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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K/A

(Amendment No. 1)

(Mark one)

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

For the fiscal year ended: December 31, 2006

or



| ̈ | TRANSITION REPORT PURSUANT TO 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.

(Exact Name of Registrant as Specified in its Charter)



|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|New Jersey                                                     |  | 22-3212190                          
|(State or Other Jurisdiction of Incorporation or Organization) |  | (I.R.S. Employer Identification No.)
|                                                               | 
|575 Route 73 North, Bldg. D, West Berlin, NJ                   |  | 08091                               
|(Address of Principal Executive Offices)                       |  | (Zip Code)                          

(856) 753-8533

(Issuers Telephone Number, Including Area Code)

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

Securities registered under Section 12(g) of the Act: Common Stock, no par value, stated value $.001 per share

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

 ̈Yes    x   No

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or
15(d) of the Act.

 ̈Yes    x  No

Indicate by check mark whether the registrant:
(1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.

x  Yes ̈No

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

Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer ̈Accelerated Filer ̈Non-accelerated filer x

Indicate by
check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

 ̈Yes    x  No

The aggregate market value of the common stock held by non-affiliates of the registrant, based on the closing price of the registrants common stock on June 30, 2006 as reported on the NASDAQ Capital Market, was approximately
$42,913,000. In determining the market value of the registrants common stock held by non-affiliates, shares of common stock beneficially owned by directors, officers and holders of more than 10% of the registrants common stock have been
excluded. This determination of affiliate status is not necessarily a conclusive determination for other purposes.

As of March 28, 2007, there were
outstanding 30,365,236 shares of the registrants common stock, no par value, stated value $.001 per share.

DOCUMENTS INCORPORATED
BY REFERENCE

None



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Explanatory Note

This
Annual Report on Form 10-K/A constitutes Amendment No. 1 to the Registrants Annual Report on Form 10-K for the fiscal year ended December 31, 2006. This Annual Report on Form 10-K/A is being filed solely to amend and restate Items 10
through 14 of the Registrants Annual Report on Form 10-K for the fiscal year ended December 31, 2006, which was previously filed with the Commission. Other than these sections, no information contained in the Form 10-K has been revised.

INDEX TO FORM 10-K/A - PART III

PART III



|         |  |                                                                                                |  |   
|-------- |  | ---------------------------------------------------------------------------------------------- |  | --
|Item 10. |  | Directors, Executive Officers, and Corporate Governance                                        |  | 2 
|         |  |                                                                                               
|Item 11. |  | Executive Compensation                                                                         |  | 5 
|         |  |                                                                                               
|Item 12. |  | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |  | 16
|         |  |                                                                                               
|Item 13. |  | Certain Relationships and Related Transactions and Director Independence                       |  | 18
|         |  |                                                                                               
|Item 14. |  | Principal Accountant Fees and Services                                                         |  | 19

PART III



|Item 10. | Directors, Executive Officers and Corporate Governance.
|-------- | -------------------------------------------------------

Directors and Executive Officers

The following table sets forth certain information regarding our directors and executive
officers as of April 26, 2007:



|                            |  |     |  |                                                         
|--------------------------- |  | --- |  | --------------------------------------------------------
|Name                        |  | Age |  | Description                                             
|David A. Jenkins (1)        |  | 49  |  | Chairman of the Board; Class III Director               
|David I. Bruce (1)          |  | 47  |  | President and Chief Executive Officer; Class II Director
|James J. Caruso (4)         |  | 46  |  | Interim Chief Financial Officer and Secretary           
|Matthew C. Hill (5)         |  | 38  |  | Chief Financial Officer and Secretary                   
|C. Bryan Byrd               |  | 46  |  | Vice President, Engineering and Manufacturing           
|John Huley                  |  | 50  |  | Vice President, Sales                                   
|Thomas Maguire              |  | 44  |  | Vice President, Regulatory and Quality Assurance        
|Richard C. Williams (2) (3) |  | 63  |  | Class I Director                                        
|Gerard Michel (2) (3) (6)   |  | 43  |  | Class II Director                                       
|Abhijeet Lele (2) (3)       |  | 41  |  | Class III 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.
|--- | ---------------------------------------------------------------



|(4) | Appointed to the position on April 17, 2007. Mr. Caruso will assume the duties of Principal Financial Officer immediately following the filing of the Companys first
quarter 2007 SEC Form 10-Q.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(5) | Mr. Hill served as the Companys Chief Financial Officer until his resignation on April 3, 2007. He remains employed by the Company as the Principal Financial Officer
during a transition period which will end with the filing of the Companys first quarter 2007 SEC Form 10-Q.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(6) | Paul Ray, one of EP MedSystems Class II directors passed away in January, 2007. The Board appointed Gerard Michel to serve as a Class II Director and to serve on the audit and
compensation committees. According to our By-Laws, Mr. Michel will be nominated for election to the Board at our next Annual Meeting of Shareholders. As a Class II Director, if elected, Mr. Michel will serve until the expiration of his
term on the date of the 2009 Annual Meeting of Shareholders.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Our 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 our by-laws, the Board of Directors has set the number of directors at 5. Our



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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
term for the Class II director expires at the 2009 Annual Meeting. The term for the Class III directors expires at the 2007 Annual Meeting. The term for the Class I director expires at the 2008 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 the Company are elected
annually and hold offices until their successors are elected and qualified, or until their earlier removal, death or resignation.

Set
forth below is a brief summary of the recent business experience and background of each of our directors and executive officers.

David
I. Bruce is the President and Chief Executive Officer of the Company. He is a Class II Director whose term expires in 2009. Mr. Bruce joined EP MedSystems in August, 2006, following nine years of increasing responsibility at Acuson
Corporation and the Ultrasound Division of Siemens, including as General Manager of the intracardiac echo (ICE) catheter group with responsibility for both commercial operations and research and development. He also served as Vice President,
Marketing for EVL, a laser vision correction company. Mr. Bruce received an MBA from the Wharton School and BS in Mechanical Engineering from the University of California, Berkeley.

David A. Jenkins is a founder and has served as the Chairman of the Board of Directors of the Company since 1995. He is a Class II Director whose
term expires in 2009. From October, 2005 to August, 2006, Mr. Jenkins served as President, Chief Executive Officer and Chief Operating Officer of the Company. Mr. Jenkins also served as the Chief Executive Officer of the Company from its
inception in 1993 until August 2002. Mr. Jenkins served as President of the Company from its inception in 1993 until August 2001. He served as President and a director of Transneuronix, Inc., a privately-held company engaged in the development
of neuromuscular stimulation devices, until its sale to Medtronic in 2005. In addition, Mr. Jenkins is a director of Geodigm, Inc., a privately-held company.

James J. Carusowas hired as the Chief Financial Officer of the Company on April 17, 2007. He will assume the duties of Principal Financial Officer immediately following the filing of the Companys
first quarter 2007 Form 10-Q. From 1999 through 2006, he served as Vice President of Finance of Hi-tronics Designs, Inc, an implantable medical device design and OEM manufacturer that was acquired by Advanced Neuromodulation Systems in 2001, and
which was subsequently acquired by St. Jude Medical, Inc. in 2005. He served as EP MedSystems Chief Financial Officer from 1995 to 1999 and managed the Companys Initial Public Offering in 1996. In addition, Mr. Caruso worked in
public accounting with Touche Ross from 1984 to 1989, and was Chief Financial Officer of an electronics manufacturing company from 1989 to 1996. He is a CPA and received a BS degree in accounting from Rutgers University and an MBA from Fordham
University.

Matthew C. Hill served as the Companys Chief Financial Officer from March 2003 until his resignation on
April 3, 2007. He is currently employed by the Company as the Principal Financial Officer during a transition period which will end with the filing of the Companys first quarter 2007 SEC Form 10-Q. He served as the Controller of the
Company from August 2002 to March 2003. In January, 2007, he was appointed to the additional position of Vice President, Operations. From 1994 through 2002, Mr. Hill held various positions, up to the level of senior manager, with Grant Thornton
LLP, the U.S. member firm of the international accounting and auditing organization of Grant Thornton International.

C. Bryan Byrd
is the Vice President, Research and Development of the Company. Mr. Byrd joined the Company in April 1993 to oversee software development for new products. Prior to joining the Company, 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.

John Huley is the Vice President, Sales of the Company. From 2000 to 2004, Mr. Huley held the position of Northeast Region Manager with Abbott Vascular Devices, where he managed the Northeastern United States in sales of
interventional cardiology devices. Prior to that, he worked for over 17 years with United States Surgical Corporation where he rose to Divisional Manager primarily responsible for sales of surgical stapling and suture devices. Mr. Huley has
over 20 years of increasing responsibilities in surgical device and interventional cardiology device sales and sales management.

Thomas
Maguire is the Vice President, Regulatory and Quality Assurance of the Company. From 2000 to 2004, Mr. Maguire served as Regulatory Compliance Manager, then Group Manager at Synthes (USA). In those roles he was responsible for developing
regulatory strategy concerning the firms biomaterial division, and subsequently managed one of its product development groups. From 1997 to 2000 he was the Director of Regulatory Affairs and Quality Assurance for Ramus Medical Technologies, a
start-up device manufacturer focused on the development of novel cardiovascular products. Mr. Maguire has over 15 years experience in quality assurance, regulatory compliance and medical devices.



