1995 Long Term
      Incentive Plan at an exercise price of $4.19 per share. Options to
      purchase 1,244 shares vested on grant date and options to purchase an
      additional 1,244 such shares vest each year thereafter. The term of such
      option is ten years.

(5)   On January 1, 1999, EP Med granted Mr. Rolston an incentive stock option
      to purchase 12,500 shares of common stock pursuant to the 1995 Long Term
      Incentive Plan at an exercise price of $3.00 per share. Options to
      purchase 2,500 shares vested on the grant date and options to purchase an
      additional 2,500 shares vest each year thereafter. The term of such option
      is five years. On June 30, 1999, EP Med granted Mr. Rolston an incentive
      stock option to purchase 3,422 shares of common stock pursuant to the 1995
      Long


                                      -48-
<PAGE>

      term Incentive Plan at an exercise price of $3.00 per share. Options to
      purchase 685 shares vested on the grant date and options to purchase an
      additional 684 vest each year thereafter. The term of such options is five
      years.

(6)   On April 17, 2000, EP Med granted Mr. Byrd an incentive stock option to
      purchase 50,000 shares of common stock pursuant to the 1995 Long Term
      Incentive Plan at an exercise price of $4.125 per share. Options to
      purchase 10,000 shares vest one year from the grant date and options to
      purchase an additional 10,000 such shares vest each year thereafter. The
      term of such option is ten years.

(7)   On October 20, 2000, EP Med granted Mr. Turner an incentive stock option
      to purchase 5,000 shares of common stock pursuant to the 1995 Long Term
      Incentive Plan at an exercise price of $3.25 per share. Options to
      purchase 1,000 shares vest one year from the grant date and options to
      purchase an additional 1,000 such shares vest each year thereafter. The
      term of such option is ten years.

(8)   On February 5, 1999, EP Med granted Mr. Turner an incentive stock option
      to purchase 50,000 shares of common stock pursuant to the 1995 Long Term
      Incentive Plan at an exercise price of $3.00 per share. Options to
      purchase 10,000 shares vested on grant date and options to purchase an
      additional 10,000 such shares vest 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 each of the executive officers identified in the Summary
Compensation Table during the fiscal year ended December 31, 2001.

                        Option Grants in Fiscal Year 2001

<TABLE>
<CAPTION>
                                    Number of Shares        Percent of Total        Exercise
                                   Underlying Options      Options Granted to       Price Per
                                         Granted            Employees in 2001         Share        Expiration Date
                                   --------------------------------------------------------------------------------
<S>                                          <C>                      <C>               <C>        <C>
David A. Jenkins
Chairman and Chief
Executive Officer                                  0                    0                   0                    0

Reinhard Schmidt
President and Chief Operating
Officer                                      160,000                  43%               $1.91      August 20, 2011

J. Randall Rolston
Vice President, Sales                              0                    0                   0                    0

Joseph M. Turner
Chief Financial Officer                            0                    0                   0                    0

C. Bryan Byrd
Vice President, Engineering
and Manufacturing                                  0                    0                   0                    0
</TABLE>

The exercise prices of the options granted during the fiscal year ended December
31, 2001 were equal to or greater than the fair market value of EP Med's common
stock on the date of each grant.


                                      -49-
<PAGE>

Option Exercises and Holdings

           The following table provides certain information with respect to each
of the executive officers identified in the Summary Compensation Table
concerning the exercise of stock options during the fiscal year ended December
31, 2001 and the value of unexercised stock options held as of such date.

         Aggregated Option Exercises in 2001 and Year-End Option Values

<TABLE>
<CAPTION>
                                                        Number of Shares Underlying Options     Value of Unexercised in-the-Money
                                                                at December 31, 2001             Options at December 31, 2001 (1)
                                                        -----------------------------------     ---------------------------------
                             Shares
                          Acquired on     Value
Name                        Exercise     Realized          Exercisable       Unexercisable       Exercisable         Unexercisable
----------------------------------------------------------------------------------------------------------------------------------
<S>                          <C>          <C>                <C>               <C>                 <C>                  <C>
David A. Jenkins (2)
Chairman and Chief
Executive Officer                0              0            166,000                 0              $69,000                  $0

Reinhard Schmidt
President and Chief
Operating Officer (3)            0              0             24,000           136,000              $14,400             $83,600

J. Randall Rolston (3)
Vice President, Sales            0              0             83,208            22,207                   $0                  $0

Joseph M. Turner (3)
Chief Financial Officer          0              0             31,000            24,000                   $0                  $0

C. Bryan Byrd (3)
Vice President,
Engineering and
Manufacturing                    0              0             34,400            43,600              $11,700                  $0
</TABLE>

----------
(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 $2.50 per share on December 31,
      2001.

(2)   On August 31, 1995, EP Med granted Mr. Jenkins a non-qualified stock
      option to purchase 96,000 shares of common stock at an exercise price of
      $2.00 per share (the "Jenkins NQSO"). Options to purchase 28,000 of the
      Jenkins NQSO shares became exercisable on the grant date and options to
      purchase 1,000 shares became exercisable each month thereafter. The term
      of the Jenkins NQSO option is ten years. On December 26, 2000, EP Med
      granted Mr. Jenkins an incentive stock option to purchase 70,000 shares of
      common stock pursuant to EP Med's 1995 Plan at an exercise price of $2.20
      per share (the "Jenkins ISO"). Options to purchase 35,000 of the Jenkins
      ISO shares became exercisable upon the grant and options to purchase the
      remaining 35,000 Jenkins ISO shares became exercisable in January 2001.
      The term of such option is ten years.

(3)   See footnotes to above summary compensation table.


                                      -50-

<PAGE>

      During the fiscal year ended December 31, 2001, 800 options were
exercised.

Compensation Plans and Other Arrangements

1995 Long Term Incentive Plan

      EP Med's 1995 Long Term Incentive Plan (the "1995 Incentive Plan") was
adopted by the Board of Directors and Shareholders in November 1995. On November
5, 1999, the Shareholders approved an amendment increasing the number of shares
available under the Plan from 700,000 to 1,000,000 shares. At December 31, 2001,
options to purchase 846,044 shares were outstanding at exercise prices ranging
from $1.60 to $4.25 per share. The 1995 Incentive Plan provides for grants of
"incentive" and "non-qualified" stock options to employees of EP Med. 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 EP Med'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
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

      EP Med'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 EP Med are available for issuance under the 1995 Director Option Plan and
options to purchase 300,000 shares were outstanding as of December 31, 2001. The
1995 Director Option Plan provides for grants of "director options" to eligible
directors of EP Med 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 EP Med, 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. The Board of
Directors has approved an amendment to the 1995 Director Plan, subject to
shareholder approval at EP Med's Annual Meeting of Shareholders increasing the
number of shares available under the Plan from 360,000 to 720,000 shares.

2002 Stock Option Plan


                                      -51-
<PAGE>

      EP Med's Board of Directors has approved a new 2002 Stock Option Plan (the
"2002 Plan"), subject to shareholder approval at EP Med's Annual Meeting of
Shareholders. The 2002 Plan provides for grants of "incentive" stock options to
employees of EP Med and "non-qualified" stock options to employees and
consultants of EP Med and 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. Under the terms of the 2002 Plan, if approved by the shareholders,
1,000,000 shares of EP Med's authorized but unissued shares of common stock will
be reserved for issuance under the Plan and, except with respect to options then
outstanding, the 2002 Plan will expire on the earliest to occur of (a) the tenth
anniversary of the date on which the Plan was adopted by the Board, (b) the
tenth anniversary of the date on which the Plan was approved by EP Med's
shareholders, or (c) the date as of which the Board, in its sole discretion,
determines to terminate the Plan.

      The exercise price of incentive stock options granted under the 2002 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 EP Med'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 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.

Compensation of Directors

      During 2001, no directors of EP Med received cash or other compensation
for services on the Board of Directors or any committee thereof. The directors
are reimbursed for their reasonable travel expenses incurred in performance of
their duties as directors.

Employment Agreements

      EP Med entered into an employment agreement, dated as of July 20, 2001
(and effective on commencement, August 20, 2001) with Reinhard Schmidt. Under
the agreement, Mr. Schmidt shall serve as President and Chief Operating Officer
of EP MedSystems for an initial term of 2 years at an annual salary of $200,000.
The Board of Directors has discretion to approve salary increases and bonuses.
The agreement provides that unless terminated by either party providing the
other with written notice of its intention not to renew at least 30 days prior
to the scheduled expiration date, the agreement shall be renewed automatically
after the initial two-year term for successive one-year terms. The agreement
further provides that if the agreement is terminated by EP Med without cause or
by Mr. Schmidt for good reason (including the occurrence of certain events
within one year of change in control), Mr. Schmidt shall be entitled to
severance payments equal to Mr. Schmidt's then-current base salary for a period
of twelve months.

      In connection with Mr. Schmidt's employment, EP MedSystems sold to Mr.
Schmidt 100,000 shares of common stock at $2.20 per share (the closing sale
price as of the date of


                                      -52-
<PAGE>

execution of the employment agreement) and issued a five-year warrant to
purchase an additional 100,000 shares of common stock at an exercise price of
$2.75 per share. EP MedSystems provided Mr. Schmidt with an interest-free,
non-recourse loan in the amount of $220,000 to effect the purchase of the shares
which loan is secured by a pledge to EP Med of the shares. The principal balance
of the loan is forgiven ratably over the term of the loan. If Mr. Schmidt
terminates his employment prior to August 20, 2003, the remaining principal
balance not forgiven, would be due and payable. The loan is forgiven, in whole,
on August 20, 2003.

Item 11. Security Ownership of Certain Beneficial Owners and Management.

      Based upon information available to EP Med, the following table sets forth
certain information regarding beneficial ownership of common stock of EP Med as
of March 25, 2002, by (i) each of EP Med's directors, (ii) each of the executive
officers identified in the Summary Compensation Table, (iii) all directors and
executive officers as a group and (iv) each person known to EP Med to
beneficially own more than five percent of EP Med'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.