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Abhijeet Lele has served as a director of the Company since April 2002. He is a Class III director
whose term expires in 2007. Since October 1999, Mr. Lele has served as a Managing Member of the general partner of EGS Private Healthcare Partnership, L.P. and EGS Private Healthcare Counterpart, L.P., (the EGS Entities) and other
affiliated funds, all of which are private equity funds focusing on investments in private and public healthcare companies. Each of the EGS Entities is a shareholder of the Company. From 1994 to 1997, Mr. Lele was a consultant in the healthcare
practice of McKinsey & Company. Before joining McKinsey & Company, Mr. Lele held operating positions in the pharmaceutical and biotechnology industries. He holds an MA in molecular biology from Cambridge University and an MBA
with distinction from Cornell University. Mr. Lele also serves as a director of CryoCath Technologies (TSE:CYT), Medarex, Inc. (NASDAQ: MEDX), Stereotaxis, Inc. (NASDAQ: STXS), Optiscan Biomedical Corporation and Ekos Corporation.

Gerard Michelhas served as a director of the Company since January 2007. He is a Class II director who must stand for election in 2007.
Mr. Michel is the Chief Financial Officer and Vice President, Corporate Strategy of NPS Pharmaceuticals, Inc. (NASDAQ: NPSP) (NPS). NPS engages in the discovery, development, and commercialization of small molecules and recombinant
proteins. NPS product candidates are primarily used for the treatment of bone and mineral disorders, gastrointestinal disorders, and central nervous system disorders. From 1995 to 2002, Mr. Michel served as a Principal of the consulting
firm of Booz-Allen & Hamilton where he worked with medical device companies, large pharmaceutical companies, biotech firms, and healthcare service firms. From 1988 to 1995, Mr. Michel was with Lederle Laboratories, serving in
Marketing, Sales and Corporate Development roles, both domestically and internationally. Mr. Michel received an MS in microbiology and an MBA degree, both from the University of Rochester.

Richard C. Williams has served as a director of the Company since August 2002. He is a Class I director whose term expires in 2008. Since 1989,
Mr. Williams has served as the founder and President of Conner-Thoele Limited, a consulting and financial advisory firm specializing in the healthcare industry and pharmaceutical segment. From 2000 to April 2001, he also served as Vice
ChairmanStrategic Planning and a director of King Pharmaceuticals Inc., a specialty pharmaceutical company (NYSE: KG). From 1992 to 2000, prior to its acquisition by King Pharmaceuticals in 2000, Mr. Williams served as Chairman and a
director of Medco Research, a cardiovascular pharmaceutical development company publicly traded on the NYSE. From 1997 to 1999, he was Co-Chairman and a director of Vysis, a genetic biopharmaceutical publicly traded on the NASDAQ. Prior to founding
Conner-Thoele Limited in 1989, Mr. Williams held various operational and financial management officer positions with Erbamont, N.V., Field Enterprises, Inc., Abbott Laboratories and American Hospital Supply Corporation. Mr. Williams is the
non-executive Chairman of the Board and interim Chief Executive Officer of Cellegy Pharmaceuticals, a publicly-held specialty pharmaceutical company. Mr. Williams is also Chairman and a director of ISTA Pharmaceuticals, Inc., (NASDAQ: ISTA) an
ophthalmology company, and is a former member of the Listed Company Advisory Committee of the NYSE. Mr. Williams received a BA in economics from DePauw University and an MBA from the Wharton School.

There are no family relationships among the directors and executive officers of the Company.

Compliance with Section 16(a) of the Exchange Act

Section 16(a) of the Exchange Act requires our executive officers, directors and holders of more than 10% of our common stock to file reports of ownership and changes in ownership with the Commission. Such persons are required to
furnish us with copies of all Section 16(a) forms they file. Based solely on our review of the copies of such forms received by us or oral or written representations from certain reporting persons that no Form 5s (Annual Statement of Changes in
Beneficial Ownership of Securities) were required for those persons, we believe that, with respect to the year ended December 31, 2006, one of our executive officers, directors and greater than 10% beneficial owners did not comply on a timely
basis with all such filing requirements. C. Bryan Byrd, Vice President, Engineering filed Form 4 for the purchase of 1,000 shares of Company stock one day late.

Audit Committee

We have an Audit Committee of our Board of Directors established in accordance with
Section 3(a)(58)(A) of the Exchange Act. Currently, Abhijeet Lele, Richard Williams and Gerard Michel are members of the Audit Committee. Mr. Lele qualifies as an independent audit committee financial expert as such term is
defined in Item 407(d)(s) of Regulation S-K. The Board has determined that all the members meet the SECs requirements with respect to independence of listed company Audit Committee members.

The Audit Committee operates pursuant to a written charter which is available on the Companys website at
www.epmedsystems.com/company/governance.html.

Code of Ethics

We have adopted a written code of ethics that applies to all of our employees, including our principal executive officer, principal financial officer, principal accounting officer or controller and any persons
performing similar functions. The code of ethics is included in our Code of Business Conduct and Ethics. All of our directors and employees, including our Chief Executive Officer and other senior executives, are required to comply with our Code of
Business Conduct and Ethics to help



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ensure that our business is conducted in accordance with the highest standards of moral and ethical behavior. Our Code of Business Conduct and Ethics covers
all areas of professional conduct, including customer relationships, conflicts of interest, insider trading, intellectual property and confidential information, as well as requiring strict adherence to all laws and regulations applicable to our
business. Employees are required to bring any violations and suspected violations of the Code of Business Conduct and Ethics to the attention of EP MedSystems, through management or by using the Companys confidential compliance line. A copy of
our Code of Business Conduct and Ethics is available on our website at http://www.epmedsystems.com/company/governance.html. We will also provide a copy of our Code of Business and Conduct and Ethics to any person without charge upon written
request addressed to EP MedSystems, Inc., 575 Route 73 North, Bldg. D, West Berlin, New Jersey 08091, Attention: James J. Caruso, Interim Chief Financial Officer.



|Item 11. | Executive Compensation.
|-------- | -----------------------

Compensation Discussion and Analysis

Compensation Objectives

The
primary objectives of the Companys executive compensation program are to attract and retain key executives, to stimulate managements efforts on our behalf in a way that supports our business plan and to align managements incentives
with the long-term interests of the Company and its shareholders. Decisions on salary adjustments and compensation awards for executive officers have been made by the entire Board of Directors.

Board meetings involving consideration of compensation adjustments and awards for executive officers typically have included, for all or a portion of
each meeting, not only the board members but also our chief executive officer. For compensation decisions relating to executive officers other than our chief executive officer, the chief executive officer typically makes recommendations and
reviews them with the chairman of the Compensation Committee and the other members of the committee. The Board of Directors, in conjunction with input from the Compensation Committee members, then considers the recommendations from the chief
executive officer.

The Company has not engaged an outside independent human resources consultant in the evaluation of the salaries of the
executive officers. The recommendations from the compensation committee on the base salary of executive officers are based upon the collective experience of the members and public and nonpublic information that is available to evaluate the market
range of base salaries for executives in companies of similar size and industry. In 2006, the Company used a retained executive search firm in the hiring of its Chief Executive Officer. This search firm assisted the Compensation Committee in
providing structuring an appropriate compensation package for the new executive.

Under Section 162(m) of the United States Internal
Revenue Code of 1986, as amended (tax Tax Code), compensation in excess of $1 million paid to a chief executive officer or to any of the four other most highly compensated officers generally cannot be deducted. The Compensation Committee
has determined the Companys compensation practices and policies are not currently affected by this limitation.

Elements of Compensation

The Companys executive compensation program consists of the following basic components: base salary, long-term incentives
pursuant to the Companys various option plans, limited perquisites and in some cases a cash bonus. Each component of the compensation program serves a particular purpose. Base salary is primarily designed to reward current and past
performance, and may be adjusted from time to time to realign salaries with market levels. Cash bonuses may also be granted to reward individual contributions and superior job performance. Grants of long-term incentives are primarily
designed to tie a portion of each executives compensation to long-term future performance. In addition, executives participate in the benefit plans and programs that are generally available to all employees of the Company. Although
our Board of Directors does review total compensation, we do not believe that significant compensation derived from one component of compensation should negate or reduce compensation from another component.

Base Salary. The Board of Directors and Compensation Committee review the base salaries of each executive officer. In determining the
appropriate level of compensation for each executive officer, the Board of Directors, based on the recommendation of the Compensation Committee, evaluates the executives performance as it relates the Companys goals, objectives and
strategic business plan and made the evaluation based upon the collective experience of the members and public and nonpublic information that is available to the members.



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Long-Term Incentive Compensation. In determining the long-term incentive component of our
executive officers compensation in 2006, the Board of Directors based on the recommendation of the Compensation Committee, reviewed the equity compensation of each employee, including executive officers, made adjustments as appropriate so that
employees within the same level of the Company had a comparable equity stake in the Company. Our executive officers are eligible to receive awards under the Companys various option plans. The option plans permit the Board of
Directors to award eligible employees and consultants with incentive options and non-statutory stock options. Awards to executive officers under the option plans have generally consisted of incentive options and non-statutory stock options, or a
combination thereof. The Compensation Committee and the Board of Directors may issue non-statutory options outside the Companys option plans, as was the case with in 2006 with the hiring of the Companys Chief Executive Officer.

The option plans permit the Board of Directors to award eligible employees and consultants with incentive-based and non-incentive-based
compensation. The maximum number of shares of stock of the Company that may be subject to incentives under the plans, including without limitation incentive options, is as follows:



|                                  |  |          
|--------------------------------- |  | ---------
|Plan                              |  | Options  
|1995 Long Term Incentive Plan (1) |  | 692,908  
|2002 Stock Option Plan            |  | 990,000  
|2006 Stock Option Plan            |  | 1,000,000



|(1) | This plan is closed for the issuance of any new options.
|--- | --------------------------------------------------------

The Company
shall reserve at least the amount of shares outstanding under each of the plans. The plans also restrict the number of shares that may be issued to one individual in any given twelve-month period. The option plans will be administered and managed
within the discretion of Compensation Committee of the Company. Incentives under the option plans may be granted to eligible employees or consultants in any one or a combination of incentive options or non-statutory stock options.

Annual Cash Incentives. The Board of Directors believes that the Companys compensation program should focus the named executive
officers and other key executives on our annual financial performance and should reward individual performance. Annually, the members create an individual bonus plan for the named executive officers and other key executives

The purpose of the individual plan is to:



| |  |  | Focus participants actions on the achievement of annual revenue growth and profitability goals;
| | - |  | ------------------------------------------------------------------------------------------------



| |  |  | Align participants actions on the accomplishment of key operational and strategic goals;
| | - |  | -----------------------------------------------------------------------------------------



| |  |  | Encourage and reward participants for the achievement of specific objectives; and
| | - |  | ---------------------------------------------------------------------------------



| |  |  | Maintain a competitive range of incentive compensation opportunities.
| | - |  | ---------------------------------------------------------------------

With respect to individual goals, the Chief Executive Officer establishes his goals with the Compensation Committee and the Chief Executive Officer
oversees the establishment of each of the other named executive officers goals for the upcoming year. Upon completion of the year, the Chief Executive Officer rates each of the other named executive officer on the attainment of those goals.
The Board of Directors retains the sole discretion to determine whether the Company and the named executive officer have met the objectives.

In addition, the Board of Directors may determine to award cash bonuses to our executive officers based upon exceptional performance, although it has done so in limited circumstances.

Perquisites. We generally limit the perquisites that we make available to our executive officers. With the exception of
Mr. Jenkins, Chairman of the Board of Directors, perquisites to executive officers consist only of auto allowances. The additional perquisite received by Mr. Jenkins is identified in the footnotes to the Summary Compensation Table.

Other Compensation. Executive officers are eligible to participate in all of our employee benefit plans, such as a medical,
dental and life insurance plan, and a 401(k) plan. At this time, the Company does not make matching contributions to the 401(k) plan.



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Compensation Policies

Effect of Accounting and Tax Treatment.On January 1, 2006, the Company adopted SFAS No. 123Revised 2004, Share-Based Payment (SFAS 123(R)), which establishes accounting for
stock-based payment transactions for employee services and goods and services received from non-employees. SFAS 123(R) is a revision of SFAS No. 123, Accounting for Stock-Based Compensation (SFAS 123), and supersedes APB
No. 25, Accounting for Stock Issued to Employees. Under the provisions of SFAS 123(R), stock-based compensation cost is measured at the date of grant, based on the calculated fair value of the award, and is recognized as expense over the
employees or non-employees service period, which is generally the vesting period of the equity grant. Because the Company offers incentive stock options and non-qualified stock options, the deductibility of a compensation award by
the Company may not always occur at the time the award is otherwise taxable to the employee.

Timing Issues. With the exception
of significant promotions and new hires, we intend to review equity compensation awards annually following the availability of the financial results for the prior year. Grants were made in December 2006 for the last fiscal year. This timing
enables us to consider prior year performance by the Company and the potential recipients and our expectations for the current year. Grants to newly hired employees are effective on the latter of the employees first day of employment or upon
approval of the grant by the Board of Directors. The exercise price of stock options is based upon the grant date fair market value, which is the fair market value of our common stock on the date of grant.

Stock Ownership Guidelines.The Board of Directors has not adopted specific stock ownership guidelines for executive officers. Under the
terms of the option plans, however, in any given year, individuals are limited to the number of incentives they receive which may be issued pursuant to the plans. Except as may otherwise be permitted by the Tax Code, incentive options granted to an
individual during one calendar year shall be limited, such that at the time the incentive options are granted, the Fair Market Value (as defined in the plans) of the stock covered by all incentive options first exercisable in any calendar year may
not, in the aggregate, exceed $100,000.

Exercise of Discretion. Pursuant to the plans, the Compensation Committee retains
limited discretion in connection with the payment of performance based compensation in cases where the defined performance goals have not been met. The Compensation Committee also retains discretion to accelerate the vesting of unvested
incentives upon a individuals termination of employment with the Company. The Compensation Committee exercised this option with respect to certain options in recognition for Mr. Jenkinss service in 2006 as Chief Executive
Officer and Chief Operating Officer.

Adjustment or Recovery of Awards upon Restatement of Company Performance. The Company
does not have a formal policy with respect to whether executive officers are required to return cash and equity incentive awards if the relevant performance targets upon which the awards are based are ever restated or otherwise adjusted in a manner
that would reduce the size of an award or payment. Under the stock option plans, however, in determining the actual size of performance-based incentives, the Compensation Committee may reduce or eliminate the amount of the performance-based
incentives earned over the relevant period, if, in its sole and absolute discretion, such reduction or elimination is appropriate.

Chief Executive
Officer Compensation

David Bruce, who was hired by the Company on August 16, 2006, will receive an annual base salary of
$300,000. Mr. Bruce will also be eligible to participate in the Companys executive officer cash bonus plan in which he can earn up to 20% of his annual base salary. Pursuant to the Offer Letter in connection with
Mr. Bruces employment, the Company made the following stock option grants to Mr. Bruce in 2006: (1) 250,000 stock options under the Companys 2006 Stock Option Plan, (2) 50,000 stock options under the Companys
2002 Stock Option Plan and (3) 500,000 stock options outside of the Companys existing plans. The stock options have a life of 10 years, vest annually in five equal installments and have an exercise price equal to the fair-market value of
the Companys common stock, defined as the mean between the high and low of the Companys share price on the date of the grant or $1.44, in this case on the first day of employment, August 16, 2006. The Offer Letter provided for
additional grants of up to 200,000 stock options over the next two years based on agreed upon goals. These options were granted on November 16, 2006 at an exercise price of $1.34 per share. The Offer Letter provided a separate Change in Control
Agreement which will result in a payment of two times the Executives annual base salary and an acceleration of vesting of all unvested options upon a change of control. The Offer Letter also provides for severance payments to the Executive in
the event that he is terminated by the Company without cause, as defined in the Offer Letter equal to (1) continuation of base salary for 12 months, (2) continuation of payment of medical and other benefits and (3) a six month
acceleration of any unvested stock options.

In determining the compensation level for the new Chief Executive Officer, the Company used a
retained executive search firm in the hiring of its Chief Executive Officer. This search firm assisted the Compensation Committee in structuring an appropriate compensation package for the new executive.



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Senior Management Incentive Agreements

On May 12, 2005 our Board of Directors approved Senior Management Incentive Agreements with each of six senior officers. Those senior officers are
Matthew C. Hill, our Chief Financial Officer and Secretary, C. Bryan Byrd, our Vice President, Engineering and Manufacturing, John Huley, our Vice President, Sales, Thomas Maguire, our Vice President, Regulatory and Quality Assurance, Richard
Gibbons, our Director of Operations, and Kristine Fuimaono, our Director of Marketing. The agreements provide that if the senior officer is employed by the Company immediately prior to a change of control (as defined in the agreements) of the
Company, the Company will pay to each of the senior officers an amount equal to two times the senior officers annual base salary (which excludes any incentive pay, premium pay, commissions, overtime, bonuses and other forms of variable
compensation) at the time of such change of control. The agreements also confirm our policy previously approved by our Board of Directors that all options to purchase common stock of the Company granted to our employees (including all senior
officers) will vest immediately prior to a change of control. The management incentive agreements also provide that if a senior officers benefits under the management incentive agreement would result in an Internal Revenue Code
Section 280C(b)(1) parachute payment, such senior officer will receive an additional amount not to exceed 20% of the amount of the payments and benefits otherwise payable to the senior officer upon the occurrence of a change in
control. All senior officers are employed by the Company on an at-will basis and none of the senior officers has an employment agreement with the Company.

The following report of the Compensation Committee of the Board of Directors shall not be deemed to be soliciting material or to be filed with the Securities and Exchange Commission or subject
to the liabilities of Section 18 of the Securities Exchange Act of 1934, and the information shall not be deemed to be incorporated by reference into any filing made by the company under the Securities Act of 1933 or the Securities Exchange Act
of 1934.

Compensation Committee Report

The Compensation Committee has reviewed and discussed the Compensation Discussion and Analysis included in this report with management. Based on the Compensation Committees review of and discussions with management with respect
to the Compensation Discussion and Analysis, the Compensation Committee has recommended to the Board of Directors that the Compensation Discussion and Analysis be included in this report.

Submitted by the Compensation Committee of the Board of Directors.