<TABLE>
<CAPTION>
                                                       Shares of Common Stock         Percent of Class
Name and Address of Beneficial Owner                   Beneficially Owned (1)
------------------------------------------------------------------------------------------------------
<S>                                                              <C>                        <C>
Group comprised of Cardiac Capital, LLC, Rollins                 3,343,400(2)               21.5%
Investment Fund, R. Randall Rollins, Gary W. Rollins
and David A. Jenkins

         Cardiac Capital, LLC                                    2,250,000                  14.6%
         2170 Piedmont Road, N.E.
         Atlanta, Georgia 30324 (3)

         Rollins Investment Fund                                 2,250,000                  14.6%
         R. Randall Rollins
         Gary W. Rollins
         2170 Piedmont Road, N.E.
         Atlanta, Georgia 30324 (4)

         David A. Jenkins                                        3,357,400                  21.5%
         Chairman of the Board and
         Chief Executive Officer
         c/o EP MedSystems, Inc.
         100 Stierli Court, Suite 107
         Mount Arlington, New Jersey 07856 (5)
</TABLE>


                                      -53-
<PAGE>

<TABLE>
<S>                                                              <C>                        <C>
Group comprised of EGS Management, LLC, EGS                      1,629,380                  10.9%
Partners, LLC, The Pharmaceutical/Medical Technology
Fund, L.P., Strategic Healthcare Investment Fund,
EGS Private Healthcare Associates, LLC, EGS Private
Healthcare Partnership, L.P., William Ehrman,
Frederic Greenberg, J. Frederick Ketcher, Junas
Gerstl, William D. Lautman, James McLaren
350 Park Avenue, 11th Floor
New York, New York 10022 (6)

Medtronic, Inc.                                                  1,131,779                   7.4%
710 Medtronic Parkway
Minneapolis, Minnesota 55432-5604 (7)

Hambrecht & Quist Capital Management Incorporated                1,075,000                   7.3%
30 Rowes Wharf, 4th Floor
Boston, Massachusetts 02110-3328 (8)

Reinhard Schmidt                                                   226,000                    1.5%
President, Chief Operating Officer and Director
c/o EP MedSystems, Inc.
100 Stierli Court, Suite 107
Mount Arlington, New Jersey 07856 (9)

Darryl D. Fry                                                      148,000                    1.0
Director
100 Stierli Court - Suite 107
Mount Arlington, New Jersey 07856 (10)

John E. Underwood                                                   45,000                     *
Director
c/o Proteus International
Crossroads Plaza
Mahwah, New Jersey 07430 (11)

J. Randall Rolston                                                 147,365                     *
Vice President, Sales and Marketing
100 Stierli Court - Suite 107
Mount Arlington, New Jersey 07856 (12)

C. Bryan Byrd                                                      106,400                     *
Vice President, Engineering and Operations
100 Stierli Court - Suite 107
Mount Arlington, New Jersey 07856 (13)

Joseph M. Turner                                                    41,000                     *
Chief Financial Officer
100 Stierli Court - Suite 107
Mount Arlington, New Jersey 07856 (14)

All executive officers and directors as a group (7               4,071,165                  25.5%
persons) (15)
</TABLE>


                                      -54-
<PAGE>

*  Represents beneficial ownership of less than 1% of the common stock.

----------

(1)   Applicable percentage ownership as of March 25, 2002 is based upon
      14,663,652 shares of common stock outstanding. Beneficial ownership is
      determined in accordance with Rule 13d-3 of the Securities Exchange Act of
      1934, as amended. Under Rule 13d-3, shares issuable within 60 days upon
      exercise of outstanding options, warrants, rights or conversion privileges
      are deemed outstanding for the purpose of calculating the number and
      percentage owned by the holder of those 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)   The information set forth with respect to the Cardiac Capital Group is
      based on information contained in a Statement on Schedule 13D filed with
      the SEC on April 5, 2001 (the "Cardiac Capital Schedule 13D"). The shares
      reflected in the table represent (i) 2,250,000 shares beneficially owned
      by Cardiac Capital, LLC; (ii) 2,250,000 shares beneficially owned by
      Rollins Investment Fund, indirectly as a 50% owner of Cardiac Capital,
      LLC, with shared voting and investment power with David A. Jenkins (see
      footnotes (3), (4) and (5)); (iii) 2,250,000 shares beneficially owned by
      each of R. Randall Rollins and Gary W. Rollins, indirectly as equal owners
      of Rollins Investment Fund, with shared voting and investment power with
      David A. Jenkins (see footnotes (3), (4) and (5)); and (iv) 3,343,400
      shares beneficially owned by David A. Jenkins, 2,250,000 of which shares
      are owned with shared voting and investment power with Rollins Investment
      Fund, R. Randall Rollins and Gary W. Rollins (see footnotes (3) and (5)).

(3)   In the Cardiac Capital Schedule 13D, the members of the group have
      reported that Cardiac Capital, LLC, the record owner of the securities
      reflected, is a Georgia limited liability company, the ownership of which
      is divided equally between Rollins Investment Fund, a Georgia general
      partnership consisting of R. Randall Rollins and Gary W. Rollins, and
      David A. Jenkins. Includes 750,000 shares issuable upon exercise of
      outstanding warrants exercisable by Cardiac Capital (see footnotes (2),
      (4) and (5)).

(4)   In the Cardiac Capital Schedule 13D, Rollins Investment Fund has reported
      that it is a Georgia general partnership, the ownership of which is
      divided equally between R. Randall Rollins and Gary W. Rollins. Rollins
      Investment Fund owns 50% of Cardiac Capital, LLC, the record owner of the
      shares of common stock and warrant shares reflected in the table, and, as
      such, the Rollins Investment Fund's ownership is indirect and it shares
      voting and investment power with David Jenkins, the other 50% owner of
      Cardiac Capital. Rollins Investment Fund and David Jenkins, together with
      EP MedSystems, have entered into a letter agreement, dated March, 2001,
      pursuant to which David Jenkins has agreed that he shall forbear from
      selling any shares of common stock of EP MedSystems owned by him, and
      shall cause his spouse, his lineal descendants and any trust for the
      benefit of any of them to similarly forbear from selling any shares of
      common stock of EP MedSystems owned by any of them during the first year
      following the closing without the prior written consent of Rollins
      Investment Fund. Under the letter agreement, Mr. Jenkins has further
      agreed that, notwithstanding any provision to the contrary in the
      operating agreement of Cardiac Capital, the decision of Cardiac Capital to
      exercise its registration rights after the first anniversary of the
      closing may be made by Rollins Investment Fund in its sole judgment and
      without the consent of Mr. Jenkins. Includes 750,000 shares issuable upon
      the exercise of outstanding warrants exercisable by Cardiac Capital.
      Rollins Investment Fund disclaims beneficial ownership of 1,125,000 shares
      (i.e., 50%) of common stock and warrant shares and each of Messrs. R.
      Randall Rollins and Gary W. Rollins disclaims beneficial ownership of
      one-half of such shares (see footnotes (2), (3) and (5)).

(5)   Includes 166,000 shares issuable upon exercise of fully vested options.
      Also includes 160,000 shares held by Mr. Jenkins as trustee for the Dalin
      Class Trust, 42,500 shares held by Mr. Jenkins' wife and 20,000 shares
      held by Mr. Jenkins' wife as custodian for his children. Also includes
      2,250,000 shares beneficially owned by Cardiac Capital, LLC, the record
      owner of the shares of common stock and warrant shares reflected in the
      table, is a Georgia limited liability company, the ownership of which is
      divided equally between Mr. Jenkins and Rollins Investment Fund and, as
      such, Mr. Jenkins' ownership is indirect and he shares voting and
      investment power with Rollins Investment Fund; 750,000 of such shares are
      issuable


                                      -55-
<PAGE>

      upon the exercise of outstanding warrants exercisable by Cardiac Capital,
      LLC (see footnotes (2), (3) and (4)). Mr. Jenkins disclaims beneficial
      ownership of (i) 42,500 shares held by his wife, (ii) 20,000 shares held
      by his wife as custodian for his children, and (iii) 1,125,000 shares
      (i.e., 50%) of common stock and warrant shares held of record by Cardiac
      Capital, LLC.

(6)   The information set forth with respect to the EGS Group is based on
      information contained in an amendment to a Statement on Schedule 13G filed
      with the SEC on February 16, 2000. The shares reflected in the table
      represent (i) 1,000,000 shares beneficially owned by EGS Private
      Healthcare Associates, LLC ("EGS Associates"), indirectly through its
      ownership of EGS Private Healthcare Partnership, L.P. ("EGS Partnership"),
      which is the record owner of 875,000 shares (which does not include
      306,250 shares issuable upon the exercise of outstanding warrants) and EGS
      Private Healthcare Counterpart, L.P. ("EGS Counterpart"), which is the
      record owner of 125,000 shares (which does not include 43,750 shares
      issuable upon the exercise of outstanding warrants); (ii) 215,682 shares
      beneficially owned by EGS Management, LLC ("EGS Management"), indirectly
      through its ownership of The Pharmaceutical/Medical Technology Fund, L.P.
      ("Pharma/Medical"), which is the record owner of the 215,682 shares; (iii)
      43,698 shares beneficially owned by EGS Partners, LLC ("EGS Partners"),
      which is the beneficial owner of Strategic Healthcare Investment Fund
      (having an address at c/o Mees Pierson (Cayman) Limited, British American
      Centre, Phase 3, Dr. Roy's Drive, P.O. Box 2003, George Town, Grand
      Cayman, Cayman Islands, B.W.I.), which is the record owner of the 43,698
      shares; (iv) 1,259,380 shares beneficially owned by William Ehrman,
      Frederic Greenberg, J. Frederick Ketcher, Jonas Gerstl and William D.
      Lautman, indirectly, as members of each of EGS Management, EGS Partners
      and EGS Associates; (v) 20,000 shares beneficially owned by Frederic
      Greenberg; and (vi) 1,000,000 shares beneficially owned by James McLaren,
      indirectly, as a member of EGS Associates.

(7)   The information set forth with respect to Medtronic, Inc. is based upon
      information contained in a Statement on Schedule 13G (the "Medtronic
      Schedule 13G") filed with the SEC on February 12, 2002. The shares
      reflected in the table represent (i) 458,000 shares beneficially owned by
      Medtronic, Inc.; and (ii) 673,779 shares issuable upon the conversion of
      currently convertible shares of Series A preferred stock of EP Med.

(8)   The information set forth with respect to Hambrecht & Quist Capital
      Management Incorporated is based on information contained in a Statement
      on Schedule 13G (the "H&Q Schedule 13G") filed with the SEC on January 29,
      2002. The shares reflected in the table represent 1,075,000 shares
      beneficially owned by Hambrecht & Quist Capital Management, a registered
      investment advisor. In the H&Q Schedule 13G, Hambrecht & Quist Capital
      Management disclaims any beneficial interest in the shares reported and
      indicates that it believes that the client accounts that it manages are
      not acting as a "group" for purposes of Section 13(d) of the Securities
      Exchange Act of 1934, as amended, and that it and such clients are not
      otherwise required to attribute to each other the "beneficial ownership"
      of securities.

(9)   Includes 26,000 shares issuable upon exercise of fully vested options and
      100,000 shares issuable upon the exercise of outstanding warrants and
      100,000 shares subject to a pledge to EP Med to secure the promissory note
      issued by Mr. Schmidt in payment of the purchase price for the shares, the
      principal balance of which is forgiven ratably over the term of the loan.
      See the Section entitled "Directors, Executive Officers, Promoters and
      Control Persons; Compliance with Section 16(a) of the Exchange Act -
      Employment Agreements."

(10)  Includes 30,000 shares issuable upon exercise of fully vested options.

(11)  Includes 45,000 shares issuable upon exercise of fully vested options.

(12)  Includes 86,953 shares issuable upon exercise of fully vested options.

(13)  Includes 34,400 shares issuable upon exercise of fully vested options.


                                      -56-
<PAGE>

(14)  Includes 41,000 shares issuable upon exercise of fully vested options.

(15)  Includes 1,279,353 shares issuable upon exercise of fully vested options
      and warrants.

Item 12. Certain Relationships and Related Transactions.

      Financing Transaction with Medtronic, Inc. As of October 23, 2001, EP Med
consummated the private sale and issuance of 673,779 shares of newly designated
Series A convertible preferred stock to Medtronic, Inc., a shareholder and
creditor of EP Med. The transaction with Medtronic, effected in reliance upon
the exemption afforded by Regulation D of the Securities Act of 1933, as
amended, involved the sale of the shares of preferred stock at a price of $1.781
per share. As part of the transaction, EP Med granted demand and incidental
registration rights to Medtronic pursuant to a registration rights agreement
entered into by the parties. EP MedSystems received aggregate gross proceeds of
$1.2 million from the transaction. EP Med believes that the transaction was
entered into on terms comparable to those it would have received from an
unaffiliated third party.

      Loan to C. Bryan Byrd. On May 23, 2000, EP MedSystems made a loan of
$100,000 to C. Bryan Byrd, its Vice President, Engineering and Operations, to
finance Mr. Byrd's exercise of fully vested options. The loan is a recourse loan
bearing interest at the Federal Fund rate and is secured by a pledge of 50,000
shares of EP Med's common stock owned by Mr. Byrd. Principal and all accrued
interest are due and payable on May 23, 2003.

      Financing Transaction with Medtronic, Inc./Pledge of Security by David A.
Jenkins. In November 2000, EP MedSystems completed a debt financing with
Medtronic Asset Management, Inc., an affiliate of Medtronic, Inc., one of EP
Med's shareholders, which provided an aggregate of $3.2 million.

      The financing transaction, evidenced by a note purchase agreement and
secured promissory note bearing interest at two percentage points over the prime
rate, provides that the principal and all accrued interest on the note are to be
repaid on November 15, 2003 and that the note is secured by a pledge by David A.
Jenkins, EP Med's Chief Executive Officer and a director and shareholder of EP
Med, of 300,000 shares of common stock of Transneuronix, Inc., a privately-held
corporation engaged in the development of neuro-muscular stimulation devices.
The shares pledged amount to approximately 5% of the total outstanding common
stock of Transneuronix, Inc. Mr. Jenkins did not receive any compensation from
EP MedSystems for furnishing the pledge as security for the note. As part of the
transaction, Medtronic agreed to subordinate its rights to repayment from EP Med
to existing rights of EP Med's bank.

      Except for the pledge by Mr. Jenkins, EP Med believes that this loan was
entered into on terms comparable to those it would have obtained from an
unaffiliated third party.

      Private Placement Financing Transaction with Cardiac Capital, LLC. On
March 28, 2001, we completed the sale and issuance of 1,625,000 shares of our
common stock and 812,500 warrant shares to two investors. The terms of the
financing provided for a purchase price of $1.99 per share of common stock and
$0.02 per warrant share for an aggregate purchase price of


                                      -57-
<PAGE>

$3,250,000 without giving effect to the possible exercise of warrants at an
exercise price of $4.00 per share, subject to adjustment. The transaction, which
received shareholder approval, closed on March 28, 2001 and the closing sale
price for EP Med's common stock on March 27, 2001 was $2.875. As such, the price
afforded the investors in this transaction was below market. However, the Board
of Directors obtained an opinion from Tucker Anthony Sutro Capital Markets,
acting as EP Med's financial advisor, as to the fairness of the transaction to
the public shareholders of EP Med from a financial point of view.

      Included among the investors is Cardiac Capital, LLC, a Georgia limited
liability company, of which David A. Jenkins, our Chairman of the Board and
Chief Executive Officer and a director and shareholder of EP Med, is a 50%
owner. The aggregate amount of the new shares, which potentially may be issued
in the financing, is in excess of 20% of the outstanding common stock of EP Med,
assuming all warrants are exercised. The consummation of the transaction
provided EP MedSystems with over $3,000,000 in working capital after expenses.

      Cardiac Capital, LLC and David A. Jenkins have a very substantial
ownership interest in EP MedSystems and may be in a position to control EP Med's
management and operations as a result of such ownership interest. David A.
Jenkins and Rollins Investment Fund, the other 50% owner in Cardiac Capital,
have entered into a letter agreement pursuant to which Mr. Jenkins has agreed
that he shall forebear from selling any shares of common stock of EP Med owned
by him, and shall cause his spouse, lineal descendants and any trust for the
benefit of any of them to similarly forebear from selling any shares of common
stock of EP Med owned by any of them in the first year following the closing of
the private placement financing, without the prior written consent of Rollins
Investment Fund. The letter agreement further provides that, notwithstanding any
provision to the contrary contained in the Operating Agreement of Cardiac
Capital, the decision of Cardiac Capital to exercise its registration rights
after the first anniversary of the closing may be made by Rollins Investment
Fund in its sole judgment and without the consent of Mr. Jenkins. In March 2002
Cardiac Capital requested that its shares be registered and EP Med anticipates
filing a registration statement in the second quarter.

      Loan to Reinhard Schmidt. In connection with Mr. Schmidt's employment with
EP MedSystems pursuant to an employment agreement, dated as of July 20, 2001,
Mr. Schmidt purchased 100,000 shares of common stock and received a warrant to
purchase an additional 100,000 shares. EP MedSystems provided Mr. Schmidt with
an interest-free, non-recourse loan in the amount of $220,000 to effect the
purchase of the shares which loan is secured by a pledge to EP Med of the
shares.

      Sublease with Transneuronix, Inc. In April 2001, EP Med entered into a
sublease with Transneuronix, Inc. as to 5,691 square feet of its office space
leased at 100 Stierli Court, Mount Arlington, New Jersey. The term of the lease
is eighteen months and the total basic rent for the term is $75,716 plus a pro
rated amount for real estate taxes, insurance and common area charges charged by
the landlord and electricity. Transneuronix is a private company of which Mr.
Jenkins, EP Med's Chief Executive Officer, is a shareholder. EP Med believes
that the sublease was entered into on terms comparable to those it would have
received from an unaffiliated third party.

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

(a) Exhibits

      The exhibits required to be filed as part of this Annual Report on Form
10-KSB are listed in the Index to Exhibits appearing on page E-1 hereof.


                                      -58-
<PAGE>

(b) Reports on Form 8-K

      EP MedSystems did not file a Current Report on Form 8-K during the last
quarter of the period covered by this Annual Report on Form 10-KSB.


                                      -59-
<PAGE>

Date:  March 29, 2002               EP MedSystems, Inc.

                                    By:s/ David A. Jenkins
                                       ------------------------------
                                    David A. Jenkins, Chairman of the
                                    Board and Chief Executive Officer

      In accordance with the 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.

Date:  March 29, 2002               s/ David A. Jenkins
                                    ----------------------------------
                                    David A. Jenkins, Chairman of the
                                    Board and Chief Executive Officer
                                    (Principal Executive Officer)

                                    s/ Reinhard Schmidt
                                    ----------------------------------
                                    Reinhard Schmidt, President, Chief
                                    Operating Officer and Director
                                    (Principal Executive Officer)

                                    s/ Joseph M. Turner
                                    ----------------------------------
                                    Joseph M. Turner, Chief
                                    Financial
                                    Officer and Secretary
                                    (Principal Accounting Officer)

                                    s/ John E. Underwood
                                    ----------------------------------
                                    John E. Underwood, Director

                                    s/ Darryl Fry
                                    ----------------------------------
                                    Darryl Fry, Director


                                      -60-
<PAGE>

                   [Auditor's Report, Financial Statements and
                 Notes to Financial Statements -to be supplied]


                                      -61-
<PAGE>

                                Index to Exhibits
Exhibit
Number      Description
-------     -----------

3.1         Amended and Restated Certificate of Incorporation (1)

3.2         Certificate of Amendment to the Amended and Restated Certificate of
            Incorporation (14)

3.3         Bylaws, as amended (1)

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

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

4.3         Form of Common Stock and Warrant Purchase Agreement, dated as of
            August 31, 1999, between EP Med and the Purchasers (including
            Exhibit A: Form of Registration Rights Agreement and Exhibit B: Form
            of Warrant) (7)

4.4         Replacement Warrant, dated as of February 15, 2000, between EP Med
            and the Purchasers (including Amendment to Registration Rights
            Agreement and Form of Replacement Warrant) (10)

4.5         Amended and Restated Common Stock and Warrant Purchase Agreement,
            dated as of February 16, 2001, between EP Med and the Purchasers
            (including Exhibit A: Form of Registration Rights Agreement and
            Exhibit B: Form of Warrant) (8)

4.6         Registration Rights Agreement, dated March 28, 2001, between EP Med
            and the Purchasers identified therein (8)

4.7         Warrant, dated March 28, 2001, issued by EP Med to Cardiac Capital,
            LLC (8)

4.8         Warrant, dated March 28, 2001, issued by EP Med to Texada Trust (8)

4.9         Common Stock Purchase Agreement, dated as of June 11, 2001, between
            EP Med and Fusion Capital Fund II, LLC (9)