Richard Williams  Chairman of the Compensation Committee

Abhijeet Lele

Gerard Michel

SUMMARY COMPENSATION TABLE

The following table sets forth information regarding compensation paid to our Named Executive Officers for the fiscal year ended December 31, 2006.
The Named Executive Officers are the our Chief Executive Officer, Chief Financial Officer and three other most highly compensated executive officers based on total compensation earned during 2006.



|                                                                                   |  |      |  |           |  |          |  |                    |  |                     |  |                                           |  |                                                                       |  |                               |  |          
|---------------------------------------------------------------------------------- |  | ---- |  | --------- |  | -------- |  | ------------------ |  | ------------------- |  | ----------------------------------------- |  | --------------------------------------------------------------------- |  | ----------------------------- |  | ---------
|Name and Principal Position                                                        |  | Year |  | Salary($) |  | Bonus($) |  | StockAwards(1) ($) |  | OptionAwards(1) ($) |  | Non-Equity Incentive PlanCompensation ($) |  | Change inPension ValueandNonqualifiedDeferredCompensationEarnings ($) |  | All Other Compensation(2) ($) |  | Total ($)
|David A. Jenkins Chairman President,Chief Executive Officer andChief Operating (3) |  | 2006 |  | 48,000    |  |         |  |                   |  | 257,412             |  |                                          |  |                                                                      |  | 4,382                         |  | 309,794  
|David I. Bruce President, Chief Executive andOperating Officer (4)                 |  | 2006 |  | 112,500   |  |         |  |                   |  | 79,086              |  |                                          |  |                                                                      |  |                              |  | 191,586  
|James J. Caruso Interim Chief Financial Officer (5)                                |  | 2006 |  |          |  |         |  |                   |  |                    |  |                                          |  |                                                                      |  |                              |  |         
|Matthew C. Hill (6) Chief Financial Officer                                        |  | 2006 |  | 152,100   |  | 10,000   |  |                   |  | 60,437              |  | 20,000                                    |  |                                                                      |  | 6,000                         |  | 248,537  
|C. Bryan Byrd Vice President, Engineering and Manufacturing                        |  | 2006 |  | 177,675   |  |         |  |                   |  | 60,190              |  | 21,000                                    |  |                                                                      |  |                              |  | 258,865  
|John Huley Vice President, Sales                                                   |  | 2006 |  | 150,000   |  |         |  |                   |  | 92,665              |  | 22,900                                    |  |                                                                      |  | 6,000                         |  | 271,565  
|Thomas Maguire Vice President, Regulatory and Quality Assurance                    |  | 2006 |  | 124,025   |  |         |  |                   |  | 10,445              |  | 20,000                                    |  |                                                                      |  | 6,000                         |  | 160,470  



|1. | The amounts in these columns reflect the dollar amount recognized for financial statement reporting purposes for the fiscal year ended December 31, 2006 in accordance with
FAS 123(R) of awards pursuant to the Companys equity incentive plans and therefore may include amounts from awards granted in 2006 and prior. Assumptions used in the calculation of these amounts for awards granted in fiscal years ended
December 31, 2006, 2005, and 2004 are included in Note 2 Summary of Significant Accounting Policiesto the Companys audited financial statements for the fiscal year ended December 31, 2006, included in the Companys
Annual Report on Form 10-K for the year ended December 31, 2006 as filed with the Securities and Exchange Commission on March 31, 2007. Assumptions used in the calculation of these amounts for the fiscal years ended December 31, 2003
and 2002 are included in Note 2 Summary of Significant Accounting Policiesto the Companys audited financial statements for the fiscal year ended December 31, 2003, included in the Companys Annual Report on Form 10-K for the
year ended December 31, 2003 as filed with the Securities and Exchange Commission on March 30, 2007. However, as required, the amounts shown exclude the impact of estimated forfeitures related to service-based vesting conditions.
|-- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

|2. | All Other Compensation consisted of the following:
|-- | --------------------------------------------------



|                 |  |      |  |                                     |       |                   |   |                                                 |  |           |  |   |      
|---------------- |  | ---- |  | ----------------------------------- | ----- | ----------------- | - | ----------------------------------------------- |  | --------- |  | - | -----
|Name             |  |      |  | Company PaidHealthcare Premiums
($) |       | Car Allowance ($) |   | Company MatchingContribution to 401(k) Plan ($) |  | Total ($)
|David A. Jenkins |  | 2006 |  | $                                   | 4,392 |                   |   |                                                |  |          |  | $ | 4,382
|David I. Bruce   |  | 2006 |  |                                     |      |                   |   |                                                |  |          |  |   |     
|James J. Caruso  |  | 2006 |  |                                     |      |                   |   |                                                |  |          |  |   |     
|Matthew C. Hill  |  | 2006 |  |                                     |      |                   | $ | 6,000                                           |  |          |  | $ | 6,000
|C. Bryan Byrd    |  | 2006 |  |                                     |      |                   |   |                                                |  |          |  |   |     
|John Huley       |  | 2006 |  |                                     |      |                   | $ | 6,000                                           |  |          |  | $ | 6,000
|Thomas Maguire   |  | 2006 |  |                                     |      |                   | $ | 6,000                                           |  |          |  | $ | 6,000



|3. | Mr. Jenkins served as President, Chief Executive Officer and Chief Operating Officer of the Company from October, 2005 through August, 2006. He has served as Chairman of the
Board since 1995.
|-- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|4. | Mr. Bruce was hired as the Chief Executive Officer and President in August, 2006.
|-- | ---------------------------------------------------------------------------------



|5. | Mr. Caruso was hired as the Chief Financial Officer on April 17, 2007. He will assume the duties of Principal Financial Officer immediately following the filing of the
Companys first quarter 2007 SEC Form 10-Q.
|-- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|6. | Mr. Hill was the Companys Chief Financial Officer from March, 2003 until he resigned his position on April 3, 2007. He is currently employed by the Company as the
Principal Financial Officer during a transition period which will end with the filing of the Companys first quarter 2007 SEC Form 10-Q.
|-- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

GRANTS OF PLAN-BASED AWARDS

The following table includes certain information with respect to grants of plan-based awards to the Named Executive Officers during the fiscal year ended December 31, 2006.



|                   |  |            |               |              |            |                                                                  |             |                                                              |               |        |            |   |             |         |                                                                |         |                                           |         |                                               |      |  |        
|------------------ |  | ---------- | ------------- | ------------ | ---------- | ---------------------------------------------------------------- | ----------- | ------------------------------------------------------------ | ------------- | ------ | ---------- | - | ----------- | ------- | -------------------------------------------------------------- | ------- | ----------------------------------------- | ------- | --------------------------------------------- | ---- |  | -------
|Name               |  | Grant Date |               | Plan Name    |            | Estimated Future Payments Under Non-Equity Incentive Plan Awards |             | Estimated Future Payments Under Equity Incentive Plan Awards |               |       
|                   |  |            | Threshold ($) |              | Target ($) |                                                                  | Maximum ($) |                                                              | Threshold (#) |        | Target (#) |   | Maximum (#) |         | All OtherOptionAwards:Number ofsecuritiesUnderlyingOptions (#) |         | Exerciseor BasePrice ofOptionAwards($/sh) |         | GrantDateFairValue
ofStockandOptionAwards ($)
|David A. Jenkins   |  |           |               |             |            |                                                                 |             |                                                             |               |       |            |  |             |        |                                                                |        |                                           |        |                                               |     |  |       
|David I. Bruce (1) |  | 8/16/06    |               | 2002 Plan    |            |                                                                 |             |                                                             |               |       |            |  |             |        |                                                                |        |                                           | 50,000  |                                               | 1.44 |  | 72,000 
|David I. Bruce     |  | 8/16/06    |               | 2006 Plan    |            |                                                                 |             |                                                             |               |       |            |  |             |        |                                                                |        |                                           | 250,000 |                                               | 1.44 |  | 360,000
|David I. Bruce     |  | 8/16/06    |               | Nonqualified |            |                                                                 |             |                                                             |               |       |            |  |             |        |                                                                |        |                                           | 500,000 |                                               | 1.44 |  | 720,000
|David I. Bruce     |  | 11/17/06   |               | Nonqualified |            |                                                                 |             | 60,000                                                       |               | 60,000 |            |  |             | 200,000 |                                                                | 200,000 |                                           | 200,000 |                                               | 1.34 |  | 268,000
|James J. Caruso    |  |           |               |             |            |                                                                 |             |                                                             |               |       |            |  |             |        |                                                                |        |                                           |        |                                               |     |  |       
|Matthew Hill (2)   |  | 12/12/06   |               | 2006 Plan    |            |                                                                 |             |                                                             |               |       |            |  |             |        |                                                                |        |                                           | 30,000  |                                               | 1.22 |  | 36,600 
|C. Bryan Byrd (3)  |  | 12/12/06   |               | 2006 Plan    |            |                                                                 |             |                                                             |               |       |            |  |             |        |                                                                |        |                                           | 30,000  |                                               | 1.22 |  | 36,600 
|John Huley (4)     |  | 12/12/06   |               | 2006 Plan    |            |                                                                 |             |                                                             |               |       |            |  |             |        |                                                                |        |                                           | 20,000  |                                               | 1.22 |  | 24,400 
|Thomas Maguire (5) |  | 12/12/06   |               | 2006 Plan    |            |                                                                 |             |                                                             |               |       |            |  |             |        |                                                                |        |                                           | 10,000  |                                               | 1.22 |  | 12,200 



|1. | On August 16, 2006, upon the start of his employment as our President and CEO, we granted David I. Bruce an incentive stock option to purchase 50,000 shares of common stock
pursuant to the 2002 Stock Option Plan at an exercise price of $1.44; an incentive stock option to purchase 250,000 shares of common stock pursuant to the 2006 Stock Option Plan at an exercise price of $1.44; and a nonqualified stock option to
purchase 500,000 shares of common stock at an exercise price of $1.44. The options vest over 5 years, subject to acceleration upon a change of control (as defined) of our company, and have a term of 10 years.
|-- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

In addition on November 17, 2006, we granted Mr. Bruce an nonqualified stock option to purchase 200,000 shares of common stock pursuant to a
separate agreement at an exercise price of $1.34. The options vest over 2 years associated with meeting operating goals for our company. The options have a term of 10 years



|2. | On December 12, 2006, we granted Matthew C. Hill, our Chief Financial Officer, an incentive stock option to purchase 30,000 shares of common stock pursuant to the 2006 Stock
Option Plan at an exercise price of $1.22 per share. The options vest over 5 years, subject to acceleration upon a change of control (as defined) of our company, and have a term of 10 years.
|-- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|3. | On December 12, 2006, we granted C. Bryan Byrd, our Vice President, Engineering and Manufacturing, an incentive stock option to purchase 30,000 shares of common stock pursuant
to the 2006 Stock Option Plan at an exercise price of $1.22 per share. The options vest over 5 years, subject to acceleration upon a change of control (as defined) of our company, and have a term of 10 years.
|-- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|4. | On December 12, 2006, we granted John Huley, our Vice President, Sales, an incentive stock option to purchase 20,000 shares of common stock pursuant to the 2006 Stock Option
Plan at an exercise price of $1.22 per share. The options vest over 5 years, subject to acceleration upon a change of control (as defined) of our company, and have a term of 10 years.
|-- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|5. | On December 12, 2006, we granted Thomas McGuire, our Vice President, Regulatory Affairs and Quality Assurance, an incentive stock option to purchase 10,000 shares of common
stock pursuant to the 2006 Stock Option Plan at an exercise price of $1.22 per share. The options vest over 5 years, subject to acceleration upon a change of control (as defined) of our company, and have a term of 10 years.
|-- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

OPTIONS EXERCISED AND STOCK VESTED TABLE

No stock options were exercised by Named Executive Officers during the fiscal year ended December 31, 2006.

OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END TABLE

The following table includes certain information with respect to the stock options held by each of the Named Executive Officers as of December 31, 2006.



|               |                                                                 |               |                                                                   |              |                                                                                        |         |                         |      |                        |                   |                                                        |   |                                                            |   |                                                                                               |   |                                                                                                            |  
|-------------- | --------------------------------------------------------------- | ------------- | ----------------------------------------------------------------- | ------------ | -------------------------------------------------------------------------------------- | ------- | ----------------------- | ---- | ---------------------- | ----------------- | ------------------------------------------------------ | - | ---------------------------------------------------------- | - | --------------------------------------------------------------------------------------------- | - | ---------------------------------------------------------------------------------------------------------- | -
|Name           |                                                                 | Option Awards |                                                                   | Stock Awards
|               | Number
ofSecuritiesUnderlyingUnexercisedOptions (#) Exercisable |               | Number
ofSecuritiesUnderlyingUnexercisedOptions (#) Unexercisable |              | EquityIncentivePlanAwards: Number ofSecuritiesUnderlyingUnexercisedUnearnedOptions (#) |         | OptionExercise Price($) |      | Option Expiration Date |                   | Number ofShares orUnits ofStock ThatHave
NotVested (#) |   | MarketValue ofShares orUnits
ofStockThatHave NotVested ($) |   | EquityIncentivePlanAwards: Number ofUnearnedShares,Units orOtherRights ThatHave NotVested (#) |   | EquityIncentivePlanAwards: Marketor PayoutValue ofUnearnedShares,Units orOtherRightsThatHave NotVested (#)
|David I. Bruce |                                                                 |              |                                                                   | 800,0000     |                                                                                        |        |                         | 1.44 |                        | August 16, 2016   |                                                        |  |                                                            |  |                                                                                               |  |                                                                                                            | 
|David I. Bruce |                                                                 |              |                                                                   |             |                                                                                        | 200,000 |                         | 1.34 |                        | November 17, 2016 |                                                        |  |                                                            |  |                                                                                               |  |                                                                                                            | 
|David Jenkins  |                                                                 | 60,500        |                                                                   |             |                                                                                        |        |                         | 2.67 |                        | October 11, 2015  |                                                        |  |                                                            |  |                                                                                               |  |                                                                                                            | 
|David Jenkins  |                                                                 | 121,000       |                                                                   |             |                                                                                        |        |                         | 2.90 |                        | October 21, 2015  |                                                        |  |                                                            |  |                                                                                               |  |                                                                                                            | 
|David Jenkins  |                                                                 | 70,000        |                                                                   |             |                                                                                        |        |                         | 2.20 |                        | December 24, 2010 |                                                        |  |                                                            |  |                                                                                               |  |                                                                                                            | 
|David Jenkins  |                                                                 | 60,500        |                                                                   |             |                                                                                        |        |                         | 2.67 |                        | October 11, 2015  |                                                        |  |                                                            |  |                                                                                               |  |                                                                                                            | 
|Bryan Byrd     |                                                                 | 50,000        |                                                                   |             |                                                                                        |        |                         | 4.13 |                        | April 17, 2010    |                                                        |  |                                                            |  |                                                                                               |  |                                                                                                            | 
|Bryan Byrd     |                                                                 | 40,000        |                                                                   | 10,000       |                                                                                        |        |                         | 2.40 |                        | August 29, 2012   |                                                        |  |                                                            |  |                                                                                               |  |                                                                                                            | 
|Bryan Byrd     |                                                                 | 30,000        |                                                                   | 20,000       |                                                                                        |        |                         | 2.14 |                        | May 7, 2003       |                                                        |  |                                                            |  |                                                                                               |  |                                                                                                            | 
|Bryan Byrd     |                                                                 | 10,800        |                                                                   | 7,200        |                                                                                        |        |                         | 2.91 |                        | July 22, 2013     |                                                        |  |                                                            |  |                                                                                               |  |                                                                                                            | 
|Bryan Byrd     |                                                                 | 3,000         |                                                                   | 2,000        |                                                                                        |        |                         | 3.75 |                        | November 3, 2013  |                                                        |  |                                                            |  |                                                                                               |  |                                                                                                            | 
|Bryan Byrd     |                                                                 | 2,400         |                                                                   | 3,600        |                                                                                        |        |                         | 3.15 |                        | July 22, 2014     |                                                        |  |                                                            |  |                                                                                               |  |                                                                                                            | 
|Bryan Byrd     |                                                                 | 1,800         |                                                                   | 7,200        |                                                                                        |        |                         | 3.46 |                        | March 2, 2015     |                                                        |  |                                                            |  |                                                                                               |  |                                                                                                            | 
|Bryan Byrd     |                                                                 | 600           |                                                                   | 2,400        |                                                                                        |        |                         | 3.03 |                        | May 12, 2015      |                                                        |  |                                                            |  |                                                                                               |  |                                                                                                            | 
|Bryan Byrd     |                                                                 |              |                                                                   | 30,000       |                                                                                        |        |                         | 1.22 |                        | December 12, 2016 |                                                        |  |                                                            |  |                                                                                               |  |                                                                                                            | 
|Matthew Hill   |                                                                 | 12,000        |                                                                   | 3,000        |                                                                                        |        |                         | 2.00 |                        | August 1, 2012    |                                                        |  |                                                            |  |                                                                                               |  |                                                                                                            | 
|Matthew Hill   |                                                                 | 30,000        |                                                                   | 20,000       |                                                                                        |        |                         | 1.32 |                        | March 5, 2013     |                                                        |  |                                                            |  |                                                                                               |  |                                                                                                            | 
|Matthew Hill   |                                                                 | 2,250         |                                                                   | 2,250        |                                                                                        |        |                         | 2.55 |                        | August 15, 2013   |                                                        |  |                                                            |  |                                                                                               |  |                                                                                                            | 
|Matthew Hill   |                                                                 | 30,000        |                                                                   | 20,000       |                                                                                        |        |                         | 2.25 |                        | August 26, 2013   |                                                        |  |                                                            |  |                                                                                               |  |                                                                                                            | 
|Matthew Hill   |                                                                 | 2,000         |                                                                   | 3,000        |                                                                                        |        |                         | 3.20 |                        | March 9, 2014     |                                                        |  |                                                            |  |                                                                                               |  |                                                                                                            | 
|Matthew Hill   |                                                                 | 10,000        |                                                                   | 15,000       |                                                                                        |        |                         | 3.15 |                        | July 22, 2014     |                                                        |  |                                                            |  |                                                                                               |  |                                                                                                            | 
|Matthew Hill   |                                                                 | 3,000         |                                                                   | 12,000       |                                                                                        |        |                         | 3.73 |                        | March 2, 2015     |                                                        |  |                                                            |  |                                                                                               |  |                                                                                                            | 
|Matthew Hill   |                                                                 |              |                                                                   | 30,000       |                                                                                        |        |                         | 1.22 |                        | December 12, 2016 |                                                        |  |                                                            |  |                                                                                               |  |                                                                                                            | 
|John Huley     |                                                                 | 60,000        |                                                                   | 30,000       |                                                                                        |        |                         | 3.18 |                        | May 10, 2014      |                                                        |  |                                                            |  |                                                                                               |  |                                                                                                            | 
|John Huley     |                                                                 | 4,000         |                                                                   | 12,000       |                                                                                        |        |                         | 2.95 |                        | October 31, 2015  |                                                        |  |                                                            |  |                                                                                               |  |                                                                                                            | 
|John Huley     |                                                                 | 4,000         |                                                                   | 12,000       |                                                                                        |        |                         | 3.62 |                        | July 11, 2015     |                                                        |  |                                                            |  |                                                                                               |  |                                                                                                            | 
|John Huley     |                                                                 |              |                                                                   | 20,000       |                                                                                        |        |                         | 1.22 |                        | December 12, 2106 |                                                        |  |                                                            |  |                                                                                               |  |                                                                                                            | 
|Thomas Maguire |                                                                 |              |                                                                   | 10,000       |                                                                                        |        |                         | 1.22 |                        | December 12, 2106 |                                                        |  |                                                            |  |                                                                                               |  |                                                                                                            | 
|Thomas Maguire |                                                                 | 10,000        |                                                                   | 15,000       |                                                                                        |        |                         | 2.70 |                        | October 18, 2104  |                                                        |  |                                                            |  |                                                                                               |  |                                                                                                            | 



11



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##### Table of Contents

Director Compensation Table

Non-employee directors of EP MedSystems received amounts ranging from $22,500 to $25,500 for their service for the year ended December 31, 2006. Directors will be compensated for the year ended December 31,
2007 as follows: (i) a retainer of $15,000 per year is payable to each outside director payable in quarterly installments, (ii) a meeting fee of $1,500 per director is payable with respect to each regularly scheduled meeting, and
(iii) a meeting fee of $1,500 is payable for each telephone meeting in excess of one hour. In addition, the directors are reimbursed for their reasonable travel expenses incurred in performance of their duties as directors and directors receive
a grant of an option to purchase 60,000 shares of Common Stock when they join the Board of Directors.