4.10        Restricted Stock Purchase Agreement, dated as of July 20, 2001,
            between EP Med and Reinhard Schmidt (13)

4.11        Promissory Note, dated as of July 20, 2001, by Reinhard Schmidt to
            EP Med (13)


                                      E-1
<PAGE>

4.12        Stock Pledge Agreement, dated as of July 20, 2001, by Reinhard
            Schmidt to EP Med (13)

4.13        Warrant, dated as of July 20, 2001, issued by EP Med to Reinhard
            Schmidt (13)

4.14        Preferred Stock Purchase Agreement, dated as of October 23, 2001,
            between EP MedSystems and Century Medical, Inc. (14)

4.15        Registration Rights Agreement, dated as of October 23, 2001, between
            EP MedSystems and Century Medical, Inc. (14)

4.16        First Amendment to Distribution Agreement, dated as of October 23,
            2001, between EP MedSystems and Century Medical, Inc. (14)

4.17        Preferred Stock Purchase Agreement, dated as of October 23, 2001,
            between EP MedSystems and Medtronic, Inc. (14)

4.18        Registration Rights Agreement, dated as of October 23, 2001, between
            EP MedSystems and Medtronic, Inc. (14)

10.1        License Agreement, dated as of November 1, 1995, between EP Med and
            Dr. Eckhard Alt, as amended (1)

10.2        License Agreement, dated as of November 1, 1995, between EP Med and
            Sanjeev Saksena (1)

10.3        License Agreement, dated February 27, 1997 between EP MedSystems and
            EchoCath, Inc. (2) together with settlement agreement, dated
            November 6, 2001 between EP MedSystems and EchoCath, Inc.

10.4        Master Manufacturing Agreement, dated April 16, 1996, between EP Med
            and Hi Tronics Designs, Inc. (1)

10.5*       Amended and Restated 1995 Long-Term Incentive Plan (3)

10.6*       Amended and Restated 1995 Director Option Plan (3)

10.7*       2002 Stock Option Plan

10.8        Agreement of Lease, dated August 25, 1997, between EP Med and
            Provident Mutual Life Insurance Company, as landlord (5)

10.9        Note Purchase Agreement, dated as of November 15, 2000, between EP
            Med and Medtronic Asset Management, Inc. (11)


                                      E-2
<PAGE>

10.10       Secured Promissory Note, dated November 15, 2000, issued by EP Med
            to Medtronic Asset Management, Inc. (11)

10.11       Stock Pledge Agreement, dated as of November 15, 2000, between
            Medtronic Asset Management, Inc. and David Jenkins (11)

10.12       Subordination Agreement, dated as of November 15, 2000, between
            Medtronic Asset Management, Inc. and Fleet National Bank (11)

10.13       Agreement, dated as of March 9, 1998, between ProCath Corporation
            and Allan Willis (12)

10.14       License Agreement, dated as of January 21, 1998, between EP Med and
            Incontrol, Inc. (13)

10.15       Employment Agreement, dated as of July 20, 2001, between EP Med and
            Reinhard Schmidt (13)

21          Subsidiaries of the Registrant

23.1        Consent of PricewaterhouseCoopers LLP

*Denotes management contract or compensatory plan or arrangement

1.    Incorporated by reference from EP Med's Registration Statement on Form
      SB-2 and Pre-Effective Amendments No. 1 and 2 thereto previously filed
      with the Commission on April 18, 1996, May 28, 1996 and June 13, 1996,
      respectively.

2.    Incorporated by reference from EP Med's Annual Report on Form 10-KSB for
      the year ended December 31, 1996 previously filed with the Commission.

3.    Incorporated by reference from EP Med's Proxy Statement for the Annual
      Meeting of Shareholders held on October 30, 1997 previously filed with the
      Commission.

4.    Incorporated by reference from EP Med's Current Report on Form 8-K dated
      April 14, 1998, previously filed with the Commission.

5.    Incorporated by reference from the Commission in connection with EP Med's
      Form 10-KSB for the year ended December 31, 1997 previously filed with the
      Commission.

6.    Incorporated by reference from EP Med's Current Report on Form 8-K, dated
      August 25, 1998, previously filed with the Commission.

7.    Incorporated by reference from EP Med's Current Report on Form 8-K, dated
      August 31, 1999, previously filed with the Commission.


                                      E-3
<PAGE>

8.    Incorporated by reference from EP Med's Proxy Statement for the special
      meeting of shareholders held on March 27, 2001 previously filed with the
      Commission on March 5, 2001.

9.    Incorporated by referenced from EP Med's Current Report on Form 8-K, dated
      June 11, 2001, previously filed with the Commission.

10.   Incorporated by reference from EP Med's Quarterly Report on Form 10-QSB
      for the quarter ended March 31, 1999 previously filed with the Commission.

11.   Incorporated by reference from EP Med's Quarterly Report on Form 10-QSB
      for the quarter ended September 30, 2000 previously filed with the
      Commission.

12.   Incorporated by reference from EP Med's Annual Report on Form 10-KSB for
      the year ended December 31, 2000, as amended, previously filed with the
      Commission.

13.   Incorporated by reference from EP Med's Registration Statement on Form
      SB-2 and Pre-Effective Amendments No.1 through 4 previously filed with the
      Commission on June 26, 2001, August 24, 2001, September 28, 2001 and
      October 12, 2001, respectively.

14.   Incorporated by reference from EP Med's Quarterly Report on Form 10-QSB
      for the quarter ended September 30, 2001.


                                      E-4
<PAGE>
                          INDEX TO FINANCIAL STATEMENTS

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

FINANCIAL STATEMENTS                                                    Page
                                                                        ----

Report of Independent Accountants                                       F-2

Consolidated Balance Sheets as of December 31, 2001 and
December 31, 2000                                                       F-3

Consolidated Statements of Operations for the years ended               F-4
December 31, 2001 and 2000

Consolidated Statements of Changes in Shareholders' Equity              F-5
for the years ended December 31, 2001 and 2000

Consolidated Statements of Cash Flows for the years ended               F-6
December 31, 2001 and 2000

Notes to Consolidated Financial Statements for the years
ended December 31, 2001 and December 31, 2000                           F-7


                                      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 sheets 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, 2001 and
December 31, 2000, and the results of its operations and its cash flows for each
of the two years in the period ended December 31, 2001 in conformity with
accounting principles generally accepted in the United States of America. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of America, which
require that we plan and perform the audits to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

PricewaterhouseCoopers LLP
Florham Park, New Jersey
March 25, 2002


                                      F-2
<PAGE>

                      EP MEDSYSTEMS, INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                December 31,
                                                            2001            2000
                                                       ------------    ------------
<S>                                                    <C>             <C>
                 ASSETS
Current assets:
   Cash and cash equivalents                           $  2,343,303    $    302,279
   Accounts receivable, net of allowances
     for doubtful accounts of $76,075 and $49,022         3,797,022       2,511,649
   Inventories, net of reserves                           2,003,770       2,377,402
   Prepaid expenses and other current assets                508,040          88,992
                                                       ------------    ------------
          Total current assets                            8,652,135       5,280,322

Property, plant and equipment, net                        2,231,531       2,530,427
Intangible assets, net                                      377,869         455,027
Other assets                                                412,126         151,168
                                                       ============    ============
          Total assets                                 $ 11,673,661    $  8,416,944
                                                       ============    ============

LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable                                       $  1,237,488    $    914,175
Accrued expenses                                            546,641         489,017
Deferred warranty revenue and prepaid rent
income                                                      124,739          82,832
Customer deposits                                           369,626          13,038
Current portion of long term debt                            33,333         814,237
                                                       ------------    ------------
     Total current liabilities                            2,311,827       2,313,299

Accrued interest on long term debt -
non-current                                                 303,606          22,317
Deferred warranty revenue- non-current                      241,036         102,750
Long term debt, less current portion                        402,778         441,665
Note payable to Medtronic, Inc.                           3,200,000       1,600,000
                                                       ------------    ------------
          Total liabilities                               6,459,247       4,480,031
                                                       ------------    ------------
Commitments and contingencies (See Note 7)

Shareholders' equity:
  Preferred stock, no par value, 5,000,000
    shares authorized, 1,259,717 shares
    issued and outstanding                                2,331,744              --
  Common stock, $.001 stated value, 25,000,000
    shares authorized, 14,077,714 and
    12,023,167 shares issued and outstanding
    at December 31, 2001 and 2000                            14,078          12,023
  Additional paid-in capital                             30,372,387      26,509,408
  Deferred offering costs                                  (554,515)             --
  Receivables from executive officers                      (320,000)       (100,000)
  Accumulated deficit                                   (26,629,280)    (22,484,518)
                                                       ------------    ------------
          Total shareholders' equity                      5,214,414       3,936,913
                                                       ------------    ------------
          Total liabilities and
            shareholders' equity                       $ 11,673,661    $  8,416,944
                                                       ============    ============
</TABLE>

        The accompanying notes are an integral part of these statements.


                                      F-3
<PAGE>

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

                                                     2001              2000
                                                 ------------      ------------
Net sales                                        $  9,933,263      $  9,760,495
Cost of products sold                               4,651,702         4,433,211
                                                 ------------      ------------
          Gross profit                              5,281,561         5,327,284

Operating costs and expenses:
   Sales and marketing expenses                     4,789,145         5,144,026
   General and administrative expenses              2,236,970         2,265,705
   Research and development expenses                2,521,396         2,787,530
                                                 ------------      ------------
          Loss from operations                     (4,265,950)       (4,869,977)
Interest expense                                     (282,284)         (105,645)
Other income, net                                     403,472           139,501
                                                 ============      ============
          Net loss                               $ (4,144,762)     $ (4,836,121)
                                                 ============      ============

Basic and diluted net loss per share             $      (0.31)     $      (0.41)
                                                 ============      ============

Weighted average shares outstanding
used to compute basic and diluted loss
per share                                          13,402,915        11,788,478
                                                 ============      ============

        The accompanying notes are an integral part of these statements.


                                      F-4
<PAGE>

                      EP MEDSYSTEMS, INC. AND SUBSIDIARIES
           CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
                 FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2000

<TABLE>
<CAPTION>
                        Common          Common        Preferred       Preferred      Additional
                        Stock           Stock           Stock           Stock         Paid-in
                        Shares          Amount          Shares          Amount         Capital          Deficit            Total
                     ------------    ------------    ------------    ------------    ------------     ------------     ------------
<S>                    <C>           <C>                <C>          <C>             <C>              <C>              <C>
Balance,
January 1, 2000        11,084,417    $     11,084              --              --    $ 24,626,713     $(17,648,397)    $  6,989,400

Issuance of
common stock in
connection with
exercise of
warrants                  205,250             205              --              --         718,170               --          718,375

Receivable from
executive officer              --              --              --              --        (100,000)              --         (100,000)

Issuance of
common stock
upon exercise of
stock options             698,500             699              --              --       1,031,282               --        1,031,981

Issuance of
common stock               35,000              35              --              --         141,215               --          141,250

Foreign currency
translation                    --              --              --              --          (7,972)              --           (7,972)

Net loss                       --              --              --              --              --       (4,836,121)      (4,836,121)
                     ------------    ------------    ------------    ------------    ------------     ------------     ------------

Balance,
December 31, 2000      12,023,167    $     12,023              --              --    $ 26,409,408     $(22,484,518)    $  3,936,913
                     ------------    ------------    ------------    ------------    ------------     ------------     ------------

Issuance of
common stock in
connection with
private placement       1,625,000           1,625              --              --       2,992,940               --        2,994,565

Issuance of
common stock to
executive
officer                   100,000             100              --              --         249,900               --          250,000

Loan granted to
executive officer              --              --              --              --        (220,000)              --         (220,000)

Issuance of
preferred stock
in connection
with private
placement                      --              --       1,259,717       2,331,744              --               --        2,331,744

Issuance of
common stock
commitment shares         225,000             225              --              --         554,290               --          554,515

Deferred
offering costs                 --              --              --              --        (554,515)              --         (554,515)

Issuance of
common stock to
employees and
non-employee              104,547             105              --              --         145,943               --          146,048

Foreign currency
translation                    --              --              --              --         (80,094)              --          (80,094)

Net loss                       --              --              --              --              --       (4,144,762)      (4,144,762)
                     ------------    ------------    ------------    ------------    ------------     ------------     ------------

Balance,
December 31, 2001      14,077,714    $     14,078       1,259,717    $  2,331,744    $ 29,497,872     $(26,629,280)    $  5,214,414
                     ============    ============    ============    ============    ============     ============     ============
</TABLE>

        The accompanying notes are an integral part of these statements.


                                      F-5
<PAGE>

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

<TABLE>
<CAPTION>
                                                               2001            2000
                                                           -----------     -----------
<S>                                                        <C>             <C>
Cash flows from operating activities:
  Net loss                                                  (4,144,762)    $(4,836,121)
  Adjustments to reconcile net loss to net cash
   used in operating activities:
     Depreciation and amortization                             754,308         792,811
     Bad debt expense                                           27,053          50,694
     Issuance of stock in payment for legal services           144,448         100,000
     Mark to market valuation of employee agreement             30,000               0
   Changes in assets and liabilities:
      (Increase) decrease in accounts receivable            (1,312,426)        384,850
      Decrease (increase) in inventories                       241,977        (489,299)
      (Increase) Decrease in prepaid expenses and
        other current assets                                  (419,048)        164,917
      (Increase) in other assets                              (260,958)       (128,245)
      (Decrease) in due to related parties                         (75)       (329,837)
      Increase (decrease) in accounts payable                  323,388         (81,173)
      Increase (decrease) in accrued expenses, deferred
        revenue, customer deposits and accrued interest        875,694         (97,883)
                                                           -----------     -----------
          Net cash used in operating activities             (3,740,401)     (4,469,286)
                                                           -----------     -----------
Cash flows from investing activities:
  Capital expenditures                                        (234,347)     (1,174,325)
  Patent costs                                                 (12,251)        (48,527)
                                                           -----------     -----------
          Net cash used in investing activities               (246,598)     (1,222,852)
                                                           -----------     -----------
Cash flows from financing activities:
  Borrowings under term notes payable, net of payments       1,541,768       1,589,000
  (Payments) borrowing under revolving line of credit         (761,560)        761,560
  Net proceeds from issuance of common stock, net of
    offering expenses                                        2,994,565         718,375
  Net proceeds from issuance of preferred stock, net of
    offering expenses                                        2,331,744              --
  Proceeds from exercise of stock options                        1,600         931,981
                                                           -----------     -----------
          Net cash provided by financing activities          6,108,117       4,000,916
                                                           -----------     -----------

Effect of exchange rate changes                                (80,094)        (13,230)

Net Increase (decrease) in cash and cash equivalents         2,041,024      (1,704,452)
Cash and cash equivalents, beginning of period                 302,279       2,006,731
                                                           -----------     -----------
Cash and cash equivalents, end of period                   $ 2,343,303     $   302,279
                                                           ===========     ===========

Supplemental cash flow information:
  Cash paid for interest                                   $    41,096     $    79,562
  Non-cash reclassification of assets from inventory
     to fixed assets                                       $   131,655              --
</TABLE>

        The accompanying notes are an integral part of these statements.


                                      F-6
<PAGE>

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

1. Basis of Presentation

      EP MedSystems, Inc. operates in a single segment. EP MedSystems designs,
manufactures and markets a broad-based line of products for the cardiac
electrophysiology market for the purpose of diagnosing, monitoring, managing and
treating irregular heartbeats known as arrhythmias.

      The Company faces a number of risks, including developing and sustaining a
profitable, cash positive business mode, which is largely dependent upon
obtaining government regulatory approvals and market acceptance of future
products.

2. Summary of Significant Accounting Policies

Principles of Consolidation

      The consolidated financial statements include the accounts of EP
MedSystems, Inc. and its wholly owned subsidiaries, EP MedSystems UK Ltd. and EP
MedSystems France S.A.R.L. All material intercompany accounts and transactions
have been eliminated in consolidation.

Cash and Cash Equivalents

      EP MedSystems considers all highly liquid investments with an original
maturity of three months or less to be cash and cash equivalents.

Concentrations of Credit Risk

      EP MedSystems is potentially subject to concentrations of credit risk with
respect to its cash investments and trade accounts receivable. EP MedSystems
invests its excess cash in an institutional money market account.

      EP MedSystems' customer base for its products is primarily comprised of
medical institutions and distributors throughout the United States and abroad.
On certain transactions, EP MedSystems may require payment in advance or an
issuance of an irrevocable letter of credit.


                                      F-7
<PAGE>

Inventories

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

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 as follows:

              Buildings and improvements                 10-25 years
              Leasehold improvements                         5 years
              Machinery and equipment                     3-10 years
              Furniture and fixtures                       3-7 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.

Goodwill and Intangible Assets

      Goodwill is a result of the excess of purchase price over book value of
certain assets, including certain process technology and EP MedSystems' West
Berlin, New Jersey facility purchased in 1993 from a manufacturer of electrode
catheters and other disposable products. Goodwill is amortized by the
straight-line method over 15 years and is included in intangible assets.
Unamortized goodwill as of December 31, 2001 and 2000 amounted to $342,000 and
$393,000, respectively. Management believes that the remaining goodwill life of
seven years is reasonable primarily based on the fact that historically there
has been a stable demand for EP MedSystems' catheter products and there is an
expected continued demand for these products. Significant changes have not
occurred in the manner or use of the acquired assets and technology, or the
strategy for EP Med's catheter business. EP Med is not aware of significant
negative industry or economic trends that would affect the carrying value of the
goodwill. Beginning in 2002, in accordance with the provisions of SFAS No. 142
"Goodwill and Other Intangible Assets", such goodwill will no longer be
amortized, but will continue to be tested for impairment (See Note 15).

      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. EP MedSystems has determined that, as of
December 31, 2001, no such assets have been impaired.


                                      F-8
<PAGE>

      Long-lived assets, including certain identifiable intangibles and goodwill
related to those assets to be held and used, are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount of
the asset may not be recoverable. An estimate of undiscounted future cash flows
produced by the asset, or the appropriate grouping of assets, is compared to the
carrying value to determine whether an impairment exists, pursuant to the
provisions of Statement of Financial Accounting Standards (SFAS) No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of."

Revenue Recognition

      EP MedSystems ships products to customers based on FOB shipping point and
recognizes revenue from product sales on the date of shipment. Installation
procedures are minimal and considered perfunctory. Payments received in advance
of shipment of product are deferred until such products are shipped. EP Med does
not have royalty agreements that result in revenue to EP Med. Royalties paid to
third parties on product sales are included in the cost of sales. EP Med does
not provide distributors or end-users with a general right to return products
purchased.

      EP MedSystems provides a one-year warranty on all of its products and, in
accordance with Statement of Financial Accounting Standard No. 5 "Accounting for
Contingencies," accrues for the estimated cost of providing this warranty at the
time of sale. The estimates of the future warranty costs are based on historical
experience. At December 31, 2001 and 2000, EP Med had recorded $55,000 in
warranty expense.

      In addition to the standard one-year warranty provided on all products EP
Med offers separately priced extended warranties. EP Med recognizes revenue from
these warranty contracts on a straight-line basis over the contract period in
accordance with FASB Technical Bulletin 90-1 "Accounting for Separately Priced
Product Warranties and Product Maintenance Contracts." Deferred warranty income
as of December 31, 2001 and 2000 totaled approximately $311,000 and $186,000,
respectively.

Research and Development

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

Stock Based Compensation

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

      EP Med records the fair value of stock issuances to non-employees based on
the market price on the date issued. The amount is expensed, capitalized or
recorded as a


                                      F-9
<PAGE>

reduction of paid-in capital, depending on the purpose for which the stock is
issued. It is EP Med's policy to account for stock options granted to
non-employees in accordance with Emerging Issues Task Force Issue No. 96-18,
"Accounting for Equity Instruments That Are Issued to Other Than Employees for
Acquiring, or in Conjunction with Selling, Goods or Services," and the fair
value measured using the Black-Scholes option pricing under Statement of
Financial Accounting Standard No. 123. EP Med has not issued stock options to
non-employees for any of the periods presented.

Net Loss Per Share

      Basic net loss per share is computed using the weighted-average number of
shares of common stock outstanding. Diluted net loss per share does not differ
from basic net loss per share since potential shares of common stock from the
exercise of stock options and warrants are anti-dilutive for all periods
presented. Accordingly, potential common shares of 2,592,794 and 1,524,810 for
the years ended December 31, 2001 and 2000, respectively, have been excluded
from the diluted per share calculation.