The following table sets forth
information regarding the compensation earned by our directors in 2006:



|                    |  |                               |  |                    |  |                     |  |                                          |  |                                                                      |  |                           |  |          
|------------------- |  | ----------------------------- |  | ------------------ |  | ------------------- |  | ---------------------------------------- |  | -------------------------------------------------------------------- |  | ------------------------- |  | ---------
|Name                |  | Fees Earnedor Paid inCash ($) |  | StockAwards ($)(1) |  | OptionAwards ($)(1) |  | Non-EquityIncentive PlanCompensation ($) |  | Change
inPension Value &NonqualifiedDeferredCompensationEarnings ($) |  | All OtherCompensation ($) |  | Total ($)
|David A. Jenkins    |  | 22,500                        |  |                   |  |                    |  |                                         |  |                                                                     |  |                          |  | 22,500   
|David I. Bruce      |  |                              |  |                   |  |                    |  |                                         |  |                                                                     |  |                          |  |         
|Richard C. Williams |  | 25,500                        |  |                   |  | 24,197              |  |                                         |  |                                                                     |  |                          |  | 49,697   
|Gerard Michel       |  |                              |  |                   |  |                    |  |                                         |  |                                                                     |  |                          |  |         
|Abhijeet Lele       |  | 25,500                        |  |                   |  | 25,205              |  |                                         |  |                                                                     |  |                          |  | 50,705   
|Paul Ray            |  | 25,500                        |  |                   |  | 24,228              |  |                                         |  |                                                                     |  |                          |  | 49,728   



|1. | The amounts in these columns reflect the dollar amount recognized for financial statement reporting purposes for the fiscal year ended December 31, 2006 in accordance with
FAS 123(R) of awards pursuant to the Companys equity incentive plans and therefore may include amounts from awards granted in 2006 and prior. Assumptions used in the calculation of these amounts for awards granted in fiscal years ended
December 31, 2006, 2005, and 2004 are included in Note 2 Summary of Significant Accounting Policiesto the Companys audited financial statements for the fiscal year ended December 31, 2006, included in the Companys
Annual Report on Form 10-K for the year ended December 31, 2006 as filed with the Securities and Exchange Commission on March 31, 2007. Assumptions used in the calculation of these amounts for the fiscal years ended December 31, 2003
and 2002 are included in Note 2 Summary of Significant Accounting Policiesto the Companys audited financial statements for the fiscal year ended December 31, 2003, included in the Companys Annual Report on Form 10-K for the
year ended December 31, 2003 as filed with the Securities and Exchange Commission on March 30, 2007. However, as required, the amounts shown exclude the impact of estimated forfeitures related to service-based vesting conditions.
|-- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Compensation Plans and Other Arrangements

1995 Long Term Incentive Plan

Our 1995 Long Term Incentive Plan (the 1995 Incentive Plan) was adopted by our
Board of Directors and shareholders in November 1995. There were 1,000,000 of shares of our common stock reserved for issuance under the 1995 Incentive Plan. At December 31, 2006, options to purchase 698,208 shares of our common stock were
outstanding at exercise prices ranging from $1.34 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 terminated on
November 30, 2005. Options may no longer be issued under the plan.

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 our 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. Options granted under
the 1995 Incentive Plan are generally subject to vesting over five years, and vesting generally accelerates upon a change of control of the Company as defined therein.



12



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##### Table of Contents

1995 Director Option Plan

The Companys 1995 Director Option Plan was adopted by our Board of Directors and our shareholders in November 1995. A total of 180,000 shares of our common stock were reserved for issuance under the 1995
Director Option Plan, and options to purchase 180,000 shares were outstanding as of December 31, 2006 at exercise prices ranging from $2.10 to $2.50 per share. 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 the Company, which determines the optionees and the terms of the
options granted, including the exercise price and the number of shares subject to the options. Options granted under the 1995 Incentive Plan are generally subject to vesting over five years, and vesting generally accelerates upon a change of control
of the Company as defined therein. The 1995 Director Option Plan terminated on November 30, 2005. Options may no longer be issued under the plan.

2002 Stock Option Plan

The Companys 2002 Stock Option Plan (the 2002 Plan) was approved by our Board of
Directors and our shareholders in August 2002 and amended in December 2005. A total of 1,000,000 shares of our common stock are reserved for issuance under the 2002 Plan. At December 31, 2006, options to purchase 984,000 shares were
outstanding at exercise prices ranging from $1.19 to $3.73. The 2002 Plan provides for grants of incentive stock options to our employees and officers and for grants of non-qualified stock options to employees, officers, advisors and consultants of
EP Med. Options granted under the 1995 Incentive Plan are generally subject to vesting over five years, and vesting generally accelerates upon a change of control of the Company as defined therein. The 2002 Plan is administered by the Compensation
Committee. The 2002 Plan will terminate on August 29, 2012, unless terminated earlier by our Board of Directors.

2006 Stock Option Plan

The Companys 2006 Stock Option Plan (the 2006 Plan) was approved by our Board of Directors in October 2005 and our
shareholders in December 2005. A total of 1,000,000 shares of our common stock are reserved for issuance under the 2006 Plan. At December 31, 2006, options to purchase 569,000 shares were outstanding at an exercise prices ranging from
$1.20 to $2.90. The 2006 Plan provides for grants of incentive stock options to our employees and officers and for grants of non-qualified stock options to employees, officers, advisors and consultants of the Company. The 2006 Plan is administered
by the Compensation Committee. Options granted under the 1995 Incentive Plan are generally subject to vesting over five years, and vesting generally accelerates upon a change in control of the Company as defined therein. The 2006 Plan will terminate
on October 21, 2015, unless terminated earlier by our Board of Directors.

2006 Director Plan

The Companys 2006 Director Plan (the 2006 Director Plan) was adopted by our shareholders in December 2005. A total of
1,000,000 shares of our common stock are reserved for issuance under the 2006 Director Plan, and no options were outstanding as of December 31, 2006. The 2006 Director 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 2006 Director Plan is administered by the Plan Committee of the Company, which determines the optionees and the terms of the options
granted, including the exercise price and the number of shares subject to the options. The 2006 Director Option Plan will terminate on October 21, 2015, unless earlier terminated by the Board of Directors.

Employment Contracts and Termination of Employment and Change-in-control Arrangements



13



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##### Table of Contents

On May 12, 2005 our Board of Directors approved Senior Management Incentive Agreements with each of
six senior officers. Those senior officers are Matthew C. Hill, our Chief Financial Officer and Secretary, C. Bryan Byrd, our Vice President, Engineering and Manufacturing, John Huley, our Vice President, Sales, Thomas Maguire, our Vice President,
Regulatory and Quality Assurance, Richard Gibbons, our Director of Operations, and Kristine Fuimaono, our Director of Marketing. The agreements provide that if the senior officer is employed with EP MedSystems immediately prior to a change of
control (as defined in the agreements) of the Company, the Company will pay to each of the senior officers an amount equal to two times the senior officers annual base salary (which excludes any incentive pay, premium pay, commissions,
overtime, bonuses and other forms of variable compensation) at the time of such change of control. The agreements also confirm our policy previously approved by our Board of Directors that all options to purchase common stock of EP MedSystems
granted to our employees (including all senior officers) will vest immediately prior to a change of control. The management incentive agreements also provide that if a senior officers benefits under the management incentive agreement would
result in an Internal Revenue Code Section 280C(b)(1) parachute payment, such senior officer will receive an additional amount not to exceed 20% of the amount of the payments and benefits otherwise payable to the senior officer upon
the occurrence of a change in control. All senior officers are employed by the Company on an at-will basis and none of the senior officers has an employment agreement with the Company.

David Bruce, who was hired by the Company on August 16, 2006, will receive an annual base salary of $300,000. Mr. Bruce will also be
eligible to participate in the Companys executive officer cash bonus plan in which he can earn up to 20% of his annual base salary. Pursuant to the Offer Letter in connection with Mr. Bruces employment, the Company made the
following stock option grants to Mr. Bruce in 2006: (1) 250,000 stock options under the Companys 2006 Stock Option Plan, (2) 50,000 stock options under the Companys 2002 Stock Option Plan and (3) 500,000 stock options
outside of the Companys existing plans. The stock options have a life of 10 years, vest annually in five equal installments and have an exercise price equal to the fair-market value of the Companys common stock, defined as the mean
between the high and low of the Companys share price on the date of the grant or $1.44, in this case on the first day of employment, August 16, 2006. These options were granted on November 17, 2006 at an exercise price of $1.34 per
share. The Offer Letter for additional grants of up to 200,000 stock options over the next two years based on agreed upon goals. The Offer Letter provided a separate Change in Control Agreement which will result in a payment of two times the
Executives annual base salary and an acceleration of vesting of all unvested options upon a change of control. The Offer Letter also provides for severance payments to the Executive in the event that he is terminated by the Company without
cause, as defined in the Offer Letter equal to (1) continuation of base salary for 12 months, (2) continuation of payment of medical and other benefits and (3) a six month acceleration of any unvested stock options.

In determining the compensation level for the new Chief Executive Officer, the Company used a retained executive search firm in the hiring of its Chief
Executive Officer. This search firm assisted the Compensation Committee in structuring an appropriate compensation package for the new executive.