Comprehensive Income

      For the years ended December 31, 2001 and 2000, EP MedSystems'
comprehensive income approximated net income, except for foreign currency
translation adjustments. Comprehensive loss for the years ended December 31,
2001 and 2000 were $4,224,856 and $4,844,093, respectively.

Foreign Currency Translation

      In accordance with Statement of Financial Accounting Standard No. 52,
"Foreign Currency Translation," ("SFAS No. 52"), foreign denominated assets and
liabilities are translated from French Francs and British Pounds Sterling into
U.S. dollars using the spot rate at the balance sheet date. Revenue and expenses
are translated into U.S. dollars using the weighted average exchange rate for
the respective year. Translation adjustments are recorded in Shareholders'
Equity.

      Also in accordance with SFAS No. 52, transaction gains and/or losses are
incurred as a result of the changes between functional currency and the
transaction denominated currency. These gains and/or losses are marked to the
current exchange rate on a quarterly basis and included in expenses in the
Statement of Operations. For the year ended December 31, 2001 and 2000, the
transaction losses recorded were approximately $104,000 and $63,000,
respectively.

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. The primary estimates used by management are in the
determination of the valuation allowance for accounts receivables and inventory
obsolescence reserve. Although these estimates are


                                      F-10
<PAGE>

based on management's knowledge of current events and actions it may undertake
in the future, the estimates may ultimately differ from actual results.

Reclassifications

      Certain prior year amounts have been reclassified to conform with the
current presentation.

Fair Value of Financial Instruments

      The carrying value of EP MedSystems' financial instruments, including
accounts receivable, accounts payable and accrued liabilities approximate their
fair values due to their short maturities. Based on borrowing rates currently
available to EP MedSystems for loans with similar terms, the carrying value of
the long-term debt also approximates fair value. The Company had not entered
into any derivative financial instruments for hedging or other purposes.

3. Related Party Transactions

      On November 15, 2000, EP MedSystems completed a debt financing in the
amount of $3.2 million, with Medtronic Asset Management, Inc., an affiliate of
Medtronic, Inc., a shareholder in EP MedSystems, receiving $1.6 million at
closing and $1.6 million at January 17, 2001. Approximately $2.3 million was
utilized to repay outstanding amounts on EP MedSystems' revolving credit
facility with its bank. The note to Medtronic bears interest at the prime rate
plus 2%. The principal and all accrued interest on the note are to be repaid on
November 15, 2003 and the note is secured by a pledge of certain shares of stock
owned by David Jenkins, EP MedSystems' Chief Executive Officer and a director
and shareholder thereof, in a privately-held company. See Note 9.

      EP MedSystems loaned $100,000 to one of its officers to finance his
exercise of fully vested options. This recourse loan bears interest at the
Federal Fund rate and is collateralized by 50,000 shares of EP MedSystems'
common stock. Principal and any accrued interest shall be due and payable on May
23, 2003.

      Additional related party transactions are discussed in Notes 10 and 11.

4. Inventories

Inventories consist of the following:

                                                         December 31,
                                                   2001                 2000
                                               -----------          -----------
Raw materials                                  $   802,855          $ 1,218,396
Work in progress                                   142,999              426,476
Finished goods                                   1,144,122              808,229
Reserve for obsolescence                           (86,206)             (75,699)
                                               -----------          -----------
                                               $ 2,003,770          $ 2,377,402
                                               ===========          ===========


                                      F-11
<PAGE>

5. Property and Equipment

Property and equipment consist of the following:

                                                         December 31,
                                                   2001                 2000
                                               -----------          -----------
Land                                           $    69,738          $    69,738
Buildings and improvements                         992,530              967,325
Leasehold improvements                             129,332              129,332
Machinery and equipment                          3,117,507            2,810,232
Furniture and fixtures                             281,979              235,715
                                               -----------          -----------
                                               $ 4,591,086          $ 4,212,342
Less: accumulated depreciation                  (2,359,555)          (1,681,915)
                                               -----------          -----------
                                               $ 2,231,531          $ 2,530,427
                                               ===========          ===========

6. Intangible Assets

Intangible assets consist of the following:

                                                         December 31,
                                                   2001                 2000
                                               -----------          -----------
Goodwill                                       $   774,099          $   774,099
Patent costs                                       167,135              154,884
                                               -----------          -----------
                  Total                            941,234              928,983
Less: accumulated amortization                    (563,365)            (473,956)
                                               -----------          -----------
                                               $   377,869          $   455,027
                                               ===========          ===========

7. Commitments and Contingencies

Operating Leases

      EP MedSystems currently has various operating leases for office
facilities. Approximately 8,800 square feet of office and manufacturing space is
leased through October 2002 in the United States. EP MedSystems UK leases 822
square feet of office and storage space in Kent, England through January 2003.
EP MedSystems also leases 1,350 square feet in France. The total rent expense
associated with the office leases was approximately $151,000 and $132,000 in
2001 and 2000, respectively. In April 2001, the Company subleased its United
States office space and recorded $70,000 of rental income, which offset rent
expense. Additionally, EP MedSystems also leases certain office equipment for
periods extending through December 2003.

      The aggregate future commitment for minimum rentals as of December 31,
2001 is as follows:

                2002                         $137,000
                2003                          $23,000
                2004                          $22,000


                                      F-12
<PAGE>

Employee Life Insurance

      EP MedSystems has key man life insurance policies for $1,000,000 covering
its Chairman and CEO and $500,000 for the Vice President of Engineering, for
which it is the beneficiary.

Litigation

      During October 1997, EP MedSystems 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 EP
MedSystems.

      Settlement negotiations commenced in 2001 and the terms of a settlement
were finalized in October and put into effect thereafter. The litigation was
dismissed with prejudice with each side agreeing to bear its own costs and legal
fees. In addition, among other things, EchoCath paid EP MedSystems $30,000 and
waived any rights it may have to receive from EP MedSystems any royalty payments
due and owing to EchoCath pursuant to the exclusive license agreement entered
into between the parties, and EP MedSystems also agreed to convert all of its
shares of EchoCath preferred stock into 300,000 shares of EchoCath Class A
common stock and to accept a five-year warrant to purchase an additional 150,000
shares of EchoCath Class A common stock and to accept a five-year warrant to
purchase an additional 150,000 shares of EchoCath Class A common stock at an
exercise price per share equal to the fair market value of a share of the stock
on the date of settlement. EP MedSystems has agreed to waive any rights it may
have to receive from EchoCath any dividends due and owing to EP MedSystems
incident to its ownership of EchoCath preferred stock.

Other

      In conjunction with EP MedSystems' common stock purchase agreement with
Fusion Capital, a commitment fee will be due to the its investment bankers of
$100,000 upon initial draw down under this agreement (See Note 10).

8. FDA Regulatory

      In July 2001, subsequent to an inspection of our facility by the FDA, we
received a "warning letter" requiring us to investigate and correct various
observations made by the FDA with respect to violations at the facility and
relating to our procedures primarily pertaining to design controls and
manufacturing process controls. The "warning letter" identified six areas
requiring our attention. We responded to all of the issues raised in the
"warning letter" and the FDA subsequently completed a re-audit of the facility
in January 2002. On March 20, 2002, EP Med met with the FDA to review the good
manufacturing practices/pre-market approval ("GMP"/"PMA") audit. The conclusion
of that meeting was to schedule a follow-up limited scope re-affirmation visit
to occur in the next 30 days. This follow-up validation was required as the
facility is being cleared for a GMP/PMA approval. If the FDA is not satisfied
with the follow-up, it could require us to make additional changes as it has
in the past or, it could take regulatory actions


                                      F-13
<PAGE>

against us including license suspension, revocation and/or denial, seizure
and/or injunction and/or civil penalties.

9. Note payable

      On November 15, 2000, EP MedSystems, Inc. completed a debt financing for
$3.2 million with Medtronic Asset Management, Inc., an affiliate of Medtronic,
Inc., one of EP MedSystems' shareholders. Approximately $2.3 million was
utilized to repay outstanding amounts on EP MedSystems' revolving credit
facility with its bank. The note to Medtronic bears interest at the prime rate
plus 2%. The principal and all accrued interest on the note are to be repaid on
November 15, 2003 and the note is secured by a pledge by David Jenkins, EP
MedSystems' Chief Executive Officer and a director and shareholder of EP
MedSystems, of shares of common stock of a privately-held corporation. The debt
financing is subordinate to existing rights of EP MedSystems' senior lender,
Fleet National Bank. The debt financing includes a covenant that requires EP
MedSystems to be in compliance with Fleet National Bank covenants. EP MedSystems
received $1.6 million at closing and $1.6 million on January 17, 2001. EP
MedSystems accrued approximately $281,000 of interest expense included within
accrued interest as of December 31, 2001.

      EP MedSystems entered into a financing arrangement in March 1999 with a
bank consisting of a $2,000,000 revolving line of credit and a $500,000 term
loan secured by a lien on EP MedSystems' facility in West Berlin, New Jersey and
the machinery, equipment and inventory located there. The Company borrowed
approximately $2 million under the revolving line of credit, which was
subsequently repaid as discussed above. The related term loan remained in place
in 2001, with principal paid on a monthly basis over a 48 month period under a
15-year amortization schedule with a balloon payment due in December 2004.
Interest is payable monthly, in arrears, at either the prime rate plus 3/4% or
LIBOR plus 3 3/4%, at the Company's discretion. The loan was repaid in March
2002 and, accordingly, encumbrances on the facility are in the process of being
released (See Note 16).

      The term loan required EP MedSystems to maintain certain financial ratios
and meet certain other financial tests, one of which was waived by the bank for
the period ended December 31, 2001. At December 31, 2001, EP MedSystems was in
compliance with these covenants. At September 30, 2000 and December 31, 2000, EP
MedSystems was not in compliance with certain of the financial convenants. In
consideration of the payment by EP MedSystems of $2.3 million outstanding on the
revolving credit facility using funds obtained from the Medtronic debt financing
completed in December 2001. EP MedSystems received a permanent waiver from the
bank for both violations as of December 31, 2000. The credit facility, which was
originally scheduled to expire in March 2001, was terminated in January 2001,
and was not replaced with another facility.

10. Shareholders' Equity

Preferred Stock

      EP MedSystems 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,


                                      F-14
<PAGE>

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.

      On October 23, 2001, EP MedSystems consummated the private sale and
issuance of newly-designated Series A convertible preferred stock to Century
Medical, Inc. ("CMI"), its Japanese distributor, and Medtronic, Inc.
("Medtronic"), a shareholder and creditor of the Company. An aggregate of
1,259,717 preferred shares were issued in the transactions. Each preferred share
is convertible into equal shares of common stock, at the option of either CMI or
Medtronic, at any time from and after the earlier of, December 31, 2001 and the
date of receipt by the United States Food and Drug Administration ("FDA") of
510K approval of EP MedSystems' ViewMate(TM) Ultrasound Imaging System device or
of pre-market approval of EP MedSystems' ALERT(R) System device (in either case,
on "FDA Event"), or by EP MedSystems at any time after an FDA Event, into one
share of EP MedSystems' common stock. The transaction with Century Medical, Inc.
involved the sale of the shares of preferred stock at a price of $2.048 per
share as well as an amendment to the Company's Distribution Agreement with CMI.
The transaction with Medtronic involved the sale of preferred stock at a price
of $1.781 per share. EP MedSystems received aggregate gross proceeds of
$2,400,000 from the two transactions. The preferred stock is recorded in
Stockholders' equity, net of issuance costs.

Common Stock

      EP MedSystems is authorized to issue 25,000,000 shares of common stock, no
par value, $.001 stated value per share, of which a total of 14,077,714 and
12,023,167 shares were outstanding at December 31, 2001 and 2000, respectively.

      On March 28, 2001, EP MedSystems consummated the private sale and issuance
to certain investors of 1,625,000 shares of common stock of EP MedSystems and
warrants for 812,500 additional shares at a purchase price of $1.99 per share of
common stock and $0.02 per warrant share. Included among the investors is
Cardiac Capital, LLC, a limited liability company, of which our Chairman of the
Board and Chief Executive Officer and a shareholder of EP MedSystems is a 50%
owner. The Company received $3,250,000 in proceeds, which was used for working
capital purposes.

      On June 11, 2001, EP MedSystems entered into a common stock purchase
agreement with Fusion Capital Fund II, LLC, under which Fusion Capital has
committed to purchase, upon request of EP MedSystems, on each trading day during
the 25-month term of the agreement, $20,000 of our common stock, up to an
aggregate of $10 million. The $20,000 daily maximum purchase amount is waived if
the Company's stock price exceeds $5.00 per share. The 2,700,000 shares of our
common stock, that may be issued under this agreement, includes 225,000 shares
of common stock issued to Fusion Capital as compensation for its purchase
commitment. The Company issued an aggregate of 225,000 shares of EP MedSystems
common stock to Fusion Capital as a commitment fee under the common stock
purchase agreement and recorded the estimated fair value of approximately
$555,000 as a separate line item labeled "Deferred Offering Costs" in
Shareholders' Equity. The Company paid approximately $462,000 in cash related to
the filing, legal, and accounting expenses associated with this transaction,
which are recorded in Other


                                      F-15
<PAGE>

Assets. The registration statement was declared effective by the Securities and
Exchange Commission on October 18, 2001. EP MedSystems, Inc. intends to
reclassify the balance from "Deferred Offering Costs" to "Additional Paid-In
Capital" ratably as the stock is sold. If the Company determines that any
portion of the $10 million maximum offering amount available from Fusion Capital
will not or cannot be sold to Fusion Capital, a pro rata portion of the Deferred
Offering Costs will be expensed.

      The shares were valued using the closing market price of EP MedSystems'
stock at each of June 11, 2001, the date on which the agreement was executed,
and on October 31, 2001, the date on which the second tranche of the commitment
fee was issued, in accordance with APB No. 25.

      In October 2001, EP Med paid a portion of its costs for legal services
rendered by issuing 103,747 shares of its common stock to counsel (and granting
incidental registration rights) in payment of approximately $145,000 in fees,
the price of such shares being based upon the average closing stock price of EP
Med's common stock for the ten trading days prior to the date the parties agreed
to this form of payment. This amount was recorded as an expense in the Statement
of Operations.

      In October 2000, EP MedSystems issued 25,000 shares of its common stock to
one of its former distributors in connection with the settlement of certain
litigation, which had been commenced by EP MedSystems earlier in the year. EP
MedSystems had sought monetary damages for alleged breach of a distributorship
agreement. The action was voluntarily dismissed pursuant to a settlement
agreement whereby the parties mutually released their claims against each other.

      In February 2000, EP MedSystems received $718,000 related to the exercise
of warrants that were issued in conjunction with EP MedSystems' private
placement in September 1999. Investors included in the exercise were two of its
institutional shareholders and two members of its board of directors. Common
stock of 205,250 shares was issued in conjunction with the exercise of the
warrants. In addition, the exercise price of the remaining unexercised warrants
to purchase 362,250 shares of common stock was increased from $3.50 to $7.50 per
share. EP MedSystems used the net proceeds from the exercise of warrants for
working capital purposes.

11. Stock Compensation

New Employee Agreement

      In connection with EP MedSystems' hiring of a new President and Chief
Operating Officer in the third quarter of 2001, EP MedSystems entered into
certain employment arrangements with the executive pursuant to which the
executive purchased 100,000 shares of EP MedSystems' common stock at $2.20 per
share, received a five-year warrant, which vested immediately, to purchase an
additional 100,000 shares of EP MedSystems' common stock, at an exercise price
of $2.75 per share, and was granted an option under the Company's Long Term
Incentive program, vesting over four years, to


                                      F-16
<PAGE>

purchase 100,000 shares at an exercise price of $1.91 per share (the stock price
as of grant date). In connection with the stock purchase, EP MedSystems provided
the executive with a two-year, interest-free, non-recourse loan in the amount of
$220,000, which is secured by a pledge to EP MedSystems of the shares. The
principal balance of the loan is forgiven ratably over the term of the loan. If
the executive terminates his employment prior to August 20, 2003, the remaining
principal balance not forgiven, would be due and payable. The loan is forgiven,
in whole, on August 20, 2003.

      As prescribed by APB No. 25, EP MedSystems accounted for the warrant and
option granted as compensation expense using the intrinsic value method. As the
exercise price for the shares under the warrant and option is at or greater than
the fair market value of the underlying stock on the date of issuance, the
intrinsic value is zero and no compensation expense was recorded.

      EP MedSystems also determined that the treatment for the valuing and
recording of the restricted shares purchased would be similar to the accounting
for stock options that qualify for variable plan accounting pursuant to footnote
2 of APB No. 25. Based on the purchase price of the shares of common stock at
the time of issuance, the intrinsic value of these instruments was zero and, as
such, no compensation expense was recorded. These shares are re-measured on a
quarterly basis and any resulting compensation expense will be amortized over
the life of the note. Compensation expense will be determined as the difference
between the fair market value and the purchase price of the stock at the end of
the reporting period. The purchase price is adjusted downward in conjunction
with the loan amount forgiven on a quarterly basis as defined in the promissory
note. The Company recorded $30,000 in compensation expense as of December 31,
2001.

1995 Long Term Incentive Plan

      EP MedSystems' 1995 Long Term Incentive Plan (the "1995 Incentive Plan")
was adopted by the Board of Directors and shareholders in November 1995. On
November 5, 1999, the Shareholders approved an amendment increasing the number
of shares available under the Plan from 700,000 to 1,000,000. At December 31,
2000, options to purchase 815,560 shares were outstanding at exercise prices
ranging from $1.75 to $4.25 per share. The 1995 Incentive Plan provides for
grants of "incentive" and "non-qualified" stock options to employees of EP
MedSystems. 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 terminated earlier by the Board of Directors.

      During 2000, EP MedSystems issued options to purchase 242,713 shares of
common stock under the 1995 Incentive Plan. The exercise prices of these options
range from $2.20 to $4.25 per share. The options granted in 2000 have terms of
ten years and vest over varying periods.


                                      F-17
<PAGE>

1995 Director Option Plan

      EP MedSystems' 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 EP MedSystems are available for issuance
under the 1995 Director Plan and options for 180,000 shares of common stock, at
exercise prices ranging from $2.00 to $3.00 per share, are outstanding as of
December 31, 2000. The 1995 Director Plan provides for grants of director
options to eligible directors of EP MedSystems and for grants of advisor options
to eligible members of the Scientific Advisory Board of EP MedSystems. 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 are five years. The 1995 Director Plan will
terminate on November 30, 2005, unless terminated earlier by the Board of
Directors.

      For the year ended December 31, 2001 no non-employee holders of non-plan
stock options exercised their options and 614,500 shares were exercised in 2000
at prices ranging from $0.10 to $2.00 per share.

      At December 31, 2001 and 2000, EP MedSystems had 1,318,044 and 1,162,560
shares, respectively, of common stock reserved for stock options under all
plans. All stock options granted by EP MedSystems, were granted at exercise
prices not less than the current fair market value of EP MedSystems' 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 EP MedSystems'
initial public offering.

      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 January 1, 2000               1,738,347     $0.10 - $3.75              $2.22
     Granted                                   242,713     $2.20 - $4.25              $3.48
     Exercised                               (698,500)     $0.10 - $3.00              $1.48
 Forfeited/expired                           (120,000)     $2.20 - $4.13              $2.62
                                         -------------   ---------------    ---------------
Outstanding at December 31, 2000             1,162,560     $1.33 - $4.25              $2.88
     Granted                                   370,000      $1.60 - 2.52              $1.96
     Exercised                                   (800)             $2.00              $2.00
     Forfeited/expired                       (213,716)     $2.19 - $4.19              $3.04
                                         -------------   ---------------    ---------------
Outstanding at December 31, 2001             1,318,044     $1.33 - $4.25              $2.60
                                         =============   ===============    ===============
Exercisable at December 31, 2001               745,997     $1.33 - $4.25              $2.59
                                         =============   ===============    ===============
</TABLE>

        EP MedSystems 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 EP MedSystems' stock option plans been determined
consistent


                                      F-18
<PAGE>

with SFAS No. 123 "Accounting for Stock-Based Compensation", EP MedSystems'
pro-forma net loss and loss per share for 2001 and 2000 would have been as
follows:

                                                   2001                 2000
                                               -----------          -----------
Reported net loss                              ($4,144,762)         ($4,836,121)
                                               ===========          ===========

Reported Basic/Diluted
loss per share                                      ($0.31)              ($0.41)
                                               ===========          ===========

Pro-forma net loss                             ($4,502,786)         ($5,113,850)
                                               ===========          ===========

Pro-forma Basic/Diluted
loss per share                                      ($0.34)              ($0.43)
                                               ===========          ===========

      Under Statement of Financial Accounting Standards No. 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 2001 and 2000, respectively:

                                                   2001                 2000
                                               -----------          -----------
Risk free interest rate                           2.89%                6.08%
Expected life                                    5 years              5 years
 Volatility                                       82.55%                50%
Weighted average fair value of
options granted during the year                   $1.63                $2.30

12. Industry Segment and Geographic Information

      EP MedSystems manages its business on the basis of one reportable
segment--the manufacture and sale of cardiac electrophysiology products. EP
MedSystems' chief operating decision makers use consolidated results to make
operating and strategic decisions.