14



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##### Table of Contents

Stock Performance Graph

The following line graph and table compare, for the five most recently concluded fiscal years, the yearly percentage change in the cumulative total stockholder return, assuming reinvestment of dividends, on the
Companys common stock with the cumulative total return of companies on the NASDAQ Stock Market and an the Russell 3000 Index.

COMPARISON OF
CUMULATIVE TOTAL RETURN AMONG EP MEDSYSTEMS, INC., THE RUSSELL 3000 INDEX AND NASDAQ MARKET INDEX

LOGO

COMPARISON OF CUMULATIVE TOTAL RETURN OF ONE OR MORE

COMPANIES, PEER GROUPS, INDUSTRY INDEXES AND/OR BROAD MARKETS



|                     |  |                    |  |            |  |            |  |            |  |            |  |           
|-------------------- |  | ------------------ |  | ---------- |  | ---------- |  | ---------- |  | ---------- |  | ----------
|                     |  | FISCAL YEAR ENDING
|COMPANY/INDEX/MARKET |  | 12/31/2001         |  | 12/31/2002 |  | 12/31/2003 |  | 12/31/2004 |  | 12/30/2005 |  | 12/29/2006
|EP Medsystems Inc.   |  | 100.00             |  | 100.00     |  | 121.60     |  | 150.00     |  | 116.40     |  | 53.60     
|Russell 3000 Index   |  | 100.00             |  | 77.19      |  | 99.37      |  | 109.39     |  | 114.06     |  | 129.80    
|NASDAQ Market Index  |  | 100.00             |  | 69.75      |  | 104.88     |  | 113.70     |  | 116.19     |  | 128.12    

Compensation Committee Interlocks and Insider Participation

The Board of Directors has established a Compensation Committee, consisting of Messrs. Williams, Lele and Michel. No members of the Compensation Committee
are officers, employees or former officers of EP MedSystems, Inc. No executive officer of EP MedSystems, Inc. served as a member of the compensation committee or Board of Directors of another entity (or other committee of our Board of Directors
performing equivalent functions or, in the absence of any such committee, the entire Board of Directors), one of whose executive officers served on the compensation committee or as a director of EP MedSystems, Inc.

On March 27, 2006, we completed a $10,000,000 private placement of its common stock to a number of accredited investors. We issued 3.78 million
shares of its common stock at a purchase price of $2.25 per share. In addition, FatBoy Capital, LP purchased approximately 617,000 shares of common stock at a price of $2.43 per share in accordance with NASDAQ marketplace rules. David Jenkins, the
Companys Chairman is a managing member of FatBoy Capitals general partner. In connection with this transaction, certain anti-dilution provisions of the Laurus Convertible Note resulted in a reduction of the conversion price of that note
from $4.20 to $3.96.



15



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##### Table of Contents

|I
tem 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
|--------- | -----------------------------------------------------------------------------------------------

Based upon information available to us, the following table sets forth certain information regarding beneficial ownership of our common stock as of
March 31, 2007, by (i) each of our 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 us to
beneficially own more than five percent of our common stock. Except as otherwise indicated, the persons named in the table have sole voting and investment power with respect to all shares beneficially owned, subject to community property laws, where
applicable.



|                                                                                                                                                                                                                                                                                                |  |                                              |  |                  |  
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------------------------------------- |  | ---------------- | -
|Name and Address of Beneficial Owner                                                                                                                                                                                                                                                            |  | Shares of Common StockBeneficially Owned (1) |  | Percent of Class |  
|David A. Jenkins Chairman c/o EP MedSystems, Inc. 575 Route 73 N, Building D West Berlin, New Jersey 08091 (2)                                                                                                                                                                                  |  | 3,161,684                                    |  | 10.4             | %
|                                                                                                                                                                                                                                                                                                |  |                                             
|Group comprised of Greenberg Healthcare Management, LLC, EGS Partners, LLC, The Pharmaceutical/Medical Technology Fund, L.P., EGS Private Healthcare
Associates, LLC, EGS Private Healthcare Partnership, L.P., Frederic Greenberg, and Abhijeet Lele 105 Rowayton Avenue Rowyton, CT 06853 (3) |  | 2,626,378                                    |  | 8.6              | %
|                                                                                                                                                                                                                                                                                                |  |                                             
|Michael A. Roth and Brian J. Stark as Joint Filers 3600
South Lake Drive St. Francis, WI 53235 (4)                                                                                                                                                                                              |  | 2,368,725                                    |  | 7.8              | %
|                                                                                                                                                                                                                                                                                                |  |                                             
|Group comprised of S.A.C. Capital Advisors, LLC, S.A.C Capital Associates, LLC, S.A.C. Capital Management, LLC and Steven A. Cohen. 172 Cummings Point Road Stamford, CT 06902 (5)                                                                                                              |  | 2,208,709                                    |  | 7.2              | %
|                                                                                                                                                                                                                                                                                                |  |                                             
|David I. Bruce President and Chief Executive
Officer c/o EP MedSystems, Inc. 575 Route 73 N, Building
D West Berlin, New Jersey 08091                                                                                                                                                           |  |                                             |  | *                |  
|                                                                                                                                                                                                                                                                                                |  |                                             
|Richard Williams Director c/o EP MedSystems, Inc. 575 Route 73 N, Building D West Berlin, New Jersey 08091 (6)                                                                                                                                                                                  |  | 56,000                                       |  | *                |  
|                                                                                                                                                                                                                                                                                                |  |                                             
|Matthew C. Hill Chief Financial Officer c/o EP MedSystems, Inc. 575 Route 73 N, Building D West Berlin, New Jersey 08091 (7)                                                                                                                                                                    |  | 103,250                                      |  | *                |  
|                                                                                                                                                                                                                                                                                                |  |                                             
|C. Bryan Byrd Vice President, Engineering and
Manufacturing c/o EP MedSystems, Inc. 575 Route 73 N, Building
D West Berlin, New Jersey 08091 (8)                                                                                                                                                |  | 174,000                                      |  | *                |  
|                                                                                                                                                                                                                                                                                                |  |                                             
|John Huley Vice President, Sales c/o EP MedSystems, Inc. 575 Route 73 N, Building D West Berlin, New Jersey 08091 (9)                                                                                                                                                                           |  | 98,000                                       |  | *                |  
|                                                                                                                                                                                                                                                                                                |  |                                             
|Thomas Maguire Vice President, Regulatory and Quality
Assurance c/o EP MedSystems, Inc. 575 Route 73 N, Building
D West Berlin, New Jersey 08091 (10)                                                                                                                                           |  | 10,000                                       |  | *                |  
|                                                                                                                                                                                                                                                                                                |  |                                             
|Gerard Michel Director c/o EP MedSystems, Inc. 575 Route 73 N, Building D West Berlin, New Jersey 08091 (11)                                                                                                                                                                                    |  | 10,000                                       |  | *                |  
|                                                                                                                                                                                                                                                                                                |  |                                             
|All executive officers and directors as a group (9 persons) (12)                                                                                                                                                                                                                                |  | 6,233,312                                    |  | 20.5             | %

---

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



|(1) | Applicable percentage ownership as of March 31, 2007 is based on 30,365,236 shares of common stock of the Company outstanding. Beneficial ownership is determined in accordance
with Rule 13d-3 of the Exchange Act. 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.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

|(2) | Includes 312,000 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 617,284 shares purchased on March 27, 2006 by FatBoy Capital, LP. Mr. Jenkins is a managing member of
FatBoy Capitals general partner. 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.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(3) | The information set forth with respect to the following EGS Entities is based on information contained in a Statement on Schedule 13D filed with the Commission on March 18,
2003 and other information known to the Company. The shares reflected in the table represent (i) 2,297,696 shares beneficially owned by EGS Private Healthcare Associates, LLC (EGS Associates), indirectly as the general partner of
EGS Private Healthcare Partnership, L.P. (EGS Partnership), which is the record owner of 2,010,484 and EGS Private Healthcare Counterpart, L.P. (EGS Counterpart), which is the record owner of 287,212; (ii) 215,682 shares
beneficially owned by Greenberg Healthcare Management, LLC (Greenberg Management), indirectly as the general partner of The Pharmaceutical/Medical Technology Fund, L.P. (Pharma/Medical); (iii) 2,513,378 shares
beneficially owned by Frederic Greenberg indirectly, as managing member of Greenberg Management and EGS Associates, (iv) 20,000 shares beneficially owned by Frederic Greenberg; (v) 2,337,696 shares beneficially owned by Abhijeet Lele,
indirectly, as managing member of EGS Private Healthcare Management, LLC, which is the General Partner of EGS Partnership and EGS Counterpart, and (vi) 60,000 shares issuable upon exercise of fully vested options beneficially held by
Mr. Lele.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(4) | The information set forth with respect to Michael A. Roth and Brian J. Stark is based on information contained in a statement on Schedule 13G filed with the Commission as of
December 31, 2006.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(5) | The information set forth with respect to the S.A.C. Capital Group is based on information contained in a statement on Schedule 13F filed with the Commission as of December 31,
2006.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(6) | Includes 4,000 shares issuable upon the exercise of fully vested options.
|--- | -------------------------------------------------------------------------



|(7) | Includes 103,250 shares issuable upon exercise of fully vested options.
|--- | -----------------------------------------------------------------------



|(8) | Includes 141,000 shares issuable upon exercise of fully vested options.
|--- | -----------------------------------------------------------------------



|(9) | Includes 98,000 shares issuable upon exercise of fully vested options.
|--- | ----------------------------------------------------------------------



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



|(11) | Includes 10,000 shares issuable upon exercise of fully vested options
|---- | ---------------------------------------------------------------------



|(12) | Includes 784,250 shares issuable upon exercise of fully vested options and warrants.
|---- | ------------------------------------------------------------------------------------