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

                                                   2001                 2000
                                               -----------          -----------
United States                                  $ 6,197,000          $ 4,909,000
Europe/Middle East                               2,544,000            2,589,000
Asia and Pacific Rim                             1,192,000            2,262,000
                                               -----------          -----------
                                               $ 9,933,000          $ 9,760,000
                                               ===========          ===========

      Sales of EP MedSystems' cardiac electrophysiology devices and related
catheters aggregated $8,676,000 and $1,257,0000 in 2001 and $8,469,000 and
$1,291,000 in 2000, respectively. EP MedSystems' long-lived assets are located
in the U.S. No customer


                                      F-19
<PAGE>

accounted for an excess of 10% of total sales during the years ended December
31, 2001 and 2000.

        Net sales for the year ended December 31, 2001 were billed in three
currencies: $8,211,000 in U.S. dollars, 1,680,000 in Euro and (pound)135,000
pounds sterling. Management has determined that the impact of foreign currency
risk on sales is minimal since a majority of sales are billed in U.S. dollars.
EP MedSystems does incur translation gains and losses, which are recorded in
Stockholders' Equity. EP MedSystems' cumulative translation loss was $80,094 at
December 31, 2001. As of December 31, 2001, EP MedSystems had not entered into
any derivative financial instruments for hedging or other purposes.

13. Employee Benefit Plan

      During 1997, EP MedSystems 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 EP MedSystems may match a percentage of employee
contributions at the discretion of the Board of Directors. During the years
ended December 31, 2001 and 2000, no matching contributions were made to the
plan.

14. Income Taxes

      EP MedSystems accounts for income taxes in accordance with the provisions
of Statement of Financial Account Standards No. 109, "Accounting for Income
Taxes" ("SFAS No. 109"). SFAS No. 109 requires EP MedSystems to recognize income
tax benefits for the loss carry forwards which have not previously been
recorded. As a result of losses incurred since EP MedSystems' inception, there
is no provision for income taxes in the accompanying financial statements. At
December 31, 2001 and 2000, EP MedSystems' net deferred tax assets are fully
offset by a valuation allowance, and, to the extent that it is determined that
such allowance is no longer required, the tax benefit of the remaining net
deferred tax assets will be recognized in the future. The tax effects of
temporary differences and carryforwards that give rise to significant portions
of deferred tax assets consist of the following:

                                                          December 31,
                                                     2001               2000
                                                 -----------        -----------
Allowance for doubtful accounts                  $    28,000        $    18,000
Inventory reserves                                    93,000             30,000
Intangible asset amortization                        (45,000)           (12,000)
Depreciation                                          (3,000)           (19,000)
Accrued liabilities                                   44,000             74,000
Net operating loss carryforwards                   8,195,000          8,343,000
Research and development credit                      515,000            218,000
Write-down of EchoCath investment                    560,000            560,000
Write-off of note receivable                          43,000             43,000
Deferred warranty income                             125,000             74,000


                                      F-20
<PAGE>

Other                                                 13,000             18,000
                                                 -----------        -----------
                                                   9,568,000          9,347,000
Less: Valuation allowance                         (9,568,000)        (9,347,000)
                                                 -----------        -----------
                                                 $        --        $        --
                                                 -----------        -----------

      On December 31, 2001 and 2000, EP MedSystems had approximately $22,900,000
and $21,698,000, respectively, of net operating loss carryforwards available to
offset future income. The federal carryforwards expire between 2009 and 2021.
Due to ownership changes that occurred, as defined by Section 382 of the
Internal Revenue Code, EP MedSystems may be limited in the use of net operating
losses generated prior to the changes in ownership in each year following the
change in ownership. Additionally, EP MedSystems may have experienced subsequent
changes in ownership, as defined by Section 382, resulting in additional
limitations in EP MedSystems' ability to utilize certain net operating losses.

      EP MedSystems sold a portion of its New Jersey cumulative 1999 net
operating loss for its EP MedSystems and ProCath statutory entities for
$420,000. The sale of the cumulative net operating loss is allowable under a New
Jersey State law enacted in January 1999, pursuant to which emerging technology
and bio-technology companies may transfer, or "sell", their unused New Jersey
net operating loss carry forwards and New Jersey research and development tax
credits to any profitable New Jersey companies qualified to purchase them for
cash. This amount is included in other income.

      A reconciliation of EP MedSystems' effective tax rate is as follows:

                                                         Year ended December 31,
                                                           2001          2000
                                                          ------        ------

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
                                                          ------        ------
                                                            --            --
                                                          ======        ======

15. Recently Issued Accounting Standards

      In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 141 ("SFAS No. 141"), "Business
Combinations." SFAS No. 141 supercedes Accounting Principles Board Opinion No.
16 ("APB No. 16"), "Business Combinations." The primary changes made by SFAS No.
141 are: (1) requiring that the purchase method of accounting be used for all
business combinations initiated after June 30, 2001, (2) establishing specific
criteria for the recognition of intangible assets separately from goodwill, and
(3) requiring unallocated negative goodwill to be written off immediately as an
extraordinary gain (instead of being deferred and amortized). The adoption of
SFAS No. 141 is required for all business combinations initiated after June 30,
2001. EP MedSystems does not expect that the


                                      F-21
<PAGE>

adoption of SFAS No. 141 will have a material impact on its results of
operations, financial position or cash flows.

      In addition, in June 2001, the FASB issued Statement of Financial
Accounting Standards No. 142 ("SFAS No. 142"), "Goodwill and Other Intangible
Assets." SFAS No. 142 supercedes Accounting Principles Board Opinion No. 17,
"Intangible Assets." SFAS No. 142 primarily addresses the accounting for
goodwill and intangible assets subsequent to their acquisition. The provisions
of SFAS No. 142 will be effective for fiscal years beginning after December 15,
2001. The primary changes made by SFAS No. 142 are: (1) goodwill and indefinite
lived intangible assets will no longer be amortized, (2) goodwill will be tested
for impairment at least annually at the reporting unit level, (3) intangible
assets deemed to have an indefinite life will be tested for impairment at least
annually, and (4) the amortization period of intangible assets with finite lives
will no longer be limited to forty years. In connection with the adoption of
this standard, EP MedSystems' unamortized goodwill balance will no longer be
amortized, but will continue to be tested for impairment. EP MedSystems plans to
test impairment of goodwill, at least annually, using a two-step impairment test
consisting of comparing goodwill fair value and book value of determined
reporting units and, if applicable, measuring the excess of the recorded amount
of goodwill with its implied fair value. We will cease to amortize the remaining
unamortized goodwill of $342,000. We had recorded approximately $50,000 of
amortization on these amounts during 2001 and would have recorded approximately
the same amount of amortization during 2002. In lieu of amortization, we are
required to perform an initial impairment review of our goodwill in 2002 and an
annual impairment review thereafter. We expect to complete our initial review
during the first quarter of 2002.

      In August 2001, the FASB issued Statement of Financial Accounting
Standards No. 143 ("SFAS No. 143"), "Accounting for Asset Retirement
Obligations." This standard requires that obligations associated with the
retirement of tangible long-lived assets be recorded as liabilities when those
obligations are incurred, with the amount of the liability initially measured at
fair value. Upon initially recognizing a liability for an asset retirement
obligation, an entity must capitalize the cost by recognizing an increase in the
carrying amount of the related long-lived asset. Over time, this liability is
accreted to its present value, and the capitalized cost is depreciated over the
useful life of the related asset. Upon settlement of the liability, an entity
either settles the obligation for its recorded amount or incurs a gain or loss
upon settlement. SFAS No. 143 is effective for financial statements issued for
fiscal years beginning after June 15, 2002, which for EP MedSystems, Inc. means
the standard will be adopted on January 1, 2003. EP MedSystems does not expect
that the adoption of this statement will have a material impact on its results
of operations, financial position or cash flows.

      In October 2001, the FASB issued Statement of Financial Accounting
Standards No. 144 ("SFAS No. 144"), "Accounting for the Impairment or Disposal
of Long-Lived Assets," which supercedes Statement of Financial Accounting
Standards No. 121 ("SFAS No. 121"), "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of." SFAS No. 144 applies to all
long-lived assets, including


                                      F-22
<PAGE>

discontinued operations, and consequently amends Accounting Principles Board
Opinion No. 30, "Reporting the Results of Operations-Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions." Based on SFAS No. 121, SFAS No. 144 develops
one accounting model for long-lived assets that are to be disposed of by sale,
as well as addresses the principal implementation issues. SFAS No. 144 requires
that long-lived assets that are to be disposed of by sale be measured at the
lower of book value or fair value less cost to sell. Additionally, SFAS No. 144
expands the scope of discontinued operations to include all components of an
entity with operations that (1) can be distinguished from the rest of the entity
and (2) will be eliminated from the ongoing operations of the entity in a
disposal transaction. SFAS No. 144 is effective for financial statements issued
for fiscal years beginning after December 15, 2001, which for EP MedSystems,
Inc. means the standard will be adopted on January 1, 2002. The Company does not
expect that the adoption of SFAS No. 144 will have a material impact on its
results of operations, financial position or cash flows.

16. Subsequent Events

      In March 2002, the Company paid the entire outstanding term loan balance
of $429,000 to Fleet Bank and, accordingly, encumbrances on the facility are in
the process of being released (See Note 9).

      In June 2001, the Company consummated the private sale and issuance of
585,938 shares of newly-designated Series A convertible preferred stock to
Century Medical, Inc. ("CMI"), its Japanese distributor. In March 2002, the
585,938 shares were converted into an equal number of shares of common
stock. (See Note 10).


                                      F-23