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##### Table of Contents

EQUITY COMPENSATION PLAN INFORMATION

The following table summarizes our equity compensation plan information as of December 31, 2006 with respect to outstanding awards and shares
remaining available for issuance under Companys existing equity compensation plans. Information is included in the table as to Common Stock that may be issued pursuant to Companys equity compensation plans.



|                                                               |  |                                                                                       |  |                                                                         |      |                                                                                                                                    |          
|-------------------------------------------------------------- |  | ------------------------------------------------------------------------------------- |  | ----------------------------------------------------------------------- | ---- | ---------------------------------------------------------------------------------------------------------------------------------- | ---------
|Plan category                                                  |  | Number ofsecurities tobe issued uponexercise ofoutstandingoptions, warrantsand
rights |  | Weighted-average exerciseprice ofoutstandingoptions, warrantsand
rights |      | Number ofsecuritiesremainingavailable forfuture issuanceunder
equitycompensationplans (excludingsecurities reflectedin column (a))
|                                                               |  | (a)                                                                                   |  | (b)                                                                     |      | (c)                                                                                                                               
|Equity compensation plans approved by our stockholders (1)     |  | 2,431,208                                                                             |  | $                                                                       | 2.42 |                                                                                                                                    | 1,437,000
|Equity compensation plans not approved by our stockholders (2) |  | 955,000                                                                               |  | $                                                                       | 1.81 |                                                                                                                                    |         
|                                                               |  |                                                                                       |  |                                                                         |      |                                                                                                                                    |          
|Totals                                                         |  | 3,386,308                                                                             |  |                                                                         | 2.25 |                                                                                                                                    | 1,437,000
|                                                               |  |                                                                                       |  |                                                                         |      |                                                                                                                                    |          



|(1) | Consists of EP MedSystems (i) 1995 Long Term Incentive Plan, (ii) 1995 Director Option Plan, (iii) 2002 Stock Option Plan, (iv) 2006 Stock Option Plan, and
(v) 2006 Directors Stock Option Plan.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(2) | These compensation plans or arrangements consist of options approved by our Board of Directors and granted to certain employees, directors and outside consultants from time to time
to incentives such persons in connection with EP MedSystemss business.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|Item 13. | Certain Relationships and Related Transactions and Director Independence.
|-------- | -------------------------------------------------------------------------

Management Incentive Agreements

On May 12, 2005, the Board of Directors approved Senior Management Incentive Agreements with each of six senior officers. Those
senior officers are Matthew C. Hill, Chief Financial Officer and Secretary, C. Bryan Byrd, Vice President, Engineering and Manufacturing, John Huley, Vice President, Sales, Thomas Maguire, Vice President, Regulatory and Quality Assurance, Richard
Gibbons, Director of Operations, and Kristine Fuimaono, Director of Marketing. The agreements provide that if the senior officer is employed with the Company immediately prior to a change of control (as defined in the agreements) of the
Company, the Company will pay to each of the senior officers an amount equal to two times the senior officers annual base salary (which excludes any incentive pay, premium pay, commissions, overtime, bonuses and other forms of variable
compensation ) at the time of such change of control. The agreements also confirm our policy previously approved by our Board of Directors that all options to purchase common stock of the Company granted to our employees (including all senior
officers) will vest immediately prior to a change of control. The management incentive agreements also provide that if a senior officers benefits under the management incentive agreement would result in an Internal Revenue Code
Section 280C(b)(1) parachute payment, such senior officer will receive an additional amount not to exceed 20% of the amount of the payments and benefits otherwise payable to the senior officer upon the occurrence of a change in
control. All senior officers are employed by EP MedSystems on an at-will basis and none of the senior officers has an employment agreement with EP MedSystems.

David Bruce, who was hired by the Company on August 16, 2006, will receive an annual base salary of $300,000. Mr. Bruce will also be eligible to participate in the Companys executive officer cash
bonus plan in which he can earn up to 20% of his annual base salary. Pursuant to the Offer Letter in connection with Mr. Bruces employment, the Company made the following stock option grants to Mr. Bruce in 2006: (1) 250,000
stock options under the Companys 2006 Stock Option Plan, (2) 50,000 stock options under the Companys 2002 Stock Option Plan and (3) 500,000 stock options outside of the Companys existing plans. The stock options have a
life of 10 years, vest annually in five equal installments and have an exercise price equal to the fair-market value of the Companys common stock, defined as the mean between the high and low of the Companys share price on the date of
the grant or $1.44, in this case on the first day of employment, August 16, 2006. These options were granted on November 17, 2006 at an exercise price of $1.34 per share. The Offer Letter for additional grants of up to 200,000 stock
options over the next two years based on agreed upon goals. The Offer Letter provided a separate Change in Control Agreement which will result in a payment of two times the Executives annual base salary and an acceleration of vesting of all
unvested options upon a change of control. The Offer Letter also provides for severance payments to the Executive in the event that he is terminated by the Company without cause, as defined in the Offer Letter equal to (1) continuation of base
salary for 12 months, (2) continuation of payment of medical and other benefits and (3) a six month acceleration of any unvested stock options.



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##### Table of Contents

In determining the compensation level for the new Chief Executive Officer, the Company used a retained
executive search firm in the hiring of its Chief Executive Officer. This search firm assisted the Compensation Committee in structuring an appropriate compensation package for the new executive.

Director Independence

Our Board is currently
composed of five directors, three of whom our Board has determined to be independent within the meaning of Nasdaq Marketplace Rules. These three directors are Messrs. Lele, Michel and Williams. As part of such determination of
independence, our Board has determined that none of these three directors has a relationship with EP MedSystems that would interfere with the exercise of independent judgment in carrying out his responsibilities as a director. Mr. Jenkins,
our Chairman and Mr. Bruce, our President and Chief Executive Officer, are the only members of management serving as a directors.



|Item 14. | Principal Accountant Fees and Services.
|-------- | ---------------------------------------

Audit Fees

The aggregate fees billed by Grant Thornton LLP for professional services rendered for the audit of our annual financial statements for
the years ended December 31, 2006 and 2005, the review of the financial statements included in our Forms 10-Q and consents issued in connection with our filings on Form S-3 and Form S-8 for 2006 and 2005 totaled $171,418 and $162,734,
respectively.

Audit-Related Fees

The
fees related to compliance with Section 404 of the Sarbanes-Oxley Act and other audit-related fees for the years ended December 31, 2006 and 2005 of approximately $6,558 and $4,000, respectively, are not disclosed in the paragraph
captioned Audit Fees above.

Tax Fees

The aggregate fees billed by Grant Thornton LLP for professional services rendered for tax compliance, for the years ended December 31, 2006 and 2005 were $27,080 and $23,850, respectively. No fees were billed by
Grant Thornton LLP for professional services rendered for tax advice and tax planning, for the years ended December 31, 2006 and 2005.

All Other
Fees

No fees were billed by Grant Thornton LLP for products and services, other than the services described in the paragraphs captioned
Audit Fees, Audit-Related Fees, and Tax Fees above for the years ended December 31, 2006 and 2005.

Audit
Committee Policies and Procedures

The Audit Committee has established its pre-approval policies and procedures, pursuant to which the
Audit Committee approved the foregoing audit services provided by Grant Thornton LLP in 2006. Consistent with the Audit Committees responsibility for engaging our independent auditors, all audit and permitted non-audit services require
pre-approval by the Audit Committee. The full Audit Committee approves proposed services and fee estimates for these services. The Audit Committee chairperson or his designee has been designated by the Audit Committee to approve any services arising
during the year that were not pre-approved by the Audit Committee. Services approved by the Audit Committee chairperson are communicated to the full Audit Committee at its next regular meeting and the Audit Committee reviews services and fees for
the fiscal year at each such meeting. Pursuant to these procedures, the Audit Committee approved the foregoing audit services provided by Grant Thornton LLP.



19



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##### Table of Contents

SIGNATURES

In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.



EP MEDSYSTEMS, INC.By:

/s/ David I. BruceDavid I. Bruce,President and Chief Executive OfficerDate: April 30, 2007


KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes
and appoints David I. Bruce and Matthew C. Hill, and each of them individually, his true and lawful attorney-in-fact, proxy and agent, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all
capacities, to act on, sign any and all amendments to this Annual Report on Form 10-K, and to file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact, proxies and agents, and each of them individually, full power and authority to do and perform each and every act and thing necessary and appropriate to be done in and about the premises, as fully as he might or could do in person,
hereby approving, ratifying and confirming all that said attorneys-in-fact, proxies and agents or any of his or their substitute or substitutes, may lawfully do or cause to be done by virtue hereof.

In accordance with the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.



|                                            |  |                                                                      |  |               
|------------------------------------------- |  | -------------------------------------------------------------------- |  | --------------
|Signature(s)                                |  | Title(s)                                                             |  | Date          
|                                            |  |                                                                     
|/s/ David I. Bruce David I.
Bruce           |  | President, Chief Executive Officer, Director                         |  | April 30, 2007
|                                            |  |                                                                     
|/s/ David A. Jenkins David A.
Jenkins       |  | Chairman of the Board of Directors                                   |  | April 30, 2007
|                                            |  |                                                                     
|/s/ Matthew C. Hill Matthew C.
Hill         |  | Chief Financial Officer (Principal Financial and Accounting Officer) |  | April 30, 2007
|                                            |  |                                                                     
|/s/ Gerard Michel Gerard
Michel             |  | Director                                                             |  | April 30, 2007
|                                            |  |                                                                     
|/s/ Richard C. Williams Richard
C. Williams |  | Director                                                             |  | April 30, 2007
|                                            |  |                                                                     
|/s/ Abhijeet Lele Abhijeet
Lele             |  | Director                                                             |  | April 30, 2007



20